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EX-32 - EXHIBIT 32 - ALL AMERICAN PET COMPANY, INC.v348043_ex32.htm
EX-31 - EXHIBIT 31 - ALL AMERICAN PET COMPANY, INC.v348043_ex31.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-33300

 

ALL AMERICAN PET COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   91-2186665
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
1100 Glendon Ave, 17th Floor    
Los Angeles, California   90024
(Address of principal executive offices)   (Zip Code)

 

(310) 689-7355

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruble 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes ¨ No x

 

Indicate the number of shares of outstanding of each of the Registrant’s classes of common equity, as of the last practicable date: As of June 14, 2013, the Registrant had outstanding 837,929,245 shares of Common Stock, no shares of Preferred Stock, and warrants exercisable for 5,000,000 shares of Common Stock.

 

 
 

 

ALL AMERICAN PET COMPANY, INC.

FOR THE THREE MONTHS ENDED

March 31, 2013

 

Index to Report on Form 10-Q

 

  Page 
PART I FINANCIAL INFORMATION  
     
Item 1 Condensed Consolidated Financial Statements (unaudited)  
  Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 3
  Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 4
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 5
  Notes to Condensed Consolidated  Financial Statements  6
Item 2 Managements’ Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures about Market Risk 21
Item 4 Controls and Procedures 21
     
PART II OTHER INFORMATION  
     
Item 1 Legal Proceedings 23
Item 1A Changes in Risk Factors 24
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3 Defaults Upon Senior Securities 25
Item 4 Mine Safety Disclosures 25
Item 5 Other Information 25
Item 6 Exhibits 26
  Signatures 27
  Certifications  

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ALL AMERICAN PET COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    Unaudited     Audited  
    March 31,     December 31,  
    2013     2012  
ASSETS
Current Assets:
Cash   $ 815     $ 13,376  
Accounts receivable     103,107       -  
Prepaid consulting fees     183,333       -  
Inventory     744,731       715,869  
Total current assets     1,031,986       729,245  
Machinery and equipment, net     96,539       69,366  
Other assets     126,388       85,290  
TOTAL ASSETS   $ 1,254,913     $ 883,901  
                 
LIABILITIES & STOCKHOLDERS' DEFICIT                
Current Liabilities:                
Bank overdraft   $ 89,626     $ 90,095  
Accounts payable     2,908,633       2,605,638  
Current portion contest prize     141,665       133,332  
Settlements and judgments payable     884,153       877,999  
Share guarantee liability     400,000       400,000  
Accrued wages     -       36,678  
Placement fees payable     54,372       54,372  
Accrued payroll taxes     905,487       889,711  
Grid note, advances     62,276       -  
Notes payable, net of debt discount     85,409       50,000  
Accrued interest     49,746       47,897  
Total current liabilities     5,581,367       5,185,722  
Long-term liabilities:                
Net present value contest prize obligation     266,714       269,518  
Total long-term liabilities     266,714       269,518  
TOTAL LIABILITIES     5,848,081       5,455,240  
                 
COMMITMENTS AND CONTINGENCIES                
Stockholders' deficit                
Common stock, $0.001 par value; authorized 1,010,000,000 shares                
at March 31, 2013 and December 31, 2012;                
issued and outstanding March 31, 2013 (784,284,203)                
and December 31, 2012 (695,494,866)     781,785       695,495  
Additional paid-in capital     19,192,568       18,486,273  
Common stock payable     542,127       677,156  
Common stock receivable     (142,000 )     (142,000 )
Accumulated deficit     (24,493,133 )     (23,729,397 )
Non-controlling interest     (474,515 )     (558,866 )
Total Stockholders' deficit     (4,593,168 )     (4,571,339 )
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT   $ 1,254,913     $ 883,901  

 

See accompanying notes to the condensed consolidated financial statements.

 

3
 

 

ALL AMERICAN PET COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Unaudited     Unaudited  
    Three Months Ended March 31,  
    2013     2012  
             
Revenue   $ 115,019     $ -  
Net sales     115,019       -  
                 
Cost of goods sold     72,764       -  
GROSS PROFIT <LOSS>     42,255       -  
                 
OPERATING EXPENSES                
Sales and marketing     66,531       77,472  
General and administrative     527,820       343,493  
TOTAL OPERATING EXPENSES     594,351       420,965  
                 
LOSS FROM OPERATIONS     (552,096 )     (420,965 )
                 
OTHER EXPENSE/(INCOME)                
Interest expense     127,289       35,244  
TOTAL OTHER EXPENSE     127,289       35,244  
                 
LOSS BEFORE TAXES     (679,385 )     (456,209 )
                 
Provision for income taxes     -       -  
NET LOSS     (679,385 )     (456,209 )
                 
Net income (loss) attributable to noncontrolling interest     84,352       (19,895
                 
NET LOSS ATTRIBUTABLE TO ALL AMERICAN PET COMPANY, INC.   $ (763,737 )   $ (436,314 )
                 
BASIC AND DILUTED LOSS PER COMMON SHARE     (0.001 )     (0.001 )
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (BASIC AND DILUTTED)     742,599,048       350,135,852  

 

See accompanying notes to the condensed consolidated financial statements.

 

4
 

 

ALL AMERICAN PET COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

    Unaudited     Unaudited  
    Three Months Ended March 31,  
    2013     2012  
CASH FLOWS FROM OPERATING ACTIVITIES                
                 
Net loss   $ (679,385 )   $ (456,209 )
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation and amortization     5,840       113  
Amortization of contest prize     5,529       5,206  
Amortization of prepaid consulting fees     16,667       -  
Amortization of debt discount     13,613       -  
Common stock issued for services     43,380       11,539  
Common stock issued as additional financing costs     100,000        
(Increase) decrease in:                
Accounts receivable     (103,107 )     -  
Inventory     (28,862 )     -  
Other assets     (41,098 )     -  
Increase (decrease) in:                
Accounts payable     302,995       14,822  
Accrued officer/consulting salaries     -       (36,850 )
Accrued payroll taxes     15,776       29,128  
Accrued liabilities     (36,678 )     1,513  
Settlements and judgments     6,154       -  
Accrued interest     1,849       -  
                 
NET CASH USED IN OPERATING ACTIVITIES     (377,325 )     (430,738 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Equipment purchases     (33,015 )     (1,422 )
                 
NET CASH FLOW USED BY INVESTING ACTIVITIES     (33,015 )     (1,422 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Bank overdraft     (469 )     10,507  
Proceeds from note payable - others     100,000       -  
Proceeds from notes payable - Grid note     62,276       -  
Proceeds from sale of common stock     235,972       419,947  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES     397,779       430,454  
                 
Decrease in cash and cash equivalents     (12,561 )     (1,706 )
Cash at beginning of period     13,376       2,396  
CASH AT END OF PERIOD   $ 815     $ 690  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Interest   $ -     $ -  
Income taxes   $ -     $ -  
                 
NON CASH INVESTING AND FINANCING ACTIVITIES:                
Common stock issued as additional financing cost   $ 100,000     $ -  
Common stock issued for officer compensation   $ -     $ -  
Common stock issued for placement fees   $ 43,380     $ -  
Accrual of placement fees   $ -     $ -  
Common stock issued for debt   $ -     $ -  
Common stock issued for employee bonus   $ -     $ -  
Conversion of debt for shares of common stock   $ -     $ 116,047  

 

See accompanying notes to the condensed consolidated financial statements.

  

5
 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of Operations

 

All American Pet Company, Inc. (“AAPT” or the “Company”) is a developer and marketer of innovative pet wellness products including super-premium dog foods and antibacterial wipes. In 2010 and 2011, AAPT produced, marketed, and sold two super-premium dog foods under the brand names Grrr-nola® Natural Dog Food and Chompions®. Both Grrr-nola® Natural Dog Food and Chompions® were the first dog food products that were formulated for canine heart health and endorsed by a veterinary cardiac surgeon. In 2012, the Company launched its line of Pawtizer™ pet wipes and spray, the pet care industry’s first alcohol-free anti-bacterial dog cleaner. The Company has also announced and is marketing its Mutt™ Great Food for Great Dogs super-premium dry kibble dog food, and its Nutra Bars™ line of portable, convenient and functional, super-premium 4 ounce dog food bars. Each 4 ounce bar has a kcal equivalent of 8 ounces of super-premium dry dog food.

 

All American Pet Company, Inc. was initially organized under the laws of the State of New York (“All American Pet Company, Inc. NY”) in February 2003. In January 2006, All American Pet Company, Inc. NY merged into All American Pet Company, Inc. a Maryland corporation (“All American Pet Company, Inc. MD”). In June 2012, All America Pet Company Inc. merged into a Nevada Corporation, (“All American Pet Company, Inc.”). The Company has formed a number of wholly owned subsidiaries to provide for accountability of each of its operations. All American PetCo, Inc. was formed in January 2008 to provide corporate infrastructure and management services. All American Pet Brands, Inc. was formed in April 2009 to be the Company’s manufacturing and warehousing operation. In September 2009, the Company signed a license and distribution agreement with AAP Sales and Distribution Inc., a third party company, that obtained the rights to manufacture and sell certain of the Company’s products on a non-exclusive basis. AAP Sales and Distribution, Inc.’s operations have been consolidated with All American Pet Company, Inc. based on accounting guidelines for Variable Interest Entities.

 

Unless the context otherwise requires, references in these financial statements to the “Company” or “AAPT” refer to All American Pet Company, Inc., a Nevada corporation, and its subsidiaries, and its predecessors, All-American Pet Company Inc., MD, a Maryland Corporation and All-American Pet Company Inc., NY, a New York corporation. All financial statements give effect to this reincorporation as if it occurred at the beginning of the period.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As described below, the Company has incurred consistent losses, limited liquid assets, significant past due debts, and has a stockholders' deficit. These conditions, among others, raise substantial doubt as to the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States.

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly certain information and notes required by generally accepted accounting principles in annual financial statements have been omitted or condensed. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012, as reported by us in our Annual Report on Form 10-K filed with the SEC on June 17, 2013. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of our financial position as of March 31, 2013, and results of operations and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the entire year.

 

Going Concern and Management’s Plans

 

These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has a limited operating history and limited funds. As shown in the consolidated financial statements, the Company incurred a net loss of $679,385, used $377,325 cash for operations in for the quarter ended March 31, 2013, had a working capital deficit of $4,549,381 and total stockholders’ deficit of $4,593,168 as of March 31, 2013. In addition, the Company has limited liquid assets, significant past due debts, including unpaid payroll taxes, and minimal revenues. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty.

 

The Company is dependent upon outside financing to continue operations. Management plans to raise funds via private placements of its common stock and/or the issuance of debt instruments to satisfy the capital requirements of the Company’s business plan.  There is no assurance that the Company will be able to obtain the necessary funds through continuing equity and debt financing to have sufficient operating capital to execute the Company's business plan. If the Company is able to obtain necessary funds, there is no assurance that the Company will successfully implement its business plan or raise sufficient capital to complete the execution of its business plan. The Company’s continuation as a going concern is dependent on the Company’s ability to raise additional funds through a private placement of its equity or debt securities or other borrowings sufficient to meet its obligations on a timely basis and ultimately to attain profitable operations.

 

6
 

 

Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of All American Pet Company, Inc. (a Nevada corporation), and its wholly-owned subsidiaries All American PetCo, Inc. (a Nevada corporation) and All American Pet Brands, Inc. (a Nevada corporation). AAP Sales and Distribution, Inc. (a Nevada corporation) is considered a variable interest entity and is consolidated because management believes the Company is the primary beneficiary.   All American Pet Company, Inc., All American PetCo, Inc., All American Pet Brands, Inc., and AAP Sales and Distribution Inc., will be collectively referred to herein as the “Company”.

 

All significant intercompany balances and transactions have been eliminated in consolidation.

  

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Management believes that the estimates used are reasonable. Significant estimates made by management include estimates for bad debts, excess and obsolete inventory, and other trade spending liabilities.

 

Revenue Recognition, Sales Incentives and Slotting Fees

 

Revenues are recognized upon passage of title to the customer, typically upon product pick-up, shipment or delivery to customers.  The Company’s revenue arrangements with its customers may include sales incentives and other promotional costs such as coupons, volume-based discounts, slotting fees and off-invoice discounts.  These costs are typically referred to collectively as “trade spending”. Pursuant to Accounting Standards Codification (“ASC”) Topic 605, these costs are recorded when revenue is recognized and are generally classified as a reduction of revenue. Slotting fees refer to arrangements pursuant to which the retail grocer allows our products to be placed on the store’s shelves in exchange for a slotting fee. Given that there are no written contractual commitments requiring the retail grocers to allocate shelf space for twelve months, the Company expenses the slotting fee at the time orders are first shipped to customers.

 

Stock-based compensation

 

The Company records stock based compensation in accordance with the guidance in ASC Topic 718, which requires the Company to recognize expenses related to the fair value of its employee stock option awards.  This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.

 

Transactions with non-employees in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date off the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date on which it is probable that performance will occur. 

 

Earnings (Loss) Per Share

 

Net loss per share is calculated using the weighted average number of common stock outstanding for the period and diluted loss per share is computed using the weighted average number of common stock and dilutive common equivalent stock outstanding.  The weighted average number of common stock outstanding was 742,599,048 and 350,135,852 for the quarter ended March 31, 2013 and 2012, respectively. Net loss per share and diluted net loss per share are the same for all periods presented.

 

Fair Value of Financial Instruments

 

ASC 820, Fair Value Measurements and Disclosures, requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. Fair value of financial instruments is the amount at which the instruments could be exchanged in a current transaction between willing parties. The Company considers the carrying amounts of cash, accounts receivable, related party and other receivables, accounts payable, notes payable, related party and other payables, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.

 

7
 

 

ASC 820 prioritizes the inputs used in measuring fair value into the following hierarchy:

 

Level 1   Quoted market prices in active markets for identical assets or liabilities.  

 

Level 2   Observable inputs other than those included in Level 1 (for example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets).

 

Level 3   Unobservable inputs reflecting management’s own assumptions about the inputs used in estimating the value off the asset or liability.

 

The Company has no financial instruments measured at fair value on a recurring or nonrecurring basis as of March 31, 2013 or December 31, 2012.

 

Cash Equivalents

 

Cash equivalents consist of highly liquid investments with maturities at the date of purchase of 90 days or less.

 

Accounts Receivable and Allowances for Uncollectible Accounts

 

Credit limits are established through a process of reviewing the financial history and stability of each customer. The Company regularly evaluates the collectability of the trade receivable balances by monitoring past due balances. If it is determined that a customer will be unable to meet its financial obligation, the Company records a specific reserve for bad debts to reduce the related receivable to the amount that is expected to be recovered.

 

Inventories

 

Inventories consist of raw materials, packaging supplies and finished goods and are valued at the lower of cost, determined on a first-in, first-out (“FIFO”) basis, or market.

 

Machinery, Equipment and Leasehold Improvements

 

Machinery and equipment are stated at cost. Significant improvements are capitalized and maintenance and repairs are expensed. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets.  Machinery and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable.  The Company evaluates recoverability of machinery and equipment to be held and used by comparing the carrying amount of the asset to estimated future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

Estimated useful lives are as follows:

 

Computer equipment 3 – 5 years

 

Furniture and fixtures 5 – 10 years

 

Warehouse equipment 5 – 10 years

 

Leasehold improvements are stated at cost and are amortized over the life of the related lease or the estimated useful life, whichever is shorter.

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on differences between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition.  As of March 31, 2013 and 2012, the Company’s only significant deferred tax asset is its net operating loss carryforwards. Based on the Company’s recurring losses and financial position, the net deferred tax assets (approximately $7.1 million as of March 31, 2013) have been fully reserved for as of March 31, 2013 and 2012. Net operating losses begin to expire in 2022 for Federal purposes and 2014 for state purposes. The U.S. tax laws contain provisions (Section 382 limitations) that limit the annual utilization of net operating loss (and credit carryforwards) upon the occurrence of certain events including a significant change in ownership interest. Generally, such limitations arise when the ownership of certain shareholders or public groups in the stock of a corporation change by more than 50 percentage points over a three-year period. The Company may have incurred such an event or events; however, the Company has not completed a current study to determine the extent of the limitations, if any. Until a study is completed and the extent of the limitations is able to be determined, no amounts are being presented as an uncertain tax position.

 

8
 

 

A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  Income tax provisions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. The Company has no unrecognized tax benefits as of March 31, 2013 and 2012. Given that the Company’s net operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions in which the Company operates.

 

2. VARIABLE INTEREST ENTITY

 

The following is a description of the Company’s financial interests in a variable interest entity that management considers significant, those for which management has determined that the Company is the primary beneficiary of the entity and, therefore, has consolidated the entity into the Company’s financial statements.

 

On August 12, 2009, the Company entered into a License Agreement with AAP Sales and Distribution, Inc. (“AAPSD”). Under the terms of the agreement, AAPSD has the non-exclusive right to manufacture and market certain products of the Company (“AAPT”). The duration of the agreement is for a period of five years.  AAPSD is the primary beneficiary of the Company because management of AAPT controls the economic resources of AAPSD and provides significant financial support to AAPSD in the form of the production and distribution and deferred payment arrangements between AAPSD the Company.

 

AAPSD owes the Company payments for product purchased and for royalties at the stated rate of 18.5% of net revenues, which are due and payable within five business days of receipt of funds by AAPSD from any sale when good funds are received from the sale.  The 18.5% royalty payments will be applied to all minimum guarantee payments. The minimum guaranteed royalties, as amended, are due based within the 12-month period following the time at which AAPT has delivered 3,000,000 pounds of finished product.  AAPSD does not have a royalty obligation to the Company until AAPSD has recouped any costs of marketing or placement fees. All royalty payments due from sales are accumulated and are applied toward the minimum royalty payment for the year.  If the 18.5% royalties are less than the minimum then AAPSD is obligated pay AAPT the difference between what was paid during the 12 month period and the required minimum.  Minimum royalty payments are due in the normal course of business as AAPSD has ten days at the end of each quarter to report any sales and royalties due and AAPC has the right to review the reports and agree on what amounts are owed based on sales and a statement of any minimum guarantees that may be due and payable.  All payments are to be made in the normal course of business as agreed at the time of the annual royalty report’s acceptance by AAPT.

 

Management has determined that AAPT is the primary beneficiary of AAPSD as the Company’s interest in the entity is subject to variability based on results from operations and changes in the fair value. During the quarter ended March 31, 2013 and 2012, all operations of AAPSD are included in the accompanying consolidated financial statements. For the quarter ended March 31, 2013 and 2012, sales of $115,019 and none, respectively, and net income(losses) of $84,352 and ($19,895), respectively, were recognized as a result of the consolidation.

 

The financial position of AAPSD at March 31, 2013 is as follows:

 

Total Assets   $ 821,504  
Total Liabilities     (1,296,019 )
Total Stockholders’ Deficit   $ 474,515  

 

3. INVENTORY

 

Inventory consists of the following:  

 

    March 31, 2013     December 31, 2012  
Raw materials   $ 30,035     $ -  
Work in process     -       -  
Finished goods     714,696       715,869  
    $ 744,731     $ 715,869  

 

9
 

 

Inventory began to scale during the three months ended March 31, 2013 due to the initial manufacturing of NutraBar™.  

 

4. MACHINERY AND EQUIPMENT

 

Machinery and equipment consists of the following:

 

    March 31, 2013     December 31, 2012  
Computer equipment and software   $ 2,769     $ 2,769  
Furniture and Fixtures     1,991       1,991  
Leasehold improvements     31,219       -  
Warehouse and food production equipment     75,357       73,562  
Total     111,336       78,322  
Less: Accumulated depreciation     (14,797 )     (8,956 )
Net Machinery and Equipment   $ 96,539     $ 69,366  

 

Depreciation expense for the quarter ended March 31, 2013 and 2012 was $5,842 and $246, respectively.

 

5. PAYROLL TAXES

 

The Company did not make certain required filings and payments of required federal and state payroll taxes. The collective amount of payroll taxes, interest and penalties due at March 31, 2013 and December 31, 2012 totaled $905,487 and $889,711, respectively. Under the Internal Revenue Code, the Internal Revenue Service may impose a civil penalty on the Company’s responsible persons that is distinct from the Company’s responsibilities. This civil penalty may equal 100% of the Company’s delinquent trust fund taxes.

 

6.  NOTES PAYABLE

 

Notes payable consists of the following:

  

    March 31,     December 31,  
    2013     2012  
Notes Payable interest at 17% per annum; interest and principal due on demand; demand has been made and the  note is in default at December 31, 2012     50,000       50,000  
Convertible 8% Note Payable due November 12, 2013     100,000          
Total Notes Payable   $ 150,000     $ 50,000  

  

10
 

 

On April 27, 2004, the Company entered into an unsecured promissory note with an unrelated third party for $150,000. The loan bears interest at 10% per annum and had an original due date of April 27, 2005. Extended due dates were granted up through 2011. On August 9, 2012, a stipulated settlement amount of $300,000, which included principal of $150,000 and accrued interest of $150,000, was reached with the noteholder. As a result of the stipulated settlement, the related $300,000 has been classified in settlements and judgments at March 31, 2013 and December 31, 2012 in the accompanying condensed consolidated balance sheet (Note 9).

 

In 2010, the Company entered into an unsecured promissory note with an unrelated third party for $50,000. The loan bears interest at 17% and is due on demand. On March 16, 2012, the noteholder demanded repayment of the note and all accrued interest. The Company has not made any payments and is in default on the note.

 

On February 12, 2013, the Company entered into an unsecured, convertible promissory note with an unrelated third party for $103,500, less a $3,500 fee.  The loan bears interest at 8% per annum and a balloon payment of principal and accrued interest is due on November 12, 2013.  At any time 180 days after the date of the note, the lender can convert the principal and accrued interest into shares of the Company’s common stock at a 39% discount based on the average of the lowest three trading prices during a ten day period ending one day prior to the conversion date.  Management determined the intrinsic value of the beneficial conversion feature to be $78,204 as of the commitment date. Such amount has been recognized as a debt discount and amortized over the note’s stated term. As a result, $13,613 of interest expense was recognized during the quarter ended March 31, 2013.

 

7. RELATED PARTY TRANSACTIONS

 

On March 6, 2012, the Board of Directors, consisting of Mr. Schwartz and Ms. Bershan, authorized the Company to execute a Convertible Revolving Grid Note (the “Grid Note”) for a principal sum of up to $1,000,000 with CEO Barry Schwartz and President, Lisa Bershan. The Grid Note bears interest at 10% per year and may be converted into common stock of the Company at a conversion price of $0.0022 any time before March 6, 2013. Neither Mr. Schwartz nor Ms. Bershan has advanced capital under the terms of the grid note as of December 31, 2012. In March 2013, the Grid Note was amended.

 

On February 26, 2013, the Board of Directors authorized the Company to amend the Convertible Revolving Grid Note for a principal sum of up to $1,000,000 with Chief Executive Officer Barry Schwartz and President, Lisa Bershan dated March 6, 2012. The amendment reduced interest to 6.5% per year, extended the maturity date to 4 years, and extended the conversion date to October 31, 2013. As of June 14, 2013, Mr. Schwartz and Ms. Bershan have loaned $521,000 under the terms of the Grid Note and such amount is convertible into 236,818,181 shares of the Company’s common stock.

 

During the quarter ended March 31, 2013, the Company received advances from Mr. Schwartz and Ms. Bershan totaling $62,276, under the Grid Note and such amount is convertible into 28,307,272 shares of common stock.

 

During the quarter ended March 31, 2013 and year ended December 31, 2012, the Company made advances to, and received advances from, an entity owned by the Company’s Chief Executive Officer. These advances are not collateralized and do not bear interest. As of March 31, 2013 and December 31, 2012, no amounts were due from and no amounts were due to this related entity.

 

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8. STOCKHOLDERS’ DEFICIT

 

Capital Stock

 

All American Pet Company, Inc. was formed under Maryland law on January 4, 2006 with 50,000,000 authorized shares of common stock and 10,000,000 authorized shares of preferred stock. On January 27, 2006, All-American Pet Company Inc., a New York corporation, merged with and into All American Pet Company, Inc., a Maryland corporation. In June 2012, All-American Pet Company Inc., Maryland, merged with and into All American Pet Company, Inc., a Nevada corporation.

 

Increase in Authorized Common Stock

 

Concurrent with the June 11, 2012 re-domicile to a Nevada corporation, the shareholders voted to increase the number of authorized shares of $0.001 par value common stock to 1,010,000,000. Previously, the shareholders voted on February 26, 2011 to increase the number of authorized shares of $0.001 par value common stock to 500,000,000. Authorized shares had been increased from 50,000,000 to 250,000,000 in 2009.

 

In 2013, the Board of Directors increased the number of authorized shares to 3,000,000,000 (Note 12).

 

Sales of Common Stock

 

During the quarter ended March 31, 2013, the Company received and accepted subscriptions for 29,067,236 shares of common stock. 2,500,000 of these subscriptions were accepted at $0.02 per share and 26,567,236 were accepted at $0.007 per share. The sale of unregistered equity securities resulted in a capital increase of $235,972, before offering costs. The Company recorded a $542,127 common stock payable on its books at March 31, 2013 to reflect the value of the 54,212,734 of common shares not yet issued. Common stock payable is comprised of $342,127 cash receipts for stock purchases (34,212,700 shares) and stock for consulting services valued at $200,000 (for 10,000,000 shares which will be issued over the course of one year). A total of 3,575,500 shares of common stock with a value of $43,380 was issued in the form of offering costs and 10 million shares of common stock was issued with a value of $100,000 as interest payment on debt during the quarter ended March 31, 2013. As of March 31, 2013, there were 784,284,203 shares issued and outstanding.

 

Conversion of Preferred Stock to Common Stock

 

On February 27, 2009, the Company entered into an agreement with the two preferred stockholders to convert all 56,500 shares of Series “A” Preferred shares held by them in exchange for 5,000,000 shares of the Company’s common stock (the “Share Guarantee”).  The delivery of the common stock to the preferred stockholders took place in March 2009 and the Company was released by the stockholders from any and all future claims and liabilities. The preferred stockholders have the right to sell the common stock at a rate of 1,250,000 in the aggregate every 90 days starting May 15, 2009 and the right to sell at will after March 31, 2010. The Company has agreed that the total value of the shares sold over the Liquidation Period, which is defined as the period from May 15, 2009 to April 30, 2010, to be at a minimum of $800,000 or the market value of 5,000,000 shares at $0.16 per share. If the value of the shares sold during the Liquidation Period is less than $800,000, then the Company will have the right to purchase any unsold shares at a price of $0.16 per share. If the gross proceeds from all sales is still less than $800,000 then the Company shall have the right and not the obligation to make up the difference by making a cash payment on or before May 31, 2010.  In addition, no later than June 15, 2010, the Company is obligated to issue an additional 3,000,000 shares of the common stock in total to these stockholders if the sales proceeds and any additional payments made by the Company is less than $800,000.

 

The Share Guarantee was subsequently amended to extend the Liquidation Period described above to March 31, 2011 and those amendments required the Company to issue 6,000,000 shares of common stock with a fair value of $400,000 in 2010. In connection with the Share Guarantee, the Company recognized an additional expense, and a corresponding accrued liability, of $600,000 in 2010.

 

In October 2012, the Share Guarantee was amended, subject to the Company’s ability to satisfy certain required payments and other conditions. As the Company did not satisfy its contractual obligations, the amendment was cancelled and became null and void.

 

Although the Company’s contractual obligations under the Share Guarantee terminated in 2011, management intends to fulfill the Company’s obligations under the related agreements and amendments.  Based on the $800,000 amount of the guarantee, amounts realized by the counterparties from selling related shares, and the number of shares the counterparties have left to sell, management estimates the Company’s obligation under the Share Guarantee to be $400,000 as of December 31, 2012. In March 2013, payment of 10 million shares of common stock with a value of $100,000 was granted to these stockholders as consideration for interest due to past due payments on the Company’s obligation under this agreement.

  

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Warrants and Stock Options

 

The Company did not issue any warrants or stock options during the quarter ended March 31, 2013. Further, there were no warrant or stock option exercises, expirations or cancellations during the quarter ended March 31, 2013.

 

Common Stock Receivable

 

On April 6, 2010, the Company settled litigation with a former employee. Terms of the settlement required the former employee to place 400,000 shares of Company common stock valued at $52,000 in an escrow account in exchange for an initial payment of $8,000 and 27 monthly payments of $1,571. The Company will receive the shares of common stock after all of the payments have been made. The Company made no payments in 2012 or 2011 related to this arrangement (Note 9).

 

On February 3, 2011, through mediation, the Company settled litigation with a former employee. Terms of the settlement required the former employee to place 750,000 shares of Company stock valued at $90,000 in an escrow account in exchange for 14 monthly payments of $6,576. The Company will receive the shares of common stock after all of the payments have been made. The Company made no payments during the three months ended March 31, 2013 and no payments during the year ended December 31, 2012 (Note 9).

 

9. LITIGATION, CLAIMS, AND JUDGMENTS

 

The Company is involved in various litigation, claims and judgments involving vendors, former employees, and a promissory noteholder. A summary is as follows:

 

    March 31, 2013     December 31, 2012  
Vendors   $ 382,473     $ 382,473  
                 
Former Employees     269,916       268,245  
                 
Promissory Noteholder     231,764       227,281  
                 
    $ 884,153     $ 877,999  

 

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Vendors

 

As of December 31, 2011, one vendor had a settlement agreement for $20,000. During 2012, six vendors made claims or were awarded judgments against the Company for a total of $364,473, and aggregate payments of $2,000 were made. The balance outstanding to these vendors at March 31, 2013 and December 31, 2012 was $382,473.

 

On July 23, 2012, a vendor filed an action against the Company and certain officers as individuals for an original $150,000 judgment previously awarded in arbitration, 4.75% interest, legal fees of $49,950, and other fees of $4,981. The action has not been heard by a court. The Company has recognized $221,463 in its March 31, 2013 and December 31, 2012 consolidated balance sheets relating to this matter.

 

Former Employees

 

As of December 31, 2011, six former employees made claims or were awarded judgments against the Company for a total of $211,480. During 2012, one former employee entered into a settlement agreement for $50,000, and there were no payments made in 2012. The balance outstanding at March 31, 2013 and December 31, 2012 was $268,245, and includes accrued interest.

 

As described in Note 8, the Company has settlement agreements with two former employees that require monthly cash payments and provide for the return of 1,150,000 shares of common stock if the Company satisfies its payment obligations to the former employees.

  

Promissory Noteholder

 

On August 9, 2012, the Company settled litigation with a note holder. The settlement requires the Company to pay cash of $300,000 and interest at 8% per annum. Terms of the settlement require an initial payment of $50,000 and quarterly payments of $30,000 beginning October 1, 2012. Total payments during 2012 were $80,000. The outstanding principal balance and accrued interest as of March 31, 2013, was $233,435.

 

In the event of default, the noteholder can enter a stipulated judgment against the Company and certain officers as individuals in the amount of $1,197,190. The Company has not made the required January 1, 2013 or April 1, 2013 payments and the noteholder has not filed the stipulated judgment against the Company.

 

10. CUTEST DOG COMPETITION

 

In May 2009, the Company finalized plans to host a nationwide viral marketing contest known as the “Cutest Dog Competition”. The contest started on August 1, 2009, allowing every dog owner in America to have the opportunity to submit a picture of their dog. The Company announced the winner of the “Cutest Dog Competition” on its website as well as at a major venue on Thanksgiving Day. Prizes were distributed for regional winners, and three top regional winners received a $5,000 prize each, qualified as finalists for the final event.  Regional winners from all over the country then competed for the title of the “Cutest Dog Competition” and that winner was awarded the $1 million prize. In November 2009, the winner was announced.

 

The present value of the $1,000,000 obligation payable over 30 years at 7.5% present value is $336,500.  The discount of $663,500 is being amortized over 30 years with annual cash payments of $33,333.  The Company did not make any payments during the quarter ended March 31, 2013 or in the years ended December 31, 2012 and 2011. As of March 31, 2013 and December 31, 2012, $408,379 and $402,850, respectively, were recorded as prize liabilities in the accompanying condensed consolidated balance sheets.

 

11. COMMITMENTS AND CONTINGENCIES

 

Lease commitments

 

In the normal course of business, the Company enters into a number of off-balance sheet commitments. These commitments expose the Company to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those recorded on the Company’s consolidated balance sheets. The Company leases space for its manufacturing operations in Shawnee, Kansas and leases equipment used in operations at that location. Amounts of minimum future annual commitments under non-cancelable operating leases are as follows:

 

  2013     $ 112,885  
  2014       150,327  
  2015       106,029  
  2016       108,022  
  2017 and thereafter       45,305  
  Total     $ 534,193  

 

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In addition to these commitments, the Company pays monthly rent for its corporate offices and rent for a warehouse forklift, both on month to month basis, totaling $6,395 per month.

 

Litigation

 

In addition to the matters described in Note 9, from time to time, the Company is involved in litigation arising in the normal course of business. Management believes that resolution of these other matters will not result in any payment that, in the aggregate, would be material to the Company’s consolidated financial position or results of operations. 

 

12. SUBSEQUENT EVENTS

 

In June 2013, the Board of Directors voted to increase authorized shares from 1 billion and 10 million to 3 billion shares. As of June 14, 2013, there were 837,929,245 shares of common stock issued and outstanding.

 

During the period from April 1, 2013 to June 14, 2013, the Company received and accepted subscriptions for 57,945,385 shares of common stock at $0.007 per share. Proceeds from the sales of equity securities aggregated $457,750, before offering costs.

 

During the period from April 1, 2013 to June 14, 2013, additional advances of approximately $459,000 were made to the Company under the Grid Note bring the balance of the Note to $521,000. This amount is convertible into 236,818,181 shares of common stock.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

All American Pet Company, Inc. and its consolidated subsidiaries (“AAPT”) develops and markets innovative first-to-market pet wellness products including super-premium dog food bars, dog food snacks and antibacterial paw wipes.

 

The executive offices are located at 1100 Glendon Avenue, 17th Floor, Los Angeles, California 90024. The office telephone number is (310) 689-7355.  

 

The Company’s online sites are www.allamericanpetcompany.com, www.nutrabar.com, www.pawtizer.com, www.facebook.com/nutrabar, www.facebook.com/pawtizer, www.vetresearchlibrary.com, http://issuu.com/nutrabar and http://bewelllivelong.wordpress.com

 

The information on our websites are not, and shall not be deemed to be, a part of this report or incorporated by reference into this or any other filing we make with the Securities and Exchange Commission (the “SEC”)

 

History of the Company and its Current Status

 

All American Pet Company, Inc. was initially organized under the laws of the State of New York (“All American Pet Company, Inc. NY”) in February 2003. In January 2006, All American Pet Company, Inc. NY merged into All American Pet Company, Inc. a Maryland Corporation (“All American Pet Company, Inc. MD”). In June 2012, All American Pet Company, Inc. MD merged into a Nevada Corporation, (“All American Pet Company, Inc.”).

 

The Company has formed a number of wholly owned subsidiaries to provide for accountability of each of its operations. All American PetCo, Inc. was formed in January 2008 to provide corporate infrastructure and management services. All American Pet Brands, Inc. was formed in April 2009 to be the Company’s manufacturing and warehousing operation. In September 2009, the Company signed a license and distribution agreement with AAP Sales and Distribution, Inc., a third party company, that obtained the rights to sell certain of the Company’s products on a non-exclusive basis. AAP Sales and Distribution, Inc.’s operations have been consolidated with All American Pet Company, Inc. based on accounting guidelines for Variable Interest Entities.

 

In 2010 and 2011, AAPT produced, marketed, and beta tested two super-premium dog foods under the brand names Grrr-nola®Natural Dog Food and Chompions®. We believe that both Grrr-nola®Natural Dog Food and Chompions® were the first dog food products that were formulated for canine heart health and endorsed by a veterinary cardiac surgeon.

 

In 2012, after the beta testing, the Company completed market research, proprietary scientific formulation and testing for an all-natural super premium bar category called NutraBar™ - original, low fat and senior formulas. It also produced proprietary formulations for two additional bars – Chomp Bar™ and Mutt Bar™. It has successfully launched its portable, convenient and functional NutraBar™ line of all natural true food super premium bars to both online and traditional brick and mortar retailers. Each gluten-free 4 ounce bar has a kCal equivalent of 8 ounces of super-premium dry dog food. The bars have been both manufactured and packaged by the Company since the fourth quarter 2012 and related sales commenced in 2013.

 

The Company has shown and announced to the U.S. market the first line of all-natural super premium dog treats called CHEWIES™, which comes in three flavors, and is preparing to market its CHEWIES™ line of flavored all-natural super-premium 27% protein dog treats.

 

During 2012, the Company also launched its PAWtizer™ line of wet wipes and spray, the pet care industry’s first alcohol-free, anti-bacterial dog cleaner.

 

The Company has never operated at a profit and is dependent upon additional financing to remain a going concern. Throughout 2012, the Company obtained equity capital in the amount of approximately $3,000,000 and continues to seek additional equity capital to sustain operations. During the three months ended March 31, 2013, the Company obtained $235,972 of equity capital and incurred $162,276 of debt to sustain operations. The Company remains under significant financial strain, primarily because of its limited operating funds and a significant amount of past due debts. The limited amount of operating capital may preclude the Company’s ability to execute its manufacturing, marketing, and distribution objectives or to continue operations. As a result, the reports of the independent registered public accounting firms on the Company’s 2012 and 2011 consolidated financial statements include explanatory paragraphs expressing substantial doubt regarding the Company’s ability to continue as a going concern.

 

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Products

 

The Company has developed a number of innovative pet wellness products. The Company is also in the process of developing new products, variations of existing products and other items that will complement and enhance the Company’s array of product offerings. The Company requires significant additional financing to market, manufacture and sell its existing products and to develop new products. Key components of the Company’s product offerings are described below:

 

NutraBar™

The Company has developed (and launched in 2013) the pet industry’s first dog food product packaged as a nutritional food bar. With three product lines targeting the super-premium dog food and dog treat segments, the Company’s all-natural bars are the equivalent of 8 ounces of dry kibble in a 4 ounce bar. These bars offer a high protein meal or snack without the inconvenience of bags and bowls. AAPT’s true food bars are formulated to contain a blend of natural ingredients and provide essential nutrients optimized to promote a dog’s nutrition, health, and vitality.

 

CHOMPBar™

The line contains 27% protein quad segmented 4 ounce bars with digestive fiber enhancements in addition to functional vitamin and mineral supplementation. It comes in original, low fat and senior formulas.

 

MUTTBar™

Mutt™Bar products contain 25% protein and are supplemented with omega 3 fatty acid to promote healthy skin and coat. They are fortified with vitamin and amino acids. The bars will also be a quad-segmented 4 ounce wrapped bar available singly, as well as in full-color display cartons of a dozen. They also come in original, low fat, and senior formulas.

 

CHEWIES™

The Company’s line of 27% high protein dog snacks will be made with the same nutritive ingredients as the food bars with additional flavorings added. CHEWIES™ will be packaged in 8 ounce and 16 ounce re-sealable pouches containing approximately 32 and 64 bite sized pieces.

 

PAWtizer™

The Company developed PAWtizer™ for the purpose of protecting the 53 million American families that are homes to 78 million dogs from infectious human germs such as MRSA, E. coli, Salmonella and other bacteria that are innocently picked up by dogs and transferred to humans. PAWtizer™ is the pet care industry’s first alcohol-free anti-bacterial dog cleaner. With PAWtizer™, the Company is delivering a product that research has shown to be more useful and effective than alcohol. PAWtizer™ is available in canisters of 100 and 45 count, chemically treated wet wipes that have been shown to kill 99.9% of the germs resident on a typical dog paw. PAWtizer™ also comes in a convenient 8 ounce spray with Bitrex® added. Bitrex® is a “bittering” agent that will prevent dogs from licking their paws and thus extending the reach of the antibacterial effects of PAWtizer™.

 

The principal active ingredient in PAWtizer™ products is 0.13% Benzalkonium chloride, a germ reducing agent that has been widely accepted for use as a topical antiseptic for human cuts and scrapes and “leave on skin” cosmetics.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Our liquidity requirements arise principally from our working capital needs, including the cost of goods, inventory, marketing, officer compensation and payroll and general and administrative costs. In the future, we intend to fund our liquidity requirements through a combination of cash flows from operations and external financings.

 

Our principal sources of liquidity have been sales of equity securities and borrowings. To meet our current requirements to operate, the Company has sold unregistered common stock and is currently attempting to undertake the sale of additional equity securities. As new funds are obtained, our principal uses of capital are to meet our operating requirements, production, marketing and advertising expenditures, and make investments in inventory and equipment. Additional funds could be used to reduce past due payroll taxes and other debts and payables. Until cash generated from operations is sufficient to satisfy our future liquidity requirements, we will be investigating purchase order and accounts receivable funding from different sources, as well as other sources of capital. We will also be looking to seek equity capital through the issuance of additional common stock.

 

In February 2013, the Company entered into an unsecured, convertible promissory note with an unrelated third party for $103,500, less a $3,500 fee.  The loan bears interest at 8% per annum and a balloon payment of principal and accrued interest is due on November 12, 2013.  At any time 180 days after the date of the note, the lender can convert the principal and accrued interest into shares of the Company’s common stock at a 39% discount based on the average of the lowest three trading prices during a ten day period ending one day prior to the conversion date. 

 

As of March 31, 2013, one other source for funding was the $1,000,000 credit facility commitment from the Company’s, Chief Executive Officer, Barry Schwartz, and President, Lisa Bershan, provided to the Company in March 2012. On March 1, 2013, this credit facility was renewed with the following changes to the terms: Interest rate was lowered to 6.5% per year and the maturing date was amended to be due and payable not later than 48 months from the original issue date of the Revolving Grid Note. As of March 31, 2013, advances to the Company under this facility totaled $62,276, increasing the holders’ beneficial ownership by 28,307,272 shares of common stock. As of June 14, 2013, a total of $521,000 has been advanced to the Company on this Grid Note whereby increasing beneficial ownership by 236,818,181 shares of common stock. The Company’s need for significant future funding will likely result in significant additional dilution to our stockholders.

 

Because of our lack of funding and limited ability to adequately market our products, the Company has incurred high costs in manufacturing and marketing our products. Further, the Company has incurred significant fixed costs, including officer compensation, occupancy and public company costs. As a result, we have experienced large operating losses and negative cash flow. The Company has funded its operations primarily through the issuance of equity securities and debt. Additional capital infusions will be needed to manufacture, distribute and promote our products, sustain operations and make payments and settlements of existing debts and obligations. The Company believes that its future profitability will depend on the commercial and consumer acceptance of its products, effective marketing strategies, efficient production and proper execution of its business plan, as to all or any of which, no assurance can be given. Additionally, success with its external financing strategies will be needed to effectuate our business plans. The Company’s limited operating history makes it difficult to evaluate prospects of success, particularly because its business plan is founded on new and unproven products. Furthermore, there can be no assurance that the Company’s external financing strategies will yield any capital or the amount of capital necessary to execute its business plan.

 

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In the three months ended March 31, 2013, the Company raised $235,972 of equity capital before offering costs and received $162,276 through the issuance of debt instruments. The Company is currently seeking additional sources of funding.

 

Results of Operations for the Three Months Ended March 31, 2013 and 2012

 

The following discussion of the results of operations should be read in conjunction with our financial statements and notes thereto for three month period ended March 31, 2013 and 2012 included in this Quarterly Report as well as the statements included in our Form 10-K for the year ended December 31, 2012.

 

The Company’s expenses have increased dramatically in relation to sales as the Company is launching new products and preparing for future growth. For the three months ended March 31, 2013, net sales were $115,019 which is attributable to the introduction of the NutraBar™ product line. Cost of goods sold were $72,764 during the same period. There were no sales or cost of sales for the three months ended March 31, 2012.

 

Sales and marketing expenses decreased $10,941, from $77,472 to $66,531, for the three months ended March 31, 2013 and 2012, respectively. Higher expenses in the first three months of the prior year are primarily due to product development, testing, and promotion of the NutraBar™ product line while the Company was in early stages of NutraBar™ development. General and administrative expenses increased $184,327, from $343,493 to $527,820, for the three months ended March 31, 2013 and 2012. This increase is attributable to payroll and facility expenses for our new manufacturing division in Shawnee, KS of approximately $106,000, and increases to legal, consulting and commission expenses of approximately $78,000 over the same period last year.

 

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Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Forward Looking Statements

 

This Quarterly Report contains forward-looking statements. These forward-looking statements include, but are not limited to, predictions regarding:

 

    our business plan;

 

    the commercial viability of our products;

 

    the effects of competitive factors on our products;

 

    expenses we will incur in operating our business and revenues we will earn in operating our business;

 

    our liquidity and sufficiency of existing cash;

 

    the success of our financing plans; and

 

    the outcome of existing, pending or threatened litigation.

 

You can identify these and other forward-looking statements by the use of words such as “may”, “will”, “expects”, “anticipates”, “believes”, “estimates”, “continues”, or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

 

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the heading “Risk Factors”. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

 

The information contained in this Quarterly Report is as of March 31, 2013, unless expressly stated otherwise.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

As a smaller reporting company, All American Pet Company, Inc. is not required to provide the information required by this item

 

Item 4. Controls and Procedures

 

Our management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that as of March 31, 2013, the Company’s disclosure controls and procedures were not effective, at the reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate to allow timely discussions regarding required disclosure due to the material weaknesses described below.

  

In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure that our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our consolidated financial condition, results of operations, changes in stockholders’ equity and cash flows for the periods presented.

  

  · Inadequate resources. The Company did not consistently maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, SEC experience and training to (i) ensure the timely and accurate preparation of interim and annual financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), (ii) effectively segregate certain incompatible functions, and (iii) remediate previously communicated deficiencies. In addition, the Company placed substantial reliance on manual procedures and detective controls that lacked adequate management monitoring for compliance.

 

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  · Control environment. We did not maintain an effective control environment. Specifically, we did not maintain: (i) a documented risk assessment process that adequately addresses COSO objectives, (ii) sufficient anti-fraud controls, including a whistleblower program, formal written policies and procedures for the review and approval of transactions with related parties, a qualified and independent audit committee, and directors that are independent of management, (iii) adequate monitoring of existing controls over financial reporting and individual and corporate performance against expectations, (iv) appropriate human resource policies, such as background investigations and consistent performance reviews for key personnel, and (v) adequate documentation of actions taken by the Board regarding: fraud oversight, review and approval of external financial statements, actions supporting executive performance and compensation.

 

  · Period-end financial reporting processes. Effective controls over period-end financial reporting processes were not maintained to effectively ensure: (i) significant agreements, or amendments thereto, are analyzed and accurately accounted for in the proper period, (ii) key reconciliations, account analyses, and summaries are performed and approved with appropriate resolution of reconciling items in a timely manner, (iii) journal entries, both recurring and non-recurring, are analyzed and approved, (iv) the resulting financial information, statements and disclosures are reviewed and appropriate checklists are used for compliance with U.S. GAAP, (v) monthly closing quality control checklists were used consistently and thoroughly to ensure all financial reporting procedures and controls were performed, and (vi) documented reviews of financial results are compared to budgets and expectations.

 

  · Cash expenditures. Effective controls related to expenditures were not maintained. Specifically, controls were not properly designed or operating effectively to ensure: (i) officer compensation, including benefits, are authorized, reviewed and approved on a timely basis, and are in accordance with contractual agreements and (ii) expenditures made by management contained adequate and appropriate supporting documentation to establish the related business purpose of the expenditure.

   

Changes in Internal Control over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is involved in various litigation involving vendors, former employees, and a promissory noteholder.

 

Vendors

 

As of December 31, 2011, one vendor had a settlement agreement for $20,000. During 2012, six vendors made claims or were awarded judgments against the Company for a total of $364,473, and related payments of $2,000 were made. The balance outstanding to these vendors at March 31, 2013 and December 31, 2012 was $382,473.

 

On July 23, 2012, a vendor filed an action against the Company and certain officers as individuals for an original $150,000 judgment previously awarded in arbitration, 4.75% interest, legal fees of $49,950, and other fees of $4,981. The action has not been heard by a court.

 

Former Employees

 

As of December 31, 2011, six former employees made claims or were awarded judgments against the Company for a total of $211,961. During 2012, one former employee entered into a settlement agreement for $50,000, and there were no payments. The balance outstanding at March 31, 2013 and December 31, 2012 was $268,245, and includes accrued interest.

 

On April 6, 2010, the Company settled litigation with one of the six former employees. Terms of the settlement required the former employee to place 400,000 shares of Company stock valued at $52,000 in an escrow account in exchange for an initial payment of $8,000 and 27 monthly payments of $1,571. The Company will receive the shares of common stock after all of the payments have been made. The Company made no payments during the three months ended March 31, 2013, no payments in 2012, and $3,342 in 2011. The outstanding balance at March 31, 2013 was $31,432.

 

On February 3, 2011, through mediation, the Company settled litigation with one of the former six former employees. Terms of the settlement required the former employee to place 750,000 shares of Company stock valued at $90,000 in an escrow account in exchange for 14 monthly payments of $6,576. The Company will receive the shares of common stock after all of the payments have been made. The Company made no payments during the three months ended March 31, 2013, no payments in 2012, and $2,069 in 2011. The outstanding balance at March 31, 2013 was $90,000.

 

On January 18, 2013, All American Pet Company,  Inc. (the “Company”) filed an action entitled All American Pet Company, Inc. vs. Eric Grushkin et al, in the Superior Court of the State of California, County of Los Angeles, West District against defendant Eric Grushkin (Case Number: SC119776).  As previously announced, on January 11, 2013,  the Company was made aware that a former employee sent communications that contained intentionally misleading and harmful disclosures as well as confidential information regarding the Company to a selected group of shareholders. These communications included allegations that the Company’s chief executive officer and president engaged in acts of malfeasance, misfeasance and negligence in the management and conduct of the Company business. The Company believes that this employee made multiple unauthorized disclosures of confidential information and misinformation to these shareholders on January 10, 2013 and thereafter. The complaint seeks damages and injunctive relief for:

 

  1. breach of contract

 

  2. misappropriation of trade secrets

 

  3. intentional interference with prospective economic advantage

 

  4. breach of fiduciary duty

 

  5. violation of computer fraud and abuse act, and

 

  6. conversion

 

Motions made by the defendant to remove to U.S. District Court and then to Dismiss have been denied. Other motions by the defendant have also been denied. This matter is currently pending in California State Court.

 

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Item 1A. Change in Risk Factors.

 

There are no material changes in Risk Factors from the Form 10-K for year-end December 31, 2012 filed on June 17, 2013.

 

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Item 2. Unregistered Sales of Equity Securities

 

During the three months ended March 31, 2013, the Company received $235,972 in subscriptions for 29,067,236 shares of common stock, of which 2,500,000 common shares were subscribed at $0.02 per share and 26,567,236 shares were subscribed at $0.007 per share. The Company incurred offering costs valued at $5,757 in the equity sales effort. As of March 31, 2013, the Company has a common stock payable of $542,127. The Company sold the shares without registration under the Securities Act of 1933, as amended, or state securities laws, in reliance on the exemptions provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated thereunder. There were no more than 35 purchasers of the common stock, appropriate financial and business information was provided to the purchasers in accordance with Rule 502(b), there was no form of general solicitation or general advertising relating to the offer and the Company exercised reasonable care to assure that the purchasers of the common stock were not underwriters within the meaning of section 2(a)(11) of the Securities Act. Based on information received, the Company believes that each purchaser of shares is an accredited investor within the meaning of the federal securities laws. The shares have not been registered. The shares may not be offered or sold by the investors absent registration or an applicable exemption from registration requirements, such as the exemption afforded by Rule 144 under the Securities Act of 1933.

 

During the three months ended March 31, 2013, the Company issued 88,789,786 shares of common stock of which 64,500,000 common shares was a reduction of the stock payable as of December 31, 2012 valued at $500,000. Additionally, 575,500 common shares, valued at $5,757, were issued as offering costs payable to placement agents, and 10,000,000 common shares, valued at $100,000, were issued to promissory note holders in consideration for interest due to past due payments on the Company’s obligation. As of March 31, 2013, there were 784,284,203 common shares outstanding. As of June 14, 2013, the Company had 837,929,245 shares of common stock outstanding.

 

On February 12, 2013, the Company entered into an unsecured, convertible promissory note with an unrelated third party for $103,500, less a $3,500 fee.  The loan bears interest at 8% per annum and a balloon payment of principal and accrued interest is due on November 12, 2013.  At any time 180 days after the date of the note, the lender can convert the principal and accrued interest into shares of the Company’s common stock at a 39% discount based on the average of the lowest three trading prices during a ten day period ending one day prior to the conversion date.  Management determined the intrinsic value of the beneficial conversion feature to be $78,000 as of the commitment date. Such amount has been recognized as a debt discount and amortized over the note’s stated term. As a result, $13,000 of interest expense was recognized during the quarter ended March 31, 2013.

 

On March 6, 2012, the Board of Directors, consisting of Mr. Schwartz and Ms. Bershan, authorized the Company to execute a Convertible Revolving Grid Note (the “Grid Note”) for a principal sum of up to $1,000,000 with CEO Barry Schwartz and President, Lisa Bershan. The Grid Note bears interest at 10% per year and may be converted into common stock of the Company at a conversion price of $0.0022 any time before March 6, 2013. Neither Mr. Schwartz nor Ms. Bershan has advanced capital under the terms of the grid note as of December 31, 2012. In March 2013, the Grid Note was amended.

 

On February 26, 2013, the Board of Directors authorized the Company to amend the Convertible Revolving Grid Note for a principal sum of up to $1,000,000 with Chief Executive Officer Barry Schwartz and President, Lisa Bershan dated March 6, 2012. The amendment reduced interest to 6.5% per year, extended the maturity date to 4 years, and extended the conversion date to October 31, 2013. As of June 14, 2013, Mr. Schwartz and Ms. Bershan have loaned $521,000 under the terms of the Grid Note and such amount is convertible into 236,818,181 shares of the Company’s common stock.

 

Item 3. Defaults Upon Senior Securities

 

As described in Note 6 to the March 31, 2013 condensed consolidated financial statements, the Company is in default of a $50,000 note.

 

As described in Note 9 to the March 31, 2013 condensed consolidated financial statements, the Company is subject to various litigation, claims and judgments.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

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Item 6. Exhibits

 

            Incorporated by reference  

Exhibit

Number

  Exhibit Description  

Filed

Herewith

  Form  

Period

Ending

  Exhibit   Filing
date
 
31   Certification pursuant to Section 302 of the Sarbanes-Oxley Act   x                  
32   Certification pursuant to Section 906 of the Sarbanes-Oxley Act   x                  

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ALL AMERICAN PET COMPANY, INC.  
(Registrant)  
   
By: /S/ Barry Schwartz  
  Barry Schwartz, CEO  
 

(On behalf of the registrant and as

Principal Financial and Accounting Officer) 

 
     
Date: June 20, 2013  

 

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