XOTC:AAPT Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 2012

 

¨ 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.)

 

1880 Century Park East, Suite 1402    
Los Angeles, California   90067
(Address of principal executive offices)   (Zip Code)

 

(310) 432-9032
(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 x No ¨

[Company has not yet filed all reports; if it has been subject to filing requirements last 90 days, should check no]; DESPITE THIS BEING FOR 3/31/11

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 ¨

 

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).

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 September 28, 2012, the Registrant had outstanding 614,734,834 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, 2012

 

Index to Report on Form 10-Q

 

  Page
PART I FINANCIAL INFORMATION 3
     
Item 1. Condensed Consolidated Financial Statements (unaudited) 3
  Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 3
  Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011. 4
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and March 31, 2011 5
  Notes to Condensed Consolidated  Financial Statements  6
Item 2. Managements’ Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures about Market Risks 18
Item 4 Controls and Procedures 19
     
PART II Other Information 23
   
Item 1 Legal Proceedings 23
Item 1a Changes in Risk Factors 24
Item 2 Unregistered Sales of Equity Securities and use of proceeds 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Mine Safety Disclosures 24
Item 5 Other Information 24
Item 6 Exhibits 24
  Signatures 25
  Certifications  

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

 

ALL AMERICAN PET COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   March 31,
2012
   December 31,
2011
 
ASSETS          
Current Assets:          
Cash  $690   $2,396 
Prepaid expenses   84,615    96,154 
Total current assets   85,305    98,550 
Machinery and equipment, net   3,851    2,542 
Other assets   5,800    5,800 
TOTAL ASSETS  $94,956   $106,892 
           
LIABILITIES & STOCKHOLDERS' DEFICIT          
Current Liabilities:          
Bank overdraft  $107,577   $97,070 
Accounts payable   2,146,240    2,145,668 
Accounts payable due to former officer   196,912    196,912 
Current portion contest prize   101,666    93,333 
Settlements and judgments payable   232,993    231,480 
Share guarantee liability   600,000    600,000 
Accrued officers salaries   20,220    57,070 
Accrued payroll taxes   826,549    797,422 
Notes payable, net of debt discount   200,000    392,000 
Accrued interest   228,287    220,787 
Total current liabilities   4,660,444    4,831,742 
Long-term liabilities:          
Net present value contest prize obligation   282,073    285,200 
Total long-term liabilities   282,073    285,200 
TOTAL LIABILITIES   4,942,517    5,116,942 
           
COMMITMENTS AND CONTINGENCIES          
Stockholders' deficit          
Common stock, $0.001 par value Authorized 250,000,000 shares issued and outstanding March 31, 2012 (438,833,027) and Decemeber 31, 2011 (254,804,866)   438,833    254,805 
Additional paid-in capital   16,085,668    15,588,999 
Common stock payable   507,642    569,642 
Common stock receivable   (142,000)   (142,000)
Accumulated deficit   (21,369,430)   (20,933,116)
Non-controlling interest   (368,274)   (348,380)
Total stockholders' deficit   (4,847,561)   (5,010,050)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $94,956   $106,892 

 

See Accompaniyng Notes to Consolidated Financial Statements.

 

3
 

 

ALL AMERICAN PET COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Three Months Ended March 31, 
   2012   2011 
         
Revenue  $-   $59,726 
Slotting fees, discounts and allowances   -    (141,313)
Net sales   -    (81,587)
           
Cost of goods sold   -    58,994 
GROSS LOSS   -    (140,581)
           
OPERATING EXPENSES          
Sales and marketing   77,472    292,155 
General and administrative   343,493    717,503 
TOTAL OPERATING EXPENSES   420,965    1,009,658 
           
LOSS FROM OPERATIONS   (420,965)   (1,150,239)
           
OTHER EXPENSE/(INCOME)          
Interest expense   35,244    33,412 
Debt discount amortization   -    36,458 
TOTAL OTHER EXPENSE   35,244    69,870 
           
LOSS BEFORE TAXES   (456,209)   (1,220,109)
           
Provision (benefit)   -    - 
NET LOSS   (456,209)   (1,220,109)
           
Net income attributable to non conctrolling interest   19,895    150,376 
           
NET LOSS ATTRIBUTABLE TO ALL AMERICAN PET COMPANY, INC.  $(436,314)  $(1,069,733)
           
BASIC LOSS PER COMMON SHARE  $(0.01)  $(0.01)
           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (BASIC)   350,135,852    227,008,907 

 

See Accompanying Notes to Consolidated Financial Statements.

 

4
 

 

ALL AMERICAN PET COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Three Months Ended March 31, 
   2011   2010 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(456,209)  $(1,220,109)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amotization   113    246 
Amortization of contest prize   5,206    5,254 
Amortization of debt discount   -    36,458 
Common stock issued for services and equity placement   11,539    677,646 
(Increase) decrease in:          
Inventory   -    37,912 
Increase (decrease) in:          
Accounts payable and other liabilities   14,822    243,513 
Accrued officer/consulting salaries   (36,850)   85,144 
Accrued payroll taxes   29,128    25,611 
Deferred rent   -    (843)
Accrued interest   -    16,134 
Employee severance   -    (40,145)
Other currrent Liabilities   1,513    46,719 
NET CASH USED IN OPERATING ACTIVITIES   (430,738)   (86,460)
           
CASH FLOW (USED) FROM INVESTING ACTIVITIES          
Equipment purchases   (1,422)   - 
NET CASH FLOW USED BY INVESTING ACTIVITIES   (1,422)   - 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Bank overdraft   10,507    9,279 
Proceeds from notes payable-others   -    75,000 
Payment settlement obligation   -    - 
Proceeds from sale of common stock   419,947    2,067 
NET CASH PROVIDED BY FINANCING ACTIVITIES   430,454    86,346 
           
Decrease in cash and cash equivalents  $(1,706)  $(114)
Cash at beginning of period   2,396    114 
CASH AT END OF PERIOD  $690   $- 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Interest  $-   $- 
Income Taxes  $-   $- 

 

See Accompanying Notes to Consolidated Financial Statements.

  

5
 

 

ALL AMERICAN PET COMPANY, INC.

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”) is a developer and marketer of innovative pet wellness products including super premium dog foods and antibacterial wipes. In 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. The Company has 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 preparing to market 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 American Pet Company Inc. merged into a Nevada Corporation, (“All American Pet Company, Inc. NV”). 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.

 

6
 

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared in accordance with the United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial positions, results of operations and cash flows for the interim periods presented have been included. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K.

 

Going Concern

 

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 financial statements, the Company incurred a net loss of $436,314, used $430,738 cash for operations during the three months ended March 31, 2012, had a working capital deficit of $4,639,899 and total stockholders’ deficit of $4,847,561 as of March 31, 2012. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying 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 a private placement of its common stock 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.

 

Significant Accounting Policies

 

Use of Estimates

The preparation of 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, coupon liabilities and other trade spending liabilities.

 

Cash Equivalents

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

 

7
 

 

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 often 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 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, we expense the slotting fee at the time orders are first shipped to customers.

 

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 350,135,852 and 227,008,907 for the three months ended March 31, 2012 and 2011, respectively. Net loss per share and diluted net loss per share are the same for all periods presented.

 

2. VARIABLE INTEREST ENTITY

 

Following is a description of our financial interests in a variable interest entity that we consider significant, those for which we have determined that we are the primary beneficiary of the entity and, therefore, have consolidated the entity into our financial statements.

 

On August 12, 2009, we 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. The duration of the agreement is for a period of five years.  AAPSD is the primary beneficiary of the Company because of the relatively significant financial support provided 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% license 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 AAPC has delivered 3,000,000 pounds of finished product.  AAPSD does not owe the Company any royalties until AAPSD has recouped any costs of marketing or placement fees. All Royalty payments due from sales are accumulated and are applied toward to the minimum royalty payment for the year.  If the 18.5% royalties are less than the minimum then AAPSD is obligated pay us 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 AAPC.

 

8
 

 

We have determined that we are the primary beneficiary of AAPSD as our interest in the entity is subject to variability based on results from operations and changes in the fair value. During the three months ended March 31, 2012 and 2011, all operations of AAPSD are included in the consolidated financial statements. For the three month period ending March 31, 2012, sales were $0.

 

The results of operations for AAPSD have been included in the financial statements of the Company. The unaudited financial position of AAPSD at March 31, 2012 is as follows:

 

Total Assets  $- 
Total Liabilities   (368,274)
Total Stockholders’ Deficit   368,274 

 

3. MACHINERY AND EQUIPMENT

 

Machinery and equipment consists of the following:

 

   March 31, 2012   December 31, 2011 
Computer equipment and software  $28,515   $27,095 
Warehouse   -    - 
Total   28,515    27,095 
Less: Accumulated depreciation   (24,664)   (24,552)
   $3,851   $2,543 

 

Depreciation expense for the three month periods ended March 31, 2012 and 2011 was $112 and $246, respectively.

 

4. PAYROLL TAXES

 

The Company was delinquent on certain filings and payments of required federal and state payroll taxes. The Company has provided an estimate for any possible penalty assessments and interest.   The amount of payroll taxes and interest due at March 31, 2012 and December 31, 2011 totaled $826,549 and $797,422, respectively.

 

5. COMMITTMENTS

 

The Company commenced an operating lease for its executive offices on January 15, 2012. The lease expires on July 31, 2014. Minimum payments due under this operating lease as of March 31, 2012 are

 

Year  Minimum
Lease
Payment
 
2012  $63,000 
2013  $84,000 
2014  $49,000 

 

Total minimum payments under the operating lease are $196,000. 

 

9
 

 

6.  NOTES PAYABLE

 

Notes payable consists of the following:

 

   March 31,   December 31, 
   2012   2011 
Notes Payable – Non-Related Parties. Interest at 10% per annum.  Interest and principle due on demand  $150,000   $150,000 
Notes Payable, Other – In default, interest due at 15% per annum   50,000    50,000 
Convertible 8% Note Payable due September 8, 2011   -    64,000 
Convertible 8% Note Payable due November 14, 2011   -    128,000 
Total Notes Payable  $200,000   $392,000 
Less: Debt Discount   -    (8,833)
Notes payable, net of debt discount  $200,000   $383,167 

 

Convertible Debt

 

On December 6, 2010, the Company entered into an unsecured, convertible promissory note with an unrelated third party for $37,500.  The loan bears interest at 8% per annum and a balloon payment of principal and accrued interest is due on September 8, 2011.  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 40% discount based on the average of the lowest three trading prices during a ten day period ending one day prior to the conversion date.  On January 9, 2012, $9,500 of the principal balance was converted into 11,445,783 shares. On January 27, 2012, $8,000 of the principle balance was converted into 11,627,606 shares. On February 2, 2012, $6,000 of the principal balance was converted into 10,714,286 shares. On February 10, 2012, $6,000 of the principle balance was converted into 10,714,286 shares. On February 15, 2012, the remaining $8,000 of principle balance and $1,500 in interest was converted into 12,179,487 shares and the note was deemed paid in full.

 

On February 11, 2011, the Company entered into an unsecured, convertible promissory note with an unrelated third party for $75,000.  The loan bears interest at 8% per annum and a balloon payment of principal and accrued interest is due on February 11, 2011.  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 40% discount based on the average of the lowest three trading prices during a ten day period ending one day prior to the conversion date.  On February 21, 2012, $7,500 of the principal balance was converted into 8,823,529 shares. On February 27, 2012, $12,000 of the principle balance was converted into 15,000,000 shares. On March 1, 2012, $11,500 of the principal balance was converted into 15,131,579 shares. On March 7, 2012, $12,000 of the principle balance was converted into 15,189,873 shares. On March 12, 2012, $9,000 of the principal balance was converted into 8,181,818 shares. On March 14, 2012, $9,500 of the principle balance was converted into 7,307,692 shares. On March 20, 2012, the remaining $13,500 of principle balance and $6,000 in interest was converted into 7,222,222 shares and the note was deemed paid in full.

 

10
 

 

7. RELATED PARTY TRANSACTIONS

 

As of March 31, 2012 and December 31, 2011, the balance of accrued officers’ salaries, totaled $20,220 and $57,070, respectively. At December 31, 2010, the balance of accrued officers’ salaries was $40,625.

 

On March 6, 2012, the Board of Directors authorized the Company to execute a Convertible Revolving Grid Note for a principal sum of up to One Million ($1,000,000) with CEO Barry Schwartz and President, Lisa Bershan. The Grid note shall bear interest at a fixed equal to 10% 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 convertible revolving grid note.

 

On April 30, 2012, subsequent to the balance sheet date, the Board of Directors approved salary advances not to exceed $250,000 for Mr. Schwartz and Ms. Bershan in 2012, The Board of Directors requires that all salary advances are repaid in full before any transactions pursuant to the grid note are consummated. The Company made salary advances to Mr. Schwartz and Ms. Bershan, which the balance of officer advances as of September 28, 2012 is $332,299.

 

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 1,000,000,000. 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 were increased from 50,000,000 to 250,000,000 in 2009.

 

Sales of Common Stock

During the three months ended March 31, 2012, the Company received and accepted subscriptions for 36,350,000 shares of common stock at $0.01 per share and issued 51,850,000, of which 40,550,000 were purchased for cash, 5,500,000 were issued as bonuses to employees and formal employees, and 2,700,000 were issued as placement fees. The sale of equity securities resulted in a capital increase of $363,500, less offering costs of $16,737.

 

During the three months ended March 31, 2012, the Company issued a total of 2,100,000 shares of common stock valued at $21,000 for service rendered to the Company, of which 20,000,000 shares of common stock valued at $20,000 were for service rendered during the year ended December 31, 2011. The $20,000 was a reduction of the stock payable as of December 31, 2011. As of June 30, 2012, the Company has a common stock payable of $507,642.

 

As of March 31, 2012 there were 438,833,027 shares outstanding.

 

11
 

 

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 delivery of the common stock to the preferred stockholders took place in March 2009 and the Company was released by the stockholders (the Releases) 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 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 are 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. This agreement was extended on May 25, 2010 to August 31, 2010 with an agreement to issue an additional 1,000,000 shares as compensation for the extension and 3,000,000 were issued on May 26, 2010 based on the terms of the original agreement that called for the shares to be issued if the value was not paid on or before June 15, 2010.  During the year ended December 31, 2010, the Company recorded $1,000,000 as share guarantee expense to account for the obligation described above.  The June 1, 2010 amendment to the March 7, 2009 agreement was amended to extend the liquidation period to achieve the $800,000 guaranteed liquidation amount to March 31, 2011.  The Company issued an additional 2,000,000 shares of Common stock as the fee for this extension at $0.06 per share for a total of $120,000. As of March 31, 2012, the share guarantee liability remained at $600,000.

 

Warrants Outstanding

A summary of the Company’s outstanding warrants and activity as of March 31, 2012 and December 31, 2011 is as follows:

 

   Number of 
Units
   Weighted-Average 
Exercise Price 
per Share
 
         
Outstanding at December 31, 2011   5,000,000   $0.16 
           
Granted/Expired in First Quarter 2012   -   $- 
           
Outstanding at March 31, 2012   5,000,000   $0.16 

 

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9. LITIGATION AND JUDGMENTS

 

The Company was and is involved in various litigation involving trade creditors, professionals and former employees. A videographer filed suit in Small Claims Court in Mercer, New Jersey for $2,000 and received a default judgment in November of 2007.  The Company has contacted the plaintiff in this matter, but no settlement agreement has been reached. A materials handling company was granted a judgment for $3,654 by Superior Court of California on January 18, 2008.  There has been no further collection activity on this account.  A media company filed a suit to collect unpaid fees dating from October 30, 2007 of $71,033. The media company was granted a judgment for $71,033 by Los Angeles Superior Court on April 6, 2010, which is still owed by the Company. There have been no efforts on the part of the media company to collect the judgment and the Company believes that it will be able to settle the amount for a reduced final payment.   Three former employees hold judgments for unpaid wages in the amounts of $9,274, $15,600 and $16,995 from labor board judgments in 2008. With penalties and accrued interest, the three labor judgments amounted to $62,043 as of March 31, 2012. An internet marketing company filed suit against the Company and agreed to arbitration which was settled for $20,000 in October of 2010.  There have been no payments made on this settlement.  A public relations firm obtained a judgment in the amount of $44,323 on April 9, 2010 for fees owed for services. There has been no collection activity and the Company intends to negotiate a reduced settlement of the final balance owed. An accounting firm that provided services to the company obtained a judgment through arbitration that was confirmed by the Circuit Court in West Palm Beach for $150,000 on August 25, 2010.  Subsequent to the balance sheet date, on July 23, 2012, the attorneys for the accounting firm filed an action in the Circuit Court in and for the Fifteenth Judicial Circuit in and for Palm Beach County, Florida, against the Company and CEO, Barry Schwartz and President, Lisa Bershan as individuals, seeking $150,000 in principal plus 6% interest from the default date of March 19, 2010, legal fees of $49,950, arbitrator fees, a filing fee of $3,781 and a state court fee of $1,200. A grocery services company filed to substitute attorneys on its filing to collect $22,000 in fees for advertising services on February 22, 2011.  The expense was incurred in 2009. The Company believes it will be settled for a nominal amount if anything based on the age of the payable. On March 11, 2011, a judgment of $2,068, plus costs of $80, was entered in small claims court in Beverly Hills, California against the Company and Mr. Schwartz and Ms. Bershan for animal training services. On July 24, 2012, the Company settled this dispute in full for $500. On April 6, 2010, the Company settled litigation with a former controller in which the former controller agreed to return 400,000 shares of Company stock valued at $52,000 in exchange for $8,000 and payments of $1,571 per month over a 27 month period. The former controller delivered the shares to an escrow agent and the escrow agent will return all of the shares to the Company once all of the payments are made to the former employee.  The Company has recorded $52,000 as a common stock receivable for the shares in escrow. As of March 31, 2012, the balance of the amount due to the former controller is $31,432. On February 3, 2011, through mediation, the Company and a Federal Bankruptcy Trustee settled litigation with a former sales person in which the former employee would return 750,000 shares of Company stock valued at $90,000 in exchange for payments totaling $92,069 over a 14 month period. The Federal Bankruptcy trustee will return all of the shares to the Company once all of the payments are made to the Bankruptcy Trustee.   The Company has recorded a $90,000 liability to the former sales person and a $90,000 common stock receivable for the shares being held by the bankruptcy trustee.

 

On August 9, 2012, the Company settled litigation with the holder of a $150,000 note bearing interest at 10% which was in default at March 31, 2012. Under the terms of the settlement, the Company will pay the note holder $300,000 with 8% interest accruing on the unpaid balance. The Company made two payments of $25,000 in August, 2012 and will make 9 additional quarterly payments of $30,000 commencing on October 1, 2012 and continuing through October 1, 2014. A final payment of $4,265 is due on January 1, 2015. In the event of any default of this settlement agreement, the note holder can enter a stipulated judgment against the Company, CEO Barry Schwartz and President, Lisa Bershan, as individuals, in the amount of $1,197,190.

 

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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. On 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 an annual cash payment of $33,333.  The Company did not make any payments during the three months ending March 31, 2012. As of March 31, 2012 and December 31, 2011, $383,739 and $341,754, respectively were recorded as contest prize liabilities.

 

11. SUBSEQUENT EVENTS

 

Subsequent to the balance sheet date, on April 4, 2012, a former human resources coordinator at the Company filed suit against the Company and its subsidiaries in the Superior Court of California, West District Beverly Hills Courthouse, for unpaid severance stemming from a November 12, 2010 severance agreement between the Company and the former Human Resources coordinator. Pursuant to the terms of the November 12, 2010 agreement, the Company was to pay a total of $30,000 in $1,000 monthly payments over 30 months commencing on December 15, 2010. As of September 28, 2012, the Company has not made any of the payments pursuant to the severance agreement and the Company intends to defend against the severance claim made by the former human resources coordinator.

 

On April 16, 2012, the Company executed a sublease for the rental of approximately 19,000 square feet of a 33,000 square foot warehouse located at 8310 Hedge Lane Terrace, Shawnee, Kansas. The Company utilizes the Shawnee premises for light manufacturing, business offices and warehouse storage facilities. The Shawnee facility lease runs for a five year minimum term with monthly rent of $8,371, taxes of $2,336, insurance of $162, $110 in CAM, plus utilities, as incurred.

 

On May 31, 2012, the Company unilaterally terminated a credit line offer for accounts receivable financing and a credit line offer for inventory and purchase order financing.

 

On June 7, 2012, a media subcontractor filed suit in the small claims division of the Superior Court of California, County of Los Angeles, West District, in Santa Monica. The Company defended in this action and attempted to negotiate a rescheduling of the subcontracted work. On July 7, 2012, judgment was rendered in favor of the media subcontractor in the amount of $4,585 plus costs of $50.

 

On June 11, 2012 the Board of Directors approved an increase the authorized number of $0.001 par value Common stock from 500,000,000 to 1,000,000,000. The stockholders also approved the change of domicile of the company from Maryland to Nevada on June 11, 2012.

 

On June 26, 2012, the Company and the former Chief Financial Officer agreed to fully settle all debts and obligations of the Company payable to the former Chief Financial Officer for $65,000 payable over six months. There was no impact on the financial statements as of December 31, 2011. The Company has made its scheduled payments and as of September 21, 2012, the total outstanding balance to the former Chief Financial Officer was $30,000.

 

During the three months ended June 30, 2012, the Company purchased approximately $369,130 of Pawtizer™ inventory and commenced sale activity.

 

On July 1, 2012, the Company engaged the services of an investor relation consultant as consideration; the Company shall issue a total of 2,000,000 shares of common stock valued at the day of the engagement entered into with a monthly payment of $7,500. As of the September 28, 2012, the Company has yet issue the 2,000,000 common shares to the consultant.

 

On August 4, 2012, the Company rented a $8,000 forklift at $725 per month for 12 months. On September 13, 2012, the Company rented a $150,000 forming machine for $5,000 per month, payable over 30 months with an option to purchase the equipment. On September 19, 2012, the Company rented a $48,950 wrapping machine for $3,875 per month with an option to purchase at $48,950 less 50% of the rental payment to date. Total minimum monthly rental payments are $9,600

  

On August 9, 2012, the Company settled litigation with the holder of a $150,000 note bearing interest at 10% which was in default at March 31, 2011. Under the terms of the settlement, the Company will pay the note holder $300,000 with 8% interest accruing on the unpaid balance. The Company made payments two payments of $25,000 in August, 2012 and will make 9 additional quarterly payments of $30,000 commencing on October 1, 2012 and continuing through October 1, 2014. A final payment of $4,265 is due on January 1, 2015. In the event of any default of this settlement agreement, the note holder can enter a stipulated judgment against the Company, CEO Barry Schwartz and President, Lisa Bershan, as individuals, in the amount of $1,197,190.

 

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On August 13, 2012, the Board of Directors approved a private placement offering of up to 60,000,000 shares of common stock at $0.02 per share.

 

On August 20, 2012 the Company committed to purchase $633,632 of extrusion equipment and $267,455 cooling system to be used in the production of Nutra Bar™ dog food bars. On September 17, 2012, the Company made an initial deposit on the equipment of $40,000. From April 1, 2012 through September 28, 2012, total purchases of manufacturing equipment were $943,270.

 

During the periods from April 1, 2012 to September 28, 2012, the Company received and accepted subscriptions for 170,240,600 shares of common stock at $0.01 per shares and received subscriptions for 21,600,000 shares of common stock at $0.02 per shares. The sales of equity securities resulted in a capital increase of $2,244,406, less offering costs of $73,096 in cash and $470,810 for 9,115,000 shares of common stocks. As of September 28, 2012, the Company issued a total of 175,901,807 shares of common stock for cash receipt during the period.

  

As of September 28, 2012, there were 614,734,834 shares of common stock issued and outstanding.

 

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

 

Overview

 

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 dog 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. The Company has 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 preparing to market its Mutt™ Great Food for Great Dogs, a super premium dry kibble dog food and its Nutra Bars™ line of portable, convenient and functional super–premium functional 4 ounce dog food bars. Each 4 ounce dog food bar has a kcal equivalent of 8 ounces of super premium dry dog food.

 

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 merged into All American Pet Company, Inc. a Maryland corporation (“All American Pet Company, Inc. MD”). In June of 2012, All American Pet Company Inc. merged (the “Merger”) into a Nevada Corporation (“All American Pet Company, Inc. NV”). 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 of 2008 to provide corporate infrastructure and management services. All American Pet Brands, Inc. was formed in April of 2009 to be the Company’s warehousing and manufacturing operation. In September of 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. As used in this report, the terms “The Company” and “AAPT” refers to All American Pet Company, Inc. NY and All American Pet Company, Inc. MD before the Merger, and to All American Pet Company, Inc. NV, All American Pet Company, Inc. and its wholly owned subsidiaries and Variable Interest Entities after the Merger.

 

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The Company has never operated at a profit and is dependent upon additional financing to remain a going concern. The Company has obtained substantial new equity capital and continues to seek new equity capital to sustain operations. The Company remains under significant financial strain primarily because of its low level of sales and limited operating funds. The limited amount of operating capital may preclude the Company’s ability to execute its manufacturing, marketing, and distribution objectives or to continue operations. No assurance can be given that the Company will secure adequate funds to sustain operations or that it will continue as a going concern.

 

Our executive offices are located at 1880 Century Park East, Suite 1402, Los Angeles, California 90067 and our telephone number at that location is (310) 432-9032.  Our websites are www.allamericanpetcompany.com and www.pawtizer.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”).

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our liquidity requirements arise principally from our working capital needs, including the cost of goods and marketing costs. In the future we intend to fund our liquidity requirements through a combination of cash flows from operations and external financings. For the three months ended March 31, 2012, the Company incurred a net loss of $456,209 on revenues of $0 and cash used from operations of $430,738 for the three month period ended March 31, 2012. In their report in connection with our 2011 financial statements, our independent registered public accountants included an explanatory paragraph stating that, because we incurred a net loss of $2,366,832 and a negative cash flow from operations of $608,244 for the year ended December 31, 2011, and had a working capital deficiency of $4,733,192 and a stockholders deficiency of $5,010,050 at December 31, 2011 there was substantial doubt about our ability to continue as a going concern.

 

Our ability to initiate our plan of operations and continue as a going concern is currently dependent on our ability to introduce products into the marketplace that gain consumer acceptance, build our customer base, and achieve profitable operations. Until these objectives are realized, the Company will be dependent upon external financings to sustain operations. Due to our stock being thinly traded and the current state of our balance sheet, including a lack of hard assets against which to borrow, we believe that it will be very difficult to obtain any form of debt financing with or without equity conversion terms. We are concerned about the ability to raise any capital in the future at terms that would be in the shareholders' best interest or at all.

 

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. We have funded our operations primarily through the issuance of equity securities and debt. Additional capital infusions may be needed to manufacture, distribute and promote our products, sustain operations and make payments and settlements of existing debts and obligations. We believe that our future profitability will depend on the commercial and consumer acceptance of our products, effective marketing strategies, efficient production and proper execution of our business plan. Additionally, success with our external financing strategies will be needed to effectuate our business objectives. Our limited operating history makes it difficult to evaluate our prospects for success and our revenue and profitability potential, particularly for newly introduced products, is unproven. Furthermore, there can be no assurance that our external financing strategies will yield any capital or the amount of capital necessary to execute our business plan.

 

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Our principal sources of liquidity have been sales of equity securities and borrowings. To meet our current requirements to operate, the Company has sold common stock and is currently attempting to undertake the sale of additional equity securities. As new funds are obtained, our principal uses of capital would be to meet our operating requirements, production, marketing and advertising expenditures, and make investments in inventory. Additional cash could be used to reduce past due 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 with other round(s) of funding. There are currently no commitments or other known sources for this funding, other than the $1,000,000 convertible revolving grid note commitment made by CEO Barry Schwartz and President, Lisa Bershan. If these funds are obtained, it would result in additional dilution to our stockholders. Alternative financing may not be available in the future in amounts or on terms acceptable to us, if at all.

 

In the three months ended March 31, 2012, the Company raised $373,500 before offering costs. We are currently seeking additional sources of funding.

 

Results of Operations for the three Months Ended March 31, 2012 compared with the three Months Ended March 31, 2011

 

The following discussion of the results of operations should be read in conjunction with our financial statements and notes thereto for the three month period ended March 31, 2012 and March 31, 2011 included in this Quarterly Report as well as the statements included in our Form 10-K for the year ended December 31, 2011.

 

For the three months ended March 31, 2012, gross sales were $0, a decrease of $59,726 as compared to the three months ending March 31, 2011. The decrease in sales resulted from the suspension of sales of both Grrr-nola®Natural Dog Food and Chompions® since the three months ending March 31, 2011. Net sales increased from negative $81,587 to $0 as there were no slotting fees incurred in the three months ending March 31, 2012. Cost of goods sold decreased from $58,994 to $0 in the three months ending March 31, 2012 as products were not shipped in the three months ending March 31, 2012.

 

For the three months ending March 31, 2012, sales and marketing expenses decreased by $214,683 from $292,155 in the three months ending March 31, 2011 to $77,472 in the three months ending March 31, 2012. The decrease is attributable to a decrease of $218.218 of consulting and research, an increase of $2,590 in advertising and promotion, and a net increase of $945 in other sales and marketing activity. General and Administrative expenses were decreased by $374,010 from $717,503 in the three months ended March 31, 2011 to $343,493 in the three months ended March 31, 2012. This amount consisted of a decrease of $412,462 in consulting expenses, a decrease of $31,293 in facilities expense, a decrease of $14,169 in legal, accounting, trademark/patent and other professional fees, a decrease in payroll and payroll taxes of $18,244, and a net increase of $102,158 in other general and administrative expenses.

 

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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 products;

 

expenses we will incur in operating our business;

 

our liquidity and sufficiency of cash;

 

the success of our financing plans; and

 

the outcome of 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, 2012, unless expressly stated otherwise.

 

As used in this report, the term Company refers to All American Pet Company, Inc., a Nevada corporation and its 100% owned subsidiaries, All American Pet Brands Inc. a Nevada corporation, and All American PetCo, Inc. a Nevada Corporation, and its Variable Interest Entity, AAP Sales and Distribution, Inc., a Nevada Corporation.

 

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

 

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Item 4(T). Controls and Procedures

 

Our management, with the participation of the Company’s Principal Executive Officer and Principal Financial and Accounting 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 Chief Executive Officer and Principal Financial and Accounting Officer has concluded that as of March 31, 2012, 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 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 financial condition, results of operations, changes in stockholders’ equity and cash flows for the periods presented.

  

Management Report on Internal Control Over Financial Reporting

  

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

 

  1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

  2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

  3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.

 

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All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of the period covered by this report based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the results of management’s assessment and evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our internal control over financial reporting was not effective due to the material weaknesses described below.

 

Material Weaknesses

 

  1. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2012. In making this assessment, the Company’s management used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control – Integrated Framework.” Based on this assessment, management concluded that, as of March 31, 2012, the Company’s internal control over financial reporting were not effective based on this framework.

 

Management evaluated the impact of ineffective control over financial reporting and concluded that the control deficiency represented a material weakness.

 

  2. In connection with the audit of our consolidated financial statements for the year ended December 31, 2011, our independent registered accounting firm, De Joya Griffith & Company, LLC, reported to the Company’s Board of Directors that they observed inadequate review and approval of certain aspects of the accounting process that they considered to be a material weakness in internal control.

  

After a review of the Company’s current review and approval of certain aspects of the accounting process, management concluded that the inadequate review and approval process represented a material weakness.

   

Attestation Report of the Independent Registered Public Accounting Firm

 

This annual report does not include an attestation report by the Company’s registered public accounting firm regarding internal control over financial reporting, because Management’s report in the annual report was not subject to attestation by the Company’s independent registered public accounting firm, pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

 

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Inherent Limitations on the Effectiveness of Controls

 

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

 

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in the Company’s internal control during the three months ended March 31, 2012 over financial reporting (as such term is defined in Rules 13-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2012, the Company carried out an assessment under the supervision and with the participation of our Chief Executive and Principal Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(1) and I 5d-15(1)). Our Chief Executive and Principal Financial and Accounting Officer concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2012.

 

Material Weaknesses and Related Remediation Initiatives

 

Set forth below is a summary of the various significant deficiencies which caused management to conclude that we had the material weaknesses identified above. Through the efforts of management, we have developed a specific action plan to remediate the material weaknesses.  We expect to implement these various action plans during 2012 and anticipate that all control deficiencies and material weaknesses will be remediated by December 31, 2012.

 

We did not effectively implement comprehensive entity-level internal controls and did not maintain a sufficient level of resources within our accounting department, as discussed below: 

 

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·Financial Close Process.  The Company only prepares financial statements on a quarterly basis which increases the potential that any unusual activities or transactions will not be detected on a timely basis.

 

·Cash Disbursement Process.   Payments to related parties and costs incurred by the Company were not subject to review and approval by independent parties which increased the potential that any improper distributions would not be detected on a timely basis.

 

·Reporting Deficiencies.  We did not perform timely and sufficient internal or external reporting of our progress and evaluation of prior year material weaknesses or the current fiscal year internal control deficiencies. 

 

Remediation of Internal Control Deficiencies and Expenditures

 

It is reasonably possible that, if not remediated, one or more of the material weaknesses described above could result in a material misstatement in our reported financial statements that might result in a material misstatement in a future annual or interim period. We are developing specific action plans for each of the above material weaknesses. We are uncertain at this time of the costs to remediate all of the above listed material weaknesses, however, we do not believe these costs will be significant and we expect to ratably incur the remediation costs during the year. We cannot guarantee that the actual costs to remediate these deficiencies will not exceed this amount.

 

We believe that we are addressing the deficiencies that affected our internal control over financial reporting as of March 31, 2012. Because the remedial actions may require hiring of additional personnel, and relying extensively on manual review and approval, the successful operation of these controls for at least several quarters may be required before management may be able to conclude that the material weaknesses have been remediated. We intend to continue to evaluate and strengthen our internal control over financial reporting systems. These efforts require significant time and resources. If we are unable to establish adequate internal control over financial reporting systems, we may encounter difficulties in the audit or review of our financial statements by our independent registered public accounting firm, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company was and is involved in various litigation involving trade creditors, professionals and former employees. A videographer filed suit in Small Claims Court in Mercer, New Jersey for $2,000 and received a default judgment in November of 2007.  The Company has contacted with the plaintiff in this matter, but no settlement agreement has been concluded.. A materials handling company was granted a judgment for $3,654 by Superior Court of California on January 18, 2008.  There has been no further collection activity on this account.  A media company filed a suit to collect unpaid fees dating from October 30, 2007 of $71,033. The media company was granted a judgment for $71,033 by Los Angeles Superior Court on April 6, 2010, which is still owed by the Company. There have been no efforts on the part of the media company to collect the judgment and the Company believes that it will be able to settle the amount for a reduced final payment.   Three former employees hold judgments for unpaid wages in the amounts of $9,274, $15,600 and $16,995 from labor board judgments in 2008. With penalties and accrued interest, the three labor judgments amounted to $62,043 as of March 31, 2012. An internet marketing company filed suit against the Company and agreed to arbitration which was settled for $20,000 in October of 2010.  There have been no payments made on this settlement.  A public relations firm obtained a judgment in the amount of $44,323 on April 9, 2010 for fees owed for services. There has been no collection activity and the Company intends to negotiate a reduced settlement of the final balance owed. An accounting firm that provided services to the company obtained a judgment through arbitration that was confirmed by the Circuit Court in West Palm Beach for $150,000 on August 25, 2010.  Subsequent to the balance sheet date, on July, 23, 2012, the attorneys for the accounting firm filed an action in the Circuit Court in and for the Fifteenth Judicial Circuit in and for Palm Beach County, Florida, against the Company and CEO, Barry Schwartz and President, Lisa Bershan as individuals, seeking $150,000 in principal plus 6% interest from the default date of March 19, 2010, legal fees of $49,950, arbitrator fees and a filing fee of $3,781 and a state court fee of $1,200. A grocery services company filed to substitute attorneys on its filing to collect $22,000 in fees for advertising services on February 22, 2011.  The expense was incurred in 2009. The Company believes it will be settled for a nominal amount if anything based on the age of the payable. On March 11, 2011, a judgment of $2,068, plus costs of $80, was entered in small claims court in Beverly Hills, California against the Company and Mr. Schwartz and Ms. Bershan for animal training services rendered. On July 24, 2012, the Company settled this dispute in full for $500. On April 6, 2010, the Company settled litigation with a former controller in which the former controller agreed to return 400,000 shares of Company stock valued at $52,000 in exchange for $8,000 and payments of $1,571 over a 27 month period. The former controller delivered the shares to an escrow agent and the escrow agent will return all of the shares to the Company once all of the payments are made to the former employee.   As of December 31, 2011, the balance due the former controller was $31,432. On February 3, 2011, through mediation, the Company and a Federal Bankruptcy Trustee settled litigation with a former sales person in which the former employee would return 750,000 shares of Company stock valued at $90,000 in exchange for payments of $92,069 over a 14 month period. The Federal Bankruptcy trustee will return all of the shares to the Company once all of the payments are made to the Bankruptcy Trustee.  The Company has recorded a $90,000 liability to the former sales person and a $90,000 common stock receivable for the shares being held by the bankruptcy trustee.

 

23
 

 

Item 1a. Change in Risk Factors.

 

There are no changes in Risk Factors from the Form 10-K for year-end December 31, 2011 filed on September 28, 2012.

 

Item 2. Unregistered Sales of Equity Securities

 

During the three months ended March 31, 2012, the Company received and accepted subscriptions for 36,350,000 shares of common stock at $0.01 per share and issued 51,850,000, of which 40,550,000 were purchased for cash, 5,500,000 were issued as bonuses to employees and formal employees, and 2,700,000 were issued as placement fees. The sale of equity securities resulted in a capital increase of $363,500, less offering costs of $16,737.

 

During the three months ended March 31, 2012, the Company issued a total of 2,100,000 shares of common stock valued at $21,000 for service rendered to the Company, of which 20,000,000 shares of common stock valued at $20,000 were for service rendered during the year ended December 31, 2011. The $20,000 was a reduction of the stock payable as of December 31, 2011. As of June 30, 2012, the Company has a common stock payable of $507,642.

 

As of March 31, 2012 there were 438,833,027 shares outstanding.

 

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.

 

Item 3. Defaults Upon Senior Securities

 

There were no defaults on Senior Securities.

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

Subsequent to the balance sheet date, on April 4, 2012, a former human resources coordinator at the Company filed suit against the Company and its subsidiaries in the Superior Court of California, West District Beverly Hills Courthouse, for unpaid severance stemming from a November 12, 2010 severance agreement between the Company and the former Human Resources coordinator. Pursuant to the terms of the November 12, 2010 agreement, the Company was to pay a total of $30,000 in $1,000 monthly payments over 30 months commencing on December 15, 2010. As of September 28, 2012, the Company has not made any of the payments pursuant to the severance agreement and the Company intends to defend against the severance claim made by the former human resources coordinator.

 

On April 16, 2012, the Company executed a sublease for the rental of approximately 19,000 square feet of a 33,000 square foot warehouse located at 8310 Hedge Lane Terrace, Shawnee, Kansas. The Company utilizes the Shawnee premises for light manufacturing, business offices and warehouse storage facilities. The Shawnee facility lease runs for a five year minimum term with monthly rent of $8,371, taxes of $2,336, insurance of $162, $110 in CAM, plus utilities, as incurred.

 

On May 31, 2012, the Company unilaterally terminated a credit line offer for accounts receivable financing and a credit line offer for inventory and purchase order financing.

 

On June 7, 2012, a media subcontractor filed suit in the small claims division of the Superior Court of California, County of Los Angeles, West District, in Santa Monica. The Company defended in this action and attempted to negotiate a rescheduling of the subcontracted work. On July 7, 2012, judgment was rendered in favor of the media subcontractor in the amount of $4,585 plus costs of $50.

 

On June 11, 2012 the Board of Directors approved an increase the authorized number of $0.001 par value Common stock from 500,000,000 to 1,000,000,000. The stockholders also approved the change of domicile of the company from Maryland to Nevada on June 11, 2012.

 

24
 

 

On June 26, 2012, the Company and the former Chief Financial Officer agreed to fully settle all debts and obligations of the Company payable to the former Chief Financial Officer for $65,000 payable over six months. There was no impact on the financial statements as of December 31, 2011. The Company has made its scheduled payments and as of September 21, 2012, the total outstanding balance to the former Chief Financial Officer was $30,000.

 

During the three months ended June 30, 2012, the Company purchased approximately $369,130 of Pawtizer™ inventory and commenced sale activity.

 

On July 1, 2012, the Company engaged the services of an investor relation consultant as consideration; the Company shall issue a total of 2,000,000 shares of common stock valued at the day of the engagement entered into with a monthly payment of $7,500. As of the September 28, 2012, the Company has yet issue the 2,000,000 common shares to the consultant.

 

On August 4, 2012, the Company rented a $8,000 forklift at $725 per month for 12 months. On September 13, 2012, the Company rented a $150,000 forming machine for $5,000 per month, payable over 30 months with an option to purchase the equipment. On September 19, 2012, the Company rented a $48,950 wrapping machine for $3,875 per month with an option to purchase at $48,950 less 50% of the rental payment to date. Total minimum monthly rental payments are $9,600.

 

On August 9, 2012, the Company settled litigation with the holder of a $150,000 note bearing interest at 10% which was in default at March 31, 2011. Under the terms of the settlement, the Company will pay the note holder $300,000 with 8% interest accruing on the unpaid balance. The Company made payments two payments of $25,000 in August, 2012 and will make 9 additional quarterly payments of $30,000 commencing on October 1, 2012 and continuing through October 1, 2014. A final payment of $4,265 is due on January 1, 2015. In the event of any default of this settlement agreement, the note holder can enter a stipulated judgment against the Company, CEO Barry Schwartz and President, Lisa Bershan, as individuals, in the amount of $1,197,190.

 

On August 13, 2012, the Board of Directors approved a private placement offering of up to 60,000,000 shares of common stock at $0.02 per share.

 

On August 20, 2012 the Company committed to purchase $633,632 of extrusion equipment and $267,455 cooling system to be used in the production of Nutra Bar™ dog food bars. On September 17, 2012, the Company made an initial deposit on the equipment of $40,000. From April 1, 2012 through September 28, 2012, total purchases of manufacturing equipment were $943,270.

 

During the periods from April 1, 2012 to September 28, 2012, the Company received and accepted subscriptions for 170,240,600 shares of common stock at $0.01 per shares and received subscriptions for 21,600,000 shares of common stock at $0.02 per shares. The sales of equity securities resulted in a capital increase of $2,244,406, less offering costs of $73,096 in cash and $470,810 for 9,115,000 shares of common stocks. As of September 28, 2012, the Company issued a total of 175,901,807 shares of common stock for cash receipt during the period.

 

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                

  

25
 

  

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: October 2, 2012

 

26

XOTC:AAPT Quarterly Report 10-Q Filling

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