See accompanying notes to the condensed
consolidated financial statements.
See accompanying notes to the condensed
consolidated financial statements.
See accompanying notes to the condensed
consolidated financial statements.
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.
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.
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.
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
|
|
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
|
|
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.
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.
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
|
|
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
|
|
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.