U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                 to                                

 

Commission file number: 333-130446

 

THE PAWS PET COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Illinois		20-3191557
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

455 N.E. 5th Avenue, Suite D464 Delray Beach, Fl.		33483
(Address of Principal Executive Offices)		(Zip Code)

 

(561) 2746805

(Registrant’s Telephone Number, Including Area Code)

 

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

Yes [  ] No [X]

 

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

Yes [X] 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

 

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

Yes [  ] No [X]

 

The number of shares outstanding of the registrant’s common stock as September 30, 2012 was 86,468,313 shares.

  

 

  

THE PAWS PET COMPANY, INC.

 

TABLE OF CONTENTS TO FORM 10-Q

 

			Page
Part I	FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (Audited)	F-1
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011	F-2
		Condensed Consolidated Statements of Cash Flows for nine months ended September 30, 2012 and 2011	F-3
		Notes to Condensed Consolidated Financial Statements	F-4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	10
	Item 4.	Controls and Procedures	10
Part II	OTHER INFORMATION
	Item 1.	Legal Proceedings	11
	Item 1A.	Risk Factors	11
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	11
	Item 3.	Defaults Upon Senior Securities	11
	Item 4.	Mine Safety Disclosures	11
	Item 5.	Other Information	11
	Item 6.	Exhibits	12
SIGNATURE			13

 

 

 

Part 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

THE PAWS PET COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2012				December 31, 2011
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash and cash equivalents		$	92,981			$	38,256
Receivable due from credit card clearing house			-				59,418
Prepaid expenses			3,223				1,537
Deferred financing fee			-				427,073
Total current assets			96,204				526,284
Property and equipment, at cost			169,136				256,199
Less: accumulated depreciation and amortization			(104,010	)			(101,665	)
Total Property and equipment, net			65,126				154,534
Security deposits and other			-				39,689
Total assets		$	161,330			$	720,507
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Convertible debentures, net of debt discount of $268,052 and $0 at September 30, 2012 and December 31, 2011, respectively		$	547,448			$	-
Accounts payable			767,426				945,083
Accrued expenses			1,769,242				965,577
Total current liabilities			3,084,116				1,910,660
Convertible debentures, net of debt discount of $0 and $482,003 at September 30, 2012 and December 31, 2011, respectively			-				342,997
Warrant liability			182,136				2,930,955
Total liabilities			3,266,252				5,184,612
Commitments and contingencies
Stockholders’ deficit:
Series A preferred stock, 10,000,000 shares authorized, none issued and outstanding at September 30, 2012 and December 31, 2011, respectively			-				-
Common stock, no par value, 350,000,000 shares authorized, 86,468,383 and 46,201,182 issued and outstanding at September 30, 2012 and December 31, 2011, respectively			-				-
Additional paid-in capital			11,566,697				9,114,465
Accumulated deficit			(14,671,619	)			(13,578,570	)
Total stockholders’ deficit			(3,104,922	)			(4,464,105	)
Total liabilities and stockholders’ deficit		$	161,330			$	720,507

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

  

THE PAWS PET COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2012				2011				2012				2011
Revenue		$	-			$	577,691			$	-			$	1,489,450
Cost of revenue			-				363,940				5,843				1,530,393
Gross loss			-				213,751				(5,843	)			(40,943	)
Operating expense:
Sales, general and administration			733,840				900,278				3,541,167				2,788,147
Loss from operations			(733,840	)			(686,527	)			(3,547,010	)			(2,829,090	)
Other income (expense):
Interest income			-				4				-				8
Interest expense			(93,962	)			(82,122	)			(313,350	)			(569,099	)
Net (loss) gain on conversion of convertible notes			(8,339	)			-				61,661				-
Loss on abandonment of property and equipment			(41,569	)			-				(41,569	)			-
Loss on extinguishment of debt			-				-				-				(571,122	)
Warrant liability valuation, net			1,133,795				7,166,847				2,748,819				(5,673,013	)
Other income (expense), net			989,925				7,084,729				2,455,561				(6,813,226	)
Loss before income taxes			256,085				6,398,202				(1,091,449	)			(9,642,316	)
Provision (benefit) for income taxes			-				-				(1,600	)			-
Net income (loss)		$	256,085			$	6,398,202			$	(1,093,049	)		$	(9,642,316	)
Net income (loss) per share, basic and diluted		$	0.00			$	0.14			$	(0.02	)		$	(0.23	)
Weighted average shares used in calculation of basic and diluted net income (loss) per share			59,324,455				44,750,634				65,970,450				41,864,799

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

  

THE PAWS PET COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine months ended September 30,
		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,093,049	)		$	(9,642,316	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			47,840				45,380
Equity based compensation			25,173				32,394
Warrant valuation, net			(2,748,819	)			6,143,013
Loss on abandonment of property and equipment			41,569				-
Loss on extinguishment of 14% debenture			-				571,122
Accelerated amortization of debt discount from conversion of debenture			59,080				325,399
Amortization of debt discount			244,267				145,731
Net gain on conversion of convertible notes			(61,661	)			-
Common shares issued for the acquisition of Impact Social Networking			1,035,168				-
Warrants issued in lieu of cash for services rendered by non-employees			-				169,062
Common shares issued in lieu of cash to Intellicell for license fee			58,209				82,500
Common shares issued in lieu of cash for interest to non-employees			6,432				413,073
Common shares issued in lieu of cash for services rendered by non-employees			818,514				-
Common shares issued in lieu of cash compensation to employees			144,000				-
Deferred financing fee			427,073				(427,073	)
Changes in certain assets and liabilities:
Receivable due from credit card clearing house			59,418				53,584
Prepaid expenses			(1,686	)			108,115
Security deposits and other			39,689				6,008
Accounts payable			(177,656	)			(292,916	)
Accrued expenses			803,664				344,708
Unearned revenue			-				22,617
Net cash used in operating activities			(272,775	)			(1,899,599	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			-				(87,653	)
Net cash used in investing activities			-				(87,653	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock			225,000				500,000
Proceeds from issuance of debt			102,500				-
Net cash provided by financing activities			327,500				500,000
Net change in cash and cash equivalents			54,725				(1,487,252	)
Cash and cash equivalents at beginning of period			38,256				1,511,057
Cash and cash equivalents at end of period		$	92,981			$	23,805
Supplementary disclosure of cash flow information
Cash paid during the year for:
Income taxes			-			$	800
Interest expense			-			$	-
Non-cash transactions:
Conversion of 8% convertible debentures to 1.3 million shares of common stock			-			$	525,000
Conversion of 8% convertible debentures to 2,033,898 shares of common stock		$	12,000
Conversion of 14% convertible debentures to 250,000 shares of common stock		$	30,000			$	-
Derivative warrant valuation APIC component			-			$	470,000
Issuance of 14% convertible debenture with warrants in exchange for 14% debenture			-			$	350,000
Derivative liability discount from issuance of 14% convertible debenture with warrants			-			$	342,632
Extinguishment of 14% debenture exchanged for 14% convertible debenture			-			$	250,000
Common shares issued in 2011 in lieu of cash for 2011 and 2010 interest due			-			$	245,677
Common shares issued in 2011 for services rendered in 2010 by non-employees			-			$	298,824

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

THE PAWS PET COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of The PAWS Pet Company, Inc. (the “Company”), formerly known as Pet Airways, Inc., and its wholly owned subsidiaries Pet Airways, Inc. (“Pet Airways”) and Impact Social Networking, Inc.(“ISN”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of the Company’s management, the accompanying condensed consolidation financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September 30, 2012 and 2011. Although management believes that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The results for the three months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2011.

 

Certain prior period amounts have been reclassified or adjusted to conform to the current presentation. These reclassifications and adjustments had no material impact on the consolidated financial position, results of operations and net cash flows from operations for all periods presented.

 

Going Concern Matters

 

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company does not presently have adequate cash from operations or financing activities to meet its long-term financing needs. For the nine month period ended September 30, 2012 and the year ended December 31, 2011, the Company had $92,981 and $38,256, respectively, in cash and cash equivalents to use in executing its business plan. For the nine months ended September 30, 2012, the Company generated no revenues and recorded a net loss of $(1,093,049) including non-cash charges of $(1,035,168) in acquisition expenses following the acquisition of the technology assets from Impact Social Networking, a $2,748,819 gain in derivative valuation expenses, a $(313,350) in non-cash interest expenses and a $(41,569) loss on abandonment of property and equipment. For the year ended December 31, 2011, the Company generated $1,584,432 in revenues and recorded a net loss of $(7,513,562). As a result of these and other factors, the Company’s independent registered public accounting firm has included an explanatory paragraph in their audited consolidated financial statements and footnotes in the Annual Report on Form 10-K for the year ended December 31, 2011 as to the substantial doubt about the Company’s ability to continue as a going concern. As further described in Footnote 2 “Equity” to the unaudited condensed consolidated financial statements, on June 3, 2011 the Company issued 2,253,470 shares of common A stock (“common stock”) and a warrant to purchase 20,476,707 shares of common stock at a price of $1.02 per share to Socius CG II, Ltd. (“Socius”) for cash of $500,000 and secured an equity line of credit for up to $5 million subject to the Company meeting certain conditions.

 

The Company will require additional working capital to continue its operations during the next 12 months and to support its long-term growth strategies. Since the company was unable to meet the conditions permitted to make draw downs under its financing arrangement with Socius, the Company needs to seek alternative funding required through one or more sources and credit facilities, if available, or through the sale of debt or issuance of additional equity securities. However, there is no assurance that funding of any type would be available to the Company, or that it would be available at rates or other terms and conditions that would be financially acceptable and viable to the Company in the long term. If the Company is unable to raise the necessary additional financing when needed, the Company may be required to stop developing technologies, sell assets or enter into a merger or other combination with a third party, any of which could adversely affect the value of its common stock, or render it worthless. If the Company issues additional debt or equity securities, such securities may enjoy rights, privileges and priorities (including but not limited to coupon rates, conversion rights, rights to fixed or preferential dividends, anti-dilution rights or preference as to the distribution of assets upon a liquidation) superior to those enjoyed by holders of the Company’s common stock, thereby diluting the value of the Company’s common stock.

 

The Company’s prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly given that the Company has limited financial resources. The Company may not be successful in addressing such risks and difficulties.

 

  

Critical Accounting Policies and Estimates

 

The preparation of the Company’s unaudited condensed consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company based these estimates and assumptions on historical experience and evaluates them on an on-going basis to ensure they remain reasonable under current conditions. Actual results could differ from those estimates. Critical accounting policies and estimates are summarized below.

 

Revenue Recognition

 

The Company recognizes revenue when the earnings process is completed.

 

In the Company’s Pet Airways business, the earnings process was completed when the scheduled flight service, or a replacement flight service, purchased by the buyer had been delivered. Revenue from tickets sold prior to a scheduled flight was initially recorded as unearned revenue, net of any discounts, and was recognized as revenue in the period when the scheduled service had been provided or offered to the buyer as agreed. In the ordinary course of the Company’s business, a portion of the tickets sold were sometimes not used by the buyer on the agreed date of the flight. In such cases, for a nominal change fee, the Company issued holders of unused tickets a “voucher” which stated value could have been applied toward the purchase of a flight for up to one year. Accordingly, the change fee was earned when the voucher was issued and the stated voucher value remained unearned until recorded as revenue upon the earlier of the vouchers expiration date or delivery of the flight service. Tickets purchased for scheduled flights that were cancelled by the Company may have been refunded or applied towards another flight at the buyer’s request. Refunds processed were removed from unearned revenue. Any inconvenience cost incurred by the Company for the benefit of the buyer was charged to cost of revenue when incurred. Fees charged by the credit card processors for handling the ticket sales were recorded to cost of sales at the time when the tickets were sold.

 

For our social media application we expected to generate revenues from the sale of advertising space within the application. Revenues were to be recognized where there was evidence of a contractual arrangement, we had delivered our obligations based on the contract, pricing could be determined and there was a reasonable expectation that the associated receivable could have been collected. Advertising revenue was expected to be generated from the display of advertisements on our platform. The arrangements would have been evidenced by either online acceptance of terms and conditions or contracts that stipulate the types of advertising to be delivered, the timing and the pricing. We expected to recognize revenue from the display of impression-based advertisements on our application in the contracted period when the impressions were to be delivered. Impressions were considered delivered when an advertisement appears in pages delivered to users. We expected to recognize revenue from the delivery of click-based advertisements on our website. Revenue associated with these advertisements was to be recognized in the period that a user clicks on an advertisement.

 

The Company is not currently generating revenues.

 

Derivative Liabilities

 

The Company has utilized convertible debentures with warrants to purchase shares of common stock to settle certain liabilities and fund operations resulting in the recording of a derivative liability. Current guidance for valuing and classifying transactions of this type includes Accounting Standards Codification (“ASC”) 470-20 “Debt with Conversion and Other Options”. Accordingly, the Company has used the Black-Scholes option-pricing model as its method of determining the fair value of the convertible debenture issued with a warrant. The resulting calculation of the beneficial conversion feature (“BCF”) and warrant equity component are recorded to additional paid in capital (“APIC”) with an offset discount to the principal value of the convertible debenture. The Company has used the effective yield interest method for amortizing the discount to interest expense over the maturity term of the convertible debenture. The Company records to interest expense the unamortized discount value associated with a debenture converted in a period.

 

The Company accounts for certain its Warrants (see Note 2, Equity, Socius CG II, Ltd. Financing) as derivatives under the guidance of ASC 815-10, Accounting for Derivative Instruments and Hedging Activities, and ASC 815-40, Contracts in an Entity’s Own Stock.

 

Accruals for Contingent Liabilities

 

The Company makes estimates of liabilities that arise from various contingencies for which values are not fully known at the date of the accrual or during the periodic financial planning and analysis cycle. These contingencies may include, but are not limited, to accruals for reserves for expenses, costs and awards involving legal settlements. Events may occur that are resolved over a period of time or on a specific future date. Management makes estimates using the facts available of the probability of the outcomes and range of cost, if measurable, of these occurrences and charges them to expense in the appropriate periods. If the ultimate resolution of any event is different than management’s estimate caused by a change in facts or material operating assumptions, corresponding entries to earnings may be required.

 

  

Equity Based Compensation

 

The Company applies ASC 718-10 Stock Compensation and ASC 505-50 Equity Based Payments to Non-Employees in accounting for stock options issued to employees and non-employees, respectively. For stock options and warrants issued to non-employees, the Company applies the same standard, which requires the recognition of compensation cost based upon the fair value of stock options and warrant at the grant date using the Black-Scholes option pricing model. The Company’s determination of fair value of share-based payment awards on the date of grant using the option-pricing model is affected by its equity price as well as assumptions regarding its expected equity price volatility over the term of the awards, the selection of a risk free interest rate, the ultimate disposition of the award and the impact of the award on earnings per share. For example, in calculating the expected equity price volatility, the Company may consider using its historical experience only, its experience plus that of a publicly trade index volatility experience, or a blended volatility experience for public peer companies. The Company also evaluates carefully the expected life term of an award though the vesting of awards to date have been immediate. Finally, the Company attempts to use a risk free rate that is widely quoted and pertinent across a broad range of transactions.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at financial institutions that are insured by the Federal Deposit Insurance Corporation.

 

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 assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

Reservation System and Development Costs

 

The Company accounts for reservation system (“website”) and development costs in accordance with ASC 350-50 “Website Development Costs.” All costs incurred in the planning stage are expensed as incurred. Costs incurred in the website application and infrastructure development stage are accounted for in accordance with ASC 350-50, which requires the capitalization of certain costs that meet specific criteria. Costs incurred in the day to day operation of the website are expensed as incurred. Costs associated with the development of the Company’s social media application are expensed in the month when they incurred.

 

Fair Value Measurements

 

The Company has adopted a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. In this valuation, the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date and fair value is a market-based measurement and not an entity-specific measurement.

 

The Company utilizes the following hierarchy in fair value measurements:

 

	●	Level 1 – Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
	●	Level 2 – Inputs use other inputs that are observable, either directly or indirectly. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
	●	Level 3 – Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

 

Depreciation, Amortization and Capitalization

 

The Company records depreciation and amortization, when appropriate, using the straight-line method over the estimated useful life of the assets (three to five years). Expenditures for maintenance and repairs are charged to expense as incurred. Additions, major renewals and replacements that increase the property’s useful life are capitalized. Property sold or retired, together with the related accumulated depreciation is removed from the appropriate accounts and the resultant gain or loss is included in operating income or loss.

 

  

Long-Lived Assets

 

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of its trademark costs. If and when such factors, events or circumstances indicate possible impairment to its trademark costs, the Company would make an estimate of undiscounted cash flows over the remaining lives of the respective assets in measuring recoverability from future operations. The Company incurred no impairment losses during the periods presented.

 

Income Taxes

 

The Company follows ASC 740, Income Taxes. Deferred tax assets or liabilities are recorded to reflect the future tax consequences of temporary differences between the financial reporting basis of assets and liabilities and their tax basis at each year-end. These amounts are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse.

 

The Company records deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities and on operating loss carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

Recent Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.

 

2. Business Overview and Organizational History

 

Business Overview

 

From inception until January 2012, the Company, through its wholly-owned subsidiary, Pet Airways, operated an airline designed specifically for the comfortable and safe transportation of pets by traveling in the main cabin of the aircraft. Pet owners booked their pets on flights online at the Company’s website or booked with its agents by phone. On the day of the scheduled flight, pet owners dropped off their pets at one of the Company’s facilities located at the departure airport. The Company placed the pet passengers into a pet-friendly carrier and then boarded the carrier into the main cabin of the aircraft. The Company ran a scheduled coast to coast service. By the end of January 2012, the Company suspended flight operations due to low bookings and insufficient capital and in April 2012 decided to cease airline operations.

 

On February 23, 2012, pursuant to a share exchange agreement (“the Agreement”) the Company acquired the 100% of the issued and outstanding capital stock of Impact Social Networking, Inc. (“ISN”), a Georgia corporation in exchange for 7,394,056 shares of the Company’s common stock, no par value per share valued at $1,035,168 on the date of the acquisition. Under the terms of the Agreement, the Company may issue additional shares of its Common Stock to the former owners of ISN based upon the attainment by the Company of certain milestones. ISN owns a number of technology assets that had not reached technical feasibility at the time of the acquisition. With the exception of these technology assets ISN had no other assets or liabilities at the time of the acquisition, and had except for the development costs incurred for these assets, had no other costs and no revenue. Following, the acquisition, the Company commenced a new strategy of developing technologies for pet owners and pet caregivers.

 

On March 16, 2012, the Company launched a beta version of a social media application called “Pawdoodle.” This was an application that could be used in conjunction with social media platforms such as Facebook, Twitter and Google Plus. We believe Pawdoodle was the first social networking application that had been developed specifically for pet owners and pet caregivers that worked across a number of social media platforms. By using Pawdoodle, pet owners could build web pages for their pets, post and view pictures of their pets, follow pet breeds and pet adoptions. Pawdoodle also allowed pet owners to store pet microchip data.

 

In September 2012, the Company closed the Pawdoodle application.

 

On March 9, 2013 the Company entered into a Securities Exchange Agreement (the “Agreement”) whereby the Company issued 80,000 shares of the Company’s Series B Convertible Preferred Stock (the “B Preferred”) to the members of Advanced Access Pharmacy Services, LLC, a Nevada limited liability company (“AAPS”) in exchange for 100% of the outstanding units of limited liability company membership interests of AAPS.

 

AAPS was created to exploit specific niche opportunities in wholesale and retail pharmacies. AAPS intends to focus on workers’ compensation and in-office physician pharmacy distribution as well as the limited purchase and collection of pharmaceutical and services related receivables. Leveraging decades of experience in pharmacy and medical receivables collections of the people being hired, the Company believes that it should be able to achieve significant profitability in a very short period with very limited investment.

 

  

See Note 7 - Subsequent Events for more details.

 

Organizational History

 

The Company was incorporated in the State of Illinois on June 6, 2005 as American Antiquities, Inc. In June 2010, the Company formed Pet Airways by the conversion of successor entity Panther Air Cargo, LLC (“Panther Air”) a limited liability company. Effective the date of the conversion, Panther Air began operating as Pet Airways, Inc. (Florida).

 

On August 13, 2010, the Company completed a reverse acquisition transaction through a share exchange with Pet Airways (the “Acquisition”), whereby the Company acquired 100% of the issued and outstanding capital stock of Pet Airways in exchange for 25,000,000 shares of the Company’s common stock, which constituted approximately 73% of its issued and outstanding capital stock on a post-acquisition basis as of and immediately after the consummation of the Acquisition.

 

Upon completion of the Acquisition, the Company changed its name from American Antiquities, Inc. to Pet Airways, Inc. and commenced trading under the symbol “PAWS” on the OTC QB. The OTC QB market tier of the OTC market helps investors identify companies that are current in their reporting obligations with the SEC. OTC QB securities are quoted on OTC Markets Group’s quotation and trading system. On July 27, 2011, the Company filed Articles of Amendment to amend its Articles of Incorporation to change its name to The PAWS Pet Company, Inc.

 

The share exchange transaction was treated as a reverse acquisition for accounting purposes, with Pet Airways as the acquirer and The PAWS Pet Company, Inc. as the acquired party. Unless the context suggests otherwise, references in this report to business and financial information for periods prior to the consummation of the reverse acquisition, refer to the business and financial information of Pet Airways, Inc. and its predecessors. For accounting purposes, the acquisition of Pet Airways, Inc. has been treated as a recapitalization with no adjustment to the historical book and tax basis of the Company’s assets and liabilities.

 

In January 2012, the Company suspended flight operations and in April 2012, ceased airline operations.

 

On February 23, 2012, pursuant to the Agreement the Company acquired the 100% of the issued and outstanding capital of ISN, a Georgia corporation in exchange for 7,394,056 shares of the Company’s common stock, no par value per share valued at $1,035,168 on the date of the acquisition. Under the terms of the Agreement, the Company may issue additional shares of its Common Stock to the former owners of ISN based upon the attainment by the Company of certain milestones. ISN owns a number of technology assets that had not reached technical feasibility at the time of the acquisition. With the exception of these technology assets ISN had no other assets or liabilities at the time of the acquisition, and had except for the development costs incurred for these assets, had no other costs and no revenue. Following, the acquisition, the Company commenced a new strategy of developing technologies for pet owners and pet caregivers. In September we closed our social media application and are currently evaluating alternative business strategies.

 

On July 13, 2012 the company increased its authorized share capital of common stock to 350,000,000.

 

3. Equity

 

Preferred Stock Authorized

 

On May 27, 2011, the Company filed an amended and restated Certificate of Designations of Preferences, Rights and Limitations of Series A Preferred Stock (the “Certificate of Designations”) with the Secretary of State of the State of Illinois that designated 500 such shares as Series A Preferred Stock (the “Preferred Stock”). A summary of the Certificate of Designations is set forth below:

 

Ranking. The Preferred Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the Common Stock, and any other classes of stock or series of preferred stock of the Company other than a class or series of preferred stock intended to be listed for trading and (ii) junior to any and all existing and future indebtedness of the Company.

 

No right of Conversion. The Preferred Stock is not convertible into Common Stock.

 

Dividends and Other Distributions. Commencing on the date of issuance of any such shares of Preferred Stock, holders of Preferred Stock shall be entitled to receive dividends on each outstanding share of Preferred Stock, which shall accrue at a rate equal to 10% per annum from the date of issuance. Accrued dividends shall be payable upon redemption of the Preferred Stock. So long as any shares of Preferred Stock are outstanding, no dividends or other distributions may be paid, declared or set apart with respect to any junior securities other than dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock. After payment of dividends at the annual rates set forth above, any additional dividends declared shall be distributed ratably among all holders of Preferred Stock and Common Stock in proportion to the number of shares of Common Stock that would be held by each such holder of Preferred Stock as if the Preferred Stock were converted into Common Stock by taking the Series A Liquidation Value (as defined below) divided by the market price of one share of Common Stock on the date of distribution.

 

  

Liquidation. Upon any liquidation, dissolution or winding up of the Company after payment or provision for payment of debts and other liabilities of the Company and any liquidation preferences to the senior securities, before any distribution or payment is made to the holders of any junior securities, the holders of Preferred Stock shall first be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to the Series A Liquidation Value, after which any remaining assets of the Company shall be distributed ratably among the holders of the Preferred Stock and the holders of junior securities, as if the Preferred Stock were converted into Common Stock by taking the Series A Liquidation Value divided by the market price of one share of Common Stock on the date of distribution.

 

Redemption. The Company may redeem, for cash or by an offset against any outstanding note payable from Socius to the Company that was issued by Socius CG II, Ltd. (“Socius”), any or all of the Preferred Stock at any time at a redemption price per share equal to $10,000 per share of Preferred Stock, plus any accrued but unpaid dividends with respect to such share of Preferred Stock (the “Series A Liquidation Value”).

 

On June 2, 2011, the Company’s Board of Directors designated 1,200,000 shares as Series A Preferred Stock. On September 30, 2012, no shares of Preferred Stock were outstanding.

 

Socius CG II, Ltd. Financing

 

On June 3, 2011, the Company entered into a securities purchase agreement with Socius, pursuant to which it secured $500,000 of immediate funding through the issuance and sale of 2,253,470 shares of common stock and a warrant to purchase up to 20,476,707 shares of common stock at an initial exercise price of $1.02 (subject to anti-dilution adjustments). In addition, Socius agreed to purchase up to an additional $5 million in non-convertible shares of Preferred Stock from the Company over the next two years, subject to the Company meeting certain conditions.

 

Subject to the terms and conditions of the securities purchase agreement, beginning 75 days after the closing of the initial purchase, at the Company’s sole discretion, the Company may submit to Socius a tranche notice to purchase a certain dollar amount of the Company’s Preferred Stock at $10,000 per share. The maximum amount that may be funded under any tranche cannot exceed 20% of the cumulative trading volume of the common stock for the 10 trading day-period prior to the applicable tranche notice date.

 

In connection with the securities purchase agreement, the Company agreed to issue on the 75 day anniversary of the initial purchase by Socius, 1,126,735 shares of common stock to Socius as consideration for executing the securities purchase agreement. The fair value of the consideration was $371,823 using the August 18, 2011 common stock closing price of $0.33 per share and was recorded as a deferred financing fee.

 

In addition, with the closing of the Socius financing, the Company approved the issuance of an aggregate of 1,800,000 shares of common stock as contingent consideration valued at $1,260,000 using the June 3, 2011 common stock closing price of $0.70 per share to two non-employee consultants. The share issuance was recorded as APIC and as financing cost charged to APIC.

 

In connection with the issuance of the warrant to purchase up to 20,476,707 shares of common stock at an initial exercise price of $1.02 (subject to full ratchet, anti-dilution adjustment), using the Black Scholes option pricing model that valued the warrants at $0.70 and $0.65 per share at June 3 and June 30, 2011 respectively, the Company recorded a charge to operations of $12,839,860 and to additional paid in capital of $470,000. In connection with this transaction the Company recorded deferred financing fees of $843,957 at June 30, 2011. Given that access to the financing is based on a percentage formula of the dollar value of stock traded, the Company feels that is unlikely that sufficient stock volume will be reached over the balance of the term of the financing and has expensed the balance of the deferred financing in the quarter ended September 30, 2012.

 

On December 29, 2011, an additional 458,678 warrants were issued to Socius with an exercise price of $0.20 per share to reflect an anti-dilution adjustment.

 

On February 23, 2012, an additional 4,336,503 warrants were issued to Socius with an exercise price of $0.14 per share to reflect an anti-dilution adjustment.

 

On March 2, 2012, an additional 252,449 warrants were issued to Socius with an exercise price of $0.14 per share to reflect an anti-dilution adjustment.

 

On April 2, 2012, an additional 53,811 warrants were issued to Socius with an exercise price of $0.05 per share to reflect an anti-dilution adjustment.

 

On April 10, 2012, an additional 3,995,247 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

  

On April 20, 2012, an additional 405,839 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On April 20, 2012, an additional 828,089 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On April 25, 2012, an additional 184,335 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On April 27, 2012, an additional 302,046 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On June 7, 2012, an additional 109,489 warrants were issued to Socius with an exercise price of $0.01 per share to reflect an anti-dilution adjustment.

 

On June 15, 2012, an additional 733,848 warrants were issued to Socius with an exercise price of $0.01 per share to reflect an anti-dilution adjustment

 

On June 30, 2012, an additional 761,126 warrants were issued to Socius with an exercise price of $0.01 per share to reflect an anti-dilution adjustment.

 

On July 24, 2012, an additional 217,390 warrants were issued to Socius with an exercise price of $0.01 per share to reflect an anti-dilution adjustment.

 

The value of the derivative warrant liability was $182,136 and $2,930,955 at September 30, 2012 and December 31, 2011, respectively.

 

Common Stock Issued

 

On January 26, 2012 the Company issued 45,833 shares of common stock valued, using the closing stock price, at $5,500 as compensation for a license fee to non-employees.

 

On February 23, 2012 pursuant to the share exchange agreement by which the Company acquired ISN, the Company issued 7,394,056 shares of its common stock, no par value per share. These shares were issued pursuant to the exemption from registration provided under Section 4(2) of the Securities Act.

 

On February 26, 2012 the Company issued 45,833 shares of common stock valued at $6,417 using the closing stock price of the day, as compensation for a license fee to non-employees.

 

On March 26, 2012 the Company issued 45,833 shares of common stock valued at $4,583 using the closing stock price of the day, as compensation for a license fee to non-employees

 

On March 31, 2012 the Company elected to issue 49,354 shares of common stock valued, using the closing stock price of the day, at $4,442 in lieu of cash to satisfy interest payable at March 31, 2012 to the convertible debentures holders.

 

On April 2, 2012 the Company sold 200,000 shares of common stock for cash consideration of $10,000.

 

On April 10, 2012 the Company issued 6,170,950 shares of common stock valued at $740,514 using the closing stock price of the day, as compensation for services rendered to employees and non-employees.

 

On April 20, 2012 the Company issued 1,500,000 shares of common stock valued at $180,000 using the closing stock price of the day, as compensation for services rendered to non-employees.

 

On April 27, 2012 the Company issued 350,000 shares of common stock valued at $42,000, using the closing stock price of the day, as compensation for services rendered to non-employees.

 

On April 30, 2012 the Company issued 250,000 shares of common stock following the conversion of $100,000 of a $350,000 14% convertible debenture.

 

On May 1, 2012 the Company issued 595,836 shares of common stock valued at $41,709 using the closing stock price of the day, as compensation for a license fee to non-employees

 

  

On June 7, 2012 the Company sold 1,500,000 shares of common stock for cash consideration of $15,000.

 

On June 15, 2012 the Company sold 10,000,000 shares of common stock for cash consideration of $100,000.

 

On June 30, 2012 the Company sold 10,000,000 shares of common stock for cash consideration of $100,000.

 

On June 30, 2012 the Company elected to issue 44,063 shares of common stock valued, using the closing stock price of the day, at $1,763 in lieu of cash to satisfy interest payable at June 30, 2012 to the convertible debentures holders.

 

On September 4, 2012 the Company issued 2,033,898 shares of common stock following the conversion of $12,000 of a $47,500 8% convertible debenture.

 

On September 30, 2012 the Company elected to issue 41,545 shares of common stock valued, using the closing stock price of the day, at $228 in lieu of cash to satisfy interest payable at September 30, 2012 to the convertible debentures holders.

 

Warrants

 

On December 29, 2011, 458,678 warrants were issued to Socius with an exercise price of $0.20 per share to reflect an anti-dilution adjustment.

 

On February 23, 2012, 4,336,503 warrants were issued to Socius with an exercise price of $0.14 per share to reflect an anti-dilution adjustment.

 

On March 2, 2012, 252,449 warrants were issued to Socius with an exercise price of $0.14 per share to reflect an anti-dilution adjustment.

 

On April 2, 2012, an additional 53,811 warrants were issued to Socius with an exercise price of $0.05 per share to reflect an anti-dilution adjustment.

 

On April 10, 2012, an additional 3,995,247 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On April 20, 2012, an additional 405,839 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On April 20, 2012, an additional 828,089 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On April 25, 2012, an additional 184,335 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On April 27, 2012, an additional 302,046 warrants were issued to Socius with an exercise price of $0.12 per share to reflect an anti-dilution adjustment.

 

On June 7, 2012, an additional 109,489 warrants were issued to Socius with an exercise price of $0.01 per share to reflect an anti-dilution adjustment.

 

On June 15, 2012, an additional 733,848 warrants were issued to Socius with an exercise price of $0.01 per share to reflect an anti-dilution adjustment

 

On June 30, 2012, an additional 761,126 warrants were issued to Socius with an exercise price of $0.01 per share to reflect an anti-dilution adjustment.

 

On July 24, 2012, an additional 217,390 warrants were issued to Socius with an exercise price of $0.01 per share to reflect an anti-dilution adjustment.

 

  

Stock Incentive Plan

 

In 2010, the Company adopted its Stock Incentive Plan (the “Plan”). Under the Plan, at September 30, 2012 we had 4,000,000 shares approved and reserved and at December 31, 2011 we had 4,000,000 shares reserved for the issuance of stock options to employees, officers, directors and outside advisors. Under the Plan, the options may be granted to purchase shares of common stock at fair market value at the date of grant.

 

At September 30, 2012 and December 31, 2011 the Company had 1,172,000 shares issued under the plan and 2,828,000 available for issuance.

 

On February 9, 2012 the Company adopted the 2012 Stock Incentive Plan (the “2012 Plan”). Under the 2012 Plan the Company had 10,000,000 shares and shares underlying stock options approved and reserved for the issuance to employees, officers, directors and outside advisors. At September 30, 2012 the Company had 6,170,950 shares issued under the 2012 Plan and 3,829,050 available for issuance.

 

4. Debt Obligations

 

Extinguishment of 14% Debenture

 

In June 2010, Pet Airways issued a $250,000 principal amount unsecured debenture, with an interest rate of 14% per annum and a maturity date of June 18, 2011 (“14% debenture”). Interest on the 14% debenture is payable quarterly starting January 1, 2011. At the Company’s option, interest due may be settled in cash or shares of Company common stock.

 

On June 3, 2011, the Company extinguished the $250,000 principal amount 14% debenture in exchange for a $350,000 principal amount convertible debenture with a coupon interest rate of 14% per annum, a conversion price of $0.50 per share of common stock and a maturity date of August 14, 2013 (“14% convertible debenture”) and a warrant to purchase 875,000 shares of common stock at an exercise price of $0.50 per share with an expiration date of June 3, 2016. The extinguishment of the $250,000 principal amount 14% debenture resulted in a total loss on the extinguishment of debt of $571,122 including $10,128 of accrued interest payable.

 

The 14% convertible debenture and warrant described above are subject to derivative liability accounting. Using the Black-Scholes option pricing model, a fair value of the debenture’s beneficial conversion feature and warrant component derivative was determined to be $332,415 and has been recorded as APIC and debt discount. Using the Black-Scholes option pricing model, a fair value of the detached warrant was determined to be $481,250 and has been recorded as APIC and element of the total loss on the extinguishment of debt.

 

Convertible Debentures

 

In August 2010, in a series of transactions, the Company issued five unsecured, convertible debentures, with an aggregate principal balance of $500,000, with interest rates of 8% per annum and a maturity date of August 2013. The debentures are convertible into shares of the Company’s stock at a conversion price of $0.50 per share. Also, in August 2010, the Company issued an unsecured, convertible debenture in the principal amount of $500,000 with an interest rate of 8% and a maturity date of August 2013. The debenture is convertible into shares of the Company’s stock at a conversion price of $0.40 per share. Interest on the above debentures is payable quarterly. At the Company’s option, interest due may be settled in cash or shares of Company common stock.

 

In January 2011, the debenture holders of aggregate $525,000 principal amount of 8% convertible debentures elected to convert their debentures into 1,300,000 shares of common stock.

 

On March 2, 2012 the Company issued an 8% convertible debenture, with a principal balance of $47,500, and a maturity date of November 29, 2012.

 

On April 25, 2012 the Company issued an 8% convertible debenture, with a principal balance of $27,500, and a maturity date of January 18, 2013.

 

On April 30, 2012, the debenture holder of $350,000 principal amount of 14% convertible debentures elected to convert $100,000 of the debenture into 250,000 shares of common stock.

 

On July 24, 2012 the Company issued an 8% convertible debenture, with a principal balance of $27,500, and a maturity date of April 19, 2013.

 

On September 4, 2012 the Company issued 2,033,898 shares of common stock following the conversion of $12,000 of a $47,500 8% convertible debenture.

 

At September 30, 2012, an aggregate of $565,500 and $250,000 principal amount 8% and 14% convertible debentures, respectively, were outstanding.

 

  

Debt Discount

 

On February 23, 2012, the Company issued an 8% convertible debenture that was subject to derivative liability accounting. Using the Black-Scholes option pricing model, a fair value of the debenture’s beneficial conversion feature was determined to be $34,397 and has been recorded as debt discount.

 

On April 25, 2012 the Company issued an 8% convertible debenture that was subject to derivative liability accounting. Using the Black-Scholes option pricing model, the fair value of the debenture’s beneficial conversion feature was determined to be $27,500 and has been recorded as debt discount.

 

On April 30, 2012 following the conversion of $100,000 principal amount 14% debenture, the Company amortized $56,333 of debt discount to interest expense.

 

On July 24, 2012 the Company issued an 8% convertible debenture that was subject to derivative liability accounting. Using the Black-Scholes option pricing model, the fair value of the debenture’s beneficial conversion feature was determined to be $27,500 and has been recorded as debt discount.

 

On September 4, 2012 following the conversion of $12,000 principal amount 8% debenture, the Company amortized $2,747 of debt discount to interest expense.

 

For the three and nine month period ended September 30, 2012, the Company amortized to interest expense using the effective interest method $91,863 and $244,267 respectively of the debt discount related to the convertible debentures.

 

At September 30, 2012 and December 31, 2011, the aggregate unamortized debt discount was $268,052 and $482,003, respectively. The unamortized debt discount at September 30, 2012 is being amortized to interest expense using the effective interest method through the earlier of the conversion date or the maturity dates of the convertible debentures.

 

The following table summarizes the principal, unamortized debt discount and equity components of the Company’s convertible debentures derivative liability net carrying amount:

 

		September 30, 2012				December 31, 2011
Principal amount 8% convertible debenture short term		$	565,500			$	-
Principal amount 8% convertible debenture long term			-				475,000
Principal amount 14% convertible debenture			250,000				350,000
Unamortized debt discount			(268,052	)			(482,003	)
Net carrying amount		$	547,448			$	342,997
Equity component (recognized in Additional paid-in capital)		$	879,528			$	790,131

 

5. Commitments and Contingencies

 

The Company leased space for certain of its offices and airport facilities under leases expiring from one month to two years after September 30, 2012. For the three and nine months ending September 30, 2012 rent expense was $56,832 and $189,168, respectively. Amounts of minimum future annual rental commitments under non-cancelable operating leases in each of the four periods ending September 30, 2013 through 2015 were:

 

Operating leases

 

Year		September 30,
2013		$	113,387
2014			10,000
2015			-
Thereafter			-
Total minimum lease payments		$	123,387

 

  

During the year the Company abandoned the leased properties but remain still liable for unpaid rent which has been accrued.

 

The Company, from time to time, is involved in legal proceedings, claims, and litigation that occur in connection with its business. The Company routinely assesses its liabilities and contingencies in connection with these matters based upon the latest available information and, when necessary, seeks input from its third-party advisors when making these assessments. Consistent with SEC rules and requirements, described below are material pending legal proceedings (other than ordinary routine litigation incidental to the Company’s business), material proceedings known to be contemplated by governmental authorities, other proceedings arising under federal, state, or local environmental laws and regulations (including governmental proceedings involving potential fines, penalties, or other monetary sanctions in excess of $10,000) and such other pending matters that we may determine to be appropriate.

 

There are no other proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to the Company’s interest.

 

The Company is self-insured and has not accrued a reserve against potential loss.

 

6. Net loss per share

 

The Company computes net loss per share in accordance with GAAP. Basic net loss per share is computed by dividing net loss attributable to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period.

 

The following is a reconciliation of the weighted average number of common shares used to calculate basic net loss per share to the weighted average common and potential common shares used to calculate diluted net loss per share for the three and nine months ended September 30, 2012 and 2011:

 

		Three months ended September 30,								Nine months ended September 30,
		2012				2011				2012				2011
		(Unaudited)								(Unaudited)
Numerator:
Net income (loss ), basic		$	256,085			$	6,398,202			$	(1,093,049	)		$	(9,642,316	)
Effect of interest expense and discount amortization			-	(1)			-				-	(1)			-
Net income (loss), dilutive		$	256,085			$	6,398,202			$	(1,093,049	)		$	(9,642,316	)
Denominator:
Weighted shares outstanding, basic			59,324,455				44,750,634				65,970,450				41,864,799
Effect of dilutive securities:
Convertible debentures and warrants			-	(1)			-				-	(1)			-
Weighted shares outstanding, dilutive			59,324,455				44,750,634				65,970,450				41,864,799
Net income (loss) per share, basic		$	0.00			$	0.14			$	(0.02	)		$	(0.23	)

 

(1) For the three and nine month periods ended Sept. 30, 2012, weighted shares outstanding excludes 36,087,181 shares issuable upon exercise of warrants and 1,575,000 shares issuable for the conversion of debt, due to a loss from continuing operations.

 

7. Subsequent Events

 

On March 9, 2013 the Company entered into a Securities Exchange Agreement (the “Agreement”) whereby the Company issued 80,000 shares of the Company’s Series B Convertible Preferred Stock (the “B Preferred”) to the members of Advanced Access Pharmacy Services, LLC, a Nevada limited liability company (“AAPS”) in exchange for 100% of the outstanding units of limited liability company membership interests of AAPS.

 

AAPS was created to exploit specific niche opportunities in wholesale and retail pharmacies. AAPS intends to focus on workers’ compensation and in-office physician pharmacy distribution as well as the limited purchase and collection of pharmaceutical and services related receivables. Leveraging decades of experience in pharmacy and medical receivables collections of the people being hired, the Company believes that it should be able to achieve significant profitability in a very short period with very limited investment.

 

Under the Agreement, the Company is obligated to file certain delinquent periodic reports with the Securities and Exchange Commission (the “SEC”). Upon filing such reports, the board of the Company will appoint two new board members designated by the former members of AAPS. Upon generating $450,000 in revenue subsequent to the transaction, one of the current members of the board will resign. If the Company does not generate $900,000 in revenue within nine (9) months after filing its Annual Report, on Form 10-K for the year ended December 31, 2012 with the SEC, then the newly appointed members to the board will resign from the board and, if a current board member resigned as previously set forth, such board member or another designee of the remaining current director will be appointed to the Board.

 

After a request to convert any part of the B Preferred, the number of shares of the Company’s common stock to be issued is equal to 0.001% of the number of shares of the Common Stock that would be issued and outstanding after the hypothetical conversion and issuance of all of the outstanding shares of any and all classes of convertible stock and/or any and all other convertible debt instruments, options and/or warrants outstanding at the time. If all the 80,000 B Preferred were to be converted at the same time the holders would get 80% of the Company’s then outstanding common stock including all other convertible instruments. The B Preferred Stock is non-voting until converted into common stock, which common stock shall similarly be non-voting until sold by the former members of AAPS to non-affiliated third parties.

 

  

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

 

Cautionary Statements Regarding Forward-Looking Statements

 

This report includes statements that may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts, including, without limitation, statements regarding future financial position, business strategy, budgets, projected sales, projected costs, and management objectives, are forward-looking statements. Terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof, any variation thereon or similar terminology are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially and adversely from the results proposed in such statements. Important factors that could cause actual results to differ from the Company’s expectations include, but are not limited to: the costs and availability of financing; our ability to maintain adequate liquidity; the Company’s ability to execute its business plan; its ability to control costs; its ability to attract and retain customers; transportation demand; general economic conditions; costs of aviation fuel; competitive pricing pressures; governmental regulation; weather conditions; and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012 and other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this report. All forward-looking statements are qualified in their entirety by the foregoing cautionary statements. The Company assumes no duty to update or revise its forward-looking statements based on changes in its expectations or events after the date hereof.

 

Business Summary

 

From inception until January 2012, the Company through its wholly-owned subsidiary, Pet Airways operated an airline designed specifically for the comfortable and safe transportation of pets by traveling in the main cabin of the aircraft. Pet owners booked their pets on flights online at the Company’s website, or with its agents by phone. Flights could be booked up to three months before the scheduled departure date. Payment for the flights was made with a credit card. On the day of the scheduled flight, pet owners dropped off their pets at one of the Company’s airport facilities located at the departure airport. The Company’s airport facilities were for the pets delivered for a flight and functions foremost as a staging, inspection, exchange and observation area for the Company’s staff and the pets under its care pending there flight departure or scheduled layover. The Company placed the pet passengers into a pet-friendly carrier and then boarded the carrier into the main cabin of the aircraft. Pet passengers flew in the main cabin of the specially-outfitted aircraft rather than, as is the case for a traditional commercial airline, flying in the cargo bay or flying as carry-on baggage placed under a passenger’s seat. The Company carried domesticated animals. The Company had a pet attendant on each flight that was responsible for monitoring the pet passengers during the flight. Upon arrival at the destination airport, pet passengers were unloaded from the plane directly into one of the Company’s airport facilities for pick up.

 

The Company did not own its own aircraft. The Company had a relationship with Suburban Air Freight, Inc. based in Omaha, Nebraska which had two Beechcraft 1900 aircraft configured to carry a maximum weight limit of approximately 5,400 lbs. The Company relied on Suburban Air to provide the aircraft, pilot and ensure that the aircraft complied with all appropriate FAA regulations. The Company did not have a written agreement with Suburban Air however under the oral agreement, Suburban Air provided the aircraft, pilot, ensured that the aircraft complied with all appropriate FAA regulations and operated the flights according to the Company’s schedule. The Company flew one aircraft on its coast-to-coast service. The Company has ceased these flight operations.

 

In February, the Company acquired Impact Social Networking, Inc. (“ISN”), a GA corporation. ISN owns a number of technology assets that had not reached technical feasibility at the time of the acquisition. With the exception of these technology assets ISN had no other assets or liabilities at the time of the acquisition. Following the acquisition, the Company commenced a new strategy of developing technologies for pet owners and pet caregivers.

 

On March 16, 2012 the Company launched a beta version of a social media application called “Pawdoodle.” This was an application that can be used in conjunction with social media platforms such as Facebook, Twitter and Google Plus. We believe Pawdoodle was the first social networking application that has been developed specifically for pet owners and pet caregivers that works across a number of social media platforms. By using Pawdoodle, pet owners could build web pages for their pets, post and view pictures of their pets, follow pet breeds and pet adoptions. Pawdoodle also allowed pet owners to store pet microchip data.

 

  

In September 2012 we closed the Pawdoodle application.

 

On March 9, 2013 the Company entered into a Securities Exchange Agreement (the “Agreement”) whereby the Company issued 80,000 shares of the Company’s Series B Convertible Preferred Stock (the “B Preferred”) to the members of Advanced Access Pharmacy Services, LLC, a Nevada limited liability company (“AAPS”) in exchange for 100% of the outstanding units of limited liability company membership interests of AAPS.

 

AAPS was created to exploit specific niche opportunities in wholesale and retail pharmacies. AAPS intends to focus on workers’ compensation and in-office physician pharmacy distribution as well as the limited purchase and collection of pharmaceutical and services related receivables. Leveraging decades of experience in pharmacy and medical receivables collections of the people being hired, the Company believes that it should be able to achieve significant profitability in a very short period with very limited investment.

 

Outlook

 

The Company is evaluating alternatives given it has limited financial resources, and continues to face an uncertain economic environment.

 

Critical Accounting Policies

 

The preparation of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the interim financial statements, the Company utilized available information, including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of the Company’s results of operations to other companies in its industry. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and estimation, or are fundamentally important to its business.

 

There have been no material changes during the nine months ended September 30, 2012 to the items that the Company disclosed as its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the year ended December 31, 2011.

 

  

Results of Operations

 

The following tables set forth certain condensed consolidated statements of operations data expressed in dollars, as a percentage of revenue and the change for the periods indicated:

 

Comparison of the three months ended September 30, 2012 and 2011, respectively.

 

		Three months ended September 30,												Year over Year Change
		2012				2011								$				%
Revenue		$	-	*		$	577,691				100	%		$	(577,691	)			-100	%
Cost of revenue			-	*			363,940				63	%			(363,940	)			-100	%
Gross profit (loss)			-	*			213,751				37	%			(213,751	)			-100	%
Operating expenses:
Sales, general and administration			733,840	*			900,278				156	%			166,438				18	%
Loss from operations			(733,840	)*			(686,527	)			-119	%			(47,313	)			7	%
Other income (expense):
Interest income			-	*			4				0	%			(4	)			-100	%
Interest expense			(93,962	)*			(82,122	)			-23	%			(11,840	)			14	%
Loss on conversion of convertible note			(8,339	)*			-				*				(8,339	)			*
Loss on abandonment of property and equipment			(41,569	)*			-				*				(41,569	)			*
Loss on extinguishment of debenture			-	*			-				0	%			-				*
Derivative warrant valuation expense, net			1,133,795	*			7,166,847				1241	%			(6,033,052	)			*
Other income (expense), net			989,925	*			7,084,729				1226	%			(6,094,804	)			*
Income before income taxes			256,085	*			6,398,202				1108	%			(6,142,117	)			-96	%
(Provision) benefit for income taxes			-	*			-				0	%			-				*
Net income		$	256,085	*		$	6,398,202				1108	%		$	(6,142,117	)			*
Net Income per share, basic		$	0.00			$	0.14
Weighted average shares used in calculation of basic net income per share			59,324,455				44,750,634

 

* Not meaningful.

 

Revenue

 

Revenue decreased $577,691 or 100%, to $0 for the three months ended September 30, 2012 compared to$577,691 for the three months ended September 30, 2011. The decrease is due to the Company’s decision to suspend flight operations in January 2012. The Company operated no flights during the three month period ended September 30, 2012 and generated no revenues from its social media application.

 

Cost of Revenue

 

Cost of revenue decreased $363,940, or 100%, to $0 for the three months ended September 30, 2012 compared to $363,940 for the three months ended September 30, 2011. The decrease in cost of revenue is the result of operating no flights during the 2012 period compared to the 2011 period.

 

Gross Profit

 

Gross profit for the three months ended September 30, 2012 was $0, compared to a gross profit of $213,751 over the same period in 2011. The reduction in gross profit was a result of operating no flights during the three months ended September 30, 2012.

 

  

Operating Expenses

 

Operating expenses decreased $166,438 or 18%, to $733,840 for the three months ended September 30, 2012 compared to $900,278 for the three months ended September 30,2011. The operating expense decrease is primarily due lower headcount and operational costs a result of not operating any flights during the three months ended September 30, 2012.

 

Other Income (Expense)

 

Other income (expense), net decreased by $6,094,804 to $989,925 for the three months ended September 30, 2012 due mainly due to the derivative warrant valuation expense, net of $7,166,847 charged during three months ended September 30, 2011.

 

(Provision) Benefit for Income Taxes

 

The Company has provided a full valuation allowance on its net deferred tax assets as net operating losses are anticipated for the year ended December 31, 2012.

 

Net Profit

 

Net profit for the three months ended September 30, 2012 was $256,085 or $6,142,117 lower than the net profit of $6,398,202 for the three months ended September 30, 2011. The decrease in net loss is primarily due to a lower derivative warrant valuation expense, net of $(6,033,052).

 

Comparison of the nine months ended September 30, 2012 and 2011, respectively.

 

		Nine months ended September 30,												Year over Year Change
		2012				2011								$				%
Revenue		$	-	*		$	1,489,450				100	%		$	(1,489,450	)			-100	%
Cost of revenue			5,843	*			1,530,393				103	%			(1,524,550	)			-100	%
Gross loss			(5,843	)*			(40,943	)			-3	%			35,100				-86	%
Operating expenses:
Sales, general and administration			3,541,167	*			2,788,147				187	%			753,020				27	%
Loss from operations			(3,547,010	)*			(2,829,090	)			-190	%			(717,920	)			25	%
Other income (expense):
Interest income			-	*			8				0	%			(8	)			-100	%
Interest expense			(313,350	)*			(569,099	)			-37	%			255,749				-45	%
Net gain on conversion of convertible note			61,661	*			-				*				61,661				*
Loss on abandonment of property and equipment			(41,569	)			-				*				(41,569	)			*
Loss on extinguishment of debenture			-	*			(571,122	)			*				571,122				*
Derivative warrant valuation expense, net			2,748,819	*			(5,673,013	)			*				8,421,832				*
Other income (expense), net			2,455,561	*			(6,813,226	)			-457	%			9,268,787				*
Income (loss) before income taxes			(1,091,449	)*			(9,642,316	)			-647	%			8,550,867				-89	%
(Provision) benefit for income taxes			(1,600	)*			-				*				(1,600	)			*
Net loss		$	(1,093,049	)*		$	(9,642,316	)			-647	%		$	8,549,267				-89	%
Net loss per share, basic		$	(0.02	)		$	(0.23	)
Weighted average shares used in calculation of basic net income (loss) per share			65,970,450				41,864,799

 

* Not meaningful.

 

Revenue

 

Revenue decreased $1,489,450 or 100%, to $0 for the nine months ended September 30, 2012 compared to$1,489,450 for the nine months ended September 30, 2011. The decrease is due to the Company’s decision to suspend flight operations in January 2012. The Company operated no flights during the nine month period ended September 30, 2012 and generated no revenues from its social media application.

 

  

Cost of Revenue

 

Cost of revenue decreased $1,524,550, or 100%, to $5,843 for the nine months ended September 30, 2012 compared to $1,530,393 for the nine months ended September 30, 2011. The decrease in cost of revenue is primarily the result of operating no flights during the 2012 period compared to the 2011 period. The cost of revenue during the nine months ended September 30, 2012 reflects credit card processing fees.

 

Gross Loss

 

Gross loss for the nine months ended September 30, 2012 was $(5,843), compared to a gross loss of $(40,943) over the same period in 2011. The reduction in gross loss was a result of operating no flights during the nine months ended September 30, 2012.

 

Operating Expenses

 

Operating expenses increased $753,020 or 27%, to $3,541,167 for the nine months ended September 30, 2012 compared to $2,788,147 for the nine months ended September 30, 2011. The operating expense increase is primarily due to $1,035,168 of acquisition costs following the acquisition of ISN in February 2012 and $330,228 of non-cash charges for services rendered in the nine month period ended September 30, 2012. This was offset by lower a headcount and operational costs as a result of not operating any flights during the nine months ended September 30, 2012.

 

Other Income (Expense)

 

Other income (expense), net decreased by $9,268,787 to $2,455,561 for the nine months ended September 30, 2012 due mainly due to derivative warrant valuation expense of $5,673,013 recorded in the nine months ended September 30, 2011.

 

(Provision) Benefit for Income Taxes

 

The Company has provided a full valuation allowance on its net deferred tax assets as net operating losses are anticipated for the year ended December 31, 2012.

 

Net Loss

 

Net loss for the nine months ended September 30, 2012 was $(1,093,049) or $8,549,267 lower than the net loss of $(9,642,316) for the nine months ended September 30, 2011. The decrease in net loss is primarily due to a change in a derivative warrant valuation adjustment of $8,421,832, loss on extinguishment of debenture of $571,122, lower interest expense $255,749, gain on conversion of debt $61,661, an improvement in gross margin of $35,100 offset by higher operating expenses of $753,020 during 2012.

Liquidity and Capital Resources

 

At September 30, 2012, the Company had $92,981 in cash and cash equivalents as compared to $38,256 in cash and cash equivalents at December 31, 2011.

 

Net cash used in operating activities was $272,775 and $1,899,599 for the nine months ended September 30, 2012 and 2011, respectively. The cash use for the 2012 period is due primarily to the net loss, offset by the increase of payable balances and the non-cash charges from the derivative valuation expense.

 

Net cash used in investing activities was $0 and $87,653 during the nine months ended September 30, 2012 and 2011, respectively, due to there was no need for additional investments in equipment during the nine month period ended September 30, 2012.

 

Net cash provided by financing activities was $327,500 and $500,000 during the nine months ended September 30, 2012 and 2011, respectively reflecting the issuance of a$47,500 8% convertible debenture that matures on November 29, 2012, a $27,500 8% convertible debenture that matures on January 18, 2013, issuance of a total of 21,700,000 shares of common stock for proceeds of $225,000 and $27,500 8% convertible debenture that matures on April 19, 2013.

 

The Company did not have any material non-cancelable purchase commitments for capital expenditures or contingencies out of the ordinary course of business accrued at September 30, 2012.

 

Socius CG II, Ltd. Agreement

 

The Company entered into a securities purchase agreement with Socius CG II, Ltd. (“Socius”) on June 3, 2011, pursuant to which it secured $500,000 of immediate funding through the issuance and sale of 2,253,470 shares of common stock and a warrant to purchase 20,476,707 shares of common stock at an initial exercise price of $1.02 (subject to anti-dilution adjustments). In addition, Socius agreed to purchase up to an additional $5 million in non-convertible Series A Preferred Stock (“Preferred Stock”) from us over the next two years, subject to the Company meeting certain conditions.

 

  

In connection with the above transaction, the Company recorded a net charge to operations of $5,673,103, which represents $14,333,695, the value of the warrants on June 3, 2011, less a charge of $470,000 to additional paid in capital, and an adjustment of $12,619,479 to reflect the value of the derivative warrant liability on September 30, 2012.

 

Equity, Convertible Debentures and Warrant Transactions

 

The Company has utilized equity, convertible debentures, and warrants to settle certain liabilities and secure services to conserve cash, fund operations and for financing.

 

During the three months ended September 30, 2012 the Company issued an 8% convertible debenture, with a principal balance of $27,500, and a maturity date of April 19, 2013.

 

Financings

 

The Company does not currently maintain a line of credit or term loan with any commercial bank or other financial institution. The Company will need to complete additional financing transactions in order to continue operations beyond the next twelve months. The Company will need approximately $2 million over the next 12 months to execute its business plan. The Company estimates that it will be able to satisfy its cash requirements for approximately 3 months based upon an expected cash burn rate of approximately $25,000-$35,000 per month absent additional financing. Financing transactions, if any, may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if the Company is able to raise the funds required, it is possible that it could incur unexpected costs and expenses, fail to generate sufficient revenues, or experience unexpected cash requirements that would force the Company to seek alternative financing. Further, if the Company issues additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of the Company’s common stock. If additional financing is not available or is not available on acceptable terms, the Company may have to significantly curtail or suspend its operations.

 

On June 3, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Socius CG II, Ltd. (“Socius”), pursuant to which the Company secured $500,000 of immediate funding through the issuance and sale to Socius of 2,253,470 shares of the Company’s common stock (such shares being the “Initial Purchase Shares” and such purchase being the “Initial Purchase”). In connection therewith, (i) the Company also issued to Socius a warrant to purchase 20,476,707 shares of common stock, and (ii) Socius agreed to purchase from the Company up to $5.0 million (the “Aggregate Preferred Stock Purchase Price”) of the Company’s newly created perpetual and non-convertible Series A Preferred Stock (the “Preferred Stock”), at a price per share of $10,000, in one or more tranches (each a “Preferred Tranche”). The Preferred Stock participates with the common stock in any dividends or distributions or change of control transactions as further described herein. In connection with the Purchase Agreement, the Company also agreed to issue an additional 1,126,735 shares of common stock to Socius on the 75 day anniversary of the Initial Purchase as consideration for executing and delivering the Purchase Agreement (the “Commitment Shares”). The Commitment Shares were issued on August 18, 2011. The warrant does not permit issuance of common stock thereunder to the extent that such issuance would result in Socius and its affiliates owning or being deemed the beneficial owner of more than 9.99% of the then issued and outstanding common stock. All of the foregoing was effectuated without registration under the Securities Act, in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder. These securities may not be transferred or sold absent registration under the Securities Act or an applicable exemption therefrom.

 

Under the terms and subject to the conditions of the Purchase Agreement, from time to time over the two-years following the Initial Purchase, beginning on August 17, 2011, at the Company’s sole discretion, the Company may sell to Socius, and Socius will be obligated to purchase, shares of the Preferred Stock. In order to effectuate such a sale, the Company will issue to Socius, subject to the terms and conditions of the Purchase Agreement (all of which conditions are outside of Socius’ control) one or more Preferred Tranche notices to purchase a certain dollar amount of such Preferred Stock (each such notice, a “Preferred Notice”). Upon receipt of a Preferred Notice, Socius will be obligated, subject to the terms and conditions specified in the Purchase Agreement (which conditions are outside of Socius’ control), to purchase the Preferred Stock subject to such Preferred Notice on the 10^th trading day after the date of the Preferred Notice. Such conditions include, but are not limited to, the following: (i) the Common Stock must be listed for trading or quoted on a trading exchange or market, (ii) the representations and warranties of the Company set forth in the Purchase Agreement must be true and correct as if made on the date of each Preferred Notice (subject, however, to the Company’s ability to update disclosure exceptions to such representations and warranties through the Company’s SEC reports), (iii) the Company must not be in breach or default of the Purchase Agreement or any agreement entered into in connection therewith (the “Transaction Documents”), or any other material agreement of the Company, (iv) there shall have occurred no material adverse effect involving the Company or its business, operations or financial condition since the date of the Initial Purchase, (v) the absence of any law or judicial action prohibiting the transactions contemplated by the Purchase Agreement, or any lawsuit seeking to prohibit or adversely affect such transactions, and (vi) all necessary governmental, regulatory or third party approvals and consents must have been obtained. The maximum amount of each Preferred Tranche is limited to a dollar amount of Preferred Stock equal to the lesser of (a) 20% of the cumulative dollar trading volume of the Common Stock for the 10 trading day-period immediately preceding the applicable Preferred Notice date and (b) $5.0 million less the amount of any previously noticed and funded Preferred Tranches. In addition, each Preferred Notice after the first Preferred Notice may not be given sooner than the trading day after the date on which the closing for the prior Preferred Tranche has occurred.

 

  

On June 3, 2011, in connection with the private placement transaction, the Company issued to Socius a five-year warrant to purchase 20,476,707 shares of Common Stock at an initial exercise price of $1.02 per share (the “Original Exercise Price”). The warrant is also exercisable on a cashless basis or through the issuance by the holder of a secured promissory note. Any secured promissory note issued in connection with an exercise of the warrant shall bear interest at 2% per year calculated on a simple interest basis. The entire principal balance and interest thereon shall be due and payable on the fourth anniversary of the date of the secured promissory note. Any such secured promissory note shall be secured by the borrower’s right, title and interest in certain securities held in the portfolio of the borrower with a fair market value equal to the principal amount of the secured promissory note. Additionally, any portion of the warrant may also be exchanged for shares of common stock based on a Black-Scholes calculation as more fully set forth in the warrant. The warrant contains certain provisions that protect against dilution in certain events such as stock dividends, stock splits and other similar events. In addition, the warrant has price-based anti-dilution protection in the event the Company issues securities at a value less than the Original Exercise Price, meaning the exercise price of the warrant would be adjusted down to the lowest applicable issuance price following the issuance of the warrant to prevent dilution to the holder. Pursuant to the warrant, any such anti-dilution adjustments shall be made on a pro-rata basis until such time as the Company has made dilutive issuances which exceed $5.0 million. The warrant shall not be exercisable or exchangeable by the holder (or any future holder) to the extent the holder (or such future holder) or any of its affiliates would beneficially own in excess of 9.9% of the Common Stock as a result of such exercise or exchange.

 

The Company will not receive any proceeds from the sales of common stock by Socius. However, the Company will receive the exercise price, if the cashless exercise feature, the full-recourse note exercise feature or the exchange feature is not used, upon exercise of the warrants by Socius. If the cashless exercise feature or the full recourse note feature is used or if the warrant is exchanged, in whole or in part, for shares of common stock, the Company will not receive any cash proceeds. The maximum amount of proceeds that we may receive from the exercise of the warrant is $20,886,241. There is no guarantee, however, that Socius will exercise for cash. The Company will require approximately $2,000,000 of additional working capital to continue its operations during the next 12 months and to support its long-term growth strategy, so as to enhance its service offerings and benefit from economies of scale. The Company expects its working capital requirements and the cash flow provided by future operating activities, if any, to vary greatly from quarter to quarter, depending on the volume of business and competition in the markets it serves. The Company may seek additional funding through one or more credit facilities, if available, or through the sale of debt or additional equity securities. However, the terms of the Company’s June 3, 2011 private placement transaction place restrictions on its ability to consummate any such additional financing without the consent of the investor. There is no assurance that Socius would consent to such a transaction or if funding of any type would be available to the Company, or that it would be available at rates and on terms and conditions that would be financially acceptable and viable to the Company in the long term. If the Company is unable to raise any necessary additional financing when needed, under the terms of the June 3, 2011 private placement or otherwise, it may be required to suspend operations, sell assets or enter into a merger or other combination with a third party, any of which could adversely affect the value of its common stock, or render it worthless. If the Company issues additional debt or equity securities, such securities may enjoy rights, privileges and priorities (including but not limited to coupon rates, conversion rights, rights to fixed or preferential dividends, anti-dilution rights or preference as to the distribution of assets upon a liquidation) superior to those enjoyed by holders of its common stock, thereby diluting the value of its common stock.

 

If the Company is unable to generate sufficient liquidity from operations or raise additional financing on acceptable terms, the Company’s business, results of operations, liquidity and financial condition could be adversely affected, and we may be required to significantly reduce its operations, including but not limited to terminating or suspending all operations and reorganizing or liquidating the Company.

 

Non-Cash Expense Items

 

During the three and nine months ended September 30, 2012, the Company continued to minimize cash usage and seek additional equity financings for working capital purposes while using equity for the settlement of services rendered in lieu of cash and general corporate purposes. The Company also issued shares of common stock in lieu of cash for interest payments on debentures. A significant portion of the equity issuances resulted in non-cash settlements of liabilities that are included in the net loss for the three and nine months ended September 30, 2012. Additionally, other transactions and events occurred in which significant non-cash expense arose due to the nature of those occurrences.

 

  

The following table summarizes the non-cash expense items, total amount and percentage of the Company’s net loss for the three and nine months ended September 30, 2012 and 2011:

 

		Three months ended September 30,																Nine months ended September 30,
		2012				%				2011				%				2012				%				2011				%
Cash and non-cash items in Net income (loss):
Cash		$	(711,829	)			-278.0	%		$	(514,471	)			-8.0	%		$	(1,423,277	)			130.2	%		$	(2,467,750	)			25.6	%
Non-cash			967,914				378.0	%			6,912,673				108.0	%			330,228				-30.2	%			(7,174,566	)			74.4	%
Net loss		$	256,085				100.0	%		$	6,398,202				100.0	%		$	(1,093,049	)			100.0	%		$	(9,642,316	)			100.0	%

 

		2012				2011				2012				2011
Summary of non-cash items:
Derivative warrant valuation income (expense), net		$	1,133,795			$	7,166,847			$	2,748,819			$	(5,673,013	)
Costs incurred in acquisition of Impact Social Networking			-								(1,035,168	)
Loss on extinguishment of 14% debenture			-				-				-				(571,122	)
Accelerated amortization of debt discount from conversion of debenture			(2,747	)			-				(59,080	)			(325,399	)
Loss on abandonment of property and equipment			(41,569	)							(41,569	)
(Loss) gain on conversion of notes			(8,339	)			-				61,661				-
Warrants issued for services rendered by non-employees			-				-				-				(169,062	)
Amortization of debt discount			(91,863	)			(64,817	)			(244,267	)			(145,731	)
Common shares issued for interest payable in lieu of cash			(228	)			(15,179	)			(6,432	)			(88,615	)
Equity based compensation			(8,391	)			(32,394	)			(25,173	)			(32,394	)
Depreciation and amortization			(12,744	)			(18,034	)			(47,840	)			(45,480	)
Common shares issued for license fee			-				(82,500	)			(58,209	)			(82,500	)
Common shares issued for services rendered by non-employees			-				(41,250	)			(818,514	)			(41,250	)
Common shares issued in lieu of cash to employees			-				-				(144,000	)			-
Total non-cash		$	967,914			$	6,912,673			$	330,228			$	(7,174,566	)
Non-cash dilutive per share amount		$	-			$	-			$	-			$	-

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-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 pursuant to Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2012 our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As reported in our Annual Report on Form 10-K for the year ended December 31, 2011, our management has identified certain material weaknesses in our internal control over financial reporting.

 

Our management, in consultation with our independent registered public accounting firm, concluded that material weaknesses existed in the following areas as of September 30, 2012:

 

(1) we do not employ full time in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions. With material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions;

 

(2) we have inadequate segregation of duties consistent with the control objectives including but not limited to the disbursement process, transaction or account changes, account reconciliations and approval and the performance of bank reconciliations;

 

(3) we have ineffective controls over the period end financial disclosure and reporting process caused by reliance on third-party experts and/or consultants and insufficient accounting staff;

 

(4) we do not have a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls, approvals and procedures.

 

  

Due to the material weaknesses that management identified, it was unable to conclude that our disclosure controls and procedures were effective as of September 30 2012.

 

Changes in Internal Control over Financial Reporting.

 

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the calendar quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, the Company is involved in legal proceedings, claims, and litigation that occur in connection with its business. The Company routinely assesses its liabilities and contingencies in connection with these matters based upon the latest available information and, when necessary, seeks input from its third-party advisors when making these assessments. Consistent with SEC rules and requirements, described below are material pending legal proceedings (other than ordinary routine litigation incidental to the Company’s business), material proceedings known to be contemplated by governmental authorities, other proceedings arising under federal, state, or local environmental laws and regulations (including governmental proceedings involving potential fines, penalties, or other monetary sanctions in excess of $10,000) and such other pending matters that we may determine to be appropriate.

 

Item 1A. Risk Factors

 

Not applicable to smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In the three months ended September 30, 2012 we issued a total of 2,075,433 shares of common stock and 217,390 warrants to Socius, pursuant to an anti-dilution adjustments. The securities were issued in transactions that were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act, which exempts transactions by an issuer not involving a public offering.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Effective October 30, 2012 Andrew Warner, ceased serving as Chief Financial Officer and Director of the Company. The Company’s CEO has assumed the role as Acting Chief Financial Officer and Acting Chief Accounting Officer.

 

  

Item 6. Exhibits.

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 302, of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

  

SIGNATURE

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: April 12, 2013

 

	THE PAWS PET COMPANY, INC.
		/s/ Dan Wiesel
		Dan Wiesel
		Chief Executive Officer