U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q/A

 

(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2013

 

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.)

 

855 El Camino Real, Suite 13A-184 Palo Alto, CA		94301
(Address of Principal Executive Offices)		(Zip Code)

 

(415) 871-0678

(Registrant’s Telephone Number, Including Area Code)

 

455 N.E. 5^th Avenue, Suite D464, Delray Beach, Fl.

(Registrant’s former address)  

 

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 [X] No [  ]

 

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 June 30, 2013 was 87,567,678 shares.

 

 

 

EXPLANATORY NOTE

 

The purpose of this amendment to the Quarterly Report on Form 10-Q of The PAWS Pet Company, Inc. (the “Company”) for the quarter ended June 30, 2013 is to (a) correct an error in the number of authorized shares of the Company’s common stock set forth in the Condensed Consolidated Balance Sheet as contained therein, (b) remove reference thereto in Notes to Condensed Consolidated Financial Statements contained therein, and (c) to add disclosure under “Note 8. Amendment to Originally Filed Form 10-Q” to the Notes to Condensed Consolidated Financial Statements in regards to the Company’s entering into an agreement in October 2013 to purchase all of the outstanding common stock of Mesa Pharmacy, Inc.

 

 

Part 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

THE PAWS PET COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2013				December 31, 2012
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	4,095			$	81,755
Prepaid expenses			2,800				1,600
Total current assets			6,895				83,355
Property and equipment, at cost			169,136				169,136
Less: accumulated depreciation and amortization			(142,240	)			(116,753	)
Total property and equipment, net			26,896				52,383
Total assets		$	33,791			$	135,738
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts and accrued expenses payable		$	1,779,093			$	1,596,826
Convertible debentures, net of debt discount of $1,424 and $160,067 at June 30, 2013 and December 31, 2012, respectively			664,076				655,433
Litigation accrual, discontinued operations			329,220				87,491
Accounts and accrued expenses payable, discontinued operations			621,697				778,074
Total current liabilities			3,394,086				3,117,824
Non-current liabilities:
Warrant liability			2,317,942				248,368
Total liabilities			5,712,028				3,366,192
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, no par value, 10,000,000 shares authorized:
Series B, 80,000 and 0, respectively, outstanding at June 30, 2013 and December 31, 2012, respectively, (liquidation preference $2,400,000 and $0)			-				-
Series C, 2,740 and 0, respectively, outstanding at June 30, 2013 and December 31, 2012, respectively, (liquidation preference $2,740,000 and $0)			-				-
Series A, none issued and outstanding at June 30, 2013 and December 31, 2012, respectively			-				-
Common stock, no par value, 350,000,000 shares authorized, 87,567,678 and 86,509,928 issued and outstanding at June 30, 2013 and December 31, 2012, respectively			-				-
Additional paid-in capital			15,708,596				11,566,930
Accumulated deficit from inception until discontinuance of operations (January 31, 2012)			(13,954,063	)			(13,918,140	)
Accumulated deficit since inception of development stage (February 1, 2012) to June 30, 2013			(7,432,770	)			(879,244	)
Total stockholders’ deficit			(5,678,237	)			(3,230,454	)
Total liabilities and stockholders’ deficit		$	33,791			$	135,738

 

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)

 

																		For the period from
																		inception of
		Three month period ended								Six month period ended								development stage
		June 30,								June 30,								(February 1, 2012)
		2013				2012				2013				2012				to June 30, 2013
Operating expense:
Sales, general and administrative			191,844				1,263,825				368,127				1,525,923				2 ,104,668
Loss from operations			(191,844	)			(1,263,825	)			(368,127	)			(1,525,923	)			(2,104,668	)
Other income (expense):
Interest expense (including $75,962, $138,328, $158,643, $211,484 and $569,975 respectively, of amortization of debt discount)			(96,946	)			(141,479	)			(181,214	)			(219,388	)			(604,324	)
Financing fee			-				-				-				-				(427,073	)
Net (loss) gain on conversion of convertible notes			(2,214,611	)			70,000				(2,214,611	)			70,000				(2,152,950	)
Subsidiary acquisition costs			-				-				(1,720,000	)			-				(1,720,000	)
Impairment of goodwill			-				-				-				(1,035,168	)			(1,035,168	)
Warrant valuation adjustment, net			(1,390,770	)			981,255				(2,069,574	)			1,615,024				613,013
Other income (expense), net			(3,702,327	)			909,776				(6,185,399	)			430,468				(5,326,502	)
Loss before income taxes			(3,894,171	)			(354,049	)			(6,553,526	)			(1,095,455	)			(7,431,170	)
Provision for income taxes			-				(1,600	)			-				(1,600	)			(1,600	)
Loss from continuing operations			(3,894,171	)			(355,649	)			(6,553,526	)			(1,097,055	)			(7,429,570	)
Discontinued operations:
Loss from discontinued operations, net of tax			(35,923	)			-				(35,923	)			(252,079	)			-
Net loss		$	(3,930,094	)		$	(355,649	)		$	(6,589,449	)		$	(1,349,134	)		$	(7,429,570	)
Net loss per share, basic and diluted		$	(0.04	)		$	(0.01	)		$	(0.08	)		$	(0.02	)		$	(0.09	)
Weighted average shares used in calculation of basic and diluted net loss per share			87,540,715				59,372,452				86,698,816				56,367,426				78,294,476

 

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)

 

										For the period from
										inception of
										development stage
		Six month period ended June 30,								(February 1, 2012) to
		2013				2012				June 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(6,589,449	)		$	(1,349,134	)		$	(7,429,570	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			25,487				35,095				74,160
Equity based compensation			3,296				16,782				28,469
Warrant valuation adjustment, net			2,069,574				(1,615,024	)			(613,013	)
Accelerated amortization of debt discount from conversion of debenture			11,974				56,333				71,054
Amortization of debt discount			146,669				155,151				498,921
Net loss (gain) on conversion of convertible notes			2,214,611				(70,000	)			2,152,950
Subsidiary acquisition costs			1,720,000				-				1,720,000
Impairment of goodwill			-				1,035,168				1,035,168
Common shares issued in lieu of cash to Intellicell for license fee			-				58,209				58,209
Common shares issued in lieu of cash for interest and penalty interest			14,059				6,205				20,697
Common shares issued in lieu of cash for services rendered by non-employees			7,200				818,514				825,714
Common shares issued in lieu of cash compensation to employees			-				144,000				144,000
Financing fee			-				-				427,073
Changes in certain assets and liabilities:
Receivable due from credit card clearing house			-				59,418				-
Prepaid expenses			(1,200	)			(2,919	)			(1,263	)
Security deposits and other			-				-				39,689
Accounts payable and accrued expenses			182,267				318,538				543,317
Accounts payable and accrued expenses, discontinued operations			85,352				113,794				-
Net cash used in operating activities			(110,160	)			(219,870	)			(404,425	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			-				-				-
Net cash used in investing activities			-				-				-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock			32,500				225,000				257,500
Proceeds from issuance of debt			-				75,000				102,500
Net cash provided by financing activities			32,500				300,000				360,000
Net change in cash and cash equivalents			(77,660	)			80,130				(44,425	)
Cash and cash equivalents at beginning of period			81,755				38,256				48,520
Cash and cash equivalents at end of period		$	4,095			$	118,386			$	4,095
Supplementary disclosure of cash flow information
Cash paid during the year for
Income taxes		$	-			$	-			$	-
Interest expense		$	-			$	-			$	-
Non-cash transactions:
Conversion of convertible debentures to 2,283,898 shares of common stock		$	-			$	30,000			$	42,000
Subsidiary acquisition costs		$	1,720,000			$	1,035,168			$	2,755,168
Issuance of Series C shares in exchange for warrants and interest		$	2,415,000			$	-			$	-

 

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

 

 

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”), Advanced Access Pharmacy Services, LLC (“AAPS”) 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 June 30, 2013 and 2012 and for the period from the inception of the development stage (February 1, 2012) to June 30, 2013. 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 six month period ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 and for the period from the inception of the development stage (February 1, 2012) to December 31, 2013. 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, 2012.

 

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 six month period ended June 30, 2013 and the year ended December 31, 2012, the Company had $4,095 and $81,755, respectively, in cash and cash equivalents to use in executing its business plan at June 30, 2013 and December 31, 2012, respectively. As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $6,589,449 for the six months ended June 30, 2013 and a net loss during the development stage from inception (February 1, 2012) through June 30, 2013 of $7,429,570. 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, 2012 as to the substantial doubt about the Company’s ability to continue as a going concern.

 

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 drawdowns 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, revenue 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. The Company is not currently generating revenue.

 

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 of 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 revenue and expenses during the reporting period. Actual results could differ from these estimates.

 

Reservation System and Development Costs

 

The Company accounts for its 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 were 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. The Company incurred $1,035,168 and $1,035,168, respectively; of impairment losses for the period from the inception of the development stage (February 1, 2012) to June 30, 2013 and for the six months ended June 30, 2012.

 

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 funds.

 

 

On February 23, 2012, pursuant to a share exchange agreement the Company acquired the all 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. 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. Pawdoodle was presumed to be 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 discontinued the Pawdoodle application.

 

On March 9, 2013 the Company entered into a Securities Exchange 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 all of the outstanding units of limited liability company membership interests of AAPS. AAPS had neither assets nor liabilities at the time of the exchange and had generated no revenue nor incurred any costs. In connection with this transaction the Company recorded an expense of $1,720,000 based upon the March 9, 2013 fair market value of the B Preferred.

 

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.

 

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 all 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 ceased airline operations.

 

On February 23, 2012, pursuant to the Agreement the Company acquired the all 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. 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 care givers. In September the Company closed the social media application and is currently evaluating alternative business strategies.

 

On July 13, 2012, the Company increased its authorized number of shares of common stock to 350,000,000.

 

 

3. Equity

 

Series B Preferred Stock

 

On May 15, 2013, the Company filed an amended and restated Certificate of Designations of Preferences, Rights and Limitations of Series B Preferred Stock (the “Certificate of Designations B”) with the Secretary of State of the State of Illinois that designated 80,000 such shares as Series B Preferred Stock (the “Series B Stock”). A summary of the Certificate of Designations is set forth below:

 

Ranking The Series B Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the Common Stock, Series A and B Preferred Stock, and any other classes of stock or series of preferred stock of the Company whether authorized now, or at any time in the future, unless any such subordination to any other class or series of Preferred Stock, is expressly agreed to, pursuant to an affirmative vote or written consent of Holders of at least sixty-seven percent (67%) of the Series B Stock issued and outstanding at the time of any such vote or written consent. and (ii) junior to any and all existing and future indebtedness of the Company.

 

Right of Conversion Any Holder of Series B Stock shall have the right to convert any or all of the Holder’s Series B Stock into a number of fully paid and non-assessable shares of Common Stock for each share of Series B Stock so converted. The number of shares of Common Stock to be issued shall be the number that 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 of conversion (the “Conversion Ratio”). In no event shall the Conversion Ratio be less than four thousand, three hundred (4,300) shares of Common Stock and in no event shall the Conversion Ratio be more than ten thousand (10,000) shares of Common Stock

 

Dividends Series B Stock shall not be entitled to dividends.

 

Liquidation In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation (collectively, a “Liquidation”), the sole participation to which the Holders of shares of Series B Stock then issued and outstanding (the “Series B Stockholders”) shall be entitled, out of the assets of the Corporation legally available for distribution to its stockholders, whether from capital, surplus or earnings, to receive, before any payment shall be made to the holders of the Common Stock or any other class or series of preferred stock ranking on Liquidation junior to such Series B Stock, an amount per share equal to $30 (thirty dollars). If upon any such Liquidation, the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the Holders of shares of Series B Stock the full amount to which they shall be entitled, the Holders of shares of Series B Stock, and of any class or series of stock ranking upon liquidation on a parity with the Series B Stock, shall share pari passu in any distribution of the remaining assets and funds of the Corporation in proportion to the respective liquidation amounts that would otherwise be payable to the Holders of preferred stock with respect to the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

 

As of June 30, 2013, 80,000 shares of Series B Stock were outstanding.

 

Series C Preferred Stock

 

On May 15, 2013, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series C Preferred Stock (the “Certificate of Designations C”) with the Secretary of State of the State of Illinois that designated 50,000 such shares as Series C Preferred Stock (the “Series C Stock”). A summary of the Certificate of Designations is set forth below:

 

Ranking The Series C Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the Common Stock, Series A Preferred Stock, and any other classes of stock or series of preferred stock of the Company whether authorized now, or at any time in the future, unless any such subordination to any other class or series of Preferred Stock, is expressly agreed to, pursuant to an affirmative vote or written consent of Holders of at least sixty-seven percent (67%) of the Series C Stock issued and outstanding at the time of any such vote or written consent. and (ii) junior to Series C Preferred Stock, and any and all existing and future indebtedness of the Company.

 

Right of Conversion Any Holder of Series C Stock shall have the right to convert any or all of the Holder’s Series C Stock into a number of fully paid and non-assessable shares of Common Stock for each share of Series C Stock so converted. The number of shares of Common Stock shares that is equal to sixty-six percent (66%) of the lowest closing price of the Common Stock, as quoted on any exchange or market upon which the Common Stock is traded over the sixty (60) calendar days preceding the date the Corporation and the Holder enter into an agreement to issue for shares of Series C Stock, for each share of Class C Stock being converted, provided, however, such ratio shall not be less than $0.005 nor more than $.01.

 

 

Dividends Series C Stock shall not be entitled to dividends.

 

Liquidation In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation (collectively, a “Liquidation”), the sole participation to which the Holders of shares of Series C Stock then issued and outstanding (the “Series C Stockholders”) shall be entitled, out of the assets of the Corporation legally available for distribution to its stockholders, whether from capital, surplus or earnings, to receive, before any payment shall be made to the holders of the Common Stock or any other class or series of preferred stock ranking on Liquidation junior to such Series C Stock, an amount per share equal to $100 (one hundred). If upon any such Liquidation, the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the Holders of shares of Series C Stock the full amount to which they shall be entitled, the Holders of shares of Series C Stock, and of any class or series of stock ranking upon liquidation on a parity with the Series C Stock, shall share pari passu in any distribution of the remaining assets and funds of the Corporation in proportion to the respective liquidation amounts that would otherwise be payable to the Holders of preferred stock with respect to the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

 

As of June 30, 2013 2,740 shares of Series C Stock were outstanding.

 

Series A Preferred Stock

 

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 “Series A Stock”). A summary of the Certificate of Designations is set forth below:

 

Ranking The Series A Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the Common Stock and (ii) junior to Series B and C Stock and any other series of preferred stock, and any and all existing and future indebtedness of the Company.

 

No right of Conversion. Series A Stock is not convertible into Common Stock.

 

Dividends and Other Distributions Commencing on the date of issuance of any such shares of Series A Stock, holders of Series A Stock shall be entitled to receive dividends on each outstanding share of Series A 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 Series A Stock. So long as any shares of Series A 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 Series A Stock and Common Stock in proportion to the number of shares of Common Stock that would be held by each such holder of Series A Stock as if the Series A 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. Series B Stock and Series C Stock has liquidation preference to the Series A Stock. , before any distribution or payment is made to the holders of any junior securities, the holders of Series A 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 Series A Stock and the holders of junior securities, as if the Series A 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 Series A Stock at any time at a redemption price per share equal to $10,000 per share of Series A Stock, plus any accrued but unpaid dividends with respect to such share of Series A Stock (the “Series A Liquidation Value”).

 

On June 2, 2011, the Company’s Board of Directors designated 1,200,000 shares as Series A Stock. As of June 30, 2013, no shares of Series A 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^thday 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 a financing cost charged against 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 a credit to additional paid in capital of $470,000. In connection with the Socius transaction we recorded total deferred financing fees of $427,073 during the year ended December 31, 2011. As of March 31, 2012, the deferred financing fee balance was $427,073, however, because access to the $5 million financing is based on a percentage formula of the dollar value of stock traded, the Company determined that it is unlikely that sufficient stock volume will be reached over the balance of the term of the financing and has expensed the deferred financing fees of $427,073 during 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 $2,317,942 and $248,368 at June 30, 2013 and December 31, 2012, 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 debenture 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 debenture holders.

 

On December 31, 2012 the Company elected to issue 41,545 shares of common stock valued at $206 using the closing stock of the day, in lieu of cash to satisfy interest payable at December 31, 2012 to the convertible debenture holders.

 

On March 31, 2013 the Company elected to issue 40,875 shares of common stock valued at $1,145 using the closing stock of the day, in lieu of cash to satisfy interest payable at March 31, 2013 to the convertible debenture holders.

 

 

On May 10, 2013 the Company reversed issuance of 18,000 shares of common stock valued at $234 previously issued in lieu of issuance of Series C Stock.

 

On June 30, 2013 the Company elected to issue 34,875 shares of common stock valued at $1,774 using the closing stock of the day, in lieu of cash to satisfy interest payable at June 30, 2013 to the convertible debenture holders.

 

Preferred Stock Issued

 

On March 9, 2013 the Company issued 80,000 shares Series B Stock in exchange for all of the shares of AAPS.

 

On May 10, 2013 the Company issued 2,740 shares Series C Stock in exchange for cash, debenture, interest and warrants issued.

 

Warrants

 

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.

 

Stock Incentive Plan

 

In 2010, the Company adopted its Stock Incentive Plan (the “Plan”). Under the Plan, at June 30, 2013 we had 4,000,000 shares approved and 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 June 30, 2013 and December 31, 2012 the Company had 367,000 and 722,000 option shares outstanding, respectively, and 3,633,000 and 3,278,000 available for issuance at June 30, 2013 and December 31, 2012, respectively.

 

 

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 June 30, 2013 the Company had 6,170,950 shares issued under the 2012 Plan and 3,829,050 available for issuance.

 

4. Debt Obligations

 

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 debenture 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.

 

On May 10, 2013, the Company issued 1,615 shares of Series C Stock in exchange for a $150,000 8% convertible debenture and accrued interest.

 

At June 30, 2013, an aggregate of $415,500 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.

 

For the six month periods ended June 30, 2013 and 2012, the Company amortized to interest expense using the effective interest method $158,643 and $73,156 of the debt discount related to the convertible debentures that included $11,974 and $56,333 of accelerated debt discount amortization, respectively, due to converted debenture amounts.

 

 

At June 30, 2013 and December 31, 2012, the aggregate unamortized debt discount was $1,424 and $160,067, respectively. The unamortized debt discount at June 30, 2013 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:

 

		June 30, 2013				December 31, 2012
Principal amount 8% convertible debenture short term		$	415,500			$	565,500
Principal amount 14% convertible debenture			250,000				250,000
Unamortized debt discount			(1,424	)			(160,067	)
Net carrying amount		$	664,076			$	655,433
Equity component (recognized in Additional paid-in capital)		$	879,528			$	879,528

 

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 June 30, 2013. In 2012, the Company abandoned the leased properties but remain still liable for unpaid rent which has been accrued.

 

The Company has, from time to time, been involved in legal proceedings, claims, and litigation that have occurred in the normal course of 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. 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.

 

On April 26, 2012, a judgment was entered against our subsidiary, Pet Airways, Inc., in Circuit Court in and for Palm Beach County, Florida by Sky Way Enterprises, Inc. in the sum of $180,827 for services rendered, damages, including costs, statutory interest and attorneys’ fees.

 

On March 4, 2013, a judgment was entered against our subsidiary, Pet Airways, Inc., in District Court of Douglas County, Nebraska by Suburban Air Freight in the sum of $87,491 for services rendered, including statutory interest and attorneys’ fees.

 

On March 6, 2013, an order was issued a by the labor commissioner of the State of California for our subsidiary, Pet Airways, Inc., to pay a former employee Alyce Tognotti wages and penalties in the sum of $17,611 for services rendered, including penalties, statutory interest and liquidated damages.

 

On May 31, 2013, a motion for final judgment was filed against our subsidiary, Pet Airways, Inc., in Circuit Court in and for Broward County, Florida by AFCO Cargo BWI, LLC in the sum of $31,120 for services rendered, including statutory interest and attorneys’ fees.

 

Other than the foregoing, there were no claims, actions, or lawsuits which to our knowledge are pending or threatened that could reasonably be expected to have a material effect on the results of our operations. The Company is self-insured and has not accrued a reserve against potential losses from unknown risks and liabilities.

 

6. Net loss per share

 

Basic earnings per share are calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon conversion of preferred shares, exercise of stock options and warrants (calculated using the reverse treasury stock method). As of June 30, 2013 there were warrants and options outstanding to purchase 36.0 million shares, which exercise price averaged $0.68. The dilutive common shares equivalents, including convertible notes, preferred stock, options and warrants, of 405.7 million shares were not included in the computation of diluted earnings per share, because the inclusion would be anti-dilutive.

 

If all dilutive instruments were exercised using the reverse treasury stock method, then the total number of shares outstanding would be 493.2 million shares.

 

7. Subsequent Events

 

On July 5, 2013 the Company issued 200 Series C Stock to an advisor for his services and lack of payment thereto. These shares are convertible into 4 million shares of common stock.

 

 

8. Amendment to Originally Filed Form 10-Q.

 

The June 30, 2013 Form 10-Q has been amended as a result of the following two events:

 

Change in the number of authorized shares of common stock

 

Although the Company’s board of directors approved an increase in the number of authorized shares of common stock on June 29, 2013, from 350,000,000 to 1.1 billion, such action also required stockholder approval, which was not obtained.

 

Accordingly, the Company’s balance sheet has been amended to reflect the authorized number of shares of common stock as 350,000,000 and to remove disclosure references of the 1.1 billion number originally reflected.

 

Material Subsequent Event

 

Subsequent to the filing of the Company’s September 30, 2013 Form 10-Q, it came to Management’s attention that the following material subsequent event was omitted in the original filing of such report. The material subsequent event occurred after the filing of the original June 30, 2013 Form 10-Q and prior to the filing of this Form 10-Q/A and has been incorporated herein.

 

On October 29, 2013 the Company entered into a Securities Exchange Agreement (the “Agreement”) with Pharmacy Development Corp. (“PDC”) to acquire from PDC, 100% of the issued and outstanding shares of Mesa Pharmacy, Inc. (“MESA”), in exchange for five hundred thousand (500,0000) shares of the Company’s Series D Convertible Preferred Stock (the “D Preferred”).

 

The closing of this transaction will take place, subject to the prior approval of respective boards of directors of both the Company and PDC, automatically on the earlier of the issuance, by the California State Board of Pharmacy, of a permanent Community Pharmacy Site Permit approving the Company as the new owner of MESA or earlier by mutual agreement of the parties. If a site permit is not issued to the Company within a specified period, the Agreement will be null and void.

 

Upon closing of the transaction, PDC will have the right to appoint three (3) individuals to the Company’s Board of Directors, which will increase the number of board members to seven (7).

 

The 500,000 shares of D Preferred are convertible into 325 million shares of the Company’s common stock. The holders of a majority of the Company’s Series B Convertible Preferred Stock shares have agreed in principle to vote to reduce the maximum conversion rate thereunder, in order to offset the new D Preferred, on a fully diluted basis.

 

Upon closing of the transaction, the Company will enter into a royalty agreement by which the Company will pay 5% of MESA’s net revenue, as defined therein, until the earlier of the Company acquiring and cancelling the notes for $6.0 million issued by PDC through a cash payment or other transaction acceptable to the note holders, or twenty (20) years. The $6.0 million notes were issued privately by PDC investors, in order to raise working capital. The notes are not being assumed by the Company.

 

MESA focuses on providing custom compounded non-narcotic, transdermal topical pain medications that are marketed to industrial health physicians and clinics. MESA has developed a series of topical ointments, in different strengths, that provide the pain relief doctors seek.

 

 

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.*
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Filed herewith.

 

 

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: December 19, 2013

 

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