ITEM 1. BUSINESS
The terms “The PAWS Pet Company. Inc.,” the “Company,” “management,” “we,” “us,” and “our” in this Annual Report on Form 10-K to refer collectively to The PAWS Pet Company Inc. and its subsidiary.
Business Summary
The PAWS Pet Company, Inc. is a development stage company seeking new investment opportunities. 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 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.
Organizational History
We were incorporated in the State of Illinois on June 6, 2005 as American Antiquities, Inc. (“AAI”). Historically, we purchased antiques and collectible items for resale, accepted items on consignment, and sold items through various auctions and third party internet websites.
On August 13, 2010, we completed a reverse acquisition transaction through a share exchange with Pet Airways, Inc. (Florida), which was a successor entity to Panther Air Cargo, LLC (the “Acquisition”), whereby AAI acquired 100% of the issued and outstanding capital stock of Pet Airways, Inc. (Florida) in exchange for 25,000,000 shares of our common stock, which constituted approximately 73% of our issued and outstanding capital stock on a post-acquisition basis as of and immediately after the consummation of the Acquisition.
Panther Air Cargo, LLC was formed as a limited liability company in the State of Florida in February 2005. From 2005 through 2009, Panther Air Cargo d/b/a Pet Airways evaluated the market for pet air travel, including reservation systems and processes. It also considered whether it should own its own planes or contract with third parties. It also evaluated the optimal ways to configure the aircraft for safe pet travel and the initial markets to commence flight operations in. Pet Airways began flight operations in July 2009 and from the period July 2009 to March 2010 operated a weekly scheduled service. In March 2010 Pet Airways suspended flight operations to upgrade its on-line reservation system and to raise additional capital. In June 2010 Pet Airways resumed flight operation after we implemented our new reservation system and raised additional capital by issuing a series of convertible debentures, shares of common stock and warrants. Immediately prior to the Acquisition Panther Air Cargo, LLC was renamed to Pet Airways, Inc., a Florida corporation. In January of 2012 the Company decided to cease operations of Pet Airways.
As a result of the Acquisition, Pet Airways, Inc. (Florida) became a wholly-owned subsidiary of ours and the controlling stockholders of Pet Airways, Inc. (Florida) became our controlling stockholders. Also, upon completion of the Acquisition, we changed our name from AAI 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 Securities and Exchange Commission (the “SEC”). OTC QB securities are quoted on OTC Markets Group’s quotation and trading system. On July 27, 2011, we filed Articles of Amendment to amend our Articles of Incorporation to change our name to The PAWS Pet Company, Inc.
The share exchange transaction was treated as a reverse acquisition, with Pet Airways, Inc. (Florida) as the acquirer and The PAWS Pet Company, Inc. as the acquired party. Unless the context suggests otherwise, when we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring 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 companies’ assets and liabilities.
Upon the closing of the Acquisition on August 13, 2010, Joseph A. Merkel, our former Chief Executive Officer, President and director and Kevin T. Quinlan, our former Chief Financial Officer, Controller and director, resigned. On the same day, our board of directors approved an increase in the size of our board to three board members and appointed Dan Wiesel, Alysa Binder and Andrew Warner to our board of directors at the effective time of the resignation of Messrs. Merkel and Quinlan, to fill the vacancies created by their resignation. In addition, our board of directors appointed Mr. Wiesel as our Chief Executive Officer and Ms. Binder as our Executive Vice President effective immediately at the closing of the Acquisition.
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. 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.
On March 9, 2013, we entered into the agreement for the acquisition of AAPS, as described above.
Employees
As of December 31, 2012, we had 2 fulltime employees. We are not a party to any collective bargaining agreements and we believe that our relationship with our employees is good.
Legal Proceedings
From time to time, we are involved in legal proceedings, claims, and litigation that occur in connection with our business. We routinely assess our liabilities and contingencies in connection with these matters based upon the latest available information and, when necessary, we seek input from our third-party advisors when making these assessments. Consistent with SEC rules and requirements, we describe below material pending legal proceedings (other than ordinary routine litigation incidental to our 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 March 4, 2013, a judgment was entered against us 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. 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.
ITEM 1A.
ITEM 1A. RISK FACTORS
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in addition to other information in this Annual Report on Form 10-K before purchasing our common stock. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our Company and our industry. In addition to these risks, our business may be subject to risks currently unknown to us. If any of these or other risks actually occurs, our business may be adversely affected, the trading price of our common stock may decline and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We have experienced a history of losses and have yet to begin generating positive cash flows from operations and, as a result, our auditors have raised substantial doubt about our ability to continue as a going concern.
We do not currently have sufficient cash on hand to meet our financing needs. As at December 31, 2012, we had approximately $82,000 of cash on hand. Our current monthly cash burn rate is negligible. We owe substantial amounts in accounts payable and debt which we are not able to pay. The report of our independent registered accountants issued in connection with the audit of our consolidated financial statements as of and for our year ended December 31, 2012 contained a qualification raising a substantial doubt about our ability to continue as a going concern. Our quarterly and annual consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we cannot continue as a viable entity, our stockholders may lose some or all of their investment in us.
We are a development stage company and anticipate losses and negative cash flow.
We are a development stage company and have no operating history upon which prospective investors may base an evaluation as to our likely performance. We are subject to all the substantial risks inherent in a development stage business enterprise. No assurances can be given that our company will be successful, profitable or that we will ever become profitable. In addition, if we ever do become profitable there can be no assurance that we will remain profitable. Before purchasing our common stock, investors should consider an investment in our common stock in light of the risks, uncertainties and difficulties frequently encountered by development stage companies in new and rapidly evolving markets, including those described herein. We may not be able to successfully address any or all of these risks. Failure to adequately address such risks could cause our business to fail which may result in our liquidation.
We have entered into a security exchange agreement with AAPS.
We have entered into a security exchange agreement with AAPS that is contingent upon the Company to file certain delinquent periodic reports with the Securities and Exchange Commission, (the “SEC”). No assurances can be given that even though we hereby are filing our Form 10-K for the year ended December 31, 2012 that the prior owners of AAPS will go forward with the transactions as the filing of this report was not done within the time limit required.
We are entering into new operations without any prior experience.
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. We intend to hire people with decades of experience in pharmacy and medical receivables collections. However, there are no assurances that the Company will be successful in hiring these individuals.
We may have difficulty managing our growth.
We anticipate that we will grow rapidly in the near future. Our ability to manage growth effectively will depend on our ability to improve and expand our operations, including our financial and management information systems, and to recruit, train and manage additional marketing, operations and administrative personnel. Our management may not be able to manage growth effectively, or may be unable to recruit and retain personnel needed to meet our needs. If we are unable to manage growth or hire necessary personnel, our business could be materially harmed.
Reliance on Key Personnel.
We are dependent on the expertise, experience and continued services of Daniel Wiesel, our Chairman and Chief Executive Officer, and Alysa Binder, our Executive Vice-President and Chief Development Officer. The loss of Mr. Wiesel or Ms. Binder could harm our competitive position and financial performance. Our future success depends, to a significant extent, on the continued services of Mr. Wiesel and Ms. Binder.
We do not carry business interruption or other insurance, so we have to bear losses ourselves.
We are subject to risk inherent to our business, including equipment failure, theft, natural disasters, industrial accidents, labor disturbances, business interruptions, property damage, product liability, personal injury and death. We do not carry any business interruption insurance or third-party liability insurance or other insurance to cover risks associated with our business. As a result, if we suffer losses, damages or liabilities, including those caused by natural disasters or other events beyond our control and we are unable to make a claim again a third party, we will be required to bear all such losses from our own funds, which could have a material adverse effect on our business, financial condition and results of operations.
Our quarterly operating results are likely to fluctuate, which may affect our stock price.
Our quarterly revenues, expenses, operating results and gross profit margins will vary from quarter to quarter, and may vary significantly. As a result, our operating results may fall below the expectations of third parties including securities analysts and investors, in some quarters, which could result in a decrease in the market price of our common shares. Period-to-period comparisons of our operating results should not be relied on as indications of future performance.
RISKS RELATED TO FINANCING OUR OPERATIONS
Without obtaining adequate capital funding, we may not be able to continue as a going concern.
The reports of our independent registered public accounting firms for the years ended December 31, 2012 and 2011 contained an explanatory paragraph to reflect its significant doubt about our ability to continue as a going concern as a result of our history of losses and our liquidity position. If we are unable to obtain adequate capital funding in the future, we may not be able to continue as a going concern, which would have an adverse effect on our business and operations, and the value of your investment in us may materially decline. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern. Substantial doubt about our ability to continue as a going concern may have created, or may create, negative reactions to the price of the common shares of our stock and we may have a more difficult time obtaining financing.
We have historically incurred losses and we expect these losses will continue in the future.
For the years ended December 31, 2012 and 2011, the Company incurred net losses of $(1,218,814) and $(7,513,562), respectively, of which $(879,244) and $(7,513,562), in losses was derived from continuing operations respectively, and $(339,570) and $0, related to losses from discontinued operations, respectively, for the years ended December 31, 2012 and 2011. As of December 31, 2012 the Company had an accumulated deficit of $(14,797,384) of which $(13,918,140) pertained to continuing operations and $(879,244) related to discontinued operations; compared to a deficit of $($13,578,570) from continuing operations, and no discontinued operations for the year ended December 31, 2011. Future losses are likely to occur. Accordingly, we may experience significant liquidity and cash flow problems and additional operating losses if we are not able to raise additional capital as needed and on acceptable terms and, in such event, our operations may be reduced or curtailed.
If we are unable to raise additional capital to finance operations, our business operations will be curtailed.
Our operations have relied almost entirely on funding from a combination of borrowings from and sales of common and warrants to third parties. We will need to raise additional capital to fund our anticipated operating expenses and future expansion. Among other things, financing will be required to cover our operating and capital costs. The sale of our stock to raise capital may cause dilution to our existing stockholders. Our inability to obtain adequate financing, whether from current investors or from other third parties, would likely result in the need to reduce or curtail business operations. Any of these events would be materially harmful to our business and may result in a loss of your investment.
The issuance of shares upon conversion of convertible debentures, exercise of outstanding warrants and in lieu of payments of interest on convertible debentures may cause immediate and substantial dilution to our existing stockholders.
If the price per share of our common stock at the time of conversion of our debentures, exercise of any warrants or issuance of shares in lieu of payments of interest on our convertible debentures is in excess of the conversion or exercise prices of these securities, the conversion or exercise of these securities would have a dilutive effect on our common stock. As of December 31, 2012, an aggregate of 124 million shares of our common stock are issuable upon conversion and/or exercise of outstanding convertible debentures.
Following the conversion of our outstanding convertible debentures and exercise of outstanding warrants, our issued and outstanding common stock would increase to 211 million shares, which represents an increase of approximately 144% over our current issued and outstanding shares of 86,509,928.
We are not permitted to include any securities other than those issued or issuable to the selling security holders until such time as all of the securities issued or issuable to the selling security holder are covered by one or more effective registration statements. This may significantly limit our ability to raise capital through future equity offerings.
The registration rights agreement prohibits us from including any securities other than those issued or issuable to the selling security holders on any registration statement without the prior written consent of the selling security holder until such time as all of the securities issued or issuable to the selling security holder are covered by one or more effective registration statements. Pursuant to the terms of the registration rights agreement, we are required to file three registration statements on behalf of the selling security holders. Once the registration statement, of which this prospectus forms a part, has been utilized for the disposition of 80% of the securities covered thereby, we are required to prepare and file a registration statement covering the sale of an additional 7,000,000 shares on behalf of the selling security holders. Once that registration statement has been utilized for the disposition of 80% of the securities covered by such registration statement, we are required to prepare and file a registration statement covering the remaining shares then held or issuable to the selling security holder. This may significantly limit our ability to raise capital through future equity financings as we will not be able to offer registration rights to other potential investors until we have satisfied our obligations under the registration rights agreement or unless the selling security holder waives its rights under the registration rights agreement.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and rules implemented by the Securities and Exchange Commission have required changes in corporate governance practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs in 2013 and beyond and to make certain activities more time consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK GENERALLY
In connection with the securities exchange transaction with AAPS, the prior controlling shareholders of AAPS will have control of 80% of the outstanding shares if they convert their Series B convertible shares.
Rubicon Peak Capital LLC is the owner of 80,000 Series B convertible shares as of March 9, 2013. As a result, it possesses the capability to convert its convertible shares to the number of shares that represent 80% of the total number of outstanding shares at the time of conversion. They will then have significant influence, giving them the ability, among other things, to elect members of our board of directors and to authorize or prevent proposed significant corporate transactions. Their ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer. The interests of these three stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, which may affect the market price for our securities.
Our common stock is quoted on the OTC QB, which may have an unfavorable impact on our stock price and liquidity.
Our common stock is currently quoted on the OTC QB. The OTC QB market tier helps investors identify companies that are current in their reporting obligations with the Securities and Exchange Commission (the “SEC”). OTC QB securities are quoted on OTC Markets Group’s quotation and trading system. The OTC QB is a significantly more limited market than established trading markets such as the New York Stock Exchange or NASDAQ. The quotation of our shares on the OTC QB may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future. We plan to list our common stock with NASDAQ or New York Stock Exchange or other exchanges as soon as practicable. However, we cannot assure you that we will be able to meet the initial listing standards of any stock exchange, or that we will be able to maintain any such listing.
We are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is considered to be a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors”, as such term is defined in the Securities Act. For transactions covered by Penny Stock Rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule required by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule within the foreseeable future, if ever. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
Our Series A Preferred Stock has a liquidation preference of $10,000 per share of Series A Preferred Stock, plus any accrued but unpaid dividends with respect to such shares of Series A Preferred Stock.
Upon any liquidation, dissolution or winding up of our Company after payment or provision for payment of our debts and other liabilities and any liquidation preferences of senior securities, before any distribution or payment may be made to the holders of any junior securities, including our common stock, the holders of our Series A Preferred Stock shall be entitled to a liquidation preference in the amount of $10,000 per share of Series A Preferred Stock plus any accrued but unpaid dividends. Dividends on our Series A Preferred Stock accrue at a rate of 10% per annum from the date of issuance and are payable upon redemption of the Series A Preferred Stock. If we were liquidated, the ability of our common stockholders to receive any distribution of payment would be significantly limited if there were then a significant amount of shares of Series A Preferred Stock outstanding.
We have never paid dividends on our common stock and we do not anticipate paying dividends in the foreseeable future.
We have never paid cash dividends on our common stock. So long as any shares of our Series A Preferred Stock are outstanding, no dividends or other distributions may be paid, declared or set apart with respect to any junior securities, including our common stock, other than dividends or other distributions payable on our common stock solely in the form of additional shares of common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock.
There is currently a very limited trading market for our common stock and we cannot ensure that one will ever develop or be sustained.
Our shares of common stock are very thinly traded, only a small percentage of our common stock is available to be traded and is held by a small number of holders and the price, if traded, may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on the perception of our operating business, among other things. We may, in the future, take certain steps, including utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers of our shares. If a market should develop, the price may be highly volatile. Because there may be a low price for our shares of common stock, many brokerage firms or clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Even if an investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of low priced shares of common stock as collateral for any loans.
Our controlling stockholders hold a significant percentage of our outstanding voting securities, which could hinder our ability to engage in significant corporate transactions without their approval.
Mr. Dan Wiesel, Ms. Alysa Binder and Daniel Zagorin are the beneficial owners of approximately 52.4% of our outstanding voting securities as of December 31, 2012. As a result, they possess significant influence, giving them the ability, among other things, to elect members of our board of directors and to authorize or prevent proposed significant corporate transactions. Their ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer. The interests of these three stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, which may affect the market price for our securities.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
We lease office space in Delray Beach, Florida. The Florida office, which is our corporate headquarters, is used for corporate administrative functions. The office is owned by our CEO, Mr. Dan Wiesel, and we lease it free of charge on a month-to-month basis.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our stock is currently listed on the OTCQB for trading. Our stock trades now under the symbol “PAWS” and previously traded under AAQS. The following table sets forth, for the calendar quarters indicated, the high and low bid prices of our common stock. These quotations reflect inter-dealer prices, without mark-up, mark-down or commission, and may not represent actual transactions.
Year Ending December 31, 2012
Year Ended December 31, 2011
Dividends
We have not paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance operations and the growth of the business.
We cannot assure you that we will ever pay cash dividends. Whether we pay any cash dividends in the future will depend on the financial condition, results of operations and other factors that the Board of Directors will consider.
Holders
As of June 13, 2013, we had 150 record holders of our common stock.
Securities Authorized for Issuance under Equity Compensation Plans
The Company has a Stock Incentive Plan (the “Plan”).Under the Plan, at December 31, 2012 and 2011, the Company 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 the Company’s common equity at fair market value, as determined by the Company’s Board of Directors, at the date of grant.
Recent Sales of Unregistered Securities
In addition to transactions reported in our periodic filings under the Securities Exchange Act of 1934:
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.
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 at $228, using the closing stock price of the day, in lieu of cash to satisfy interest payable at September 30, 2012 to the convertible debentures holders.
On December 31, 2012 the Company elected to issue 41,545 shares of common stock valued at $206, using the closing stock price of the day, in lieu of cash to satisfy interest payable at December 31, 2012 to the convertible debentures holders.
All of the foregoing securities were issued pursuant to the exemption from registration afforded by Section 4(a) (2) under the Securities Act.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results Of Operation and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption “Risk Factors” beginning on page 6 of this report and elsewhere herein. The following should be read in conjunction with our annual consolidated financial statements contained elsewhere in this report.
Dollar amounts of $1.0 million or more are rounded to the nearest one tenth of a million; all other dollar amounts are rounded to the nearest one thousand and all percentages are stated to the nearest one percent or one tenth of one percent.
Overview
We are a development stage company currently seeking new opportunities for investment.
Critical Accounting Policies
The discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continuously evaluate our estimates and judgments, including those related to revenue recognition, bad debts, impairment of intangible assets, income taxes, contingencies and litigation. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our Board of Directors has reviewed our related disclosures in our Form 10-K for the period ended December 31, 2012 and for the period ended December 31, 2011 filed with the SEC. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Derivative Liabilities
We have 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 include ASC 470-20 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement”),” EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments.” Accordingly, we have used the Black-Scholes option-pricing model as our 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 APIC with an offset discount to the principal value of the convertible debenture. We have used the effective yield interest method for amortizing the discount to interest expense over the maturity term of the convertible debenture. We record to interest expense the unamortized discount value associated with a debenture converted in a period.
Accruals for Contingent Liabilities
We make 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 costs and awards involving legal settlements, cost associated with planned changes in workforce or operating levels, costs associated with reduced flight services from Suburban, the building out of leased premises, vacating leased premises or abandoning leased equipment, and costs involved with the discontinuance of a segment of a business. 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 measureable, 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, compensating entries to earnings may be required.
Equity-Based Compensation
We are using the Black-Scholes option-pricing model as our method of valuation for share-based awards (e.g., warrant to purchase shares of common stock) used to settle certain liabilities to non-employees. Our determination of fair value of share-based payment awards on the date of grant using the option-pricing model is affected by our equity price as well as assumptions regarding our 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, we may consider using our historical experience only, our experience plus that of a publicly trade index volatility experience, or a blended volatility experience for public peer companies. We also evaluate carefully the expected life term of an award though the vesting of awards to date have been immediate. Finally, we attempt to use a risk free rate that is widely quoted and pertinent across a broad range of transactions.
Results of Operations
Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011.
The following table sets forth, certain statement of operations data relating to the business for the periods indicated.
* Not meaningful.
Revenue. Revenue for the year ended December 31, 2012 was $0 compared to $1.6 million for the year ended December 31, 2011. The decrease is due to discontinued operations as of January 2012.
Cost of revenue. Cost of revenue for the year ended December 31, 2012 was $0 compared to $1.8 million (115% of revenue) for the year ended December 31, 2011 due to discontinued operations as of January 2012.
Operating expenses. Operating expenses for the year ended December 31, 2012 consisted mainly of payroll costs, R&D costs, non-cash equity-based compensation, professional fees, and outside services. The operating expenses for the year ended December 31, 2012 were $1.7 million compared to $4.0 million for the year ended December 31, 2011.
Other income (expense), net. Other income (expense), net increased to an income of $859,000 from an expense of $3.3 million, or a change of income of $4.1 million primarily due to the derivative warrant valuation change of $5.1 million from 2011 to 2012 and a change in deferred financing fee of $854,000.
Loss from discontinued operations. The Company closed the Pet Airway business and discontinued flight operations in January 2012. In closing the business we incurred over the year $340,000 in discontinued operations related expenses.
Net loss. Our net loss was $1.2 million in 2012 as compared to $7.5 million in 2011. The decrease in losses is primarily attributable to an increase in other income (expense) items and a reduction of sales, general and administration expenses of $2.3 million.
Non-Cash Expense Items
During 2012 and 2011, we entered into a number of equity financings for working capital purposes, the settlement of services rendered in lieu of cash and general corporate purposes. Additionally, other transactions and events occurred in which significant non-cash expense arose due to the nature of those occurrences.
The following tables summarize the non-cash expense items, total amount and percentage of our net loss for the years ended December 31, 2012 and 2011:
Liquidity and Capital Resources
At December 31, 2012, the Company had $81,755 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 $(284,001) and $(1,941,148) for the years ended December 31, 2012 and 2011, respectively. The Company’s operating activities were substantially curtailed as we stopped our Pet Airway operations. The Company still expended monies trying to develop the Pawdoodle initiative, in which the initiative was subsequently abandoned.
Net cash used in investing activities was $(87,653) during the year ended December 31, 2011 with no investing activities during the year ended December 31, 2012. Cash used during the year ended December 31, 2011 period was primarily due to upgrades to the reservation system enhancements and the build out for the San Jose administrative offices and pet airport facilities.
Net cash provided by financing activities was $327,500 and $556,000 during the years ended December 31, 2012 and 2011, respectively. The cash provided in 2012 was received through issuance of convertible notes and sale of shares, compared to proceeds received in 2011 that was primarily due to proceeds of the issuance of 2,253,470 shares of common stock for $500,000 from the Socius CG II, Ltd. financing (See Socius CG II, Ltd. Agreement below).
Financings
We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution. We will need to complete additional financing transactions in order to continue operations beyond the next twelve months. We do not currently have sufficient cash on hand to meet our needs to pay outstanding debt and payables. We currently do not generate any from our operations to cover our monthly operating costs. Financing transactions, if any, may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to generate sufficient revenues, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privilege senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we may have to significantly curtail or suspend our operations.
If we are unable to generate sufficient liquidity from operations or raise additional financing on acceptable terms, our business, results of operations, liquidity and financial condition could be adversely affected, and we may be required to significantly reduce our operations, including but not limited to terminating or suspending all operations and reorganizing or liquidating the Company.
Socius CG II, Ltd. Financing
On June 3, 2011, the Company entered into a securities purchase agreement with Socius CG II, Ltd. Agreement (“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 the above transaction, we recorded a net charge to operations of $5,673,053 and a charge to additional paid in capital of $470,000 during the year ended December 31, 2011. The above value of the derivative liability was reduced to $2,930,955 at December 31, 2011 and $248,368 at December 31, 2012, respectively. In connection with the Socius transaction we recorded total deferred financing fees of $427,073 during the year ended December 31, 2011. 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.
Off-Balance Sheet Arrangements
As of December 31, 2012, the Company did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities that had been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
ITEM 8.
ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements of the Company, the Notes thereto and the Report of Independent Registered Public Accounting Firm thereon required by this item appears in this report on the pages indicated in the following index:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
The Paws Pet Company, Inc.
Delray Beach, Florida
We have audited the accompanying consolidated balance sheets of The Paws Pet Company, Inc., (A Development Stage Company), (“the Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in shareholders’ deficit, and cash flows for each of the years in the two year period ended December 31, 2012, and for the period from inception of development stage (February 1, 2012) to December 31, 2012. The Paws Pet Company, Inc. management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Paws Pet Company, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 201, and for the period from inception of development stage (February 1, 2012) to December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 15 to the consolidated financial statements, the Company has suffered recurring losses from operations, and is dependent upon shareholders to provide sufficient working capital to maintain continuity. These circumstances create substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KBL, LLP
New York, NY
June 26, 2013
THE PAWS PET COMPANY, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
THE PAWS PET COMPANY, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
THE PAWS PET COMPANY, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
The accompanying notes are an integral part of these consolidated financial statements.
THE PAWS PET COMPANY, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business
The PAWS Pet Company, Inc. is a development stage company seeking new investment opportunities. 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 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.
Continuation of Company as a Going Concern
The Company has experienced net losses in each calendar quarter since our inception and, as of the year ended December 31, 2012, had a total accumulated deficit of $(14,797,384). The Company incurred a net loss to common shareholders of $(339,570) during the period January 1, 2012 to January 31, 2012 and a net loss of $(879,244) during the period February 1, 2012 to December 31, 2012. As a result of these conditions, the report of our independent registered accountants issued in connection with the audit of our consolidated financial statements as of and for our year ended December 31, 2012 contained a qualification raising a substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we cannot continue as a viable entity, our stockholders may lose some or all of their investment in us.
2. Summary of Significant Accounting Policies
Fiscal Year
The Company’s fiscal year is the twelve month period ending on December 31.
Principles of Consolidation
The consolidated financial statements presented above include the accounts of The PAWS Pet Company, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated.
Development Stage Company
On January 31, 2012, the Company exited the pet airline business. The Company is planning to exploit specific niche opportunities in wholesale and retail pharmacies with a focus on workers’ compensation and in-office physician pharmacy distribution as well as the limited purchase and collection of pharmaceutical and services related receivables. The Company has been in the development stage since February 1, 2012 and has not yet realized any revenue since then. The Company is a development stage company as defined in Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) ASC 915 “Development Stage Entities.” A development stage enterprise is one in which planned and principal operations have not commenced or, if its operations have commenced, there has been no significant revenue therefrom. As a development stage enterprise the Company will report cumulative costs beginning from the time the Company discontinued its previous operations.
Use of Estimates
The preparation of consolidated financial statements and related footnote disclosures in conformity with accounting principles generally accepted in the United States requires management 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 evaluates, on an on-going basis, its estimates and judgments, including those related to revenue recognition, bad debts, impairment of goodwill and intangible assets, income taxes, contingencies and litigation. Its estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity or remaining maturity of three months or less at the date of purchase to be classified as cash and cash equivalents consisting of checking and money market accounts. Cash and cash equivalents are stated at cost, which approximates market value, and are primarily maintained at two financial institutions.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Advertising Costs
Advertising and marketing costs of $0 and $78,746 were expensed as incurred in each of the years ended December 31, 2012 and 2011, respectively.
Property and equipment
Property and equipment are stated at cost. Depreciation of computer equipment and software is computed using the straight line method over the estimated useful lives of the assets. Estimated useful lives of three to five years are used for computer equipment and software. Property and equipment sold, retired or disposed of, together with related accumulated depreciation is removed from the appropriate accounts and the resultant gain or loss is included in income or loss. The interest expense amount subject to capitalization during the construction period of the Pet Lounges was immaterial as of December 31, 2012.
Long-lived assets
The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, and its eventual disposition. Measurement of an impairment loss for intangible and long-lived assets that management expects to hold and use is based on the fair value of the asset as estimated using a discounted cash flow model. The goodwill acquired in connection to the share exchange agreement with Impact Social Networking, Inc. was impaired as of March 31, 2012, and written off to the Statement of Operations. There were no long-lived assets as of December 31, 2012 and 2011, respectively.
Concentrations
Payment collected is invested in money market and interest earning deposit accounts at a FDIC insured financial institution at times at levels that may exceed the $250,000 insurance limit afford each account holder.
Revenue Recognition
The Company recognizes revenue when it is earned, and its collection is reasonable assured.
Income Taxes
The Company accounts for income taxes using the asset and liability approach in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in operations in the period that includes the enactment date. Pursuant to accounting guidance concerning provision for uncertain income tax provisions contained in Accounting Standards Codification (“ASC”) 740-10, there are no uncertain income tax positions. The federal, state, and city income tax returns of the Company are subject to examination by the federal and state taxing authorities, generally for three years after they were filed.
Computation of Earnings per Share
In accordance with FASB ASC 260, “Earnings per Share”, the basic earnings or loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share is computed in a manner similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. At December 31, 2012 and 2011, the Company stock equivalents were anti-dilutive and excluded in the diluted loss per share computation.
Equity Based Award Compensation
The Company accounts for equity-based compensation under the provisions of ASC 718-10 and ASC 505-50 “Stock Compensation and Equity Based Payments to Non-Employees”. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Statement of Operations.
The Company uses the Black-Scholes option-pricing model as its method of valuation for share-based awards. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate. Equity-based compensation expense for awards to employees and non-employees recognized was $987,714 and $602,835 for the years ended December 31, 2012 and 2011, respectively.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Segment Information
ASC 280, “Disclosures about Segments of an Enterprise and Related Information”, establishes standards for reporting information regarding operating segments in annual consolidated financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company originally operated as a single segment company; however, as of February 1, 2012 the Company became a development stage company and is no longer operating as a segment. The Company intends to commence operations as another segment in the near future.
Reclassification
The Company has made certain reclassifications to conform to prior periods’ data to the current presentation. These reclassifications had no effect on reported losses, operating ratios or ROI measurements.
Fair Value Measurement
The Company adopted the provisions of ASC 820 “Fair Value Measurements and Disclosures” on January 1, 2009, the beginning of our 2009 fiscal year. ASC 820 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy. As originally issued, it was effective for fiscal years beginning after November 15, 2007, with early adoption permitted. It does not require any new fair value measurements. It only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments.
On February 12, 2008, the FASB allowed deferral of the effective date of ASC 820 for one year, as it relates to nonfinancial assets and liabilities. Accordingly, our adoption related only to financial assets and liabilities. Upon adoption ASC 820, there was no cumulative effect adjustment to beginning retained earnings and no impact on the consolidated financial statements as of December 31, 2012 and 2011, respectively.
Valuation techniques considered under ASC 820 techniques are based on observable and unobservable inputs. The ASC classifies these inputs into the following hierarchy:
Level 1 inputs are observable inputs and use quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date and are deemed to be most reliable measure of fair value.
Level 2 inputs are observable inputs and reflect assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Level 2 inputs includes 1) quoted prices for similar assets or liabilities in active markets, 2) quoted prices for identical or similar assets or liabilities in markets that are not active, 3) observable inputs such as interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, credits risks, default rates, and 4) market-corroborated inputs.
Level 3 inputs are unobservable inputs and reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.
In October 2008, the FASB clarified the application of ASC 820 in determining the fair value of a financial asset when the market for that financial asset is not active.
The Company adopted the provisions of ASC 825, “The Fair Value Option for Financial Assets and Liabilities”, on January 1, 2009, the beginning of our 2009 fiscal year. ASC 825 permits us to choose to measure certain financial assets and liabilities at fair value that are not currently required to be measured at fair value (the “Fair Value Option”). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected are reported as a cumulative adjustment to beginning retained earnings.
Our current and non-current debentures payable obligations are valued using Level 3 inputs. The fair values of the obligations exceed their carrying cost and are fairly presented throughout our consolidated financial statements at December 31, 2012.
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 consolidated financial statements.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Acquisition of subsidiary
On February 23, 2012, pursuant to a share exchange agreement (the “Exchange Agreement”) the Company acquired 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. 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. The Transaction was accounted for using the acquisition method under ASC Topic 805, Business Combinations. Under the acquisition method, the purchase price was allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with the remainder allocated to goodwill. None of the goodwill recorded in connection with the Transaction will be deductible for income tax purposes.
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 decided not to continue to pursue the development of Pawdoodle. The Company, during its annual impairment review of long-lived assets determined that the fair value of the goodwill was zero based that the software purchased was not finished and internally developed and therefore, wrote off the value of the goodwill of $1,035,168 as impaired per the Statement of Operations.
4. Property and Equipment
Property and equipment consist of the following at:
Depreciation and amortization expense was $53,098 for the year ended December 31, 2012, that comprised of $1,497 and $51,601 of expense, related to discontinued and continuing operations, respectively, compared to $63,078 of depreciation expense for the year ended December 31, 2011. In January 2012, the Company abandoned equipment located in several formerly rented facilities related to the airline business therefore, recognizing a loss due to abandonment of equipment of $49,053.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Capital
Common Stock
The Company is authorized to issue up to 350,000,000 shares of common stock, no par value. There were 86,509,928 and 46,201,182 shares of common outstanding as of December 31, 2012 and 2011, respectively. Holders of the common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefore. Upon the liquidation, dissolution, or winding up of our Company, the holders of common stock are entitled to share ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any outstanding common stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are validly issued, fully paid and non-assessable.
During the year ended December 31, 2012, the Company issued an aggregate of 6,820,950 shares of common stock to non-employees valued at $818,541. During the year ended December 31, 2012, the Company issued 1,200,000 shares of common stock to employees for services rendered valued at $144,000.
Pursuant to the terms of the unsecured, convertible debentures (“debentures”), the Company has elected to issue shares of common stock to satisfy the accrued interest due to the debenture holders. For the year ended December 31, 2012 the Company elected to issue 176,507 shares of common stock valued at $6,638 using the closing stock price at the close of the quarter end, in lieu of cash to satisfy interest payable at each reporting quarter period end to the convertible debentures holders.
There were no stock warrants or stock options exercised during the years ended December 31, 2012 and 2011.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred stock, no par value. The 10,000,000 shares of preferred stock authorized are undesignated as to preferences, privileges and restrictions. As the shares are issued, the Board of Directors must establish a “series” of the shares to be issued and designate the preferences, privileges and restrictions applicable to that series. As of December 31, 2012 and 2011, there were no shares of any series of preferred stock outstanding.
6. Private Placements
Common Stock Sale
Socius CG II, Ltd. Agreement
On June 3, 2011, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an accredited investor, pursuant to which we secured $500,000 of immediate funding through the issuance and sale to accredited investor 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) we also issued to accredited investor a warrant to purchase up to 20,476,707 shares of our common stock, and (ii) accredited investor agreed to purchase from the Company up to $5.0 million (the “Aggregate Preferred Stock Purchase Price”) of our 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, we also agreed to issue an additional 1,126,735 shares of common stock to accredited investor on the 75 day anniversary of the Initial Purchase as consideration for executing and delivering the Purchase Agreement (the “Commitment Shares”). The Commitment Shares shall not be issued to accredited investor and shall be held in abeyance (and accredited investor shall not have the right to, or be deemed to have, beneficial ownership of such Commitment Shares) to the extent that such issuance would result in accredited investor and its affiliates owning or being deemed the beneficial owner of more than 9.99% of the then issued and outstanding common stock. The warrant also does not permit issuance of common stock there under to the extent that such issuance would result in accredited investor 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 there under. These securities may not be transferred or sold absent registration under the Securities Act or an applicable exemption therefrom.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the accredited investor, and the accredited investor will be obligated to purchase, shares of the Preferred Stock. In order to effectuate such a sale, the Company will issue to the accredited investor, subject to the terms and conditions of the Purchase Agreement (all of which conditions are outside of the accredited investor’s 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, the accredited investor will be obligated, subject to the terms and conditions specified in the Purchase Agreement (which conditions are outside of the accredited investor’s control), to purchase the Preferred Stock subject to such Preferred Notice on the 10th 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 our private placement transaction, we issued to the investor a five-year warrant to purchase up to 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.
In connection with the above transaction, we recorded a net charge to operations of $5,673,053 and a charge to additional paid in capital of $470,000 during the year ended December 31, 2011. The value of the derivative warrant liability was reduced to $2,930,955 at December 31, 2011 and $248,368 at December 31, 2012. In connection with this transaction we recorded deferred financing fees of $427,073. However, because access to the 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, the Company completed a private placement with three investors where we issued and sold a total of 280,000 shares of our common stock and a warrant to purchase 280,000 shares of our common stock at an exercise price of $0.20, for gross proceeds of $56,000. The exercise price equaled the quoted per share market price at the date of the sale of the shares.
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.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 49,394 shares of common stock valued, using the closing stock price of the day valued 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 at $1,763, using the closing stock price of the day, 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 at $228, using the closing stock price of the day, in lieu of cash to satisfy interest payable at September 30, 2012 to the convertible debentures 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 debentures holders.
7. Stock Options Plan
The Company has a Stock Incentive Plan (the “Plan”).Under the Plan, at December 31, 2012 and 2011, the Company had 4,000,000, 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 the Company’s common equity at fair market value, as determined by the Company’s Board of Directors, at the date of grant.
Through December 31, 2012, the Company granted 1,222,000 options to purchase shares of our common stock to officers and employees with an exercise price of $0.17 per share, the fair market value at the date of grant. The options vest from zero to three years. The option compensation value will be expensed to operations over the option's vesting schedule. Using the Black-Scholes option pricing model and on an estimated forfeiture rate, the remaining value to be expensed based on 722,000 outstanding options is approximately $13,000. The expense amortized during the years ended December 31, 2012 and 2011, was $25,173 and $39,679, respectively.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes information about options outstanding at December 31, 2012:
The following table summarizes information about non-vested options outstanding at December 31, 2012:
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. 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.
In June 2010, Pet Airways, Inc. (Florida) 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 detached warrant for the purchase of 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 detached warrant issued above is 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 $342,632 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.
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 December 31, 2012, an aggregate of $565,500 and $250,000 principal amount 8% and 14% convertible debentures, respectively, were outstanding.
Convertible debentures, net of unamortized discounts, consist of the following:
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The discount is amortized as interest expense over the period of the debentures term. Interest expense of $411,332 was recorded to operations related to the amortization of debenture debt discounts during the year ended December 31, 2012. This included $2,747 of accelerated amortization due to the conversion of $12,000 of 8% convertible debentures, in addition to $56,333 due to the conversion of $100,000 of 14% convertible debentures.
Warrants
On January 4, 2011, the Company issued a warrant with an exercise price of $1.00 for the purchase of 100,000 shares of common stock valued at $1.50 per share, or $150,000, as settlement of services rendered by non-employee in 2010.
On February 4, 2011, the Company issued a warrant with an exercise price of $1.00 purchase of 16,575 shares of common stock valued at $1.15 per share, or $19,061, as settlement of services rendered by non-employee in 2010.
On June 3, 2011, the Company issued a warrant with an exercise price of $0.50 purchase of 875,000 shares of common stock valued at $0.70 per share, or $ 612,500.
On June 3, 2011, the Company issued a warrant with an exercise price of $1.02 purchase of 20,476,707 shares of common stock valued at $0.70 per share, or $14,333,694.
On December 29, the Company issued a warrant with an exercise price of $0.20 purchase of 738,678 shares of common stock valued at $0.14 per share, or $103,414.
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.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
A summary of the warrant activity for the year ended December 31, 2012 is as follows:
9. Segment Information
The Company originally operated as a single segment company; however, effective February 1, 2012 the Company became a development stage company and is no longer operating as a segment. The Company intends to commence operations as another segment in the near future.
10. Income Taxes
As of December 31, 2012, the Company had deferred tax assets primarily consisting of its net operating loss carry forwards, accrued expenses and capitalized start-up costs for tax purposes. However, because the cumulative losses in several consecutive years, the Company has recorded a full valuation allowance such that its net deferred tax asset is zero.
With respect to tax years prior to 2010, the Company was taxed as a partnership. Accordingly, all of the losses of the Company flow through to the members of the partnership and the Company has no deferred tax assets or loss carry forwards from this period.
The valuation allowance for the deferred tax asset increased by $1,325,588 for the year ended December 31, 2012.
We must also make judgments whether the deferred tax assets will be recovered from future taxable income. To the extent that we believe that recovery is not likely, we must establish a valuation allowance. A valuation allowance has been established for deferred tax assets which we do not believe meet the “more likely than not” criteria. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the valuation allowances we have established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.
The Company accounts for income taxes using the asset and liability approach in accordance with ASC 740, “Accounting for Income Taxes”., by prescribing a more-likely-than-not (i.e., greater than 50% likelihood of receiving a benefit) threshold to recognize any benefit of a tax position taken or expected to be taken in a tax return. Tax positions that meet the recognition threshold are reported in the consolidated financial statements. The guidance further provides the benefit to be realized assuming a review by tax authorities having all relevant information and applying current conventions. The interpretation also clarifies the consolidated financial statements classification of tax related penalties and interest and set forth new disclosures regarding unrecognized tax benefits. The adoption of ASC 740-10 did not have a material impact on our consolidated financial results.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 2012, the Company had available net operating loss carry forwards of approximately $7,169,146 for federal income tax purposes. Such carry forwards may be used to reduce consolidated taxable income, if any, in future years through their expiration in 2032 subject to limitations of Section 382 of the Internal Revenue Code, as amended. Utilization of net operating loss carry forwards may be limited due to the ownership changes and the Company’s acquisitions.
At December 31, 2012, the Company had not filed the federal tax return for the years ended December 31, 2012, 2011 and 2010.
Deferred tax assets are comprised of the following components:
11. Net Loss per Share
Net loss per share is computed based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of our convertible debt securities, stock options and warrants to purchase common stock.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies
Operating lease commitments
Rent expense charged to operations were $252,040 and $443,866 for the years ended December 31, 2012 and 2011, respectively. The entire amount of rent incurred during 2012 was related to discontinued operations. The Company had no lease agreements with a term in excess of one year at December 31, 2012.
Employment Agreements
The Company had no employment agreements at December 31, 2012.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Legal Proceedings
On March 4, 2013, a judgment was entered against us 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. Except for the foregoing, there were no ongoing legal proceedings nor is the Company aware of any material un-asserted claims for the year ended December 31, 2012. From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is currently not aware of any such legal proceedings or claims other than those mentioned above that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.
14. Discontinued Operations
In January, 2012, the Company decided to discontinue its Pet Airways business. The remaining liabilities are presented on the balance sheet under the caption “Accounts and accrued expenses payable, discontinued operations.” Liabilities related to discontinued operations were as follows:
The following table sets forth for the year ended December 31, 2012 indicated selected financial data of the Company’s discontinued operations of its pet airways business.
15. Going Concern Matters
The accompanying audited 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. For the years ended December 31, 2012 and 2011, the Company incurred net losses of $(1,218,814) and $(7,513,562), respectively, of which $(879,244) and $(7,513,562), in losses was derived from continuing operations respectively, and $(339,570) and $0, related to losses from discontinued operations, respectively, for the years ended December 31, 2012 and 2011. As of December 31, 2012 the Company had an accumulated deficit of $(14,797,384) of which $(13,918,140) pertained to continuing operations and $(879,244) related to discontinued operations; compared to a deficit of $($13,578,570) from continuing operations, and no discontinued operations deficit as of December 31, 2011. We do not presently have adequate cash from operations or financing activities to meet our long-term financing needs. As of December 31, 2012, we had $81,755 in cash on hand to use in executing our business plan. We will require additional working capital to continue our operations during the next 12 months and to support our long-term growth strategies, so as to enhance our service offerings and benefit from economies of scale. Our working capital requirements and the cash flow provided by future operating activities, if any, will vary greatly from quarter to quarter, depending on the volume of business and competition in the markets we serve. We may seek any necessary funding through one or more credit facilities, if available, or through the sale of debt or additional equity securities. However, there is no assurance that funding of any type would be available to us, or that it would be available at rates and on terms and conditions that would be financially acceptable and viable to us in the long term. If we are unable to raise any necessary additional financing when needed, we 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 our common stock, or render it worthless. If we issue 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 our common stock, thereby diluting the value of our common stock.
THE PAWS PET COMPANY, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Subsequent Events
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 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.
On March 15, 2013, the Company issued one million shares of common stock to a consultant in connection to the engagement of the consultant.
Effective May 10, 2013, The PAWS Pet Company Inc. (“PAWS”) entered into (i) Settlement Agreements with Bellevue Holdings, Inc. and Fantasy Funding, Inc; (ii) a Securities Exchange Agreement with Bellevue Holdings, Inc. and (iii) Securities Exchange Agreements with Fantasy Funding, Inc. and Destiny Diversification Holdings Corp., whereby the parties exchanged PAWS convertible notes and common stock purchase warrants for an aggregate of 2,415 shares of PAWS Series C preferred stock (the “Series C Stock”).
Each share of Series C Stock is convertible into 20,000 shares of PAWS common stock, with a conversion ratio of $0.005. All the 2,415 shares of Series C Stock issued in the foregoing exchange are convertible into a total of 48,300,000 shares of PAWS common stock. The exchanges were effective pursuant to the exemption from registration under Section 3 (a)(9) of the Securities Act of 1933, as amended (the “Securities Act”).
On May 10, 2013 PAWS also entered into an agreement to sell 325 shares of Series C Stock to Destiny Diversification Holdings Corp for a cash payment of $25,000 and an additional payment on June 1, 2013 of $7,500. The 325 shares of Series C Stock issued in that transaction are convertible into a total of 6,500,000 shares of PAWS common stock. The foregoing transaction was effective pursuant to the exemption from registration under Section 4 (a)(2) of the Securities Act and Rule 506 of Regulation D there under.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
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 acting Chief Financial Officer concluded that, as of December 31, 2012, subject to the inherent limitations noted in this Part II, Item 9A as of December 31, 2012 our disclosure controls and procedures were not effective due to the existence of material weaknesses in our internal controls over financial reporting, as discussed below.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(e) and 15d - 15(e) under the Exchange Act as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal controls over financial reporting as of December 31, 2012 using criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Our management has concluded that our internal control over financial reporting was not effective as of December 31, 2012 due to material weaknesses in our internal controls.
A material weakness is a control deficiency, or a combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management, in consultation with our independent registered public accounting firm, concluded that material weaknesses existed in the following areas as of December 31, 2012:
(1) we do not have 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.
Management believes the material weaknesses set forth in items 1 to 3 above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and a lack of a majority of outside directors on our board of directors results in a lack of oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our consolidated financial statements in future periods.
Managements Remediation Initiatives.
In order to remedy the identified material weaknesses and other deficiencies and enhance our internal controls, management would initiate, when funding permits, the following series of measures:1) create a financial position that adequately segregates financial duties consistent with control objectives; 2) hire staff technically proficient at applying U.S. GAAP to financial transactions and reporting; and 3) appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will perform the oversight in the establishment and monitoring of required internal controls and procedures including but not limited to a) review and approval of significant transactions; b) selection and approval of the services of the independent registered public accounting firm; and c) review and approval of the report of the registered independent certified public accountants on the required periodic external reports.
This annual report does not include an attestation report of our registered independent certified public accountants regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered independent certified public accounting firm pursuant to rules adopted under the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit us to provide only management’s report in this annual report.
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 and for the year ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the name, age and position of each of our executive officers and directors:
Name
Age
Position
Dan Wiesel
Chairman, Chief Executive Officer and Director
Alysa Binder
Executive Vice President and Chief Development Officer and Director
Evon L. Midei
Director
Jonathan Renkas, M.D.
Director
Business Experience
We believe that our board should be composed of individuals with sophistication and experience in many substantive areas that impact our business. We believe the experience, qualifications, or skills in the following areas are most important: sales and marketing; strategic planning; human resources and development practices; and board practices from other corporations. These areas are in addition to the personal qualifications described in this section. We believe that all of our current board members possess the professional and personal qualifications necessary for board service, and have highlighted particularly noteworthy attributes of each Board member in the individual biographies below. The principal occupation and business experience, for at least the past five years, of each current director is as follows;
Dan Wiesel co-founded Pet Airways in 2005 and has served as our Chairman of the board of directors and Chief Executive Officer since August 2009. Mr. Wiesel has also served as our President and Chief Financial Officer until January 2011. From 1983 to 1985, Mr. Wiesel served as Vice President of Acquisitions for a national real estate investment company, where Mr. Wiesel was responsible for the negotiation and purchase of over $300 million in commercial real estate. Subsequently, in 1985 Mr. Wiesel founded The Wendemere Group, a real estate development firm, which built custom homes with a total value of more than $20 million. In 1990, Mr. Wiesel founded StitchIt Corporation, a manufacturer of women’s swim wear. In 1995, as principal of Interlink Recruiting, Mr. Wiesel was responsible for the creation of this boutique executive recruiting firm. Mr. Wiesel holds an MBA in Entrepreneurship from the University of Southern California and holds a private pilot’s license. As a result of these and other professional experiences, Mr. Wiesel possesses particular knowledge and experience in business development, sales strategy and management that strengthen the board’s collective qualifications, skills, and experience.
Alysa Binder co-founded Pet Airways in 2005 and has served as our Executive Vice President and Chief Development Officer since August 2009. Ms. Binder began her career in the premium incentive industry, responsible for marketing and sales to large corporate customers. Ms. Binder later founded a retail jewelry operation, expanding the business to include custom creations for high-profile clients. In 1995, Ms. Binder founded Interlink Recruiting. Ms. Binder is Dan Wiesel’s wife. In 2005, Ms. Binder joined Dan in founding Pet Airways. As a result of these and other professional experiences, Ms. Binder possesses particular knowledge and experience in business development, strategic planning and marketing that strengthen the board’s collective qualifications, skills, and experience.
Evon L. Midei is a registered pharmacist with over 35 years’ experience in pharmacy operations, pharmacy management and executive level hospital administration. Since 2011, Mr. Midei has served as independent consultant with Empire Pharmacy Consultations in Miami, Florida, providing management and other operational consulting services to various pharmacy and healthcare organizations. From 1995 to 2010, he was a pharmacist with CVS in Allentown, Pennsylvania. In 1996, he was Director of Operations for Raytel Medical Corporation in Windsor, Canada. From 1982 to 1995, he was employed by St. Luke’s Hospital in Allentown, Pennsylvania, where he initially was Risk Manager/Special Projects Administrator. During his tenure at the hospital, he rose to become Senior Vice President and Chief Operating Officer, serving in such position from 1993 to 1995. In such capacity, he was responsible for day to day operations of the hospital and its affiliated businesses. He also negotiated managed care contracts of all types with manage care organizations, physicians, employers and government agencies. Prior to joining St. Luke’s, Mr. Midei occupied various positions in the healthcare and pharmacy industry, including Pharmacist Manager of Thrift Drugs, in Bethlehem, Pennsylvania from 1973 to 1979, where he managed all aspects of the operation of this multi-million dollar community pharmacy.
Jonathan Renkas, M.D., is a practicing emergency room physician in the Chicago, Illinois area, where he has been affiliated with West Suburban Medical Center since March 2013 and Ingalls Community Hospital since 2011. Prior thereto, he was affiliated with various hospitals in Wisconsin and Indiana since 2006. From 2004 to 2006, he served as Senior Vice President and Chief Medical Officer of U.S. Asthma Care, based in Fort Worth, Texas and contemporaneously as Utilization Management Medical Director of Midland Management Company. Since 2006, he has also served on a consulting basis as Senior Quality Management Analyst for Sterling HealthCare Initiatives in Chicago, Illinois.
Directors serve at the discretion of the board of directors. Executive officers are appointed by and serve at the discretion of the board of directors.
Family Relationships
Mr. Wiesel, our Chief Executive Officer and Chairman of our board of directors, and Ms. Binder, our Executive Vice President and a director, are married.
Compliance with Section 16(a) of the Exchange Act
The SEC has adopted rules relating to the filing of ownership reports under Section 16 (a) of the Exchange Ac. Section 16(a) of the Exchange Act requires our directors, officers and stockholders who beneficially own more than 10% of any class of our equity securities registered pursuant to Section 12 of the Exchange Act to file initial reports of ownership and reports of changes in ownership with respect to our equity securities with the SEC. All reporting persons are required by SEC regulations to furnish us with copies of all reports that such reporting persons file with the SEC pursuant to Section 16(a). Based solely on our review of the copies of such forms received by us and upon written representations of such reporting persons, we believe that all reporting persons are in compliance with all Section 16(a) filing requirements applicable to such reporting persons, except that the Daniel T. Zagorin Trust, Ms. Binder and Mr. Wiesel failed to timely file a Form 3 and Mr. Warner failed to file a Form 3 and Form 4.
Audit Committee and Audit Committee Financial Expert
Due to the size of our operation, members of the board of directors serve collectively as the Audit Committee and have primary responsibility for monitoring the quality of internal financial controls and ensuring that the financial performance of our company is properly measured and reported on. It receives and reviews reports from management and auditors relating to the annual, periodic and interim accounts and the accounting and internal control systems in use throughout our company.
Our Audit Committee also consults with our independent registered public accounting firm prior to the presentation of financial statements to stockholders and, as appropriate, initiates’ inquiries into aspects of our financial affairs. Our Audit Committee is responsible for establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. The Audit Committee meets not less than quarterly and has unrestricted access to our auditors.
Code of Business Conduct and Ethics
Due to our small size and limited number of persons comprising our management, we have not adopted a code of ethics that applies to our principal executive officer, principal accounting officer, or persons performing similar functions.
Shareholder Communications
We have not implemented any formal procedures for shareholder communication with our board of directors. Any matter intended for our board of directors, or for any individual member or members of our board of directors, should be directed to our corporate secretary at The PAWS Pet Company, Inc. 777 E. Atlantic Avenue Suite C2 265, Delray Beach, Florida 33483. In general, all shareholder communications delivered to the corporate secretary for forwarding to the board of directors or specified members of the board of directors will be forwarded in accordance with shareholder’s instructions. However the corporate secretary reserves the right to not forward to members of the board of directors any abusive, threatening or otherwise inappropriate materials.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table shows the compensation for years 2012 and 2011 awarded to or earned by our Chairman and Chief Executive Officer, President and former Chief Financial Officer and Executive Vice President and Chief Development Officer as of December 31, 2012. There were no other highly compensated executive officers serving in such capacities as of December 31, 2011. The persons listed in the following Summary Compensation Table are referred to herein as the “Named Executive Officers or NEOs.”
(1)
Mr. Warner resigned from his position with the Company on October 29, 2012.
(2)
Includes accrued salary $143,294 $113,750 and $113,333 to Mr. Wiesel, Mr. Warner and Ms. Binder at December 31, 2011, No salary was paid during 2012 .
(3)
In April 2012 we granted Mr. Wiesel, Mr. Warner and Ms. Binder 400,000 shares each of restricted stock at a fair value of $48,000 each. All shares were fully vested on the grant date.
We have not entered into any employment agreements with our named executive officers.
Outstanding Equity Awards at Year-End
As of December 31, 2012, there were 350,000 outstanding vested awards owned by a former executive officer with an exercise price of $0.17 that expired in January 2013.
Director Compensation
Effective March 2011, the Company pays each non-employee director a fee of $1,500 for each “in-person” board or committee meeting and $500 for every telephonic board or committee meeting. All directors are reimbursed for all reasonable expenses incurred in connection with the performance of their respective duties as a director. No payments were made to directors during the year ended December 31, 2012.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding beneficial ownership of our common stock as of December 31, 2012 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of The PAWS Pet Company, Inc., 455 NE 5th Ave, Suite D464, Delray Beach, FL 33483.
1)Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.
2)A total of 86,509,928 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d) (1) as of December 31 2012. For each beneficial owner above, any options exercisable within 60 days are included in the denominator.
3)Dan Wiesel and Alysa Binder are husband and wife and own their shares jointly with right of survivorship.
4)Daniel T. Zagorin has voting and dispositive control over the shares held by the Daniel T. Zagorin Trust.
5)Includes 33,115,557 warrants.
Equity Compensation Plan Information
The following is certain information about our equity compensation plans as of December 31, 2012.
Stock Incentive Plan
In 2010, we adopted our Stock Incentive Plan (the “Plan”). Under the Plan at December 31, 2011 and 2010 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 our common stock at fair market value at the date of grant.
There are options to purchase 722,000 shares and 1,172,000 shares under the Plan as of December 31, 2012 and 2011, respectively.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following includes a summary of transactions through December 31, 2012, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $21,000 or approximately five percent of the average of our total assets at year end for the last two completed years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
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Other compensation $0 and$445,000, for the twelve months ended December 31, 2012 and 2011, respectively.
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In June 2012, we issued to the Daniel T. Zagorin Trust who remains a holder in excess of 5% of our issued and outstanding shares of common stock 20,000,000 shares of common stock at a price of $0.10 per share for gross proceeds of $200,000.
Director Independence
Pursuant to Item 407 (a) (i)(ii) of regulation S-K promulgated under the Securities Act, we have adopted the definition of “independent director” as set forth in Rules 5000 (a)(19) and 5605(a)(2) of the rules of the NASDAQ Stock Market. There is no independent director serving on our board presently. Our board of directors has not created separately designated standing committees. Officers are appointed annually by our board of directors and serve at the discretion of our board of directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The fees billed for professional services rendered by KBL LLP, our independent accountant, for the audit of our annual consolidated financial statements for the years ended December 31, 2012 and 2011 and the review of the consolidated financial statements included in each of our interim reports during the years ended December 31, 2012 and 2011 were $112,500 and $61,750 respectively.
Tax Fees
During the fiscal years ended December 31, 2012 and 2011, respectively, there were no fees billed for tax compliance, tax advice and /or tax planning by our independent accountants.
All Other Fees
During the years ended December 31, 2012 and 2011, there were additional fees of zero and $8,250, respectively billed for products and services provided by the independent accountant.
Audit Committee Approval
Our board of directors serves as our audit committee. It approves the engagement of our independent auditors including the scope of accounting services to be perform.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Consolidated financial statements:
The consolidated financial statements included in Item 8. Consolidated Financial Statements and Supplementary Data above are filed as part of this annual report.
2. Financial Statement Schedules:
There are no consolidated financial statements schedules filed as part of this annual report, since the required information is included in the consolidated financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present.
3. Exhibits:
Exhibit No.
Description
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registration statement Form SB-2, File No. 333-130446, initially filed with the SEC on December 19, 2005, as amended)
3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to registration statement Form SB-2, File No. 333-130446, initially filed with the SEC on December 19, 2005, as amended)
3.3
Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K filed with the SEC on October 25, 2010)
3.4
Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K filed with the SEC on July 20, 2012)
10.1
Form of Share Exchange Agreement, dated as of June 25, 2010, among the Registrant, Pet Airways, Inc., a Florida corporation (“PAWS”), the shareholders of PAWS, and Joseph A. Merkel, Kevin T. Quinlan, and Bellevue Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on July 1, 2010)
10.2
Form of 8% Convertible Debenture (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on August 17, 2010)
10.3
Form of Subscription Agreement for 8% Convertible Debentures and Share Purchase Warrants (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed with the SEC on August 17, 2010)
10.4
Form of Common Stock Subscription Agreement (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on November 9, 2010)
10.5
Form of Share Exchange Agreement, dated as of February 23, 2012, among the Registrant, The PAWS Pet Company, Inc, an Illinois corporation (“PAWS”), and all the shareholders of Impact Social Networking Inc., a Georgia corporation, (incorporated by reference to Exhibit 2.1 to the current report on Form 8-K filed with the SEC on February 29, 2012)
10.6
Form of Security Purchase Agreement, dated February 27, 2012 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed with the SEC on March 7, 2012)
10.7
Form of 8% Convertible Promissory Note, dated as of February 27, 2012, (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on March 7, 2012)
10.8
Form of Security Purchase Agreement, dated April 16, 2012 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed with the SEC on April 26, 2012)
10.9
Form of 8% Convertible Promissory Note, dated as of April 16, 2012, (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on April 26, 2012)
10.9
Stock Incentive Plan, dated as of February 9, 2012, (incorporated by reference to Exhibit 4.1 to the Form S-8 filed with the SEC on April 26, 2012)
10.10
Form of Subscription Agreement(incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on June 19, 2012)
10.11
Form of Subscription Agreement(incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on July 7, 2012)
10.12
Form of Security Purchase Agreement, dated July 17, 2012 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed with the SEC on July 26, 2012)
10.13
Form of 8% Convertible Promissory Note, dated as of July 17, 2012, (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on July 26, 2012)
10.14
Securities Exchange Agreement dated March 9, 2013, (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on March 15, 2013)
10.15
Exhibit B to the Securities Exchange Agreement dated March 9, 2013, (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed with the SEC March 15, 2013)
10.16
Bellevue Securities Exchange Agreement 2011 Warrants effective as of May 10, 2013, (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on June 7, 2013)
10.17
Bellevue Settlement Agreement effective as of May 10, 2013, (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed with the SEC on June 7, 2013)
10.18
Fantasy Securities Exchange Agreement 2010 Note effective as of May 10, 2013, (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed with the SEC on June 7, 2013)
10.19
Fantasy Securities Exchange Agreement 2011 Warrants effective as of May 10, 2013, (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K filed with the SEC on June 7, 2013)
10.20
Fantasy Settlement Agreement effective as of May 10, 2013, (incorporated by reference to Exhibit 10.5 to the current report on Form 8-K filed with the SEC on June 7, 2013)
16.1
Letter from Cordovano and Honick LLP regarding the resignation of the independent accountant (incorporated by reference to Exhibit 16.1 to the current report on Form 8-K filed with the SEC on August 31, 2010)
21.1
Subsidiaries of the Registrant.
31.1
Certification of Chief Executive Officer pursuant to Section 302, of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
The PAWS Pet Company, Inc.
By: /s/ Daniel Wiesel
Daniel Wiesel
Chairman and Chief Executive Officer,
Acting Chief Financial Officer and Acting
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.