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AAPT > SEC Filings for AAPT > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for ALL AMERICAN PET COMPANY, INC.

Form 10-Q for ALL AMERICAN PET COMPANY, INC.


14-Aug-2013

Quarterly Report


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

Overview

All American Pet Company, Inc. and its consolidated subsidiaries ("AAPT") develops and markets innovative first-to-market pet wellness products including super-premium dog food bars, dog food snacks and antibacterial paw wipes.

The executive offices are located at 1100 Glendon Avenue, 17th Floor, Los Angeles, California 90024. The office telephone number is (310) 689-7355.

The Company's online sites are www.allamericanpetcompany.com, www.nutrabar.com, www.pawtizer.com, www.facebook.com/nutrabar, www.facebook.com/pawtizer, www.vetresearchlibrary.com, http://issuu.com/nutrabar and http://bewelllivelong.wordpress.com

The information on our websites are not, and shall not be deemed to be, a part of this report or incorporated by reference into this or any other filing we make with the Securities and Exchange Commission (the "SEC")

History of the Company and its Current Status

All American Pet Company, Inc. was initially organized under the laws of the State of New York ("All American Pet Company, Inc. NY") in February 2003. In January 2006, All American Pet Company, Inc. NY merged into All American Pet Company, Inc. a Maryland Corporation ("All American Pet Company, Inc. MD"). In June 2012, All American Pet Company, Inc. MD merged into a Nevada Corporation, ("All American Pet Company, Inc.").

The Company has formed a number of wholly owned subsidiaries to provide for accountability of each of its operations. All American PetCo, Inc. was formed in January 2008 to provide corporate infrastructure and management services. All American Pet Brands, Inc. was formed in April 2009 to be the Company's manufacturing and warehousing operation. In September 2009, the Company signed a license and distribution agreement with AAP Sales and Distribution, Inc., a third party company, that obtained the rights to sell certain of the Company's products on a non-exclusive basis. AAP Sales and Distribution, Inc.'s operations have been consolidated with All American Pet Company, Inc. based on accounting guidelines for Variable Interest Entities.

In 2010 and 2011, AAPT produced, marketed, and beta tested two super-premium dog foods under the brand names Grrr-nola®Natural Dog Food and Chompions®. We believe that both Grrr-nola®Natural Dog Food and Chompions® were the first dog food products that were formulated for canine heart health and endorsed by a veterinary cardiac surgeon.

In 2012, after the beta testing, the Company completed market research, proprietary scientific formulation and testing for an all-natural super premium bar category called NutraBar™ - original, low fat and senior formulas. It also produced proprietary formulations for two additional bars - Chomp Bar™ and Mutt Bar™. It has successfully launched its portable, convenient and functional NutraBar™ line of all natural true food super premium bars to both online and traditional brick and mortar retailers. Each gluten-free 4 ounce bar has a kCal equivalent of 8 ounces of super-premium dry dog food. The bars have been both manufactured and packaged by the Company since the fourth quarter 2012 and related sales commenced in 2013.

The Company has shown and announced to the U.S. market the first line of all-natural super premium dog treats called CHEWIES™, which comes in three flavors, and is preparing to market its CHEWIES™ line of flavored all-natural super-premium 27% protein dog treats.

During 2012, the Company also launched its PAWtizer™ line of wet wipes and spray, the pet care industry's first alcohol-free, anti-bacterial dog cleaner.

The Company has never operated at a profit and is dependent upon additional financing to remain a going concern. Throughout 2012, the Company obtained equity capital in the amount of approximately $3,000,000 and continues to seek additional equity capital to sustain operations. During the three months ended June 30, 2013, the Company obtained $583,778 of equity capital and borrowed $478,981 from its CEO and President under the terms of a convertible note to sustain operations. The Company remains under significant financial strain, primarily because of its limited operating funds and a significant amount of past due debts. The limited amount of operating capital may preclude the Company's ability to execute its manufacturing, marketing, and distribution objectives or to continue operations. As a result, the reports of the independent registered public accounting firms on the Company's 2012 and 2011 consolidated financial statements include explanatory paragraphs expressing substantial doubt regarding the Company's ability to continue as a going concern.

Products

The Company has developed a number of innovative pet wellness products. The Company is also in the process of developing new products, variations of existing products and other items that will complement and enhance the Company's array of product offerings. The Company requires significant additional financing to market, manufacture and sell its existing products and to develop new products. Key components of the Company's product offerings are described below:

NutraBar™

The Company has developed (and launched in 2013) the pet industry's first dog food product packaged as a nutritional food bar. With three product lines targeting the super-premium dog food and dog treat segments, the Company's all-natural bars are the equivalent of 8 ounces of dry kibble in a 4 ounce bar. These bars offer a high protein meal or snack without the inconvenience of bags and bowls. AAPT's true food bars are formulated to contain a blend of natural ingredients and provide essential nutrients optimized to promote a dog's nutrition, health, and vitality.

CHOMPBar™

The line contains 27% protein quad segmented 4 ounce bars with digestive fiber enhancements in addition to functional vitamin and mineral supplementation. It comes in original, low fat and senior formulas.

MUTTBar™

Mutt™Bar products contain 25% protein and are supplemented with omega 3 fatty acid to promote healthy skin and coat. They are fortified with vitamin and amino acids. The bars will also be a quad-segmented 4 ounce wrapped bar available singly, as well as in full-color display cartons of a dozen. They also come in original, low fat, and senior formulas.

CHEWIES™

The Company's line of 27% high protein dog snacks will be made with the same nutritive ingredients as the food bars with additional flavorings added. CHEWIES™ will be packaged in 8 ounce and 16 ounce re-sealable pouches containing approximately 32 and 64 bite sized pieces.

PAWtizer™

The Company developed PAWtizer™ for the purpose of protecting the 53 million American families that are homes to 78 million dogs from infectious human germs such as MRSA, E. coli, Salmonella and other bacteria that are innocently picked up by dogs and transferred to humans. PAWtizer™ is the pet care industry's first alcohol-free anti-bacterial dog cleaner. With PAWtizer™, the Company is delivering a product that research has shown to be more useful and effective than alcohol. PAWtizer™ is available in canisters of 100 and 45 count, chemically treated wet wipes that have been shown to kill 99.9% of the germs resident on a typical dog paw. PAWtizer™ also comes in a convenient 8 ounce spray with Bitrex® added. Bitrex® is a "bittering" agent that will prevent dogs from licking their paws and thus extending the reach of the antibacterial effects of PAWtizer™.

The principal active ingredient in PAWtizer™ products is 0.13% Benzalkonium chloride, a germ reducing agent that has been widely accepted for use as a topical antiseptic for human cuts and scrapes and "leave on skin" cosmetics.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity requirements arise principally from our working capital needs, including the cost of goods, inventory, marketing, officer compensation and payroll and general and administrative costs. In the future, we intend to fund our liquidity requirements through a combination of cash flows from operations and external financings.

Our principal sources of liquidity have been sales of equity securities and borrowings. To meet our current requirements to operate, the Company has sold unregistered common stock and is currently attempting to undertake the sale of additional equity securities. As new funds are obtained, our principal uses of capital are to meet our operating requirements, production, marketing and advertising expenditures, and make investments in inventory and equipment. Additional funds could be used to reduce past due payroll taxes and other debts and payables. Until cash generated from operations is sufficient to satisfy our future liquidity requirements, we will be investigating purchase order and accounts receivable funding from different sources, as well as other sources of capital. We will also be looking to seek equity capital through the issuance of additional common stock.

In February 2013, the Company entered into an unsecured, convertible promissory note with an unrelated third party for $103,500, less a $3,500 fee. The loan bears interest at 8% per annum and a balloon payment of principal and accrued interest is due on November 12, 2013. At any time 180 days after the date of the note, the lender can convert the principal and accrued interest into shares of the Company's common stock at a 39% discount based on the average of the lowest three trading prices during a ten day period ending one day prior to the conversion date.

As of June 30, 2013, one other source for funding was the $1,000,000 credit facility commitment from the Company's, Chief Executive Officer, Barry Schwartz, and President, Lisa Bershan, provided to the Company in March 2012. On March 1, 2013, this credit facility was renewed with the following changes to the terms:
Interest rate was lowered to 6.5% per year and the maturing date was amended to be due and payable not later than 48 months from the original issue date of the Revolving Grid Note. As of June 30, 2013, advances to the Company under this facility totaled $541,257, increasing the holders' beneficial ownership by 246,025,909 shares of common stock. The Company's need for significant future funding will likely result in significant additional dilution to our stockholders.

The terms of the Grid Note provide that the conversion price be lowered upon the occurrence of certain defined events. Notwithstanding this fact, the embedded conversion right is not required to be bifurcated from the host debt instrument, as the underlying common stock is not deemed to be readily convertible to cash (Accounting Standards Codification 815-15-25-51) based on management's evaluation of the trading volume of the Company's common stock and the lock up provisions of the Grid Note.

The conversion price of the Grid Note was below the closing market price of the Company's common stock at the tie of related borrowings. As a result, the Company recognized beneficial conversion features, which were limited to the amount of the Grid Note borrowings of $541,257. The beneficial conversion features are being amortized to interest expense over the term of the Grid Note (March 2016). During the three and six months ended June 30, 2013, interest expense related to the amortization of beneficial conversion features totaled $25,000.

In the three months ended June 30, 2013, the Company raised $583,778 of equity capital before offering costs. The Company is currently seeking additional sources of funding.

Because of our lack of funding and limited ability to adequately market our products, the Company has incurred high costs in manufacturing and marketing our products. Further, the Company has incurred significant fixed costs, including officer compensation, occupancy and public company costs. As a result, we have experienced large operating losses and negative cash flow. The Company has funded its operations primarily through the issuance of equity securities and debt. Additional capital infusions will be needed to manufacture, distribute and promote our products, sustain operations and make payments and settlements of existing debts and obligations. The Company believes that its future profitability will depend on the commercial and consumer acceptance of its products, effective marketing strategies, efficient production and proper execution of its business plan, as to all or any of which, no assurance can be given. Additionally, success with its external financing strategies will be needed to effectuate our business plans. The Company's limited operating history makes it difficult to evaluate prospects of success, particularly because its business plan is founded on new and unproven products. Furthermore, there can be no assurance that the Company's external financing strategies will yield any capital or the amount of capital necessary to execute its business plan.

Results of Operations for the Six Months Ended June 30, 2013 and 2012

The following discussion of the results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto for the six month period ended June 30, 2013 and 2012 included in this Quarterly Report as well as the statements included in our Form 10-K for the year ended December 31, 2012.

The Company's expenses have increased dramatically in relation to sales as the Company is launching new products and preparing for future growth. For the six months ended June 30, 2013, net sales were $113,491 which is attributable to the introduction of the NutraBar™ product line. Cost of goods sold were $116,330 during the same period. Net sales during our second quarter were lower than our first quarter sales primarily as a result of production inefficiencies. Our negative gross margin results from our sales being insufficient to cover certain fixed production costs. Net sales and cost of sales for the same period in 2012 were $10,930 and $5,514, respectively.

Sales and marketing expenses decreased $47,950, from $177,733 to $129,783, for the six months ended June 30, 2012 and 2013, respectively. Higher expenses in the first six months of the prior year are primarily due to product development, testing, and promotion of the NutraBar™ product line while the Company was in early stages of NutraBar™ development. General and administrative expenses increased $491,599, from $749,549 to $1,241,148, for the six months ended June 30, 2012 and 2013. This increase is attributable to payroll and facility expenses for our new manufacturing division in Shawnee, KS of approximately $234,000 and increases to legal, consulting and commission expenses of approximately $258,000 over the same period last year.

Results of Operations for the Three Months Ended June 30, 2013 and 2012

The following discussion of the results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto for the three month period ended June 30, 2012 and 2013 included in this Quarterly Report as well as the statements included in our Form 10-K for the year ended December 31, 2012.

The Company's expenses have increased dramatically in relation to sales as the Company is launching new products and preparing for future growth. For the three months ended June 30, 2013, net sales were $20,947 which is attributable to the NutraBar™ product line. Cost of goods sold were $43,566 for the same period. Net sales during our second quarter were lower than our first quarter sales primarily as a result of production inefficiencies. Our negative gross margin results from our sales being insufficient to cover certain fixed production costs. Net sales and cost of sales for the same period in 2012 were $10,930 and $5,514, respectively.

Sales and marketing expenses decreased $37,009, from $100,261 to $63,252, for the three months ended June 30, 2012 and 2013, respectively. Higher expenses in the prior year period are primarily due to product development, testing, and promotion of the NutraBar™ product line while the Company was in early stages of NutraBar™ development. General and administrative expenses increased $321,863, from $406,056 to $727,919, for the three months ended June 30, 2012 and 2013. This increase is attributable to payroll and facility expenses for our new manufacturing division in Shawnee, KS of approximately $170,000 and increases to legal, consulting and commission expenses of approximately $152,000 over the same period last year.

Critical Accounting Estimates

Our unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on June 17, 2013, in Part II, Item 7 under the heading "Critical Accounting Policies/Estimates." In addition, refer to Note 1 to the consolidated interim financial statements included in Part I, Item 1 of this report for a summary of our significant accounting policies.

Recent Accounting Pronouncements

We do not believe that any recent accounting pronouncements will have a material impact on the Company's consolidated financial statements.

Off-Balance Sheet Arrangements

Other than the lease commitments described in Note 11 to our June 30, 2013 unaudited condensed consolidated financial statements, we have no off-balance sheet arrangements that have or are likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Forward Looking Statements

This Quarterly Report contains forward-looking statements. These forward-looking statements include, but are not limited to, predictions regarding:

• our business plan;

• the commercial viability of our products;

• the effects of competitive factors on our products;

• expenses we will incur in operating our business and revenues we will earn in operating our business;

• our liquidity and sufficiency of existing cash;

• the success of our financing plans; and

• the outcome of existing, pending or threatened litigation.

You can identify these and other forward-looking statements by the use of words such as "may", "will", "expects", "anticipates", "believes", "estimates", "continues", or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the heading "Risk Factors". All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

The information contained in this Quarterly Report is as of June 30, 2013, unless expressly stated otherwise.

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