UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended December 31, 2011.

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from ______to _________.

Commission file number: 333-171041

Passionate Pet, Inc.

(Exact name of registrant as specified in its charter)

Nevada		27-4135824
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

27702 Crown Valley Parkway, Suite D-4 #185

Ladera Ranch, CA

92694

(Address of principal executive offices)

(Zip Code)

(949) 851-0777

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

The number of shares outstanding of the Registrant’s Common Stock on February 21, 2012 was 19,565,104.

PASSIONATE PET, INC.

FORM 10-Q

		Page

INDEX

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I. FINANCIAL INFORMATION		2
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	2
	Balance Sheets as of December 31, 2011 and September 30, 2011	3
	Statements of Operations for the Three Months ended December 31, 2011 and 2010	4
	Statements of Cash Flows for the Three Months ended December 31, 2011 and 2010	5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19

PART II. OTHER INFORMATION		20
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 5.	Other Information	20
Item 6.	Exhibits	20

SIGNATURES		21

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Passionate Pet, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

		December 31,			September 30,
		2011			2011
Assets

Current assets:
Cash	$	10,621		$	17,711
Inventories		84,871			103,645
Prepaid expenses		9,120			17,273
Total current assets		104,612			138,629

Property and equipment, net		713,145			747,084

Other assets:
Security deposits		3,138			81,113

Total Assets	$	820,895		$	966,826

Liabilities and Stockholder's (Deficit)

Current liabilities:
Accounts payable	$	743,412		$	557,791
Accrued expenses		42,139			41,398
Accrued expenses, related party		39,956			34,365
Deferred rent obligation		525,374			524,782
Officer loan, related party		279,525			273,525
Current maturities of capital lease obligations payable		7,926			12,394
Short term debts		631,961			643,355
Total current liabilities		2,270,293			2,087,610

Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding		–			–
Common stock, $0.001 par value, 90,000,000 shares authorized; 19,565,104 shares issued and outstanding		19,565			19,565
Additional paid in capital		1,942,350			1,942,350
Accumulated (deficit)		(3,411,313	)		(3,082,699	)
Total Stockholders' Equity (Deficit)		(1,449,398	)		(1,120,784	)

Total Liabilities and Stockholders' Equity (Deficit)	$	820,895		$	966,826

See accompanying notes to financial statements

Passionate Pet, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	For the Three Months
	ended December 31,
	2011			2010
Revenue:
Sales	$	–		$	–

Expenses:
Rent and occupancy costs		121,379			–
General and administrative		1,680			–
Professional fees		17,729			–
Total operating expenses		140,788			–

Net operating (loss)		(140,788	)		–

Loss from continuing operations		(140,788	)		–

Discontinued operations:
Loss from operations of discontinued Irvine component		(187,826	)		(283,566	)

Net (loss)	$	(328,614	)	$	(283,566	)

Basic and fully diluted net (loss) per share:
Basic and fully diluted net (loss) per share from continuing operations	$	(0.01	)	$	–
Basic and fully diluted net (loss) per share from discontinued operations		(0.01	)		(0.02	)
Basic and fully diluted net (loss) per share	$	(0.02	)	$	(0.02	)

Weighted average number of common shares outstanding - basic and fully diluted		19,565,104			18,000,000

See accompanying notes to financial statements

Passionate Pet, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months
	ended December 31,
	2011			2010
Cash flows from operating activities
Net (loss)	$	(328,614	)	$	(283,566	)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Depreciation and amortization expense		33,939			16,056
Decrease (increase) in assets:
Inventories		18,774			(27,011	)
Prepaid expenses		8,153			35,704
Security deposits		77,975			–
Increase (decrease) in liabilities:
Accounts payable		185,621			87,076
Accrued expenses		741			9,464
Accrued expenses, related party		5,591			5,096
Deferred rent obligation		592			17,213
Capital lease obligations payable		(4,468	)		(4,095	)
Net cash used in operating activities		(1,696	)		(144,063	)

Cash flows from financing activities
Proceeds from notes payable		–			525,000
Proceeds from officer loan, related party		6,000			50,000
Repayments on notes payable		(11,394	)		(10,735	)
Net cash provided by (used in) financing activities		(5,394	)		564,265

Net increase (decrease) in cash		(7,090	)		420,202
Cash - beginning		17,711			22,105
Cash - ending	$	10,621		$	442,307

Supplemental disclosures:
Interest paid	$	7,072		$	8,165
Income taxes paid	$	–		$	–

See accompanying notes to financial statements

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the following entities, all of which are under common control and ownership:

Name of Entity	Form of Entity	State of Incorporation	Relationship

Passionate Pet, Inc.	Corporation	Nevada	Parent
Passionate Pet, Inc.	Corporation	California	Subsidiary

The condensed consolidated financial statements herein contain the operations of the wholly owned CA subsidiary that was acquired on September 30, 2010 as each entity is owned beneficially by the same shareholder. All significant inter-company transactions have been eliminated in the preparation of these financial statements.

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.

The Company has adopted a fiscal year end of September 30th.

The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to not make the information presented misleading.

These statements reflect all adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended September 30, 2011 and notes thereto included in the Company's 10-K annual report. The Company follows the same accounting policies in the preparation of interim reports.

Use of Estimates

The preparation of financial statements 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 and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Inventories

Inventories are stated at the lower of cost (average cost) or market (net realizable value) and consist of the following:

	December 31,		September 30,
	2011		2011

Goods available for sale	$	84,871	$	103,645

Inventory items sold are relieved from inventory based on the perpetual average cost method.

No reserve for obsolete inventories has been recognized. The Company’s vendors replace damaged inventory as necessary.

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Property and Equipment

Equipment is recorded at its acquisition cost, which includes the costs to bring the equipment to the condition and location for its intended use, and equipment is depreciated using the straight-line method over the estimated useful life of the related asset as follows:

Furniture and fixtures	7 years
Machinery and equipment	7 years
Software and hardware	5 years
Leasehold improvements	Lease Term
Assets held under capital leases	7 years

Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the useful lives of the assets due to transfer of ownership after the lease term has expired.

Maintenance and repairs will be charged to expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected in operations.

Property and equipment are evaluated for impairment whenever impairment indicators are prevalent. The Company will assess the recoverability of equipment by determining whether the depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the period in which such impairment is determined by management.

Segment Reporting

FASB ASC 280-10-50 requires annual and interim reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources. All of the Company’s stores are considered operating segments, and will be aggregated into one reportable segment given the similarities in economic characteristics among the operations represented by the stores and the common nature of the products, customers and methods of distribution. As of December 31, 2011, we only had one retail store that sold retail and bulk sales of pet supplies, and provide services such as, pet grooming and boarding services. Another retail location has been under renovation and is expected to continue when funds become available.

Fair Value of Financial Instruments

Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no other items that required fair value measurement on a recurring basis.

Revenue Recognition

Sales are recorded when products are delivered to customers and collectability is reasonably assured. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. Estimates for sales returns and other allowances are generated from our review of monthly sales versus subsequent returns, and receipt of payments. Typically, subsequent returns consist of less than 1% of monthly sales. The Company defers any revenue from boarding or grooming services for which the service has not been performed until such time that the Company and the customer jointly determine that the service has been performed or no refund will be required.

Cost of Merchandise Sales and Occupancy Costs

Cost of merchandise sales and occupancy costs includes the following types of expenses: purchase price of inventory sold, including inbound freight charges; shipping and handling costs; inventory shrinkage costs and valuation adjustments; payroll and benefits costs; store occupancy costs, including rent, common area maintenance, property taxes, utilities, insurance, and depreciation of leasehold improvements and capitalized lease assets. Also included in cost of merchandise sales and occupancy costs is certain consideration received from vendors for vendor rebates, allowances and discounts.

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Cost of Services Sales

Cost of services sales includes the following types of expenses: payroll and benefit costs, as well as, professional fees for outsourced groomers and trainers, in addition to other direct costs of the services line of business.

Pre-Opening Costs

Costs incurred in connection with opening new stores are expensed as incurred and are recorded in general and administrative expenses. Such costs include initial store supplies, rent and utilities.

Advertising and Promotion

All costs associated with advertising and promoting products are expensed as incurred. These expenses approximated $-0- and $10,833 for the three months ended December 31, 2011 and 2010, respectively.

Deferred Rent Obligation

The Company has entered into operating lease agreements for its corporate office and retail locations which contain provisions for future rent increases. In accordance with generally accepted accounting principles, the Company records monthly rent expense equal to the total of the payments due over the lease terms, divided by the number of months of the lease terms. The difference between rent expense recorded and the amount paid is credited or charged to “Deferred rent obligation,” which is reflected as a separate line item in the accompanying Balance Sheets.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

Basic and Diluted Loss per Share

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and therefore basic and diluted earnings per share result in the same figure.

Stock-Based Compensation

The Company adopted FASB guidance on stock based compensation upon inception at April 23, 2009. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. There were no share-based payments to employees, or otherwise, for the periods presented.

Uncertain Tax Positions

Effective upon inception at April 23, 2009, the Company adopted new standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions. As of December 31, 2011 the Company had no uncertain tax positions.

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Recently Issued Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which is effective for annual reporting periods beginning after December 15, 2011. ASU 2011-05 will become effective for the Company on October 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material impact on our financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will become effective for the Company on October 1, 2012. We are currently evaluating ASU 2011-04 and have not yet determined the impact that adoption will have on our financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” This amendment explains which modifications constitute troubled debt restructurings (“TDR”). Under the new guidance, the definition of a troubled debt restructuring remains essentially unchanged, and for a loan modification to be considered a TDR, certain basic criteria must still be met. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructuring occurring on or after the beginning of the fiscal year of adoption. The adoption of this ASU did not have a material impact on our financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of supplementary pro forma information for business combinations.” This update changes the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. These changes become effective for the Company beginning October 1, 2011. The adoption of this ASU did not have a material impact on our financial statements.

In December 2010, the FASB issued ASU 2010-28, “Intangible –Goodwill and Other (Topic 350): When to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.” This update requires an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. These changes become effective for the Company beginning October 1, 2011. The adoption of this ASU did not have a material impact on our financial statements.

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 2 – Going Concern

As shown in the accompanying condensed consolidated financial statements, we discontinued our operations in our Irvine location, have incurred recurring losses from operations resulting in an accumulated deficit of ($3,411,313), and as of December 31, 2011, our current liabilities exceeded its current assets by $2,165,681. In addition, we are currently in default on our lease for our only remaining retail location. These factors raise substantial doubt about our ability to continue as a going concern. Management is actively pursuing new ventures to increase revenues. In addition, we are currently seeking additional sources of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 3 – Discontinued Operations

On January 16, 2012, the Company was evicted from its retail and wholesale distribution business unit located in Irvine, California and decided to discontinue its operations in that location. The Company decided to dispose of this business unit primarily because it has incurred significant operating losses in each of the last two years as the operations could not generate enough revenues to satisfy the significant rent and occupancy costs in the last two years. The Company anticipates the disposal of the net assets of this business unit to be completed by March 31, 2012. The loss on disposal of this segment has not yet been determined. A tax benefit was not recorded on this loss due to limitations on current tax recognition. The results of operations from the Irvine business unit have been retrospectively presented as losses from discontinued operations as presented below for the three months ended December 31, 2011 and 2010, respectively:

	For the three months ended
	December 31,
	2011			2010
Revenue:
Sales of services	$	137,547		$	94,219
Discounts on sales of services		(3,029	)		(66	)
Merchandise sales		85,465			102,283
Discounts on merchandise sales		–			(3,002	)
Wholesale sales		–			28,253
Total net revenues		219,983			221,687
Cost of merchandise sales and occupancy costs		274,801			243,614
Cost of services sales		20,775			46,124
Gross (loss)		(75,593	)		(68,051	)

Expenses:
Advertising		25			10,833
General and administrative		16,996			28,681
Professional fees		12,250			97,038
Salaries and wages		66,694			10,417
Total operating expenses		95,965			146,969

Net operating (loss)		(171,558	)		(215,020	)

Other income (expense):
Interest income		–			10
Interest expense and financing costs		(16,268	)		(68,556	)
Total other income (expense)		(16,268	)		(68,546	)

Loss on discontinued operations	$	(187,826	)	$	(283,566	)

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In accordance with Accounting Standard Classification (“ASC”) Subtopic 360-10, Impairment or Disposal of Long-Lived Assets, depreciation on these abandoned assets was determined based on their adjusted useful lives as a change in accounting estimate. Leasehold improvements and equipment surrendered pursuant to the eviction were fully depreciated as of December 31, 2011, and depreciation expense of $22,036 was recognized for the three months ended December 31, 2011.

The carrying value of the assets and liabilities of the discontinued operations were comprised of the following at December 31, 2011 and 2010, respectively:

	2011		2010
Assets of discontinued business unit:
Cash	$	9,732	$	442,307
Inventories		84,871		208,481
Prepaid expenses		4,849		4,873
Property and equipment, net		260,917		409,179
Other assets		3,138		38,535
Total assets	$	363,507	$	1,103,375
Liabilities of discontinued business unit:
Accounts payable	$	465,587	$	210,460
Accrued expenses		82,095		52,797
Deferred rent obligation		355,215		348,894
Officer loan, related party		279,525		256,025
Capital lease obligations payable		7,926		25,229
Short and long term debts		631,961		1,171,565
Total liabilities	$	1,822,309	$	2,064,970

Note 4 – Related Party

From time to time, the Company’s founder and CEO, John Dunn has advanced loans to the Company for operations at an 8% interest rate, due on demand. The principal balances due were $279,525 and $273,525 at December 31, 2011 and September 30, 2011, respectively. In addition, accrued interest of $34,365 and $39,956 existed at December 31, 2011 and September 30, 2011, respectively.

Note 5 – Fair Value of Financial Instruments

The Company adopted FASB ASC 820-10 upon inception at April 23, 2009. Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

Financial assets and liabilities measured at fair value are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

The Company doesn’t have any financial instruments that must be measured under the new fair value standard.

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 6 – Property and Equipment

Property and Equipment consists of the following:

	December 31,			September 30,
	2011			2011

Furniture and fixtures	$	321,836		$	321,836
Machinery and equipment		56,776			56,776
Software and hardware		125,130			125,130
Leasehold improvements		432,540			432,540
Assets held under capital leases		44,962			44,962
		981,244			981,244
Less accumulated depreciation and amortization		(268,099	)		(234,160	)
	$	713,145		$	747,084

Depreciation and amortization expense totaled $33,939 and $16,056 for the three months ended December 31, 2011 and 2010, respectively.

Note 7 – Officer Loan, Related Parties

Officer loan consisted of the following at December 31, 2011 and September 30, 2011, respectively:

	December 31,		September 30,
	2011		2011

Unsecured promissory note to John Dunn, founder and CEO, carries an 8% interest rate, due on demand	$	279,525	$	273,525

The Company recorded interest expense in the amount of $5,591 and $5,096 related to the officer loan for the three months ended December 31, 2011 and 2010, respectively.

Note 8 – Notes Payable

Notes payable consisted of the following at December 31, 2011 and September 30, 2011, respectively:

	December 31,		September 30,
	2011		2011

Small Business Administration (SBA) loan, carries a variable interest rate of 2.75% above prime, secured by all inventory, chattel paper, accounts, equipment, and general intangibles, as well as, a personal guarantee by the CEO, John Dunn, and an assignment of a life insurance policy in the amount of $512,300, maturing on August 26, 2019. Interest only due and payable monthly for the first twelve (12) months (until August 31, 2010), and interest and principal amortized equally over the remaining term of the loan thereafter. Currently in default due to our material adverse change in financial condition related to our discontinued operations on January 16, 2012	$	452,064	$	463,458

Unsecured promissory note, originated on May 11, 2010, carries an 8% interest rate, matured on May 11, 2011 and extended to September 15, 2011. Currently in default		150,000		150,000

Unsecured promissory note, originated on August 18, 2011, carries an 8% interest rate, matured on October 15, 2011. Currently in default		29,897		29,897
Total long term debt		631,961		643,355
Less: current maturities		631,961		643,355
Long term debt	$	–	$	–

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company recorded interest expense on notes payable in the amount of $11,624 and $18,426 for the three months ended December 31, 2011 and 2010, respectively. Interest expense is included in the loss from operations of discontinued Irvine component on the statement of operations as the financing was used to renovate the leased property and maintain the operations in our Irvine retail facility.

Note 9 – Changes in Stockholders’ Equity (Deficit)

The Company has authorized 90,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Common Stock

No shares of common stock or preferred stock were issued during the three months ended December 31, 2011 or 2010, respectively.

Note 10 – Income Taxes

The Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.

As of December 31, 2011, the Company incurred a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. The Company had approximately $3,901,000 and $3,322,000 of federal net operating loss carry forwards at December 31, 2011 and September 30, 2011, respectively. The net operating loss carry forwards, if not utilized, will begin to expire in 2029.

The components of the Company’s deferred tax asset are as follows:

	December 31,			September 30,
	2011			2011
Deferred tax assets:
Net operating loss carry forwards	$	1,365,350		$	1,162,700

Net deferred tax assets before valuation allowance	$	1,365,350		$	1,162,700
Less: Valuation allowance		(1,365,350	)		(1,162,700	)
Net deferred tax assets	$	–		$	–

Based on the available objective evidence, including the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 2011 and September 30, 2011, respectively. The Company had no uncertain tax positions as of December 31, 2011 and 2010.

A reconciliation between the amounts of income tax benefit determined by applying the applicable U.S. and State statutory income tax rate to pre-tax loss is as follows:

	December 31,			September 30,
	2011			2011

Federal and state statutory rate		35	%		35	%
Change in valuation allowance on deferred tax assets		(35	%)		(35	%)

Note 11 – Future Minimum Lease Payments

The Company leases certain equipment under agreements that are classified as capital leases. The cost of equipment under capital leases is included in the Balance Sheets as property and equipment and was $44,962 and $44,962 at December 31, 2011 and September 30, 2011, respectively. Accumulated amortization of the leased equipment at December 31, 2011 and September 30, 2011 was $13,917 and $12,311, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense.

Passionate Pet, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2011, are as follows:

December 31,	Amount

2012	$	8,106
Total minimum payments		8,106
Less amount representing interest		(180	)
Present value of net minimum
lease payments		7,926
Less: Current maturities of
Capital lease obligations		(7,926	)
Long-term capital lease obligations	$	–

We also leased our office space and facility in Irvine, California under a 10-year operating lease expiring October 31, 2019. The lease provided for increases in future minimum annual rental payments based on defined annual increases beginning with monthly payments of $12,389 and culminating in a monthly payment of $35,397 in 2019. The Company is also obligated for related occupancy costs including property taxes, insurance and maintenance. The lease contains provisions for future rent increases, rent free periods, and periods in which rent payments were reduced (abated). The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to “Deferred rent obligation,” in the accompanying Balance Sheets.

The Company was in default on its lease payments for its Irvine location, and entered into an amendment on January 26, 2011 to defer collection of base rents for the six month period from January 1, 2011 through June 30, 2011 until the last six months of the lease from February 1, 2019 through and including July 1, 2019 in exchange for payment of $175,390 of unpaid rents, which were subsequently paid in April of 2011. In addition, the lease was amended to provide the Company a one-time right to early termination upon written notice no later than July 1, 2011 subject to an early termination fee of $1,263,613. This election was not chosen. As of December 31, 2011, the Company owed $289,944 of past due rents, which were included in accounts payable. On January 16, 2012, the Company was evicted from this facility and discontinued the operations from this location for failure to pay our scheduled rents. The loss on disposal of this segment has not yet been determined, and the future minimum lease payment obligations are included in their entirety within the table listed below.

We also entered into a lease on our new facility in development in Mission Viejo, California under a non-cancelable 10.5-year operating lease expiring June 30, 2021. The lease covering 25,000 square feet commenced on February 1, 2011 and ends on June 30, 2021, with annual rents initially of $412,500 in monthly installments of $33,333, increasing by 12% every five years. The Company has the option and right to extend the original term of the lease for two periods of sixty months, commencing on expiration of the original term. Rents were abated until September 1, 2011 while the location is being renovated to accommodate the planned operations. The Company is also obligated for related occupancy costs including property taxes, insurance and maintenance. The lease contains provisions for future rent increases, rent free periods, and periods in which rent payments were reduced (abated). The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to “Deferred rent obligation,” in the accompanying Balance Sheets. We are in default with respect to the terms of the Mission Viejo lease as well, so there can be no assurance that this lease will still be available to us if we do not raise the funds necessary to bring our lease current. We currently still have access to this location and the landlord has not pursued any actions against us, but there can be no assurance that we don’t get evicted from this location as well.

Future minimum lease payments required under operating leases according to our fiscal year-end are as follows:

Year Ending
September 30,	Amount
2012	$	556,982
2013		755,622
2014		769,781
2015		770,961
2016		793,344
Thereafter		3,391,671
	$	7,038,361

Rent expense was $227,362 and $112,945 for the three months ended December 31, 2011 and 2010, respectively.

Note 12 – Commitments and Contingencies

The Company leased its retail and office facility in Irvine, California. As a result of the Company’s default under its debt obligations, as more fully discussed in Notes 3 and 11 to the financial statements, the Company is in default under their lease agreement. The lessor has taken legal action against the Company and filed for, and was awarded, a writ of possession by the court in Orange County, California. As a result, the lessor forced eviction from the premises on January 16, 2012. The Company has recorded the potential liability for all unpaid rents and interest charges, however, we cannot be certain additional costs will not be assessed.

We are in default with respect to the terms of our lease on our new facility in development in Mission Viejo, California under a non-cancelable 10.5-year operating lease expiring June 30, 2021. The lease covering 25,000 square feet commenced on February 1, 2011 and ends on June 30, 2021, with annual rents initially of $412,500 in monthly installments of $33,333, increasing by 12% every five years. We have the option and right to extend the original term of the lease for two periods of sixty months, commencing on expiration of the original term. Rents were abated until September 1, 2011. The Company is also obligated for related occupancy costs including property taxes, insurance and maintenance. The lease contains provisions for future rent increases, rent free periods, and periods in which rent payments were reduced (abated). We are in default with respect to the terms of this lease as well, so there can be no assurance that this lease will still be available to us if we do not raise the funds necessary to bring our lease current. We currently still have access to this location and the landlord has not pursued any actions against us, but there can be no assurance that we don’t get evicted from this location as well if we don’t remedy the default. We have assets with a net book value of $452,228 on our balance sheet as of December 31, 2011 that could be lost if the landlord were to evict us from this property.

The Company is a defendant in a lawsuit, filed by a former lender alleging breach of contract, which seeks damages totaling $166,669 plus interest from September 30, 2011. The Company has recognized the entire $150,000 of principal related to the promissory note currently in default within these financial statements. In addition, we continue to recognize accrued interest on the debt, in the amount of $19,669 as of December 31, 2011.

Note 13 – Subsequent Events

On January 16, 2012, the Company was evicted from its retail and wholesale distribution business unit located in Irvine, California and discontinued its operations in that location. The Company anticipates the disposal of the net assets of this business unit to be completed by March 31, 2012. The loss on disposal of this segment has not yet been determined. A tax benefit was not recorded on this loss due to limitations on current tax recognition. The results of operations from the Irvine business unit have been retrospectively presented as losses from discontinued operations for the three months ended December 31, 2011 and 2010 respectively.

The assets and liabilities of the Irvine facility are comprised of the following at December 31, 2011 and 2010, respectively:

	2011		2010
Assets of discontinued business unit:
Cash	$	9,732	$	442,307
Inventories		584,871		208,481
Prepaid expenses		4,849		4,873
Property and equipment, net		260,917		409,179
Other assets		3,138		38,535
Total assets	$	363,507	$	1,103,375
Liabilities of discontinued business unit:
Accounts payable	$	465,587	$	210,460
Accrued expenses		82,095		52,797
Deferred rent obligation		355,215		348,894
Officer loan, related party		279,525		256,025
Capital lease obligations payable		47,926		25,229
Short and long term debts		631,961		1,171,565
Total liabilities	$	822,309	$	2,064,970

On January 18, 2012 the Company received $32,500 in exchange for an unsecured convertible promissory note that carries an 8% interest rate, matures on October 23, 2012. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty one percent (51%) of the average of the lowest three trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The note carries a 22% interest rate in the event of default.

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

SPECIAL NOTE REGARDING FORWARD–LOOKING STATEMENTS

On one or more occasions, we may make forward-looking statements in this Quarterly Report on Form 10-Q regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. Words or phrases such as “anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,” “will continue” or similar expressions identify forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in our Annual Report on Form 10-K. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the Securities and Exchange Commission on Forms S-1, 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

Unless the context requires otherwise, references to “we,” “us,” “our,” and the “Company” refer specifically to Passionate Pet, Inc.

Overview and Outlook

We operated a retail pet store which offered a combination of premium pet food and supplies. Our retail operations carried products that included pet grooming, pet day care, pet food, toys, novelty items, and books. We offered customers a full range of assorted pet related products at competitive prices. We have incurred operating losses since inception on April 23, 2009. On January 16, 2012, our lessor evicted us from our offices and retail store in Irvine, California. Our revenues could no longer support our extensive occupancy costs and we decided to discontinue operations in our one operating location. We plan to move our offices to the Mission Viejo, California store once resources become available to continue renovation of the leased facility. We are in default with respect to the terms of the Mission Viejo lease as well, however, so there can be no assurance that this lease will still be available to us if we do not raise the funds necessary to bring our lease current.

We expect to continue to incur losses for at least the next twelve months. We do not expect to generate revenue that is sufficient to cover our expenses, and we do not have sufficient cash and cash equivalents to execute our plan of operations for at least the next twelve months. We will need to obtain additional financing to conduct our day-to-day operations, and to fully execute our business plan. We plan to raise the capital necessary to fund our business through the sale of equity securities or debt financing.

Results of Operations for the Three Months Ended December 31, 2011 and 2010:

The following tables and narrative discussion set forth key components of our results of operations for the period indicated, in dollars, and key components of our income and expenses for the period indicated, in dollars. Our subsequent discontinued operations on January 16, 2012 necessitated that we present our historical operations related to those operations as a single line item within the statement of operations. The following discussion of our results of operations is based on our continuing operations and, therefore, excludes any results or discussion of our discontinued operation.

	For the Three			For the Three
	Months Ended			Months Ended		Increase /
	December 31, 2011			December 31, 2010		(Decrease)
Revenue:	$	–		$	–	$	–

Expenses:
Rent and occupancy costs		121,379			–		121,379
General and administrative		1,680			–		1,680
Professional fees		17,729			–		17,729
Total operating expenses		140,788			–		140,788

Net operating (loss)		(140,788	)		–		140,788

Loss from continuing operations	$	(140,788	)	$	–	$	140,788

Revenues:

We only operated one retail store through December 31, 2011, which was subsequently closed on January 16, 2012 pursuant to the eviction notice from our landlord. As such, there were no comparative revenues from continued operations to present during the three months ended December 31, 2011 and 2010, and historical revenues from discontinued operations are no longer meaningful.

Expenses:

Due to the discontinued operations of our single retail location, there were no comparative expenses from continued operations to present during the three months ended December 31, 2010. The expenses incurred from continued operations for the three months ended December 31, 2011 relate entirely to expenses incurred in the development of a second retail location in Mission Viejo, California and the support of our corporate structure as a public company.

Rent and occupancy costs:

Rent and occupancy costs were $121,379 for the three months ended December 31, 2011 as incurred under a non-cancelable 10.5-year operating lease on our new facility in development in Mission Viejo, California expiring June 30, 2021. The lease, covering 25,000 square feet commenced on February 1, 2011 and ends on June 30, 2021, with annual rents initially of $412,500 in monthly installments of $33,333, increasing by 12% every five years. Rents were abated until September 1, 2011 while the location is being renovated to accommodate the planned operations. We are also obligated for related occupancy costs including property taxes, insurance and maintenance. The lease contains provisions for future rent increases, rent free periods, and periods in which rent payments were reduced (abated). The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to “Deferred rent obligation,” in the accompanying Balance Sheets.

General and administrative:

General and administrative expenses were $1,680 for the three months ended December 31, 2011, consisting of approximately $1,000 of stock services and filing fees, $550 of license and registration costs, and $130 of bank charges.

Professional fees:

Professional fees were $17,729 for the three months ended December 31, 2011, comprised of legal and accounting fees.

Net operating loss:

Net operating loss for the three months ended December 31, 2011 was $140,788 or $(0.01) per share.

Net loss from continued operations:

The net loss from continued operations for the three months ended December 31, 2011 was $140,788 or $(0.01) per share. Net loss from continued operations consisted primarily of rent and occupancy costs incurred from a lease on our new facility in development in Mission Viejo, California under a non-cancelable 10.5-year operating lease and professional fees.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes total assets, accumulated deficit, stockholders’ equity and working capital at December 31, 2011 compared to September 30, 2011.

	December 31, 2011			September 30, 2011
Total Assets	$	820,895		$	966,826

Accumulated (Deficit)	$	(3,411,313	)	$	(3,082,699	)

Stockholders’ Equity (Deficit)	$	(1,449,398	)	$	(1,120,784	)

Working Capital (Deficit)	$	(2,165,681	)	$	(1,948,981	)

While we have raised capital to meet our working capital and financing needs in the past, additional financing will be required in order to meet our current and projected cash requirements for the operation of our premium pet food and supply stores. As of December 31, 2011, we had a working capital (deficit) of ($2,165,681).

Our principal source of operating capital has been provided from private sales of our common stock, revenues from operations, and, debt financings. During the three months ended December 31, 2011 we received proceeds of $6,000 on short term loans from our CEO, John Dunn. We utilized these funds to pay a legal invoice to our former securities attorney. We do not have sufficient funds to finance our operations at their current level for the next twelve months.

We anticipate that we may incur operating losses in the next twelve months. Our revenues are not expected to exceed our investment and operating costs in the next twelve months. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of operations. To address these risks, we must, among other things, seek growth opportunities through investment and acquisitions in the pet supply industry, effectively monitor and manage our claims for payments that are owed to us, implement and successfully execute our business strategy, respond to competitive developments, and attract, retain and motivate qualified personnel. We cannot assure that we will be successful in addressing such risks, and the failure to do so could have a material adverse effect on our business prospects, financial condition and results of operations.

Satisfaction of our cash obligations for the next 12 months.

As of December 31, 2011, our balance of cash on hand was $10,621. Our plan for satisfying our cash requirements for the next twelve months is through sale of shares of our common stock, third party financing, and/or traditional bank financing.

Summary of product and research and development that we will perform for the term of our plan.

We are not anticipating significant research and development expenditures in the near future.

Expected purchase or sale of plant and significant equipment.

We anticipate the purchase of significant property and equipment as funds become available to complete renovations on a retail store leased in Mission Viejo, CA. We estimate that an additional $750,000 will be required to complete the leasehold improvements to the facility and open the door to the general public. Renovation has currently been halted.

Significant changes in the number of employees.

As of December 31, 2011, we had fifteen employees, in addition to our chief executive officer, John Dunn. We subsequently laid off all fifteen of these employees when we were evicted from our Irvine location on January 16, 2012. We intend to re-hire some of these employees and hire additional employees if we are able to open a new retail store leased in Mission Viejo, CA. Currently, there are no organized labor agreements or union agreements and we do not anticipate any in the future.

Assuming we are able to expand our premium pet service and supply stores, we may need to hire additional officers. In the interim, we intend to use the services of independent consultants and contractors to perform various professional services when appropriate. We believe the use of third-party service providers may enhance our ability to control general and administrative expenses and operate efficiently.

Off-Balance Sheet Arrangements

None

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial conditions and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements required us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.

While our significant accounting policies are more fully described in notes to our financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we used in the preparation of our financial statements.

Deferred Rent Obligation

Stock-Based Compensation

We have accounted for stock-based compensation under the provisions of FASB Accounting Standards Codification (ASC) 718-10-55 (Prior authoritative literature: FASB Statement 123(R), Share-Based Payment). This statement requires us to record any expense associated with the fair value of stock-based compensation. We used the Black-Scholes option valuation model to calculate stock based compensation at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimate.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our CEO, John Dunn, carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(c) and 15d – 15(e)). Based upon that evaluation, our principal executive officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, Mr. Dunn concluded that our disclosure controls and procedures are not effective in timely alerting him to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings and ensuring that information required to be disclosed by us in the reports we file or submit under the Act is accumulated and communicated to our management, including our chief financial officer, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure, for the following reasons:

·	The Company does not have an independent board of directors or audit committee or adequate segregation of duties.

·	We do not have an independent body to oversee our internal controls over financial reporting and lack segregation of duties due to the limited nature and resources of the Company.

Inherent Limitations of Internal Controls

Our Principal Executive Officer does not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, other than those stated above, during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, 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.

On or about October 4, 2011, we and our Chief Executive Officer, John J. Dunn, were served with a Complaint that had been filed with the Superior Court of the State of California, County of Orange, Central Justice Center – General Civil, by Bruce Renner and Cathy Renner as Plaintiffs for: (1) Breach of Written Contract; (2) Fraud; (3) Money Had and Received; and (4) Common Counts seeking damages of approximately $166,167. The Answer to this Complaint was due and filed on November 3, 2011. We have recognized the entire $150,000 of principal related to the promissory note currently in default within these financial statements. In addition, we continue to recognize accrued interest on the debt, in the amount of $19,669 as of December 31, 2011.

We leased our retail and office facility in Irvine, California. However, we are in default under the lease agreement. The lessor has taken legal action against us and filed for, and was awarded, a writ of possession by the court in Orange County, California. As a result, the lessor forced eviction from the premises on January 16, 2012. We recorded the potential liability for all unpaid rents and interest charges, and additional costs may be assessed.

Item 1A. Risk Factors

Not applicable

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

None.

Item 3. Defaults Upon Senior Securities

None

Item 5. Other Information

None

Item 6. Exhibits

31.1		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS		XBRL Instance Document.*

101.SCH		XBRL Schema Document.*

101.CAL		XBRL Calculation Linkbase Document.*

101.DEF		XBRL Definition Linkbase Document.*

101.LAB		XBRL Labels Linkbase Document

101.PRE		XBRL Presentation Linkbase Document.*

* Filed herewith.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 21, 2012

Passionate Pet, Inc.

/s/ John Dunn

John Dunn

Chief Executive Officer

(Principal Executive Officer and Principal Financial Officer)

Passionate Pet, Inc. 10-Q