Pazoo, Inc. - Annual Report: 2016 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

________________________

 

Form 10-K

________________________

 

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2016

OR 

 

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

 

For the transition period from ________________ to ________________  

 

Commission File No. 333-178037

 

 PAZOO, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		27-3984713
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
23 Vreeland Rd, Suite 110 Florham Park, NJ		07932
(Address of Principal Executive Offices)		(Zip Code)

(973) 884-0136

(Registrant's Telephone Number, Including Area Code)

 

 

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

  Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§230.405 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 ☒  No ☐

 

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

	Large accelerated filer	☐	Accelerated filer	☐
	Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☒

 

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

 

2,627,589,893 shares of common stock, par value $0.001 per share, outstanding as of April 21, 2017.  

 

 

 

 

Table of Contents

 

 

	Page
PART I	3
Item 1. Business	3
Item 1A. Risk Factors	7
Item 1B. Unresolved Staff Comments	11
Item 2. Properties	11
Item 3. Legal Proceedings	11
Item 4. Mine Safety Disclosures	11
PART II	12
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6. Selected Consolidated Financial Data	12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation	12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	16
Item 8. Consolidated Financial Statements and Supplementary Data	16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	37
Item 9A. Controls and Procedures	37
Item 9B. Other Information	37
PART III	38
Item 10. Directors, Executive Officers and Corporate Governance.	38
Item 11.  Executive Compensation	40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	41
Item 13. Certain Relationships and Related Transactions, and Director Independence.	42
Item 14. Principal Accounting Fees and Services	43
PART IV	44
Item 15. Exhibits and Financial Statement Schedules	44

 

 

 

 

 

 

PART I

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to, statements regarding: our core strategy; the growth of the marijuana testing market; liquidity; free cash flows; revenues; net income; legal costs; operating cash flows; stock price volatility; timing of facilities construction; nature of our licensing agreements; future governmental regulation; obtaining additional capital; significance of future contractual obligations; domestic expansion. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included throughout this filing and particularly in Item 1A: "Risk Factors" section set forth in this Annual Report on Form 10-K. Forward-looking statements include those that use forward-looking terminology, such as the words "anticipate," "believe," "estimate," "expect," "intend," "may." "project," "plan," ''will,'' "shall," "should," and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to revise or publicly release any revision to any such forward-looking statement, except as may otherwise be required by law.

 

Item 1.  Business

 

Organization

 

On March 30, 2016, the Company effectuated its Definitive 14C filing through FINRA resulting in a reverse split to the common stock of a ratio of 100:1. All fractional shares were rounded up. The total amount authorized and all Preferred shareholders were unaffected by the reverse split. The impact of this reverse stock split has been retroactively applied to the financial statements and the related notes.

 

Our Company

 

 

●           Pharmaceutical Testing Facilities.   We entered this arena through our acquisition of a 100% equity stake in MA & Associates, LLC in order to set up two testing locations.   MA & Associates, LLC was launched in September of 2013 to provide quality control services to the medical cannabis industry. MA & Associates, LLC's primary mission is to protect the public health by providing infrastructure and analytical services to legally authorized distributors and producers of cannabis and to regulators tracking their operations.

The company will provide the medical cannabis industry guidelines on how the regulation and inspection by public health authorities is to be implemented.  MA & Associates, LLC's primary customer base includes all of the licensed cannabis cultivators, in the State of Nevada, who are required by law to have their products tested before they can be transferred to the dispensaries.  Furthermore, we have acquired all of the Membership interest in Harris Lee Holdings, LLC. Harris Lee was set up to take the MA model and testing operations to additional states above and beyond Nevada either in direct testing laboratories or through licensing the testing protocol. As such, we are in a unique position to provide the mandated health and safety testing in this burgeoning industry.  Lastly, Harris Lee Holdings, LLC, due to Colorado residency requirements, entered into an advisory agreement with Harris Lee Colorado, LLC, Harris Lee Holdings, LLC has sub-licensed the testing protocols to Harris Lee Colorado, LLC in exchange for a management fee for each test conducted.  The Colorado MED approved the transfer of management of an existing laboratory, operating as Steep Hill Colorado, to Harris Lee Colorado, LLC (a related party) and Harris Lee Holdings, LLC has derived management fees from Harris Lee Colorado, LLC in the year ending December 31, 2016.  All 2016 revenue was derived from these related-party management fees for the year ended December 31, 2016. However, because of the failure to transfer the MED license to Harris Lee Colorado, LLC, the Denver laboratory was closed by the end 2016. Currently, operations have not come back online and the Company is concentrating its focus on MA & Associates, LLC in Nevada.

 

Pazoo.com has a unique and compelling online marketing platform. Pazoo.com offers the following important marketing advantages to its target audiences:

 

1.

A comprehensive solution as a content source – information on a full spectrum of disciplines within the health and wellness marketplace;

2.

Health and wellness experts that have expertise in these varied disciplines and write about their areas expertise; and

3.

Content that is both for the health and wellness of people as well as their pets (over 50% of American homes have pets).

4.

Content in the Health and Wellness sector of cannabis.  To empower users to read and learn about the benefits and the need for the testing of the cannabis plant.

 

Growth Strategy

 

We plan to grow our assets and earnings per share by employing the following business strategies:

●           Opportunistically Pursue Strategic Acquisitions.   We plan to selectively pursue strategic, investments in, or acquisitions of, companies (like MA & Associates, LLC and Harris Lee Holdings, LLC) and assets that are complementary to our existing lines of business. We believe that our existing management platform can support more assets without significant increases to our infrastructure due to the scalable nature of our operations.

 

●           Expand Our Foot Print in the Pharmaceutical Testing Arena. Through the acquisition and formation of MA & Associates, LLC and Harris Lee Holdings, LLC, Pazoo has entered the business of pharmaceutical testing of cannabis products.  MA & Associates, LLC has obtained a license from the State of Nevada to operate a cannabis testing laboratory. Harris Lee Holdings, LLC, due to Colorado residency requirements, entered into an advisory agreement with Harris Lee Holdings, LLC cannot meet, Harris Lee Holdings, LLC has sub-licensed the testing protocols to Harris Lee Colorado, LLC in exchange for a testing fee for each test conducted.  The Colorado MED approved the transfer of management of an existing laboratory, operating as Steep Hill Colorado, to Harris Lee Colorado, LLC (a related party) and Harris Lee Holdings, LLC has derived testing revenue from Harris Lee Colorado, LLC in the year ending December 31, 2016.  However, because of the failure to transfer the MED license to Harris Lee Colorado, LLC, the Denver laboratory was closed by the end of 2016.

 

●           Grow Secondary Revenue Streams. Pazoo is a health and wellness company with a strategy of growing revenues through a number of sources. From our inception, the strategy has been to be an integrated health and wellness company offering quality products and services in many lines of business which include the following:

 

 

1.

Advertising revenue through more traditional media outlets, such as television and radio. The internet has given direct response an inexpensive, effective way to test a direct response offer in terms of the product itself, the pricing of that product, the messaging associated with that product and the target audience. Limited, focused, pay per click (PPC) campaigns can be effectively executed for a fraction of broadcast costs. If a test campaign can successfully determine the elements for a profitable PPC, on line campaigns can be rolled out leading to testing for traditional media outlets such as television, radio and print. Once the consulting business has enough transactions, visibility and awareness, Pazoo can put on a forum which would be marketed using the Pazoo brand which will have substantial awareness, promoted through the pazoo.com web site and existing partnerships, and feature our own Experts. By rolling out this division in the aforementioned manner, Pazoo will be effectively able to introduce this service without exposing itself to some of the risks that others are exposed to when they enter the public forum business. During 2016, no revenue was derived from these services.

2.

Consulting services featuring our experts. Generally, our Experts regularly advise consumers and/or companies on matters related to each Expert's specific discipline. At some point in the future, it would be a natural extension of our relationship with the Experts to find them "for pay" consulting engagements. The consulting engagement could be in the form of working with a person one-on-one or advising a small or large group in a forum or presentation.  For Pazoo, this would be a natural extension of our relationship with our Experts (which is already provided for in their contracts with Pazoo). Additionally, with the size of the Pazoo.com audience we have a built in solicitation vehicle for our Experts' services. Additionally, the Pazoo management is regularly meeting with potential customers for consulting services. The attractive part of this additional revenue stream is that the risk is minimal because there is not meaningful overhead attached to it as a startup opportunity. And, Pazoo only has to pay the Experts when it gets paid.  During 2016, no revenue was derived from these services.

3.

Pazoo branded events like forums and conventions. As a further extension to our consulting business, Pazoo will put on its own health and wellness forums. Pazoo will continue to sell health and wellness products through their website www.pazoo.com as well as their subsidiary CK Distribution, LLC.

 

Marketing and Promotion

 

To achieve our marketing goal and objective of being the leading provider of pharmaceutical testing, health and wellness content, services and products, our marketing strategy has focused on the following:

 

●           Increase testing revenue through sales employees and independent sales representatives;

●           Strengthen the Pazoo.com brand name;

●           Continue to build strong customer loyalty

  

We have and will utilize a variety of marketing tools to increase testing revenue and traffic on pazoo.com and awareness about the Pazoo brand name and www.pazoo.com.  These marketing tools include the following:

 

Sales and Employee Agents

 

●

Hire dedicated sales employees to drive testing sales to the laboratories in Nevada;

●

Contract with independent sales agents, on a commission basis, employees to drive testing sales to the laboratories in Nevada.

On-Line Marketing

 

●           Search Engine Optimization (SEO)

●           Social media (Facebook, Twitter, Instagram, YouTube)

 

Brick and Mortar Marketing and Promotion

 

●           Take advantage of market relationships from suppliers and retailers

●           Take advantage of combined sales efficiencies from online as well as off-line

●           Build strong relationships with suppliers from both a sales standpoint as well as a promotional standpoint

To achieve our marketing goal and objective of being a leader in the cannabis laboratory testing industry our marketing strategy has focused on the following:

 

●

Promote through business to business direct sales and have our lab managers and directors conduct direct sales calls as well as in person appointments and networking events;

●

Promote laboratory testing and educational cannabis information on the Pazoo.com website;

●

Promote through an array of media outlets including social media, online interviews and articles, and newspaper and magazine interviews and articles; and

●

Routinely provide tours of the labs to potential new clients to introduce them to the company and answer any questions they might have.

 

 

Industry Trends

 

●           Steady and Rapid Growth in Online Advertising. Over the past decade in particular, the internet has changed the landscape of how we share and obtain information.  More and more businesses are realizing the power of an online presence and are taking their businesses to the internet for marketing, brand recognition, and sales.  The industry trend for 2017 is that online advertising and online marketing will continue to increase and permeate aspects of both business and personal life.  Specifically, content marketing will continue to increase. Specifically, the diversification of online social media platforms and marketing is now a crucial trend in the industry. By consistently creating and disseminating content through an array of online channels, businesses are reaching consumers and retaining consumer bases in a whole new way.  Further, Social Media will continue to be a powerful driving force in online advertising, marketing, and branding. Mobile content will be increasingly necessary and important.  Due to the ever expanding use of smartphones and mobile devices, consumers are spending more time searching and purchasing products and information on their handheld devices than ever before.  In addition, due to our emergence in the cannabis sector in 2015, the website will be re-branded to properly display our diversity in the health and wellness sector.

 

The marijuana testing industry will continue to increase as it is just in its infancy.  The following States have enacted some form of medical marijuana laws: Alaska, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Oregon, Ohio, Rhode Island, Vermont, Washington, and the District of Columbia. The following States have legalized the recreational use of marijuana: Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington. Of the States that have enacted some form of medical marijuana laws, the following have enacted marijuana testing or sampling requirements: Alaska, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, New York, Oregon, Vermont, and Washington. The State of Georgia does not allow for dispensaries or cultivation, and only permits the medicinal use of a low dose of cannabis oil, therefore the State has not enacted marijuana testing requirements.

Competition

●           Pharmaceutical Testing.  Inasmuch as this industry is in its infancy, it is clear that there is currently competition and if the industry goes as we anticipate it will, new entrants to the market will be inevitable.  However, there are certain barriers to entry which clearly benefit Pazoo.  For example:

1.

Cost of establishing a testing laboratory.  The cost to setting up a fully operational laboratory, depending on the variety and number of tests the laboratory can do, can range for $500,000 to $2,000,000.  Pazoo has the advantage of going through this process with MA & Associates, LLC and had built relationships with equipment suppliers for the lease and/or purchase of the equipment needed to run a laboratory.

2.

The Need for a Proven Set of Testing protocols.  Nevada boasts the most stringent testing laws in the nation and we are developing our own standard testing protocols by which to operate in this state and subsequently in other states in the future.

3.

Limited Number of Licenses to be Issued.  Each state has its own regulations for the licensing of testing laboratories.   Many states, such as Nevada, limit the number of licenses which may be issued.  Accordingly, if the maximum number of licenses has been issued, there would be a complete bar to the entry of new competitors.

●           Health & Wellness Websites.  Pazoo.com is a site for people who want to live a healthy life and also want the same for their pets.  Based on our market research, we have not identified other web sites that offer our dual health and wellness offerings, catering to the health of people and pets.

 

There are indirect competitors, which offer medical advice such as WebMD. However, these sites have, in relative terms, a narrow focus on medical issues and don't focus on the broader area of health and wellness. We are not looking to be an in depth resource about a specific ailment or condition, which is the main focus for WebMD and other similar sites. In effect, we are not competing with those sites per se, because if you want specific information on a specific ailment or condition a consumer will perform internet searches and end up at sites such as WebMD.

 

People Focused.  We are about living a healthy and happy lifestyle which includes making sure that a visitor has the proper health and wellness experts involved in their lives when professionals are needed. On the people side we are looking for the same audience as Health.com, Shape.com, EveryDayHealth.com, etc., which are very informative sites. These sites primarily focus on diets and exercise. While Pazoo does provide content related to diets and exercise, we go beyond that offering a comprehensive look at health and wellness by going to areas like military health and wellness. We not only have professional writers addressing these issues but we have our Pazoo experts discussing these issues. In another words, we go outside the narrow focus that other sites have, utilizing our own Experts as well as professional writers.

 

 

Pet Focused.  We compete with websites in the pet owner space. These sites are usually more narrowly focused than Pazoo's approach to a broad view of the Pet world. Most pet sites are for shopping (Petco.com) or a specific area like adoption/rescue, etc. (Breeders.net, Dogfriendly.com -- travel advice). We take a broad view, providing an ongoing experience to learn more about a lot of different areas in the pet world. So, if a visitor is a pet lover (over 60% of American homes have pets) then this visitor can go to pazoo.com and find a wide array of topics and new information.

●           E-Commerce.  The online commerce market is rapidly evolving and intensely competitive, and we expect the competition to intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost. In addition, the health improvement industry is intensely competitive. We currently or potentially compete with a variety of other companies. These competitors include:

 

1.

Direct competitors that specialize in or derive a substantial portion of their revenues from online retail and direct marketing of health and wellness products, including Vitacost;

2.

Various nutrition centers and vendors of other health related products such as sports nutrition, diet or other wellness products, including General Nutrition Centers; and

3.

Online vendors of dietary supplements, vitamins, minerals and herbs, with significant brand awareness, sales volume and customer bases, such as and VitaminShoppe.

 

We believe that the principal competitive factors in our market are brand recognition, selection, convenience, price, accessibility, customer service, and speed of order fulfillment. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than Pazoo. In addition, online retailers may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies as use of the Internet and other online services increases. Some of our competitors may be able to secure merchandise from vendors on terms that are more favorable, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to website and systems development than our company. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. There can be no assurance that we will be able to compete successfully against current and future competitors, and competitive pressures faced by us may have a material adverse effect on our financial condition, operational results, business, and prospects.  Furthermore, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on our financial condition, operational results, business, and prospects.

Item 1A.  Risk Factors

General Risks Relating to the our Business

 

We have only a limited operating history. We have had only limited sales and revenue during our operating history. We have never been profitable. We cannot therefore forecast with any accuracy the results of operations for the next fiscal year, nor predict our need for cash. Our revenues may not grow as anticipated, and revenues are dependent on consumer acceptance of our products and services and website, our ability to market our products and services and website, the effect of competition, and general economic factors beyond our control.

 

Regulation of Pharmaceutical Testing Facilities.  There are stringent regulatory risks and guidelines.  The risk factors set forth below relate to risks related to testing facilities in the State of Nevada, where MA & Associates, LLC has been granted a State license as a testing facility.  

 

1.

Local Regulatory Risk.  The primary local regulatory risk faced by medical marijuana facilities is that of the local municipality enacting a moratorium on the issuance of business licenses.  Some of the local municipalities have gone back and forth regarding whether and what categories of medical marijuana facilities they will allow in their jurisdiction.  Municipalities from the City of Henderson to the City of North Las Vegas have vacillated between a full moratorium, a moratorium on dispensaries only, and no moratorium at all.

2.

State Regulatory Risk.  On November 7th, 2000, 65% of Nevada voters passed 'Question 9' which went into effect October 1st, 2001. Question 9 amended the States' constitution recognizing the medical use of marijuana and removing the state-level criminal penalties for the use, possession and cultivation of marijuana by qualified patients.  Nevada marijuana laws allow the legal use of medical marijuana by a patient with 'written documentation' and a 'registry identification card'. The will of the people was codified in Nevada Revised Statute 453A. Despite the fact that the people of the State of Nevada expressed their wish to legalize medical marijuana in 2000, NRS 453A was not fully adopted until April 1, 2014.

 

 

3.

Federal Regulatory Risk.  Due to the current federal laws prohibiting the use of cannabis for any reason, medical or non-medical, the regulatory risks associated with federal enforcement of the Controlled Substances Act are the most serious threat to the medical marijuana industry as a whole.  Fortunately, the U.S. Department of Justice (USDOJ) thus far has taken a stance on the matter that it will enforce the law to prevent sales to minors, sales by criminal enterprises or gangs, interstate commercial trade of medical marijuana, and medical marijuana as a pretext for trafficking other controlled substances.  The USDOJ has specifically declared that it will leave all other enforcement to the States to enforce as they see fit and in compliance with their own State laws.  There is no guaranty that this policy of limited enforce by the USDOJ will continue in the future.  Strict enforcement of the Controlled Substances Act could have a crippling effect on the marijuana industry.  During the Presidential campaign, President Donald Trump stated he would seek to enforce the federal law.  In recent pronouncements, United States Attorney General Jeff Sessions said that enforcement of Federal Law in this area is a distinct possibility and would be a change over the policies of the previous administration.  Additionally, because of the uncertainly in the future outcome of federal enforcement, many conventional lenders and banking institutions are reluctant to make large investments, or create banking and clearing relationships in this industry.

  

Federal regulation and enforcement may adversely affect the implementation of medical marijuana laws and regulations may negatively impact our revenues and profits.  Currently, there are 24 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the Controlled Substance Act (the "CSA"), the policies and regulations of the Federal government and its agencies are that cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited. Unless and until Congress amends the CSA with respect to medical marijuana, as to the timing or scope of any such potential amendments there can be no assurance, there is a risk that federal authorities may enforce current federal law, and we may be deemed to be possession of  marijuana in violation of federal law with respect to MA & Associates, LLC's business operations or we may be deemed to be facilitating the selling or distribution, or aiding and abetting the selling or distribution, of drug paraphernalia in violation of federal law with respect to CK Distribution's  business operations. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect our revenues and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings and stated federal policy remains uncertain.

 

The U.S. Supreme Court declined to hear a case brought by San Diego County, California that sought to establish federal preemption over state medical marijuana laws. The preemption claim was rejected by every court that reviewed the case. The California 4th District Court of Appeals wrote in its unanimous ruling, "Congress does not have the authority to compel the states to direct their law enforcement personnel to enforce federal laws." However, in another case, the U.S. Supreme Court held that, as long as the CSA contains prohibitions against marijuana, under the Commerce Clause of the United States Constitution, the United States may criminalize the production and use of homegrown cannabis even where states approve its use for medical purposes.

 

In an effort to provide guidance to federal law enforcement, the Department of Justice (the "DOJ") has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum provides that the DOJ is committed to the enforcement of the CSA, but, the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent and rational way.

 

The August 29, 2013 memorandum provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession in small amounts.

 

The memorandum sets forth certain enforcement priorities that are important to the federal government:

 

●

Distribution of marijuana to children;

●

Revenue from the sale of marijuana going to criminals;

●

Diversion of medical marijuana from states where it is legal to states where it is not;

●

Using state authorized marijuana activity as a pretext of other illegal drug activity;

●

Preventing violence in the cultivation and distribution of marijuana;

●

Preventing drugged driving;

●

Growing marijuana on federal property; and

●

Preventing possession or use of marijuana on federal property.

 

The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits.

 

 

We could be found to be violating laws related to medical cannabis.  The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings and stated federal policy remains uncertain. Because we do not currently cultivate, produce, sell or distribute any medical marijuana, but we do test marijuana for growers and dispensaries and may be deemed to facilitate the selling or distribution of medical marijuana in violation of federal law. Also, CK Distribution, LLC intends to sell hydroponic and other equipment to marijuana growers. Should it be determined under the CSA that our products or equipment are deemed to fall under the definition of drug paraphernalia because our products could be determined to be primarily intended or designed for use in manufacturing or producing cannabis, we could be found to be in violation of federal drug paraphernalia laws and there may be a direct and adverse effect on our business and our revenues and profits.

 

Variations in state and local regulation and enforcement in states that have legalized medical cannabis that may restrict marijuana-related activities, including activities related to medical cannabis may negatively impact our revenues and profits.  Individual state laws do not always conform to the federal standard or to other states laws. A number of states have decriminalized marijuana to varying degrees, other states have created exemptions specifically for medical cannabis, and several have both decriminalization and medical laws. Eight states, Alaska, California, Colorado, Maine, Massachusetts, Nevada,  Oregon, and Washington, have legalized the recreational use of cannabis. Variations exist among states that have legalized, decriminalized or created medical marijuana exemptions. For example, Alaska and Colorado have limits on the number of marijuana plants that can be homegrown. In most states, the cultivation of marijuana for personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical marijuana needing care or that person's caregiver. Active enforcement of state laws that prohibit personal cultivation of marijuana may indirectly and adversely affect our business and our revenue and profits.

 

Marijuana remains illegal under Federal law.  Marijuana is a schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our inability to proceed with our business plan.

 

Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed operations.  Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of our business plan and result in a material adverse effect on certain aspects of our planned operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to certain aspects of our proposed medical marijuana businesses. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

We may not obtain the necessary permits and authorizations to operate our marijuana businesses.  We may not be able to obtain or maintain the necessary licenses, permits, authorizations or accreditations, or may only be able to do so at great cost, to operate our marijuana testing businesses. In addition, we may not be able to comply fully with the wide variety of laws and regulations applicable to the marijuana industry. Failure to comply with or to obtain the necessary licenses, permits, authorizations or accreditations could result in restrictions on our ability to operate our marijuana businesses, which could have a material adverse effect on our business.

 

If we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.  Our participation in the marijuana industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local governmental authorities against these subsidiaries. Litigation, complaints, and enforcement actions involving these subsidiaries could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability, and growth prospects. As our subsidiaries are in various stages of the process of applying for licenses to test marijuana in Nevada and Oregon, and are not as such presently engaged in the testing of marijuana, our subsidiaries have not been, and are not currently, subject to any material litigation, complaint or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental authority.

 

We may have difficulty accessing the service of banks, which may make it difficult for us to operate.  Since the use of marijuana is illegal under federal law, there is a strong argument that banks cannot accept for deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. The inability to open bank accounts may make it difficult for us to operate our contemplated marijuana businesses.

There is only a limited public trading market for the common stock.  Investors may not be able to resell their common stock or stock underlying convertible debt, warrants and/or preferred stock, if at all, and thus could lose all or part of their investment. The common stock is listed on the OTC Bulletin Board under the symbol PZOO. Listing on the OTC Bulletin Board does not constitute any endorsement or approval of a listed company or its securities, and the OTC Bulletin Board does not review or monitor an issuer's activities.   Our common stock is a "penny stock" (as defined in Exchange Act Rule 3a-51) which means that brokers can only buy or sell the common stock on an unsolicited basis. The penny stock rule and similar regulations will reduce the likelihood that a liquid trading market will arise for the common stock. The common stock may trade at less than the offering price. Because our stock is a "penny stock" a shareholder may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, Pazoo's common stock.

 

 

In the absence of a security being quoted on NASDAQ, or the Company having $2,000,000 in net tangible assets, trading in the Common Stock is covered by Rule 15c2-6 promulgated under the Securities Exchange Act of 1934 for non-NASDAQ and non-exchange listed securities.  Under such rule, broker/dealers who recommend such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with their spouse) must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale.  Securities are also exempt from this rule if the market price is at least $5.00 per share, or for warrants, if the warrants have an exercise price of at least $5.00 per share.

The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosures related to the market for penny stocks and for trades in any stock defined as a penny stock.  The Commission's regulations under such Act define a penny stock to be any NASDAQ or non-NASDAQ equity security that has a market price or exercise price of less than $5.00 per share and allow for the enforcement against violators of the proposed rules.  In addition, unless exempt, the rules require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule prepared by the Commission explaining important concepts involving the penny stock market, the nature of such market, terms used in such market, the broker/dealer's duties to the customer, a toll-free telephone number for inquiries about the broker/dealer's disciplinary history, and the customer's rights and remedies in case of fraud or abuse in the sale.  Disclosure also must be made about commissions payable to both the broker/dealer and the registered representative, current quotations for the securities, and if the broker/dealer is the sole market-maker, the broker/dealer must disclose this fact and its control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

While many NASDAQ stocks are covered by the proposed definition of penny stock, transactions in NASDAQ stock are exempt from all but the sole market-maker provision for (i) issuers who have $2,000,000 in tangible assets ($5,000,000 if the issuer has not been in continuous operation for three years), (ii) transactions in which the customer is an institutional accredited investor and (iii) transactions that are not recommended by the broker/dealer.  In addition, transactions in a NASDAQ security directly with the NASDAQ market-maker for such securities, are subject only to the sole market-maker disclosure, and the disclosure with regard to commissions to be paid to the broker/dealer and the registered representatives.

Our financial statements have been prepared assuming that the Company will continue as a going concern. Our audited consolidated financial statements for the fiscal year ended December 31, 2016 have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements for the years ended December 31, 2016, and 2015, the continuation of the Company as a going concern is dependent upon the continued financial support through sales of the Company's common stock, the ability to raise equity or debt financing, and the attainment of profitable operations from the Company's planned business. Our independent registered public accounting firm has included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report for the fiscal years ended December 31, 2016, and 2015. If we are unable to raise additional capital or borrow money we will not be able to continue our operating plans. If that were to occur the Company would be forced to suspend or terminate operations and, in all likelihood cause investors to lose their entire investment.

Dependence on Key Personnel and Management of Growth.  The Company's success and growth will depend upon its ability to attract and retain skilled employees and the ability of its officers and key employees to initiate and to manage successfully any growth.  Any failure to do so could have a material adverse effect on the Company's operations.  The Company expects that, in order to attract and retain skilled employees, the Company will have to offer to such prospective employees an equity participation in the Company.  Such equity participation could dilute the existing investors' ownership interest, resulting in diminished potential earnings per share and/or book value.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our brand and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. We are continuing to work to improve our internal controls, including in the areas of access, segregation of duties and security. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

 

We have reported material weaknesses in internal controls over financial reporting as of December 31, 2016 and we cannot assure you that additional material weaknesses will not be identified in the future or that we can effectively remediate our reported weaknesses. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be 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. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

As a result, we cannot assure you that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future or that we can effectively remediate our reported weaknesses. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties 

Our corporate headquarters is located at 23 Vreeland Rd, Suite 110, Florham Park, New Jersey 07932.  We lease 750 square feet of office space which is comprised of three offices for corporate personnel, storage space to house inventory and one conference room for meeting space.   Pazoo's office facilities are specifically used to further our business endeavors.  MA & Associates, LLC has leased approximately 3,250 square feet of space at 2900 Western Avenue, Las Vegas, Nevada which houses the testing laboratory and administrative offices for the Nevada testing laboratory. 

 

Item 3.  Legal Proceedings 

In April 2013, the Company filed a complaint against Edataworx, Inc. for return of monies and stock under an agreement dated August 2012. On November 4, 2013, the Company filed an amended complaint now seeking total damages of $105,000 and a return, for cancellation, of the 20,000 shares of company's common stock issued to Edataworx Inc.  On November 21, 2013 Edataworx, Inc. filed an Answer to the Amended Complaint denying the allegations and asserted a Counter-Claim against the Company in the amount of $25,000. Edataworx, Inc. also filed a Third-Party Complaint against Integrated Capital Partners, Inc. (an investor of the Company) for the same $25,000. On February 27, 2015, the parties agreed to settle all claims whereby Edataworx, Inc. will pay to the Company a total of $35,000 in three installments.  Additionally, Edataworx, Inc. will be allowed to retain a minimum of 15,000 shares of the Company's common stock previously issued with the possibility to retain all 20,000 shares if Edataworx Inc. elects to sell the 15,000 shares agreed upon, and the aggregate sales price is less than $2.00 per share. Edataworx, Inc. failed to make any required payments.  On February 25, 2016 new action to enforce the Settlement Agreement, including a claim for attorney's fees as provided for in the Settlement Agreement, was filed.  Edataworx failed to respond to the Complaint in the action to enforce the Settlement Agreement.  On September 16, 2016 a Judgment was entered in favor of the Company in the Amount of $35,012.  The Company is currently seeking to enforce the Judgment.

 

Item 4.  Mine Safety Disclosures 

None.

 

 

 

PART II

 

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

(a) Market for Our Common Shares

 

Our common shares are quoted on the OTC Pink Sheets under the symbol PZOO. The high and low common closing stock prices per share during the periods indicated were as follows:

 

Quarter Ended		March 31				June 30				September 30				December 31				Year
2016
High			0.0500				0.0319				0.0010				0.0005				0.0500
Low			0.0100				0.0009				0.0001				0.0002				0.0001
2015
High			1.7500				1.6000				0.7500				0.4500				1.7500
Low			0.4200				0.5500				0.3800				0.0300				0.0300

 

NUMBER OF HOLDER OF OUR COMMON SHARES

As of the date of this filing there are five thousand eight hundred and thirteen (5,813) holders of record of our common shares.

 

DIVIDEND POLICY

We have never paid cash or any other form of dividend on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. Moreover, any future credit facilities might contain restrictions on our ability to declare and pay dividends on our common stock. We plan to retain all earnings, if any, for the foreseeable future for use in the operation of our business and to fund the pursuit of future growth. Future dividends, if any, will depend on, among other things, our results of operations, capital requirements and on such other factors as our board of directors, in its discretion, may consider relevant.  We have issued shares of Series A Preferred Stock dividends on our preferred stock in accordance with the Series A Certificate of Designation.

In March 2016, the Company effected a 1-for-100 reverse stock split of the outstanding common stock ("the Reverse Stock Split") whereby every one hundred (100) shares of outstanding common stock decreased to one (1) share of common stock. The impact of this reverse stock split has been retroactively applied to the consolidated financial statements and the related notes.

In 2017, the Company filed a Form 14-C in order to effectuate a 1-for-250 reverse stock split of the outstanding common stock (the "Reverse Stock Split") whereby every two hundred and fifty (250 shares of outstanding common stock decreases to one (1) share of common stock. The current Reverse Stock Split is still pending and has not yet gone effective.

 

Item 6.  Selected Consolidated Financial Data 

As a smaller reporting company we are not required to provide the information required by this item.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

This report on Form 10-K contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Any statements in this Annual Report that are not statements of historical facts but rather are forward-looking statements, which involve risks and uncertainties. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from those indicated in the forward-looking statements as a result of the factors set forth elsewhere in this Annual Report on Form 10-K, including under "Risk Factors." You should read the following discussion and analysis together with our audited financial statements for the periods specified and the related notes included herein.

This report on Form 10-K contains terminology referring to Pazoo, Inc., such as "us," "our," and "the Company."

 

Management intends the following discussion to assist in the understanding of our financial position and our results of operations for the years ended December 31, 2016 and December 31, 2015.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

 

Overview

We were incorporated as a C-Corporation in the State of Nevada as IUCSS, Inc. on November 16, 2010 and we established a fiscal year end of December 31.  On May 9, 2011, we changed our name to Pazoo, Inc. to take advantage of unique branding and website opportunities. We are a start-up health and wellness social community that has developed its website (www.pazoo.com) to provide information, services, and online products for improvement of everyday living.  Our mission is to be 1) a leading social community offering best-in-class health and wellness products for both people and pets; 2) an important resource for consumers and professionals with diverse information about health and wellness and 3) specifically as it relates to medical marijuana and the testing of medical marijuana to ensure quality and safety for the consumer.

Our principal executive offices are located at 23 Vreeland Rd, Suite 110, Florham Park NJ 07923. Our telephone number is (855) PAZOO-US. Our internet address is www.pazoo.com.

On or about April 8, 2014, Pazoo moved into the pharmaceutical testing space with the acquisition of MA & Associates, LLC, a Nevada limited liability company formed with the purpose of opening a cannabis testing laboratory based in Las Vegas, Nevada to be branded under the Steep Hill Labs name. Harris Lee Holdings, LLC was formed, as a Nevada limited liability company, on or about July 23, 2014 and was formed to hold a License from Steep Hill Labs, Inc. for cannabis testing protocols and the use of the Steep Hill Labs name.  Both entities are now wholly owned subsidiaries of the Company.  The intent is that Harris Lee Holdings, LLC will directly own and operate testing laboratories in states where permitted to do so, and sub-license the Steep Hill testing protocol in states where direct ownership would be prohibited.

The Company, due to the uncertainties surrounding the license agreement, impaired 100% of the value of the Steep Hill Labs licenses due to the purported unsubstantiated termination of the license agreements in June 2016 between Steep Hill Labs and MA & Associates, LLC and Harris Lee, LLC respectively.  The Company strongly believes that any attempted termination of the licenses on the part of Steep Hill Labs was ineffective for many reasons, including, without limitation, Steep Hill's failure to provide key deliverables including technology, scientific know-how and lab guidance. On July 6, 2016, the Company contested the improper attempted termination of the licenses which was based on no identifiable contractual justification, and to which Steep Hill has not formally responded.  To the contrary, as of the date of this Report, Steep Hill Labs continues to list the Company as one of its "partners" and continues to display the Company's Las Vegas facility as a Steep Hill location. If Steep Hill Labs takes any further action to effectuate the ineffective termination of the licenses, this matter will be litigated under the terms and conditions of the respective license agreements, which management will vigorously defend.

With Regards to Harris Lee Holdings, LLC,  the Colorado MED approved the transfer of management of an existing laboratory, operating as Steep Hill Colorado, to Harris Lee Colorado, LLC (a related party) and Harris Lee Holdings, LLC has derived management revenue from Harris Lee Colorado, LLC in the year ending December 31, 2016.  However, because of the failure to transfer the MED license to Harris Lee Colorado, LLC, the Denver laboratory was closed by the end 2016. The lab is currently not operational and there are no current plans to re-open in the near future.

 

Liquidity and Capital Resources at December 31, 2016 Compared with December 31, 2015

As of December 31, 2016 and December 21, 2015, the Company had cash and cash equivalents of $88,909 and $16,819.  As of December 31, 2016, we had a working capital deficit of $7,599,588.

 

During the year ended December 31, 2016, Pazoo sold 128,572 Preferred Series C stock. Each Series C Preferred share of stock is convertible into 100 shares of common stock subject to adjustment.  The Company received gross proceeds of $90,000 related to such offerings during the year ended December 31, 2016.

 

The Company has no agreements, arrangements or understandings with any officer, director or shareholder as to any future financing, either equity or debt. In view of general economic conditions, there can be no assurance that any additional financing will be available to us, that any affiliate will provide additional investments in the Company or that adequate funds for our operations will otherwise be available when needed or on terms acceptable to us.

 

Cash used in operating activities during the year end 2016 was ($928,085) compared to cash used of ($1,928,310) during the year end 2015. This resulted from a net loss of $8,795,474 in the year end 2016 and $4,478,725 in 2015. The Company continued to have net cash flow used in operations for the year ended December 31, 2016 and 2015, primarily as a result of continued net losses and no significant revenue to cover operating expenses.

 

Net cash provided by financing activities for the years ended December 31, 2015 and December 31, 2016 was $2,301,683, and $1,000,175 respectively.  At December 31, 2016, our principal source of liquidity had been funded primarily through the borrowings on convertible notes and preferred stock offset by repayment of convertible notes in the period.

 

Net cash used in investing activities for the years ended December 31, 2015 and December 31, 2016 was $1,090,191, and $0, respectively.  The decrease in investing activities was due to the Company focusing its resources on the current testing laboratories.

 

The company raised $667,678 under various loans, convertible loans and advances during 2017, to support operations.  As of the issuance of these financial statements, a total of $160,720 has been repaid.

 

 

Critical Accounting Policy and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 

 

Revenue Recognition

 

Revenues are recognized when evidence of an agreement exists, the price is fixed or determinable, collectability is reasonably assured and goods have been delivered or services performed.  The Company is paid revenue from various advertising sources.  Typically advertising revenue is based upon the activity reports received from the advertising brokers and revenue is paid in accordance with the broker agreements at varying intervals from 30 to 75 days following the close of the particular advertising period.  The Company is also paid from management fees through Harris Lee Holdings, LLC.  The Company recognizes the revenue, and records the accounts receivable, upon receipt of the activity report from the broker.  In the event payment is not received within 120 days of the due date, the Company will classify such amount as an account where collection is doubtful.   The Company has only recognized minimal revenue to date.

 

Stock Based Compensation

 

We follow ASC 718 "Compensation - Stock Compensation" which prescribes accounting and reporting standards for all stock-based payments awarded to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, which may be classified as either equity or liabilities. The Company determines if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the option to settle by issuing equity instruments lacks commercial substance or (b) the present obligation is implied because of an entity's past practices or stated policies. If a present obligation exists, the transaction is recognized as a liability; otherwise, the transaction is recognized as equity.  The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50 "Equity-Based Payments to Non-Employees." Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date, the performance completion date, or the contract date.  To date, the Company has not issued any stock options, but has issued common stock to non-employees for services.

 

Fair Value of Financial Instruments

 

We follow ASC Topic 820, Fair Value Measurement, to measure certain financial instruments.  The fair value of our long-term debt is determined by using estimated market prices. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

 

Level 1:  Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

 

Level 2:  Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.

 

Level 3:  Inputs include management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation.

 

Derivatives

We follow ASC Topic 815, Derivatives and Hedging, to evaluate our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

Impairment of Long-Lived Assets

 

The Company's intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the historical-cost carrying value of an asset may no longer be appropriate.  The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value.  If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized.  An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset.

Comparison of Fiscal Years Ended December 31, 2016 and 2015

 

 

 

None noted.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

As a "smaller reporting company", as defined by Item 10(f) of Regulation S-K, we are not required to provide the information required by Item 7A. 

 

Item 8.  Financial Statements

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Pazoo, Inc.

 

 

 

 

 

PAZOO, INC.
CONSOLIDATED BALANCE SHEETS
		December 31,				December 31,
		2016				2015
ASSETS
Current assets:
Cash		$	88,909			$	16,819
Prepaid expenses			5,536				5,448
Total current assets			94,445				22,267
Fixed assets, net			613,332				749,841
Intangible assets, net			-				1,590,935
Total other assets			613,332				2,340,776
Total assets		$	707,777			$	2,363,043
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Lines of credit		$	21,039			$	19,500
Accounts payable and accrued liabilities			608,332				406,176
Loans payable			615,801				203,000
Interest payable			1,452,102				172,709
Convertible debt, net of unamortized discounts of $195,827 and $533,391			983,621				809,644
Contingent consideration liabilities			713,581				718,581
Derivative liabilities			2,925,627				1,756,435
Capital lease liability			373,930				304,516
Total current liabilities			7,694,033				4,390,561
Long-term liabilities:
Long-term portion of convertible debt, net of unamortized discounts of $110,672, and $794,036			1,401,828				198,464
Capital lease liability			136,672				242,771
Total long-term liabilities			1,538,500				441,235
Total liabilities			9,232,533				4,831,796
Commitments
Stockholders' deficit:
Convertible Preferred Stock, 50,000,000 shares authorized, $0.001 par value
Series A; 10,000,000 shares authorized, 230,401 and 860,669 shares issued and outstanding, respectively.			230				861
Series B; 5,000,000 shares authorized, 1,762,500 and 1,762,500 shares issued and outstanding, respectively.			1,762				1,762
Series C; 10,000,000 shares authorized, 2,621,375 and 2,051,000 shares issued and outstanding, respectively.			2,621				2,051
Series D; 12,500,000 shares authorized, 0 and 0 shares issued and outstanding, respectively.			-				-
Series E; 12,500,000 shares authorized, 0 and 0 shares issued and outstanding, respectively.			-				-
Common stock, $0.001 par value; 2,950,000,000 shares authorized, 2,284,407,419 and 14,865,053 shares issued and outstanding, respectively.			2,284,408				14,865
Additional paid-in capital			9,880,371				9,410,382
Accumulated deficit			(20,694,148	)			(11,898,674	)
Total stockholders' deficit			(8,524,756	)			(2,468,753	)
Total liabilities and stockholders' deficit		$	707,777			$	2,363,043

 

 

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

 

PAZOO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
		Years Ended
		December 31,
		2016				2015
Revenues:
Management fees - related party		$	30,515			$	-
Advertising Sales			-				26,662
Total revenues			30,515				26,662
Operating expenses:
Selling, general and administrative expenses			2,269,494				3,143,262
Professional fees			664,022				823,488
Loss on impairment of license			1,540,207				-
Website setup			9,274				135,154
Total operating expenses			4,482,997				4,101,904
Loss from operations			(4,452,482	)			(4,075,242	)
Other income/(expenses):
Gain/(loss) on derivative liabilities			(3,827,703	)			(898,759	)
Gain on debt extinguishment			2,430,259				3,412,265
Gain on change in fair value of contingent consideration			5,000				10,000
Loss on impairment of equity method investment			-				(839,919	)
Interest expense			(2,950,548	)			(2,087,070	)
Total other income/(expenses)			(4,342,992	)			(403,483	)
Net loss		$	(8,795,474	)		$	(4,478,725	)
Series A preferred stock dividends			(76	)			(39,743	)
Net loss attributable to common stockholders		$	(8,795,550	)		$	(4,518,468	)
Net loss per common share – basic and diluted		$	(0.01	)		$	(0.69	)
Weighted average common shares outstanding - basic and diluted			669,625,441				6,553,747

 

 

 

 

 

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

 

PAZOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
		Years Ended
		December 31,
		2016				2015
Cash flows from operating activities:
Net loss		$	(8,795,474	)		$	(4,478,725	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discounts			1,420,061				1,971,984
Depreciation			136,509				140,047
Amortization			50,728				62,337
Change in fair value of contingent consideration			(5,000	)			(10,000	)
Stock-based compensation			79,900				1,297,481
(Gain)/loss on derivative liabilities			3,827,703				898,759
(Gain)/loss on debt extinguishment			(2,430,259	)			(3,412,265	)
(Gain)/loss on impairment of intangibles			1,540,207				-
Loss on settlement			1,146,231
Impairment loss on equity method investment			-				839,919
Changes in operating assets and liabilities:
Accounts receivable			-				87,949
Inventory			-				2,668
Prepaid expenses and other current assets			(1	)			733
Accounts payable, accrued liabilities and interest payable			2,101,310				670,803
Net cash used in operating activities			(928,085	)			(1,928,310	)
Cash flows from investing activities:
Cash paid for purchase of licenses			-				(307,500	)
Acquisition of fixed assets			-				(4,052	)
Equity investment in equity method investee			-				(778,639	)
Net cash used in investing activities			-				(1,090,191	)
Cash flows from financing activities:
Proceeds from convertible note			673,460				1,443,287
Stock subscription receivable			-				18,253
Repayments on capital leases			(36,685	)			(67,737	)
Repayments on convertible notes and loans			(175,239	)			(413,000	)
Proceeds from loans payable			447,100				200,000
Proceeds from issuing common stock			-				48,380
Proceeds from sale of Series A preferred stock and warrants			-				580,000
Proceeds from exercise of Series A preferred warrants			-				25,000
Proceeds from sale of Series C preferred stock			90,000				448,000
Lines of credit			1,539				19,500
Net cash provided by financing activities			1,000,175				2,301,683
Net (decrease) in cash and cash equivalents			72,090				(716,818	)
Cash and cash equivalents beginning of period			16,819				733,637
Cash and cash equivalents end of period		$	88,909			$	16,819
Supplemental Disclosure of Cash Flows Information
Cash paid for interest		$	-			$	-
Cash paid for income taxes			-				-
Noncash Investing and Financing Activities
Fixed assets acquired through capital lease		$	-			$	615,024
Preferred shares issued for acquisition of MA & Associates			-				1,000,000
Contingent consideration for acquisition of MA & Associates			-				1,228,581
Common stock issued for the conversion of Series A preferred stock			34,659				3,115
Common stock issued for the conversion of Series C preferred stock			183,570				200
Debt discount due to derivative liabilities			1,233,098				2,296,385
Preferred shares issued for conversion of debt and interest			30,652				-
Common shares issued for conversion of debt and interest			1,042,688				1,303,908
Common shares issued with debt			-				93,087
Common shares issued for accrued liability			350,000				-

 

 

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

 

PAZOO, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
		Common Stock								Series A Preferred Stock								Series B Preferred Stock								Series C Preferred Stock								Additional Paid-In				Accumulated
		Shares				Par				Shares				Par				Shares				Par				Shares				Par				Capital				Deficit				Total
December 31, 2014			1,930,304			$	1,930				1,036,394			$	1,036				1,187,500			$	1,187				-			$	-			$	4,629,912			$	(7,419,949	)		$	(2,785,884	)
Common shares issued for services			522,208				522				-				-				-				-				-				-				135,459				-				135,981
Conversion of preferred stock to common stock			3,315,000				3,315				(3,115,000	)			(3,115	)			-				-				(200,000	)			(200	)			-				-				-
Preferred Series A stock and warrants issued for cash			-				-				2,542,132				2,542				-				-				-				-				577,458				-				580,000
Preferred shares issued for services			-				-				50,000				50				575,000				575				803,000				803				1,160,072				-				1,161,500
Preferred shares issued for acquisitions			-				-				-				-				-				-				1,000,000				1,000				999,000				-				1,000,000
Preferred shares issued for cash											-				-				-				-				448,000				448				447,552				-				448,000
Common shares issued for cash			54,601				55				-				-				-				-				-				-				48,325				-				48,380
Issuance of preferred stock for warrant exercises			-				-				347,143				348				-				-				-				-				24,652				-				25,000
Common shares issued for conversion of debt			8,921,288				8,921				-				-				-				-				-				-				1,294,987				-				1,303,908
Common shares issued with debt			121,652				122				-				-				-				-				-				-				92,965				-				93,087
Net Loss			-				-				-				-				-				-				-				-				-				(4,478,725	)			(4,478,725	)
December 31, 2015			14,865,053			$	14,865				860,669			$	861				1,762,500			$	1,762				2,051,000			$	2,051			$	9,410,382			$	(11,898,674	)		$	(2,468,753	)
Common shares issued for services			60,000				60				-				-				-				-				-				-				2,340				-				2,400
Conversion of preferred stock to common stock			218,228,526				218,229				(691,629	)			(692	)			-				-				(1,835,697	)			(1,836	)			(215,701	)			-				-
Preferred Series A stock issued for debt conversion			-				-				61,306				61				-				-				-				-				30,591				-				30,652
Preferred Series A stock issued for dividends			-				-				55				-				-				-				-				-				-				-				-
Preferred Series C issued for services - non cash			-				-				-				-				-				-				77,500				77				77,423				-				77,500
Preferred Series C stock issued for cash			-				-				-				-				-				-				128,572				129				89,871				-				90,000
Preferred Series C stock issued to ICPI for settlement			-				-				-				-				-				-				2,200,000				2,200				1,494,031				-				1,496,231
Common shares issued for conversion of debt			2,051,253,840				2,051,254				-				-				-				-				-				-				(1,008,566	)			-				1,042,688
Net Loss			-				-				-				-				-				-				-				-				-				(8,795,474	)			(8,795,474	)
December 31, 2016			2,284,407,419			$	2,284,408				230,401			$	230				1,762,500			$	1,762				2,621,375			$	2,621			$	9,880,371			$	(20,694,148	)		$	(8,524,756	)

 

 

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

 

 

Pazoo, Inc.

Notes to Consolidated Financial Statements

 

Note 1—DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

The Company entered the pharmaceutical testing laboratory market with their acquisitions of MA & Associates, LLC which will operate pharmaceutical testing laboratories in Nevada, and Harris Lee Holdings, LLC which will operate pharmaceutical testing laboratories within other states, or license testing protocols as independently owned laboratories.  These pharmaceutical testing laboratories focus on providing quality control services to the medical cannabis industry.  The mission is to protect the public health by providing infrastructure and analytical services to legally-authorized cannabis producers and distributors as well as to regulators.  States that have legalized cannabis are developing cannabis health and safety criteria that we will fulfill through their testing laboratories.  Harris Lee Holdings, LLC, due to Colorado residency requirements, entered into an advisory agreement with Harris Lee Colorado, LLC, a related party. Harris Lee Holdings, LLC has sub-licensed the testing protocols to Harris Lee Colorado, LLC in exchange for management fees for each test conducted.  The Colorado MED approved the transfer of management of an existing laboratory, operating as Steep Hill Colorado, to Harris Lee Colorado, LLC (a related party) and Harris Lee Holdings, LLC has derived management fees from Harris Lee Colorado, LLC in the year ending December 31, 2016.  However, because of the failure to transfer the MED license to Harris Lee Colorado, LLC, the Denver laboratory was closed by the end 2016.  The Company does not expect to re-commence operations in the near future. Lastly, the Company's wholly owned subsidiary, CK Distribution LLC, provides the marketing and sales agent for the distribution of non-controlled hemp products throughout the USA. Non-controlled hemp products are the items utilized by the industry that support grow facilities, infusion companies and dispensaries.

 

Further, the business consists of pazoo.com, an online, content driven, ad supported health and wellness web site for people and their pets. Additionally, this site has e-commerce functionality which allows pazoo.com to be an online retailer of nutritional foods/supplements, wellness goods, and fitness apparel. Pazoo, Inc. does not have any brick and mortar establishments.

 

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Pazoo, Inc. ("Pazoo" or the "Company") and its wholly-owned subsidiaries MA & Associates, LLC, Harris Lee Holdings LLC, and CK Distribution.  These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). All significant inter-company transactions and accounts have been eliminated in consolidation.

In March 2016, the Company effected a 1-for-100 reverse stock split of the outstanding common stock (the "Reverse Stock Split") whereby every one hundred (100) shares of outstanding common stock decreased to one (1) share of common stock. Similarly, the number of shares of common stock, par value $0.001 ("Common Stock") into which each outstanding Preferred stock, convertible debt and warrant to purchase common stock is to be exercisable decreased on a 1-for-100 basis and the exercise price of each outstanding preferred stock and warrant to purchase common stock increased proportionately. The impact of this reverse stock split has been retroactively applied to the financial statements and the related notes and all debt terms were also adjusted/effected.

In January 2017, the Company filed a Form 14-C in order to effectuate a 1-for-250 reverse stock split of the outstanding common stock (the "Reverse Stock Split") whereby every two hundred and fifty (250 shares of outstanding common stock decreases to one (1) share of common stock. The current Reverse Stock Split is still pending and has not yet gone effective, and is pending FINRA approval.  All Preferred shares of stock are not effected by reverse splits or re-capitalizations.

Use of Estimates

 

In accordance with GAAP the preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period.

On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in the notes to the financial statements.  

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Pazoo and its subsidiaries, which are wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Fixed Asset

 

Fixed assets are presented at cost at the date of acquisition. Depreciation and amortization is calculated based on the straight-line method over the estimated useful lives of the depreciable assets, or in the case of leasehold improvements, the shorter of the lease term or the estimated useful life of the asset, a portion of which is allocated to cost of sales. Improvements are capitalized while repairs and maintenance are charged to operations as incurred. 

Impairment of Long-Lived Assets

 

The Company's intangible assets and fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the historical-cost carrying value of an asset may no longer be appropriate.  The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value.  If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized.  An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset.

The Company, due to the uncertainties surrounding the license agreement, impaired 100% of the value of the Steep Hill Labs licenses due to the purported unsubstantiated termination of the license agreements in June 2016 between Steep Hill Labs and MA & Associates, LLC and Harris Lee, LLC respectively.  The Company strongly believes that any attempted termination of the licenses on the part of Steep Hill Labs was ineffective for many reasons, including, without limitation, Steep Hill's failure to provide key deliverables including technology, scientific know-how and lab guidance. On July 6, 2016, the Company contested the improper attempted termination of the licenses which was based on no identifiable contractual justification, and to which Steep Hill has not formally responded.  To the contrary, as of the date of this Report, Steep Hill Labs continues to list the Company as one of its "partners" and continues to display the Company's Las Vegas facility as a Steep Hill location. If Steep Hill Labs takes any further action to effectuate the ineffective termination of the licenses, this matter will be litigated under the terms and conditions of the respective license agreements, which management will vigorously defend.

Fair Value of Financial Instruments

 

The Company's financial instruments consist principally of cash and cash equivalents and accounts payable. The Company believes that the recorded values of all of its other financial instruments approximate their fair values because of their nature and respective maturity dates or durations. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

 

Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.

Level 3: Inputs include management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation.

 

The following table sets forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value as December 31, 2016 and 2015.

 

Recurring Fair Value Measurements		Level 1				Level 2				Level 3				Total
LIABILITIES:
Derivative liability – December 31, 2016			$	-			$	-			$	2,925,627			$	2,925,627
Derivative liability – December 31, 2015			$	-			$	-			$	1,756,435			$	1,756,435

 

Cash and Cash Equivalents

 

We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents.

 

 

 

Stock Based Compensation

 

ASC 718 "Compensation - Stock Compensation" prescribes accounting and reporting standards for all stock-based payments awarded to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, which may be classified as either equity or liabilities. The Company determines if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the option to settle by issuing equity instruments lacks commercial substance or (b) the present obligation is implied because of an entity's past practices or stated policies. If a present obligation exists, the transaction is recognized as a liability; otherwise, the transaction is recognized as equity.  The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50 "Equity-Based Payments to Non-Employees." Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date, the performance completion date, or the contract date.

 

Revenue Recognition

 

Revenues are recognized when evidence of an agreement exists, the price is fixed or determinable, collectability is reasonably assured and goods have been delivered or services performed.  The Company is paid revenue from various advertising, cannabis testing, management fees, and sales and distribution of non-controlled hemp products. During the year ended 2016, the Company's only recognized revenues were derived from management fees.

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.

 

We have net operating loss carryforwards available to reduce future taxable income. Future tax benefits for these net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. To the extent that we will not realize a future tax benefit, a valuation allowance is established.

 

Basic and Diluted Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share reflects, in addition to the weighted average number of common shares, the potential dilution if shares of convertible preferred stock and debt were converted into shares of common stock and a corresponding accrued 5% dividend, unless the effects of such exercises and conversions would have been anti-dilutive.

 

Potentially Dilutive Securities
		December 31, 2016				December 31, 2015
Common stock warrants			-				3,355
Convertible notes			32,355,840,300				92,239,381
Preferred series A shares & warrants			23,040,100				86,066,900
Preferred series B			352,000,000				352,000,000
Preferred series C			262,137,500				205,100,000
			32,993,017,900				735,409,636

 

Advertising Expenses

Costs associated with advertising are charged to expense as incurred.

 

 

 

Recent Accounting Pronouncements

 

February 2016, the Financial Accounting Standards Board ("FASB") issued new guidance related to how an entity should recognize lease assets and lease liabilities. The guidance specifies that an entity who is a lessee under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases under previous FASB guidance. Accounting for leases by lessors is largely unchanged under the new guidance. The guidance is effective for us beginning in the first quarter of 2019. Early adoption is permitted.  In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is evaluating the impact of adopting this guidance on our consolidated financial condition, results of operations and cash flows.

  

In March 2016, the FASB issued new guidance which involves several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This ASU is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period, however early adoption is permitted. The Company is currently evaluating the guidance to determine the Company's adoption method and the effect it will have on the Company's Consolidated Financial Statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. The amendments in this ASU are effective for non-public companies for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning December 15, 2019.  Early adoption of the amendments in the ASU is permitted as early as the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The adoption of this standard is not expected to have a material effect on the consolidated financial position and results of operations and statements of cash flows.

In August 2014, the FASB issued ASU No. 2014-15 —Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The ASU requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements are issued and if management's plans will alleviate that doubt. Management will be required to make this evaluation for both annual and interim reporting periods. The Company adopted this guidance for the fiscal year ended December 31, 2016. This adoption did not have a material impact on the Company's consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update (ASU) 2015-16—Business Combinations, as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The amendment eliminates the requirement to retrospectively apply adjustments made to provisional amounts recognized in a business combination. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company expects to adopt this guidance for the year ended December 31, 2016. The Company does not expect this guidance to have a material effect on its consolidated financial statements.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. This ASU permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor have they determined the effect of the standard on our ongoing financial reporting.

Other recent accounting pronouncements issued by the FASB did not or are not believed to have a material impact on our present or future consolidated financial statements.

 

 

 

Note 2—GOING CONCERN

 

 

Note 3—ACQUISITIONS

 

MA & Associates, LLC

 

On April 8, 2014 the Company entered into a Limited Liability Company Membership Interest Purchase Agreement with MA & Associates, LLC ("MA") under which the Company agreed to acquire a 40% equity interest in MA for two testing locations in exchange for a purchase price of $2,000,000 and 150,000 shares of the Company's Series C Preferred Stock. MA was formed to become a cannabis testing laboratory within the State of Nevada. In 2014 and 2015, prior to the purchase of the remaining 60% and obtaining control as discussed below, the Company paid an aggregate of $1,321,419 of the cash portion and issued 100,000 shares of the Series C Preferred Stock.  

 

During 2015, prior to taking control through the acquisition of the remaining 60% interest, the consideration paid was originally recorded as an equity method investment, and was subsequently impaired prior to entering into the second investment agreement noted below.

 

On June 3, 2015, the Company entered into a 2nd agreement to acquire the remaining 60% interest in MA for 1,000,000 shares of Series C preferred stock, valued at $1,000,000.  In accordance with generally accepted accounting principles ("GAAP") in accounting for a step-acquisition, the Company estimated the fair value of the previously held equity method investment at $667,666, resulting in a total purchase price of approximately $1.7 million.

 

As of December 31, 2015 the Company was still obligated to pay the remaining portion under the original 40% investment agreement, consisting of $678,000 of cash and 50,000 shares of Series C Preferred Stock (valued at $35,000 as of December 31, 2016), totaling $713,581 and included in contingent consideration liability on the accompanying consolidated balance sheet.

 

The remaining contingent consideration will be issued in the future after the testing laboratory is operational.

 

ICPI, who is a related party, was entitled to 500,000 Series C shares as a commission for services related to the MA & Associates LLC., acquisition, of which 300,000 were issued during the year ended December 31, 2015 valued and expensed at $300,000. The remaining 200,000 shares will be issued upon achieving certain milestones in 2016 and this amount has been properly accrued for as of December 31, 2015.  As of December 31, 2016, all remaining shares upon achieving certain milestones in 2016 were issued due to settlement to ICPI.

 

The acquisition was accounted for using the purchase method and accordingly, the purchase price was allocated based on the estimated fair market values of the assets acquired and liabilities assumed on the date of each acquisition.

 

ACQUIRED ASSETS:
Current assets		$	4,866
Fixed assets			270,811
Other assets			56,985
Total assets acquired		$	332,662
LIABILITIES ASSUMED:
Current liabilities		$	(11,756	)
Other liabilities			(9	)
Total liabilities assumed		$	(11,766	)
Net assets acquired		$	320,896
Acquisition Price		$	1,666,667
Intangible Assets from Acquisition		$	1,345,771

 

 

The Company obtained a 3rd party valuation for the value of the intangible assets with an estimated life of twenty years. Intangibles related to the acquisition of MA will not be deductible for tax purposes.  Management deemed the unaudited pro forma results of operations data for the year ended December 31, 2016 and 2015 immaterial and are thus not shown.

 

The Company, due to the uncertainties surrounding the license agreement, impaired 100% of the value of the Steep Hill Labs licenses due to the purported unsubstantiated termination of the license agreements in June 2016 between Steep Hill Labs and MA & Associates, LLC and Harris Lee, LLC respectively.  The Company strongly believes that any attempted termination of the licenses on the part of Steep Hill Labs was ineffective for many reasons, including, without limitation, Steep Hill's failure to provide key deliverables including technology, scientific know-how and lab guidance.

 

Harris Lee Holdings, LLC

 

On July 23, 2014, the Company and the MA founders formed Harris Lee Holdings, LLC ("Harris Lee") of which the Company obtained a 45% equity interest for an initial cash contribution of $45.  On October 24, 2014, the Company agreed to acquire an additional 10% interest in Harris Lee in exchange for 300,000 shares of the Company's Series C Preferred stock based on a series of milestone events. As of December 31, 2014, the acquisition of this additional 10% interest had not closed. Then on January 13, 2015, the Company agreed to acquire the remaining 45% of Harris Lee in exchange for 450,000 shares of the Company's Series B Preferred Stock, again issued upon completion of certain milestones.  No construction has commenced on any Harris Lee facility and accordingly no cash has been paid to date.  No shares were issued in 2014. In 2015, based on the milestones, 150,000 shares of Series C Preferred Stock were issued, and all of the 450,000 shares of Series B Preferred Stock were issued.  At December 31, 2014, the Company owned 45% of Harris Lee Holdings, LLC ("Harris Lee").

 

During 2015, the company acquired the remaining 55% interest in Harris Lee in exchange for 150,000 shares of the Company's Series C Preferred stock to be issued based on a series of milestone events and 450,000 shares of the Company's Series B Preferred Stock.  Management deemed it had control of Harris Lee prior to the 2015 preferred issuance. As such, value was considered compensation and not a business combination.

 

The aggregate fair value of the 450,000 Series B and the 150,000 Series C shares was determined to be $219,450 and it was recognized as compensation expense to the sellers of Harris Lee. Harris Lee is now consolidated in the Company's financial results.

 

During the year ended December 31, 2015, Harris Lee was not operating and its impact on the Company's Statement of Operations was zero as it was determined to be nominal.

Harris Lee Holdings, LLC has sub-licensed the testing protocols to Harris Lee Colorado, LLC in exchange for a management fee for each test conducted.  During 2016, the Colorado MED approved the transfer of management of an existing laboratory, operating as Steep Hill Colorado, to Harris Lee Colorado, LLC (a related party) and Harris Lee Holdings, LLC has derived management fees from Harris Lee Colorado, LLC in the year ending December 31, 2016.  However, because of the failure to transfer the MED license to Harris Lee Colorado, LLC, the Denver laboratory was closed by the end 2016.  There are currently no plans to re-open the facility in the near future.

 

Note 4—FIXED ASSETS

Fixed assets consists of the following:

 

Fixed Assets
		Estimated Useful Life (in years)				December 31, 2016				December 31, 2015
Cost:
Equipment			3-5			$	643,195			$	643,195
Furniture and fixture			7				6,687				6,687
Leasehold improvements			3-5				238,620				238,620
Website			3				1,385				1,385
						$	889,887			$	889,887
Accumulated depreciation and amortization							(276,555	)			(140,046	)
Fixed Assets, Net						$	613,332			$	749,841

 

Costs of assets acquired under capital leases were approximately $615,000 for the year ended December 31, 2015 and 2016.  The capital lease represents a total of three leases for testing equipment. The leases hold an interest rate of 0% and monthly payments are approximately $17,000 per month. The depreciation for the years ended December 31, 2016 and December 31, 2015 was $136,510 and $140,046, respectively.  The accumulated depreciation of the assets under the capital lease for the years ended December 31, 2016 and December 31, 2015 was $159,401 and $36,059, respectively. All leased equipment is collateral under the respective lease agreements.  As of December 31, 2016 the Company was currently in default of these lease agreements, as scheduled payments were not made.  Commencing in 2017 the Company began making payments toward the capital leases again.

 

 

 

Note 5—INTANGIBLE ASSETS & GOODWILL

Intangible assets as of December 31, 2015 consisted of a license agreement acquired for $307,500 from Steep Hill Labs for the right to take the Steep Hill software and methodology to states above and beyond Nevada, and the MA license derived from the acquisition of $1,345,771.  During 2016, the Company impaired 100% of the Steep Hill license agreement acquired for $307,500 as well as the MA license derived from acquisition of $1,345,771. The impairment was due to the uncertainties surrounding the license agreement, as well as the purported unsubstantiated termination of the license agreements in June 2016 between Steep Hill Labs and MA & Associates, LLC and Harris Lee, LLC respectively.

Note 6—LINES OF CREDIT

The Company entered into a line of credit with Wells Fargo in December 2015 in the amount of $25,000.  The credit line bears an interest rate of 9.75% annually, compounded daily, and there is no term on the account. There are no financial covenants and the guarantor on the account is Steve Basloe, the Company's President. The line of credit has been used for general operating expenses.

The Company entered into a line of credit with Wells Fargo in May 2016 in the amount of $5,000. The credit line bears an interest rate of 24.24% for the first year and then 9.75% annually, compounded daily, and there is no term on the account. There are no financial covenants and the guarantor on the account is David Cunic, the Company's CEO. The credit has been used for general operating expenses.

The combined lines of credit at December 31, 2015 totaled $19,500 compared to $21,039 at December 31, 2016.

 

Note 7—RELATED PARTY TRANSACTIONS

 

In July 2013, the Company entered into a consulting agreement with an affiliate of Mr. Basloe, a board member and President of the Company. The agreement provides for consulting on marketing-related services for the Company. The amounts paid under this agreement for the years ended December 31, 2016 and December 31, 2015 were $20,500 and $46,617, respectively.

In January 2015, the Company entered into a services agreement with a family member of board member Mr. Basloe. The agreement provided for consultation services related to the Colorado recreational and medical marijuana marketplace and onsite retail operations studies in Boulder, CO and Denver, CO. The consultant was granted 250,000 common shares under the agreement which vest after six months. The fair value of the award was determined to be $1,750, of which $1,750 was recognized during the year ended December 31, 2015 as stock-based compensation.

 

In connection with the investments in Harris Lee Holdings, LLC and MA & Associates, LLC the Company issued Series B and Series C Preferred shares to two current board members, Mr. Del Hierro and Mr. Lieberthal. Mr. Del Hierro was issued 150,000 shares of Series B Preferred and 380,000 shares of Series C Preferred. Mr. Lieberthal was issued 150,000 shares of Series B Preferred shares and 332,000 shares of Series C Preferred shares for total compensation of $891,000, which was recorded as stock compensation in 2015.

 

In July 2015 Harris Lee Holdings, LLC entered into a series of agreements related to the operations of the Colorado testing facility being managed by Harris Lee Colorado, LLC.  The Managing Member of Harris Lee Colorado, LLC is an immediate family member of Steve Basloe, President and Director of the Company.  Among the agreements signed is a sub-license Agreement whereby Harris Lee Holdings, LLC sub-licenses the Steep Hill Labs testing protocol to Harris Lee Colorado, LLC in exchange for licensing fees based on the number of tests conducted by Harris Lee Colorado, LLC.

In 2016, the Company managed Harris Lee Colorado, LLC, an existing lab in Denver, Colorado, after receiving approval from the Colorado Marijuana Enforcement Division in February of 2016. Harris Lee Holdings, LLC has sub-licensed the testing protocols to Harris Lee Colorado, LLC in exchange for a management fee for each test conducted. The Colorado MED has recently approved the transfer of management of an existing laboratory, to Harris Lee Colorado, LLC (a related party) and Harris Lee Holdings, LLC has begun to derive management fees from Harris Lee Colorado, LLC.  The revenue derived from these management fees for the year ended December 31, 2016 was $30,515.  The laboratory is currently closed and the Company does not have plans to re-open in the near future.

 

 

   

 

Note 8—CONVERTIBLE DEBT

 The following table summarizes the changes in the convertible notes during 2015 and 2016:

 

		Short Term				Long Term				Total
Balance as of January 1, 2015 - Gross		$	1,309,562			$	812,500			$	2,122,062
Cash additions			1,263,287				180,000				1,443,287
Interest added to notes payable			331,193				-				331,193
Cash payments			(413,000	)			-				(413,000	)
Conversions			(1,224,163	)			-				(1,224,163	)
Original issue discount			76,156				-				76,156
Total		$	1,343,035			$	992,500			$	2,335,535
Less:  unamortized discount			(533,391	)			(794,036	)			(1,327,427	)
Balance as of December 31, 2015 - Net		$	809,644			$	198,464			$	1,008,108
Add back: unamortized discount			533,391				794,036				1,327,427
Balance as of December 31, 2015 - Gross		$	1,343,035			$	992,500			$	2,335,535
Cash additions			373,460				300,000				673,460
Interest added to notes payable			111,778				116,600				228,378
Cash payments			(118,223	)			-				(118,223	)
Conversions			(474,777	)			-				(474,777	)
Reassignments			(103,400	)			103,400				-
Original issue discount			47,575				-				47,575
Total		$	1,179,448			$	1,512,500			$	2,691,948
Less: unamortized discount			(195,827	)			(110,672	)			(306,499	)
Balance as of December 31, 2016 - Net		$	983,621			$	1,401,828			$	2,385,449

 

The Company received $673,460 of new cash additions in the year ended December 31, 2016. In addition to the funds received, noteholders converted $474,777 during the year ended December 31, 2016 into common stock exclusive of accrued interest.  Cash payments consisted of $118,223. Non-cash additions, which are due to the increase in principle for compounding interest, including accrued interest totaled $103,400 in 2016.  As of December 31, 2016, the unamortized debt discounts totaled $306,499. The interest rates on the notes ranged from 8% to 12%.

 

The Company received $1,443,287 of new cash additions in the year ended December 31, 2015. In addition to the funds received, noteholders converted $1,224,163 during the year ended December 31, 2015 into common stock exclusive of accrued interest.  Non-cash additions, which are due to the increase in principle for compounding interest, including accrued interest, totaled $331,193 in 2015.  As of December 31, 2015, the unamortized debt discounts totaled $1,327,427.

 

The Company evaluated all convertible notes describe above under ASC 815 and determined that certain conversion features qualify as derivative liabilities (see Note 10).

 

During the year ended December 31, 2016 the Company incurred approximately $2.4 million of a gain in debt extinguishment primarily as a result of various notes converting to equity, with the corresponding derivative liability value at the date of conversion being written off to debt extinguishment as a gain, offset by the unamortized discount on the convertible debt at the time of conversion.

 

In 2016, the Company modified certain convertible notes aggregating a total of $992,500 to increase the interest rate from 10% to 12% retroactively. The maturity dates of these notes were also extended by 2 years. The modification of notes was accounted for as a gain on debt extinguishment, included in the note above.

 

Additionally, at December 31, 2016, a total of 9 notes with a principle balance of $1,014,103 were past due. The Company has adequately accrued all default interest and associated penalties related to these instruments. Additionally, cross default clauses exist within certain other instruments containing terms which would make the notes immediately due and payable, however no cross default clauses have been triggered as of yet.

 

Future minimum payments owed on the outstanding debt of the Company as of December 31, 2016 are as follows:

 

		Year Ended December 31, 2016
		2017				2018				2019				2020				2021				Thereafter				Total
Convertible notes			1,179,448				220,000				-				-				1,062,500				230,000				2,691,948
Loans payable			615,801				-				-				-				-				-				615,801
Total			1,795,249				220,000				-				-				1,062,500				230,000				3,307,749

 

 

Note 9—LOANS PAYABLE

In January 2016, Pazoo, Inc. entered into a loan agreement with Kabbage Loans totaling $9,100. The loan has a monthly payment consisting of $500 to the principal and $210 to fees, totaling a monthly cost of $710. The loan will be paid off in a maximum of 12 months. As of December 31, 2016, this loan was paid off.

In February 2016, Pazoo, Inc. entered into a loan totaling $25,000 with LG Capital, LLC. The note has an interest of 8.0% and it matures on October 4, 2017. As of December 31, 2016, $25,000 still remains outstanding.

In June 2016, Pazoo, Inc. entered into a loan agreement with Kabbage Loans totaling $35,000.  The loan will be paid off in a maximum of 12 months and has a monthly payment consisting of $3,792 to the principal and $875 to fees, totaling a monthly cost of $4,667.  As of December 31, 2016, $18,387 remains outstanding.

In July 2016, Pazoo, Inc. entered into a loan agreement with Kabbage Loans totaling $7,500.  The loan will be paid off in a maximum of 6 months and has a monthly payment consisting of $1,250 to the principal and $188 to fees, totaling a monthly cost of $1,438.  As of December 31, 2016, $1,092 remains outstanding.

In August 2016, Pazoo, Inc, entered into loan agreements totaling an aggregate of $96,000 with a private investor.  The notes have an interest rate of 8.0% and maturity dates range from October 2016 to August 2017.  As of December 31, 2016, $84,000 still remains outstanding.

In August 2016, Pazoo, Inc. entered into a loan agreement with David Cunic, Company CEO, and totaling $5,000.  The note has an interest rate of 0.70% and the maturity date is August 2018. As of December 2016, $3,300 remains outstanding.

In September 2016, Pazoo, Inc. entered into a loan agreement with Kabbage Loans totaling $7,700.  The loan will be paid off in a maximum of 6 months and has a monthly payment consisting of $1,284 to the principal and $193 to fees, totaling a monthly cost of $1,477.  As of December 31, 2016, $5,472 remains outstanding.

In September 2016, Pazoo, Inc. entered into a loan agreement with Steve Basloe, Company President, and totaling $2,500.  The note has an interest rate of 0.70% and the maturity date is September 2018. As of December 2016, $2,500 remains outstanding.

In October 2016, Pazoo, Inc, entered into loan agreements totaling an aggregate of $112,000 with a private investor.  The notes have an interest rate of 8.0% and maturity dates of October 2017.  As of December 31, 2016, $112,000 still remains outstanding.

In November 2016, Pazoo, Inc, entered into loan agreements totaling an aggregate of $33,000 with a private investor.  The notes have an interest rate of 8.0% and maturity dates of November 2017.  As of December 31, 2016, $33,000 still remains outstanding.

In December 2016, Pazoo, Inc, entered into loan agreements totaling an aggregate of $95,000 with a private investor.  The notes have an interest rate of 8.0% and maturity dates of December 2017.  As of December 31, 2016, $95,000 still remains outstanding.

 

 

In December 2016, Pazoo, Inc. entered into a loan agreement with Kabbage Loans totaling $16,000.  The loan will be paid off in a maximum of 12 months and has a monthly payment consisting of $1,334 to the principal and $400 to fees, totaling a monthly cost of $1,734.  As of December 31, 2016, $13,333 remains outstanding.

Note 10—DERIVATIVE LIABILITIES

 

The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. 

 

Under ASC-815 the conversion options embedded in the notes payable described in Note 9 require liability classification because they do not contain an explicit limit to the number of shares that could be issued upon settlement. In addition, all of the Company's outstanding common stock warrants include price protection clauses and are accounted for as derivative liabilities.

 

The following table summarizes the changes in the derivative liabilities during 2015 and 2016:

 

Balance as of January 1, 2015		$	2,576,025
Initial value derivatives			5,962,270
Extinguished			(4,014,734	)
Change in fair value			(2,767,126	)
Balance as of December 31, 2015		$	1,756,435
Initial value derivatives			4,070,636
Extinguished			(3,891,703	)
Change in fair value			990,165
Balance as of December 31, 2016		$	2,925,627

 

 

		2015			2016
Dividend yield:			0	%			0	%
Expected volatility		145.0% to 228.0		%	163.0% to 489.2			%
Risk free interest rate		.03% to 1.63		%	.51% to 1.93			%
Expected life (years)		0.13 to 4.89			0.09 to 5.05

 

Note 11—STOCKHOLDERS' EQUITY

 

Preferred Stock

 

On August 14, 2015 the Company filed a Definitive Information Statement with the SEC on Form 14C with regard to changes in its capital structure.  On October 1, 2015 the Company filed an Amendment to its Articles of Incorporation authorizing 50 million shares of $0.001 par value Preferred Stock. The preferred shares available for issuance are 10,000,000 Series A Convertible Preferred Stock, 5,000,000 Series B Convertible Preferred Stock, 10,000,000 Series C Convertible Preferred Stock, 12,500,000 Series D Preferred Stock, and 12,500,000 Series E Preferred Stock.

 

 

 

 

In 2015, the Company sold an aggregate of 2,542,132 Series A Preferred Stock for cash proceeds of $580,000.

 

In 2015, the Company issued an aggregate of 50,000 Series A Preferred Stock for services, valued at a total of $20,300.

 

During 2015, 3,115,000 shares of Series A Preferred stock were converted into 3,115,000 common shares.

 

In 2015, ICPI exercised warrants in the amount of 347,143 Series A Preferred Stock warrants for cash proceeds of $25,000.

 

Total Series A Preferred shares outstanding as of December 31, 2015 were 860,669.

 

In 2016, the Company issued an aggregate of 61,306 Series A Preferred Stock for settlement, valued at a total of $30,652.

 

During 2016, 691,629 shares of Series A Preferred stock were converted into 34,658,826 common shares.

 

Total Series A Preferred shares outstanding as of December 31, 2016 were 230,401.

 

 

In 2015, the Company issued an aggregate of 450,000 Series B Preferred Stock in connection with the MA and Associates, LLC, which was recorded as stock compensation and issued 125,000 Series B Preferred Stock as compensation.

 

Total Series B Preferred shares outstanding as of December 31, 2015 and 2016 were 1,762,500.

 

 

In 2015, the Company issued an aggregate of 1,803,000 Series C Preferred Stock for services.

 

In 2015, the Company sold an aggregate of 448,000 Series C Preferred Stock for cash proceeds of $448,000.

 

During 2015, 200,000 Series C Preferred Stock were converted into 200,000 common shares.

 

Total Series C Preferred shares outstanding as of December 31, 2015 were 2,051,000.

 

In 2016, the Company issued an aggregate of 2,277,500 Series C Preferred Stock for services consisting of 2,200,000 shares to ICPI per the previously disclosed settlement agreement and the remaining 77,500 shares to marketing consultants.

 

In 2016, the Company sold an aggregate of 128,572 Series C Preferred Stock for cash proceeds of $90,000.

 

During 2016, 1,835,697 Series C Preferred Stock were converted into 183,569,700 common shares.

 

Total Series C Preferred shares outstanding as of December 31, 2016 were 2,621,375.

 

 

In 2015, there have been no issuances or sales of Series D Preferred Stock or Series E Preferred Stock.

 

Common Stock

 

Issuances

 

In 2015, the Company issued a total of 54,601 common shares for aggregate cash proceeds of $48,380, in accordance with an agreement with Premier Venture Capital.

 

 

In 2015, the Company issued a total of 522,208 common shares to consultants and experts who have agreed to be included in the "Our Experts" section of our Company website (www.pazoo.com) as well as certain consultants.  Each expert has executed an expert services contract giving them a certain number of shares issued upon the signing of the agreement and further shares on each anniversary of the contract date. Consultants were used by the Company to increase its marketing, advertising, and awareness. Consultants were issued shares based on individual service contracts.

 

In 2015, the Company issued 9,042,939 common shares with debt or for the conversion of debt valued at $1,396,995.

 

In 2016, the Company issued a total of 60,000 common shares for services.

 

In 2016, the Company issued an aggregate of 2,051,253,840 common shares for the conversion of debt and accrued interest totaling $1,042,688.

 

 

In 2015, the Company issued 2,325,000 Series A Preferred Stock warrants with an exercise price of $0.50.

 

In 2015, ICPI exercised 347,143 Series A Preferred Stock warrants for cash proceeds of $25,000.

 

In 2016, pursuant to a Settlement Agreement with ICPI, all remaining Series A Warrants have been retired in exchange for the issuance of Series C Preferred Stock.  A total of 1,700,000 Series C Preferred Shares were issued to ICPI in exchange for the retirement of all remaining Series A Warrants and the waiver of unpaid dividends on Series A Preferred stock held by ICPI for the years 2014, 2015 and 2016.  Additionally, 500,000 Series C preferred shares were issued to ICPI for settlement of liability to issue shares for services.

 

The following table presents the Series A preferred stock warrant activity during 2016 and 2015:

						Weighted
						Average
		Warrants				Exercise Price
Outstanding – December 31, 2014			1,030,226			$	2.23
Granted			2,325,000				0.50
Forfeited/canceled			(50,000	)			0.05
Exercised			(347,143	)			0.01
Outstanding – December 31, 2015			2,958,083			$	1.17
Granted			-				-
Forfeited/canceled			(2,958,083	)			1.17
Exercised			-				-
Outstanding – December 31, 2016			-			$	-
Exercisable – December 31, 2016			-			$	-

 

The weighted average remaining life of the outstanding Series A preferred stock warrants as of December 31, 2016 and December 31, 2015 was 0.00 and 4.22 years, respectively.

 

 

The following table presents the common stock warrant activity during 2016 and 2015: