Form 10-K for PAZOO, INC.
14-May-2015
Annual Report
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, 2014 and December 31, 2013.
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.
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 in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. 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 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 with classify such amount as an account where collection is doubtful. At this time the Company has no reason to believe any accounts are not collectible and therefore no allowance for doubtful accounts has been made at this time for any advertising revenue.
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.
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.
Comparison of Fiscal Years Ended December 31, 2014 and 2013
Revenues. Revenues were $52,813 in the fiscal year ended December 31, 2013, compared to $111,287 in the fiscal year ended December 31, 2014, an increase of $58,474, or 110%. Merchandise sales in fiscal 2014 decreased to $251 from $9,989 in fiscal year 2013, a decrease of $9,738. The decrease was a result of a shift in efforts towards developing advertising sales to replace merchandise sales. Advertising sales increased 259% from $42,824 in fiscal 2013 to $111,036 in fiscal year 2014.
Cost of Goods Sold. Cost of goods sold were $8,977 in fiscal 2013, compared to $541 in fiscal 2014, a decrease of $8,436 or 94%. The decrease in cost of goods was due to our shift in selling product to online advertising. There are no cost of goods sold in the online advertising space market because we are not selling a product, but instead selling a space on our website. The cost to drive traffic is considered an overhead cost and that cost then creates the opportunity for the particular ad space. We handed out some product free of charge at networking events, marketing events, and conventions to increase our marketing and awareness.
Operating Expenses. Operating expenses consisted of the following expenses:
selling, general and administrative expenses; professional fees; and website setup. Total expenses were $579,452 in fiscal 2013, compared to $2,479,057 in fiscal 2014, an increase of 328%. Selling, general and administrative (SG&A) expenses were $418,778 or 72.3% of total expenses in fiscal 2013 compared to $1,639,228 in fiscal 2014, an increase of $1,220,450 or 291%. SG&A expenses were mainly comprised of Branding and Public Relations, Marketing and Advertising, and Payroll. Marketing and Advertising expense was comprised of website advertising, including contracts with Maximum Harvest and MobileSeed LLC to provide website optimization and social media optimization. In addition this included the hiring of a full time web designer, full time web content operator, and many freelance copywriters, editors, and bloggers. Professional fees were $111,394 or 19.2% of total expenses in fiscal 2013, compared to $642,740 or 25.9% of total expenses in fiscal 2014, an increase of $531,346. This was due to the large increase in investor relations and awareness.
Other Expenses. For the year ended December 31, 2014, other expenses were $1,292,419 from the increase in fair value of derivative liabilities, $542,780 from an impairment loss on the equity-method investment in MA & Associates, and $696,073 for interest expense. For the year ended December 31, 2013, other expenses were $122,049 primarily from the increase in fair value of derivative liabilities.
Net loss. The net loss was $657,690 for the year ended December 31, 2013, compared to net loss of $4,889,583 for the year ended December 31, 2014.
Liquidity and Capital Resources.
Cash and cash equivalents were $35,848 and $733,637 as of December 31, 2013 and December 31, 2014, respectively.
Net cash used in investing activities was $0 and $542,780 for the twelve months ended December 31, 2013 and December 31, 2014, respectively. The increase in cash used in investing activities was attributed to an investment made in an equity method investment.
Net cash provided by financing activities as of December 31, 2013 and December 31, 2014 was $278,367 and $2,514,276, respectively. At December 31, 2014, our principal source of liquidity had been funded primarily through the borrowings on convertible notes which went from $50,000 in the year ended December 31, 2013 to $2,297,200 in the year ended December 31, 2014. We used a majority of those proceeds to pay website costs as well as our funding obligation to MA & Associates for the year ended December 31, 2014. During 2014, we incurred accounting costs of $42,900 associated with the audit of our financial statements. We expect that the legal and accounting costs of being a public company will continue to impact our liquidity. In the event the Company does not generate sufficient revenue to meet its expenses, additional funding will need to be obtained.
For the year ended December 31, 2014, we incurred liabilities of $3,634,572 which included accounts payable of $84,189 and derivative liabilities of $2,576,025.
Subsequent Events
In January 2015, Premier Ventures, LLC, purchased 5,460,125 common shares for $48,380 pursuant to the put option executed by the Company.
In January 2015, ICPI converted 130,000 Series A Preferred shares into 13,000,000 common shares.
In January, 2015 the Company entered into a LLC Membership Purchase Agreement (the “Purchase Agreement”) with all of the Members of Harris Lee, LLC (“Harris Lee”) whereby the Company acquired 100% of the equity interest in Harris Lee in exchange for 450,000 shares of the Company’s Series B Preferred Stock, and 300,000 shares of the Company’s Series C Preferred Stock. Harris Lee is in the process of becoming a licensed medical marijuana testing laboratory in the States of Colorado and Oregon, with intentions of expanding to other states in the future. Harris Lee in a wholly owned subsidiary of the Company and is a complementary business to that of MA and Associates, LLC which received a license form the State of Nevada in November 2014 to become a licensed marijuana testing laboratory in the State of Nevada
In January 2015, the Company issued 200,000 Preferred C shares to ICPI in accordance with the MA and Associates agreement signed April 2014.
In January 2015, the Company issued 250,000 Preferred C shares to MA and Associates in accordance with the MA and Associates agreement signed April 2014.
In January 2015, we sold 75,000 Preferred A shares at $0.40 per share for $30,000.
On or about January 8, 2015 the Company and Premier Venture Partners, LLC entered into an Amendment to April 4, 2014 Equity Purchase Agreement which changes the Pricing Period for any Put Notice to nine (9) days and allows the Company to put more shares than previously permitted. The Company expects to take advantage of these new terms following to effectiveness of the Registration Statement on Form S-1which was filed on February 13, 2015 for additional shares to be registered for Premier.
On or about January 28, 2015, Vista Capital funded the Company an additional $25,000 under the Convertible Promissory Note agreement dated October 23, 2014.
In February 2015, ICPI converted 200,000 Preferred A shares into 20,000,000 common shares.
In February 2015, we sold 25,000 Preferred A shares at $0.40 per share for $10,000.
In February 2015, we sold 300,000 Preferred A shares at $0.20 per share for $60,000.
On or about February 20, 2015, the Company entered into a Equity Purchase Agreement and Registration Rights Agreement with Kodiak Capital Group, LLC “Kodiak”) whereby Kodiak is obligated, providing the Company has met certain conditions including the filing or a Form S-1 Registration Statement for the shares to be acquired, to purchase up to Five Hundred Thousand Dollars ($500,000) of the Company’s common stock at the rates set forth in the Equity Purchase Agreement. Under the Equity Purchase Agreement the shares are purchased at the discretion of the Company by issuing a Put Notice when funds are needed. Pyrenees Investments, LLC, will be paid a fee by the Company related to this transaction in an amount up to ten percent (10%) of the amount actually funded pursuant to a certain Investment Banking Agreement dated May 14, 2014.
On or about February 24, 2015 a settlement payment was reached between claimant Pazoo Inc and Defendant Edataworx Inc. The settlement payment totaling $35,000 is to be paid in the following schedule: (i) $15,000 on or before 2/20/2015;
(ii) $15,000 on or before 3/20/2015; (iii) $5,000 on or before 4/20/2015. Additionally EDW will surrender to Pazoo the Common Stock Certificate No. 208 (2,000,000 shares). Pazoo will notify transfer agent to cancel this certificate and issue three new common stock certificates of 500,000 shares each and 2 new certificates of 250,000 each.
On or about February 25, 2015, Tangiers funded the Company an additional $25,000 under the Convertible Promissory Note agreement dated February 27, 2014.
In March, 2015, ICPI converted 160,000 Preferred A shares into 16,000,000 common shares.
In March 2015, we sold 375,000 Preferred A shares at $0.20 per share for $75,000.
On or about March 2, 2015 Pazoo Inc engaged in a consulting agreement with SmallCapVoice.com Inc. Pazoo Inc agrees to compensate SmallCapVoice.com Inc in the amount of $50,000 due upon the execution of the agreement. The term of which is 15 days commencing on 3/2/15. Out of pocket expenses authorized by Pazoo Inc in advance in writing will be reimbursed by Consultant.
On or about March 10, 2015, Harris Lee signed a licensing agreement with Steep Hill Labs, LLC pursuant to the Letter of Intent signed December 30, 2014. The purpose of this agreement is to take the Steep Hill licensing to additional states to test medical marijuana above and beyond the State of Nevada, namely Oregon and Colorado.
On or about March 9, 2015, private investor Rick Marion purchased 50,000 Preferred A shares from the Company in exchange for $50,000.
On or about March 30, 2015, the Company dba Harris Lee signed a Letter of Intent with Front Range to take over their existing medical marijuana testing laboratory in the State of Colorado. The company expects to sign the definitive agreement in the next 30-60 days and be up and operational in Colorado shortly thereafter.
On or about April 2, 2015, the Company entered into a Convertible Promissory Note with LG Capital funding in the amount of $63,000.
On or about April 6, 2015, the Company and Iconic Holdings LLC agreed to amend the $220,000 Promissory Note dated 2/27/14. Iconic shall make a payment to Pazoo Inc of $22,000 of which $2,000 is original issue discount, on or before 4/6/15. The Company received $20,000 on April 2, 2015.
On or about April 14, 2015, the Company paid off the LG Convertible Promissory Note Dated October 22, 2014 for $72,676.
On or about April 14, 2015, the Company paid off the Macallan Convertible Promissory Note Dated October 30, 2014 for $153,480.
In 2015, Auctus converted aggregate principal of $58,705 into 17,680,360 common shares in accordance with the Convertible Promissory Note dated August 6, 2014.
In 2015, Auctus converted aggregate principal of $57,522 into 26,754,792 common shares in accordance with the Convertible Promissory Note dated September 30, 2014.
In 2015, Tangiers converted aggregate principal of $137,895 into 51,886,514 common shares in accordance with the Convertible Promissory Note dated February 27, 2014.
In 2015, JMJ converted aggregate principal of $62,222 into 25,925,925 common shares in accordance with the Convertible Promissory Note dated December 4, 2013.
In 2015, JSJ converted aggregate principal of $109,474 into 28,565,677 common shares in accordance with the Convertible Promissory Note dated April 28, 2014.
In 2015, JSJ converted aggregate principal of $106,949 into 53,475,158 common shares in accordance with the Convertible Promissory Note dated August 22, 2014.
In 2015, Typenex converted aggregate principal of $148,677 into 49,033,066 common shares in accordance with the Convertible Promissory Note dated May 28, 2014.
In 2015, the Company issued an aggregate of 3,833,333 common shares to pazoo.com experts and consultants. The aggregate value of the common shares at time of issuance is $61,143.
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