Notes to Consolidated Financial Statements
Note 1—DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company is a growth stage health and wellness company. Presently, their 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.
Further, the Company entered the pharmaceutical testing laboratory market with their acquisitions of MA & Associates, LLC (see Note 3) which will operate pharmaceutical testing laboratories in Nevada, and Harris Lee Holdings, LLC (see Note 3) 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. 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.
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. and Harris Lee Holdings LLC 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 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.
Equity Method Investments
Equity method investees are all entities over which the Company has significant influence, but not control. Significant influence is presumed with a shareholding of between 20% and 50% of the voting rights. Investments in equity method investees are accounted for using the equity method of accounting and are initially recognized at cost. As of December 31, 2014, the Company has investments in, MA & Associates, LLC and Harris Lee, LLC which provide the Company with significant influence.
In 2015, both entities became wholly owned subsidiaries.
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 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 Steep Hill and MA license, along with the in-process research & development, were evaluated for impairment and no impairment loss was incurred as of December 31, 2015. During the year ended December 31, 2014, the Company performed an impairment analysis and determined that due to the fact that MA is a start up with no current cash flows; we impaired 100% of the equity method investment resulting in an impairment loss of $542,780 during 2014.
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. 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.
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, 2015 and 2014.
Recurring Fair Value Measurements
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,756,435
|
|
|
$
|
1,756,435
|
|
Derivative liability – December 31, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,576,025
|
|
|
$
|
2,576,025
|
|
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 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.
Inventories
Inventory currently consists predominately of goods purchased from third party suppliers and does not include raw materials. Certain inventory contains expiration dates (“shelf life”) and the efficacy of any product which is held beyond its shelf life may be impaired. Our inventory reserve is zero. The company purchased most inventory in 2011 with very little purchases in 2012 and as such, there are some products that are approaching the end of their shelf life and were written off in 2013 and 2014. Inventory cost is determined using the weighted average cost method.
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 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.
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, or ASU 2014-15. ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 defines the term substantial doubt, requires an evaluation of every reporting period including interim periods, provides principles for considering the mitigating effect of management’s plan, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, requires an express statement and other disclosures when substantial doubt is not alleviated, and requires an assessment for a period of one year after the date that the financial statements are issued or available to be issued. The amendments in ASU 2014-15 are effective for annual periods beginning after December 15, 2016 and interim periods within those reporting periods. Earlier adoption is permitted. The Company is currently evaluating the impact this guidance may have on our 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 we determined the effect of the standard on our ongoing financial reporting.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed to have a material impact on our present or future consolidated financial statements.
Note 2—GOING CONCERN
During 2015 and 2014, the Company incurred net losses of $4,478,725 and $4,899,583, respectively. In addition, as of December 31, 2015, the Company had a working capital deficit of $4,368,294. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon our ability to generate sufficient cash flow and raise additional capital to meet our obligations on a timely basis and ultimately attain profitability. If the Company is unable to generate sufficient cash flow or raise additional capital, it could be forced to cease operations.
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 2014 and 2015, prior to taking control through the acquisition of the remaining 60% interest, the consideration paid was originally recorded as an investment in 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 $40,000 as of December 31, 2015), totaling $718,581 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.
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
|
|
Intangible - License Agreement
|
|
|
1,345,771
|
|
Other assets
|
|
|
56,985
|
|
Total assets acquired
|
|
$
|
1,678,433
|
|
|
|
|
|
|
LIABILITIES ASSUMED
:
|
|
|
|
|
Current liabilities
|
|
$
|
(11,756
|
)
|
Other liabilities
|
|
|
(9
|
)
|
Total liabilities assumed
|
|
$
|
(11,766
|
)
|
Net assets acquired
|
|
$
|
1,666,667
|
|
|
|
|
|
|
Acquisition Price
|
|
$
|
1,666,667
|
|
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, 2015 and 2014 immaterial and are thus not shown.
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.
Note 4—LINE 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 bares 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 line of credit has been used for general operating expenses.
Note 5—FIXED ASSETS
Fixed assets consists of the following:
|
|
Estimated Useful Life
(in years)
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
3-5
|
|
|
$
|
643,195
|
|
|
$
|
-
|
|
Furniture and fixture
|
|
|
7
|
|
|
|
6,687
|
|
|
|
-
|
|
Leasehold improvements
|
|
|
3-5
|
|
|
|
238,620
|
|
|
|
-
|
|
Website
|
|
|
3
|
|
|
|
1,385
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
889,887
|
|
|
$
|
-
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(140,046
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets, Net
|
|
|
|
|
|
$
|
749,841
|
|
|
$
|
-
|
|
Costs of assets acquired under capital leases were approximately $615,000 for the year ended December 31, 2015. 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, 2015 and December 31, 2014 was $140,046 and $0, respectively.
Note 6—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 for the acquisition of $1,345,771. The cost basis of the intangible asset will be amortized over a twenty year useful life. Amortization expense during the year ended December 31, 2015 was $62,336. Annual amortization expense is approximately $107,000 per year.
Note 7—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 Non-convertible Preferred Stock, 10,000,000 Series C Non-convertible Preferred Stock,12,500,000 Series D Preferred Stock, and 12,500,000 Series E Preferred Stock.
On or about March 17, 2014, the Board of Directors voted to affect a 10 for 1 reverse stock split on all outstanding Series A Preferred Stock As a result of the reverse stock split, the Series A Preferred Stock is now convertible into one hundred shares of common stock (which giving effect to the reverse stock split of 100 for 1 in March of 2016, is now one to one on conversion)
for each Preferred share at the option of the holder, does not have voting rights and pays a Series A Preferred Stock dividend of 5% annually and an expiration date of February 1, 2022. The Company shall pay the amount due on the Maturity Date in kind with shares of Common Stock. The number of shares of Common Stock to be issuable to a Holder on the Maturity Date (the “Maturity Shares”) shall be equal to the quotient of (x) the aggregate Liquidation Preference for such Holder’s Shares on the Maturity Date divided by (y) the Conversion Price in effect as of the Maturity Date. On or before the third (3rd) Business Day following the Maturity Date (the “Maturity Share Delivery Date”), the Company must deliver to each Holder the Maturity Shares issuable to such Holder. In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, each Holder shall be entitled to receive prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of any Junior Stock, an amount (the “Liquidation Preference”) equal to (A) $1,000 per Share held by such Holder, plus (B) a further amount equal to any Dividends accrued but unpaid on such Shares. If, upon such liquidation, dissolution or winding up of the Company, the assets of the Company available for distribution to the stockholders of the Company are insufficient to provide for the payment of the full aforesaid preferential amount, such assets as are so available shall be distributed among the Holders in proportion to the relative aggregate Liquidation Preferences of the Shares held by such Holders. The Liquidation Preference shall be appropriately adjusted for any stock splits, stock combinations, stock dividends or similar recapitalizations.
The Series B Preferred Stock is non-convertible, does not pay a dividend, and contains preferential voting rights. On August 14, 2015 the Company filed a Definitive Information Statement with the SEC on Form 14C increased the voting rights from a ratio of 200 votes for each share of Series B Preferred Stock to 1,000 votes for each share of Series B Preferred Stock. In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, each Holder shall be entitled to receive prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of any Junior Stock, an amount (the “Liquidation Preference”) equal to $0.001 per Share held by such Holder, or such other amount as any Securities Purchase Agreement under which the Shares are issued may provide. If, upon such liquidation, dissolution or winding up of the Company, the assets of the Company available for distribution to the stockholders of the Company are insufficient to provide for the payment of the full aforesaid preferential amount, such assets as are so available shall be distributed among the Holders in proportion to the relative aggregate Liquidation Preferences of the Shares held by such Holders. The Liquidation Preference shall be unaffected for any stock splits, stock combinations, stock dividends or similar recapitalizations.
The Series C Preferred Stock is non-convertible and has no voting rights and has an expiration date for redemption to February 1, 2022. The Company shall pay the amount due on the Maturity Date in kind with shares of Common Stock. The number of shares of Common Stock to be issuable to a Holder on the Maturity Date (the “Maturity Shares”) shall be equal to the quotient of (x) the aggregate Liquidation Preference for such Holder’s Shares on the Maturity Date divided by (y) the Conversion Price in effect as of the Maturity Date. On or before the third (3rd) Business Day following the Maturity Date (the “Maturity Share Delivery Date”), the Company must deliver to each Holder the Maturity Shares issuable to such Holder. In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, each Holder shall be entitled to receive prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of any Junior Stock, an amount (the “Liquidation Preference”) equal to (A) $0.001per Share held by such Holder, plus (B) a further amount equal to any Dividends accrued but unpaid on such Shares. If, upon such liquidation, dissolution or winding up of the Company, the assets of the Company available for distribution to the stockholders of the Company are insufficient to provide for the payment of the full aforesaid preferential amount, such assets as are so available shall be distributed among the Holders in proportion to the relative aggregate Liquidation Preferences of the Shares held by such Holders. The Liquidation Preference shall be appropriately adjusted for any stock splits, stock combinations, stock dividends or similar recapitalizations.
The Company and ICPI have engaged in a total of six investment agreements between the time of January 2011 and April 2016, with the last amendment to Investment Agreement No. 6 coming November 2016. All of the investment agreements between ICPI and the Company provide for Series A Preferred Stock to be issued by the Company upon a cash investment provided to the Company by ICPI. ICPI makes up the majority of the Series A Preferred Stock outstanding at December 31, 2015.
Total stock-based compensation recognized during 2015 totaled $1,221,981, consisting of 522,208 common shares and 50,000 Series A preferred shares, 575,000 Series B preferred shares and 803,000 Series C preferred shares. Total stock-based compensation recognized during 2014 totaled $1,116,008, consisting of 353,742 common shares and 15,000 Series A preferred shares.
On or about March 17, 2014, the Board of Directors voted to affect a 10 for 1 reverse stock split on all outstanding Series A Preferred Stock. All share and per share amounts herein have been retroactively restated to reflect the split.
In 2014, The Company sold an aggregate of 287,500 of Series A Preferred Stock and 287,500 Series A preferred stock warrants for cash proceeds of $340,000.
In 2014, ICPI exercised warrants in the amount of 80,000 Series A Preferred Stock warrants for cash proceeds of $40,000.
In August 2014, 10,000 shares of Series A Preferred Stock was issued to Jordan Stroum as Pazoo’s representative to MA & Associates in Las Vegas, Nevada per the agreement signed July 25, 2014. Series A Preferred Stock converts at a rate of 100:1. The 10,000 Series A Preferred Stock convert into 10,000 shares of common stock. The shares were valued at $34,800.
In October 2014, 5,000 Series A Preferred Stock was issued to Jordan Stroum in exchange for services rendered as Pazoo’s representative to MA & Associates in Las Vegas, Nevada as per the agreement signed July 25, 2014. Series A Preferred Stock converts at a rate of 1:1. The 5,000 Series A Preferred Stock convert into 5,000 shares of common stock. The shares were valued at $19,850.
During 2014, 269,500 shares of Series A preferred stock were converted into 269,500 common shares.
Total Series A Preferred shares outstanding as of December 31, 2014 were 1,036,394.
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 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 were 1,762,500.
In 2015, the Company issued an aggregate of 1,803,000 Series C Preferred Stock for acquisitions and 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 2015, there have been no issuances or sales of Series D Preferred Stock or Series E Preferred Stock.
Common Stock
Issuances
In 2014, we issued a total of 51,961 common shares for aggregate cash proceeds of $77,076, in accordance with the put agreements per the equity agreement with Premier Venture Capital dated April 4, 2014.
In 2014, we issued a total of 17,395 common shares for a stock subscription receivable $18,253 which was collected during 2015.
In 2014, we issued a total of 353,742 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. The total stock compensation expense recorded during 2014 was $1,061,358. As of December 31, 2014, there were 5,893,333 shares to be issued that will be earned through 2015.
In 2014, we issued 12,500 common shares with debt valued and recorded as a debt discount at $35,897.
In 2015, we 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, we 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, we issued 9,042,939 common shares with debt or for the conversion of debt valued at $1,303,908.
Conversions
In 2014, we issued an aggregate of 211,109 common shares for the conversion of debt and accrued interest totaling $207,843.
In 2015, we issued an aggregate of 9,042,939 common shares for the conversion of debt and accrued interest totaling $1,396,995.
Preferred Stock Warrants
In 2014, The Company sold an aggregate of 287,500 of Series A Preferred Stock and 287,500 Series A preferred stock warrants for cash proceeds of $340,000.
In 2014, ICPI exercised 80,000 Series A Preferred Stock warrants for cash proceeds of $40,000.
In 2015, in connection to the Preferred Stock above, 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.
The following table presents the Series A preferred stock warrant activity during 2015 and 2014:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2015
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2015
|
|
|
|
|
|
|
|
|
The weighted average remaining life of the outstanding Series A preferred stock warrants as of December 31, 2015 and December 31, 2014 was 4.22 and 3.26 years, respectively.
Common Stock Warrants
The following table presents the common stock warrant activity during 2015 and 2014:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding - December 31, 2013
|
|
|
5,000,000
|
|
|
$
|
0.05
|
|
Granted
|
|
|
1,130,470
|
|
|
|
0.05
|
|
Forfeited/canceled
|
|
|
(2,200,000
|
)
|
|
|
0.05
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding - December 31, 2014
|
|
|
3,930,470
|
|
|
$
|
0.05
|
|
Granted
|
|
|
-
|
|
|
|
0.05
|
|
Forfeited/canceled
|
|
|
(2,600,000
|
)
|
|
|
0.05
|
|
Exercised
|
|
|
(1,330,470
|
)
|
|
|
0.05
|
|
Outstanding – December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable – December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
As of December 31, 2014 two warrants exercisable into 3,930,470 common shares were outstanding, which were comprised of a warrant for 2,600,000 shares relating to ICPI Investment Agreement No. 1, dated January 11, 2011, all of which expired during the twelve months ended December 31, 2015 and a warrant for 1,330,470 that was exercisable into $67,500 worth of common stock, which was exercised during 2015. See below for additional details regarding this warrant. As of December 31, 2015, no warrants for common stock were outstanding.
On June 22, 2015 Typenex Co-Investments, LLC submitted a cashless warrant Notice of Exercise seeking 529,682 shares pursuant to a Warrant dated on or about May 14, 2014. The Company disputed the Notice of Exercise due to what the company believes was bad faith upon the holder acting in such a fashion to deflate the Company’s stock price in order to obtain more share under the Warrant. On or about July 29, 2015 the Company permitted Typenex to submit a new Notice of Exercise for 45,000 shares. It is the Company’s position that Typenex is not entitled to any additional shares under the Warrant. The Company and Typenex have reached an agreement in principal to resolve this dispute. Under the terms of the proposed settlement, Typenex will be issued common stock of the Company in the total aggregate value of $50,000. Typenex is prohibiting from holding more than 4.99% of the outstanding common stock of the Company and will be subject to leak out provisions restricting the amount of stock of the Company that sold. These terms and stock to be issued has been properly accrued for.
Note 8—RELATED PARTY TRANSACTIONS
In July 2013, the Company entered into a consulting agreement with an affiliate of Mr. Basloe, a board member of the Company. The agreement provides for consulting on marketing-related services for the Company. The amounts paid under this agreement in the years ended December 31, 2015 and December 31, 2014 were $46,617 and $57,650, 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 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.
Note 9—CONVERTIBLE NOTES
The following table summarizes the changes in the convertible notes during 2014 and 2015:
|
|
Short Term
|
|
|
Long Term
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
1,849
|
|
|
$
|
-
|
|
|
$
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,444,700
|
|
|
|
852,500
|
|
|
|
2,297,200
|
|
|
|
|
14,752
|
|
|
|
-
|
|
|
|
14,752
|
|
|
|
|
(240,000
|
)
|
|
|
-
|
|
|
|
(240,000
|
)
|
|
|
|
(88,400
|
)
|
|
|
(50,000
|
)
|
|
|
(138,400
|
)
|
|
|
|
176,661
|
|
|
|
10,000
|
|
|
|
186,661
|
|
|
|
|
1,309,562
|
|
|
|
812,500
|
|
|
|
2,122,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized discount
|
|
|
(413,898
|
)
|
|
|
(783,668
|
)
|
|
|
(1,197,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
$
|
895,664
|
|
|
$
|
28,832
|
|
|
$
|
924,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263,287
|
|
|
|
180,000
|
|
|
|
1,443,287
|
|
|
|
|
331,193
|
|
|
|
-
|
|
|
|
331,193
|
|
|
|
|
(413,000
|
)
|
|
|
-
|
|
|
|
(413,000
|
)
|
|
|
|
(1,224,163
|
)
|
|
|
-
|
|
|
|
(1,224,163
|
)
|
|
|
|
76,156
|
|
|
|
-
|
|
|
|
76,156
|
|
|
|
|
1,343,035
|
|
|
|
992,500
|
|
|
|
2,335,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized discount
|
|
|
(533,391
|
)
|
|
|
(794,036
|
)
|
|
|
(1,327,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
809,644
|
|
|
$
|
198,464
|
|
|
$
|
1,008,108
|
|
In February 2014, the Company entered into a 10% convertible note with Tangiers in the amount of $60,500. Of this amount, $5,500 was an original issue discount on the note. The note is amortized using the straight line method through the maturity date of February 27, 2015. The note is convertible at a variable price of the lower of $0.01 or 50% of the lowest trading price during the 25 day period prior to the date of conversion. The note is convertible 180 days from the date of the note. The note matures on February 27, 2015. In September 2014, the entire balance was converted into 80,666 shares of common stock using a conversion price of $0.0075 per share. The note was fully amortized since it was converted in full during the year 2014.
In April 2014, the Company entered into a 12% Convertible Note with JSJ Investments, Inc. (“JSJ”) in the amount of $100,000. Prior to October 28, 2014, the Company may redeem the Note for $150,000. Thereafter, JSJ may convert the Note into common stock of the Company at a stated discount of 50% based on the average of the lowest three trades in the previous ten days, or $0.06 per share. The note matures on October 28, 2014. The note was amended on October 21, 2014. The new conversion rate is now either 50% discount to the average of the three lowest trades in the previous ten days immediately prior to the date of conversion or a 50% discount to the average of the three lowest trades in the previous ten trading days immediately prior to October 28, 2014. The new maturity date is April 28, 2015. The amendment included a standstill provision whereby the parties agree to no conversions under the Note until February 1, 2015 and in consideration of the standstill provision the Company agrees to pay JSJ $36,000 by October 28, 2014, of which $1,000 is for legal fees payable to New Venture Attorneys, P.C. The payment of $35,000 to JSJ and payment of $1,000 to New Venture Attorneys, P.C. were both paid on October 27, 2014.
In April 2014, the Company entered into an Equity Purchase Agreement and a Securities Purchase Agreement with Premier Venture Partners, LLC (“Premier”) whereby Premier is obligated, providing the Company has met certain conditions including the filing of a Form S-1 Registration Statement for the shares to be acquired, to purchase up to $5,000,000 of the Company’s common stock at the rates set forth at the request of the Company by issuing a Put Notice when funds are needed. The Securities Purchase Agreement is a facility whereby the Company will receive $22,500 pursuant to two Convertible Promissory Notes.
In April 2014, the Company entered into a Convertible Promissory note totaling $16,601 with ICPI for expense of rent of office space. ICPI may convert the note into fully paid and non-assessable shares of Series A Preferred Stock. The conversion price is $0.50 per share.
In April 2014, the Company entered into a $10,000 Convertible Promissory Note (the “Note”) with Premier Venture Partners, LLC. Under the terms of the Note the Company will receive $10,000 for the preparation and filing of the Form S-1 Registration Statement required for the Equity Purchase Agreement (Attached as Exhibit 99.02 to the Company's Form 8-K filed April 9, 2014). Premier Venture Partners, LLC shall have the right to convert any unpaid sums into common stock of the Company at the rate of the lesser of $.03 per share or 50% of the lowest trade reported in the 10 days prior to date of conversion. A second Convertible Promissory Note, in the amount of $12,500, will be issued after the Form S-1 Registration Statement is filed in order to cover any additional expense of making the Form S-1 Registration Statement effective. All of the $22,500 was paid directly to legal for the expense of preparing and making the S-1 Registrations Statement effective.
In May 2014, the Company entered into a 10% Convertible Note with Typenex Co Investment LLC (“Typenex”) in the amount of $139,500, of which $14,500 is the original issue discount. The discount is amortized using the straight line method over the term of the note. Typenex may convert the Note into common stock of the Company at a conversion price of $0.07 per share. The note matures on March 28, 2015. In conjunction with the note, a total of 11,304 common stock warrants were issued. The warrants were accounted for as derivative liabilities resulting in a discount to the note of $83,682. In December 2014, $35,174 of the note and accrued interest was converted into 27,140 shares of common stock using a conversion price of $1.30 per share.
In May 2014, the Company entered into an 8% Convertible Note with LG Capital Funding LLC (“LG”) in the amount of $58,500, of which $10,000 is the original issue discount. The discount is amortized using the straight line method over the term of the note. LG may convert the Note into common stock of the Company at a stated discount of 50% based average of the lowest trading bid price for the 15 prior trading days. The note is convertible 180 days from the date of the note.
In July 2014, the Company entered into a $200,000 Convertible Note with WHC Capital LLC, of which there is a $40,000 original issue discount. WHC was also issued 12,500 common shares as part of the agreement and those shares were recorded as debt discount of $52,500. WHC may convert the note into common stock of the Company at a 50% discount to the lowest trading price of 25 trading days prior to the conversion date. The note is convertible 180 days from the date of the note. WHC was fully repaid in October of 2014 in the amount of $240,000.
In July 2014, Tangiers provided additional funding to the Company in the amount of $50,000 in accordance with the February 2014 agreement. The note had a $5,000 original issue discount and accrues interest at 10%.
In August 2014, the Company entered into a 12% $100,000 Convertible Note with JSJ Investments. JSJ may convert the Note into common stock of the Company at a 50% discount to the average 3 lowest trading days of 20 trading days prior to conversion OR 20 trading days prior to the date the note was executed.
In August 2014, the Company entered into a $56,250 Convertible Note with Auctus Private Equity Fund LLC, of which $6,250 is original issue discount. Auctus may convert the note into common stock at a 50% discount to the average 2 lowest trading days of 25 trading days prior to the conversion. The note is convertible 180 days from the date of the note.
In September 2014, the Company entered into an amendment to the Tangiers convertible note up to the amount of $220,000 from February 2014. Company borrowed a total of $55,000 of which $5,000 is original issue discount. Tangiers may convert the Note into common stock of the Company at the lower of $2.30 or a 50% discount to the trading price of the prior 25 trading days. The note is convertible 180 days from the date of the note. The new term of the note is September 22, 2014.
In September 2014, JMJ Investments provided additional funding to the Company in the amount of $50,000 in accordance with the December 2013 agreement of which $5,556 is original issue discount.
In September 2014, the Company entered into a $55,250 Convertible Note with Auctus Private Equity Fund LLC, of which $5,250 is original issue discount. Auctus may convert the note into common stock at a 50% discount to the average 2 lowest trading days of 25 trading days prior to the conversion. The note is convertible 180 days from the date of the note.
In October 2014, the Company entered into a 8% Convertible Note with Union Capital LLC in the amount of $50,000 of which $2,500 is original issue discount. Union may convert the note into common shares of the Company at a discount of 50% to the lowest trading price of the 20 trading days prior to the conversion date.
In October 2014, the Company entered into a $55,000 Convertible Note with Vista Capital Investments LLC, of which $6,111 is original issue discount. Vista may convert the note into common shares of the Company at $5.00 or a 60% discount to the lowest trading price of the 25 days prior to the conversion date.
In October 2014, JMJ Investments provided additional funding to the Company in the amount of $40,000 in accordance with the December 2013 agreement of which $4,444 is original issue discount.
In October 2014, the Company entered into a 8% Convertible Note with LG Capital Funding LLC in the amount of $47,250, of which $6,750 is original issue discount. LG may convert the note into common shares of the Company at a 50% discount to the lowest trading price of the 15 days prior to the conversion date.
In October 2014, the Company entered into a 10% Convertible Note with Sarna Family Limited Partnership in the amount of $200,000. Sarna may convert the note into common shares of the Company at $1.00. In November 2014, $25,000 of the note was converted into 25,000 shares of common stock using a conversion price of $1.00 per share.
In October 2014, the Company entered into a 10% Convertible Note with private investor Mark Sarna in the amount of $200,000. Mr. Sarna may convert the note into common shares of the Company at $1.00. In November 2014, $25,000 of the note was converted into 25,000 shares of common stock using a conversion price of $1.00 per share.
In October 2014, the Company paid off the WHC Capital LLC Convertible Note in the amount of $240,000.
In October 2014, the Company entered into a 10% Convertible Note with Macallan Partners in the amount of $110,000, of which $10,000 is original issue discount. Macallan may convert the note into common shares of the Company at the lesser of a 50% discount to the lowest price in the previous 20 days prior to conversion or at a 50% discount to the bid price on the day of conversion.
In November 2014, the Company entered into a 12% Convertible Note with Eastmore Capital in the amount of $55,000, of which $4,000 is original issue discount. Eastmore may convert the note into common shares of the Company at the lesser of the lowest trading price of the day preceding the conversion or at a 50% discount to the lowest price in the previous 15 trading days before the conversion.
In November 2014, the Company entered into a 12% Convertible Note with Carebourn Capital in the amount of $128,000, of which $15,800 is original issue discount. Carebourn may convert the note into common shares of the Company at a discount of 50% of the average 3 lowest trading days within the previous 10 trading days prior to conversion.
In December 2014, the Company entered into a 10% Convertible Note with SBI Investments in the amount of $240,000, of which $40,000 is original issue discount. SBI may convert the note into common shares of the Company at a 50% discount to the lowest trading price in the previous 25 trading days prior to the conversion.
In December 2014, the Company entered into a 10% Convertible Note with investor Joshua Parkiel in the amount of $12,500. Mr. Parkiel may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with private investor David Sarna in the amount of $12,500. Mr. Sarna may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with investor Howard Schwartz in the amount of $25,000. Mr Schwartz may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with private investor Larry Pantirer in the amount of $25,000. Mr. Pantirer may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with investor Seymour Pinewski in the amount of $50,000. Mr Pinewski may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with private investor Stuart Troyetsky in the amount of $50,000. Mr. Troyetsky may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with investor Alan Pines in the amount of $75,000. Mr Pines may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with private investor Martin Statfield in the amount of $50,000. Mr. Statfield may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with investor Morris Sarna in the amount of $50,000. Mr. Sarna may convert the note into common shares of the Company at $1.00.
In December 2014, the Company entered into a 10% Convertible Note with private investor Steve Montag in the amount of $12,500. Mr. Montag may convert the note into common shares of the Company at $1.00.
In 2014, JMJ Investments converted an aggregate of $62,169 of notes and accrued interest into 53,302 shares of common stock using conversion prices ranging from $0.75 to $20.4 per share.
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, to new assignee, totaled $331,193 in 2015. As of December 31, 2015, the unamortized debt discounts totaled $1,327,427.
During 2014, the Company received $2,297,200 of new cash additions. Noteholders converted $138,400 during the year ended December 31, 2014 into common stock. Non-cash additions totaled $16,601 in the year ended December 31, 2014. As of December 31, 2014, the unamortized debt discount totaled $1,197,566. Interest rates ranged from 8% to 22%
and the conversion rates on average are $1.00 to $0.02 at December 31, 2015
.
The Company evaluated all convertible notes describe above under ASC 815 and determined that they qualify as derivative liabilities (see Note 10).
Certain convertible Notes above, as of December 31, 2015, were in default because they were past due so these notes were amended to extend maturity dates into 2016 or converted into common stock in 2016.
In 2016, interest rates of 10% increased to 12% retroactively and starts when the debt was issued. The maturity dates of these notes were also extended by 2 years retroactively and starts when the debt was issued.
Future minimum payments owed on the outstanding debt of the Company as of December 31, 2015 are as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,343,035
|
|
|
|
-
|
|
|
|
-
|
|
|
|
712,500
|
|
|
|
280,000
|
|
|
|
2,335,535
|
|
Short-term Non-Convertible Note
|
|
|
203,000
|
|
|
|
-
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-
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-
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203,000
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1,546,035
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-
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-
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712,500
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280,000
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2,538,535
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Note 10—DERIVATIVE LIABILITIES
The Company evaluates all of it 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.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
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 are tainted, as they include price protection clauses, in 2014 and 2015 and accounted for as derivative liabilities.
The following table summarizes the changes in the derivative liabilities during 2014 and 2015:
Balance as of December 31, 2013
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Additions at fair value recognized as expense
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Additions at fair value recognized as debt discounts
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Gain on change in fair value
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Resolution of derivative liabilities
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Balance as of December 31, 2014
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Initial value derivatives
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Balance as of December 31, 2015
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During 2015 and 2014, the aggregate loss on derivative liabilities was $898,759 and $1,292,419, respectively, consisting of initial derivative expense and the change in the fair value of the derivative liabilities.
The Company uses the Black Scholes Option Pricing Model to value its convertible debt and warrant derivative liabilities based upon the following assumptions:
Note 11—INCOME TAXES
The Company uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. During 2014 and 2015, the company incurred net losses and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $3,881,918 at December 31, 2015, and will expire in the years 2031 – 2033.
Internal Revenue Section 382 restricts the ability to use these carryforwards whenever an ownership change as defined occurs.
At December 31, 2015, deferred tax assets consisted of the following:
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Less: valuation allowance
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At December 31, 2014, deferred tax assets consisted of the following:
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Less: valuation allowance
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Note 12—LOANS PAYABLE
In June 2013, Pazoo, Inc. entered into a Promissory note totaling $9,000 with ICPI for expenses paid directly to vendors. In November 2013, $6,000 was converted into 15,000 Series A Preferred shares. ICPI is a Series A Preferred stockholder. As of December 31, 2015 and 2014, $3,000 still remains outstanding.
In September 2015, Pazoo, Inc. entered into a loan note totaling $200,000 with Mark Sarna and Sarna Family Limited Partnership. The note has an interest rate of 15.0% and matures September 22, 2016. As of December 31, 2015, $200,000 still remains outstanding.
Note 13—COMMITMENTS
On March 10, 2015, Harris Lee signed a 9-year licensing agreement with Steep Hill Labs, LLC, with options to renew for an additional 9 years. The purpose of the 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. Under the license agreement for the first two states (Oregon and Colorado), if certain gross revenue thresholds are met, the Company is obligated to pay an additional $250,000. In addition, the Company is obligated to pay certain royalties over the life of the license agreement to Steep Hill Labs, LLC, based on the greater of the number of tests ($5 dollars a test) or an escalating royalty rate (7% to 15%) of the initial purchase price.
The Company has the option to enter into additional states with similar commitments and royalties.
During the twelve months ended December 31, 2015 MA and Associates, LLC entered into various capital lease agreements to finance fixed asset purchases for approximately $615,000. Total monthly payments over the 36 month terms are approximately $17,000.
The Company rents office space in New Jersey with a term ending on February of 2016 and monthly payments of approximately $1,500. The Company’s MA and Associates, LLC subsidiary rents space in Nevada with a 60 month term ending in May of 2019, with monthly rent expense of $1,632. The Company’s Harris Lee, LLC subsidiary rents space in Portland, Oregon under a 96 month lease, ending October of 2023 with escalating monthly rental payments from $1,650 to $2,322.
Note 14—SUBSEQUENT EVENTS
In 2016, the company issued an aggregate of 7,528,617 common shares to debt holders valued at a total of $45,075 for conversions pursuant to convertible notes. The conversion prices on these stock issuances ranged from $0.007 to $0.7.
In 2016, investors converted 368,526 Series A Preferred stock into 368,526 common stock.
Investors of Series A Preferred stock converted 875,000 shares of Preferred A stock into 875,000 shares of common stock which was issued on January 4, 2016.
In 2016, the Company issued an aggregate of 97,500 Series C Preferred stock for an aggregate amount of $50,000.
In January 2016, the Company entered into short term capital loans in the aggregate amount of $20,000.
In February 2016, the company entered into convertible note agreements for an aggregate total of $102,750. The interest rates range from 8% - 12% and the conversion terms are at a 50% discount to the 25 prior trading days
In February 2016, Pazoo licensee Harris Lee Colorado, LLC, a related party, received official approval from the Colorado Marijuana Enforcement Division (MED) on 2/22/16 to officially take over management control of the Denver testing lab.
In March 2016, Pazoo entered into a convertible agreement note with private investors for the amount of $300,000 with an interest rate of 12% and a maturity date of March 2021.
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.