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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
______________
 
FORM 10-Q
______________
 
 
x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2012 

OR 
 
o 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)
     
15A Saddle Road
Cedar Knolls, NJ
 
07927
(Address of Principal Executive Offices)
 
(Zip Code)

(973) 455-0970
(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 preceding12 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 x No o
 
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 x No o
 
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
o
Accelerated filer
o
 
Non-accelerated filer
o    (Do not check if a smaller reporting company)
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o No x
 
74,429,500 shares of common stock, par value $0.001 per share, outstanding as of November 12, 2012


 
 
Pazoo, Inc.
Form 10-Q 
 
Table of Contents
 
 

 
 
 
 
 

 
 

 

 
 
Part I – FINANCIAL INFORMATION 
 
Item 1       Financial Statements
 
 
PAZOO, INC  
(A DEVELOPMENT STAGE COMPANY)  
BALANCE SHEETS  
             
             
   
 September 30,
2012
   
 December 31,
2011
 
   
(Unaudited)
   
(Audited)
 
             
ASSETS            
Current assets:
           
Cash and cash equivalents
  $ 252,524     $ 3,022  
Accounts receivable
    43,360       -  
Inventories
    5,423       3,360  
Prepaid expenses
    1,698,872       696  
                 
Total current assets
    2,000,179       7,078  
Property and equipment, net
    -       -  
                 
Total assets
  $ 2,000,179     $ 7,078  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
               
Current liabilities:
               
Accounts payable
  $ 46,665     $ 24,755  
Payroll liabilities
    7,856       4,066  
Loans payable - related party
    18,302       18,302  
Interest payable
    82       37  
Accrued taxes
    11       -  
                 
Total current liabilities
    72,916       47,160  
                 
Total liabilities
  $ 72,916     $ 47,160  
                 
Stockholders' equity (deficiency):
               
Common stock, $0.001 par value; 980,000,000 shares authorized,  74,429,500 and 48,182,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
    29,430       3,182  
Preferred stock, Ser. A, $0.001 par value, 10,000,000 shares authorized, 5,485,306 and 4,515,306 shares issued and outstanding, respectively, at September 30, 2012. 2,400,000 shares issued and outstanding  and December 31, 2011.
    5,485       2,400  
Preferred stock, Ser. B, $0.001 par value, 2,500,000 shares authorized, 1,375,000  and no shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
    -       -  
Preferred stock, Ser. C, $0.001 par value, 7,500,000 shares authorized, no shares issued and outstanding at September 30, 2012 and December 31, 2011
    -       -  
Warrants, 13,000,000 and 2,400,000 warrants issued and outstanding at September 30, 2012, and December 31, 2011, respectively
    -       -  
Additional paid-in capital - stock and stock equivalents
    2,120,656       12,728  
Additional paid-in capital - preferred stock
    1,168,780       117,600  
Retained earnings (accumulated deficit)
    (1,397,088 )     (175,992 )
                 
Total stockholders' equity (deficiency)
    1,927,263       (40,082 )
                 
Total liabilities and stockholders' equity (deficiency)
  $ 2,000,179     $ 7,078  
 
 
The accompanying notes are an integral part of these financial statements.
 

 
PAZOO, INC.  
(A DEVELOPMENT STAGE COMPANY)  
STATEMENT OF OPERATIONS  
(Unaudited)  
                               
   
For the three months ended
September 30,
2012
   
For the three months ended
September 30,
2011
   
For the nine months ended
September 30,
2012
   
For the nine months ended
September 30,
2011
   
November 16,
2010
(Inception) to
September 30,
2012
 
                               
Net sales
                             
Service Revenue
  $ 45,000     $ -     $ 90,000     $ -     $ 90,000  
Merchandise Sales
    4,497       561       10,806       636       12,986  
Total Income
    49,497       561       100,806       636       102,986  
Cost of goods sold
                                       
Service Revenue
    -       -       -       -       -  
Merchandise Sales
    4,262       315       11,225       390       13,483  
Total Cost of Goods Sold
    4,262       315       11,225       390       13,483  
Gross profit (loss)
    45,235       246       89,581       246       89,503  
                                         
Selling, general and administrative expenses
    647,249       25,777       719,520       49,980       782,829  
Business advisory
    -       -       35,000       -       35,000  
Loss on advance to vendor
    -       -       -       -       12,900  
Professional fees
    438,459       6,086       490,077       37,112       545,940  
Interest expense
    15       21       45       21       82  
Equipment
    -       -       910       3,904       4,828  
Organizational costs
    -       475       -       3,642       5,258  
Website setup
    33,643       10,120       60,358       27,260       94,988  
Total operating expenses
    1,119,366       42,479       1,305,910       121,919       1,481,825  
                                         
Loss from operations
    (1,074,131 )     (42,233 )     (1,216,329 )     (121,673 )     (1,392,322 )
                                         
Provision for income taxes
    -       -       -       -       -  
                                         
Net loss
  $ (1,074,131 )   $ (42,233 )   $ (1,216,329 )   $ (121,673 )   $ (1,392,322 )
                                         
Weighted average common shares outstanding
                                       
Basic
    69,389,690       48,182,000       57,524,144       48,182,000       50,815,113  
Diluted
    69,389,690       48,182,000       57,524,144       48,182,000       50,815,113  
Net loss per common share
                                       
Basic
  $ (0.02 )     -     $ (0.02 )     -       (0.03 )
Diluted
  $ (0.02 )     -     $ (0.02 )     -       (0.03 )
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
 
PAZOO, INC.  
(A DEVELOPMENT STAGE COMPANY)  
STATEMENT OF CASH FLOWS  
(Unaudited)  
                   
   
For the nine months ended
Septlember 30,
2012
   
For the nine months ended
September 30,
2011
   
November 16,
2010
(Inception) to
September 30,
2012
 
                   
Cash flows from operating activities:
                 
Net loss
  $ (1,216,329 )   $ (121,673 )   $ (1,392,322 )
Adjustments to reconcile net loss to net cash used in operating activities:
                 
Stock issued for services
    2,053,674       12,910       2,069,585  
Changes in operating assets and liabilities:
                       
Increase in accounts receivable
    (43,360 )     -       (43,360 )
Increase in inventories
    (2,063 )     (1,050 )     (5,423 )
Increase in prepaid expenses and other current assets
    (1,698,176 )     (9,900 )     (1,698,872 )
Increase in accounts payable
    21,910       8,527       46,665  
Increase in interest payable
    45       21       82  
Increase in payroll liabilities
    3,790       2,079       7,856  
Increase in accrued taxes
    11       -       11  
                         
Net cash used in operating activities
    (880,498 )     (109,086 )     (1,015,778 )
                         
Cash flows from investing activities:
                       
                         
Net cash used in investing activities
    -       -       -  
                         
Cash flows from financing activities:
                       
Loans payable - related party
    -       11,687       18,302  
Common stock
    -       -       -  
Additional paid-in capital
    -       -       -  
Preferred stock
    4,600       2,000       7,000  
Additional paid-in capital - preferred stock
    1,125,400       98,000       1,243,000  
                         
Net cash provided by financing activities
    1,130,000       111,687       1,268,302  
                         
Net increase in cash and cash equivalents
    249,502       2,601       252,524  
                         
Cash and cash equivalents beginning of period
    3,022       -       -  
                         
Cash and cash equivalents end of period
  $ 252,524     $ 2,601     $ 252,524  
                         
Supplemental Disclosure of Noncash Financing Activities
                 
Conversion of 1,080,000 shares of Preferred Stock, Series A to 10,800,000 shares of Common Stock
  $ 54,000     $ -     $ 54,000  
                         
Preferred Stock Dividend - 95,306 shares Preferred Stock, Series A
  $ 4,765     $ -     $ 4,765  
                         
Conversion of 530,000 shares of Preferred Stock, Series A to 5,300,000 shares of Common Stock
  $ 26,500     $ -     $ 26,500  
 
 
The accompanying notes are an integral part of these financial statements.
 

 
PAZOO, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
Unaudited
 
Note 1 – BASIS OF PRESENTATION
 
The unaudited financial statements have been prepared by Pazoo, Inc. (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The results for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.
 
Note 2 – DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES
 
Description of Business
 
Pazoo, Inc. was originally incorporated in the State of Nevada as IUCSS, Inc., and is a development stage company with our operating headquarters in Cedar Knolls, New Jersey as a leading health and wellness social community to provide information, services, and online products for improvement of everyday living through our website.  We changed our name on May 9, 2011 to take advantage of unique branding and website opportunities in the health improvement field.    The Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7 (FAS7), "Accounting and Reporting by Development Stage Enterprises".  The Company has devoted substantially all of its efforts to business planning and development, as well as allocating a substantial portion of its time and resources in bringing unique product offerings to the market.  The Company is in the initial stages of commencing commercial operations as of September 30, 2012.
 
Use of Estimates
 
In accordance with Generally Accepted Accounting Principles (GAAP) the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the 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.
 
 
 
 
Fair Value of Financial Instruments
 
For certain of the Company's assets and liabilities, including accounts receivable, prepaid expenses, and accounts payable, the carrying amounts approximate fair value due to their short maturities.  The amounts shown for loan payable also approximate fair value because current interest rates and terms offered to the Company for similar debt are substantially the same.
 
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
 
Total stock based compensation is $2,069,585.  Stock based compensation shares issued in the nine month period ended September 30, 2012 totaled $2,053,674 for 10,147,500 shares issued to consultants.  ASC 718 "Compensation - Stock Compensation" which codified SFAS No. 123 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" which codified SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services." 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
 
The Company's financial statements are prepared under the accrual method of accounting. 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.
 
Internal-use Software and Website Development
 
Costs incurred to develop software for internal use and our websites are capitalized and amortized over the estimated useful life of the software.  Costs related to design or maintenance of internal-use software and website development are expensed as incurred.  For the three month period ended September 30, 2012 and the year ended December 31, 2011, no costs were capitalized.  We incurred website hosting and setup expenses, including updates and search engine optimization for our main website, of $33,643 and $10,120 for the three month periods ended September 30, 2012 and 2011, respectively.
 
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 has recently purchased inventory and as such, there are no products that are approaching the end of their shelf life.  Inventory cost is determined using the weighted average cost method.
 
 
 
 
Income Taxes
 
Since inception to September 30, 2012, the Company had no reserves for unrecognized tax benefits on the balance sheet.  There are currently no income tax examinations in progress.  The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company files income tax returns in the U.S. federal jurisdiction and in the state of New Jersey. The Company has filed Federal and State tax returns for the period ended December 31, 2011.
 
Recent Accounting Pronouncements
 
As of September 30, 2012, the Company does not expect any recently issued accounting pronouncements to have a material impact on its financial condition or results of operations.
 
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.  At September 30, 2012, there were 5,485,306 shares of Series A Convertible Preferred Stock outstanding which have not been included in the calculation of diluted common shares outstanding, given that these contingent stock issuances would have an anti-dilutive effect on earnings per share.  Each share of Series A Convertible Preferred Stock converts, at the option of the holder, into 10 shares of the Company’s common stock.   In addition, 13,000,000 shares which may be acquired pursuant to outstanding warrants have also not been included in the calculation of diluted common shares outstanding.  No warrants have been exercised as of September 30, 2012.
 
   
For the
three month period ended
September 30,
   
November 16,
2010
(Inception) to
September 30,
 
   
2012
   
2012
 
                 
Weighted average common shares outstanding
  
     
  
     
Basic
  
 
          69,389,690
   
   
 
50,815,113
  
Diluted
  
 
69,389,690
   
   
 
50,815,113
  
Net income per common share
  
     
   
     
Basic
  
$
         (.02)
 
   
 $
(.03)
  
Diluted
  
$
                        (.02)
 
   
 $
(.03)
 
 
 
 
 
 
 
 
Note 3 – STOCKHOLDERS’ EQUITY
 
Preferred Stock
 
We have authorized 20 million shares of $0.001 par value Preferred Stock.  The preferred shares available for issuance are 10,000,000 Series A Convertible Preferred Stock (Series A Preferred Stock), 2,500,000 Series B Non-convertible Preferred Stock (Series B Preferred Stock), and 7,500,000 Series C Non-convertible Preferred Stock (Series C Preferred Stock).   As of September 30, 2012, we have 7,095,306 and 5,485,306 shares of Series A Preferred Stock issued and outstanding, respectively.  Also, as of September 30, 2012, we have 1,375,000 shares of Series B Preferred Stock issued and outstanding. No Series C Preferred Stock has been issued.
 
The Series A Preferred Stock is convertible into ten shares of common stock for each Preferred share at the option of the holder, does not have voting rights, pays a Series A Preferred Stock dividend of 5% annually, and matures on February 1, 2013.  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 voting rights at a ratio of 200 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, pays a common stock dividend from 2% to 12% annually, and matures on February 1, 2013.  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.
 
 
 
 
In July 2012, Integrated Capital Partners, Inc. (“ICPI”) converted 400,000 shares of Series A Convertible Preferred Stock into 4,000,000 shares of Common Stock pursuant to ICPI’s Investment Agreement dated January 3, 2011 (See, Exhibit 99.1, of the Company’s Form S-1 filed with the Securities and Exchange Commission on November 18, 2011.
 
In August 2012, we issued 1,500,000 Series A Preferred Stock to ICPI at a price of $0.50 per share for $750,000 in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”) in reliance on Section 4(2) of the Act.  This investment completes the $1,000,000 investment commitment under the June 1, 2012 Investment Agreement (See, Exhibit 99.03, of the Company’s Form 8-K filed with the Securities and Exchange Commission on June 20, 2012.
 
In September 2012, ICPI converted 130,000 shares of Series A Convertible Preferred Stock into 1,300,000 shares of Common Stock pursuant to ICPI’s Investment Agreement dated January 3, 2011 (See, Exhibit 99.1, of the Company’s Form S-1 filed with the Securities and Exchange Commission on November 18, 2011.
 
Total Series A Preferred shares outstanding as of September 30, 2012 were 5,485,306.
 
Common Stock
 
Issuances
 
In July 2012, we issued 3,000,000 shares of common stock to Equities Awareness Group in connection with a Financial Marketing Consulting Services Agreement for services to be rendered during the period July 9, 2012 through July 9, 2013.
 
In August 2012, we issued 1,000,000 shares of restricted common stock to Maiella Investment Holdings, LLC (MIH) in connection with an advisory agreement, relating to the Company’s upcoming branding campaign, dated on or about July 1, 2012.
 
In August 2012, we issued 2,000,000 shares of restricted common stock to Edataworx, Inc. in connection with a consulting services agreement, relating to the Company’s upcoming digital branding campaign, dated on or about August 1, 2012.  Edataworx, Inc. has agreed that it will not be eligible to sell 1,000,000 shares until after April 6, 2013 and the remaining 1,000,000 shares until after April 6, 2014.
 
In September 2012, we issued 100,000 shares of restricted common stock to Sigma Software Solutions, Inc. d/b/a Keros Capital in connection with Keros Capital Consulting Agreement, dated on or about September 5, 2012.
 
In September 2012, we issued a total of 537,500 shares of restricted common stock to twenty experts who have agreed to be included in the “Our Experts” section of our Company website (www.pazoo.com).  Each Expert has executed an expert services contract.  The issuances were as follows: Sheila Kay (50,000); Michael Tranquilli (50,000); Dena Mosola (25,000); Matthew Moghaddom (25,000); Laura Miranda (25,000); Richard Seelig (25,000); Randy Rabney (25,000); Terri Rozyla (25,000); Nitin Chhoda (25,000); Aurora Marks (25,000); Christine Watkins (25,000); Cami Smalley (25,000); Jason Levy (25,000); Tanya Maximoff (25,000); Lois Kramer-Perez (25,000); David Philp (25,000); Gregory Jamiel (25,000); Danielle Weinstein (25,000); Elizabeth Bradley (25,000);  and Janice Morra (12,500).
 
In addition to shares issued to experts in the above amounts, we are committed to issuing an additional total of 1,145,000 shares to these various experts for the completion of their services on their one year anniversary date in 2013, an additional total of 1,115,000 shares on their two year anniversary date in 2014, and an additional total of 1,115,000 shares on their three year anniversary date in 2015.  We anticipate adding an additional thirty more experts for a total of total of fifty experts by the first quarter of 2013.
 
 
 
 
Conversions
 
In July 2012, ICPI converted 400,000 shares of Series A Convertible Preferred Stock into 4,000,000 shares of Common Stock pursuant to, and in accordance with, an Investment Agreement dated January 3, 2011 (See, Exhibit 99.01, of the Company’s Form S-1 filed with the Securities and Exchange Commission on November 18, 2011).
 
In September 2012, ICPI converted 130,000 shares of Series A Convertible Preferred Stock into 1,300,000 shares of Common Stock pursuant to, and in accordance with, an Investment Agreement dated January 3, 2011 (See, Exhibit 99.01, of the Company’s Form S-1 filed with the Securities and Exchange Commission on November 18, 2011). 
 
Warrants
 
Simultaneous with the issuance of common stock to Equities AG in July 2012, we issued 2,000,000 cashless warrants with an exercise price of $0.01 that will not be exercisable until April 6, 2014 and will expire on April 6, 2015.  The fair value of these warrants, estimated on the contract date, was recorded as a prepaid expense in the amount of $280,000, and is being amortized as service is performed.
 
Simultaneous with the issuance of common stock to MIH in August 2012, we issued 4,000,000 cashless warrants with an exercise price of $0.01 that will not be exercisable until April 6, 2013 and will expire on April 6, 2014.  The fair value of these warrants, estimated on the contract date, was recorded as a prepaid expense in the amount of $560,000, and is being amortized as service is performed.
 
Simultaneous with the purchase of Series A Preferred Stock in August 2012, we issued 1,500,000 warrants to ICPI and each warrant entitles its owner to purchase one share of Series A Preferred Stock for each Series A Preferred Stock at an exercise price of $0.75 per common share thereunder, subject to the terms of the warrant agreement between the warrant agent and us. The warrants are exercisable three years from the date of issue.  These warrants had negligible fair value at the time of issuance.
 
No warrants have been exercised as of September 30, 2012.
 
Note 4 – RELATED PARTY TRANSACTIONS
 
Related Party Transactions
 
David Cunic has ownership interests in Pazoo, Inc. as a Board Member and the CEO of Pazoo.  He is also an owner of DMC Athletics & Rehabilitation, Inc. (DMC), a collection of outpatient orthopedic physical therapy and personal training centers in Morris County, New Jersey.  Pazoo subleases office space at 15A Saddle Road, Cedar Knolls, NJ 07927, which is also one of the locations of DMC.  Mr. Cunic spends roughly 40 hours per week contributing to the advancement of Pazoo, Inc.  Gina Morreale was previously employed as Secretary/Treasurer for Pazoo, Inc. and was concurrently employed by ICPI, a Series A Convertible Preferred Stock holder.  In September 2011, Ben Hoehn assumed the role of Chief Operating Officer and replaced Gina Morreale as Secretary/Treasurer.
 
ICPI was previously the investor relations firm for VitaminSpice, LLC, prior to its investment into Pazoo, Inc.  VitaminSpice and Pazoo signed a supply agreement in February 2011.
 
 
 
 
 
In April 2012 we entered into a consulting agreement with DMC to render such advice, consultation, information, and services to the Directors and/or Officers of Client regarding general business and marketing matters including, but not limited to the following: advice on structure of the organization, organization of sales team, prospecting new partners/vendor relationships and clients, and positioning of Client into promotional and healthcare marketing, whether through Consultant’s website (www.Pazoo.com), or by some other means, as well as professional physical therapy sessions performed by David M. Cunic for Client.  The amount and duration of any physical therapy services performed by David M. Cunic hereunder shall be by mutual agreement of the Consultant and Client and there shall be no minimum required services performed.
 
Loans Payable- Related Party
 
Pazoo, Inc. entered into Promissory notes totaling $18,302 with ICPI and used the funds for startup and organizational costs.  ICPI is a Series A Preferred stockholder.
 
Note 5 – CONTRACTUAL COMMITMENTS AND LONG TERM LIABILITIES
 
Contractual commitments and Long Term Liabilities
 
Pazoo, Inc. sublets office space at $500 per month from DMC for a twelve-month term which commenced on April 1, 2011 and was extended for an additional year to expire on March 31, 2013.  This lease may be extended on a year-to-year basis at the sole option of Pazoo, Inc.  For the term of the sublet period, we have agreed to maintain public liability insurance on the property as stated in the same amounts of DMC’s original lease with the landlord.  We also lease office space at $695 per month at 5450 East High Street, Phoenix, Arizona, 85054 for a twelve-month term which commenced on January 1, 2012.  This lease is renewable on a 12 month basis.
 
Note 6 – GOING CONCERN
 
Going Concern
 
From November 16, 2010 (inception) through September 30, 2012, the Company incurred net losses of $1,392,322.  This factor, among others, raises significant doubt about the Company’s ability to continue as a going concern. These 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 to meet our obligations on a timely basis and ultimately attain profitability.  Management believes that we can alleviate the facts and circumstances which indicate a going concern by expanding our services, expert advice and online products and becoming more than a web based company providing e-commerce through direct response, retail, e-commerce, and advertising revenue.
 
 
 
 
 
 
 
Note 7 – OTHER EXPENSES
 
Selling, General, and Administrative (SG&A)
 
For the three month period ended September 30, 2012, we incurred selling, general, and administrative expenses of $647,249 compared to $25,777 for the three month period ended September 30, 2011.  The increase was primarily attributed to branding and public relations expenses of $424,499 and media relations expenses of $88,003.  Our branding and public relations expenses increased as a result of contracts with Edataworx and Maiella Investment Holdings who provided consulting services including, but not limited to: corporate branding and awareness strategies, strategic business planning, product marketing and distribution guidance, and Expert Consultant recruitment. Our media relations expenses were attributed to a contract with Money TV to provide 4 weeks of 60 commercial units to air in various cities in the United States, as well as a guest appearance and interview on Money TV.
 
Professional Fees
 
For the three month period ended September 30, 2012, we incurred professional fees of $438,459 compared to $6,086 for the three month period ended September 30, 2011. The increase was mainly attributed to investor relations fees of $396,748 for consulting contracts with Equities AG and Keros Capital to increase the awareness of Pazoo, Inc. in the United States investment community, and with Trion Capital GmbH to provide investor awareness in Europe.
 
Note 8 – SUBSEQUENT EVENTS
 
Subsequent Events
 
In a related party transaction, we signed a Letter of Intent (LOI) in October 2012 to acquire New Jersey based DMC, a collection of outpatient orthopedic physical therapy and personal training centers in Morris County, New Jersey.  Pazoo will exchange a $1.5 million, two (2) year balloon note with 3% interest for the acquisition of DMC and a possible earn-out over the next two (2) years.  David Cunic is the CEO of both Pazoo, Inc. and DMC.  Ben Hoehn is the COO of both Pazoo, Inc. and DMC.  Pazoo subleases office space from DMC at 15A Saddle Road, Cedar Knolls, NJ 07927.
 
 
 
 
 
 


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

This Quarterly Report on Form 10-Q contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Any statements in this Quarterly Report that are not statements of historical facts 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 Quarterly Report on Form 10-Q, including under “Risk Factors.” You should read the following discussion and analysis together with our unaudited financial statements for the periods specified and the related notes included herein. Further reference should be made to our Registration Statement on Form S-1 filed with the Securities and Exchange Commission.

This Quarterly Report on Form 10-Q 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 three months ended September 30, 2012 and September 30, 2011, along with our results of operations for the nine months ended September 30, 2012, and September 30, 2011.

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 deliver healthy cost-effective nutritional products through relationships with leading manufacturers in the health improvement industry.   Pazoo.com’s mission is to be 1) a leading social community offering best-in-class health and wellness products for both people and pets; and 2) an important resource for consumers and professionals with diverse information about health and wellness.  We updated our website prior to the 3rd quarter of 2012 to include the addition of various new experts, multiple new product offerings, user friendly navigation, and a new upgraded backend processing system developed specifically for Pazoo. We anticipate adding an additional thirty more experts for a total of total of fifty experts by the first quarter of 2013.  In the 3rd quarter of 2012 we announced our plans to introduce a new product offering with third party labeling.

Sources of Revenue
With a team of health and wellness experts and other supportive professionals, Pazoo.com is committed to making an impact on its visitors’ health and wellness while producing profit with revenue streams coming from a variety of business initiatives.  We have expanded our business plan to generate revenue through five main sources: 1-website (Pazoo.com), 2-direct response (Pazoo Direct), 3-retail (Pazoo Retail), 4-consulting (Pazoo Wellness), and 5-advertising (Pazoo Advertising).  Since November 16, 2010 (our inception) to the period ended September 30, 2012 (the date of the accompanying financial statements) we have generated $102,986 in total revenues, which is comprised of $12,986 in merchandise revenues and $90,000 in service revenues and we have a cumulative net loss of $1,392,322.  We have never been party to any bankruptcy, receivership or similar proceeding, nor have we undergone any material reclassification, merger, consolidation, purchase or sale of a significant amount of assets not in the ordinary course of business.   

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.
 
 

 
 
Results of Operations
Comparison of the three months ended September 30, 2012 to the three months ended September 30, 2011

Net Sales.  We had net sales of $49,497 comprised of $45,000 service revenue and $4,497 merchandise revenue for the three months ended September 30, 2012, and had no service revenue and $561 merchandise revenue in the three months ended September 30, 2011.  The merchandise revenue increase was attributable to a larger selection of product offerings, a larger customer base and a higher percentage of higher margin sales.  The service revenue increase was a result of a Consulting Advisory Agreement with DMC Athletics & Rehabilitation (See, Exhibit 10.2 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 14, 2012).  Our website (www.pazoo.com) was functional in limited form beginning August 2011.

Operating Expenses.  Operating expenses consisted primarily of, selling, general and administrative expenses, and professional fees.  Total expenses increased 2,535% to $1,119,366 for the three month period ended September 30, 2012 from $42,479 for the three month period ended September 30, 2011.  The components of operating expenses are detailed below.
 
  Selling, General and Administrative increased 2,411% to $647,249 from $25,777, in 2012 versus 2011 which was mainly comprised of branding/public relations expenses.  We incurred branding and public relations expenses of $424,499 in the three month period ended September 30, 2012 compared to $0 for the three month period ended September 30, 2011.  The increased expense was attributed to contracts with Edataworx and Maiella Investment Holdings who provided consulting services including, but not limited to: corporate branding and awareness strategies, strategic business planning, product marketing and distribution guidance, and Expert Consultant recruitment.
     
 
Professional fees increased 7,104% to $438,459 from $6,086 in 2012 versus 2011.  We incurred investor relations expenses of $336,748 in the three month period ended September 30, 2012 compared to $0 for the three month period ended September 30, 2011.  The increase in investor relations expenses was mainly attributed to consulting contracts with Equities AG and Keros Capital to increase the awareness of Pazoo, Inc. in the United States investment community, and with Trion Capital GmbH to provide investor awareness in Europe.
 
Net Loss.  Our net loss increased to $1,074,131 for the three months ended September 30, 2012 from $42,233 for the same period in 2011, which was an increase of 2,443%.  The increase is primarily attributable to selling, general and administrative, and professional expenses as described above.

Comparison of the nine months ended September 30, 2012 to the nine months ended September 30, 2011

Operating Expenses

Net Sales.  We had net sales of $100,806 comprised of $90,000 service revenue and $10,806 merchandise revenue for the nine months ended September 30, 2012, and had no service revenue and $636 merchandise revenue in the nine months ended September 30, 2011.  We signed a Consulting Advisory Agreement to provide consulting services to DMC Athletics and Rehabilitation in the nine months ending September 30, 2012.  (See Exhibit 10.2 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 14, 2012).

Operating Expenses.  Operating expenses consisted of primarily of selling, general and administrative expenses, and professional fees.  Total expenses increased 971% to $1,305,910 for the nine month period ended September 30, 2012 from $121,919 for the nine month period ended September 30, 2011.  The components of operating expenses are detailed below:
 
 
Selling, General and Administrative increased 1,340% to $719,520 from $49,980, in 2012 versus 2011 which was mainly comprised of branding/public relations expenses.  We incurred branding and public relations expenses of $424,499 in the nine month period ended September 30, 2012 compared to $0 for the nine month period ended September 30, 2011.  The increased expense was attributed to contracts with Edataworx and Maiella Investment Holdings who provided consulting services including, but not limited to: corporate branding and awareness strategies, strategic business planning, product marketing and distribution guidance, and Expert Consultant recruitment.
     
 
Professional fees increased 1,221% to $490,077 from $37,112 in 2012 versus 2011.  We incurred investor relations expenses of $396,748 in the nine month period ended September 30, 2012 compared to $0 for the nine month period ended September 30, 2011.  The increase in investor relations expenses was mainly attributed to consulting contracts with Equities AG and Keros Capital to increase the awareness of Pazoo, Inc. in the United States investment community, and with Trion Capital GmbH to provide investor awareness in Europe.
 
 
 
 
Net Loss.  Our net loss increased to $1,216,329 for the nine months ended September 30, 2012 from $121,673 for the corresponding period in 2011, or an increase of 900%.  The increase is primarily attributable to selling, general and administrative and  professional expenses as described above.

Liquidity and Capital Resources.  In the nine month period ended September 30, 2012, we issued 4,695,306 Series A Preferred Stock to Integrated Capital Partners, Inc. (ICPI) which was comprised of 2,600,000 shares at $0.05 per share valued at $130,000 and 2,000,000 shares at $0.50 per share valued at $1,000,000. In addition, we issued 95,306 shares pursuant to a 5% dividend as per the Investment Agreement of January 2011 (For dividend information See, Exhibit 99.1, of the Company’s Form S-1 filed with the Securities and Exchange Commission on November 18, 2011).  This capital was used for prepayment of marketing and branding expenses, investor relations expenses, and operational expenses.  We expect that the legal and accounting costs of becoming a public company will continue to impact our liquidity; however, we do not need to obtain additional funds beyond those committed to us by ICPI to pay those expenses.  Other than the anticipated increases in legal and accounting costs due to the reporting requirements of becoming a reporting company, we are not aware of any other known trends, events or uncertainties, which may affect our future liquidity.
 
Our total assets were $2,000,179 as of September 30, 2012, which mainly consisted of $252,524 in cash and $1,698,872 in prepaid expenses.  We prepaid $1,656,855 to consultants in cash or share based compensation for future services to be performed.  Edataworx and Maiella Investment Holdings received the majority of this prepaid expense in cash, common stock, and warrants or a combination thereof.

We had working capital of $1,927,263 as of September 30, 2012.

Our total liabilities were $72,916 which was mainly attributed to accounts payable of $46,665, short term loans of $18,302, and accrued payroll liabilities of $7,856.

Our total stockholder’s equity as of September 30, 2012 was $1,927,263 and we had an accumulated deficit of $1,397,088 through the same period.

We incurred $880,498 in net cash used in operating activities for the nine months ended September 30, 2012, which included a net loss of $1,216,329, and was offset by stock issued for non-employee compensation of $2,053,674, and was in large part due to $1,698,176 in prepaid expenses to consultants.

We had no cash provided by investing activities in the nine month period ended September 30, 2012.

As of September 30, 2012, we had no formal long-term lines of credit or bank financing arrangements.

Off-Balance Sheet Arrangements.  We have no off-balance sheet arrangements.

 Subsequent Events.

In a related party transaction, we signed a Letter of Intent (LOI) in October 2012 to acquire New Jersey based DMC, a collection of outpatient orthopedic physical therapy and personal training centers in Morris County, New Jersey.  Pazoo will exchange a $1.5 million, two (2) year balloon note with 3% interest for the acquisition of DMC and a possible earn out over the next two (2) years.  David Cunic is the CEO of both Pazoo, Inc. and DMC.  Ben Hoehn is the COO of both Pazoo, Inc. and DMC.  Pazoo subleases office space from DMC at 15A Saddle Road, Cedar Knolls, NJ 07927.
 
Item 3       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 this Item.

Item 4       Controls and Procedures

Evaluation of disclosure controls and procedures.
 
We carried out an evaluation, under the supervision of and with our executive officers, David M. Cunic in his role as Chief Executive Officer and Gregory Jung in his role as Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934).  Based upon that evaluation, the officers concluded that because of the limited size of our organization our disclosure controls and procedures are not effective as of September 30, 2012.
 
 
 
 
We have not made any changes in our internal control over financial reporting during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION 

Item 1       Legal Proceedings 
 
None. 
 
Item 1A     Risk Factors
 
As a “smaller reporting company” as defined by Item 10(f) of Regulation S-K, we are not required to provide information required by this item. 
 
Item 2       Unregistered Sales of Equity Securities and Use of Proceeds 
 
In August 2012, we issued 1,500,000 Series A Preferred Stock to ICPI at a price of $0.50 per share for $750,000 in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”) in reliance on Section 4(2) of the Act.  This investment completes a $1,000,000 investment commitment under a June 1, 2012 Investment Agreement (See, Exhibit 99.03, of the Company’s Form 8-K filed with the Securities and Exchange Commission on June 20, 2012.
 
The proceeds were used for operational expenses and prepayments to media, advertising, investor relations, and business advisory consultants to further execute our business plan.
 
Item 3       Defaults Upon Senior Securities 
 
None. 
 
Item 4       (Reserved) 
 
 
Item 5       Other Information 
 
None. 
 
Item 6       Exhibits
 
 
 
 
 
 
SIGNATURE
 
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
November 12, 2012
PAZOO, INC.
 
     
 
/s/ David M. Cunic
 
 
David M. Cunic
 
 
Chief Executive Officer
 
     
     
November 12, 2012
PAZOO, INC.
 
     
 
/s/ Gregory Jung
 
 
Gregory Jung
 
 
Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 

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