Notes to Unaudited Condensed 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 which will operate pharmaceutical testing laboratories in Nevada, and Harris Lee Holdings, LLC which will operate pharmaceutical testing laboratories within other states, or license testing protocols as independently owned laboratories. These pharmaceutical testing laboratories focus on providing quality control services to the medical cannabis industry. The mission is to protect the public health by providing infrastructure and analytical services to legally-authorized cannabis producers and distributors as well as to regulators. States that have legalized cannabis are developing cannabis health and safety criteria that we will fulfill through their testing laboratories. 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 unaudited condensed 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 unaudited condensed 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.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 as filed on April 15, 2016.
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. In 2015, both entities became wholly owned subsidiaries.
Use of Estimates
In accordance with GAAP the preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed 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 condensed 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 licenses were evaluated for impairment and no impairment loss was incurred as of March 31, 2016.
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.
|
Dilutive Securities
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
848,119,672
|
|
|
|
441,917,854
|
|
|
Preferred series A shares & warrants
|
|
|
351,153,200
|
|
|
|
425,965,600
|
|
|
Preferred series C
|
|
|
216,963,000
|
|
|
|
58,000,000
|
|
|
|
|
|
1,416,235,872
|
|
|
|
925,883,454
|
|
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.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, derivatives, convertible debt, 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.
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.
Note 2—GOING CONCERN
During the three months ended March 2015 and 2016, the Company incurred net losses of $1,924,528 and $4,342,042, respectively. In addition, as of March 31, 2016, the Company had a working capital deficit of $7,098,307. 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—FIXED ASSETS
Fixed assets consists of the following:
|
|
|
Estimated Useful Life
(in years)
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
3-5
|
|
|
$
|
643,195
|
|
|
$
|
643,195
|
|
|
Furniture and fixture
|
|
|
7
|
|
|
|
6,687
|
|
|
|
6,687
|
|
|
Leasehold improvements
|
|
|
3-5
|
|
|
|
238,620
|
|
|
|
238,620
|
|
|
Website
|
|
|
3
|
|
|
|
1,385
|
|
|
|
1,385
|
|
|
|
|
|
|
|
|
$
|
889,887
|
|
|
$
|
889,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(186,550
|
)
|
|
|
(140,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets, Net
|
|
|
|
|
|
$
|
703,337
|
|
|
$
|
749,841
|
|
Costs of assets acquired under capital leases were approximately $615,000 as of March 31, 2016 and $615,000 at 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. As of March 31, 2016 and at December 31, 2015, accumulated depreciation related to assets under capital lease was $131,547 and $103,796, respectively.
Note 4—INTANGIBLE ASSETS
Intangible assets as of March 31, 2016 and December 31, 2015 consisted of a license agreement acquired for $307,500 from Steep Hill Labs for the right to take the Steep Hill software and methodology to states above and beyond Nevada, and the MA license derived from the acquisition of $1,345,771. The cost basis of the intangible asset will be amortized over a twenty year useful life. Amortization expense for the three months ended March 31, 2016 and March 31, 2015 were $25,365 and $0, respectively. Annual amortization expense is approximately $107,000 per year.
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Steep Hill license
|
|
$
|
307,500
|
|
|
$
|
307,500
|
|
|
MA & Associates license
|
|
|
1,345,771
|
|
|
|
1,345,771
|
|
|
|
|
$
|
1,653,271
|
|
|
$
|
1,653,271
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(87,701
|
)
|
|
|
(62,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, Net
|
|
$
|
1,565,570
|
|
|
$
|
1,590,935
|
|
Note 5—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 bears an interest rate of 9.75% annually, compounded daily, and there is no term on the account. There are no financial covenants and the guarantor on the account is Steve Basloe. The line of credit has been used for general operating expenses.
Note 6—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 8 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 three months ended March 31, 2016:
|
Deritvative Liability Table
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
1,756,435
|
|
|
|
|
|
|
|
|
Initial value derivatives
|
|
|
2,165,934
|
|
|
Extinguished
|
|
|
(951,023
|
)
|
|
Change in fair value
|
|
|
647,163
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
3,618,509
|
|
The Company uses the Black Scholes Option Pricing Model to value its convertible debt and warrant derivative liabilities based upon the following assumptions during the three months ended March 31, 2016:
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
Dividend yield:
|
|
|
0
|
|
|
Expected volatility
|
|
|
80%
|
|
|
Risk free interest rate
|
|
0.16% to 0.39%
|
|
|
Expected life (years)
|
|
0.04 to 0.86
|
|
During three months ended March 31, 2016 and 2015, the aggregate gain/(loss) on derivative liability was ($2,406,761) and $439,113, respectively, consisting of initial derivative expense and the change in fair value of the derivative liabilities.
Note 7—STOCKHOLDERS’ EQUITY
Preferred Stock
Total stock-based compensation recognized at March 31, 2016 totaled $49,900, consisting of 60,000 common shares and 47,500 Series C preferred shares. For the three months ended March 31, 2015 total stock-based compensation was recognized at March 31, 2015 of $862,800.
During the three months ended March 31, 2016, 368,526 shares of Series A preferred stock were converted into 2,348,526 common shares and in 2015 275,000 Series A preferred stock were converted into 275,000 common shares, respectively.
During the three months ended March 31, 2016, the Company issued an aggregate of 61,306 Series A Preferred Stock in connection with conversion of $30,652 notes payable with no effect to net loss.
During the three months ended March 31, 2016, the Company sold 71,430 Series C Preferred Stock for $50,001.
The conversion rates for the Preferred Series of Stock are not affected by the stock split.
Common Stock
Issuances
During the three months ended, March 31, 2016, the Company issued 7,456,707 common shares in connection with conversion of debt valued at $265,258 for the conversion of debt of $77,874.
Preferred Stock Warrants
The following table presents the Series A preferred stock warrant activity during 2015 and first quarter 2016:
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2015
|
|
|
2,958,083
|
|
|
$
|
1.17
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/canceled
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding – March 31, 2016
|
|
|
2,958,083
|
|
|
$
|
1.17
|
|
|
Exercisable – March 31, 2016
|
|
|
2,958,083
|
|
|
$
|
1.17
|
|
The weighted average remaining life of the outstanding Series A preferred stock warrants as of March 31, 2016 and December 31, 2015 was 3.97 and 4.22 years, respectively.
In April 2016, pursuant to a Settlement Agreement with ICPI, all remaining Series A Warrants have been retired in exchange for the issuance of Series C Preferred Stock. A total of 1,700,000 Series C Preferred Shares were issued to ICPI in exchange for the retirement of all remaining Series A Warrants and the waiver of unpaid dividends on Series A Preferred stock held by ICPI for the years 2014, 2015 and 2016.
Note 8—CONVERTIBLE NOTES
The following table summarizes the changes in the convertible notes in the three months ending March 31, 2016:
|
|
|
Short Term
|
|
|
Long Term
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015 - Net
|
|
$
|
809,644
|
|
|
$
|
198,464
|
|
|
$
|
1,008,108
|
|
|
Add back: unamortized discount
|
|
|
533,391
|
|
|
|
794,036
|
|
|
|
1,327,427
|
|
|
Balance as of December 31, 2015 - Gross
|
|
$
|
1,343,035
|
|
|
$
|
992,500
|
|
|
$
|
2,335,535
|
|
|
Cash additions
|
|
|
72,750
|
|
|
|
300,000
|
|
|
|
372,750
|
|
|
Interest added to notes payable
|
|
|
192,936
|
|
|
|
192
|
|
|
|
192,936
|
|
|
Cash payments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Conversions
|
|
|
(78,874
|
)
|
|
|
-
|
|
|
|
(78,874
|
)
|
|
Original issue discount
|
|
|
5,000
|
|
|
|
-
|
|
|
|
5,000
|
|
|
Total
|
|
$
|
1,534,847
|
|
|
$
|
1,292,500
|
|
|
$
|
2,827,347
|
|
|
Less: unamortized discount
|
|
|
(141,874
|
)
|
|
|
-
|
|
|
|
(141,874
|
)
|
|
Balance as of March 31, 2016
|
|
$
|
1,392,973
|
|
|
$
|
1,292,500
|
|
|
$
|
2,685,473
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Therafter
|
|
Total
|
|
|
Convertible notes
|
|
|
1,534,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
992,500
|
|
|
|
2,827,347
|
|
|
Short-term non-convertible notes
|
|
|
232,584
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
232,584
|
|
|
Total
|
|
|
1,767,431
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
992,500
|
|
|
|
3,059,931
|
|
In February 2016, the company entered into convertible note agreements for an aggregate total of $72,750. The interest rates range from 8% - 12% and the conversion terms are at a 50% discount to the 25 prior trading days. The maturity dates range from November 2016 to February 2017.
In March 2016, the Company 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.
In addition to the funds received, noteholders converted $78,874 during the three months ended March 31, 2016 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 $192,936 in the first three months of 2016. At March 31, 2016, a total of 6 notes with a principle balance of $852,861 were past due.
Note 9—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. Amounts incurred under this agreement for the three months ended March 31 2016 and 2015, totaled $6,500 and $15,000, 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 in 2015. 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 10—LOANS PAYABLE
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 March 31, 2016, $200,000 still remains outstanding.
In January 2016, Pazoo, Inc. entered into a loan note totaling $5,000 with RBF Unlimited, LLC. The note has an interest rate of 0.70% and matures January 27, 2017. As of March 31, 2016, loan was paid back in full.
In January 2016, Pazoo, Inc. entered into a loan agreement with Kabbage Loans totaling $9,100. The loan has a monthly payment consisting of $500 to the principal and $210 to fees, totaling a monthly cost of $710. The loan will be paid off in a maximum of 12 months. As of March 31, 2016, $7,583 still remains outstanding.
In February 2016, Pazoo, Inc. entered into a loan note totaling $25,000 with LG Capital, LLC. The note has an interest of 8% and it matures on October 4, 2017. As of March 31, 2016, $25,000 still remains outstanding.
Note 11—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.
In 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.
As of March 31, 2016 the Company was still obligated to pay the remaining portion under the original 2014 40% investment agreement with MA and Associates, LLC, consisting of $678,000 of cash and 50,000 shares of Series C Preferred Stock (valued at $35,000 as of March 31, 2016), totaling $713,581 and included in contingent consideration liability on the accompanying consolidated balance sheet and will be issued in the future after the testing laboratory is operational.
As of March 31, 2016 the Company was obligated to pay Blue Moon Advisors, Inc., per the November 2015 Incubation Agreement. The Company is obligated to pay $17,000 per month starting on January 1, 2016, throughout the year of 2016, totaling $204,000.
Note 12—SUBSEQUENT EVENTS
The company issued an aggregate of 38,813,053 common shares to debt holders valued at a total of $151,863 for conversions pursuant to convertible notes. The conversion prices on these stock issuances averaged at a price of $0.005876.
Investors converted 83,103 Series A Preferred stock into 8,310,300 common stock.
The Company issued 28,579 Series C Preferred stock for an amount of $20,000.
The Company issued 2,200,000 Series C Preferred stock in accordance with a Settlement Agreement dated April 22, 2016. This Agreement specifies an issuance of 2.2 million Series C Preferred stock for the retirement of any and all outstanding warrants, preferred shares, or contingent considerations in the past or moving forward. As noted in Note 7, 1.7 million of these Series C Preferred shares are for the cancellation of approximately 2.95 million warrants and release from any prior Series A dividends. The remaining shares were issued for payment on certain contingent consideration accrued for as of March 31, 2016 and for compensation, recognized as of March 31, 2016.
In Company entered into a line of credit with Wells Fargo Bank for a total of $5,000.
The Company entered into a convertible note agreements for $58,000. The interest rate is 10% and the conversion terms are at the lesser of $0.02 or a 50% discount to the 20 prior trading days. The maturity date of the note is April 12, 2017.
The Company issued an aggregate of 55 Series A Preferred stock for dividends from 2015 for certain Preferred A shareholders.
The consolidated financial statements included in this report have been prepared in conformity with generally accepted accounting principles that contemplate our continuance as a going concern. The Company has had minimal revenues and has generated losses from operation. As set forth in Note 2 to the audited Financial Statements, the continuation of the Company as a going concern is dependent upon the Company obtaining adequate capital to fund operating losses until it becomes profitable, if ever. The financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.