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PAZOO, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 15, 2014

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 March 31, 2014 and March 31, 2013.

Overview

Pazoo ("Pazoo") was incorporated in Nevada on November 16, 2010 under the name "IUCSS, Inc." A name change from IUCSS, Inc. to Pazoo occurred on May 9, 2011. We are a health and wellness company. Presently, our primary business is 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. At present our only revenue source is www.pazoo.com which generates product sales and online advertising revenue. As of March 31, 2014, we had total assets of $146,119 and plan to make additional investments in online content.

The primary mission of pazoo.com is to deliver health and wellness content in the form of media, articles, blogs, videos and other media/content. Additionally, www.pazoo.com delivers healthy cost-effective nutritional products based on relationships with leading manufacturers in the health improvement industry. In other words, pazoo.com is a user-friendly, attractively designed web site and e-commerce portal for total health and wellness information and health products for individuals and their pets. We seek to enhance visitors' experiences to our website by providing total health content and health products including foods, drinks, supplements, wellness merchandise, and health/wellness advice. Pazoo.com's primary target demographic is health conscious adults ages 24 - 54 seeking to better their personal well-being and complement their daily lifestyles with consumer products items that are part of and promote a healthy lifestyle.

Our principal executive offices are located at 760 Route 10, Suite 203, Whippany, New Jersey 07981. Our telephone number is (855) PAZOO-US. Our internet address is www.pazoo.com.

Sources of Revenue We currently have three lines of business relating to and revolving around the health and wellness arena:

? Advertising Revenue from Our Website, www.pazoo.com. Through advertising providers and agencies, pazoo.com is paid for every ad impression that appears on a page for which a visitor goes to. As we build our visitor base, ad revenue will increase. However, just having the traffic does not effectively increase advertising revenue. To get the full value of each visitor, the time on site must be long enough so that a visitor is interested in going to multiple pages for which there are ads on each page. The only way this will transpire is if the visitor's experience is gratifying. This is why pazoo.com is so focused on quality content that's interesting and informative. A bad visitor experience will result in a low time on site and fewer page views. Internet tracking tools have much improved over the past decade and will continue to improve in the coming years, especially when it comes to advertising and overall website analytics. Pazoo continues to constantly improve is this area at all times. Pazoo.com has seen a strong increase in its viewership as shown by the recent average time spent on site for the period March 2014 to May 2014 of five minutes and forty seconds versus three minutes and twenty-seven seconds for the same time period from December 2013 to February 2014 with the same amount of page views. Pazoo.com has a unique and compelling online marketing platform. Pazoo.com offers the following important marketing advantages to its target audiences: 10



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Table of Contents 1. A comprehensive solution as a content source - information on a full spectrum of disciplines within the health and wellness marketplace; 2. Health and wellness experts that have expertise in these varied disciplines and write about their areas expertise; and 3. Content that is both for the health and wellness of people as well as their pets (over 60% of American homes have pets). ? E-commerce. Our e-commerce offerings will increase as we build the traffic coming to pazoo.com. In this way we could establish a revenue source over and above advertising to increase the value of each visitor. We have the following e-commerce elements ready for an activated marketing program: 1. An e-commerce platform that is functional; 2. Relationships with manufacturers, distributors and other e-commerce companies so that increasing product offerings will not be time consuming; 3. Members on the pazoo.com content team with merchandising experience: i.e. a Pazoo expert is buyer of pet products for a large pet retailer; and 4. Members on the pazoo.com content team that are experienced in e-commerce marketing; i.e. we will look to offer our consumers low cost and timely delivery of product by negotiating with shipping companies to offer a flat rates on various products. ? Pharmaceutical Testing Facilities. We entered this arena through our recent acquisition of a 40% minority equity stake in MA & Associates, LLC. MA & Associates was launched in September of 2013 to provide quality control services to the medical cannabis industry. MA & Associates' primary mission is to protect the public health by providing infrastructure and analytical services to legally authorized distributors and producers of cannabis and to regulators tracking their operations. The company will provide the medical cannabis industry guidelines on how the regulation and inspection by public health authorities is to be implemented. MA & Associates' primary customer base includes all of the licensed cannabis cultivators, in the State of Nevada, and their customers are required by law to have their products tested before they can be transferred to the dispensaries. As such, we are in a unique position to provide the mandated health and safety testing upon which this burgeoning industry must hinge.



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

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Table of Contents

Results of Operations Comparison of the three months ended March 31, 2014 to the three months ended March 31, 2013

Net Sales. We had net sales of $17,327 and $4,370 in the three months ended March 31, 2014 and March 31, 2013 , respectively. The revenue increase was attributed to the addition of advertising sales in late 2013.

Cost of Goods Sold. We had cost of goods sold of $325 and $4,603 in the three months ended March 31, 2014 and March 31, 2013, respectively. The decrease was directly attributable to advertising sales having a lower cost of sales than merchandise sales.

Operating Expenses. Operating expenses consisted primarily of selling, general and administrative expenses and professional fees,. Total operating expenses increased 72% to $264,299for the three month period ended March 31, 2014 from $154,097 for the three month period ended March 31, 2013 . The components of operating expenses are detailed below.

Selling, General and Administrative increased 120% to $206,458 from $93,705, in 2014 versus 2013 which was mainly comprised of stock compensation, pay-per-click (PPC), and marketing & advertising. We incurred stock compensation expenses of $110,991 in the three month period ended March 31, 2014 compared to $39,048 for the three month period ended March 31, 2013. The increase was a result of shares issued to consultants and experts in the period ending March 31, 2014 versus only experts in the period ending March 31, 2013. PPC expenses increased to $33,320 from $0 in the three month period ended March 31, 2013. Marketing & advertising expenses increased to $44,048 from $13,364 in the three month period ended March 31, 2013.

Professional fees decreased 13% to $35,433 from $40,747 in 2014 versus 2013. The decrease in professional fees was attributed to a reduction in legal fees in 2014 compared to the same period ended in 2013. Legal fees decreased to $7,863 from $17,003 in the three month period ended March 31, 2014 versus the three month period ended March 31, 2013.

Net Loss. Our net loss increased to $647,288 for the three months ended March 31, 2014 from $154,522 for the same period in 2013, which was a increase of 319%. The increase is primarily attributable to a loss on derivative liability on convertible notes which did not exist in the prior year.

Liquidity and Capital Resources. In the three month period ended March 31, 2014, we issued 100,000 shares of Series A Preferred Stock and 100,000 Series A preferred stock warrant to ICPI at a price of $1.00 per share, the proceeds of which are to be used for the furtherance of the business and the financial improvement of Pazoo. This issuance was pursuant to an Investment Agreement dated March 13 ,2014 (See Exhibit 99.1) 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.

Our total assets were $146,119 as of March 31, 2014, which mainly consisted of a deposit for an equity interest in MA Associates, and $40,998 accounts receivable, the majority of which was $21,013 in advertising revenue. As of the date of this filing, we have collected $12,715 in advertising revenue.

We had negative working capital of $562,692 as of March 31, 2014.

Our total liabilities were $708,811 which was mainly comprised of derivative liability of $603,236 for our convertible notes and accounts payable/accrued liabilities of $74,847.

Our total stockholder's deficit as of March 31, 2014 was $562,692 and we had an accumulated deficit of $3,167,654 through the same period.

We used $152,349 in net cash for operating activities for the three months ended March 31, 2014, which included a net loss of $647,288 and loss on derivative liability of $376,187.

We used $50,000 net cash for investing activities in the three month period ended March 31, 2014 .

As of March 31, 2014, we had no formal long-term lines of credit or bank financing arrangements.

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

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Table of Contents Subsequent Events.



In accordance with FASB ASC 855-10-50-1 we evaluated our subsequent events through May 12, 2014.

In April 2014, the Company issued 125,000 shares of Series A Preferred Stock to ICPI in exchange for $125,000.

Simultaneous with the issuance of Series A Preferred Stock in April 2014, and under the Investment Agreement No. 4 we issued 125,000 warrants to ICPI which entitles its owner to purchase one share of Series A Preferred Stock for each Series A Preferred Stock at an exercise price of $2.00, subject to the terms of the warrant agreement between the warrant agent and us.

In April 2014, the Company entered into a Equity Purchase Agreement and 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 Five Million Dollars ($5,000,000) of the Company's common stock at the rates set forth in the Equity Purchase Agreement. Under the Equity Purchase Agreement the shares are purchased at the discretion of the Company by issuing a Put Notice when funds are needed. 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 issued 150,000 shares of Series A Preferred Stock to ICPI in exchange for $150,000. The Company also simultaneously issued 150, 000 warrants to ICPI which entitles its owner to purchase one share of Series A Preferred Stock for each Series A Preferred Stock at an exercise price of $2.00.

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's 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.

In April 2014, the Company agreed to buy a 40% equity interest in MA and Associates, LLC for $2,000,000 and 150,000 shares of the Company's Series C Preferred Stock. MA is in the process of becoming a licensed medical marijuana testing laboratory in the State of Nevada. The Company made a $50,000 down payment in March 2014.

In May 2014, the Company entered into a 12% Convertible Note (the "Note") with JSJ Investments, Inc. ("JSJ") in the amount of $100,000. Prior to October 28, 2014, the Company may redeem the Note for a $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.

In May 2014, the Company issued 25,000 shares of Series A Preferred Stock to ICPI in exchange for $25,000, in accordance with Investment Agreement No. 4

Simultaneous with the issuance of Series A Preferred Stock in May 2014, and under the Investment Agreement No. 4 we issued 25,000 warrants to ICPI which entitles its owner to purchase one share of Series A Preferred Stock for each Series A Preferred Stock at an exercise price of $2.00, subject to the terms of the warrant agreement between the warrant agent and us.


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Source: Edgar Glimpses


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