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

August 19, 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 and six months ended June 30, 2014 and June 30, 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 June 30, 2014, we had total assets of $352,574 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 a unique and compelling online marketing platform. Pazoo.com offers the following important marketing advantages to its target audiences: 12



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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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Results of Operations Comparison of the three months ended June 30, 2014 to the three months ended June 30, 2013

Net Sales. We had net sales of $69,954 and $9,731 in the three months ended June 30, 2014 and June 30, 2013, respectively. The revenue increase was attributed to the addition of advertising sales in late 2013 and early 2014.

Cost of Goods Sold. We had cost of goods sold of $244 and $3,076 in the three months ended June 30, 2014 and June 30, 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 533% to $492,211 for the three month period ended June 30, 2014 from $92,285 for the three month period ended June 30, 2013. The components of operating expenses are detailed below.

Selling, General and Administrative increased 566% to $320,808 from $56,608, in 2014 versus 2013 which was mainly comprised of professional fees, stock compensation, and marketing & advertising. We incurred stock compensation expenses of $235,547 in the three month period ended June 30, 2014 compared to $14,270 for the three month period ended June 30, 2013. The increase was a result of shares issued to consultants and experts in the period ending June 30, 2014 versus only experts in the period ending June 30, 2013.

Professional fees increased 725% to $136,701 from $18,832 in 2014 versus 2013. The increase in professional fees can be attributed to the increase in investor relations, executive compensation, and consulting fees related to convertible notes and funding opportunities.

Net Loss. Our net loss increased to $533,110 for the three months ended June 30, 2014 from $85,640 for the same period in 2013, which was an increase of 622%. The increase is primarily attributable to an increase in selling, general and administrative as well as a loss on derivative liability on convertible notes which did not exist in the prior year.

Comparison of the six months ended June 30, 2014 to the six months ended June 30, 2013

Net Sales. We had net sales of $87,280 and $14,101 in the six months ended June 30, 2014 and June 30, 2013, respectively. The revenue increase was attributed to the addition of advertising sales in late 2013 and early 2014.

Cost of Goods Sold. We had cost of goods sold of $569 and $7,679 in the six months ended June 30, 2014 and June 30, 2013, respectively. The decrease was directly attributable to advertising sales having a lower cost of sales than merchandise sales.

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Operating Expenses. Operating expenses consisted primarily of selling, general and administrative expenses and professional fees. Total operating expenses increased 339% to $836,987 for the six month period ended June 30, 2014 from $246,382 for the six month period ended June 30, 2013. The components of operating expenses are detailed below.

Selling, General and Administrative increased 380% to $607,743 from $159,710, in 2014 versus 2013 which was mainly comprised of stock compensation, professional fees, and marketing & advertising. We incurred stock compensation expenses of $346,268 in the six month period ended June 30, 2014 compared to $50,820 for the six month period ended June 30, 2013. The increase was a result of shares issued to consultants and experts in the period ending June 30, 2014 versus only experts in the period ending June 30, 2013.

Professional fees increased 288% to $172,134 from $59,582 in 2014 versus 2013. . The increase in professional fees can be attributed to the increase in investor relations, executive compensation, and consulting fees related to convertible notes and funding opportunities.

Net Loss. Our net loss increased to $1,183,102 for the six months ended June 30, 2014 from $239,985 for the same period in 2013, which was an increase of 492%. The increase is primarily attributable to an increase in selling, general and administrative as well as a loss on derivative liability on convertible notes which did not exist in the prior year.

Liquidity and Capital Resources. In the six month period ended June 30, 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 $352,574 as of June 30, 2014, which mainly consisted of a deposit for an equity interest in MA Associates, and $88,562 accounts receivable, the majority of which was advertising revenue.

We had negative working capital of $690,255 as of June 30, 2014.

Our total liabilities were $1,042,829 which was mainly comprised of derivative liability of $813,430 for our convertible notes and accounts payable/accrued liabilities of $76,127.

Our total stockholder's deficit as of June 30, 2014 was $690,255 and we had an accumulated deficit of $3,700,764 through the same period.

We used $152,349 in net cash for operating activities for the three months ended June 30, 2014, which included a net loss of $1,183,102 and loss on derivative liability of $813,430

We used $198,000 net cash for investing activities in the three month period ended June 30, 2014.

As of June 30, 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 August 18, 2014.

In July 2014, Iconic Holdings LLC provided additional funding to the Company in the amount of $50,000 in accordance with the February 2014 agreement.

In July 2014, the Company entered into a Convertible Note (the "Note") with WHC Capital LLC ("WHC") in the amount of $240,000. Prior to 10/31/14 the Company may redeem the note for $240,000. Thereafter, WHC may convert the Note into common stock of the Company at a state 50% discount off the lowest intra-day trading price of common price in the 25 days preceding the conversion date.

In August 2014, the Company entered into a 8% Convertible Note (the "Note") with Auctus Private Equity Fund LLC ("Auctus") in the amount of $56,250. Prior to 5/16/15 the Company may redeem the Note for $56,250. Thereafter, Auctus may convert the Note into common stock of the Company at a stated 50% discount multiplied by the 2 lowest trading prices of the 25 previous trading days.

In August 2014, the Company issued a total of 100,000 shares of Series C Preferred Stock as a finder's fee under the MA & Associates, LLC agreement.

In August 2014, the Company issued a total of 10,000 shares of Series A Preferred Stock to Jordan Stroum. Per his agreement, among other things, to act as the Company's representative on the MA & Associates, LLC Board of Directors.


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Source: Edgar Glimpses


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