Why PZOO May Move to New Lows

Today, Pazoo, Inc. (PZOO) filed another preliminary proxy in advance of a dramatic boost to its authorized shares. The company is raising its common share authorization by almost 2 billion to 2.95 billion from 0.98 billion. It is also increasing its preferred stock authorization from 20mm to 50mm. Investors should be aware that some of these securities are convertible.

The dilution so far in 2015 has been extraordinary, as the company had 193mm shares at year-end, up from 101mm at the end of 2013, but now reports over 660mm as of 6/22. Part of the reason for the boost in the authorized shares is to cover shares reserved for potential issuance to holders of convertible notes. The preliminary proxy lists seven different entities that have loaned the company $799K, requiring a reserve of over 600mm shares. These loans are all due in less than a year and cost 8-12% in interest costs.

In addition to extensive liquidity challenges that could lead to further share issuance if the company doesn't generate enough cash to pay its debt, the float faces a bigger near-term challenge. Since its inception as a public company, PZOO has been relying upon financing provided by James Farinella of Integrated Capital Partners, Inc. (ICPI). Farinella provides money to the company in exchange for convertible preferred stock (Series A). At the end of the first quarter, the company had 1.478526mm shares outstanding, up from 1.203526mm at year-end. The terms of conversion are 100 shares to 1, so this represented a potential addition of almost 148mm common shares.

The company reported $435K of conversions (into 43.5mm shares) after the end of the quarter. It also issued another 1.4375mm Preferred A for just $225K. THIS IS A RED FLAG, as the price is just $0.00157 per share on a converted basis. The company has progressively lowered the price to Farinella, from $0.0100 (last year), to $0.0040, to $0.0020 (both in February) and now just $0.0016. In other words, Farinella can make a return of 100% if he converts and sells at $0.0032, a 47% discount to the current price. The all-time low in early March was exactly twice Farinella's new conversion price of $0.0020.

The chart reflects the tremendous dilution in 2015 that has pressured the stock:

Earlier this month, the stock traded at an all-time high volume following the release of three different press releases and two interviews in the course of a 24-hour period. PZOO remains one of the most promotional companies on the OTC (see www.stockpromoters.com for more details). Unfortunately for the company, investors are no longer reacting positively to these promotions.

One final concern that hasn't been addressed publicly is the set of incentives provided to CEO David Cunic. In 2014 he earned a salary and bonus of just $27,250. His entire equity exposure is limited to just 15mm shares (currently valued at $90K). Cunic works hard, but why?

PZOO has several potential near-term drivers, most of which have seen delays. The company is still finalizing the purchase of the Colorado Steep Hill Labs, is awaiting on the opening of the Nevada market and is in site selection for its Oregon facility. The company is likely to face severe pressure financially absent revenue and cash flow generation, as it will be forced again to let its multiple convertible note holders convert over the next year should it not be able to pay off the principal. The recent issuance of effectively 22% of its current shares outstanding at just $0.00157 (through the convertible preferred) is a red flag and a likely harbinger of a drop to a new low.

(Note: This is public and comments are restricted)

Posted to Your Cannabis Analyst on Jul 24, 2015 — 8:07 PM
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