UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 333-139117
EPAZZ, INC.
(Exact name of registrant as specified in its
charter)
Illinois |
36-4313571 |
(State or other
jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
205 W. Wacker Dr., Suite 1320
Chicago, IL 60606
(Address of principal executive offices)
(312) 955-8161
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION
12(B)
OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION
12(G)
OF THE EXCHANGE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 preceding
12 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 [ ]
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 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 [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
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 filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer [ ] |
Accelerated filer [ ] |
Non-accelerated filer [ ] |
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 [ ] No [X]
The aggregate market value of the issuer's voting and non-voting
common equity held by non-affiliates computed by reference to the average bid and ask price of such common equity on the Over-The-Counter
Bulletin Board as of June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter)
was $1,306,212.
There were 2,273,292,485 shares of the registrant's Class A common
stock outstanding as of May 4, 2015.
TABLE OF CONTENTS
PART 1 |
ITEM 1 |
|
Business |
1 |
ITEM 1A |
|
Risk Factors |
9 |
ITEM 1B |
|
Unresolved Staff Comments |
25 |
ITEM 2 |
|
Properties |
25 |
ITEM 3 |
|
Legal Proceedings |
25 |
ITEM 4 |
|
Mine Safety Disclosures |
25 |
PART II |
ITEM 5 |
|
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
26 |
ITEM 6 |
|
Selected Financial Data |
28 |
ITEM 7 |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
ITEM 7A |
|
Quantitative and Qualitative Disclosures About Market Risk |
38 |
ITEM 8 |
|
Financial Statements and Supplementary Data |
39 |
ITEM 9 |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
40 |
ITEM 9A |
|
Controls and Procedures |
40 |
ITEM 9B |
|
Other Information |
41 |
PART III |
ITEM 10 |
|
Directors, Executive Officers, and Corporate Governance |
43 |
ITEM 11 |
|
Executive Compensation |
46 |
ITEM 12 |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
49 |
ITEM 13 |
|
Certain Relationships and Related Transactions, and Director Independence |
51 |
ITEM 14 |
|
Principal Accounting Fees and Services |
54 |
ITEM 15 |
|
Exhibits, Financial Statement Schedules |
55 |
SIGNATURES |
56 |
PART I
ITEM 1. BUSINESS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS
All statements in this discussion that are
not historical are forward-looking statements. Statements preceded by, followed by or that otherwise include the words "believes",
"expects", "anticipates", "intends", "projects", "estimates", "plans",
"may increase", "may fluctuate" and similar expressions or future or conditional verbs such as "should",
"would", "may" and "could" are generally forward-looking in nature and not historical facts. These
forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important
factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements
include the information concerning our future financial performance, business strategy, projected plans and objectives. These factors
include, among others, the factors set forth below under the heading "risk factors." Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Most of these factors are difficult to predict accurately and are generally beyond our control. We are under no
obligation to publicly update any of the forward-looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events, except as otherwise provided by law. Readers are cautioned not to place undue
reliance on these forward-looking statements. References in this form 10-K, unless another date is stated, are to December 31,
2014. As used herein, the “Company,” “Epazz,” “we,” “us,” “our” and
words of similar meaning refer to Epazz, Inc., and include Epazz’s wholly owned subsidiaries, Desk Flex, Inc., an Illinois
corporation (“DFI”), Professional Resource Management, Inc., an Illinois corporation (“PRMI”), Intellisys,
Inc., a Wisconsin corporation ("IntelliSys"), K9 Bytes, Inc., an Illinois corporation (“K9 Bytes”), MS Health,
Inc., an Illinois corporation (“MS Health”), Telecorp Products, Inc., a Michigan corporation (“Telecorp”),
Jadian, Inc., an Illinois corporation (“Jadian”), Strantin, an Illinois corporation (“Strantin”) and Interaction
Technology, Inc., an Illinois corporation, (“Interact”) unless otherwise stated, or the context suggests otherwise.
Forward-looking statements involve inherent
risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ
materially from those set forth in the forward-looking statements include the following:
| · | volatility or decline of our stock price; |
| · | low trading volume and illiquidity of our common stock, and application of the SEC’s penny stock rules; |
| · | potential fluctuation in quarterly results; |
| · | our failure to earn revenues; |
| · | material defaults on monetary obligations owed us, resulting in unexpected losses; |
| · | dissipation of existing assets and failure to acquire or grow a new business; |
| · | litigation, disputes and legal claims involving outside parties; |
| · | risks related to our ability to be listed on a national securities exchange and meeting listing requirements; |
| · | risks related to our recently announced acquisition, our ability to finance the acquisition; |
| · | risks associated with our ability to raise necessary capital to continue as a going concern; and |
| · | other risks set forth below under “risk factors” and included from time to time in our filings with the Commission. |
We have based these forward-looking statements
on our current expectations and assumptions about future events. While our management considers these expectations and assumptions
to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties,
most of which are difficult to predict and many of which are beyond our control. Accordingly, results actually achieved may differ
materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. You should
consider carefully the statements in “Item 1A. Risk Factors” and other sections of this report, which describe factors
that could cause our actual results to differ from those set forth in the forward-looking statements.
Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking
statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required
by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports
filed with the United States Securities and Exchange Commission (the “SEC”) which attempt to advise interested parties
of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more
of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially
from those expected or projected.
Business Overview
The Company was incorporated in the State of
Illinois on March 23, 2000, to create software to help college students organize their college information and resources. The idea
behind the Company was that if the information and resources provided by colleges and universities was better organized and targeted
toward each individual, the students would encounter a personal experience with the college or university that could lead to a
lifetime relationship with the institution. This concept is already used by business software designed to retain relationships
with clients, employees, vendors and partners.
The Company developed a web portal infrastructure
operating system product called BoxesOS v3.0. BoxesOS provides a web portal infrastructure operating system designed to increase
the satisfaction of key stakeholders (students, faculty, alumni, employees, and clients) by enhancing the organizational experience
through the use of enterprise web-based applications to organize their relationships and improve the lines of communication. BoxesOS
decreases an organization’s operating expenses by providing development tools to create advanced web applications. The applications
can be created by non-technical staff members of each institution. BoxesOS creates sources of revenue for Alumni Associations and
Non-Profit organizations through utilizing a web platform to conduct e-commerce and provides e-commerce tools for small businesses
to easily create "my accounts" for their customers. It further reduces administrative costs, by combining technology
applications into one package, providing an alternative solution to enterprise resource planner (“ERP”) modules and
showing a return on investment for institutions by reducing the need for 3rd party applications license fees. BoxesOS can also
link a college or university’s resources with the business community by allowing businesses to better train their employees
by utilizing courseware development from higher education institutions.
On or about June 18, 2008, the Company entered
into a Stock Purchase Agreement (the “Purchase Agreement”) with Desk Flex, Inc., an Illinois corporation (“DFI”),
Professional Resource Management, Inc., an Illinois corporation (“PRMI” and collectively with DFI, the “Target
Companies”) and Arthur A. Goes, an individual and the sole stockholder of the Target Companies, whereby Epazz acquired 100%
of the outstanding shares of the Target Companies.
Professional Resource Management, Inc. and Desk Flex, Inc., Wholly
Owned Subsidiaries
Professional Resource Management, Inc. was
incorporated under the laws of Illinois in June 1985. On or around December 31, 1997, Professional Resource Management, Inc. established
a wholly-owned subsidiary, PRM Transfer Corp. On or around December 31, 1997, Professional Resource Management, Inc., PRM Transfer
Corp. and Arthur Goes entered into a Reorganization Agreement, whereby Professional Resource Management, Inc. transferred all of
its assets and liabilities to PRM Transfer Corp., with the exception of those assets pertaining to its proprietary source code
or software product, Desk/Flex. Also pursuant to the Reorganization Agreement, Professional Resource Management, Inc. amended its
corporate charter to change its name to Desk Flex, Inc. (“DFI”), and PRM Transfer Corp. amended its charter to change
its name to Professional Resource Management, Inc. (“PRMI”).
PRMI and DFI are separate legal entities, but
operate in conjunction. PRMI and DFI share office space and certain employees. DFI’s main source of revenue comes from the
“Desk/Flex Software” product, which it owns, and PRMI’s main source of revenue comes from the “Agent Power”
product line, which it owns. PRMI also acts as the general agent for DFI; however, there is no formal agency agreement between
the two companies. DeskFlex is a Hoteling and Scheduling Solution for conference rooms, workspaces, desks, car parking spaces,
equipment, hoteling and HotDesking so office managers can accommodate the occasional needs of mobile workers while reducing the
rent. PRMI Agent Power Software provides vital information and tools for call centers to help improve their workforce management.
Historical, real-time, and forecast information is available at the touch of a button to plan, control, and monitor your call center.
AutoHire Software, Asset Purchase
Effective February 1, 2010, the Company entered
into a Software Product Asset Purchase Agreement (the “Software Rights Agreement”) with Igenti, Inc., a Florida corporation
(“Igenti”) to acquire the rights to Igenti’s AutoHire software, domain names, permits, customers, contracts,
know-how, equipment, software programs, receivables totaling approximately $10,000 and the intellectual property of Igenti associated
therewith (the “AutoHire Software”). AutoHire competes favorably with other hiring system providers by providing a
wide range of applicant tracking functionality combined with ease of use. The system design is uncomplicated, making it easy for
the user to navigate. Quick access to candidate records is provided directly from the job postings.
IntelliSys, Inc., Wholly-Owned Subsidiary
On or about September 2, 2010, the Company
entered into a Stock Purchase Agreement (the “IntelliSys Purchase Agreement”) with IntelliSys, Inc., a Wisconsin corporation
(“IntelliSys”) and Paul Prahl, an individual and the sole stockholder of IntelliSys. Pursuant to the IntelliSys Purchase
Agreement, the Company purchased 100% of the outstanding shares of IntelliSys from Mr. Prahl. IntelliSys SystemVIEW is a scada
software and hmi software for rapid application development of HMI and process.
K9 Bytes, Inc., Wholly-Owned Subsidiary
On October 26, 2011, the Company, through a
newly-formed wholly-owned Illinois subsidiary, K9 Bytes, Inc. (“K9 Bytes”), entered into an Asset Purchase Contract
and Receipt Agreement with K9 Bytes, Inc., a Florida corporation (“K9 Florida” and the “Purchase Contract”).
Pursuant to the Purchase Contract, the Company purchased all of K9 Florida’s assets, including all of its intellectual property,
its business trade name, website (k9bytessoftware.com), furniture, fixtures, equipment and inventory, and goodwill. K9 Bytes
focuses on core application areas related to pet care: pet boarding, daycare, grooming, training, and other pet care services (including
dog walking and pet sitting). K9 Bytes products also include retail inventory and point of sale capabilities; including credit
and debit card processing, collar printers, digital signature tablets, and biometric/fingerprint identification hardware.
MS Health Software Corporation, Asset Purchase
On March 8, 2012, the Company, through a newly-formed
wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), entered into an Asset Purchase Agreement with MS Health
Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the Purchase Agreement, we purchased all of MSHSC’s
assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and
software in consideration for an aggregate of $500,000, of which $39,200 was paid in cash at the closing, $360,800 was financed
using a small business loan and $100,000 was paid by way of a Promissory Note (the “MSHSC Note”). The terms of the
MSHSC Note include interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or
interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and
full payment of all amounts due after five (5) years. Pursuant to a subsequent amendment to a consulting agreement with the seller
on March 23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during
the year ended December 31, 2012. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase
and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC. The acquisition was financed in part with a
$360,800 Small Business Administration (“SBA”) loan, bearing interest at fixed and variable rates. The initial interest
rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which
the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining
seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company
must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health
and the Company, and secured by the assets of MS Health and the Company.
In connection with the Asset Purchase, the
shareholders of MSHSC and the Company (through MS Health) entered into a Covenant Not to Compete; Consulting Agreement, Non-Competition
and Consulting Agreement, pursuant to which the shareholders of MSHSC agreed to provide consulting services to the Company for
a period of six months following closing. Pursuant to the agreement, the shareholders of MSHSC agreed not to compete against the
Company for two years from the closing of the acquisition.
FlexFridge, Inc., Formation of Subsidiary
and Subsequent Spin-Off
On March 4, 2013, the Board of Directors of
Epazz, Inc. (the “Company”), consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved
the formation of a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc., which was later renamed,
Z Fridge, Inc., and ultimately again renamed as, FlexFridge, Inc. (“FlexFridge”) on May 29, 2014. The Company
has filed a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge.
On November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz,
Inc. received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial
interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards
Codification (“ASC”) 810-10.
Terran Power, Inc., Recent Formation of
Subsidiary
On September 19, 2013, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Terran Power, Inc. The Company plans to file a non-provisional patent application to develop a
mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing an outlet or
a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.
Telecorp Products, Inc., Stock Purchase
Agreement
On February 28, 2014, the Company entered
into a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario
Canada corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder
and the sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding
shares of Telecorp from Troy Holdings, for an aggregate purchase price of $302,000 (the “Purchase Price”). The Purchase
Price was payable as follows:
|
(a) |
The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and |
|
(b) |
The Company provided Troy Holdings with a Promissory Note in the amount of $102,000 (the “Telecorp Note”), which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing less $18,000 overpayment adjustment. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum. |
Additionally, the Company agreed to assume
aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. As a result of the Closing, Telecorp
became a wholly-owned subsidiary of the Company.
In connection with the Stock Purchase Agreement,
the shareholders of Telecorp and the Company entered into a Non-Disclosure/Non-Compete Agreement, pursuant to which the shareholders
of Telecorp and the Company, each agreed to not for a period of one (1) year, communicate or divulge to, or use for the benefit
of itself or any other person, firm, association or corporation, any information in any way relating to the Proprietary Property,
in competition with the business of the Company, and pursuant to the agreement, the shareholders of Telecorp agreed not to compete
against the Company for one (1) year from the closing of the acquisition.
Zinergy (DBA) formerly Cynergy Software,
Asset Purchase
On April 4, 2014, the Company entered into
an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase
Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s
help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers,
software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing,
$25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the
closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation.
The acquisition was financed in part with a software financing agreement. Financing agreement has a lien against the software assets.
Zinergy Service Desk Software is very customizable
for your business processes. Integrate Zinergy with just about every other business tool you can think of. Help Desk Support Software,
Help Desk Ticketing Software, Customer Support Software, HRIS Ticketing Solution and much more.
Jadian Enterprises, Inc., Asset Purchase
Agreement
On May 9, 2014, the Company, through a newly-formed
wholly-owned Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset Purchase Agreement
(“APA”) with Jadian, Inc., a Michigan corporation (“Jadian”). Pursuant to the APA, we purchased substantially
all of the intangible assets and certain tangible assets used in connection with Jadian’s software business, including all
of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable
in consideration for an aggregate of $417,945, of which $207,945 was paid at the closing and $210,000 was financed by way of a
Promissory Note (the “Jadian Note”). The terms of the Jadian Note include interest at 6% per annum, a ten (10) year
amortization, full right of offset, no payments of either principal or interest for thirty (30) days after Closing and equal payments
of principal and interest commencing thereafter, no prepayment penalty, and a balloon payment consisting of full payment of all
amounts due after three (3) years, subject to certain offsets, including an offset for $40,760 for prepaid maintenance contracts
received by the seller prior to Closing. The Jadian Note is secured by a lien on the assets of Jadian. We did not purchase and
Jadian agreed to retain and be responsible for any and all liabilities of Jadian. We did not purchase and Jadian agreed to retain
and be responsible for any and all liabilities of Jadian.
The Company also agreed to provide the seller
with additional earn-out rights in connection with the purchase, which provide that the seller will receive up to a maximum of
$100,000 per year for the three twelve month periods following the Closing (any delinquent earn-out payment shall bear interest
at the rate of 10% per annum until the delinquent amount is paid), based on the gross revenues generated by Jadian during such
applicable year based on the following schedule (the “Earn-Out”):
Revenue for the Relevant Year |
Earn-Out |
$-0- to $500,000 |
$ |
– |
$500,000 to $600,000 |
$ |
25,000 |
$600,000 to $700,000 |
$ |
50,000 |
$700,000 to $800,000 |
$ |
75,000 |
$800,000 or more |
$ |
100,000 |
Provided that in no event shall the total amount
payable to Jadian Enterprises in connection with the Earn-Out exceed $100,000 per year, or $300,000 in aggregate.
Strand, Inc., Asset Purchase Agreement
On July 31, 2014, one of the Company’s
subsidiaries, Telecorp Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Strantin, Inc. (“Strantin”),
closed on an Asset Purchase Agreement (“APA”) with Strand, Inc., an Illinois corporation (“Strand”). Pursuant
to the APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets
used in connection with Strand’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $185,000, of
which $100,000 was paid at the closing, and $85,000 was financed by way of a Convertible Promissory Note (the “Strand Note”).
The terms of the Strand Note include interest at 6% per annum, no payments of either principal or interest for thirty (30) days
after Closing and monthly principal and interest payments of $2,586 commencing thereafter, no prepayment penalty, and a balloon
payment consisting of full payment of all amounts due after one (1) year. In the event we default on the July 31, 2015 balloon
payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the
parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid
price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever
is greater. The Strand Note is secured by a lien on the assets of Strand. We did not purchase and Strand agreed to retain and be
responsible for any and all liabilities of Strand. We did not purchase and Strand agreed to retain and be responsible for any and
all liabilities of Strand.
This acquisition was accounted for as a business
combination under the purchase method of accounting, given that substantially all of the Company’s assets and ongoing operations
were acquired. The purchase resulted in $206,321 of goodwill. According to the purchase method of accounting, the Company recognized
the identifiable assets acquired and liabilities assumed as follows:
| |
July | |
| |
2014 | |
Consideration: | |
| | |
Cash paid at, and prior to, closing | |
$ | 100,000 | |
Seller financed note payable(1)(2) | |
| 85,000 | |
| |
| 185,000 | |
Fair value of identifiable liabilities acquired: | |
| | |
Deferred revenue | |
| 36,638 | |
Fair value of total consideration exchanged | |
| 221,638 | |
| |
| | |
Fair value of identifiable assets acquired assumed: | |
| | |
Software | |
| 9,447 | |
Trade name | |
| 5,870 | |
Total fair value of assets assumed | |
| 221,638 | |
Consideration paid in excess of fair value (Goodwill)(3) | |
$ | 206,321 | |
_______________
(1) | Consideration included an unsecured $85,000 seller financed note payable (“Strand
Note”), which bears interest at 6% per annum until the maturity date of July 31, 2015, and provides for equal monthly principal
and interest payments of $2,585.86 commencing on August 31, 2014. The Strand Note includes a balloon payment, consisting of the
remaining outstanding balance of principal and interest upon maturity at July 31, 2015. |
(2) | The fair value of the seller financed note in excess of the $85,000 principal balance
attributable to the deferred payment terms will be amortized to interest expense over the deferred financing period. |
(3) | The consideration paid in excess of the net fair value of assets acquired and liabilities
assumed has been recognized as goodwill. |
Interaction Technology, Inc., Asset Purchase
Agreement
On December 29, 2014, The Company through a
newly-formed wholly-owned Illinois subsidiary, Interaction Technology, Inc. (“Interact”), closed on an Asset Purchase
Agreement (“APA”) with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the
APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used
in connection with Interaction’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $600,000, of
which $250,000 was paid at the closing, and $150,000 was financed by way of a Promissory Note (the “Inter Note1”) and
$200,000 was financed by way of a Promissory Note (the "Inter Note2"). The terms of the Inter Note1 include interest
at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal payments
of $37,500 commencing thereafter, no prepayment penalty. The terms of the Inter Note2 include interest at 6% per annum, no payments
of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $11,881.03
commencing thereafter, no prepayment penalty. The Inter Note 1 and Inter Note2 is unsecured. We did not purchase and Inter agreed
to retain and be responsible for any and all liabilities of Inter.
Recent Debt Financing
Originated March 18, 2015, a $6,250 unsecured
promissory note payable, including a $1,250 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 18, 2015. The note also carries
a liquidated damages fee of $1,000 upon default.
Originated January 22, 2015, an unsecured $47,000
promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries
a liquidated damages fee of $1,500 upon default.
Originated February 24, 2015, an unsecured
$48,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries
a liquidated damages fee of $1,500 upon default.
Originated March 3, 2015, an unsecured $21,875
promissory note payable, including a $4,375 loan origination fee, owed to Star Financial, a corporation owned by an immediate family
member of the Company’s CEO. The note carries a 15% interest rate, matured on October 3, 2015. The note also carries a liquidated
damages fee of $1,500 upon default.
Convertible Debt Financing
Originated January 7, 2015, an unsecured $42,323.64
convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“One Magna Group Note”) owed
to Magna Group, LLC, consisting of one partial note acquired and assigned from Star Financial Corporation, a related party, consisting
of a total of $75,000 of principal and $9,647.28 of accrued interest. The acquired promissory notes did not carry conversion terms,
and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common
stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the 3 lowest trading price
of the Company’s common stock for the ten (10) days prior to the conversion date, or $0.000075 per share, whichever is greater.
The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal of $42,323.64
was subsequently converted to a total of 309,445,417 shares of common stock over various dates from January 7, 2015 to March 18,
2015 in complete satisfaction of the debt.
Originated January 7, 2015, an unsecured $17,500
convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“Two Magna Group Note”) owed
to Magna Group, LLC. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible
note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price
equal to fifty percent (50%) of the average of the 3 lowest trading price of the Company’s common stock for the ten (10)
days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 4.99% of
the Company’s issued and outstanding shares.
On January 29, 2015,
we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible Promissory
Note in the original principal amount of $43,000. The One KBM Note had a maturity date of November 2, 2015, and was convertible
into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable
Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price”
means the average of the lowest three (3) Trading Prices for the Common Stock during the thirty (30) Trading Day period ending
on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share.
The shares of common stock issuable upon conversion of the One KBM Note were restricted securities as defined in Rule 144 promulgated
under the Securities Act of 1933. The issuance of the One KBM Note was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor,
familiar with our operations, and there was no solicitation.
Originated February 13, 2015, an unsecured
$127,812.50 convertible promissory note, carries a 15% interest rate, matures on January 7, 2016, (“IBC Note”) owed
to IBC Funds, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of
a total of $106,000 of principal and $21,812.5 of accrued interest and fees. The acquired promissory notes did not carry conversion
terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares
of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest
trading price of the Company’s common stock for the fifteen (15) days prior to the conversion date. The debt holder was limited
to owning 4.99% of the Company’s issued and outstanding shares. IBC Funds did not complete the require payments under the
debt purchase agreement and the note is currently in dispute.
Originated February 17, 2015, an unsecured
$22,542.47 convertible promissory note, carries a 5% interest rate, matures on February 17, 2016, (“Blackbridge Note”)
owed to Blackbridge Capital, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party,
consisting of a total of $20,000 of principal and $2,542.47 of accrued interest. The acquired promissory notes did not carry conversion
terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares
of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest
trading price of the Company’s common stock or $0.0001 which is greater for the fifteen (15) days prior to the conversion
date. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. The assigned principal
of $22,542.47 was subsequently converted to a total of 187,300,733 shares of common stock over various dates from February 17,
2015 to March 5, 2015 in complete satisfaction of the debt.
Originated March 2, 2015, an unsecured $5,000
convertible promissory note, carries a 15% interest rate, matures on May 20, 2015, (“Star Note”) owed to Star Financial
Corporation, a related party, consisting of a total of $5,000 of principal and $447.95 of accrued interest. The October 20, 2014
promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued
interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.000075. The debt
holder was limited to owning 9.99% of the Company’s issued and outstanding shares.
Originated March 2, 2015, an unsecured $18,750
convertible promissory note, carries a 15% interest rate, matures on May 28, 2014, (“GG Note”) owed to GG Mars, Inc.,
a related party, consisting of a total of $18,750 of principal and $2,196.06 of accrued interest. The March 28, 2014 promissory
notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest
is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was
limited to owning 9.99% of the Company’s issued and outstanding shares.
Originated March 31, 2015, an unsecured $30,000
convertible promissory note, carries a 15% interest rate, matures on May 7, 2014, (“Star Note”) owed to Star Financial
Corporation, a related party, consisting of a total of $30,000 of principal and $3,772.60 of accrued interest. The March 7, 2014
promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued
interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt
holder was limited to owning 9.99% of the Company’s issued and outstanding shares.
Our Products
The Company currently offers twelve primary
product lines. The Epazz BoxesOS v3.0 product is offered through Epazz, Inc., the Desk/Flex Software product is offered through
Desk Flex, Inc., the Agent Power product is offered through Professional Resource Management, Inc., the AutoHire software is offered
through Epazz, Inc., IntelliSys offers the Integrated Plant Management Control (“IPMC”) software product, K9 Bytes
offers a series of Point of Sale software products for pet care, boarding and retail pet stores and the Company developed and sells
CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and
social services through MS Health, Inc.
Epazz BoxesOS v3.0
Epazz BoxesOS v3.0 (Web Infrastructure Operating
System) is the Company's flagship product. It is the core package of Epazz, Inc.’s products and services. Epazz BoxesOS integrates
with each organization's back-end systems and provides a customizable personal information system for each stakeholder.
AutoHire Software
AutoHire system is the interactive question
and online screening and ranking system. The interactive question system provides a means for the client to maintain their own
library of questions and to attach selected questions to job opportunities posted. Responses obtained can be used to screen and
rank candidates to permit hiring managers to focus their attention on only the most suitable candidates. We believe that result
can have a substantial impact on the cost of recruiting and the quality of candidates selected.
Desk Flex Software
DFI developed the Desk/Flex Software (“Desk/Flex”)
to enhance the value of businesses’ real estate investments and modernize their office space. Desk/Flex lets businesses make
better use of office space restrictions by enabling employees to instantly access their workstation tools from multiple areas in
and outside of the office. Desk/Flex lets employees reserve space in advance or claim space instantly. It adjusts the telephone
switch (Private Branch Exchange or “PBX”) so that calls ring at the 'desk du jour', or go directly to voice mail when
a worker is not checked in.
Agent Power Software
Agent Power Software (“Agent Power”)
is PRMI’s proprietary software line. PRMI believes Agent Power provides vital information and tools for call centers to help
improve their workforce management. Historical, real-time, and forecast information is available at the touch of a button to plan,
control, and monitor a business’s call center. Coordinated stand-alone modules allow a company to develop employee schedules,
track queue and agent performance, communicate this information with the company’s agents and improve workforce management.
IntelliSys Software
IntelliSys developed the IPMC Software (“IPMC”)(Integrated
Plant Management Control) which is a software system design for water and wastewater facility management. IPMC is the technology-based
strategy for optimizing operations by automatically collecting, managing, organizing and disseminating information for the operations,
management, laboratory, maintenance, and engineering functions.
K9 Bytes Software
K9 Bytes develops and sells point of sale (“POS”)
software products that focus on core application areas related to pet care: pet boarding, daycare, grooming, training, and other
pet care services (including dog walking and pet sitting). K9 Bytes products include scheduling, billing, retail inventory and
general POS capabilities; including credit and debit card processing, collar printers, digital signature tablets, and biometric/fingerprint
identification hardware.
MS Health Software
MSHSC developed and sells CHMCi, an enterprise
wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services. With
CMHCi, an organization will realize the benefits of increased efficiency, accountability, and productivity. CMHCi offers server-based,
internet, and secure cloud computing enabling the user to access information as required. By maintaining a complete electronic
client record, including data collection and reporting across multiple programs, locations, episodes of care, and service providers,
CMHCi helps eliminate redundant record keeping. The scheduler component tracks client, staff, and group appointments. Easy to use,
it interfaces seamlessly with service authorization tracking, service history, and billing. The integrated financial reporting
component provides the basis for an efficient and comprehensive accounting system, including electronic claims and remittance,
third party insurance, and client, municipality, and grantor billing.
Telecorp Software
MCCS has brought Avaya, Cisco and Nortel real-time
and historical information to the web, allowing access from anywhere. This feature makes MCCS ideal for increased accessibility,
including connecting with multiple sites or at home agents. Customizable, Easy-to-Use Data includes ad-hoc reporting, scheduled
reports through email.
Cynergy Software
Cynergy Service Desk Software is very customizable
for your business processes. Integrate Cynergy with just about every other business tool you can think of. Help Desk Support Software,
Help Desk Ticketing Software, Customer Support Software, HRIS Ticketing Solution
Jadian Software
Jadian is a globally-operating software and
services company that provides complete solutions for managing compliance, audits, inspections, work orders, licenses/certificates/permits,
and enforcement activities. Jadian's compliance solutions are being used by wide variety of private industry companies and government
agencies, including public health agencies, audit and inspection companies, food manufacturers, organic certifiers, road transportation
authorities, national accreditation bodies, and federal agencies.
Strand Software
Strand offers enterprise-grade overarching
surveillance management software from the very first camera installed. Strand allows for unlimited cameras to be added and unlimited
users to be defined to the system at no extra cost. Strand’s Enterprise Solution was built for practicality and functionality,
allowing clients to leave scalable and modular pricing concerns behind while searching for the perfect surveillance solution.
Interaction Software
Interaction
is a software management intranet/portal solution designed specifically for your business needs. This robust solution encompasses
key integrated components to manage and organize content for your company or organization, using a standard web browser. Company
employees from executives to part-time staff have the ability to access pertinent information, resources and content relating to
their duties and needs.
Sales & Marketing
Epazz uses telemarketing and email campaigns
to meet with key decision makers in order to demonstrate the significant customer satisfaction, cost savings, and revenue enhancement
benefits they can realize by using the Epazz systems.
Research and Development
The Company has not spent resources on
research and development activities for the fiscal years ended December 31, 2014 and December 31, 2013.
Employees
We currently employ eight (8) full-time employees,
all of which are provided to us by Insperity, Inc., with whom we have a client service agreement to provide labor and human resource
services.
Competition
The environment for our products and services
is intensely competitive. Our current and potential competitors include many large and well capitalized software companies and
many smaller less-known software companies.
We believe that the principal competitive factors
in our market segments include selection, price, availability, convenience, brand recognition, customer service, reliability, ease
of use, and ability to adapt to changing conditions, as well as our future customers' overall trust in the entire experience in
transactions with us.
Our overall market is intensely competitive,
and there are a number of other competitors that are much larger than us and have significantly greater resources at their disposal.
We believe that our product offerings are competitive with others in the marketplace; however, we do not have a dominant market
share.
Intellectual Property
We regard our trademark, copyrights, domain
names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as important to our success, and
we plan to rely on trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our
employees, customers, partners, and others to protect our proprietary rights.
Policing unauthorized use of our proprietary
rights is inherently difficult, and we may not be able to determine the existence or extent of any unauthorized use. The protection
of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, we cannot
be certain that the steps we take to protect our intellectual property will adequately protect our rights or that others will not
independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.
ITEM 1A. RISK FACTORS
Any investment in our common stock involves
a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this
report before deciding whether to make an equity investment in our Company. Our business, financial condition or results of operations,
including those of our wholly owned subsidiaries DFI, PRMI, Intellisys, K9 Bytes, MS Health, Terran Power and FlexFridge,
could be materially adversely affected by these risks if any of them actually occur. Some of these factors have affected our financial
condition and operating results in the past or are currently affecting us.
RISKS RELATED TO OUR BUSINESS
We owed a total of $5,005,501 in liabilities
as of December 31, 2014. We will need to raise additional funds to repay our obligations and continue our operations, and these
funds may not be available on acceptable terms or at all. Failure to raise additional funds could require us to substantially reduce
or terminate our operations.
As of December 31, 2014, we had $5,005,501
in liabilities and owed approximately $3,900,562 in outstanding notes payable, which included $80,239 owed on line of credits,
$5,890 owed on our capital leases; $1,221,323 owed to our Chief Executive and other related parties; a total of $88,739 owed on
six convertible debentures, including a discount on beneficial conversion features of $131,774, or a total face value of $88,739
of convertible debts, and $2,504,371 owed to other unrelated third parties. We anticipate raising additional funds through public
or private financing, strategic relationships or other arrangements in the near future to support our business operations; however
we currently do not have commitments from third parties for additional capital. Our cash on hand is sufficient to fund operations
for the next six months. We will need to raise additional funds to continue to operate as a going concern.
We cannot be certain that any such financing
will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue
and expand our business. We intend to overcome the circumstances that impact our ability to remain a going concern through a combination
of the commencement of additional revenues, of which there can be no assurance, with interim cash flow deficiencies being addressed
through additional equity and debt financing. Our ability to obtain additional funding for the remainder of the 2015 year and thereafter
will determine our ability to continue as a going concern. There can be no assurances that these plans for additional financing
will be successful. Failure to secure additional financing in a timely manner to repay our obligations and supply us sufficient
funds to continue our business operations and on favorable terms if and when needed in the future could have a material adverse
effect on our financial performance, results of operations and stock price and require us to implement cost reduction initiatives
and curtail operations. Furthermore, additional equity financing may be dilutive to the holders of our common stock, and debt financing,
if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, and may require
that we relinquish valuable rights. In the event that we are unable to repay our current and long-term obligations as they come
due, we could be forced to curtail or abandon our business operations, and/or file for bankruptcy protection; the result of which
would likely be that our securities would decline in value and/or become worthless.
The Notes payable in connection with the
acquisition of IntelliSys, due to a third party lender, due in connection with K9 Bytes acquisition, due in connection with the
MS Health acquisition, due in connection with the Telecorp Products acquisition, due in connection with the Cynergy due in connection
with the Jadian acquisition, due in connection with the Strand acquisition and due in connection with the Interaction are secured
by a security interest in substantially all of the assets of the Company.
The Company agreed to secure the payment of
the $50,000 IntelliSys Note (described above) with a Uniform Commercial Code Security Interest filing, which the Company agreed
to file, at the Company’s expense, to grant a security interest over all of IntelliSys’ tangible and intangible assets,
and the outstanding stock of IntelliSys until the IntelliSys Note is repaid, which security interest is junior to the Third Party
Note (described below). On September 30, 2010, the Company obtained a $185,000 U.S. Small Business Association Loan from Third
Party Lender (the “Third Party Lender Note” and “Third Party Lender”). The Third Party Lender Note bears
interest at the rate of the Prime Rate in effect from time to time plus 2.75% (which has an initial interest rate of 6% per annum).
The Company agreed to repay the Third Party Lender Note at the rate of $2,054 per month, which commenced in November 2010. The
Third Party Lender Note is due and payable on September 30, 2020. The repayment of the Third Party Lender Note is secured by a
security interest over substantially all of the Company’s property, including, but not limited to the stock of IntelliSys
which was purchased in connection with the IntelliSys Purchase Agreement. Additionally, the Third Party Lender Note is guaranteed
by Shaun Passley, Ph.D., our Chief Executive Officer and director, related parties, PRMI and DFI. The Third Party Note is also
secured by a mortgage on the properties of related parties, and Shaun Passley, Ph.D.. Finally, Shaun Passley, Ph.D. agreed to further
secure the Third Party Lender Note with the proceeds of a personal insurance policy, equal at least to the amount of the Third
Party Lender Note. An aggregate of $125,000 received in connection with the Third Party Lender Note was used to pay Mr. Prahl the
Cash Consideration due under the IntelliSys Purchase Agreement, $50,000 was used for working capital, and $10,000 was paid in closing
costs associated with the note.
On October 26, 2011, the Company purchased
all of K9 Florida’s assets in consideration for an aggregate of $205,000, of which $5,000 was paid in cash at the closing,
$169,750 was financed using a small business loan and $30,750 was paid by way of a Balloon Installment Promissory Note (the “K9
Note”). The K9 Note accrues interest at 6% per annum and is payable in monthly installments of $333 per month starting in
November 2011 and ending on October 26, 2014, at which time the then remaining balance of the K9 Note ($23,017, assuming no additional
payments other than those scheduled) is due. The repayment of the K9 Note is secured by all of the securities of K9 Bytes, which
owns all of the assets purchased as a result of the Purchase Contract, provided that Third Party Lender, as a result of the SBA
Loan described below, has a first priority security interest to such securities. The K9 Note is also personally guaranteed by Shaun
Passley, Ph.D., our Chief Executive Officer.
We raised the funds
paid to K9 Florida in connection with the Purchase Contract through a $235,000 Small Business Association loan obtained by K9 Bytes
from the Third Party Lender (the “SBA Loan”). The SBA Loan has a term of ten (10) years; bears interest at the prime
rate plus 2.75% per annum (currently 6%), adjusted quarterly; is payable in monthly installments (beginning in December 2011) of
$2,609 per month; is guaranteed by the Company and personally guaranteed by Shaun Passley, Ph.D., the Company’s Chief Executive
Officer; and is secured by all of the assets of K9 Bytes and the Company, 100% of the outstanding capital of K9 Bytes which is
held by the Company, and a life insurance policy on Dr. Passley’s life in the amount of $235,000. A total of approximately
$10,000 of the amount borrowed under the SBA Loan was used to pay closing fees in connection with the loan, $175,000 was used to
pay K9 Florida the cash amount due pursuant to the terms of the Purchase Contract and $50,000 of such loan amount was made available
for working capital for the Company and K9 Bytes.
On March 8, 2012, we, through a newly-formed
wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), entered into an Asset Purchase Agreement with MS Health
Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the Purchase Agreement, we purchased all of MSHSC’s
assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and
software in consideration for an aggregate of $500,000, of which $39,200 was paid in cash at the closing, $360,800 was financed
using a small business loan and $100,000 was paid by way of a Promissory Note (the “MSHSC Note”). The terms of the
MSHSC Note include interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or
interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and
full payment of all amounts due after five (5) years. Pursuant to an amendment to a consulting agreement with the seller on March
23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during the year
ended December 31, 2012 before discontinuing payments. The MSHSC Note is secured by a security interest over the assets of MS Health.
The acquisition was financed in part with a $360,800 Small Business Administration (“SBA Loan”) loan, bearing interest
at fixed and variable rates. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect
on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition
to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the
Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed
by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.
On February 28, 2014, the Company entered into
a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario Canada
corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder and the
sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding shares
of Telecorp from Troy Holdings, for an aggregate purchase price of $302,000 (the “Purchase Price”). The Purchase Price
was payable as follows:
|
(a) |
The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and |
|
(b) |
The Company provided Troy Holdings with a Promissory Note in the amount of $102,000 (the “Telecorp Note”), which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing less $18,000 overpayment adjustment. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum. |
Additionally, the Company agreed to assume
aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. As a result of the Closing, Telecorp
became a wholly-owned subsidiary of the Company.
On April 4, 2014, the Company entered into
an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma
corporation (“Cynergy”). Pursuant to the Purchase Agreement, we purchased substantially all of the intangible assets
and certain tangible assets used in connection with Cynergy’s help desk software business, including all of its intellectual
property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration
for an aggregate of $75,000, of which $25,000 was paid at the closing, $25,000 was paid within fifteen (15) days after the closing
and the remaining $25,000 was paid within forty (40) days after the closing. We did not purchase and Cynergy agreed to retain and
be responsible for any and all liabilities of Cynergy Corporation. The acquisition was financed in part with a software financing
agreement. Financing agreement has a lien against the software assets.
On May 9, 2014, the Company, through a newly-formed
wholly-owned Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset Purchase Agreement
(“APA”) with Jadian, Inc., a Michigan corporation (“Jadian”).
Pursuant to the APA, we purchased substantially all of the intangible assets and certain tangible assets used in connection with
Jadian’s software business, including all of its intellectual property, its business trademarks and copyrights, equipment,
computers, software, machinery and accounts receivable in consideration for an aggregate of $417,945, of which $207,945 was paid
at the closing and $210,000 was financed by way of a Promissory Note (the “Jadian Note”). The terms of the Jadian Note
include interest at 6% per annum, a ten (10) year amortization, full right of offset, no payments of either principal or interest
for thirty (30) days after Closing and equal payments of principal and interest commencing thereafter, no prepayment penalty, and
a balloon payment consisting of full payment of all amounts due after three (3) years, subject to certain offsets, including an
offset for $40,760 for prepaid maintenance contracts received by the seller prior to Closing. The Jadian Note is secured by a lien
on the assets of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian.
We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian.
On July 31, 2014, one of the Company’s
subsidiaries, Telecorp Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Strantin, Inc. (“Strantin”),
closed on an Asset Purchase Agreement (“APA”) with Strand, Inc., an Illinois corporation (“Strand”). Pursuant
to the APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets
used in connection with Strand’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $185,000, of
which $100,000 was paid at the closing, and $85,000 was financed by way of a Convertible Promissory Note (the “Strand Note”).
The terms of the Strand Note include interest at 6% per annum, no payments of either principal or interest for thirty (30) days
after Closing and monthly principal and interest payments of $2,586 commencing thereafter, no prepayment penalty, and a balloon
payment consisting of full payment of all amounts due after one (1) year. In the event we default on the July 31, 2015 balloon
payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the
parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid
price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever
is greater. The Strand Note is secured by a lien on the assets of Strand. We did not purchase and Strand agreed to retain and be
responsible for any and all liabilities of Strand. We did not purchase and Strand agreed to retain and be responsible for any and
all liabilities of Strand.
On December 29, 2014, The Company through a
newly-formed wholly-owned Illinois subsidiary, Interaction Technology, Inc. (“Interact”), closed on an Asset Purchase
Agreement (“APA”) with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the
APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used
in connection with Interaction’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $600,000, of
which $250,000 was paid at the closing, and $150,000 was financed by way of a Promissory Note (the “Inter Note1”) and
$200,000 was financed by way of a Promissory Note (the "Inter Note2"). The terms of the Inter Note1 include interest
at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal payments
of $37,500 commencing thereafter, no prepayment penalty. The terms of the Inter Note2 include interest at 6% per annum, no payments
of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $11,881.03
commencing thereafter, no prepayment penalty. The Inter Note 1 and Inter Note2 is unsecured. We did not purchase and Inter agreed
to retain and be responsible for any and all liabilities of Inter.
If we default on the repayment of the notes
described above the holders of such notes may enforce their security interest over the assets of the Company or its subsidiaries
which secure the repayment of such notes, and we could be forced to curtail or abandon our current business plans and operations.
If that were to happen, any investment in the Company could become worthless.
We have a history of losses which may continue
and may negatively impact our ability to achieve our business objectives.
We incurred a net loss of $7,667,407 for the
year ended December 31, 2014 and accumulated losses of $15,169,401 from March 2000 (inception) to December 31, 2014, in addition
to having negative working capital of $3,453,062 at December 31, 2014. We cannot assure you that we can achieve or sustain profitability
on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the software
development industry. We cannot assure you that future operations will be profitable. Revenues and profits, if any, will depend
upon various factors, including whether we will be able to increase our revenues. We may not achieve our business objectives and
the failure to achieve such goals would have an adverse impact on our business, financial condition and result of operations.
We have conditions that raise substantial
doubt that we can continue as a going concern, which may negatively affect our ability to raise additional funds and otherwise
operate our business. If we fail to raise sufficient capital, we will not be able to implement our business plan, we may have to
liquidate our business, and you may lose your investment.
There is substantial doubt about our ability
to continue as a going concern given our recurring losses from operations, deficiencies in working capital and equity and our failure
to make payments related to our notes payable as described herein. This substantial doubt could materially limit our ability to
raise additional funds by issuing new debt or equity securities or otherwise. If we fail to raise sufficient capital, we will not
be able to implement our business plan, we may have to liquidate our business and you may lose your investment. You should consider
our independent registered public accountants’ comments when determining if an investment in us is suitable.
Shares eligible for future sale may adversely
affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace
could reduce the price of our common stock.
Shares eligible for future sale may have an
adverse effect on the market price of our common stock by creating an excessive supply. We currently plan to raise additional funding
through the sale of debt or equity securities in the future, which would cause a significant increase in the number of outstanding
shares which we currently have, and would cause immediate and substantial dilution to our existing shareholders. Additionally in
the future, shareholders, including our President and Chief Executive Officer, and any shareholders who purchase shares in the
future may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open
market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule
144, if the Company remains a reporting company, a non “affiliate” stockholder (or stockholders whose shares are aggregated)
who has satisfied a six month holding period may sell their securities free of any volume limitations. Rule 144 also permits, under
certain circumstances, the sale of securities, with certain volume limitations, by an affiliate, if the Company is a reporting
company, the “affiliate” has held such shares for six months, and the Company continues to file periodic reports with
the commission. The rules are different however for non-reporting companies in that non-“affiliate” and “affiliate
shareholders must hold their securities for at least a year, and no sales by “non-affiliates” are able to be made unless
certain requirements are met, including, but not limited to that there is current public information available regarding the Company
and the “affiliate” complies with the applicable volume limitations. The disclosures in this paragraph assume for all
purposes that the Company is not a “shell company” or former “shell company” as described in Rule 144.
Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price
of our common stock by creating an excessive supply.
Our success and the success of our products
depend in part upon our ability to develop new products and enhance our existing products. Failure to successfully introduce new
or enhanced products to the market may adversely affect our business.
We may not be successful in achieving market
acceptance of our products. Any failure or delay in diversifying our existing product offerings could harm our business, results
of operations and financial condition.
Our future success depends in part on our ability
to develop enhancements to our existing products and to introduce new products that keep pace with rapid technological developments.
We must continue to modify and enhance our products to keep pace with changes in technologies. We may not be successful in developing
these modifications and enhancements or in bringing them to market in a timely manner. In addition, uncertainties about the timing
and nature of new technologies and platforms or modifications to existing platforms or technologies, could increase our research
and development expenses. Any failure of our products to operate effectively with future network platforms and technologies could
reduce the demand for our products, result in customer dissatisfaction and harm our business. Additionally, accelerated product
introductions and short product life cycles require high levels of expenditures for research and development that could adversely
affect our operating results.
We may not be able to effectively manage
our growth, which may harm our profitability.
Our strategy envisions the expansion of our
business. If we fail to effectively manage our growth, our financial results could be adversely affected. Growth may place a strain
on our management systems and resources. We must continue to refine and expand our business capabilities, our systems and processes
and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot
assure that we will be able to:
| · | expand our systems effectively or efficiently or in a timely manner; |
| · | allocate our human resources optimally; |
| · | identify and engage qualified employees and consultants, or retain valued employees and consultants;
or |
| · | incorporate effectively the components of any business that we may acquire in our effort to achieve
growth. |
If we are unable to manage our growth, our
financial condition and results of operations may be materially adversely affected.
Our operating results are difficult to predict
and fluctuate substantially from quarter to quarter and year to year, which may increase the difficulty of financial planning and
forecasting and may result in declines in our stock price.
Our future operating results may vary from
our past operating results, are difficult to predict and may vary from year to year due to a number of factors. Many of these factors
are beyond our control. These factors include:
| · | the potential delay in recognizing revenue from transactions due to revenue recognition rules which
we must follow; |
| · | customer decisions to delay implementation of our products; |
| · | any seasonality of technology purchases; |
| · | demand for our products, which may fluctuate significantly; |
| · | the timing of new product introductions and product enhancements by both us and our competitors; |
| · | changes in our pricing policy; and |
| · | the publication of opinions concerning us, our products or technology by industry analysts. |
As a result of these and other factors, our
operating results for any fiscal quarter or fiscal year will be subject to significant variation, and we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful in terms of their relation to future performance. You should
not rely upon these comparisons as indications of future performance. It is likely that our future quarterly and annual operating
results from time to time will not meet the expectations of public market analysts or investors, which could cause a drop in the
price of our common stock.
Defects or errors in our software could
adversely affect our reputation, result in significant costs to us and impair our ability to sell our software.
If our software is determined to contain defects
or errors, our reputation could be materially adversely affected, which could result in significant costs to us and impair our
ability to sell our software in the future. The costs we would incur to correct product defects or errors may be substantial and
would materially adversely affect our operating results. After the release of our software, defects or errors may be identified
from time to time by our internal team and by our clients. Such defects or errors may occur in the future.
Any defects in our applications, or defects
that cause other applications to malfunction or fail, could result in:
| · | lost or delayed market acceptance and sales of our software; |
| · | product liability suits against us; |
| · | diversion of development resources; |
| · | injury to our reputation; and |
| · | increased maintenance and warranty costs. |
Our market is subject to rapid technological
change and if we fail to continually enhance our products and services in a timely manner, our revenue and business would be harmed.
We must continue to enhance and improve the
performance, functionality and reliability of our products in a timely manner. The software industry is characterized by rapid
technological change, changes in user requirements and preferences, frequent new product and services introductions embodying new
technologies, and the emergence of new industry standards and practices that could render our products and services obsolete. Our
failure to continually enhance our products and services in a timely manner would adversely impact our business and prospects.
Our success will depend, in part, on our ability to internally develop and license leading technologies to enhance our existing
products and services, to develop new products and services that address the increasingly sophisticated and varied needs of our
future customers, and to respond to technological advances and emerging industry standards and practices on a cost-effective and
timely basis. Our product development efforts are expected to continue to require substantial investments, and we may not have
sufficient resources to make the necessary investments. If we are unable to adapt our products and services to changing market
conditions, customer requirements or emerging industry standards, we may not be able to maintain or increase our revenue and expand
our business.
Our management has no senior management
experience in the software industry which may hinder our ability to manage our operations.
Our Company is a relatively new software company
and our management has limited experience managing in our industry and our management and employees have limited experience developing
and selling software. The lack of experience in software design and sales may make it difficult to compete against companies that
have more senior management and design experience. We expect to add additional key personnel in the future. Our failure to attract
and fully integrate our new employees into our operations or successfully manage such employees could have a material adverse effect
on our business, financial condition and results of operations.
Significant unauthorized use of our products
would result in material loss of potential revenues and our pursuit of protection for our intellectual property rights could result
in substantial costs to us.
Our software is planned to be licensed to customers
under license agreements, which license may include provisions prohibiting the unauthorized use, copying and transfer of the licensed
program. Policing unauthorized use of our products will likely be difficult and, while we are unable to determine the extent to
which piracy of our software products exists, any significant piracy of our products could materially and adversely affect our
business, results of operations and financial condition. In addition, the laws of some foreign countries do not protect the proprietary
rights to as great an extent as do the laws of the United States and our means of protecting our proprietary rights may not be
adequate.
We may face product liability claims from
our future customers which could lead to additional costs and losses to the Company.
Our license agreements with our future customers
will contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the license agreements may not be effective under the laws of some jurisdictions.
A successful product liability claim brought against us could result in payment by us of substantial damages, which would harm
its business, operating results and financial condition and cause the price of its common stock to fall.
We may not be able to respond to technological
changes with new software applications, which could materially adversely affect our sales and profitability.
The markets for our software applications are
characterized by rapid technological changes, changing customer needs, frequent introduction of new software applications and evolving
industry standards. The introduction of software applications that embody new technologies or the emergence of new industry standards
could make our software applications obsolete or otherwise unmarketable. As a result, we may not be able to accurately predict
the lifecycle of our software applications, which may become obsolete before we receive any revenue or the amount of revenue that
we anticipate receiving from them. If any of the foregoing events were to occur, our ability to retain or increase market share
could be materially adversely affected.
To be successful, we need to anticipate, develop
and introduce new software applications on a timely and cost-effective basis that keep pace with technological developments and
emerging industry standards and that address the increasingly sophisticated needs of our future customers and their budgets. We
may fail to develop or sell software applications that respond to technological changes or evolving industry standards, experience
difficulties that could delay or prevent the successful development, introduction or sale of these applications or fail to develop
applications that adequately meet the requirements of the marketplace or achieve market acceptance. Our failure to develop and
market such applications and services on a timely basis, or at all, could materially adversely affect our sales and profitability.
Our failure to offer high quality customer
support services could harm our reputation and could materially adversely affect our sales of software applications and results
of operations.
Our future customers, if any, will depend on
us to resolve implementation, technical or other issues relating to our software. A high level of service is critical for the successful
marketing and sale of our software. If we do not succeed in helping our customers quickly resolve post-deployment issues, our reputation
could be harmed and our ability to make new sales or increase sales to customers could be damaged.
We expect to rely on off-shore independent
contract service providers and, as a result, will be exposed to potential service problems from those providers.
Certain Company functions, such as software
development, will be provided through off-shore contract providers. Any material disruption or slowdown in service resulting from
telephone or Internet failures, power or service outages, natural disasters, labor disputes, or other events could make it difficult
or impossible to provide adequate off-shore services. Furthermore, we may be unable to attract and retain an adequate number of
competent software developers, which is essential in creating a favorable customer experience. In addition, because our outsourced
software development is located in India, we may experience difficulties in training or monitoring the level of support provided.
If we are unable to continually provide adequate and trained staffing for our software development operations, our reputation could
be seriously harmed and our sales could decline. Further, we cannot assure you that our needs will not exceed our capacities. If
this occurs, we could experience delays in developing software and addressing customer concerns. Because our success depends in
large part on keeping our future customers satisfied, any failure to provide satisfactory levels of software development would
likely impair our reputation and we could lose customers.
Our business could be harmed if our independent
third party contractors violate labor or other laws.
Once we are able to retain them, our independent
contract third party contractors may not operate in compliance with applicable United States and foreign laws and regulations,
including labor practices. If one of any of our possible future independent contractors violates labor or other laws or diverges
from those labor practices generally accepted as ethical in the United States, it could result in adverse publicity for us, damage
our reputation in the United States or render our conduct of business in a particular foreign country undesirable or impractical,
any of which could harm our business.
Our future success depends on our ability
to respond to changing customer demands, identify and interpret trends and successfully market new products.
The software industry is subject to rapidly
changing customer demands, particularly in the “enterprise” market that we intend to market our product. Accordingly,
we must identify and interpret trends and respond in a timely manner. Demand for and market acceptance of new products are uncertain
and achieving market acceptance for new products generally requires substantial product development and marketing efforts and expenditures.
If we do not meet changing customer demands or are unable to develop products that appeal to current customer demands, our results
of operations will be negatively impacted. In addition, we will have to make decisions about product development and marketing
expenditures in advance of the time when customer acceptance can be determined. If we fail to anticipate, identify or react appropriately
to changes and trends or are not successful in marketing our products, we could experience excess inventories, higher than normal
markdowns or an inability to sell our products once and if the products are available.
Our business and the success of our products
could be harmed if we are unable to establish and maintain a brand image.
We believe that establishing a brand is critical
to achieving acceptance of our software products and to establishing key strategic relationships. As a new company with a new brand,
we believe that we have little to no brand recognition with the public. We may experience difficulty in establishing a brand name
that is well-known and regarded, and any brand image that we may be able to create may be quickly impaired. The importance of brand
recognition will increase when and if our competitors create products that are similar to our products. Even if we are able to
establish a brand image and react appropriately to changes in customer preferences, customers may consider our brand image to be
less prestigious or trustworthy than those of our larger competitors. Our results of operations may be affected in the future should
our products even be successfully launched.
We may fail in introducing and promoting
our products to the software market, which will have an adverse effect on our ability to generate revenues.
Demand for and market acceptance of new products
is inherently uncertain. Our revenue will come from the sale of our products, and our ability to sell our products will depend
on various factors, including the eventual strength, if any, of our brand name, competitive conditions and our access to necessary
capital. If we fail to introduce and promote our products, we may not be able to generate any significant revenues. In addition,
as part of our growth strategy, we intend to expand our product offerings to introduce more products in other categories. This
strategy may however prove unsuccessful and our association with failed products could impair our brand image. Introducing and
achieving market acceptance for these products will require, among other things:
| · | the establishment of our brand; |
| · | the development and performance to our planned product introductions; |
| · | the establishment of key relationships with customers for our software products; and |
| · | substantial marketing and product development efforts and expenditures to create and sustain customer
demand. |
We will face intense competition, including
competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these
companies, our business could be harmed.
We will face intense competition in the software
industry from other established companies. We have a very limited market for our product, product sales, brand recognition, manufacturing
or brand equity. Almost all of our competitors have significantly greater financial, technological, engineering, manufacturing,
marketing and distribution resources than we do. Their greater capabilities in these areas will enable them to better withstand
periodic downturns in the software industry, compete more effectively on the basis of price and production and more quickly develop
new products. In addition, new companies may enter the markets in which we expect to compete, further increasing competition in
the software industry.
We believe that our ability to compete successfully
will depend on a number of factors, including the functionality of our products once marketed and the strength of our brand, once
established, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased
competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows
that are sufficient to maintain or expand our development and marketing of new products.
We depend on key personnel to manage our
business effectively in a rapidly changing market, and if we are unable to retain existing personnel, our business could be harmed.
Our future success depends upon the continued
services of key employees especially Shaun Passley, Ph.D., our President and Chief Executive Officer. The loss of the services
of Dr. Passley or any other key employee could harm us. Our future success also depends on our ability to identify, attract and
retain additional qualified personnel. Competition for employees in our industry is intense and we may not be successful in attracting
and retaining such personnel.
The disruption, expense and potential liability
associated with unanticipated future litigation against us could have a material adverse effect on our business, results of operations
and financial condition.
We may be subject to various legal proceedings
and threatened legal proceedings from time to time as part of our ordinary business. We are not currently a party to any legal
proceedings. However, any unanticipated litigation in the future, regardless of merits, could significantly divert management’s
attention from our operations and result in substantial legal fees to us. Further, there can be no assurance that any actions that
have been or will be brought against us will be resolved in our favor or, if significant monetary judgments are rendered against
us, that we will have the ability to pay such judgments. Such disruptions, legal fees and any losses resulting from these claims
could have a material adverse effect on our business, results of operations and financial condition.
Protection of our intellectual property
is limited, and any misuse of our intellectual property by others could materially adversely affect our sales and results of operations.
Proprietary technology in our software is important
to our success. To protect our proprietary rights, we plan to rely on a combination of patents, copyrights, trademarks, trade secrets,
confidentiality procedures and contractual provisions. We do not own any issued patents and we have not emphasized patents as a
source of significant competitive advantage. We have sought to protect our proprietary technology under laws affording protection
for trade secrets, copyright and trademark protection of our software, products and developments where available and appropriate.
In the event we are issued patents, our issued patents may not provide us with any competitive advantages or may be challenged
by third parties, and the patents of others may seriously impede our ability to conduct our business. Further, any patents issued
to us may not be timely or broad enough to protect our proprietary rights.
We also have one registered trademark in the
U.S. for our “Epazz” mark. Although we attempt to monitor use of and take steps to prevent third parties from using
our trademark without permission, policing the unauthorized use of our trademark is difficult. If we fail to take steps to enforce
our trademark rights, our competitive position and brand recognition may be diminished.
Protection of trade secrets and other intellectual
property rights in the markets in which we operate and compete is highly uncertain and may involve complex legal and scientific
questions. The laws of countries in which we operate may afford little or no protection to our trade secrets and other intellectual
property rights. Policing unauthorized use of our trade secret technologies and proving misappropriation of our technologies is
particularly difficult, and we expect software piracy to continue to be a persistent problem. Piracy of our products represents
a loss of revenue to us. Furthermore, any changes in, or unexpected interpretations of, the trade secret and other intellectual
property laws in any country in which we operate may adversely affect our ability to enforce our trade secret and intellectual
property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our confidential
information and trade secret protection. If we are unable to protect our proprietary rights or if third-parties independently develop
or gain access to our or similar technologies, our competitive position and revenue could suffer.
We may incur significant litigation expenses
protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on
our cash flow and results of operations.
If our efforts to protect our intellectual
property rights are inadequate to prevent imitation of our products by others or to prevent others from seeking to block sales
of our products as a violation of the intellectual property rights of others, we could incur substantial significant legal expenses
in resolving such disputes.
Our competitors may develop similar, non-infringing
products that adversely affect our ability to generate revenues.
Our competitors may be able to produce a software
product that is similar to our product without infringing on our intellectual property rights. Since we have yet to establish any
significant brand recognition for our product, we could lose a substantial amount of business due to competitors developing products
similar to our software products. As a result, our future growth and ability to generate revenues from the sale of our product
could suffer a material adverse effect.
Claims that we misuse the intellectual property
of others could subject us to significant liability and disrupt our business, which could materially adversely affect our results
of operations and financial condition.
Because of the nature of our business, we may
become subject to material claims of infringement by competitors and other third-parties with respect to current or future software
applications, trademarks or other proprietary rights. Our competitors, some of which may have substantially greater resources than
us and have made significant investments in competing technologies or products, may have, or seek to apply for and obtain, patents
that will prevent, limit or interfere with our ability to make, use and sell our current and future products, and we may not be
successful in defending allegations of infringement of these patents. Further, we may not be aware of all of the patents and other
intellectual property rights owned by third-parties that may be potentially adverse to our interests. We may need to resort to
litigation to enforce our proprietary rights or to determine the scope and validity of a third party’s patents or other proprietary
rights, including whether any of our products or processes infringe the patents or other proprietary rights of third-parties. The
outcome of any such proceedings is uncertain and, if unfavorable, could significantly harm our business. If we do not prevail in
this type of litigation, we may be required to:
| · | pay damages, including actual monetary damages, royalties, lost profits or other damages and third-party’s
attorneys’ fees, which may be substantial; |
| · | expend significant time and resources to modify or redesign the affected products or procedures
so that they do not infringe a third-party’s patents or other intellectual property rights; further, there can be no assurance
that we will be successful in modifying or redesigning the affected products or procedures; |
| · | obtain a license in order to continue manufacturing or marketing the affected products or processes,
and pay license fees and royalties; if we are able to obtain such a license, it may be non-exclusive, giving our competitors access
to the same intellectual property, or the patent owner may require that we grant a cross-license to part of our proprietary technologies;
or |
| · | stop the development, manufacture, use, marketing or sale of the affected products through a court-ordered
sanction called an injunction, if a license is not available on acceptable terms, or not available at all, or our attempts to redesign
the affected products are unsuccessful. |
Any of these events could adversely affect
our business strategy and the value of our business. In addition, the defense and prosecution of intellectual property suits, interferences,
oppositions and related legal and administrative proceedings in the United States and elsewhere, even if resolved in our favor,
could be expensive, time consuming, generate negative publicity and could divert financial and managerial resources.
We expect that software developers will increasingly
be subject to infringement claims as the number of software applications and competitors in our industry segment grows and the
functionality of software applications in different industry segments overlaps. Thus, we could be subject to additional patent
infringement claims in the future. There can be no assurance that the claims that may arise in the future can be amicably disposed
of, and it is possible that litigation could ensue.
Intellectual property litigation can be complex,
costly and protracted. As a result, any intellectual property litigation to which we are subject could disrupt our business operations,
require us to incur substantial costs and subject us to significant liabilities, each of which could severely harm our business.
Plaintiffs in intellectual property cases often
seek injunctive relief. Any intellectual property litigation commenced against us could force us to take actions that could be
harmful to our business, including the following:
| · | stop selling our products or using the technology that contains the allegedly infringing intellectual
property; |
| · | stop selling our products or using the technology that contains the allegedly infringing intellectual
property; |
| · | attempt to obtain a license to use the relevant intellectual property, which may not be available
on reasonable terms or at all; and |
| · | attempt to redesign the products that allegedly infringed upon the intellectual property. |
If we are forced to take any of the foregoing
actions, our business, financial position and operating results could be harmed. We may not be able to develop, license or acquire
non-infringing technology under reasonable terms, if at all. These developments would result in an inability to compete for customers
and would adversely affect our ability to increase our revenue. The measure of damages in intellectual property litigation can
be complex, and is often subjective or uncertain. If we were to be found liable for the infringement of a third party’s proprietary
rights, the amount of damages we might have to pay could be substantial and would be difficult to predict.
Our business may be negatively impacted
as a result of changes in the economy and corporate and institutional spending.
Our business will depend on the general economic
environment and levels of corporate and institutional spending. Purchases of software may decline in periods of recession or uncertainty
regarding future economic prospects. During periods of recession or economic uncertainty, we may not be able to maintain or increase
our sales to customers, maintain sales levels, establish operations on a profitable basis or create earnings from operations as
a percentage of net sales. As a result, our operating results may be adversely and materially affected by downward trends in the
economy or the occurrence of events that adversely affect the economy in general. Our operating results and margins will be adversely
impacted if we do not grow as anticipated.
We may engage in future acquisitions or
investments that present many risks, and we may not realize the anticipated financial and strategic goals for any of these transactions.
We do not have significant experience acquiring
companies. However, in the future we may acquire or make investments in companies, in addition to our acquisition of DFI, PRMI,
IntelliSys, K9 Bytes, MS Health, Telecorp, Jadian, Strantin, Interaction and our purchase of the AutoHire and Zinergy Software
described above. If we acquire or make investments in complementary companies, products, services and technologies, the acquisitions
and investments will involve a number of risks, including:
| · | we have limited experience acquiring or making investments in complementary companies, products,
services and technologies; |
| · | we may find that the acquired company or assets do not further our business strategy, or that we
overpaid for the company or assets, or that industry or economic conditions change, all of which may generate a future impairment
charge; |
| · | we may have difficulty integrating the operations and personnel of the acquired business and may
have difficulty retaining the key personnel of the acquired business; |
| · | we may have difficulty incorporating the acquired technologies or products with our existing product
lines; |
| · | there may be customer confusion where our products overlap with those that we acquire; |
| · | our ongoing business and management’s attention may be disrupted or diverted by transition
or integration issues and the complexity of managing geographically and culturally diverse locations; |
| · | we may have difficulty maintaining uniform standards, controls, procedures and policies across
locations; |
| · | the acquisition may result in litigation from terminated employees or third parties; and |
| · | we may experience significant problems or liabilities associated with product quality, technology
and legal contingencies. |
These factors could have a material adverse
effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition
or multiple acquisitions in a short period of time.
From time to time, we may enter into negotiations
for acquisitions or investments that are not ultimately consummated. These negotiations could result in significant diversion of
management time, as well as out-of-pocket costs.
The consideration paid for an investment or
acquisition may also affect our financial results. If we were to proceed with one or more significant acquisitions in which the
consideration included cash, we could be required to use a substantial portion of our available cash, including a portion of the
net proceeds of this offering. To the extent we issue shares of our capital stock or other rights to purchase shares of our capital
stock, including options or other rights, our existing stockholders may be diluted, and our earnings per share may decrease. In
addition, acquisitions may result in the incurrence of debt, large one-time write-offs, including write-offs of acquired in-process
research and development costs, and restructuring charges. They may also result in goodwill and other intangible assets that are
subject to impairment tests, which could result in future impairment charges.
We may be unable to scale our operations
successfully and fail to attain our planned growth.
Our plan is to grow our business rapidly. Our
growth, if it occurs as planned, will place significant demands on our management, as well as our financial, administrative and
other resources. We will need to hire highly skilled personnel to effectuate our planned growth. There is no guarantee that we
will be able to locate and retain qualified personnel for such positions, which would likely hinder our ability to manage operations.
Furthermore, we cannot guarantee that any of the systems, procedures and controls we put in place will be adequate to support the
commercialization of our products or other operations. Our operating results will depend substantially on the ability of our officers
and key employees to manage changing business conditions and to implement and improve our financial, administrative and other resources.
If we are unable to respond to and manage changing business conditions, or the scale of our products, services and operations,
then the quality of our services, our ability to retain key personnel and our business could be harmed.
RISKS RELATED TO OUR CAPITAL STRUCTURE
We have the obligation to issue additional
shares of our Class A Common Stock in the future. The issuance of such additional shares of common and preferred stock may depress
the price of our common stock and cause dilution to existing shareholders.
We have both the ability as well as outstanding
obligations to issue additional shares of common stock in the future. These include the following:
| · | As
of May 11, 2015, there were 1,800,000,000 shares of common stock reserved for issuance
upon conversion of a convertible note payable agreement with KBM Worldwide, Inc. |
| · | As
of May 11, 2015, there were 60,000,000 shares of common stock reserved for issuance upon
conversion of a convertible note payable agreement with GG Mars, Inc. |
| · | May
11, 2015, there were 158,630,176 shares of common stock reserved for issuance upon conversion
of a convertible note payable agreement with LG Capital, Inc. |
| · | As
of May 11, 2015, there were 443,000,000 shares of common stock reserved for issuance
upon conversion of a convertible note payable agreement with LG Capital, Inc. |
| · | As
of May 11, 2015, there were 800,000,000 shares of common stock reserved for issuance
upon conversion of a convertible note payable agreement with Vis Vires. |
We also have outstanding obligations to issue
additional shares of common stock in the future related to conversions of Preferred Stock and Convertible Class B Common Stock,
provided that we do not currently have a sufficient number of authorized but unissued shares to issue such securities, given our
6,000,000,000 total authorized shares. These shares are held entirely by our CEO and other related parties who have the ability
to amend the Articles of Incorporation and increase the authorized shares as necessary without the approval or consent of our minority
shareholders. These include the following:
| · | As of April 10, 2015, there were 4,078,038,438 shares of common stock reserved for issuance upon
conversion of 1,000 shares of outstanding Convertible Series A Preferred Stock. |
| · | As of April 10, 2015, there were 679,673,073 shares of common stock reserved for issuance upon
conversion of 1,000 shares of outstanding Convertible Series B Preferred Stock. |
| · | As of April 10, 2015, there were 8,831,166,600 shares of common stock reserved for issuance upon
conversion of 2,943,722,200 shares of outstanding Convertible Series B Preferred Stock. |
| · | As of April 10, 2015, there were 23,000,000 shares of common stock reserved for issuance upon conversion
of a Convertible Class B Common Stock. |
Any shares of common stock issued pursuant
to these conversions would further dilute the percentage ownership of existing stockholders. We may issue additional shares in
the future other than as listed above. There are no preemptive rights in connection with our common stock. Thus, the percentage
ownership of existing stockholders may be diluted if we issue additional shares in the future. Our Board of Directors intends to
use its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with
any such grant. Nonetheless, future issuances of additional shares pursuant to conversions granted could cause immediate and substantial
dilution to the net tangible book value of shares of common stock issued and outstanding immediately before such transaction. Any
future decrease in the net tangible book value of such issued and outstanding shares could materially and adversely affect the
market value of the shares. Additionally, our Board of Directors is authorized to issue shares of preferred stock in one or more
series and to fix the voting powers, preferences and other rights and limitations of the preferred stock. Shares of preferred stock
may be issued by our Board of Directors without shareholder approval, with voting powers and such preferences and relative, participating,
optional or other special rights and powers as determined by our Board of Directors, which may be greater than the shares of common
stock currently outstanding. As a result, shares of preferred stock (similar to the above) may be issued by our Board of Directors
which cause the holders to have majority voting power over our shares, provide the holders of the preferred stock the right to
convert the shares of preferred stock they hold into shares of our common stock, which may cause substantial dilution to our then
common stock shareholders and/or have other rights and preferences greater than those of our common stock shareholders including
having a preference over our common stock with respect to dividends or distributions on liquidation or dissolution.
Investors should keep in mind that the Board
of Directors has the authority to issue additional shares of common stock and preferred stock, which could cause substantial dilution
to our existing shareholders. Additionally, the dilutive effect of any preferred stock which we may issue may be exacerbated given
the fact that such preferred stock may have voting rights and/or other rights or preferences which could provide the preferred
shareholders with substantial voting control over us subsequent to the date of this filing and/or give those holders the power
to prevent or cause a change in control, even if that change in control might benefit our shareholders. As a result, the issuance
of shares of common stock and/or preferred stock may cause the value of our securities to decrease.
Finally, investors should keep in mind that
our majority shareholders have the right in their sole discretion (because they exercise super majority voting control over our
securities) to increase our authorized but unissued shares of common and preferred stock in their sole discretion without approval
of the minority shareholders of the Company. Such increases in authorized shares make additional authorized but unissued shares
available for issuance, which could further dilute existing shareholders and/or cause our majority shareholders to gain even greater
ownership of our voting securities.
We may issue additional stock without shareholder
consent.
Our board of directors has authority, without
action or vote of the shareholders, to issue all or part of our authorized but unissued shares. Additional shares may be issued
in connection with future financing, acquisitions, employee stock plans, or otherwise. Any such issuance will dilute the percentage
ownership of existing shareholders. The board of directors can issue preferred stock in one or more series and fix the terms of
such stock without shareholder approval. We currently have 39,998,000 shares of preferred stock undesignated. Preferred stock may
include the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. The issuance of preferred stock could adversely affect the rights of the holders of common
stock and reduce the value of the common stock. In addition, specific rights granted to holders of preferred stock could discourage,
delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our shareholders. Such
issuance could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your
choosing and to cause us to take other corporate actions you desire.
We may exchange non-convertible debt for
convertible debt without shareholder consent which may cause immediate and substantial dilution.
Our board of directors has authority, without
action or vote of the shareholders, to exchange non-convertible debts for convertible debts with agreement by the lenders. As of
December 31, 2014, we had a total of $3,811,823 of non-convertible debts on our balance sheet, and a total of $88,739 of outstanding
convertible debts. Any conversion of the Convertible Notes and sale of shares of common stock issuable in connection with the conversion
thereof will likely cause the value of our common stock, if any, to decline in value, as described in greater detail under the
Risk Factors below.
The Convertible Notes are convertible
into shares of our common stock at a discount to market.
The conversion price
of the $60,674 in Convertible Notes (principal only) currently outstanding as of May 1, 2015, is convertible at various prices
discounted to market as depicted in the table below, in addition to the 4,557,590 shares of Class A Common Stock issued in conversion
of a total of $2,250,914 of principal and interest over various dates from January 1, 2013 through December 31, 2014, including
584,333 shares pursuant to the conversion of $58,433 of previously non-convertible related party debt. In addition, a total of
$1,500 of principal on convertible notes was repaid in cash during the year ended December 31, 2014. As a result, any conversion
of the Convertible Notes and sale of shares of common stock issuable in connection with the conversion thereof will likely cause
the value of our common stock, if any, to decline in value, as described in greater detail under the Risk Factors below.
|
|
|
|
|
|
|
Potential issuable shares at various conversion prices |
|
|
|
|
|
|
|
below the most recent market price of $0.0002 per share |
|
|
Conversion |
|
Principal |
|
100% |
|
75% |
|
50% |
|
25% |
Lender / Origination |
|
Terms |
|
Borrowed |
|
$0.0002 |
|
$0.00015 |
|
$0.0001 |
|
$0.00005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JMJ Financial
(Second JMJ Note)
November 13, 2013 |
|
Convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. |
|
$ |
16,125 |
|
80,625,000 |
|
107,500,000 |
|
161,260,000 |
|
322,520,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St. George Investments, Inc.
(First St. George Note)
September 5, 2013 |
|
Convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest closing bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. |
|
$ |
44,549 |
|
222,745,000 |
|
296,933,333 |
|
445,490,000 |
|
890,980,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
60,674 |
|
303,370,000 |
|
404,493,333 |
|
606,750,000 |
|
1,213,500,000 |
The issuance and
sale of common stock upon conversion of the Convertible Notes may depress the market price of our common stock.
As sequential conversions
of the Convertible Notes and sales of such converted shares take place, the price of our common stock may decline, and as a result,
the holder of the Convertible Notes will be entitled to receive an increasing number of shares in connection with its conversions,
which shares could then be sold in the market, triggering further price declines and conversions for even larger numbers of shares,
to the detriment of our investors. The shares of common stock which the Convertible Notes are convertible into may be sold without
restriction pursuant to Rule 144. As a result, the sale of these shares may adversely affect the market price, if any, of our common
stock.
In addition, the common
stock issuable upon conversion of the Convertible Notes may represent overhang that may also adversely affect the market price
of our common stock. Overhang occurs when there is a greater supply of a company's stock in the market than there is demand for
that stock. When this happens the price of the Company's stock will decrease, and any additional shares which shareholders attempt
to sell in the market will only further decrease the share price. The various Convertible Notes will be convertible into shares
of our common stock at various discounts to market, which provide the holders with the ability to sell their common stock at or
below market and still make a profit. In the event of such overhang, the note holders will have an incentive to sell their common
stock as quickly as possible. If the share volume of our common stock (which to date has been very limited) cannot absorb the discounted
shares, then the value of our common stock will likely decrease.
The issuance of
common stock upon conversion of the Convertible Notes will cause immediate and substantial dilution.
The issuance of common
stock upon conversion of the Convertible Notes will result in immediate and substantial dilution to the interests of other stockholders
since the holder of the Convertible Notes may ultimately receive and sell the full amount of shares issuable in connection with
the conversion of such Convertible Notes. Although the Convertible Notes may not be converted if such conversion would cause the
holder thereof to own more than 4.99% of our outstanding common stock (subject to 61 days written notice of such holder’s
intent to waive such restriction), this restriction does not prevent the holder of the Convertible Notes from converting some of
its holdings, selling those shares, and then converting the rest of its holdings, while still staying below the 4.99% limit. In
this way, the holder of the Convertible Notes could sell more than this limit while never actually holding more shares than this
limit allows. If the holder of the Convertible Notes chooses to do this, it will cause substantial dilution to the then holders
of our common stock.
The continuously
adjustable conversion price feature of our Convertible Notes could require us to issue a substantially greater number of shares,
which may adversely affect the market price of our common stock and cause dilution to our existing stockholders.
Our existing stockholders
will experience substantial dilution of their investment upon conversion of the Convertible Notes. The Convertible Notes are convertible
into shares of common stock at various discounted prices to market. As a result, the number of shares issuable could prove to be
significantly greater in the event of a decrease in the trading price of our common stock, which decrease would cause substantial
dilution to our existing stockholders. As sequential conversions and sales take place, the price of our common stock may decline,
and if so, the holder of the Convertible Notes would be entitled to receive an increasing number of shares, which could then be
sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution
to our existing stockholders and would likely cause the value of our common stock to decline.
The continuously
adjustable conversion price feature of our Convertible Notes may encourage the holder of the Convertible Notes to sell short our
common stock, which could have a depressive effect on the price of our common stock.
The Convertible Notes
are convertible into shares of our common stock at various discounted prices to market. The significant downward pressure on the
price of our common stock as the holder of the Convertible Notes converts and sells material amounts of our common stock could
encourage investors to short sell our common stock. This could place further downward pressure on the price of our common stock.
In addition, not only the sale of shares issued upon conversion of the Convertible Notes, but also the mere perception that these
sales could occur, may adversely affect the market price of our common stock.
The price of our common stock may be volatile.
In the past several years, technology stocks
have experienced high levels of volatility and significant declines in value from their historic highs. The trading price of our
common stock may fluctuate substantially. These fluctuations could cause you to lose all or part of your investment in our common
stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
| · | price and volume fluctuations in the overall stock market from time to time; |
| · | significant volatility in the market price and trading volume of software companies; |
| · | actual or anticipated changes in our earnings or fluctuations in our operating results; |
| · | actual or anticipated changes in the expectations of securities analysts; |
| · | announcements of technological innovations, new solutions, strategic alliances or significant agreements
by us or by our competitors; |
| · | general economic conditions and trends; |
| · | major catastrophic events; |
| · | sales of large blocks of our stock; or |
| · | recruitment or departures of key personnel. |
In the past, following periods of volatility
in the market price of a company’s securities, securities class action litigation has often been brought against that company.
If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial
costs and divert our management’s attention and resources from our business.
We may experience a decline in revenue or
volatility in our operating results, which may adversely affect the market price of our common stock.
We cannot predict our future revenue with certainty
because of many factors outside of our control. A significant revenue or profit decline, lowered forecasts or volatility in our
operating results could cause the market price of our common stock to decline substantially. Factors that could affect our revenue
and operating results include the following:
| · | the possibility that our future customers may cancel, defer or limit purchases as a result of reduced
information technology budgets; |
| · | the possibility that our future customers may defer purchases of our software applications in anticipation
of new software applications or updates from us or our competitors; |
| · | the ability of the Company or its distributors to meet their sales objectives; |
| · | market acceptance of our new applications and enhancements; |
| · | our ability to control expenses; |
| · | changes in our pricing and distribution terms or those of our competitors; |
| · | the demands on our management, sales force and services infrastructure as a result of the introduction
of new software applications or updates; and |
| · | the possibility that our business will be adversely affected as a result of the threat of terrorism
or military actions taken by the United States or its allies. |
Our expense levels are relatively fixed and
are based, in part, on our expectations of our future revenue. If revenue levels fall below our expectations, our net income would
decrease because only a small portion of our expenses varies with our revenue. Therefore, any significant decline in revenue for
any period could have an immediate adverse impact on our results of operations for the period. We believe that period-to-period
comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, our results
of operations could be below expectations of public market analysts and investors in future periods, which would likely cause the
market price of our common stock to decline.
The President and Chief Executive officer
of the Company has significant influence over our Company.
Shaun Passley, Ph.D. beneficially owns approximately
4% of our Class A Common Stock, and 100% of our Convertible Class B Common Stock, which is entitled to 10,000 votes per share,
which represents approximately 97% of our aggregate outstanding voting stock. Dr. Passley, as majority shareholder, sole director,
President and Chief Executive Officer of the Company possesses significant influence over our Company, giving him the ability,
among other things, to elect a majority of the Board of Directors and to approve significant corporate transactions. Such stock
ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation,
takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to
obtain control of our Company. While Dr. Passley has managed the Company since its inception, he has no other accounting or finance
experience and has no experience relating to a public company.
If securities analysts do not publish research
or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.
The trading market for our common stock will
rely in part on the research and reports that industry or financial analysts publish about us or our business. If one or more of
the analysts covering us downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these
analysts cease coverage of our Company, we could lose visibility in the market for our stock, which in turn could cause our stock
price to decline.
Shareholders may be diluted significantly
through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.
We have no committed source of financing. Wherever
possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe
that the non-cash consideration will consist of restricted shares of our common stock. Our Board of Directors has authority, without
action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock. In addition, if
a trading market develops for our common stock, we may attempt to raise capital by selling shares of our common stock, possibly
at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders, may further
dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s
ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing
management.
There is currently a limited trading market
for our common stock and we cannot ensure that one will ever develop or be sustained.
To date there has not been a significant liquid
trading market for our common stock. We cannot predict how liquid the market for our common stock might become. We currently do
not satisfy the initial listing standards for any major securities exchange, although we intend to apply for such an exchange listing
when we are able. Currently our common stock is traded on the OTCQB. Should we fail to remain traded on the OTCQB or not be able
to be traded on the OTCQB, the trading price of our common stock could suffer, the trading market for our common stock may be less
liquid and our common stock price may be subject to increased volatility. Furthermore, for companies whose securities are quoted
on the OTCQB, it may be more difficult (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because
major wire services generally do not publish press releases about such companies and (iii) to obtain needed capital.
State securities laws may limit secondary
trading, which may restrict the States in which and conditions under which you can sell shares.
Secondary trading in our common stock will
not be possible in any state until the common stock is qualified for sale under the applicable securities laws of the state or
there is confirmation that an exemption, such as listing in certain recognized securities manuals, is available for secondary trading
in the state. If we fail to register or qualify, or to obtain or verify an exemption for the secondary trading of, the common stock
in any particular state, the common stock could not be offered or sold to, or purchased by, a resident of that state. In the event
that a significant number of states refuse to permit secondary trading in our common stock, the liquidity for the common stock
could be significantly impacted.
Because
we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have
limited protections against interested director transactions, conflicts of interest and similar matters.
The
Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges
and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate
governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to
securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with
many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated
with such compliance any sooner than legally required, we have not yet adopted these measures.
Because
our sole director is not an independent director, we do not currently have independent audit or compensation committees. As a result,
our sole director has the ability to, among other things; determine his own level of compensation. Until we comply with such corporate
governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may
leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar
matters and any potential investors may be reluctant to provide us with funds necessary to expand our operations.
We
intend to comply with all corporate governance measures relating to director independence as and when required. However, we may
find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required
to provide for our effective management as a result of the Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act
of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors
and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter
qualified individuals from accepting these roles.
Due
to the fact that we are a public reporting company we will incur significant increased costs in connection with compliance with
section 404 of the Sarbanes Oxley act, and our management will be required to devote substantial time to new compliance initiatives.
As
a publicly reporting company we will incur significant legal, accounting and other expenses, including expenses in connection with
various new requirements on public companies imposed by the Sarbanes Oxley Act of 2002 (the “Sarbanes Oxley Act”).
Additionally, our management and other personnel need to devote a substantial amount of time to these new compliance initiatives.
Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more
time-consuming and costly. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal
controls for financial reporting and disclosure of controls and procedures. Our compliance with Section 404 will require that we
incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group,
and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting
knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we identify deficiencies
in our internal controls over financial reporting that are deemed to be material weaknesses (similar to those weakness identified
by our management as discussed in this report), the market price of our stock could decline, and we could be subject to penalties
or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Investors may face significant restrictions
on the resale of our common stock due to federal regulations of penny stocks.
As our common stock is listed on the OTCQB,
it is subject to the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act as long as the price of our common
stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established
customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with
any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not
traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures
include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated
with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their
securities in the secondary market.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive offices are located at 205 W.
Wacker Dr., Suite 1320, Chicago, IL 60606. The executive offices represent approximately 2,522 square feet. We occupy this space
under a lease agreement between Epazz, Inc. and 205 West Wacker Property Owner, LLC which has a sixty six month term that began
on September 1, 2013 and ends on February 28, 2019. The monthly rent under the lease is as follows:
Lease |
|
Monthly |
|
Minimum |
|
Minimum |
Year |
|
Installments |
|
Annual Rent |
|
Annual Rent PSF |
1 |
|
$ |
2,417 |
|
$ |
29,004 |
|
$ |
11.50 |
2 |
|
$ |
2,522 |
|
$ |
30,264 |
|
$ |
12.00 |
3 |
|
$ |
2,627 |
|
$ |
31,524 |
|
$ |
12.50 |
4 |
|
$ |
2,732 |
|
$ |
32,784 |
|
$ |
13.00 |
5 |
|
$ |
2,837 |
|
$ |
34,044 |
|
$ |
13.50 |
6 |
|
$ |
2,942 |
|
$ |
35,304 |
|
$ |
14.00 |
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become a party to
litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently
involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial
condition or results of operations. We may become involved in material legal proceedings in the future.
ITEM 4. MINE SAFETY DISCLOSURES
Mine safety disclosures are not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
The Company's Series A Common Stock is quoted
on the OTCQB under the symbol "EPAZ” as maintained by the OTC Markets Group Inc.
The following table sets forth the high and
low bid prices for each quarter within the last two fiscal years. The quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not necessarily represent actual transactions.
|
|
COMMON STOCK MARKET PRICE |
|
|
|
HIGH |
|
|
LOW |
|
FISCAL YEAR ENDED DECEMBER 31, 2014: |
|
|
|
|
|
|
Fourth Quarter (Quarter ended December 31, 2014) |
|
$ |
0.0070 |
|
|
$ |
0.0032 |
|
Third Quarter (Quarter ended September 30, 2014) |
|
$ |
0.0001 |
|
|
$ |
0.0001 |
|
Second Quarter (Quarter ended June 30, 2014) |
|
$ |
0.0002 |
|
|
$ |
0.0001 |
|
First Quarter (Quarter ended March 31, 2014) |
|
$ |
0.0004 |
|
|
$ |
0.0003 |
|
FISCAL YEAR ENDED DECEMBER 31, 2013: |
|
|
|
|
|
|
|
|
Fourth Quarter (Quarter ended December 31, 2013) |
|
$ |
0.0010 |
|
|
$ |
0.0004 |
|
Third Quarter (Quarter ended September 30, 2013) |
|
$ |
0.0022 |
|
|
$ |
0.0006 |
|
Second Quarter (Quarter ended June 30, 2013) |
|
$ |
0.0029 |
|
|
$ |
0.0006 |
|
First Quarter (Quarter ended March 31, 2013) |
|
$ |
0.0077 |
|
|
$ |
0.0010 |
|
(b) Holders of Common Stock
As of May 4, 2015, the Company had 2,273,292,485
shares of Class A Common Stock outstanding held by approximately 58 shareholders of record. As of May 4, 2015, the closing
price of the Company's shares of common stock was $0.0002 per share. Island Stock Transfer Company (telephone: (727) 289-0010;
facsimile: (727) 289-0069) is the registrar and transfer agent for our common stock.
Class A Common Stock, Convertible Class B Common Stock, Convertible
Series A Preferred Stock, Convertible Series B Preferred Stock, Convertible Series C Preferred Stock and Convertible Series D Preferred
Stock
Rights to Dividends and on Liquidation.
Each share of Class A Common Stock and Convertible Class B Common Stock is entitled to share equally in dividends (other than
dividends declared with respect to any outstanding Preferred Stock) when and as declared by our Board of Directors. Upon liquidation,
each share of Class A Common Stock and Convertible Class B Common Stock is entitled to share equally in our assets available for
distribution to the holders of those shares. Any outstanding Preferred Stock would rank senior to the Class A Common Stock and
Convertible Class B Common Stock in respect of liquidation rights and could rank senior to that stock in respect of dividend rights.
Voting--General. All voting power is
vested in the holders of Class A Common Stock, Convertible Class B Common Stock and Convertible Series C Preferred Stock voting
together without regard to class but with votes determined as described below. However, we could in the future create a series
of Preferred Stock with voting rights equal to or greater than our Class A Common Stock, Convertible Class B Common Stock or Convertible
Series C Preferred Stock ("Full Voting Preferred Stock").
Each holder of Class A Common Stock is entitled
to one vote per share, each holder of Convertible Class B Common Stock is entitled to 10,000 votes per share, and each holder of
Convertible Series C Preferred Stock is entitled to 3 votes per share. Our Convertible Series A and B Preferred Stock carry no
voting rights.
Non-Cumulative Voting Rights. Our Class
A Common Stock, Convertible Class B Common Stock, and Convertible Series C Preferred Stock, as well as any Full Voting Preferred
Stock we may issue, do not have cumulative voting rights.
Voting by Class. Holders of our Class
A Common Stock, Convertible Class B Common Stock, and Convertible Series C Preferred Stock vote as one class.
Miscellaneous Rights and Provisions.
There are no preemptive rights, subscription rights, or redemption provisions relating to our Class A Common Stock, Convertible
Class B Common Stock, Convertible Series A Preferred Stock, Convertible Series B Preferred Stock and Convertible Series C Preferred
Stock and none of the shares carry any liability for further calls. Our Class B Common Stock is convertible into shares of Class
A Common on a 1:1 basis. Our Convertible Series A Preferred Stock is convertible into 60% of the issued and outstanding shares
of Class A Common Stock at the time of conversion, our Convertible Series B Preferred Stock is convertible into 10% of the issued
and outstanding shares of Class A Common Stock at the time of conversion, and our Convertible Series C Preferred Stock is convertible
into three (3) shares of Class A Common Stock at the time of conversion and our Convertible Series D Preferred Stock is convertible
into three (3) shares of Class A Common Stock at the time of conversion. We are not obligated to redeem or retire the Convertible
Class B Common Stock, Convertible Series A Preferred Stock, Convertible Series B Preferred Stock, Convertible Series C Preferred
Stock or Convertible Series D Preferred Stock.
Ranking. The Convertible Series A Preferred
Stock ranks senior to the Convertible Series B and C Preferred Stock, which in turn ranks senior to the Class A Common Stock, which
also ranks senior to the Convertible Class B Common Stock with respect to dividends and upon liquidation.
As of December 31, 2014, the Company had 1,000
shares of Convertible Series A Preferred Stock outstanding, all of which are held by the Company’s Chief Executive Officer,
Shaun Passley, Ph.D. There is currently no market for the Company’s Convertible Series A Preferred Stock.
As of December 31, 2014, the Company had 1,000
shares of Convertible Series B Preferred Stock outstanding, which are held by the Company’s Secretary, Craig Passley (10
shares), Vivienne Passley (500 shares), the aunt of the Company’s CEO and Fay Passley (490 shares), the mother of the Company’s
CEO. There is currently no market for the Company’s Convertible Series B Preferred Stock.
As of December 31, 2014, the Company had 2,932,755,533
shares of Convertible Series C Preferred Stock outstanding, which are held by the Company’s Chief Executive Officer, Shaun
Passley, Ph.D. (2,421,052,632 shares), the Company’s Secretary, Craig Passley (60,000,000 shares), GG Mars Capital, Inc.
(224,000,000 shares), a Company solely owned by Vivienne Passley, the aunt of the Company’s CEO and Star Financial Corporation
(225,000,000 shares), a Company solely owned Fay Passley, the mother of the Company’s CEO. There is currently no market for
the Company’s Convertible Series C Preferred Stock.
As of December 31, 2014, the Company had 23,000,000
shares of Convertible Class B Common Stock outstanding, all of which are held by the Company’s Chief Executive Officer, Shaun
Passley, Ph.D. There is currently no market for the Company’s Convertible Class B Common Stock.
As of December 31, 2014, the Company had not
issued any Convertible Series D Preferred Stock.
(c) Dividends
On January 1, 2014, the Company declared and
accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1
million during the year ended December 31, 2013. Dividends equal to 1.5% of the Company’s revenues per quarter during the
year ending December 31, 2014 accrue quarterly, resulting in a dividend payable of $11,000, which can be paid in cash or in shares
of Class A Common Stock in lieu of cash at the sole discretion of the Board of Directors. The declaration and payment of future
dividends on the Common Stock will be at the sole discretion of the Board of Directors and will depend on Epazz's profitability
and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed
relevant. During 2014, 11,000 shares of Class A Common Stock in consideration for the dividend payable.
The Company has 1,000 authorized and 1,000
outstanding shares of $0.01 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series
A Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any
calendar year in which the Company has generated revenue over $2 million, and an additional 6% of the Company’s net income
beginning on January 1st of any calendar year in which the Company has generated net income over $2 million (which has not occurred
to date). The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The
Series A Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The
Series A Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with
five business days' notice into 60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series
A Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred
Stock holders.
The Company has 1,000 authorized and 1,000
outstanding shares of $0.01 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series
B Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any
calendar year in which the Company has generated revenue over $1 million (which dividends began accruing on January 1, 2013, due
to the fact that the Company had revenue of over $1 million during fiscal 2012), and an additional 6% of the Company’s net
income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million (which has not
occurred to date). The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until
paid. The Series B Preferred Stock includes a liquidation preference equal to $0.01 per share, plus any accrued and unpaid dividends.
The Series B Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock,
with five business days' notice into 10% of the total number of then issued and outstanding shares of Class A Common Stock, provided
that no conversion will take place until all holders of the Series B Preferred Stock consent to such conversion. The Series B Preferred
Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series B Preferred Stock holders.
The Company has 3,000,000,000 authorized and
2,932,755,533 outstanding shares of $0.0001 par value Series C Convertible Preferred Stock (“Series C Preferred Stock”).
The Series C Preferred Stock shall accrue dividends, when, as and only if declared by the Board of Directors, out of any assets
at the time legally available therefor, payable in preference and priority to any declaration or payment of any distribution on
common stock of the Corporation in such calendar year. The Series C Preferred Stock includes a liquidation preference equal to
$0.0001 per share, plus any accrued and unpaid dividends. Each share of Series C Preferred Stock is convertible, at the option
of the holder into three (3) shares of the Company’s Class A Common Stock, with five business days' notice, provided that
no conversion will take place until all holders of the Series C Preferred Stock consent to such conversion. The Series C Preferred
Stock has preferential voting rights that carry three (3) voting rights for each share issued and outstanding, and shall vote together
with the shares of the Common Stock of the Company, and not as a separate class.
The Company has 1,000,000 authorized and zero
outstanding shares of $0.01 par value Series D Convertible Preferred Stock (“Series D Preferred Stock”). The Series
D Preferred Stock shall carry an 8.0% dividend, payable semiannually at Issuer’s election in either (i) cash or (ii) shares
of common stock. Each share of Series D Preferred Stock is convertible, at the option of the holder into three (3) shares of the
Company’s Class A Common Stock, with five business days' notice, provided that no conversion will take place until all holders
of the Series C Preferred Stock consent to such conversion. The Series D Preferred Stock has preferential voting rights that carry
three (3) voting rights for each share issued and outstanding, and shall vote together with the shares of the Common Stock of the
Company, and not as a separate class.
(d) Securities Authorized for Issuance under Equity Compensation
Plans
None.
(e) Recent Sales of Unregistered Securities
The following issuances of equity securities
by the Company occurred during the three month period ended December 31, 2014:
On October 10, 2014 the Company issued 30,000,000
shares of Class A Common to our CEO from a conversion notice from Preferred C. As this was a conversion within the terms of the
Preferred C equity instrument no additional value was recognized as a result of this conversion.
On October 10, 2014 the Company issued 1,500,000
shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party, from a conversion
notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was
recognized as a result of this conversion.
On October 10, 2014 the Company issued 1,400,000
shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from a conversion
notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was
recognized as a result of this conversion.
On October 28, 2014 the Company issued 35,000
shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $1,399.
On November 3, 2014 the Company issued 150,000
shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $5,994.
On November 7, 2014 the Company issued 60,584
shares of Class A Common Stock as additional consideration pursuant to the November 13, 2013 promissory note entered into with
LG Capital Funding LLC. The conversion amount was $12,117.
On November 11, 2014 the Company issued 227,273
shares of Class A Common Stock pursuant to the September 5, 2013 promissory note entered into with St. George Investment. The conversion
amount was $15,000.
On December 4, 2014 the Company issued 700,000
shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $8,442.
On December 10, 2014 the Company issued 1,108,647
shares of Class A Common Stock pursuant to the September 5, 2013 promissory note entered into with St. George Investment. The conversion
amount was $15,000.
On December 16, 2014 the Company issued 1,690,000
shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $5,374.
The foregoing securities issued for services
were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
Not required.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS:
The following discussion of our financial condition
and plan of operations should be read in conjunction with our financial statements and the related notes, and the other financial
information included in this report. This Management’s Discussion and Analysis or Plan of Operations describes the matters
Epazz considers to be important to understanding Epazz’s history, technology, current position, financial condition and future
plans. Our fiscal year begins on January 1 and ends on December 31.
The following discussion includes forward looking
statements and uncertainties, including plans, objectives, goals, strategies, financial projections as well as known and unknown
uncertainties. The actual results of our future performance may differ materially from the results anticipated in these forward-looking
statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievement.
PLAN OF OPERATION
During the next twelve months, we plan to integrate
our recent acquisitions, including Zinergy, Telecorp, Jadian and Strantin, and hope to expand our customer base for our Desk/Flex,
Agent Power, AutoHire, IntelliSys, K9 Bytes and MS Health software packages. In addition, we plan to develop our Project Flex product,
which consists of a patent pending foldable mini-fridge that has yet to be developed, and continue to pursue growth through additional
acquisitions. We believe we can satisfy our cash requirements for the next three months with our current cash on hand and revenues
generated from our operations. As such, continuing operations and completion of our plan of operation are contingent on finding
additional sources of capital. We cannot assure investors that adequate revenues will be generated. In the absence of our projected
revenues, we may be unable to proceed with our plan of operations. Even without significant revenues or additional funding within
the next several months, we still anticipate being able to continue with our present activities, but we may require financing to
potentially achieve our goals of growing our operations and increasing our revenues.
Results of Operations for the Years Ended December 31, 2014 and
December 31, 2013:
| |
For the Years Ended | | |
| |
| |
December 31, | | |
Increase / | |
| |
2014 | | |
2013 | | |
(Decrease) | |
Revenues | |
$ | 1,560,252 | | |
$ | 750,139 | | |
$ | 810,113 | |
| |
| | | |
| | | |
| | |
General and administrative | |
| 1,524,779 | | |
| 758,353 | | |
| 766,426 | |
Salaries and wages | |
| 3,505,511 | | |
| 2,201,161 | | |
| 1,304,350 | |
Depreciation and amortization | |
| 206,437 | | |
| 260,423 | | |
| (53,986 | ) |
Impairment on intangible assets and goodwill | |
| 1,659,335 | | |
| 276,282 | | |
| 1,383,053 | |
Bad debts (recoveries) | |
| 62,601 | | |
| (27,129 | ) | |
| 89,730 | |
| |
| | | |
| | | |
| | |
Total Operating Expenses | |
| 6,958,663 | | |
| 3,469,090 | | |
| 3,489,573 | |
| |
| | | |
| | | |
| | |
Net Operating Loss | |
| (5,398,411 | ) | |
| (2,718,951 | ) | |
| (3,440,158 | ) |
| |
| | | |
| | | |
| | |
Total other income (expense) | |
| (2,268,996 | ) | |
| (657,287 | ) | |
| (1,611,709 | ) |
| |
| | | |
| | | |
| | |
Net Loss | |
$ | (7,667,407 | ) | |
$ | (3,376,238 | ) | |
$ | (4,097,445 | ) |
Revenue:
For the year ended December 31, 2014 we had
revenue of $1,560,252, compared to revenue of $750,139 for the year ended December 31, 2013, an increase of $810,113, or 108%,
from the comparative year. The increase in revenues is due to new products developed in 2013 and released in 2014. We entered into
a few strategic acquisitions in 2014 to rejuvenate our operations and expand our scope of products.
General and Administrative:
General and administrative expenses increased
by $766,426, or 101%, to $1,524,779 for the year ended December 31, 2014, compared to general and administrative expense of $758,353
for the year ended December 31, 2013. The increase in general and administrative expense is due mainly to increased marketing and
public relations expenses over the prior year.
Salaries and Wages:
Salaries and wages increased by $1,304,350,
or 59%, to $3,505,511 for the year ended December 31, 2014, compared to salaries and wages of $2,201,161 for the year ended December
31, 2013. The increase in salaries and wages is due primarily to the increase in stock based compensation of approximately $1,251,458
pursuant to stock issuances to our CEO, Shaun Passley, Ph.D., Craig Passley, our Corporate Secretary and two other immediate family
members related to Shaun Passley, Ph.D., in addition to increased cash compensation paid to our CEO over the prior year.
Depreciation and Amortization:
We had depreciation and amortization expense
of $206,437 for the year ended December 31, 2014, compared to $260,423 for the year ended December 31, 2013, a decrease of $53,986,
or 21%, from the comparative year.
Bad Debts (recoveries):
We had bad debts (recoveries) of $62,601 for
the year ended December 31, 2014 as compared to $(27,129) of bad debts expense for the year ended December 31, 2013, an increase
of $89,730, or 331%, from the comparative year. This increase is due primarily to unpaid customer invoices from the acquired companies.
We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days old.
Net Operating Income (Loss):
Total operating expenses for the year ended
December 31, 2014 were $6,958,663, compared to $3,469,090 for the year ended December 31, 2013, an increase of $2,768,366, or
80%, from the comparative year. We had net operating losses of $5,38,411 for the year ended December 31, 2014 compared to $2,718,951
for the year ended December 31, 2013, an increase in operating loss of $2,679,460, or 99%, from the comparative year. The increase
in operating loss was primarily due to the increase in stock based compensation of approximately $1,251,458 pursuant to the issuance
of shares of common stock to our CEO, Shaun Passley, Ph.D., increased development expense of $583,887 and an increase of $1,383,053
for impairments on intangible assets.
Other Income (Expense):
Interest expense was $1,318,468 for the year
ended December 31, 2014, compared to $562,529 for the year ended December 31, 2013, an increase of $755,939, or 134%, from the
comparative year. Interest expense increased due to increased borrowings to finance our operations and acquisitions.
Change in derivative liabilities was a loss of $777,664 in 2014
compared to $-0- for the year ended December 31, 2013, an increase of $777,664 from the comparative period. The current period
loss on derivative liabilities consisted of a loss of $837,010 due to the value in excess of the face value of the convertible
notes, as offset by a net gain in market value of $59,346 on the convertible debts.
Loss on debt modifications was $172,864 for
the year ended December 31, 2014, compared to $94,758 for the year ended December 31, 2013, an increase of $78,106, or 82%, from
the comparative year. Loss on debt modifications for the year ended December 31, 2014 consisted of the modification of a promissory
note with a related party. The debt modification resulted in a loss on debt modifications of $172,864.
Net Income (Loss):
We had a net loss of $7,667,407 for the year
ended December 31, 2014 compared to $3,376,238 for the year ended December 31, 2013, an increased net loss of $4,291,169,
or 127%, from the comparative year. The increased net loss was primarily due to impairment of intangible assets and goodwill of
$1,659,335, the stock based compensation of approximately $1,251,458 pursuant to the issuance of shares of common stock to our
CEO, Shaun Passley, Ph.D., an increase in interest expense of $755,939, and $1,659,335 of impairments on intangible assets no
longer in service, and increased borrowing costs used to finance our recent acquisitions and sustain operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes total assets,
accumulated deficit, stockholders’ equity and working capital at December 31, 2014, compared to December 31, 2013.
| |
December 31, | |
| |
2014 | | |
2013 | |
Total Assets | |
$ | 1,087,191 | | |
$ | 1,082,961 | |
| |
| | | |
| | |
Total Liabilities | |
$ | 5,005,501 | | |
$ | 2,607,576 | |
| |
| | | |
| | |
Accumulated (Deficit) | |
$ | (15,169,401
| ) | |
$ | (7,501,994 | ) |
| |
| | | |
| | |
Stockholders’ Equity (Deficit) | |
$ | (3,918,310 | ) | |
$ | (1,524,615 | ) |
| |
| | | |
| | |
Working Capital (Deficit) | |
$ | (3,453,062 | ) | |
$ | (1,283,338 | ) |
We had total current assets of $267,737 as
of December 31, 2014, consisting of cash of $106,708, net accounts receivable of $96,422, and other current assets of $64,607.
We had non-current assets of $819,454 as of
December 31, 2014, consisting of $106,698 of property and equipment, net of accumulated depreciation and amortization of $137,436,
intangible assets of $337,938, net of accumulated amortization of $466,784, and goodwill of $374,818 related to the goodwill.
We had total current liabilities of $3,720,799
as of December 31, 2014, consisting of $419,206 of accounts payable, $88,026 of accrued expenses, $469,937 of deferred revenues,
current portion of outstanding balances on lines of credit of $80,239, current portion of capitalized leases in the amount of
$5,890, notes payable, related parties of $1,221,323, current maturities on convertible debentures of $88,739, net of discounts
of $131,774, and current maturities on long term debts in the amount of $1,219,669.
We had negative working capital of $3,453,062
and a total accumulated deficit of $15,169,401 as of December 31, 2014.
We had total liabilities of $5,005,501 as of
December 31, 2014, which included total current liabilities of $3,720,799, and the long-term portion of debts of $1,284,702.
We had net cash used in operating activities
of $678,907 for the year ended December 31, 2014, which was primarily due to our net loss of $7,667,407 after adjustments for
non-cash expenses, a decrease of $1,130 in accounts receivable and an increase of $56,247 of other current assets, an increase
of $161,043 in accounts payable, and increase of $141,757 in accrued expenses and $43,661 in deferred revenues.
We had ($758,533) of net cash used in investing
activities for the year ended December 31, 2014, which consisted of cash paid for the acquisition of subsidiaries and the purchase
of equipment.
We had $1,335,581 of net cash provided in financing
activities during the year ended December 31, 2014, which represented proceeds from long term debts, notes payable and convertible
debts of $2,111,043, repayments on long term debts of $679,551 and principal payments on capital leases of $11,532.
Recent Financing Activities
Fourth quarter of 2014:
Debt Financing, Related Parties
Originated October 20, 2014, unsecured promissory
note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s
CEO. The note carries a 15% interest rate, matures on May 20, 2014. In addition, a loan origination fee of $1,500 was issued as
consideration for the loan, and is being amortized on a straight line basis over the life of the loan.
Originated November 9, 2014, an unsecured $60,000
promissory note payable, including a $12,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on June 9, 2015. The note also carries
a liquidated damages fee of $1,500 upon default.
Originated December 17, 2014, an unsecured
$9,000 promissory note payable, including a $2,500 loan origination fee, owed to L & F Lawn Service, Inc., a corporation owned
by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 17, 2015.
Convertible Debt Financing
On October 20,
2014, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible
Promissory Note in the original principal amount of $43,000 (“One KBM Note”). The One KBM Note had a maturity date
of July 22, 2015, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed
Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount
rate of 50%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during
the thirty (30) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion
Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the One KBM Note were restricted
securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the One KBM Note was exempt from
the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser
was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
On December 3,
2014, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible
Promissory Note in the original principal amount of $33,000 (“Two KBM Note”). The Two KBM Note had a maturity date
of September 2, 2015, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the
Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing
a discount rate of 50%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock
during the thirty (30) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed
Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the Two KBM Note
were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Two KBM Note
was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder.
The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
Originated November 6, 2014, an unsecured $50,239
convertible promissory note, carries a 8% interest rate, matures on November 6, 2015, (“LG Note”) owed to LG Capital,
consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $43,000
of principal and $7,239 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently
exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion
of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s
common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder
was limited to owning 9.9% of the Company’s issued and outstanding shares.
Originated November 6, 2014, an unsecured $33,600
convertible promissory note, carries a 8% interest rate, matures on November 5, 2015, (“LG Note 2”) owed to LG Capital.
The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal
and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five
percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to
the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s
issued and outstanding shares.
Debt Financing
On October 2, 2014, the Company received a
loan of $25,250 from Knight Capital, Inc. (“Knight Loan”). The loan bears interest at an effective rate of 187%, consisting
of 100 daily weekday payments of $250, maturing on November 3, 2014. The loan is collateralized with the accounts receivable of
Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On October 28, 2014, the Company entered into
an equipment financing agreement with Direct Capital for a total of $200,000 bearing an effective interest rate of 6%, consisting
of 60 monthly payments of $3,846.02; maturing on October 28, 2019. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On November 3, 2014, the Company entered into
an equipment financing agreement with Western Finance for a total of $50,000 bearing an effective interest rate of 8%, consisting
of 36 monthly payments of $1,702.60; maturing on November 3, 2017. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On December 1, 2014, the Company entered into
an equipment financing agreement with Direct Credit for a total of $35,000 bearing an effective interest rate of 15%, consisting
of 36 monthly payments of $1,187.11; maturing on December 1, 2017. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On December 1, 2014, the Company renew a loan
for $119,000 from EBF Partners, LLC. (“EBF Loan”). The loan bears interest at an effective rate of 15%, consisting
of 100 daily weekday payments of $999, maturing on June 19, 2014. The loan is collateralized with future accounts receivable of
Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On December 10, 2014, the Company entered into
an equipment financing agreement with Direct Credit for a total of $35,000 bearing an effective interest rate of 16%, consisting
of 36 monthly payments of $1,210.63; maturing on December 10, 2017. The loan is collateralized with software. Given the nature
and status of the software development, no equipment costs have been capitalized.
On December 15, 2014, the Company received
a loan of $25,000 from Lendini, Inc. (“Lendini Loan”). The loan bears interest at an effective rate of 187%, consisting
of 100 daily weekday payments of $293, maturing on June 15, 2015. The loan is collateralized with the accounts receivable of Epazz,
Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On December 15, 2014, the Company received
a loan of $25,250 from Knight Capital, Inc. (“Knight Loan”). The loan bears interest at an effective rate of 187%,
consisting of 100 daily weekday payments of $250, maturing on November 3, 2014. The loan is collateralized with the accounts receivable
of Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On December 17, 2014, the Company received
a loan of $27,800 from WebBank, c/o NewLogic Business Loans, Inc., (“NewLogic”), which has been renamed to CAN Capital
Assets Servicing, Inc (“CAN Capital”) bearing an effective interest rate of 63.9%, consisting of 176 daily weekday
payments of $131, maturing on December 19, 2015. The loan is collateralized with receivables. The promissory note is also personally
guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On December 19, 2014, the Company entered into
an equipment financing agreement with MEF for a total of $50,000 bearing an effective interest rate of 16%, consisting of 36 monthly
payments of $1,702.60; maturing on December 10, 2017. The loan is collateralized with software. Given the nature and status of
the software development, no equipment costs have been capitalized.
On January 30, 2015, the Company entered into
an equipment financing agreement with CIT Finance for a total of $100,000 bearing an effective interest rate of 11%, consisting
of 36 monthly payments of $3,210; maturing on January 30, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On January 27, 2015, the Company entered into
an equipment financing agreement with Direct Credit for a total of $50,000 bearing an effective interest rate of 17%, consisting
of 36 monthly payments of $1,793; maturing on January 27, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On February 20, 2015, the Company entered into
an equipment financing agreement with Safe Leasing for a total of $37,500 bearing an effective interest rate of 21%, consisting
of 36 monthly payments of $1,549; maturing on February 20, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
Critical Accounting Policies:
The establishment and consistent application
of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with generally
accepted accounting principles in the United States (GAAP), as well as ensuring compliance with applicable laws and regulations
governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting
and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances
and a complex series of decisions.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the following entities, all of which are under common control and ownership:
|
|
State of |
|
|
|
Abbreviated |
Name of Entity(2) |
|
Incorporation |
|
Relationship(1) |
|
Reference |
Epazz, Inc. |
|
Illinois |
|
Parent |
|
Epazz |
IntelliSys, Inc. |
|
Wisconsin |
|
Subsidiary |
|
IntelliSys |
Professional Resource Management, Inc. |
|
Illinois |
|
Subsidiary |
|
PRMI |
Desk Flex, Inc. |
|
Illinois |
|
Subsidiary |
|
DFI |
K9 Bytes, Inc. |
|
Illinois |
|
Subsidiary |
|
K9 Bytes |
MS Health, Inc. |
|
Illinois |
|
Subsidiary |
|
MS Health |
FlexFridge, Inc.(3) |
|
Illinois |
|
Subsidiary(4) |
|
FlexFridge |
Terran Power, Inc.(5) |
|
Illinois |
|
Subsidiary |
|
Terran |
Telecorp Products, Inc. |
|
Michigan |
|
Subsidiary |
|
Telecorp |
Jadian, Inc. |
|
Illinois |
|
Subsidiary |
|
Jadian |
Strantin, Inc. |
|
Illinois |
|
Subsidiary |
|
Strantin |
Interaction Technology, Inc. |
|
Illinois |
|
Subsidiary |
|
Interaction |
_______________
(1) All subsidiaries, with the
exception of FlexFridge, are wholly-owned subsidiaries.
(2) All entities are in the
form of Corporations.
(3) Formerly Z Fridge, Inc.
and Cooling Technology Solutions, Inc.
(4) FlexFridge, Inc. was
spun-off on November 21, 2013, and distributed on a 1:10 basis to shareholders of record on September 15, 2014.
Epazz has a controlling financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial
statements pursuant to Accounting Standards Codification (“ASC”) 810-10.
(5) Entity formed for
prospective purposes, but has not incurred any income or expenses to date.
The consolidated financial statements herein
contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated
in the preparation of these financial statements. The parent company, Epazz and subsidiaries, IntelliSys, PRMI, DFI, K9 Bytes,
MS Health and FlexFridge will be collectively referred to herein as the “Company”, or “Epazz”. The Company's
headquarters are located in Chicago, Illinois and substantially all of its customers are within the United States.
These statements reflect all adjustments, consisting
of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained
therein.
Segment Reporting
FASB ASC 280-10-50 requires annual and interim
reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and
major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which
it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating
decision maker in deciding how to allocate resources. All of the Company’s software products are considered operating segments,
and will be aggregated into one reportable segment given the similarities in economic characteristics among the operations represented
by the common nature of the products, customers and methods of distribution.
Reclassifications
Certain amounts in the financial statements
of the prior year have been reclassified to conform to the presentation of the current year for comparative purposes.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Restatement Accounting Policy
Prior Period Errors must be corrected
retrospectively in the financial statements. Retrospective application means that the correction affects only prior period comparative
figures. Current period amounts are unaffected. Therefore, comparative amounts of each prior period presented which contain errors
are restated. If however, an error relates to a reporting period that is before the earliest prior period presented, then the
opening balances of assets, liabilities and equity of the earliest prior period presented must be restated.
Cash and Cash Equivalents
Epazz maintains cash balances in non-interest-bearing
transaction accounts, which do not currently exceed federally insured limits. For the purpose of the statements of cash flows,
all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were
no cash equivalents on hand at December 31, 2014 and 2013.
Property and Equipment
Equipment is recorded at its acquisition cost,
which includes the costs to bring the equipment to the condition and location for its intended use, and equipment is depreciated
using the straight-line method over the estimated useful life of the related asset as follows:
Furniture and fixtures |
|
5 years |
Computers and equipment |
|
3-5 years |
Software |
|
3 years |
Assets held under capital leases |
|
3-4 years |
Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Assets held under capital leases are recorded
at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the
lease. Amortization expense is computed using the straight-line method over the useful lives of the assets due to transfer of ownership
after the lease term has expired.
Maintenance and repairs will be charged to
expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of
equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will
be reflected in operations.
Property and equipment are evaluated for impairment
whenever impairment indicators are prevalent. The Company will assess the recoverability of equipment by determining whether the
depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future
cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the
period in which such impairment is determined by management.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting
Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of
this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts
of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value
primarily due to the short term nature of the instruments.
Intangible Assets
Intangible assets are amortized using the straight-line
method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible assets periodically
and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
All of our intangible assets are subject to amortization. Amortization expense on intangible assets totaled $150,947 and $446,988
for the years ended December 31, 2014 and 2013, respectively. Additionally, impairments of $170,257 and $276,282 for the years ended
December 31, 2014 and 2013, respectively.
Goodwill
The Company evaluates the carrying value of
goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would
more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but
are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair
value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. The
fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market
approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds its fair value, then the
amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of
reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value
of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess
of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of
goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company's
evaluation of goodwill completed during the year resulted in no impairment losses.
Deferred Financing Costs
Costs relating to obtaining certain debts are
capitalized and amortized over the term of the related debt using the straight-line method. The unamortized capitalized balance
of deferred financing costs at December 31, 2014, and 2013, was $54,729 and $44,986, respectively. Amortization of deferred financing
costs charged to operations was $422,451 and $79,123 for the years ended December 31, 2014 and 2013, respectively. When a
loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.
Allowance for Doubtful Accounts
We generate the majority of our revenues and
corresponding accounts receivable from the sales of software products. We evaluate the collectability of our accounts receivable
considering a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its
financial obligations to us, we record a specific reserve for bad debts against amounts due in order to reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts
based on past write-off experience and the length of time the receivables are past due. Bad debts expense (recoveries) was $62,601
and ($27,129) for the years ended December 31, 2014 and 2013, respectively. The allowance for doubtful accounts was $132,985 and
$7,017 for the years ended December 31, 2014 and 2013, respectively.
Beneficial Conversion Features
From time to time, the Company may issue convertible
notes that may contain an embedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible
note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining
unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of
warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt
discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the
life of the note using the effective interest method.
Revenue Recognition
The Company designs and sells various software
programs to business enterprises, hospitals and Government and post-secondary institutions. Prior to shipment, each software product
is tested extensively to meet Company specifications. The software is shipped fully functional via electronic delivery, but some
installation and setup is required. No other entities sell the same or largely interchangeable software.
Installation is a standard process, outlined
in the owner's manual, consisting principally of setup, calibration, and testing the software. A purchaser of the software could
complete the process using the information in the owner's manual, although it would probably take significantly longer than it
would take the Company’s technicians to perform the tasks. Although other vendors do not install the Company’s software,
they do provide largely interchangeable installation services for a fee. Historically, the Company has never sold the software
without installation. Most installations are performed by the Company within 7 to 24 days of shipment and are included in the overall
sales price of the software. In addition, the customer must pay for support contracts and training packages, depending on their
desired level of service. The Company is the only manufacturer of the software and it only sells software on a standalone basis
directly to the end user.
The sales price of the arrangement consists
of the software, installation, and training and support services, which the customer is obligated to pay in full upon delivery
of the software. In addition, there are no general rights of return involved in these arrangements. Therefore, the software is
accounted for as a separate unit of accounting.
The Company does not have vendor-specific objective
evidence of selling price for the software because it does not sell the software separately (without installation services and
support contracts). In addition, third-party evidence of selling price does not exist as no vendor separately sells the same or
largely interchangeable software. Therefore, the Company uses its best estimate of selling price when allocating such arrangement
consideration.
In estimating its selling price for the software,
the Company considers the cost to produce the software, profit margin for similar arrangements, customer demand, effect of competitors
on the Company’s software, and other market constraints. When applying the relative selling price method, the Company uses
its best estimate of selling price for the software, and third-party evidence of selling price for the installation. Accordingly,
without considering whether any portion of the amount allocable to the software is contingent upon delivery of the other items,
the Company allocates the selling price to the software, support, and installation.
The Company doesn’t currently provide
product warranties, but if it does in the future it will provide for specific product lines and accrue for estimated future warranty
costs in the period in which the revenue is recognized.
Advertising and Promotion
All costs associated with advertising and promoting
products are expensed as incurred. These expenses approximated $22,443 and $181,497 for the years ended December 31, 2014 and 2013,
respectively.
Income Taxes
The Company recognizes deferred tax assets
and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a
valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Basic and Diluted Loss per Share
The basic net loss per common share is computed
by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed
by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding
plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and
therefore basic and diluted earnings per share result in the same figure.
Stock-Based Compensation
The Company adopted FASB guidance on
stock based compensation on January 1, 2006. Under FASB ASC 718-10-30-2, all share-based payments to employees, including
grants of employee stock options, are to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. Common stock issued for services and compensation was $3,069,781 and $1,713,150
for the years ended December 31, 2014 and 2013, respectively. Common stock issued for services and compensation to related
parties was $2,964,608 and $1,713,150 for the years ended December 31, 2014 and 2013, respectively. Common stock issued for
services and compensation to third parties was $105,173 and $-0- for the years ended December 31, 2014 and 2013,
respectively.
Uncertain Tax Positions
Effective January 1, 2009, the Company adopted
new standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
Various taxing authorities periodically audit
the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including
the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected
with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures.
A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved.
The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position
relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions. As
of December 31, 2014, the Company had no uncertain tax positions.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Compensation – Stock Compensation (Topic 718):
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite
Service Period. The new guidance requires that share-based compensation that require a specific performance target to be achieved
in order for employees to become eligible to vest in the awards and that could be achieved after an employee completes the requisite
service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the
grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes probable that the
performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite
service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite
service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service
period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number
of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service
period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target
is achieved. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15,
2015. Early adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted
or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of
the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.
The adoption of ASU 2014-12 is not expected to have a material impact on our financial position or results of operations.
In June 2014, the FASB issued ASU No.
2014-10: Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment
to Variable Interest Entities Guidance in Topic 810, Consolidation, to improve financial reporting by reducing the cost and complexity
associated with the incremental reporting requirements of development stage entities. The amendments in this update remove all
incremental financial reporting requirements from U.S. GAAP for development stage entities, thereby improving financial reporting
by eliminating the cost and complexity associated with providing that information. The amendments in this Update also eliminate
an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable
interest entity on the basis of the amount of investment equity that is at risk. The amendments to eliminate that exception simplify
U.S. GAAP by reducing avoidable complexity in existing accounting literature and improve the relevance of information provided
to financial statement users by requiring the application of the same consolidation guidance by all reporting entities. The elimination
of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity
that has an interest in an entity in the development stage. The amendments related to the elimination of inception-to-date information
and the other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to
Topic 275, which shall be applied prospectively. For public companies, those amendments are effective for annual reporting periods
beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The adoption of ASU 2014-10 is not
expected to have a material impact on our financial position or results of operations.
In July 2013, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires that unrecognized tax
benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is effective for fiscal
years and interim periods within those years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to
have a material impact on our financial position or results of operations.
In February 2013, FASB issued ASU No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve
the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially
excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive
income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive
income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in
the financial statements under U.S. GAAP. The new amendments will require an organization to:
| - | Present (either on the face of the statement where net income is presented or in the notes) the
effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but
only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting
period; and |
| - | Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification
items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting
period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially
transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense. |
The amendments apply to all public and private
companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all
reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for
public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial
position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01,
Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies
which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11.
The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed
unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope
of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while
still giving financial statement users sufficient information to analyze the most significant presentation differences between
financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in
this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have
a material impact on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EPAZZ, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page |
Annual Financial Statements |
|
|
Report of Independent Registered Public Accounting Firm |
F-1 |
|
Consolidated Balance Sheets as of December 31, 2014 and 2013 |
F-2 |
|
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013 |
F-3 |
|
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended December 31, 2014 and 2013 |
F-4 |
|
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013 |
F-5 |
|
Notes to Consolidated Financial Statements |
F-6 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors
EPAZZ, INC.
We have audited the accompanying consolidated
balance sheets of Epazz, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The
Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Epazz, Inc. as of December 31,
2014 and 2013, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company has an accumulated deficit of $(15,169,401) and a working capital deficit of $(3,453,062), which raises
substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also
described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ M&K CPAS, PLLC
http://www.mkacpas.com
Houston, Texas
May 12, 2015
EPAZZ, INC.
CONSOLIDATED
BALANCE SHEETS
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 106,708 | | |
$ | 208,567 | |
Accounts receivable, net | |
| 96,422 | | |
| 25,248 | |
Other current assets | |
| 64,607 | | |
| 106,114 | |
Total current assets | |
| 267,737 | | |
| 339,929 | |
| |
| | | |
| | |
Property and equipment, net | |
| 106,698 | | |
| 113,410 | |
Intangible assets, net | |
| 337,938 | | |
| 374,162 | |
Goodwill | |
| 374,818 | | |
| 255,460 | |
| |
| | | |
| | |
Total assets | |
$ | 1,087,191 | | |
$ | 1,082,961 | |
| |
| | | |
| | |
| |
| | | |
| | |
Liabilities and Stockholders' Equity (Deficit) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Dividends payable | |
$ | – | | |
$ | 11,000 | |
Accounts payable | |
| 419,206 | | |
| 258,163 | |
Accrued expenses | |
| 88,026 | | |
| 45,298 | |
Accrued expenses, related parties | |
| 127,770 | | |
| 28,741 | |
Deferred revenue | |
| 469,937 | | |
| 322,130 | |
Lines of credit | |
| 80,239 | | |
| 73,232 | |
Current maturities of capital lease obligations payable | |
| 5,890 | | |
| 17,421 | |
Current maturities of notes payable, related parties ($1,066,073 currently in default) | |
| 1,221,323 | | |
| 397,368 | |
Convertible debts, net of discounts of $131,774 and $105,300, respectively ($60,674 currently in default) | |
| 88,739 | | |
| 115,128 | |
Current maturities of long term debts | |
| 1,219,669 | | |
| 354,786 | |
Derivative Liabilities | |
| – | | |
| – | |
Total current liabilities | |
| 3,720,799 | | |
| 1,623,267 | |
| |
| | | |
| | |
Notes payable, related parties | |
| – | | |
| 85,000 | |
Convertible debts, net of discounts of $0 and $4,283, respectively | |
| – | | |
| 42,166 | |
Long term debts, net of current maturities | |
| 1,284,702 | | |
| 857,143 | |
Total liabilities | |
| 5,005,501 | | |
| 2,607,576 | |
| |
| | | |
| | |
Stockholders' equity (deficit): | |
| | | |
| | |
Convertible preferred stock, Series A, $0.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding | |
| – | | |
| – | |
Convertible preferred stock, Series B, $0.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding | |
| – | | |
| – | |
Convertible preferred stock, Series C, $0.0001 par value, 3,000,000,000 shares authorized, 2,932,755,533 shares issued and outstanding | |
| 293,275 | | |
| – | |
Common stock, Class A, $0.0001 par value, 9,000,000,000 shares authorized, 37,557,842 and 346,836 shares issued and outstanding, respectively | |
| 375,578 | | |
| 3,468 | |
Convertible common stock, Class B, $0.0001 par value, 60,000,000 shares authorized, 23,000,000 and 10,500,000 shares issued and outstanding, respectively | |
| 2,300 | | |
| 1,050 | |
Additional paid in capital | |
| 10,579,938 | | |
| 6,772,861 | |
Stockholders' receivable, consisting of -0- and 20,000,000 shares of Class A Common Stock, respectively | |
| – | | |
| (800,000 | ) |
Accumulated deficit | |
| (15,169,401 | ) | |
| (7,501,994 | ) |
Total stockholders' equity (deficit) | |
| (3,918,310 | ) | |
| (1,524,615 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' equity (deficit) | |
$ | 1,087,191 | | |
$ | 1,082,961 | |
See
accompanying notes to financial statements.
EPAZZ, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
For the Year Ended | | |
For the Year Ended | |
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Revenue | |
$ | 1,560,252 | | |
$ | 750,139 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
General and administrative | |
| 1,524,779 | | |
| 758,353 | |
Salaries and wages | |
| 3,505,511 | | |
| 2,201,161 | |
Depreciation and amortization | |
| 206,437 | | |
| 260,423 | |
Impairment on intangible assets | |
| 1,659,335 | | |
| 276,282 | |
Bad debts (recoveries) | |
| 62,601 | | |
| (27,129 | ) |
Total operating expenses | |
| 6,958,663 | | |
| 3,469,090 | |
| |
| | | |
| | |
Net operating loss | |
| (5,398,411 | ) | |
| (2,718,951 | ) |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Interest expense, net | |
| (1,318,468 | ) | |
| (562,529 | ) |
Loss on debt modifications, related parties | |
| (172,864 | ) | |
| (94,758 | ) |
Change in derivative liabilities | |
| (777,664 | ) | |
| – | |
Total other income (expense) | |
| (2,268,996 | ) | |
| (657,287 | ) |
| |
| | | |
| | |
Net loss | |
$ | (7,667,407 | ) | |
$ | (3,376,238 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding - basic and fully diluted |
|
|
8,504,489 |
|
|
|
253,610 |
|
| |
| | | |
| | |
Net loss per share - basic and fully diluted | |
$ | (0.90 | ) | |
$ | (13.31 | ) |
See
accompanying notes to financial statements.
EPAZZ, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
|
Convertible
Series A | |
Convertible
Series B | |
Convertible
Series C | |
Class A | |
Convertible
Class B | |
Additional | |
| | |
| | |
Total | |
|
Preferred Stock | |
Preferred Stock | |
Preferred Stock | |
Common Stock | |
Common Stock | |
Paid-in | |
Stockholders’ | |
Accumulated | |
Stockholders’ | |
|
Shares | |
Amount | |
Shares | |
Amount | |
Shares | |
Amount | |
Shares | |
Amount | |
Shares | |
Amount | |
Capital | |
Receivable | |
(Deficit) | |
(Deficit) | |
Balance, December 31, 2011 |
| – | |
$ | – | |
| – | |
$ | – | |
| – | |
$ | – | |
| 30,900,281 | |
| 3,090 | |
| 2,500,000 | |
$ | 250 | |
$ | 2,668,032 | |
$ | (1,000,000 | ) |
$ | (2,208,067 | ) |
$ | (536,695 | ) |
Shares issued for services, related parties |
| 1,000 | |
| – | |
| 1,000 | |
| – | |
| – | |
| – | |
| 1,075,596,515 | |
| 107,560 | |
| 3,000,000 | |
$ | 300 | |
$ | 1,008,962 | |
$ | 200,000 | |
| – | |
$ | 1,316,822 | |
Shares issued for conversion of debt, related parties |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 59,370,640 | |
| 5,937 | |
| – | |
| – | |
$ | 288,791 | |
| – | |
| – | |
$ | 294,728 | |
Shares issued for conversion of debt |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 11,921,689 | |
| 1,192 | |
| – | |
| – | |
$ | 81,808 | |
| – | |
| – | |
$ | 83,000 | |
Beneficial conversion feature of convertible debt |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
$ | 277,323 | |
| – | |
| – | |
$ | 277,323 | |
Net (loss) for the year ended December 31, 2012 |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
$ | (1,906,689 | ) |
$ | (1,906,689 | ) |
Balance, December 31, 2012 |
| 1,000 | |
| – | |
| 1,000 | |
| – | |
| – | |
| – | |
| 1,177,789,125 | |
$ | 117,779 | |
| 5,500,000 | |
$ | 550 | |
$ | 4,324,916 | |
$ | (800,000 | ) |
$ | (4,114,756 | ) |
$ | (471,511 | ) |
Shares issued for services, related parties |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 1,802,052,632 | |
| 180,205 | |
| 5,000,000 | |
| 500 | |
| 1,496,294 | |
| – | |
| – | |
| 1,676,999 | |
Shares issued for debt origination fees, related parties |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 25,750,000 | |
| 2,575 | |
| – | |
| – | |
| 33,575 | |
| – | |
| – | |
| 36,150 | |
Shares issued for conversion of debt, related parties |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 281,096,026 | |
| 28,110 | |
| – | |
| – | |
| 159,607 | |
| – | |
| – | |
| 187,717 | |
Shares issued for conversion of debt |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 181,670,925 | |
| 18,167 | |
| – | |
| – | |
| 137,657 | |
| – | |
| – | |
| 155,824 | |
Beneficial conversion feature of convertible debt |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 195,652 | |
| – | |
| – | |
| 195,652 | |
Fair value of debt modification, related parties |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 81,792 | |
| – | |
| – | |
| 81,792 | |
Dividends declared, 1.5% of revenues |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| (11,000 | ) |
| (11,000 | ) |
Net (loss) for the year ended December 31, 2013 |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| (3,376,238 | ) |
| (3,376,238 | ) |
Balance, December 31, 2013 |
| 1,000 | |
| – | |
| 1,000 | |
| – | |
| – | |
| – | |
| 3,468,358,708 | |
| 346,836 | |
| 10,500,000 | |
| 1,050 | |
| 6,429,493 | |
| (800,000 | ) |
| (7,501,994 | ) |
| (1,524,615 | ) |
Shares issued for services, related parties |
| – | |
| – | |
| – | |
| – | |
| 400,000,000 | |
| 40,000 | |
| – | |
| – | |
| 12,500,000 | |
| 1,250 | |
| 980,186 | |
| – | |
| – | |
| 1,021,436 | |
Shares issued for debt origination fees, related parties |
| – | |
| – | |
| – | |
| – | |
| 49,000,000 | |
| 4,900 | |
| 28,880,000 | |
| 2,888 | |
| – | |
| – | |
| 47,690 | |
| – | |
| – | |
| 55,478 | |
Shares issued for conversion of debt, related parties |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 484,330,000 | |
| 48,433 | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 48,433 | |
Share exchange, related party |
| – | |
| – | |
| – | |
| – | |
| 2,494,722,200 | |
| 249,472 | |
| (2,494,722,200 | ) |
| (249,472 | ) |
| – | |
| – | |
| 1,081,054 | |
| 800,000 | |
| – | |
| 1,881,054 | |
Shares issued for dividend, related party |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 110,000,000 | |
| 11,000 | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 11,000 | |
Beneficial conversion feature of convertible debt |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 124,811 | |
| – | |
| – | |
| 124,811 | |
Fair value of debt modification |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 172,864 | |
| – | |
| – | |
| 172,864 | |
Increase Class B voting rights from 2,000:1 to 10,000:1 |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 6,640 | |
| – | |
| – | |
| 6,640 | |
Shares issued for services |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 277,780,000 | |
| 27,778 | |
| – | |
| – | |
| 27,778 | |
| – | |
| – | |
| 55,556 | |
Shares issued for debt |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 75,000,000 | |
| 7,500 | |
| – | |
| – | |
| 30,000 | |
| – | |
| – | |
| 37,500 | |
Shares issued for conversion of debt |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 5,263,760,477 | |
| 526,376 | |
| – | |
| – | |
| 1,270,638 | |
| – | |
| – | |
| 1,797,014 | |
Reverse stock split Class A Common Stock 1:10,000 |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| (7,212,665,646 | ) |
| (714,125 | ) |
| – | |
| – | |
| 714,125 | |
| – | |
| – | |
| – | |
Preferred C Shares conversion to Common A Shares, related party |
| – | |
| – | |
| – | |
| – | |
| (10,966,667 | ) |
| (1,097 | ) |
| 32,900,000 | |
| 329,000 | |
| – | |
| – | |
| (327,903 | ) |
| – | |
| – | |
| – | |
Shares issued for debt |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| 3,936,504 | |
| 39,365 | |
| – | |
| – | |
| 22,562 | |
| – | |
| – | |
| 61,927 | |
Net (loss) for the year ended December 31, 2014 |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| – | |
| (7,667,407 | ) |
| (7,667,407 | ) |
Balance, December 31, 2014 |
$ | 1,000 | |
$ | – | |
$ | 1,000 | |
$ | – | |
$ | 2,932,755,533 | |
$ | 293,275 | |
$ | 37,557,842 | |
$ | 375,578 | |
$ | 23,000,000 | |
$ | 2,300 | |
$ | 10,579,937 | |
$ | – | |
$ | (15,169,401 | ) |
$ | (3,918,310 | ) |
See
accompanying notes to financial statements.
EPAZZ,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
For the Year Ended | |
| |
December 31, | |
| |
2014 | | |
2013 | |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (7,667,407 | ) | |
$ | (3,376,238 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Bad debts (recoveries) | |
| 62,601 | | |
| (27,129 | ) |
Depreciation and amortization | |
| 206,437 | | |
| 260,423 | |
Impairment of intangible assets | |
| 1,659,335 | | |
| 276,282 | |
Amortization of deferred financing costs | |
| 422,451 | | |
| 79,123 | |
Amortization of discounts on convertible debts | |
| 518,465 | | |
| 237,065 | |
Loss on debt modifications, related parties | |
| 172,864 | | |
| 96,032 | |
Loss on default provisions of convertible debt | |
| 12,842 | | |
| | |
Change in fair market value of derivative liabilities | |
| 777,664 | | |
| – | |
Stock based compensation issued for services | |
| 105,173 | | |
| – | |
Stock based compensation issued for services, related parties | |
| 2,964,608 | | |
| 1,713,150 | |
Decrease (increase) in assets: | |
| | | |
| | |
Accounts receivable | |
| 1,130 | | |
| 38,876 | |
Other current assets | |
| 56,247 | | |
| (56,134 | ) |
Increase (decrease) in liabilities: | |
| | | |
| | |
Accounts payable | |
| (158,735 | ) | |
| 153,436 | |
Accrued expenses | |
| 44,728 | | |
| 27,798 | |
Accrued expenses, related parties | |
| 99,029 | | |
| 10,796 | |
Deferred revenues | |
| 43,661 | | |
| 102,540 | |
Net cash provided by (used in) operating activities | |
| (678,907 | ) | |
| (463,980 | ) |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Cash acquired in merger | |
| 736 | | |
| – | |
Purchase of equipment | |
| (48,778 | ) | |
| (6,830 | ) |
Acquisition of subsidiaries | |
| (710,491 | ) | |
| – | |
Net cash used in investing activities | |
| (758,533 | ) | |
| (6,830 | ) |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Payments on capital lease obligations payable | |
| (11,532 | ) | |
| (25,699 | ) |
Proceeds from notes payable, related parties | |
| 811,137 | | |
| 634,379 | |
Repayment of notes payable, related parties | |
| (82,879 | ) | |
| (210,596 | ) |
Proceeds from convertible notes | |
| 109,600 | | |
| 202,000 | |
Repayment of convertible notes | |
| (1,500 | ) | |
| (60,500 | ) |
Proceeds from long term debts | |
| 1,190,306 | | |
| 450,800 | |
Repayment of long term debts | |
| (679,551 | ) | |
| (357,108 | ) |
Net cash provided by financing activities | |
| 1,335,581 | | |
| 633,276 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| (101,859 | ) | |
| 162,466 | |
Cash - beginning | |
| 208,567 | | |
| 46,101 | |
Cash - ending | |
$ | 106,708 | | |
$ | 208,567 | |
| |
| | | |
| | |
Supplemental disclosures: | |
| | | |
| | |
Interest paid | |
$ | 32,991 | | |
$ | 205,508 | |
Income taxes paid | |
| – | | |
| – | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Acquisition of subsidiary in exchange for debt | |
$ | 961,988 | | |
$ | – | |
Value of shares issued for conversion of debt | |
$ | 695,353 | | |
$ | 329,300 | |
Value of shares issued for conversion of debt, related parties | |
$ | 173,477 | | |
$ | – | |
Beneficial conversion features | |
$ | 124,810 | | |
$ | 195,652 | |
Discount on derivatives | |
$ | 422,240 | | |
| | |
Deferred financing costs | |
$ | 432,194 | | |
$ | 107,076 | |
Conversion of Preferred C to Common A | |
$ | 329,000 | | |
| – | |
Derivative adjustment due to debt conversions | |
$ | 1,199,904 | | |
| | |
Dividends payable declared | |
| – | | |
$ | 11,000 | |
See
accompanying notes to financial statements.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Business and Summary of Significant
Accounting Policies
Nature of Business and Organization
Epazz, Inc. (“Epazz” or the “Company”),
an Illinois corporation, was formed on March 23, 2000 to create software to help college students organize their college information
and resources.
On or about June 18, 2008, the Company entered
into a Stock Purchase Agreement (the “Purchase Agreement”) with Desk Flex, Inc., an Illinois corporation (“DFI”)
and Professional Resource Management, Inc., an Illinois corporation (“PRMI” and collectively with DFI, the “Target
Companies”) to acquire 100% of the outstanding shares of the Target Companies. Pursuant to the Purchase Agreement, the Company
purchased 100% of the outstanding shares of the Target Companies and DFI and PRMI became wholly-owned subsidiaries of the Company.
DFI’s main source of revenue comes from
the “Desk/Flex Software” product, which it owns, and PRMI’s main source of revenue comes from the “Agent
Power” product line, which it owns. PRMI also acts as the general agent for DFI; however, there is no formal agency agreement
between the two companies. DFI developed the Desk/Flex Software (Desk/Flex) to enhance the value of businesses’ real estate
investments and modernize their office space. Desk/Flex lets businesses make better use of office space restrictions by enabling
employees to instantly access their workstation tools from multiple areas in and outside of the office.
On September 30, 2010, the Company acquired
IntelliSys, Inc., doing business as, AutoHire Software, a Florida-based company owned by Igenti, Inc. (“Intellisys”).
Intellisys had developed a Web portal infrastructure operating system product called BoxesOSv3.0. BoxesOS creates sources of revenue
for Alumni Associations and Non-Profit organizations by utilizing a Web platform to conduct e-commerce and provides e-commerce
tools for small businesses to create “my accounts” for their customers. BoxesOS also links a college or university’s
resources with the business community by allowing businesses to train their employees by utilizing courseware development from
higher education institutions.
On October 26, 2011, the Company, through a
newly-formed wholly-owned Illinois subsidiary, K9 Bytes, Inc., entered into an Asset Purchase Contract and Receipt Agreement with
K9 Bytes, Inc., a Florida corporation (“K9 Bytes” and the “Purchase Contract”). Pursuant to the Purchase
Contract, the Company purchased all of K9 Bytes assets, including all of its intellectual property, its business trade name, website
(k9bytessoftware.com), furniture, fixtures, equipment and inventory, and goodwill. The Company did not purchase, and K9 Bytes agreed
to retain and be responsible for, any and all liabilities of K9 Bytes. K9 Bytes sells Point of Sale software to retail pet stores
throughout the United States.
On March 28, 2012, we, through a newly-formed
wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), closed on an Asset Purchase Agreement (“APA”)
with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the APA, we purchased all of MSHSC’s
assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and
software. MS Health develops and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill,
and track behavioral healthcare and social services.
FlexFridge, Inc. (“FlexFridge”),
an Illinois corporation, was formed as a wholly-owned subsidiary of Epazz on March 4, 2013 as Cooling Technology Solutions, Inc.
(“CTS”), and was renamed Z Fridge, Inc. (“Z Fridge”) on September 19, 2013 prior to being renamed again
to FlexFidge on May 27, 2014. The Company filed a non-provisional patent application and currently has limited activity. The Company
has filed a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge.
On November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz,
Inc. received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial
interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards
Codification (“ASC”) 810-10.
Terran Power, Inc (“Terran”), an
Illinois corporation formed as a wholly-owned subsidiary of Epazz on September 19, 2013 to file a non-provisional patent application
to develop a mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing
an outlet or a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues
or expenses.
On February 28, 2014, the Company entered into a Stock Purchase
Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario Canada corporation
(“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder and the sole stockholder
of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding shares of Telecorp from
Troy Holdings.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On April 4, 2014, the Company entered into
an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma
corporation (“Cynergy”). Pursuant to the Purchase Agreement, we purchased substantially all of the intangible assets
and certain tangible assets used in connection with Cynergy’s help desk software business, including all of its intellectual
property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable.
On May 9, 2014, the Company, through a newly-formed wholly-owned
Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset Purchase Agreement (“APA”)
with Jadian, Inc., a Michigan corporation (“Jadian”). Pursuant to the APA, we purchased substantially all of the intangible
assets and certain tangible assets used in connection with Jadian’s software business, including all of its intellectual
property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable.
On July 31, 2014, one of the Company’s subsidiaries, Telecorp
Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Strantin, Inc. (“Strantin”), closed on an
Asset Purchase Agreement (“APA”) with Strand, Inc., an Illinois corporation (“Strand”). Pursuant to the
APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used
in connection with Strand’s software business, including all of its intellectual property, its business trademarks and copyrights,
equipment, computers, software, machinery and accounts receivable.
On December 29, 2014, The Company through a newly-formed wholly-owned
Illinois subsidiary, Interaction Technology, Inc. (“Interact”), closed on an Asset Purchase Agreement (“APA”)
with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the APA, we purchased substantially
all of the seller’s assets, including intangible assets and certain tangible assets used in connection with Interaction’s
software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software,
machinery and accounts receivable.
Basis of
Accounting
Our consolidated financial statements are prepared
using the accrual method of accounting as generally accepted in the United States of America (U.S. GAAP) and the rules of the Securities
and Exchange Commission (SEC).
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the following entities, all of which are under common control and ownership:
|
|
State of |
|
|
|
Abbreviated |
Name of Entity(2) |
|
Incorporation |
|
Relationship(1) |
|
Reference |
Epazz, Inc. |
|
Illinois |
|
Parent |
|
Epazz |
IntelliSys, Inc. |
|
Wisconsin |
|
Subsidiary |
|
IntelliSys |
Professional Resource Management, Inc. |
|
Illinois |
|
Subsidiary |
|
PRMI |
Desk Flex, Inc. |
|
Illinois |
|
Subsidiary |
|
DFI |
K9 Bytes, Inc. |
|
Illinois |
|
Subsidiary |
|
K9 Bytes |
MS Health, Inc. |
|
Illinois |
|
Subsidiary |
|
MS Health |
FlexFridge, Inc.(3) |
|
Illinois |
|
Subsidiary(4) |
|
FlexFridge |
Terran Power, Inc.(5) |
|
Illinois |
|
Subsidiary |
|
Terran |
Telecorp Products, Inc. |
|
Michigan |
|
Subsidiary |
|
Telecorp |
Jadian, Inc. |
|
Illinois |
|
Subsidiary |
|
Jadian |
Strantin, Inc. |
|
Illinois |
|
Subsidiary |
|
Strand |
Interaction Technology, Inc. |
|
Illinois |
|
Subsidiary |
|
Inter |
_______________
(1) All subsidiaries,
with the exception of FlexFridge, are wholly-owned subsidiaries.
(2) All entities are in
the form of Corporations.
(3) Formerly Z Fridge,
Inc. and Cooling Technology Solutions, Inc.
(4) FlexFridge, Inc. was
spun-off on November 21, 2013, and distributed on a 1:10 basis to shareholders of record on September 15, 2014.
Epazz has a controlling financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial
statements pursuant to Accounting Standards Codification (“ASC”) 810-10.
(5) Entity formed for
prospective purposes, but has not incurred any income or expenses to date.
The consolidated financial statements herein
contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated
in the preparation of these financial statements. The parent company, Epazz and subsidiaries, IntelliSys, PRMI, DFI, K9 Bytes,
MS Health and FlexFridge will be collectively referred to herein as the “Company”, or “Epazz”. The Company's
headquarters are located in Chicago, Illinois and substantially all of its customers are within the United States.
These statements reflect all adjustments, consisting
of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained
therein.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Reporting
FASB ASC 280-10-50 requires annual and interim
reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and
major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which
it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating
decision maker in deciding how to allocate resources. All of the Company’s software products are considered operating segments,
and will be aggregated into one reportable segment given the similarities in economic characteristics among the operations represented
by the common nature of the products, customers and methods of distribution.
Reclassifications
Certain amounts in the financial statements
of the prior year have been reclassified to conform to the presentation of the current year for comparative purposes.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Epazz maintains cash balances in non-interest-bearing
transaction accounts, which do not currently exceed federally insured limits. For the purpose of the statements of cash flows,
all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were
no cash equivalents on hand at December 31, 2014 and 2013.
Property and Equipment
Equipment is recorded at its acquisition cost,
which includes the costs to bring the equipment to the condition and location for its intended use, and equipment is depreciated
using the straight-line method over the estimated useful life of the related asset as follows:
Furniture and fixtures |
|
5 years |
Computers and equipment |
|
3-5 years |
Software |
|
3 years |
Assets held under capital leases |
|
3-4 years |
Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Assets held under capital leases are recorded
at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the
lease. Amortization expense is computed using the straight-line method over the useful lives of the assets due to transfer of ownership
after the lease term has expired.
Maintenance and repairs will be charged to
expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of
equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will
be reflected in operations.
Property and equipment are evaluated for impairment
whenever impairment indicators are prevalent. The Company will assess the recoverability of equipment by determining whether the
depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future
cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the
period in which such impairment is determined by management.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting
Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of
this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts
of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value
primarily due to the short term nature of the instruments.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Intangible assets are amortized using
the straight-line method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible
assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate
that impairment exists. All of our intangible assets are subject to amortization. Amortization expense on intangible assets totaled
$150,947 and $446,988 for the years ended December 31, 2014 and 2013, respectively. Impairments charges of $170,257 and $276,282
were recorded for the years ended December 31, 2014 and 2013, respectively.
Goodwill
The Company evaluates the carrying value of
goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would
more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include,
but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the
fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill.
The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the
market approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds its fair value,
then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair
value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the
fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values.
The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair
value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
The Company's evaluation of goodwill completed during the year resulted in impairment losses of $1,489,078 and $-0- for the years
ended December 31, 2014 and 2013, respectively.
Deferred Financing Costs
Costs relating
to obtaining certain debts are capitalized and amortized over the term of the related debt using the straight-line method. The
unamortized capitalized balance of deferred financing costs at December 31, 2014, and 2013, was $54,729 and $44,986, respectively.
Amortization of deferred financing costs charged to operations was $422,451 and $79,123 for the years ended December 31,
2014 and 2013, respectively. When a loan is paid in full, any unamortized financing costs are removed from the related accounts
and charged to operations.
Allowance for Doubtful Accounts
We generate the majority of our revenues and
corresponding accounts receivable from the sales of software products. We evaluate the collectability of our accounts receivable
considering a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its
financial obligations to us, we record a specific reserve for bad debts against amounts due in order to reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts
based on past write-off experience and the length of time the receivables are past due. Bad debts expense (recoveries) was $62,601
and $(27,129) for the years ended December 31, 2014 and 2013, respectively. The allowance for doubtful accounts was $132,985 and
$7,017 for the years ended December 31, 2014 and 2013, respectively.
Beneficial Conversion Features
From time to time, the Company may issue convertible
notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible
note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining
unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of
warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt
discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the
life of the note using the effective interest method.
Revenue Recognition
The Company designs and sells various software
programs to business enterprises, hospitals and Government and post-secondary institutions. Prior to shipment, each software product
is tested extensively to meet Company specifications. The software is shipped fully functional via electronic delivery, but some
installation and setup is required. No other entities sell the same or largely interchangeable software.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Installation is a standard process, outlined
in the owner's manual, consisting principally of setup, calibrating, and testing the software. A purchaser of the software could
complete the process using the information in the owner's manual, although it would probably take significantly longer than it
would take the Company’s technicians to perform the tasks. Although other vendors do not install the Company’s software,
they do provide largely interchangeable installation services for a fee. Historically, the Company has never sold the software
without installation. Most installations are performed by the Company within 7 to 24 days of shipment and are included in the overall
sales price of the software. In addition, the customer must pay for support contracts and training packages, depending on their
desired level of service. The Company is the only manufacturer of the software and it only sells software on a standalone basis
directly to the end user.
The sales price of the arrangement consists
of the software, installation, and training and support services, which the customer is obligated to pay in full upon delivery
of the software. In addition, there are no general rights of return involved in these arrangements. Therefore, the software is
accounted for as a separate unit of accounting.
The Company does not have vendor-specific objective
evidence of selling price for the software because it does not sell the software separately (without installation services and
support contracts). In addition, third-party evidence of selling price does not exist as no vendor separately sells the same or
largely interchangeable software. Therefore, the Company uses its best estimate of selling price when allocating such arrangement
consideration.
In estimating its selling price for the software,
the Company considers the cost to produce the software, profit margin for similar arrangements, customer demand, effect of competitors
on the Company’s software, and other market constraints. When applying the relative selling price method, the Company uses
its best estimate of selling price for the software, and third-party evidence of selling price for the installation. Accordingly,
without considering whether any portion of the amount allocable to the software is contingent upon delivery of the other items,
the Company allocates the selling price to the software, support, and installation.
The Company doesn’t currently provide
product warranties, but if it does in the future it will provide for specific product lines and accrue for estimated future warranty
costs in the period in which the revenue is recognized.
Advertising and Promotion
All costs associated with advertising and promoting
products are expensed as incurred. These expenses approximated $22,443 and $181,497 for the years ended December 31, 2014 and 2013,
respectively.
Income Taxes
The Company recognizes deferred tax assets
and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a
valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Basic and Diluted Loss per Share
The basic net loss per common share is computed
by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed
by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding
plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and
therefore basic and diluted earnings per share result in the same figure.
Stock-Based Compensation
The Company adopted FASB guidance on stock
based compensation on January 1, 2006. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee
stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Common stock issued for services and compensation was $2,964,608 and $1,713,150 for the years ended December 31, 2014 and 2013,
respectively.
Uncertain Tax Positions
Effective January 1, 2009, the Company adopted
new standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Various taxing authorities periodically audit
the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including
the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected
with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures.
A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved.
The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position
relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions. As
of December 31, 2013, the Company had no uncertain tax positions.
Restatement Accounting Policy
Prior Period Errors must be corrected
retrospectively in the financial statements. Retrospective application means that the correction affects only prior period comparative
figures. Current period amounts are unaffected. Therefore, comparative amounts of each prior period presented which contain errors
are restated. If however, an error relates to a reporting period that is before the earliest prior period presented, then the
opening balances of assets, liabilities and equity of the earliest prior period presented must be restated.
Recent Accounting Pronouncements
On August 2014, The Financial Accounting Standards
Board (FASB) issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements – Going Concerns (Subtopic
205-40): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments require management
to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that
are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt,
(2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating
effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration
of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and
(6) require 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 this Update are effective for the annual period ending after December 15, 2016, and for annual periods
and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is not expected to have a material
impact on our financial position or results of operations.
In June 2014, the FASB issued ASU No. 2014-12,
Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That
a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance requires that share-based compensation
that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards and that
could be achieved after an employee completes the requisite service period be treated as a performance condition. As such, the
performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized
in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost
attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable
of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized
prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the
requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those
awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible
to vest in the award if the performance target is achieved. This new guidance is effective for fiscal years and interim periods
within those years beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in this Update
either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance
targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all
new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on our financial position
or results of operations.
In July 2013, the FASB issued ASU No. 2013-11:
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for
such carryforwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December
15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our financial position or results of operations.
In February 2013, FASB issued ASU No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve
the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially
excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive
income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive
income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in
the financial statements under U.S. GAAP. The new amendments will require an organization to:
| - | Present (either on the face of the statement where net income is presented or in the notes) the
effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but
only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting
period; and |
| - | Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification
items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting
period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially
transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense. |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The amendments apply to all public and private
companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all
reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for
public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial
position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01,
Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies
which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11.
The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed
unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope
of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while
still giving financial statement users sufficient information to analyze the most significant presentation differences between
financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in
this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have
a material impact on our financial position or results of operations.
Note 2 – Going Concern
As shown in the accompanying financial statements,
the Company has incurred recurring losses from operations resulting in an accumulated deficit of $(15,169,401), and as of December
31, 2014, the Company’s current liabilities exceeded its current assets by $3,453,062 and its total liabilities exceeded
its total assets by $3,918,310. These factors raise substantial doubt about the Company’s ability to continue as a going
concern.
Epazz will require substantial additional funding
for continuing research and development, obtaining regulatory approval and for the commercialization of its products. Management
expects to be able to raise enough funds to meet its working capital requirements through debt and/or equity financing. There is
no assurance that Epazz will be able to obtain sufficient additional funds when needed, or that such funds, if available, will
be obtainable on terms satisfactory to Epazz. The accompanying financial statements do not include any adjustments that might be
necessary should Epazz be unable to continue as a going concern.
Note 3 – Subsidiary Formation
Formation of Subsidiary – Terran Power,
Inc., September 19, 2013
On September 19, 2013, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Terran Power, Inc. The Company plans to file a non-provisional patent application to develop a
mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing an outlet or
a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.
Subsidiary Formation – FlexFridge,
Inc., March 4, 2013
On March 4, 2013, the Board of Directors of
Epazz, Inc. (the “Company”), consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved
the formation of a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc., which was later renamed,
Z Fridge, Inc., and ultimately again renamed as, FlexFridge, Inc. (“FlexFridge”) on May 29, 2014. The Company has filed
a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge. On
November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz, Inc.
received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial
interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards
Codification (“ASC”) 810-10. There has been no material activity within FlexFridge to date.
Formation of Subsidiary – Jadian,
Inc., May 6, 2014
On May 6, 2014, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Jadian, Inc. for the asset purchase agreement with Jadian Enterprises, Inc.
Formation of Subsidiary – Strantin,
Inc. July 31, 2014
On July 31, 2014, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Strantin, Inc. for the asset purchase agreement with Strand, Inc.
Formation of Subsidiary – Interaction
Technology, Inc. December 17, 2014
On December 17, 2014, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Interaction Technology, Inc. for the asset purchase agreement with Interaction Technology, Inc.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Acquisitions
Interaction Technology, Inc., Asset Purchase
Agreement
On December 29, 2014, The Company through
a newly-formed wholly-owned Illinois subsidiary, Interaction Technology, Inc. (“Interact”), closed on an Asset Purchase
Agreement (“APA”) with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the
APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used
in connection with Interaction’s software business, including all of its intellectual property, its business trademarks
and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $600,000,
of which $250,000 was paid at the closing, and $150,000 was financed by way of a Promissory Note (the “Inter Note 1”)
and $200,000 was financed by way of a Promissory Note (the “Inter Note 2”). The terms of the Inter Note 1 include
interest at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal
payments of $37,500 commencing thereafter, no prepayment penalty. The terms of the Inter Note 2 include interest at 6% per annum,
no payments of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments
of $11,881.03 commencing thereafter, no prepayment penalty. The Inter Note 1 and Inter Note 2 are unsecured. We did not purchase
and Inter agreed to retain and be responsible for any and all liabilities of Inter.
This acquisition was
accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s
assets and ongoing operations were acquired. The purchase resulted in $508,535 of goodwill. According to the purchase method of
accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
| |
December 29, | |
| |
2014 | |
Consideration: | |
| | |
Cash paid at closing | |
$ | 250,000 | |
Subordinated promissory note(1) | |
| 150,000 | |
Seller financed note payable (2) | |
| 200,000 | |
Fair value of total consideration exchanged | |
$ | 600,000 | |
| |
| | |
Fair value of identifiable assets/(liabilities) acquired assumed: | |
| | |
Current assets | |
$ | 4,175 | |
Software | |
| 52,200 | |
Contracts | |
| 24,800 | |
Trademark | |
| 18,000 | |
Deferred revenue liability | |
| (8,510 | ) |
Total fair value of assets assumed | |
| 91,465 | |
Consideration paid in excess of fair value (Goodwill)(3) | |
$ | 508,535 | |
_______________
(1) $150,000
was financed by way of a Promissory Note (the “Inter Note 1”). The terms of the Inter Note1 include
interest at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal
payments of $37,500 commencing thereafter, no prepayment penalty. The Inter Note 1 is unsecured.
(2) $200,000
was financed by way of a Promissory Note. The terms of the Inter Note 2 include interest at 6% per annum, no payments of either
principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $11,881.03 commencing
thereafter, no prepayment penalty. The Inter Note 2 is unsecured.
(3)
The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited supplemental pro forma results
of operations of the combined entities had the dates of the acquisitions been January 1, 2014 or January 1, 2013 are
as follows:
| |
Combined Pro Forma: | |
| |
For the 12 months ended | |
| |
December 31, | |
| |
2014 | | |
2013 | |
Revenue: | |
$ | 2,098,269 | | |
$ | 1,457,134 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| 7,041,089 | | |
| 3,600,915 | |
| |
| | | |
| | |
Net operating loss | |
| (4,942,820 | ) | |
| (2,143,781 | ) |
| |
| | | |
| | |
Other income (expense) | |
| (2,268,996 | ) | |
| (657,287 | ) |
| |
| | | |
| | |
Net loss | |
$ | (7,211,816 | ) | |
$ | (2,801,068 | ) |
| |
| | | |
| | |
Weighted average number of common shares | |
| | | |
| | |
Outstanding – basic and fully diluted | |
| 8,504,489 | | |
| 253,610 | |
| |
| | | |
| | |
Net loss per share – basic and fully diluted | |
$ | (0.85 | ) | |
$ | (11.04 | ) |
Strand, Inc., Asset Purchase Agreement
On July 31, 2014, one of the Company’s
subsidiaries, Telecorp Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Strantin, Inc. (“Strantin”),
closed on an Asset Purchase Agreement (“APA”) with Strand, Inc., an Illinois corporation (“Strand”). Pursuant
to the APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets
used in connection with Strand’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $185,000, of
which $100,000 was paid at the closing, and $85,000 was financed by way of a Convertible Promissory Note (the “Strand Note”).
The terms of the Strand Note include interest at 6% per annum, no payments of either principal or interest for thirty (30) days
after Closing and monthly principal and interest payments of $2,586 commencing thereafter, no prepayment penalty, and a balloon
payment consisting of full payment of all amounts due after one (1) year. In the event we default on the July 31, 2015 balloon
payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the
parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid
price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever
is greater. The Strand Note is secured by a lien on the assets of Strand. We did not purchase and Strand agreed to retain and be
responsible for any and all liabilities of Strand. We did not purchase and Strand agreed to retain and be responsible for any and
all liabilities of Strand.
This acquisition was accounted for as a business
combination under the purchase method of accounting, given that substantially all of the Company’s assets and ongoing operations
were acquired. The purchase resulted in $399,865 of goodwill. According to the purchase method of accounting, the Company recognized
the identifiable assets acquired and liabilities assumed as follows:
| |
July, | |
| |
2014 | |
Consideration: | |
| | |
Cash paid at, and prior to, closing | |
$ | 100,000 | |
Seller financed note payable(1)(2) | |
| 85,000 | |
| |
| 185,000 | |
Fair value of identifiable liabilities acquired: | |
| | |
Deferred revenue | |
| 36,638 | |
Fair value of total consideration exchanged | |
$ | 221,638 | |
| |
| | |
Fair value of identifiable assets acquired assumed: | |
| | |
Software | |
$ | 9,447 | |
Trade name | |
| 5,870 | |
Total fair value of assets assumed | |
| 15,317 | |
Consideration paid in excess of fair value (Goodwill)(3) | |
$ | 206,321 | |
_______________
(1) Consideration included
an unsecured $85,000 seller financed note payable (“Strand Note”), which bears interest at 6% per annum until the maturity
date of July 31, 2015, and provides for equal monthly principal and interest payments of $2,585.86 commencing on August 31, 2014.
The Strand Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity
at July 31, 2015.
(2) The fair value of
the seller financed note in excess of the $85,000 principal balance attributable to the deferred payment terms will be amortized
to interest expense over the deferred financing period.
(3) The consideration
paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Management believes the product line of Strand,
software and other assets acquired will enable the Company to enhance their business model and strengthen its future cash flows
to fund operations and take advantage of additional growth opportunities.
The unaudited supplemental pro forma
results of operations of the combined entities had the dates of the acquisitions been January 1, 2014 or January 1,
2013 are as follows:
| |
Combined Pro Forma: | |
| |
For the 12 months ended December 31, | |
| |
2014 | | |
2013 | |
Revenue: | |
$ | 1,724,945 | | |
$ | 900,742 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| 7,044,595 | | |
| 3,609,116 | |
| |
| | | |
| | |
Net operating income (loss) | |
| (5,319,650 | ) | |
| (2,708,374 | ) |
| |
| | | |
| | |
Other income (expense) | |
| (2,269,968 | ) | |
| (659,059 | ) |
| |
| | | |
| | |
Net income (loss) | |
$ | (7,589,345 | ) | |
$ | (3,367,733 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and fully
diluted | |
| 8,504,489 | | |
| 253,610 | |
| |
| | | |
| | |
Net income (loss) per share – basic and fully diluted | |
$ | (0.89 | ) | |
$ | (13.30 | ) |
Zinergy (DBA) formerly Cynergy Software,
Asset Purchase
On April 4, 2014, we closed on a March 13,
2014 Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase
Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s
help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers,
software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing,
$25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the
closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation.
The acquisition was financed in part with a software financing agreement. The financing agreement has a lien against the software
assets of Zinergy.
Zinergy Service Desk Software is very customizable
for business processes. Zinergy integrates with just about every other business tool available. Help Desk Support Software, Help
Desk Ticketing Software, Customer Support Software, HRIS Ticketing Solution and much more.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
This acquisition was
accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s
assets and ongoing operations were acquired. The purchase resulted in $65,139 of goodwill. According to the purchase method of
accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
| |
April 4, | |
| |
2014 | |
Consideration: | |
| |
Cash paid at, and prior to, closing | |
$ | 75,000 | |
| |
| | |
Fair value of identifiable assets acquired assumed: | |
| | |
Software | |
$ | 8,035 | |
Trade name | |
| 1,826 | |
Total fair value of assets assumed | |
| 9,861 | |
Consideration paid in excess of fair value (Goodwill)(1) | |
$ | 65,139 | |
_______________
(1) The consideration paid in excess of the
net fair value of assets acquired and liabilities assumed has been recognized as goodwill.
Management believes the product line of Cynergy,
software and other assets acquired will enable the Company to enhance their business model and strengthen its future cash flows
to fund operations and take advantage of additional growth opportunities.
Jadian Enterprises, Inc., Asset Purchase
Agreement
On May 9, 2014, the Company, through a newly-formed
wholly-owned Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset Purchase Agreement
(“APA”) with Jadian, Inc., a Michigan corporation (“Jadian”). Pursuant to the APA, we purchased substantially
all of the intangible assets and certain tangible assets used in connection with Jadian’s software business, including all
of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable
in consideration for an aggregate of $425,000, of which $207,945 was paid at the closing, $7,055 was settled as a result of certain
offsets, including an offset for $40,760 for prepaid maintenance contracts received by the seller prior to Closing, as diminished
by a credit for Accounts Receivable of $33,705, and $210,000 was financed by way of a Promissory Note (the “Jadian Note”).
The terms of the Jadian Note include interest at 6% per annum, a ten (10) year amortization, full right of offset, no payments
of either principal or interest for thirty (30) days after Closing and equal payments of principal and interest commencing thereafter,
no prepayment penalty, and a balloon payment consisting of full payment of all amounts due after three (3) years. The Jadian Note
is secured by a lien on the assets of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all
liabilities of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian.
The Company also agreed to provide the seller
with additional earn-out rights in connection with the purchase, which provide that the seller will receive up to a maximum of
$100,000 per year for the three twelve month periods following the Closing (any delinquent earn-out payment shall bear interest
at the rate of 10% per annum until the delinquent amount is paid), based on the gross revenues generated by Jadian during such
applicable year based on the following schedule (the “Earn-Out”):
Revenue for the Relevant Year |
Earn-Out |
$-0- to $500,000 |
$ |
– |
$500,000 to $600,000 |
$ |
25,000 |
$600,000 to $700,000 |
$ |
50,000 |
$700,000 to $800,000 |
$ |
75,000 |
$800,000 or more |
$ |
100,000 |
Provided that in no event shall the total amount
payable to Jadian Enterprises in connection with the Earn-Out exceed $100,000 per year, or $300,000 in aggregate. Management has
determined the probability of having to pay out any of these Earn-Out provisions as Medium and accordingly, has not recorded a
contingent liability.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
This acquisition
was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s
assets and ongoing operations were acquired. The purchase resulted in $399,865 of goodwill. According to the purchase method of
accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
| |
May 9, | |
| |
2014 | |
Consideration: | |
| | |
Cash paid at, and prior to, closing | |
$ | 215,000 | |
Seller financed note payable(1)(2) | |
| 210,000 | |
Adjustments to cash paid at closing(3) | |
| (7,055 | ) |
| |
| 417,945 | |
Fair value of identifiable liabilities acquired: | |
| | |
Deferred revenue | |
| 86,423 | |
Fair value of total consideration exchanged | |
$ | 504,368 | |
| |
| | |
Fair value of identifiable assets acquired assumed: | |
| | |
Accounts receivable | |
$ | 42,382 | |
Software | |
| 37,180 | |
Trade name | |
| 24,941 | |
Total fair value of assets assumed | |
| 104,503 | |
Consideration paid in excess of fair value (Goodwill)(4) | |
$ | 399,865 | |
____________________
(1) Consideration included
an unsecured $210,000 seller financed note payable (“Jadian Note”), which bears interest at 6% per annum until the
maturity date of May 9, 2017, and provides for equal monthly principal and interest payments of $6,389 commencing on June 1, 2014.
The Jadian Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity
at May 9, 2017. The interest rate shall be 8% per annum with an additional 5% late payment fee upon default.
(2) The fair value of
the seller financed note in excess of the $210,000 principal balance attributable to the deferred payment terms will be amortized
to interest expense over the deferred financing period.
(3) The Company agreed
to adjust the purchase price in connection with the Closing by paying an additional $33,705 for the accounts receivable acquired,
less $40,760 attributable to deferred revenues recognized on previously collected sales for which services are still pending. The
net total of $7,055 was credited as payment at the Closing.
(4) The consideration
paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.
Management believes the product line of Jadian,
software and other assets acquired will enable the Company to enhance their business model and strengthen its future cash flows
to fund operations and take advantage of additional growth opportunities.
The unaudited supplemental pro forma results
of operations of the combined entities had the dates of the acquisitions been January 1, 2014 or January 1, 2013 are
as follows:
| |
Combined Pro Forma: | |
| |
For the 12 months ended December 31, | |
| |
2014 | | |
2013 | |
Revenue: | |
$ | 1,729,127 | | |
$ | 1,008,084 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| 7,100,879 | | |
| 3,715,426 | |
| |
| | | |
| | |
Net operating income (loss) | |
| (5,371,752
| ) | |
| (2,707,342 | ) |
| |
| | | |
| | |
Other income (expense) | |
| (2,272,930 | ) | |
| (665,243 | ) |
| |
| | | |
| | |
Net income (loss) | |
$ | (7,644,682 | ) | |
$ | (3,372,585 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and
fully diluted | |
| 8,504,489 | | |
| 253,610 | |
| |
| | | |
| | |
Net income (loss) per share – basic and fully diluted | |
$ | (0.90 | ) | |
$ | (13.30 | ) |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Purchase Acquisition – Telecorp
Products, Inc., February 28, 2014
On February 28, 2014, the Company entered into
a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario Canada
corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder and the
sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding shares
of Telecorp from Troy Holdings, for an aggregate purchase price of $302,000 (the “Purchase Price”). The Purchase Price
was payable as follows:
|
(a) |
The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and |
|
(b) |
The Company provided Troy Holdings with a Promissory Note in the amount of $102,000 (the “Telecorp Note”), as adjusted from an original $120,000 by $18,000 of liabilities acquired in excess of the agreed upon limit of $50,000 of liabilities, which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum. |
Additionally, the Company agreed to assume
aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. A total of $68,000 of liabilities was
actually acquired, and the resulting $18,000 of excess liabilities was credited as payment against the Telecorp Note. As a result
of the Closing, Telecorp became a wholly-owned subsidiary of the Company.
Telecorp developed and sells software to effectively
operate contact centers. Telecorp’s solutions work with equipment from the giants of the computer telephony industry, such
as Avaya, Cisco and Nortel Networks. In connection with the Stock Purchase Agreement, the shareholders of Telecorp and the Company
entered into a Non-Disclosure/Non-Compete Agreement, pursuant to which the shareholders of Telecorp and the Company, each agreed
to not for a period of one (1) year, communicate or divulge to, or use for the benefit of itself or any other person, firm, association
or corporation, any information in any way relating to the Proprietary Property, in competition with the business of the Company,
and pursuant to the agreement, the shareholders of Telecorp agreed not to compete against the Company for one (1) year from the
closing of the acquisition.
This acquisition was
accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s
assets and ongoing operations were acquired. The purchase resulted in $428,577 of goodwill. According to the purchase method of
accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
| |
February 28, | |
| |
2014 | |
Consideration: | |
| | |
Cash paid at, and prior to, closing | |
$ | 200,000 | |
Seller financed note payable(1)(2) | |
| 120,000 | |
Excess liability adjustment to seller financed note payable(3) | |
| (18,000 | ) |
| |
| 302,000 | |
Fair value of identifiable liabilities acquired: | |
| | |
Accounts payable and accrued expenses | |
| 43,500 | |
Deferred revenue | |
| 162,016 | |
Line of credit | |
| 24,500 | |
Fair value of total consideration exchanged | |
$ | 532,016 | |
| |
| | |
Fair value of identifiable assets acquired assumed: | |
| | |
Cash | |
$ | 736 | |
Other current assets | |
| 823 | |
Technology-based intangible assets | |
| 72,490 | |
Trade name | |
| 29,390 | |
Total fair value of assets assumed | |
| 103,439 | |
Consideration paid in excess of fair value (Goodwill)(4) | |
$ | 428,577 | |
______________
(1) Consideration included
an unsecured $120,000 seller financed note payable (“Telecorp Note”), which provides for six (6) equal monthly payments
of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which
case the interest rate shall be 10% per annum.
(2) The fair value of
the seller financed note in excess of the $102,000 principal balance attributable to the deferred payment terms will be amortized
to interest expense over the deferred financing period.
(3) The Company agreed
to assume aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. A total of $68,000 of liabilities
was actually acquired, and the resulting $18,000 of excess liabilities was credited as payment against the Telecorp Note.
(4) The consideration
paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Management believes the product line
of Telecorp, customer base and other assets acquired will enable the Company to enhance their business model and strengthen its
future cash flows to fund operations and take advantage of additional growth opportunities.
The unaudited supplemental pro forma results
of operations of the combined entities had the dates of the acquisitions been January 1, 2014 or January 1, 2013 are
as follows:
| |
Combined pro Forma: | |
| |
For the 12 months ended December 31, | |
| |
2014 | | |
2013 | |
Revenue: | |
$ | 1,648,955 | | |
$ | 1,038,678 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| 7,042,077 | | |
| 3,824,831 | |
| |
| | | |
| | |
Net operating income (loss) | |
| (5,393,122 | ) | |
| (2,786,153 | ) |
| |
| | | |
| | |
Other income (expense) | |
| (2,268,872 | ) | |
| (657,984 | ) |
| |
| | | |
| | |
Net income (loss) | |
$ | (7,661,994 | ) | |
$ | (3,444,137 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and
fully diluted | |
| 8,504,489 | | |
| 253,610 | |
| |
| | | |
| | |
Net income (loss) per share – basic and fully diluted | |
$ | (0.90 | ) | |
$ | (13.58 | ) |
Note 5 – Related Parties
Debt Financing
From time to time we have received and repaid
loans from our CEO and his immediate family members to fund operations. These related party debts are fully disclosed in Note 14
below.
In addition to the debts disclosed in Note
14, we had two convertible notes with related parties that are disclosed in Note 15 as follows:
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Unsecured $14,838 convertible promissory note carries an 11% interest rate (“First GG Mars Note”) owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note was acquired from and assigned by another independent lender on August 15, 2013 prior to being exchanged for the convertible note. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for the one hundred and twenty (120) days prior to the conversion date, or $0.00001 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of $14,838 was immediately converted at the election of the note holder into 46,856,526 shares. | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013, $32,000 into another 40,000,000 shares pursuant to debt conversion on August 7, 2013, $18,750 into 125,000,000 shares pursuant to debt conversion on April 7, 2014, $20,000 into 200,000,000 shares pursuant to debt conversion on May 3, 2014, and $15,000, consisting of $7,699 of principal and $7,301 of interest into 150,000,000 shares pursuant to debt conversion on May 22, 2014 | |
| – | | |
| 46,449 | |
| |
| | | |
| | |
Total convertible debts, related parties | |
| – | | |
| 46,449 | |
Less: unamortized discount on beneficial conversion feature | |
| – | | |
| (5,653 | ) |
Convertible debts | |
| – | | |
| 40796 | |
Less: current maturities of convertible debts, related parties included in convertible debts | |
| – | | |
| – | |
Long term convertible debts, related parties included in convertible debts | |
$ | – | | |
$ | 40,796 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in Stockholders’ Equity, Related
Parties
Dividends Payable
On January 1, 2013, the Company declared and
accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1
million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the
year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which was subsequently paid on September
11, 2014, with the issuance of 11,000 shares of Class A Common Stock in lieu of cash.
On September 10, 2014, an amendment to
the corporation’s Articles of Incorporation was approved with respect to the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock. With regard to each series of preferred stock, the Corporation shall not without first obtaining
the approval, by written consent, as provided by law, of the holders of 2/3rds of the then outstanding shares of each respective
series of Preferred Stock, to increase or decrease, other than by redemption or conversion, the total number of authorized shares
of each respective series of Preferred Stock, to effect an exchange, reclassification, or cancellation of all or a part of each
respective series of Preferred Stock, but excluding a stock split, forward split or reverse stock split of the Corporation’s
Common Stock or series B Preferred Stock, to effect an exchange, or create a right of exchange, of all or part of the shares of
another class of shares into shares of any series of Preferred Stock, or to alter or change the rights, preferences or privileges
of the shares of any series of Preferred Stock so as to affect adversely the shares of such series. With respect to the Class
B Common Stock, the amendment as approved stipulates that The Corporation will take all such action as may be necessary or appropriate
in order to protect the Conversion rights of the holders of Class B Common Stock against impairment as a result of any reorganization,
transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action.
A valuation of the various classes of stock
was performed by an independent third party to provide an estimated change in the fair value of each class affected by the amendment.
The estimated change to the fair value of the various classes of stock is $721,207. The market value of equity was estimated with
the market price of the Company's Class A common stock as of September 10, 2014 according to Capital IQ.
Shares of Convertible Series C Preferred
Stock Issued for Services to Related Parties
On January 17, 2014, the Company issued 600,000,000
shares of the recently designated Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000 shares
of his previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $568,283 based
on an independent valuation on the date of grant; therefore the Company recognized additional compensation expense of $345,427
due to the difference in the fair value of the Class A Common Stock exchanged.
On February 7, 2014, the Company issued 2,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost in consideration for a $26,000 short term promissory note. The total fair value of the common stock was $2,385
based on an independent valuation on the date of grant.
On February 21, 2014, the Company issued 15,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related
party, as a loan origination cost in consideration for a $75,000 short term promissory note. The total fair value of the common
stock was $9,562 based on an independent valuation on the date of grant.
On February 22, 2014, the Company issued 15,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost in consideration for a $100,000 short term promissory note. The total fair value of the common stock was $14,266
based on an independent valuation on the date of grant.
On March 7, 2014, the Company issued 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $30,000 short term promissory note. The total fair value of the common stock
was $2,912 based on an independent valuation on the date of grant.
On March 22, 2014, the Company issued 200,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, for providing
a personal guaranty on an acquisition loan. The total fair value of the common stock was $127,746 based on an independent valuation
on the date of grant.
On March 22, 2014, the Company issued 200,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
for providing a personal guaranty on an acquisition loan. The total fair value of the common stock was $127,746 based on an independent
valuation on the date of grant.
On March 22, 2014, the Company issued
1,821,052,632 shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 182,105 Class A
Common shares, consisting of 173,053 previously issued and unvested shares of Class A Common Stock and 9,052 shares of his
previously issued and vested Class A Common Stock. The vesting terms were accelerated commensurate with the exchange.
The total fair value of the Series C Convertible Preferred Stock was $1,163,162 based on an independent valuation on the date
of grant; therefore the Company recognized additional compensation expense of $707,025 due to the difference in the fair
value of the Class A Common Stock exchanged.
On March 22, 2014, the Company issued 13,669,568
shares of the Series C Convertible Preferred Stock to L&F Lawn Services, a company owned by our CEO’s family member,
a related party, in exchange for 1,367 of their previously issued Class A Common Stock. The total fair value of the Series C Convertible
Preferred Stock was $8,731 based on an independent valuation on the date of grant; therefore the Company recognized additional
compensation expense of $5,370 due to the difference in the fair value of the Class A Common Stock exchanged.
On March 22, 2014, the Company issued 60,000,000
shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000,000 shares, consisting of
5,400 previously issued and unvested shares of Class A Common Stock and 600 shares of his previously issued and vested Class A
Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible
Preferred Stock was $38,324 based on an independent valuation on the date of grant; therefore the Company recognized additional
compensation expense of $23,295 due to the difference in the fair value of the Class A Common Stock exchanged.
On July 7, 2014 the Company issued 5,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost that was previously granted on January 15, 2014 in consideration for a $43,000 short term promissory
note. The total fair value of the common stock was $6,465 based on an independent valuation on the date of grant.
On July 7, 2014 the Company issued 1,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost that was previously granted on February 8, 2014 in consideration for a $13,000 short term promissory
note. The total fair value of the common stock was $1,193 based on an independent valuation on the date of grant.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On July 7, 2014 the Company issued 2,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost that was previously granted on March 7, 2014 in consideration for a $22,000 short term promissory note. The total
fair value of the common stock was $1,942 based on an independent valuation on the date of grant.
On July 7, 2014 the Company issued 3,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost that was previously granted on March 26, 2014 in consideration for a $37,500 short term promissory note. The total
fair value of the common stock was $2,928 based on an independent valuation on the date of grant.
On July 7, 2014 the Company issued 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost that was previously granted on March 26, 2014 in consideration for a $25,000 short term promissory note.
The total fair value of the common stock was $2,928 based on an independent valuation on the date of grant.
On July 7, 2014 the Company issued 2,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost that was previously granted on March 28, 2014 in consideration for an $18,750 short term promissory note. The
total fair value of the common stock was $1,594 based on an independent valuation on the date of grant.
On July 7, 2014 the Company issued 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost that was previously granted on March 28, 2014 in consideration for a $25,000 short term promissory note.
The total fair value of the common stock was $2,928 based on an independent valuation on the date of grant.
On October 10, 2014 the Company issued 30,000,000
shares of Class A Common to our CEO from a conversion notice from Preferred C. As this was a conversion within the terms of the
Preferred C equity instrument no additional value was recognized as a result of this conversion.
On October 10, 2014 the Company issued 1,500,000
shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party, from a conversion
notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was
recognized as a result of this conversion.
On October 10, 2014 the Company issued 1,400,000
shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from a conversion
notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was
recognized as a result of this conversion.
Shares of Class A Common Stock Issued for
Services to Related Parties
On March 5, 2013, the Company issued 1,250
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on an acquisition loan that
originated on September 30, 2010. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.
On March 5, 2013, the Company issued 1,250
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on two acquisition loans
that originated on October 26, 2011. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.
On March 5, 2013, the Company issued 2,000
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The shares
will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock was
$400,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction
against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied.
The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares.
On March 20, 2013, the Company issued 3,550
shares of Class A Common Stock to Vivienne Passley, a related party, for providing collateral on acquisition loans that originated
on September 30, 2010 and October 26, 2011. The total fair value of the common stock was $35,500 based on the closing price of
the Company’s common stock on the date of grant.
On March 20, 2013, the Company issued 6,000
shares of Class A Common Stock to Craig Passley, a related party, for providing corporate secretary services from 2012 to 2021.
The total fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the date
of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until
the terms of the vesting periods are satisfied. A total of $6,000 was expensed related to the vested services for the year ended
December 31, 2012. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares
for Convertible Series C Preferred shares.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On May 16, 2013, the Company issued 71,053
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The total
fair value of the common stock was $1,350,000 based on the closing price of the Company’s common stock on the date of grant.
On May 24, 2013, the Company issued 3,550 shares
of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on September
30, 2010 and October 26, 2011. The total fair value of the common stock was $71,000 based on the closing price of the Company’s
common stock on the date of grant.
On July 5, 2013, the Company issued 2,500 shares
of Class A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value of the
common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.
On July 8, 2013, the Company issued 71,053
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services, of which
20,000 shares vested immediately and the remaining 510,526,316 shares will be vested once the Company reports revenue of $10 million
in a calendar year. The total fair value of the common stock was $497,368 based on the closing price of the Company’s common
stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional paid
in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions
were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.
Shares of Class A Common Stock Issued for
Loan Origination Fees to Related Parties
On July 19, 2013, the Company issued 250 shares
of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $23,000 short term
promissory note. The total fair value of the common stock was $4,250 based on the closing price of the Company’s common stock
on the date of grant.
On July 31, 2013, the Company issued 300 shares
of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination
cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $4,200 based on the
closing price of the Company’s common stock on the date of grant.
On August 2, 2013, the Company issued 300 shares
of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination
cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $5,100 based on the
closing price of the Company’s common stock on the date of grant.
On August 7, 2013, the Company granted 250
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $24,000 short term promissory note. The total fair value of the common stock was $4,250
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November
13, 2013.
On August 12, 2013, the Company issued 500
shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $51,000
short term promissory note. The total fair value of the common stock was $7,000 based on the closing price of the Company’s
common stock on the date of grant.
On August 20, 2013, the Company granted 250
shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party, as
a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock was
$3,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
On August 27, 2013, the Company granted 125
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $12,500 short term promissory note. The total fair value of the common stock was $1,500
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November
13, 2013.
On September 7, 2013, the Company granted
600 shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $65,000 short term promissory note. The total fair value of the common stock
was $6,600 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
On April 23, 2014, the Company granted
350 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a
loan origination cost in consideration for a $35,000 short term promissory note. The total fair value of the common stock was
$1,050 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on August 29, 2014.
On April 24, 2014, the Company granted
1,000 shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination
cost in consideration for a $150,000 short term promissory note. The total fair value of the common stock was $3,000 based on
the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29,
2014.
On May 7, 2014, the Company granted 1,000
shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost
in consideration for a $125,000 short term promissory note. The total fair value of the common stock was $2,000 based on the closing
price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On May 28, 2014, the Company granted 325
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $32,500 short term promissory note. The total fair value of the common stock was $650
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August
29, 2014.
On June 12, 2014, the Company granted
213 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a
loan origination cost in consideration for a $5,000 short term promissory note. The total fair value of the common stock was $213
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August
29, 2014.
Convertible Class
B Common Stock Issuance for Services
On March 22, 2014, the Company issued 12,500,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing services. The total fair value
of the common stock was $44,737 based on the closing price of the Company’s common stock on the date of grant.
Debt Conversions into Class A Common Stock
– Related Parties
On April 2, 2014, the Company issued 25,000
shares of Class A Common Stock pursuant to the conversion of $25,000 of convertible debt held by Vivienne Passley, a related party,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On April 7, 2014, the Company issued 12,500
shares of Class A Common Stock pursuant to the conversion of $18,750 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 3, 2014, the Company issued 20,000 shares
of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a related
party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On May 22, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On June 17, 2014, the Company issued 33,433
shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party,
which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On October 10, 2014 the Company issued 30,000,000
shares of Class A Common to our CEO from a conversion notice from Preferred C. As this was a conversion within the terms of the
Preferred C equity instrument no additional value was recognized as a result of this conversion.
On October 10, 2014 the Company
issued 1,500,000 shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party,
from a conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional
value was recognized as a result of this conversion.
On October 10, 2014 the Company issued 1,400,000
shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from a conversion
notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was
recognized as a result of this conversion.
Employment Agreement
On September 6, 2012, we entered into an employment
agreement with Shaun Passley, Ph.D., our Chief Executive Officer, President, and Chairman of the Board of Directors which had a
term of ten (10) years. Compensation pursuant to the agreement calls for a base salary of $180,000 per year; of which $30,000 shall
be payable annually in cash and $150,000 shall be payable in shares of the Company’s Common Stock at the rate of $0.006 per
share, or 2,500 shares per year. In addition, the Company issued 1 billion shares of Class A Common Stock to the Company’s
CEO as a bonus in consideration for various services performed, and to be performed over a ten year period beginning on September
6, 2012, provided that all of the shares remain subject to forfeiture until such time, if ever, as we generate annual revenues
of at least $10 million, subject to the below termination provisions. The total fair value of the common stock was $6,000,000 based
on the closing price of the Company’s common stock on the date of grant, which has been presented as a deduction against
additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The
vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares. In the event of the termination of Dr. Passley’s employment agreement for cause by the Company or without
good reason by Dr. Passley, any non-vested shares are to be canceled and he is to be paid any consideration he is owed through
the date of termination. In the event of the termination of Dr. Passley’s employment agreement for good reason (as described
in the agreement) by Dr. Passley or without cause by the Company, he is due eight additional weeks of compensation and all non-vested
shares vest to him immediately. In the event of the termination of Dr. Passley’s employment agreement for any other reason,
he is due eight weeks of additional salary and any non-vested shares are to be canceled.
We do not have an employment or consultant
agreement with Craig Passley, our Secretary, however on March 20, 2013, we granted 60 million shares to Craig Passley for services
rendered between 2012 and 2021. The shares vest annually over the 10 year period with the first 6 million vesting upon the grant
date. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible
Series C Preferred shares.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Amendments to Employment Agreement
On August 16, 2013, the Company amended Shaun
Passley, Ph.D.’s employment agreement to increase the cash portion of his compensation from $30,000 per year to $100,000
in the initial year of the agreement only. All other terms remain in effect, and the shares of stock awarded as a bonus as previously
disclosed were granted in addition to the stock based compensation outlined in the original agreement.
Note 6 – Fair Value of Financial Instruments
Under FASB ASC 820-10-5, fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order
to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets
and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured
at fair value.
The Company does not have any financial instruments
that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using
inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.
Level 2 - Inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield
curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means
(market corroborated inputs).
Level 3 - Unobservable inputs that
reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation
of financial instruments at fair value on a non-recurring basis in the balance sheets as of December 31, 2014 and 2013:
| |
Fair Value Measurements at December 31, 2014 | |
| |
Level 1 | | |
Level 2 | | |
Level 1 | |
Assets | |
| | | |
| | | |
| | |
Intangible assets | |
$ | – | | |
$ | – | | |
$ | 337,938 | |
Goodwill | |
| – | | |
| – | | |
| 374,818 | |
Total assets | |
| – | | |
| – | | |
| 712,756 | |
Liabilities | |
| | | |
| | | |
| | |
Lines of credit | |
| – | | |
| 80,239 | | |
| – | |
Capital leases | |
| – | | |
| 5,889 | | |
| – | |
Promissory notes | |
| – | | |
| 2,504,371 | | |
| – | |
Notes payable, related parties | |
| – | | |
| 1,221,323 | | |
| – | |
Convertible debts, net of discount of $131,774 | |
| – | | |
| 88,739 | | |
| – | |
Total Liabilities | |
| – | | |
| 3,900,561 | | |
| – | |
| |
$ | – | | |
$ | (3,900,561 | ) | |
$ | 712,756 | |
| |
Fair Value Measurements at December 31, 2013 | |
| |
Level 1 | | |
Level 2 | | |
Level 1 | |
Assets | |
| | | |
| | | |
| | |
Intangible assets | |
$ | – | | |
$ | – | | |
$ | 374,162 | |
Goodwill | |
| – | | |
| – | | |
| 255,460 | |
Total assets | |
| – | | |
| – | | |
| 629,622 | |
Liabilities | |
| | | |
| | | |
| | |
Lines of credit | |
| – | | |
| 73,232 | | |
| | |
Capital leases | |
| – | | |
| 17,421 | | |
| | |
Long term debts | |
| – | | |
| 1,211,929 | | |
| | |
Notes payable, related parties | |
| – | | |
| 482,368 | | |
| | |
Convertible debts, net of discount of $105,300 | |
| – | | |
| 157,294 | | |
| | |
Total Liabilities | |
| – | | |
| 1,942,244 | | |
| | |
| |
$ | – | | |
$ | (1,942,244 | ) | |
$ | 629,622 | |
There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the years ended December 31, 2014 and 2013.
Level 3 assets consist of intangible assets
and goodwill. Impairment adjustments related to the measurement of intangible assets of $1,659,335 and $276,282 were necessary
during the years ended December 31, 2014 and 2013.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Other Current Assets
As of December 31, 2014 and 2013 other current
assets included the following:
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Deferred financing costs | |
$ | 54,729 | | |
$ | 44,986 | |
Other receivable | |
| – | | |
| 51,250 | |
Security deposits | |
| 9,878 | | |
| 9,878 | |
| |
$ | 64,607 | | |
$ | 106,114 | |
The Company recognized $422,451 and $79,123
of amortization expense related to the deferred financing costs during the years ended December 31, 2014 and 2013, respectively.
Note 8 – Property and Equipment
Property and Equipment consists of the following
at December 31, 2014 and 2013, respectively:
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Furniture and fixtures | |
$ | 22,006 | | |
$ | 2,187 | |
Computers and equipment | |
| 188,613 | | |
| 325,105 | |
Software | |
| 15,660 | | |
| 67,986 | |
Assets held under capital leases | |
| 17,855 | | |
| 134,800 | |
| |
| 244,134 | | |
| 530,078 | |
Less accumulated depreciation and amortization | |
| (137,436 | ) | |
| (416,668 | ) |
| |
$ | 106,698 | | |
$ | 113,410 | |
Depreciation expense totaled $55,490 for the
years ended December 31, 2014 and 2013, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Intangible Assets
Intangible assets consisted of the following at December 31, 2014
and 2013, respectively:
| |
Useful | | |
December 31, | | |
December 31, | |
Description | |
Life | | |
2014 | | |
2013 | |
Technology-based intangible assets | |
| | | |
| | | |
| | |
K9 Bytes | |
| 5 Years | | |
| 42,000 | | |
| 42,000 | |
MS Health | |
| 5 Years | | |
| 124,000 | | |
| 124,000 | |
Intellisys | |
| 5 Years | | |
| 163,333 | | |
| 200,000 | |
Cynergy | |
| 5 Years | | |
| 1,205 | | |
| – | |
Interaction | |
| 5 Years | | |
| 11,892 | | |
| – | |
Jadian | |
| 5 Years | | |
| 37,180 | | |
| – | |
Strand | |
| 5 Years | | |
| 9,447 | | |
| – | |
Telecorp | |
| 5 Years | | |
| 12,082 | | |
| – | |
| |
| | | |
| 401,139 | | |
| 366,000 | |
Contracts | |
| | | |
| | | |
| | |
MS Health | |
| 6 Years | | |
| 258,000 | | |
| 258,000 | |
Interaction | |
| 6 Years | | |
| 24,800 | | |
| – | |
| |
| | | |
| 282,800 | | |
| 258,000 | |
Trade Name | |
| | | |
| | | |
| | |
K9 Bytes | |
| 5 Years | | |
| 22,000 | | |
| 22,000 | |
Cynergy | |
| 5 Years | | |
| 274 | | |
| – | |
Jadian | |
| 5 Years | | |
| 24,941 | | |
| – | |
Strand | |
| 5 Years | | |
| 5,870 | | |
| – | |
Telecorp | |
| 5 Years | | |
| 4,898 | | |
| – | |
| |
| | | |
| 57,983 | | |
| 22,000 | |
Other Intangible Assets | |
| | | |
| | | |
| | |
MS Health | |
| 2 Years | | |
| 18,000 | | |
| 18,000 | |
K9 Bytes | |
| 2 Years | | |
| 26,000 | | |
| 26,000 | |
Interaction | |
| 2 Years | | |
| 18,800 | | |
| – | |
| |
| | | |
| 62,800 | | |
| 44,000 | |
| |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Total intangible assets | |
| | | |
| 804,722 | | |
| 690,000 | |
Less: accumulated amortization | |
| | | |
| (466,784 | ) | |
| (315,838 | ) |
Intangible assets, net | |
| | | |
$ | 337,938 | | |
$ | 374,162 | |
Amortization expense on intangible assets
totaled $150,946 and $446,998 for the years ended December 31, 2014 and 2013, respectively. The company also recorded intangible
asset impairments of $170,257 and $276,282 for the years ended December 31, 2014 and 2013, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – Goodwill
The changes in the carrying amount of goodwill
and accumulated impairment losses for the years ended December 31, 2014 and 2013, respectively, are as follows:
|
IntelliSys |
|
K9 Bytes |
|
MS Health |
|
Jadian |
|
Cynergy |
|
Telecorp |
|
Strand |
|
Interaction |
|
Total |
Goodwill acquired during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses |
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
– |
Balance, December 31, 2013: |
|
53,588 |
|
|
87,244 |
|
|
114,628 |
|
|
|
|
|
|
|
|
|
|
|
|
255,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year |
|
|
|
|
– |
|
|
– |
|
399,865 |
|
65,139 |
|
428,576 |
|
206,321 |
|
508,535 |
|
|
1,608,436 |
Impairment loses |
|
(53,588) |
|
|
– |
|
|
(114,628) |
|
(318,612) |
|
(65,139) |
|
(428,576) |
|
– |
|
(508,535) |
|
|
(1,489,078) |
Balance, December 31, 2014: |
$ |
– |
|
$ |
87,244 |
|
$ |
– |
|
$ |
81,253 |
|
$ |
– |
|
$ |
– |
|
$ |
206,321 |
|
$ |
– |
|
$ |
374,818 |
Our subsidiaries operate as a single operating
segment. The fair value of the goodwill is tested for impairment in the fourth quarter, after the annual forecasting process. Our
annual forecasting resulted in impairment losses of $1,489,078 and $-0- during the years ended December 31, 2014 and 2013 respectively.
We will perform our next earnings forecast during the fourth quarter of 2015, unless events occur or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its carrying amount. The fair value of our goodwill
was estimated using the expected present value of future cash flows.
Note 11 – Accrued Expenses
As of December 31, 2014 and 2013 accrued expenses
included the following:
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Accrued interest | |
$ | 63,697 | | |
$ | 28,628 | |
Accrued interest, related parties | |
| 127,770 | | |
| 28,741 | |
Accrued payroll and payroll taxes | |
| 23,769 | | |
| 16,610 | |
Other accrued expenses | |
| 560 | | |
| 60 | |
| |
$ | 215,796 | | |
$ | 74,039 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Line of Credit
Lines of credit consisted of the following
at December 31, 2014 and 2013, respectively:
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Line of credit of $50,000 from PNC bank, originating on February 16, 2012. The outstanding balance on the line of credit bears interest at an introductory rate of 4.25% for the first year, subject to renewal thereafter. Payments of $739 are due monthly. | |
$ | 47,898 | | |
$ | 49,507 | |
| |
| | | |
| | |
Line of credit of $20,000 from US Bank, originating on June 8, 2012. The outstanding balance on the line of credit bears interest at 9.75%, maturing on June 5, 2019. Payments of $500 are due monthly. | |
| 14,786 | | |
| 18,087 | |
| |
| | | |
| | |
Line of credit of $40,000 from Dell Business Credit available for the purchase of Dell products, such as computer and software equipment. The outstanding balance on the line of credit bears interest at a rate of 26.99%. Variable payments are due monthly. | |
| 5,305 | | |
| 5,637 | |
| |
| | | |
| | |
Line of credit of $25,000 from Bank of America. The outstanding balance on the line of credit bears interest at a rate of 4.25%. Variable payments are due monthly. A total of $24,500 was acquired with the acquisition of Telecorp. | |
| 12,250 | | |
| – | |
| |
| | | |
| | |
Total line of credit | |
| 80,239 | | |
| 73,232 | |
Less: current portion | |
| (80,239 | ) | |
| (73,232 | ) |
Line of credit, less current portion | |
$ | – | | |
$ | – | |
Note 13 – Capital Lease Obligations
Payable
The Company leases certain equipment under
agreements that are classified as capital leases as follows:
Lease #1 - Commenced on March 12, 2010 with
monthly lease payments of $2,455 and two months paid in advance, and the remaining payments paid over the following 43 months.
The term of this lease ended on March 12, 2014
Lease #2 – Commenced on January 12, 2012
with monthly lease payments of $480 over the next 48 months, and a bargain purchase price of $1 at the end of the lease.
The cost of equipment under capital leases
is included in the Balance Sheets as property and equipment and was $17,855 and $134,800 at December 31, 2014 and 2013, respectively.
Accumulated amortization of the leased equipment was $10,713 and $124,087 at December 31, 2014 and 2013, respectively. Amortization
of assets under capital leases is included in depreciation and amortization expense.
The future minimum lease payments required
under the capital leases and the present value of the net minimum lease payments as of December 31, 2014, are as follows:
Twelve Months |
| |
| |
Ending |
| |
| |
December 31, |
| |
Amount | |
2015 |
| |
| 5,890 | |
Total minimum payments | |
$ | 5,890 | |
Less: amount representing interest | |
| (766 | ) |
Present value of net minimum lease payments | |
| 5,124 | |
Less: Current maturities of capital lease obligations | |
| (5,124 | ) |
Long-term capital lease obligations | |
$ | 0 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Notes Payable, Related Parties
Notes payable, related parties consist of the
following at December 31, 2014 and 2013, respectively:
| |
2014 | | |
2013 | |
On various dates, the Company’s CEO advanced and repaid short term loans to the Company. A total of $77,879 and $209,380 was advanced and repaid during the years ending December 31, 2014 and 2013, respectively. | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
Originated July 28, 2014, an unsecured $37,500 promissory note payable, including a $7,500 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 15, 2014. The note also carried a liquidated damages fee of $1,000 upon default, which was amended and removed on September 19, 2014. | |
| 37,500 | | |
| – | |
| |
| | | |
| | |
Originated August 1, 2014, an unsecured $36,000 promissory note payable, including an $8,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 3, 2014. The note also carried a liquidated damages fee of $1,000 upon default, which was amended and removed on September 19, 2014. | |
| 36,000 | | |
| – | |
| |
| | | |
| | |
Originated August 21, 2014, an unsecured $12,500 promissory note payable, including a $2,500 loan origination fee, owed to L & F Lawn Service, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 21, 2014. The note also carried a liquidated damages fee of $1,000 upon default. | |
| 12,500 | | |
| – | |
| |
| | | |
| | |
Originated August 26, 2014, an unsecured $57,000 promissory note payable, including a $12,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default. | |
| 57,000 | | |
| – | |
| |
| | | |
| | |
Originated September 2, 2014, an unsecured $69,000 promissory note payable, including a $14,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default. | |
| 69,000 | | |
| – | |
| |
| | | |
| | |
Originated September 22, 2014, an unsecured $43,750 promissory note payable, including an $8,750 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default. | |
| 43,750 | | |
| – | |
| |
| | | |
| | |
Originated June 30, 2014, an unsecured $20,000 promissory note payable, including a $3,500 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 30, 2014. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014. | |
| 20,000 | | |
| – | |
| |
| | | |
| | |
Originated June 12, 2014, an unsecured $21,250 promissory note payable, including a $4,250 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on October 12, 2014. In addition, a loan origination fee consisting of 2,125,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014. | |
| 21,250 | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Originated June 3, 2014, an unsecured $5,000 promissory note payable, including a $1,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carried a 15% interest rate, matures on December 3, 2014. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014. | |
| 5,000 | | |
| – | |
| |
| | | |
| | |
Originated June 3, 2014, a $25,000 unsecured promissory note payable, including a $4,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carried a 15% interest rate, matures on December 3, 2014. The note also carries a liquidated damages fee of $1,000 upon default, which was amended and removed on September 19, 2014. | |
| 25,000 | | |
| – | |
| |
| | | |
| | |
Originated May 28, 2014, an unsecured $32,500 promissory note payable, including a $7,500 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on September 28, 2014. In addition, a loan origination fee consisting of 3,250,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014. | |
| 32,500 | | |
| – | |
| |
| | | |
| | |
Originated May 7, 2014, a $125,000 unsecured promissory note payable, including a $25,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 7, 2014. In addition, a loan origination fee consisting of 10,000,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $12,500 upon default, which was amended and removed on September 19, 2014. | |
| 125,000 | | |
| – | |
| |
| | | |
| | |
Originated April 24, 2014, a $150,000 unsecured promissory note payable, including a $30,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on June 26, 2014. In addition, a loan origination fee consisting of 10,000,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $10,000 upon default, which was amended and removed on September 19, 2014. | |
| 150,000 | | |
| – | |
| |
| | | |
| | |
Originated April 23, 2014, an unsecured $35,000 promissory note payable, including a $7,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 23, 2014. In addition, a loan origination fee consisting of 3,500,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014. | |
| 35,000 | | |
| – | |
| |
| | | |
| | |
Originated March 28, 2014, an unsecured $25,000 promissory note payable, including a $5,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 28, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock valued at $2,390 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014. | |
| 25,000 | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Originated March 28, 2014, an $18,750 unsecured promissory note payable, including a $3,750 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 28, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock valued at $1,594 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $7,000 upon default, which was amended and removed on September 19, 2014. | |
| 18,750 | | |
| – | |
| |
| | | |
| | |
Originated March 26, 2014, a $37,500 unsecured promissory note payable, including a $7,500 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 26, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock valued at $2,928 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $1,500 upon default, which was amended and removed on September 19, 2014. | |
| 37,500 | | |
| – | |
| |
| | | |
| | |
Originated March 26, 2014, an unsecured $25,000 promissory note payable, including a $5,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 26, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock valued at $2,928 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014. | |
| 25,000 | | |
| – | |
| |
| | | |
| | |
Originated March 7, 2014, an unsecured $30,000 promissory note payable, including a $6,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 7, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock valued at $2,912 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $1,500 upon default, which was amended and removed on September 19, 2014. | |
| 30,000 | | |
| – | |
| |
| | | |
| | |
Originated March 7, 2014, a $22,000 unsecured promissory note payable, including a $7,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 7, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock valued at $1,942 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $7,000 upon default, which was amended and removed on September 19, 2014. | |
| 22,000 | | |
| – | |
| |
| | | |
| | |
Originated February 22, 2014, a $100,000 unsecured promissory note payable, including a $25,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on April 30, 2014. In addition, a loan origination fee consisting of 15,000,000 shares of Convertible Series C Preferred Stock valued at $14,266 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $35,000 upon default, which was amended and removed on September 19, 2014. | |
| 100,000 | | |
| – | |
| |
| | | |
| | |
Originated February 21, 2014, an unsecured $75,000 promissory note payable, including a $15,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on April 30, 2014. In addition, a loan origination fee consisting of 10,000,000 shares of Convertible Series C Preferred Stock valued at $9,562 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $25,000 upon default, which was amended and removed on September 19, 2014. | |
| 75,000 | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Originated February 8, 2014, an unsecured $13,000 promissory note payable, including a $3,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 30, 2014. In addition, a loan origination fee consisting of 1,000,000 shares of Convertible Series C Preferred Stock valued at $1,193 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014. | |
| 13,000 | | |
| – | |
| |
| | | |
| | |
Originated February 7, 2014, a $26,000 unsecured promissory note payable, including a $6,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 30, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock valued at $2,385 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014. | |
| 26,000 | | |
| – | |
| |
| | | |
| | |
Originated January 15, 2014, an unsecured $43,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 20, 2014. In addition, a loan origination fee consisting of 5,000,000 shares of Convertible Series C Preferred Stock valued at $6,465 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014. | |
| 43,000 | | |
| – | |
| |
| | | |
| | |
Originated November 1, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on March 7, 2014. In addition, a loan origination fee of $25,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default. As disclosed in Note 10, pursuant to a settlement agreement, dated February 12, 2014, the $125,000 note, along with $8,264 of accrued interest, was sold and assigned to IBC Funds, LLC and was subsequently converted to stock as part of a court order on February 14, 2014 under Section 3(a)(10) of the Securities Act of 1933. | |
| – | | |
| 125,000 | |
| |
| | | |
| | |
Originated October 15, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014. | |
| 18,000 | | |
| 18,000 | |
| |
| | | |
| | |
Originated September 7, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on February 7, 2014. In addition, a loan origination fee of $10,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 6,000,000 shares of Series A Common Stock with a fair market value of $6,600 was granted as consideration for the loan on September 7, 2013 and the shares were subsequently issued on November 13, 2013. As disclosed in Note 10, pursuant to a settlement agreement, dated February 12, 2014, the $65,000 balance of this note, along with $7,528 of accrued interest, was sold and assigned to IBC Funds, LLC and was subsequently converted to stock as part of a court order on February 14, 2014 under Section 3(a)(10) of the Securities Act of 1933. | |
| – | | |
| 65,000 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Originated August 20, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 20, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $3,250 was granted as consideration for the loan on August 20, 2013 and the shares were subsequently issued on November 13, 2013. Currently in default. | |
| 25,000 | | |
| 25,000 | |
| |
| | | |
| | |
Originated August 12, 2013, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on February 15, 2014. In addition, a loan origination fee of $6,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 5,000,000 shares of Series A Common Stock with a fair market value of $7,000 was issued as consideration for the loan on August 12, 2013. The note, consisting of $51,000 of principal, $4,933 of accrued interest and $2,500 of liquidated damages, was subsequently sold and assigned to a third party and exchanged for a convertible note on April 2, 2014 and the $58,433 was converted in exchange for 584,333,745 shares of common stock in complete satisfaction of the debt. | |
| – | | |
| 51,000 | |
| |
| | | |
| | |
Originated July 19, 2013, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was issued as consideration for the loan on July 19, 2013. The note, consisting of $23,000 of principal and $1,153 of accrued interest, was subsequently sold and assigned to a third party and exchanged for a convertible note on February 4, 2014. | |
| – | | |
| 23,000 | |
| |
| | | |
| | |
Originated August 27, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 27, 2014. In addition, a loan origination fee of $2,500 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 1,250,000 shares of Series A Common Stock with a fair market value of $1,500 was granted as consideration for the loan on August 27, 2013 and the shares were subsequently issued on November 13, 2013. As disclosed in Note 10, pursuant to a settlement agreement, dated February 12, 2014, the $12,500 note, along with $3,519 of accrued interest, was sold and assigned to IBC Funds, LLC and was subsequently converted to stock as part of a court order on February 14, 2014 under Section 3(a)(10) of the Securities Act of 1933. | |
| – | | |
| 12,500 | |
| |
| | | |
| | |
Originated August 7, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 20, 2014. In addition, a loan origination fee of $4,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was granted as consideration for the loan on August 7, 2013 and the shares were subsequently issued on November 13, 2013. Currently in default. | |
| 24,000 | | |
| 24,000 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Originated August 2, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 17, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 3,000,000 shares of Series A Common Stock with a fair market value of $5,100 was issued as consideration for the loan on August 2, 2013. Currently in default. | |
| 32,000 | | |
| 32,000 | |
| |
| | | |
| | |
Originated July 31, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 3,000,000 shares of Series A Common Stock with a fair market value of $4,200 was issued as consideration for the loan on July 31, 2013. The note, consisting of $32,000 of principal and $5,000 of accrued interest, was subsequently sold and assigned to a third party and exchanged for a convertible note on February 19, 2014. | |
| – | | |
| 32,000 | |
| |
| | | |
| | |
Originated June 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $2,000 was issued as consideration for the loan on June 12, 2013, and is being amortized on a straight line basis over the life of the loan. The note, consisting of $10,000 of principal and $338 of accrued interest, was subsequently sold and assigned to a third party and exchanged for a convertible note on February 4, 2014. | |
| – | | |
| 10,000 | |
| |
| | | |
| | |
Originated April 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 12, 2015. In addition, a loan origination fee of $7,000 was issued as consideration for the loan on April 12, 2013, and is being amortized on a straight line basis over the life of the loan. As disclosed in Note 10, pursuant to a settlement agreement, dated February 12, 2014, the $57,000 note, along with $9,261 of accrued interest, was sold and assigned to IBC Funds, LLC and was subsequently converted to stock as part of a court order on February 14, 2014 under Section 3(a)(10) of the Securities Act of 1933. | |
| – | | |
| 57,000 | |
| |
| | | |
| | |
Originated October 9, 2012, unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matures on July 15, 2013. In addition, a loan origination fee, consisting of 144,928 shares of Series A Common Stock with a fair market value of $884 was issued as consideration for the loan on October 9, 2012. Currently in default. | |
| 2,868 | | |
| 2,000 | |
| |
| | | |
| | |
Unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matured on July 31, 2007. Principal of $5,000 was repaid during the first quarter of 2014. Currently in default. | |
| – | | |
| 5,868 | |
| |
| | | |
| | |
Originated August 11, 2014, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a zero percent (0%) interest rate, matures on December 1, 2014. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was issued as consideration for the loan on July 19, 2013.
| |
| 3,705 | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Originated October 20, 2014, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on May 20, 2014. In addition, a loan origination fee of $1,500 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. | |
| 5,000 | | |
| | |
| |
| | | |
| | |
Originated December 17, 2014, an unsecured $9,000 promissory note payable, including a $2,500 loan origination fee, owed to L & F Lawn Service, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 17, 2015. | |
| 9,000 | | |
| | |
| |
| | | |
| | |
Originated November 9, 2014, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on June 9, 2015. In addition, a loan origination fee of $12,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. | |
| 60,000 | | |
| | |
Total notes payable, related parties | |
| 1,221,323 | | |
| 482,368 | |
Less: current portion | |
| (1,221,323 | ) | |
| (397,368 | ) |
Notes payable, related parties, less current portion | |
$ | – | | |
$ | 85,000 | |
The Company recorded interest expense on notes
payable to related parties in the amounts of $138,636 and $127,770 during the years ended December 31, 2014 and 2013, respectively.
The Company recorded accrued interest of $127,770 and $28,741 during the years ended December 31, 2014 and 2013, respectively.
Note 15 – Convertible Debts
Convertible debts consist of the following
at December 31, 2014 and 2013, respectively:
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Originated April 2, 2014, an unsecured $51,000 convertible promissory note, carried a 15% interest rate, matured on August 1, 2014, (“First Vivienne Passley Note”) owed to Vivienne Passley, a related party. The convertible promissory note was issued in exchange for a promissory note originally issued on August 12, 2013 to the same debt holder, which did not carry conversion terms. The principal and accrued interest was convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.0001 per share. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The debt modification resulted in a loss on debt modifications, related party of $172,864. The assigned principal of $51,000, interest of $4,933 and liquidated damages incurred prior to assignment of $2,500 was subsequently converted to a total of 584,333,745 shares of common stock over various dates from April 2, 2014 to June 17, 2014 in complete satisfaction of the debt. | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
Originated February 19, 2014, an unsecured $37,700 convertible promissory note, carries a 12% interest rate, matures on February 17, 2015, (“Third Magna Group Note”) owed to Magna Group, LLC, consisting of a promissory note acquired and assigned from Star Financial Corporation, a related party, consisting of $32,000 of principal and $5,700 of accrued interest. The acquired promissory note did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was subsequently converted to a total of 377,000,000 shares of common stock over various dates from March 10, 2014 to March 19, 2014 in complete satisfaction of the debt. | |
| – | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Originated February 4, 2014, an unsecured $35,491 convertible promissory note, carries a 12% interest rate, matures on February 4, 2015, (“Second Magna Group Note”) owed to Magna Group, LLC, consisting of two notes acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $33,000 of principal and $2,491 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was subsequently converted to a total of 236,606,400 shares of common stock over various dates from February 13, 2014 to February 27, 2014 in complete satisfaction of the debt. | |
| – | | |
| – | |
| |
| | | |
| | |
Unsecured $33,000 convertible promissory note originated on November 13, 2013, including an Original Issue Discount (“OID”) of $3,000, carries a 12% interest rate (“Second JMJ Note”), matures on November 12, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The unamortized OID is $2,604 at December 31, 2013. On July 11, 2014, the Company and JMJ Financial amended this note. The amendment specifies that due to the previously delinquent SEC filings, any future borrowings shall only be made by mutual agreement of both the borrower and lender. | |
| 16,125 | | |
| 33,000 | |
| |
| | | |
| | |
Unsecured $35,028 convertible promissory note originated on December 31, 2013, carries a 12% interest rate (“First Magna Group Note”) owed to Magna Group, LLC. Two notes totaling $33,000 of principal and $1,028 of accrued interest were acquired from and assigned by Star Financial on December 31, 2013 prior to being exchanged for the convertible note, including $1,000 of loan origination costs. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,028 was subsequently converted to a total of 216,806,667 shares of common stock over various dates from January 7, 2014 to February 6, 2014 in complete satisfaction of the debt. | |
| – | | |
| 35,028 | |
| |
| | | |
| | |
Unsecured $56,900 convertible promissory note, including an Original Issue Discount (“OID”) of $6,900, carries an 8% interest rate (“First St. George Note”), matures on May 30, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted $15,000 of outstanding principal into 125,000,000 shares pursuant to debt conversion on March 7, 2014.The unamortized OID is $3,791 at December 31, 2013. During the 2nd quarter of 2014, a total of $77,375 of principal and another $7,512 of accrued interest was added to the debt due to default provisions, including $25,000 of principal due to a Late Clearing Adjustment penalty. Currently in default. | |
| 44,549 | | |
| 56,900 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Unsecured $42,500 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on June 20, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted $41,000 of outstanding principal into 341,666,667 shares pursuant to debt conversion on March 25, 2014, and $2,750, consisting of $1,500 of principal and $1,250 of interest was repaid in cash during the second quarter of 2014. | |
| – | | |
| 42,500 | |
| |
| | | |
| | |
Unsecured $53,000 convertible promissory note carries an 8% interest rate (“Seventh Asher Note”), matures on May 21, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted $27,000 of outstanding principal into 150,000,000 shares pursuant to debt conversion on March 3, 2014, and $28,120, consisting of $26,000 of principal and $2,120 of accrued interest into 200,857,143 shares pursuant to debt conversion on March 5, 2014 in complete satisfaction of the debt. | |
| – | | |
| 53,000 | |
| |
| | | |
| | |
Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into 40,000,000 shares pursuant to debt conversion on August 7, 2013, $18,750 into 125,000,000 shares pursuant to debt conversion on April 7, 2014, $20,000 into 200,000,000 shares pursuant to debt conversion on May 3, 2014, and $15,000, consisting of $7,699 of principal and $7,301 of interest into 150,000,000 shares pursuant to the final debt conversion on May 22, 2014. | |
| – | | |
| 46,449 | |
| |
| | | |
| | |
Unsecured $43,000 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on September 5, 2015. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest trading bid prices of the Company’s common stock for the thirty (30) trading days prior to the conversion date. The note carries a twenty two percent (22%) interest rate in the event of default. | |
| 43,000 | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Unsecured $33,000 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on July 22, 2015. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest trading bid prices of the Company’s common stock for the thirty (30) trading days prior to the conversion date. The note carries a twenty two percent (22%) interest rate in the event of default. | |
| 33,000 | | |
| – | |
| |
| | | |
| | |
Originated November 6, 2014, an unsecured $33,600 convertible promissory note, carries a 8% interest rate and matures on November 5, 2015 owed to LG Capital. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s issued and outstanding shares. | |
| 33,600 | | |
| – | |
| |
| | | |
| | |
Originated November 6, 2014, an unsecured $50,238.63 convertible promissory note, carries a 8% interest rate, matures on November 6, 2015, (“LG Note”) owed to LG Capital, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $43,000 of principal and $7,238.63 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s issued and outstanding shares. | |
| 50,239 | | |
| – | |
Total convertible debts | |
| 220,513 | | |
| 266,877 | |
Less: unamortized discount on beneficial conversion feature | |
| (131,774 | ) | |
| (103,188 | ) |
Less: unamortized OID | |
| – | | |
| (6,395 | ) |
Convertible debts | |
| 88,739 | | |
| 157,294 | |
Less: current maturities of convertible debts | |
| (88,739 | ) | |
| (115,128 | ) |
Long term convertible debts | |
$ | – | | |
$ | 42,166 | |
The Company recognized interest expense in
the amount of $33,393 and $28,628 for the years ended December 31, 2014 and 2013, respectively related to convertible debts. The
Company recorded accrued interest of $3,573 and $28,628 during the years ended December 31, 2014 and 2013, respectively.
In addition, the Company recognized and measured
the embedded beneficial conversion feature present in the convertible debts by allocating a portion of the proceeds equal to the
intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment
date using the effective conversion price of the convertible debt. This intrinsic value is limited to the portion of the proceeds
allocated to the convertible debt.
The aforementioned accounting treatment resulted
in a total debt discount equal to $131,774 and $195,652 during the years ended December 31, 2014 and 2013, respectively. The discount
is amortized on a straight line basis from the dates of issuance until the stated redemption date of the debts, as noted above.
The convertible notes that created the beneficial
conversion feature carry default provisions that place a “maximum share amount” on the note holders that can be owned
as a result of the conversions to common stock by the note holders is 9.99% and 4.99%, respectively, of the issued and outstanding
shares of Epazz.
During the years ended December 31, 2014 and
2013, the Company recorded debt amortization expense in the amount of $518,465 and $237,065, respectively, attributed to the aforementioned
debt discount, including $6,916 of amortization on the $17,300 OID during the year ended December 31, 2013.
During year ended December 31, 2014, the Company
issued a total of 43,448 shares pursuant to debt conversions in settlement of $343,540, consisting of $336,094 of outstanding principal
and $7,446 of unpaid interest, including 22,000 shares pursuant to debt conversion in settlement of $144,400 of outstanding principal
owed to a related party (“Star Convertible Note”) and 4,686 shares pursuant to debt conversion in settlement of $14,838
of outstanding principal owed to a related party (“GG Mars Capital Convertible Note”). The principal and interest was
converted in accordance with the conversion terms, therefore no gain or loss has been recognized. In addition, on May 27, 2013,
the Company modified a related party debt and issued 1,424 shares of Class A Common Stock in settlement of $14,239 of related party
debt owed to Vivienne Passley, which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest. The total fair
value of the common stock was $28,479 based on the closing price of the Company’s common stock on the date of grant, resulting
in the recognition of a $14,240 loss on debt settlement.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Asher Enterprises,
Inc. Convertible Note
On August 19, 2013,
we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $53,000. The Seventh Asher Note had a maturity date of May 21, 2014, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the Seventh Asher Note were restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Seventh Asher Note was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Seventh Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0006
below the market price on August 19, 2013 of $0.0014 provided a value of $39,021, of which $-0- and $19,014 was amortized during
the years ended December 31, 2014 and 2013, respectively.
On September 18, 2013,
we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $42,500. The Eighth Asher Note had a maturity date of June 20, 2014, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the Eighth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Eighth Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Eighth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0004
below the market price on September 18, 2013 of $0.0010 provided a value of $27,210, of which $-0- and $10,290 was amortized during
the years ended December 31, 2014 and 2013, respectively.
On October 20, 2014,
we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $43,000. The Seventh Asher Note had a maturity date of July 22, 2015, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the Ninth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Ninth Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated the Nine Asher Note and determined that the
shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute
a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur
at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial
conversion feature discount resulting from the conversion price of $0.03330 below the market price on October 20, 2014 of $0.20
provided a value of $43,000, of which $11,258 and $-0- was amortized during the years ended December 31, 2014 and 2013, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On December 3, 2014,
we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $33,000. The Tenth Asher Note had a maturity date of September 5, 2015, and
was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.
The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%).
“Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading
Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean
$0.00005 per share. The shares of common stock issuable upon conversion of the Tenth Asher Note were restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Tenth Asher Note was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Tenth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.005 below
the market price on December 3, 2014 of $0.03 provided a value of $33,000, of which $3,348 and $-0- was amortized during the years
ended December 31, 2014 and 2013, respectively.
LG Capital, Inc.
Convertible Notes
On November 6, 2014,
we entered into a Securities Purchase Agreement with LG Capital, Inc., pursuant to which we sold to LG Capital an 8% Convertible
Promissory Note in the original principal amount of $33,600. The First LG Capital Note had a maturity date of November 6, 2015,
and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.
The “Variable Conversion Price” shall mean 65% multiplied by the Market Price (representing a discount rate of 35%).
“Market Price” means the average of the lowest two (2) Trading Prices for the Common Stock during the twelve (12) Trading
Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean
$0.00005 per share. The shares of common stock issuable upon conversion of the First LG Capital were restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First LG Capital was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the First LG Capital and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.125 below
the market price on November 6, 2014 of $0.0817 provided a value of $33,600, of which $5,063 and $-0- was amortized during the
years ended December 31, 2014 and 2013, respectively.
On October 31, 2014,
we entered into a Securities Purchase Agreement with LG Capital, Inc., pursuant to which we sold to LG Capital an 8% Convertible
Promissory Note in the original principal amount of $50,239. The Second LG Capital Note had a maturity date of October 31, 2015,
and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.
The “Variable Conversion Price” shall mean 65% multiplied by the Market Price (representing a discount rate of 35%).
“Market Price” means the average of the lowest two (2) Trading Prices for the Common Stock during the twelve (12) Trading
Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean
$0.00005 per share. The shares of common stock issuable upon conversion of the Second LG Capital were restricted securities as
defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second LG Capital was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Second LG Capital and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.21 below
the market price on October 31, 2014 of $0.1667 provided a value of $50,239, of which $8,396 and $-0- was amortized during the
years ended December 31, 2014 and 2013, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
GG Mars Capital, Inc. Convertible Note,
Related Party
On August 20, 2013,
we entered into a Convertible Promissory Note Agreement with GG Mars Capital, Inc. (“GG Mars”), a company owned by
our CEO’s family member, pursuant to which we sold to GG Mars an 11% Convertible Promissory Note in the original principal
amount of $14,838. The note was acquired from and assigned by another independent lender on August 15, 2013 prior to being exchanged
for the convertible note. The First GG Mars Note was convertible into shares of common stock at the discretion of the note holder
at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for
the one hundred and twenty (120) days prior to the conversion date, or $0.0001 per share, whichever is greater. The shares of common
stock issuable upon conversion of the First GG Mars Note were restricted securities as defined in Rule 144 promulgated under the
Securities Act of 1933. The issuance of the First GG Mars Note was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The debt holder was limited to owning 4.99% of the Company’s
issued and outstanding shares. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there
was no solicitation.
The Company evaluated
the First GG Mars Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.001 below
the market price on August 20, 2013 of $0.0013 provided a value of $14,838, of which $-0- and $14,838 was amortized during the
years ended December 31, 2014 and 2013, respectively.
Star Financial, Inc. Convertible Note, Related
Party
On July 2, 2012, we
modified a previously outstanding non-convertible debt of $342,321, consisting of $296,103 of principal and $46,218 of accrued
interest in exchange for a Convertible Promissory Note with Star Financial Corporation (“Star”), a company owned by
our CEO’s family member, pursuant to which we issued to Star a 10% Convertible Promissory Note in the original principal
amount of $440,849. The modification resulted in a loss on debt modification of $98,528. The note was again modified on March 5, 2013,
resulting in a loss on debt modification of $81,792. The Star Convertible Note has a maturity date of July 2, 2017, and is convertible
into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable
Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price”
means the average of the five (5) Closing Prices for the Common Stock during the five (5) Trading Day period ending on the latest
complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00075 per share. The shares
of common stock issuable upon conversion of the Star Convertible Note will be restricted securities as defined in Rule 144 promulgated
under the Securities Act of 1933. The issuance of the Star Convertible Note was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated
investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Star Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.00141 below the market price on July 2, 2012 of $0.012 provided a value of $112,382, of which $5,653 and $39,445 was amortized
during the years ended December 31, 2014 and 2013, respectively.
JMJ Financial, Inc. Convertible Note
On November 13, 2013,
we drew additional funds on the June 12, 2013 Securities Purchase Agreement with JMJ Financial, Inc., (“JMJ”) pursuant
to which we sold to JMJ another 12% Convertible Promissory Note in the original principal amount of $33,000. The Second JMJ Note
has a maturity date of November 12, 2014, and was convertible into our common stock at the greater of (i) the Variable Conversion
Price and (ii) the Fixed Conversion Price, not less than $0.00009 per share. The “Variable Conversion Price” shall
mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the lowest Trading
Price for the Common Stock during the twenty five (25) Trading Day period ending on the latest complete Trading Day prior to the
Conversion Date. “Fixed Conversion Price” shall mean $0.00009 per share. The shares of common stock issuable upon conversion
of the Second JMJ Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance
of the Second JMJ Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation
D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was
no solicitation.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluated
the Second JMJ Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00024
was above the market price on November 13, 2013 and did not result in a beneficial conversion feature.
St. George Investments, Inc. Convertible
Note
On September 5, 2013,
we entered into a Securities Purchase Agreement with St. George Investments, Inc., (“First St. George Note”) pursuant
to which we sold to St. George an 8% Convertible Promissory Note in the original principal amount of $56,900. The First St. George
Note has a maturity date of May 30, 2014, and is convertible into our common stock at the greater of (i) the Variable Conversion
Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market
Price (representing a discount rate of 40%). “Market Price” means the average of the two lowest Closing Bid Prices
for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.
“Fixed Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the
First St. George Note are restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance
of the First St. George Note is exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of
Regulation D promulgated thereunder. The purchaser is an accredited and sophisticated investor, familiar with our operations, and
there was no solicitation.
The Company evaluated
the First St. George Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.0005 below the market price on September 5, 2013 of $0.0012 provided a value of $46,555, of which $25,580 and $20,975 was
amortized during the years ended December 31, 2014 and 2013, respectively.
Magna Group, LLC Convertible Note
On December 31, 2013,
we issued to Magna Group, LLC (“First Magna Group Note”) a 12% Convertible Promissory Note in the original principal
amount of $35,028. The note was issued in exchange for two notes totaling $33,000 of principal and $1,028 of accrued interest,
along with a $1,000 origination fee, that were acquired from, and assigned by, Star Financial on December 31, 2013. The First
Magna Group Note has a maturity date of December 31, 2014, and is convertible into our common stock at the greater of (i) the
Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied
by the Market Price (representing a discount rate of 50%). “Market Price” means the lowest Trading Price for the Common
Stock during the five (5) day period prior to delivery of the conversion notice. “Fixed Conversion Price” shall mean
$0.00004 per share. The shares of common stock issuable upon conversion of the First Magna Group Note are restricted securities
as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Magna Group Note is exempt from
the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser
is an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the First Magna Group Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.0003 below the market price on December 31, 2013 of $0.0006 provided a value of $35,028, of which $35,028 and $-0- was amortized
during the years ended December 31, 2014 and 2013, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 – Promissory Notes
Promissory notes consist of the following at
December 31, 2014 and 2013, respectively:
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Can Capital Loan – K9 Bytes: On February 20, 2014, the Company received a loan of $22,283 from WebBank, c/o CAN Capital Assets Servicing, Inc (“CAN Capital”) bearing an effective interest rate of 58.7%, consisting of 308 daily weekday payments of $130, maturing on December 25, 2014. The loan is collateralized with K9 Bytes’ receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. On July 10, 2014, we amended this loan agreement to increase the loan balance to $46,368, consisting of additional proceeds of $18,055, a rolled over balance of $15,545 to be paid over the restarted one year term of the loan via daily payments of $141. | |
| 29,085 | | |
| – | |
| |
| | | |
| | |
Can Capital Loan – MS Health: On June 24, 2013, the Company received a loan of $15,000 from WebBank, c/o NewLogic Business Loans, Inc., (“NewLogic”), which has been renamed to CAN Capital Assets Servicing, Inc (“CAN Capital”) bearing an effective interest rate of 63.9%, consisting of 176 daily weekday payments of $106, maturing on February 19, 2014. The loan is collateralized with MS Health’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| | | |
| | |
| |
| | | |
| | |
On January 7, 2014, we amended this loan agreement to increase the loan balance to $22,025, consisting of additional proceeds of $18,323, a rolled over loan balance of $3,702 to be paid over the restarted one year term of the loan via daily payments of $113. On June 30 , 2014, we amend this loan agreement to increase the loan balance to $34,706, consisting of additional proceeds of $10,132, a rolled over balance of 15,767.63 to be paid over the restarted one year term of the loan via daily payments of $131. | |
| 34,721 | | |
| 4,202 | |
|
|
|
|
|
|
|
|
|
On July 30, the Company received a loan of $100,000 from CIT Finance LLC. (“CIT Loan”) as a partial financing to purchase certain assets of Strand, Inc. for a total of $185,000. The loan bears interest at an effective rate of 5.13%, consisting of monthly payments of $3,346, maturing on February 25, 2017. The loan is collateralized with Strand’s assets. |
|
|
79,926 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
On July 31, 2014, the Company issued an unsecured $85,000 seller financed note payable as partial payment on an asset purchase (“Strand Note”), which bears interest at 6% per annum until the maturity date of July 31, 2015, and provides for equal monthly principal and interest payments of $2,586 commencing on August 31, 2014. The Strand Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity at July 15, 2015. In the event we default on the July 31, 2015 balloon payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever is greater. |
|
|
69,484 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
On August 25, 2014, the Company received a loan of $75,000 from EBF Partners, LLC. (“EBF Loan”). The loan bears interest at an effective rate of 15%, consisting of 100 daily weekday payments of $937, maturing on February 26, 2015. The loan is collateralized with the accounts receivable of Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. |
|
|
- |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
On June 6, 2014, the Company received a loan of $42,000 from Global Merchant Cash, Inc. (“GMC Loan”). The loan bears interest at an effective rate of 187%, consisting of 100 daily weekday payments of $599, maturing on November 3, 2014. The loan is collateralized with the accounts receivable of Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. The loan was refinanced in October 16, 2014. |
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
On May 9, 2014, the Company issued an unsecured $210,000 seller financed note payable as partial payment on an asset purchase (“Jadian Note”), which bears interest at 6% per annum until the maturity date of May 9, 2017, and provides for equal monthly principal and interest payments of $6,389 commencing on June 1, 2014. The Jadian Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity at May 9, 2017. The interest rate shall be 8% per annum with an additional 5% late payment fee upon default. |
|
|
201,035 |
|
|
|
– |
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
On April 30, 2014, the Company purchased furniture and fixtures and computer equipment in the total amount of $41,300 from IKEA, which was partially financed with proceeds of $37,788 pursuant to an equipment financing agreement with Financial Pacific Leasing bearing an effective interest rate of 26.78%, consisting of 36 monthly payments of $1,488; maturing on March 15, 2017. The loan is collateralized with the furniture and fixtures and computer equipment, along with a personal guarantee by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| 43,226 | | |
| – | |
| |
| | | |
| | |
On Deck Capital Loan – Telecorp: On April 4, 2013, the Company received a loan of $65,000 from On Deck Capital, Inc., (“On Deck”), bearing an effective interest rate of 42.74%, consisting of 377 daily weekday payments of $234, maturing on September 11, 2015. The loan is collateralized with Telecorp’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| 38,226 | | |
| – | |
| |
| | | |
| | |
On April 2, 2014, the Company received a loan of $25,000 from BSB Leasing, Inc. (“BSB Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 25%, consisting of monthly payments of $944, maturing on February 25, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| 27,376 | | |
| – | |
| |
| | | |
| | |
On March 20, 2014, the Company received a loan of $25,000 from BMT Leasing, Inc. (“BMT Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 21%, consisting of monthly payments of $910, maturing on March 20, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| 22,749 | | |
| – | |
| |
| | | |
| | |
On March 25, 2014, the Company received a loan of $25,000 from Navitas Leasing, Inc. (“Navitas Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 21%, consisting of monthly payments of $907, maturing on April 1, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| 24,475 | | |
| – | |
| |
| | | |
| | |
On February 28, 2014, the Company provided Troy Holdings with a Promissory Note in the amount of $120,000 (the “Telecorp Note”), which was adjusted down to $102,000 for excess liabilities acquired during the acquisition of Telecorp Products, Inc. The Note provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum. The loan was paid off August 28, 2014 | |
| – | | |
| – | |
| |
| | | |
| | |
On June 11, 2014, DeskFlex refinanced the Accion #2 promissory note and entered into a $15,207 promissory note, bearing interest at 10.25% (“Accion #3”). The promissory note is payable in monthly principal and interest installments of $1,339 per month, maturing on June 20, 2015 (the “Maturity Date”). | |
| 6,508 | | |
| – | |
| |
| | | |
| | |
Can Capital Loan – Epazz: On November 4, 2013, the Company received net proceeds of $75,381, and a direct payoff of $36,619 on the Rapid Advance Loan listed below, on a loan of $112,000 from CAN Capital Assets Servicing, Inc., (“CAN Capital #4”) bearing an effective interest rate of 53.1%, consisting of 370 daily weekday payments of $552, maturing on November 13, 2014. The loan is collateralized with Epazz’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. On April 23, 2014, we amended this loan agreement to increase the loan balance to $150,000, consisting of additional proceeds of $71,685, and a rolled over loan balance of $78,315, to be paid over the restarted term of the loan via 432 daily weekday payments of $648, maturing on July 7, 2015. | |
| 84,852 | | |
| 98,984 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
On November 20, 2013, DeskFlex entered into a $10,550 demand promissory note bearing interest at 10.25% (“Accion #2”). The promissory note is payable in monthly installments of $1,223 per month, maturing on August 20, 2014 (the “Maturity Date”). | |
| – | | |
| 9,417 | |
| |
| | | |
| | |
On October 24, 2013, the Company purchased licenses to develop content management software in the total amount of $51,250 from Igenti, Inc., of which $51,250 was financed pursuant to an equipment financing agreement with Baytree National Bank & Trust Company bearing an effective interest rate of 13.235%, consisting of 36 monthly payments of $1,719; maturing on October 23, 2016. The loan is collateralized with the data management software. Igenti subsequently paid a total of $53,500, including $2,250 of penalties, to the Company for future payment for the development of the content management software. Given the nature and status of the software development, no equipment costs have been capitalized. | |
| 37,808 | | |
| 47,321 | |
| |
| | | |
| | |
On October 10, 2013, the Company purchased licenses to develop content management software in the total amount of $34,800 from Igenti, Inc., of which $34,800 was financed pursuant to an equipment financing agreement with Financial Pacific Leasing bearing an effective interest rate of 31.625%, consisting of 36 monthly payments of $1,438; maturing on October 9, 2016. The loan is collateralized with the content management software. Igenti retained a total of $1,300 of financing fees and paid the remaining proceeds of $33,500 to the Company for future payment for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized. | |
| 31,925 | | |
| 32,025 | |
| |
| | | |
| | |
On May 1, 2013, the Company purchased licenses to develop data management software in the total amount of $51,250 from Igenti, Inc., bearing an effective interest rate of 11%, consisting of 36 monthly payments of $1,674, maturing on April 30, 2016. The loan is collateralized with the data management software. Igenti retained a total of $4,615 of financing fees and paid the remaining proceeds of $46,615 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized. | |
| 21,677 | | |
| 41,167 | |
| |
| | | |
| | |
On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed pursuant to an equipment financing agreement with Baytree National Bank & Trust Company on March 7, 2013 bearing an effective interest rate of 11.48%, consisting of 36 monthly payments of $1,674; maturing on March 6, 2016. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized. | |
| 24,888 | | |
| 38,361 | |
| |
| | | |
| | |
On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed with an equipment finance loan from Summit Funding Group, Inc. equipment with a three year loan term consisting of monthly loan payments of $1,828, with $2,078 paid at signing, maturing on February 21, 2016. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized. | |
| 31,074 | | |
| 40,108 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
On August 10, 2012, the Company purchased $13,870 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 31.55%, along with monthly principal and interest payments of $585. The loan is collateralized with the purchased equipment. Matures on August 9, 2015. | |
| 5,267 | | |
| 10,228 | |
| |
| | | |
| | |
On April 1, 2012, the Company purchased $129,747 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 8.3%, along with monthly principal and interest payments of $4,078. The loan is collateralized with the purchased equipment. Matures on April 1, 2015. | |
| 44,165 | | |
| 78,603 | |
| |
| | | |
| | |
Consideration for the MS Health acquisition included partial proceeds obtained from a $360,800 Small Business Association (“SBA”) loan, bearing interest at fixed and variable rates, maturing on March 27, 2022. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company. | |
| 283,868 | | |
| 312,095 | |
| |
| | | |
| | |
Consideration for the MS Health acquisition included an unsecured $100,000 seller financed note payable (“MSHSC Note”), bearing interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and full payment of all amounts due after five (5) years, maturing March 27, 2022. Pursuant to an amendment to a consulting agreement with the seller on March 23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during the year ended December 31, 2012. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC. | |
| 99,441 | | |
| 94,000 | |
| |
| | | |
| | |
Pursuant to an asset purchase agreement entered into on October 26, 2011, the Company granted K9 Bytes, Inc., a Florida corporation, a subordinated secured $30,750 promissory note carrying a 6% interest rate, payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the promissory note ($23,017, assuming no additional payments other than those scheduled) is due. The promissory note is secured by a secondary lien on all of the assets of Epazz’s subsidiary, K9 Bytes, Inc., an Illinois corporation formed to house the purchased assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. On August 27, 2014, The Company agreed to a payoff release with Candamo, LLC for $941. | |
| – | | |
| 2,510 | |
| |
| | | |
| | |
Unsecured $50,000 promissory note originated on September 15, 2010 between IntelliSys and Paul Prahl, payable in monthly installments of $970 carries a 6% interest rate, maturing on September 18, 2015. The Company also agreed to provide Mr. Prahl earn-out rights, which provide that he will receive up to a maximum of $13,350 per year for the three calendar years following the Closing (with the first such calendar year beginning on January 1, 2011), based on the revenues generated by IntelliSys during such applicable year, whereas $6,675 is earned if revenues are between $350,000 and $380,000, $10,012 is earned if revenues are between $380,000 and $395,000, or $13,350 is earned if revenues are greater than $395,000 during each relevant year. | |
| 8,454 | | |
| 8,186 | |
| |
| | | |
| | |
Unsecured term loan between Epazz and Bank of America, originating on June 15, 2011 bearing interest at 9.5% matures on June 17, 2016. Payments of $1,559 are due monthly. | |
| 39,471 | | |
| 60,573 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Unsecured promissory note between Epazz and Newtek Finance for $185,000 originating on September 30, 2010 bearing interest at 6% matures on September 30, 2020. Payments of $2,054 are due monthly. | |
| 120,062 | | |
| 137,087 | |
| |
| | | |
| | |
The Company raised funds paid pursuant to an asset purchase agreement with K9 Bytes, Inc., a Florida corporation, on October 26, 2011, through a $235,000 Small Business Association (“SBA”) loan from a third party lender (the “Third Party Lender” and the “SBA Loan”). The SBA Loan has a term of ten (10) years; maturing on October 26, 2021, bearing interest at the prime rate plus 2.75% per annum, adjusted quarterly; is payable in monthly installments (beginning in December 2011) of $2,609 per month; is guaranteed by the Company and personally guaranteed by Shaun Passley, Ph.D., the Company’s Chief Executive Officer; and is secured by all of the assets of K9 Bytes, Inc., the Illinois corporation and wholly-owned subsidiary formed to house the acquired assets and the Company, 100% of the outstanding capital of the K9 subsidiary, and a life insurance policy on Dr. Passley’s life in the amount of $235,000. A total of approximately $10,000 of the amount borrowed under the SBA Loan was used to pay closing fees in connection with the loan, $169,250 was used to pay K9 Bytes the cash amount due pursuant to the terms of the Purchase Contract and the remainder of such loan amount was made available for working capital for the Company and the wholly-owned subsidiary, K9 Bytes, Inc. | |
| 176,702 | | |
| 197,062 | |
| |
| | | |
| | |
WLCC (Lendini) - Jadian: On December 15, 2014, the Company received a loan of $34,500 from Wakpamni Lake Community Corp, (“Lendini”), bearing an effective interest rate of 15.97%, consisting of 118 daily weekday payments of $293, maturing on September 11, 2015. The loan is collateralized with Jadian’s accounts receivable. | |
| 31,273 | | |
| – | |
| |
| | | |
| | |
Everest Business Funding (EBF Partners) - Epazz: On December 18, 2014, the Company received a loan of $34,500 from EBF Parters LLC, , bearing an effective interest rate of 15%, consisting of 120 daily weekday payments of $999, maturing on June 3, 2015. The loan is collateralized with Epazz accounts receivable. | |
| 112,925 | | |
| – | |
| |
| | | |
| | |
Knight Capital Funding II, LLC - Deskflex: On December 18, 2014, the Company received a loan of $35,830 from EBF Parters LLC, , bearing an effective interest rate of 12.5%, consisting of 143 daily weekday payments of $251, maturing on June 3, 2015. The loan is collateralized with Epazz accounts receivable. | |
| 22,049 | | |
| – | |
| |
| | | |
| | |
Direct Credit Funding Inc - Telecorp On December 26, 2014, the Company purchased $35,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 15%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment. | |
| 32,579 | | |
| – | |
| |
| | | |
| | |
Direct Credit Funding Inc - Telecorp On December 18, 2014, the Company purchased $45,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 17%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment. | |
| 43,101 | | |
| – | |
| |
| | | |
| | |
Maquerie Equipment Finance – Interaction Information Technology Inc On December 19, 2014, the Company purchased $50,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 16%, along with monthly principal and interest payments of $1,703. The loan is collateralized with the purchased equipment. | |
| 48,297 | | |
| – | |
| |
| | | |
| | |
Western Equipment Finance – Interaction Information Technology Inc On November 3, 2014, the Company purchased $50,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 8%, along with monthly principal and interest payments of $1,560. The loan is collateralized with the purchased equipment. | |
| 54,611 | | |
| – | |
| |
| | | |
| | |
Direct Credit Funding Inc - Epazz On December 18, 2014, the Company purchased $230,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 6%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment. | |
| 223,069 | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| | | |
| | |
Seller Note – Hopkins Unsecured $150,000 promissory note originated on December 29, 2014 between Epazz and J Hopkins, payable in equal monthly installments of $37,500 carries a 0% interest rate if paid in full by the maturity date of April 29, 2015. This Note may be prepaid at any time, in whole or in part, without penalty. | |
| 150,000 | | |
| – | |
| |
| | | |
| | |
Seller Note – Hopkins Unsecured $200,000 promissory note originated on December 29, 2014 between Epazz and J Hopkins. Beginning June 8, 2015, and continuing on the 8th day of each and every month until the Maturity Date, Epazz, Inc shall pay equal installments of principal and interest in the amount of $11,881.03. The interest rate on the note is 6% which matures on November 8, 2016. This Note may be prepaid at any time, in whole or in part, without penalty. | |
| 200,000 | | |
| | |
Total promissory notes | |
| 2,504,371 | | |
| 1,211,929 | |
Less: current portion | |
| (1,219,669 | ) | |
| (354,786 | ) |
Promissory notes, less current portion | |
$ | 1,284,702 | | |
$ | 857,143 | |
The Company recorded interest expense on promissory
notes of $251,794 and $100,160 for the twelve months ended December 31, 2014 and 2013, respectively. The Company recorded accrued
interest of $60,123 and $-0- during the years ended December 31, 2014 and 2013, respectively.
Note 17 – Stockholders’ Equity
On September 10, 2014, an amendment to
the corporation’s Articles of Incorporation was approved with respect to the Series B Convertible Preferred Stock and the
Series C Convertible Preferred Stock. The Corporation shall not without first obtaining the approval, by written consent, as provided
by law, of the holders of 2/3rds of the then outstanding shares of Series B Preferred Stock, to increase or decrease, other than
by redemption or conversion, the total number of authorized shares of Series B Preferred Stock, to effect an exchange, reclassification,
or cancellation of all or a part of the Series B Preferred Stock, but excluding a stock split, forward split or reverse stock
split of the Corporation’s Common Stock or Series B Preferred Stock, to effect an exchange, or create a right of exchange,
of all or part of the shares of another class of shares into shares of Series B Preferred Stock, or to alter or change the rights,
preferences or privileges of the shares of Series B Preferred Stock so as to affect adversely the shares of such series. A valuation
of the various classes of stock was performed by an independent third party to provide an estimated change in the fair value of
each class affected by the amendment. The estimated change to the fair value of the various classes of stock is $721,207.
On April 10, 2015 and December 1, 2014, the
Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, amended the Article of
Incorporation to change the par value and number of authorized shares of each class of common and series of preferred stock and
authorize a fourth class of preferred stock, Series D Convertible Preferred Stock, in addition to the modification of the attributes
and dividends. The disclosures herein reflect these modifications and the changes to the par value have been retroactively reflected
throughout.
Reverse Stock Split
In September 2014, Epazz, Inc.’s (the
“Company’s”) majority stockholder and sole director (Shaun Passley) approved a 1:10,000 reverse stock split of
the Company’s Class A common stock Effective October 6, 2014, the Company affected the 1:10,000 reverse stock split of its
Class A common stock. The Company’s Class B common stock and preferred stock were not affected by the reverse stock split.
The Company’s new symbol following the reverse split will be EPAZD. The D will be removed in 20 business days. The Company’s
new CUSIP number is 29413V 309. In order for the Company to be in compliance with the minimum bid price requirement of $0.01 per
share for listing on OTCQB OTC markets. The Company may need to be do reverse split, if the share price falls below $0.01 or if
the Company needs to qualify for a national stock exchange.
Convertible Preferred
Stock, Series A
The Company has one thousand (1,000) authorized
shares of $0.0001 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred
Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar
year in which the Company has generated revenue over $2 million, and an additional 24% of the Company’s net income beginning
on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are
payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes
a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible,
at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into
60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited
voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders. The Company
shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient
to effect the conversions.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On July 2, 2012, the Company issued 1,000 shares
of convertible Series A Preferred Stock to the Company’s CEO for services provided and personal guarantees associated with
previous acquisition activities. The total fair value of the preferred
stock was $229,236 based on valuations performed using an option-pricing method based on the Company’s publicly traded common
stock on the date of grant, and a 5% discount for lack of marketability.
Convertible Preferred
Stock, Series B
The Company has one thousand (1,000) authorized
shares of $0.0001 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred
Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar
year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning
on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are
payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes
a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series B Preferred Stock is convertible,
at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into
10% of the total number of then issued and outstanding shares of Class A Common Stock, provided that no conversion will take place
until all holders of the Series B Preferred Stock consent to such conversion. The Series B Preferred Stock has limited voting rights,
relating solely to matters which adversely affect the rights of the Series B Preferred Stock holders. The Company shall reserve
and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect
the conversions.
On July 2, 2012, the Company issued a total
of 1,000 shares of convertible Series B preferred stock amongst three related parties pursuant to the exchange and extension of
a promissory note owed to Star Financial Corporation, a related party. The total fair value of the preferred stock was $61,130
based on valuations performed using an option-pricing method based on the Company’s publicly traded common stock on the date
of grant, and a 5% discount for lack of marketability.
Convertible Preferred
Stock, Series C
Effective January 14, 2014, the Company has
three billion (3,000,000,000) authorized shares of $0.0001 par value Series C Convertible Preferred Stock (“Series C Preferred
Stock”). The Series C Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning
on January 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6%
of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net
income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until
paid. The Series C Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends.
Subject to certain conversion restrictions over the first three months from the original issuance date, each share of Series C
Preferred Stock is convertible, at the option of the holder into three (3) shares of the Company’s Class A Common Stock,
with five business days’ notice. The following conversion restrictions shall apply; (i) the holder shall be prohibited from
converting any Series C Preferred shares for a period of one (1) month from the original issuance date, (ii) the holder shall be
prohibited from converting not more than 30% of the Series C Preferred shares originally issued to holder during the second (2nd)
month following the original issuance date, (iii) the holder shall be prohibited from converting not more than 30% (60% in total)
of the Series C Preferred shares originally issued to holder during the third (3rd) month following the original issuance
date, (iv) the holder shall be prohibited from converting not more than an additional 40% (100% in total) of the Series C Preferred
shares originally issued to holder following the end of the third month following the original issuance date. The Series C Preferred
Stock shall each vote three voting share and shall vote together with the Common Stock of the Company. The Company shall reserve
and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect
the conversions.
Convertible Preferred Stock, Series D
Effective December 18, 2014, the Company has
1,000,000 authorized and zero outstanding shares of $0.01 par value Series D Convertible Preferred Stock (“Series D Preferred
Stock”). The Series D Preferred Stock shall carry an 8.0% dividend, payable semiannually at Issuer’s election in either
(i) cash or (ii) shares of common stock. Each share of Series D Preferred Stock is convertible, at the option of the holder into
three (3) shares of the Company’s Class A Common Stock, with five business days' notice, provided that no conversion will
take place until all holders of the Series C Preferred Stock consent to such conversion. The Series D Preferred Stock has preferential
voting rights that carry three (3) voting rights for each share issued and outstanding, and shall vote together with the shares
of the Common Stock of the Company, and not as a separate class.
Common Stock, Class
A
The Company has 9 billion authorized shares
of $0.01 par value Class A Common Stock.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Class A Common
Stock Issuances, 2014:
On January 7, 2014, the Company issued 2,514
shares of Class A Common Stock pursuant to the conversion of $5,028 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On January 22, 2014, the Company issued 2,500
shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On January 31, 2014, the Company issued 6,667
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 6, 2014, the Company issued 10,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 13, 2014, the Company issued 10,327
shares of Class A Common Stock pursuant to the conversion of $15,491 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 27, 2014, the Company issued 13,333
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 10, 2014, the Company issued 18,000
shares of Class A Common Stock pursuant to the conversion of $18,000 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 19, 2014, the Company issued 19,700
shares of Class A Common Stock pursuant to the conversion of $19,700 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 3, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $27,000 of convertible debt held by Asher Enterprises, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 5, 2014, the Company issued 20,086
shares of Class A Common Stock pursuant to the conversion of $28,120 of convertible debt held by Asher Enterprises, which consisted
of $26,000 of principal and $2,120 of interest. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 7, 2014, the Company issued 12,500
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by St. George Investments, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 25, 2014, the Company issued 34,167
shares of Class A Common Stock pursuant to the conversion of $41,000 of convertible debt held by Asher Enterprises, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 2, 2014, the Company issued 15,190
shares of Class A Common Stock pursuant to the conversion of $15,190 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 7, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $30,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 10, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On April 16, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 22, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 24, 2014, the Company granted 1,000
shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost
in consideration for a $150,000 short term promissory note. The total fair value of the common stock was $3,000 based on the closing
price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
On April 28, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 1, 2014, the Company issued 20,000 shares
of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted entirely
of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 3, 2014, the Company issued 20,000 shares
of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a related
party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On May 6, 2014, the Company issued 20,000 shares
of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt held by IBC Funds, LLC, which consisted entirely
of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 6, 2014, the Company issued 16,912 shares
of Class A Common Stock pursuant to the conversion of $8,456 of convertible debt held by IBC Funds, LLC, which consisted entirely
of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 7, 2014, the Company granted 1,000 shares
of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration
for a $125,000 short term promissory note. The total fair value of the common stock was $2,000 based on the closing price of the
Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
On May 22, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 28, 2014, the Company granted 325 shares
of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination
cost in consideration for a $32,500 short term promissory note. The total fair value of the common stock was $650 based on the
closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
On June 12, 2014, the Company granted 213 shares
of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination
cost in consideration for a $5,000 short term promissory note. The total fair value of the common stock was $213 based on the closing
price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
On June 17, 2014, the Company issued 33,433
shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party,
which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On July 30, 2014 the Company issued 27,778 shares of
Class A Common Stock to Wellington Shields Holdings, LLC, as a fee for closing on an acquisition. The total fair value of the
common stock was $55,556 based on the closing price of the Company’s common stock on the date of grant.
On August 29, 2014 the Company issued 350
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost that was previously granted on April 23, 2014 in consideration for a $35,000 short term promissory note. The
total fair value of the common stock was $1,050 based on the closing price of the Company’s common stock on the date of
grant.
On October 10, 2014 the Company issued 30,000,000
shares of Class A Common to our CEO from a conversion notice from 10,000,000 shares of Preferred C which convert at the ratio of
1 to 3. As this was a conversion within the terms of the Preferred C equity instrument no additional value was recognized as a
result of this conversion
On October 10, 2014 the Company issued 1,500,000
shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party, from a conversion
notice from 500,000 shares of Preferred C which convert at the ratio of 1 to 3. As this was a conversion within the terms of the
Preferred C equity instrument no additional value was recognized as a result of this conversion
On October 10, 2014 the Company issued 1,400,000
shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from a conversion
notice from 466,667 shares of Preferred C which convert at the ratio of 1 to 3. As this was a conversion within the terms of the
Preferred C equity instrument no additional value was recognized as a result of this conversion
On November 3, 2014 the Company issued 150,000
shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $5,994. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.
On November 11, 2014 the Company issued 227,273
shares of Class A Common Stock pursuant to the September 5, 2013 promissory note entered into with St. George Investment. The conversion
amount was $15,000. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.
On December 4, 2014 the Company issued 700,000
shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $8,442. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.
On December 10, 2014
the Company issued 1,108,647 shares of Class A Common Stock pursuant to the September 5, 2013 promissory note entered into with
St. George Investment. The conversion amount was $15,000. As the conversion occurred within the terms of the conversion agreement;
no gain or loss was recognized.
On January 2, 2015 the Company issued 1,695,000
shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $2,543. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.
Equity Based Debt Settlement Financing,
Conversions into Class A Common Stock – IBC Funds, LLC
On February 14, 2014, IBC Funds, LLC (“IBC”)
filed a Joint Motion for Approval of Settlement Agreement and Stipulation, and Request for Fairness Hearing in the Circuit Court
of the Twelfth Judicial Circuit in and for Sarasota County, Florida, Case No. 2014-CA-000899. IBC has contracted with various note
holders of the Company to acquire approximately $314,021 of Company debt and subsequently converted the debt to common stock of
the Company at 50% of the lowest trading price over the 15 days prior to, and including the conversion request date pursuant to
Section 3(a)(10) of the Securities Act of 1933, which allows the exchange of claims, securities, or property for stock when the
arrangement is approved for fairness by a court proceeding. In addition, the Company agreed to issue 7,500 settlement shares to
IBC. The Company has agreed to these terms as the acquisition of these debts and subsequent conversion would alleviate a significant
portion of the Company’s liabilities. A fairness hearing was held on February 14, 2014 and the arrangement was approved.
A total of 304,082 shares of Class A Common Stock was issued, in addition to the 7,500 settlement shares, in complete satisfaction
of the debt, as disclosed in detail below.
On February 14, 2014, the Company issued 7,500
settlement shares of Class A Common Stock pursuant to the February 12, 2014 settlement agreement entered into with IBC
Funds, LLC. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized. The
total fair value of the common stock was $37,500 based on the closing price of the Company’s common stock on the date of
grant.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On February 14, 2014, the Company issued 2,500
shares of Class A Common Stock pursuant to the conversion of $3,750 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 24, 2014, the Company issued 10,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 25, 2014, the Company issued 10,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 25, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 28, 2014, the Company issued 14,290
shares of Class A Common Stock pursuant to the conversion of $21,435 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 7, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 11, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 14, 2014, the Company issued 10,190
shares of Class A Common Stock pursuant to the conversion of $10,190 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 25, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 27, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Convertible Common
Stock, Class B
The Company has 60,000,000, authorized shares
of $0.01 par value Convertible Class B Common Stock, convertible at the option of the holder into shares of the Company’s
Class A Common Stock on a 1:10,000 basis. Effective January 14, 2014, the preferential voting rights of the Convertible Class B
Common Stock were changed from preferential voting rights of 2,000 votes to each Class A Common Stock vote (2,000:1) to 10,000
votes to each Class A Common Stock vote (10,000:1). The Company shall reserve and keep available out of its authorized but unissued
shares of Class A Common Stock such number of shares sufficient to effect the conversions. Common B was not part of the October
6, 2014 reversed stock split.
Convertible Class
B Common Stock Issuance for Services
On March 22, 2014, the Company issued 12,500,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing services. The total fair value
of the common stock was $44,737 based on the closing price of the Company’s common stock on the date of grant.
On March 16, 2013, the Company issued 5,000,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing product development services.
The total fair value of the common stock was $9,500 based on the closing price of the Company’s common stock on the date
of grant.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends Payable
On January 1, 2013, the Company declared and
accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1
million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the
year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which was subsequently paid on September
11, 2014, with the issuance of 11,000 shares of Class A Common Stock in lieu of cash.
Shares of Convertible Series C Preferred
Stock Issued for Services to Related Parties
On January 17, 2014, the Company issued 600,000,000
shares of the recently designated Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000 shares
of his previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $367,713 based
on an independent valuation on the date of grant.
On February 7, 2014, the Company issued 2,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost in consideration for a $26,000 short term promissory note. The total fair value of the common stock was $1,226
based on an independent valuation on the date of grant.
On February 21, 2014, the Company issued 10,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related
party, as a loan origination cost in consideration for a $75,000 short term promissory note. The total fair value of the common
stock was $6,129 based on an independent valuation on the date of grant.
On February 22, 2014, the Company issued 15,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost in consideration for a $100,000 short term promissory note. The total fair value of the common stock was $9,193
based on an independent valuation on the date of grant.
On March 7, 2014, the Company issued 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $30,000 short term promissory note. The total fair value of the common stock
was $1,839 based on an independent valuation on the date of grant.
On March 22, 2014, the Company issued 200,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, for providing
a personal guaranty on an acquisition loan. The total fair value of the common stock was $122,571 based on an independent valuation
on the date of grant.
On March 22, 2014, the Company issued 200,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
for providing a personal guaranty on an acquisition loan. The total fair value of the common stock was $122,571 based on an independent
valuation on the date of grant.
On March 22, 2014, the Company issued 1,821,052,632
shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 182,105 shares, consisting of 173,053
previously issued and unvested shares of Class A Common Stock and 9,052 shares of his previously issued and vested Class A Common
Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible Preferred
Stock was $1,116,041 based on an independent valuation on the date of grant.
On March 22, 2014, the Company issued 13,669,568
shares of the Series C Convertible Preferred Stock to L&F Lawn Services, a company owned by our CEO’s family member,
a related party, in exchange for 1,367 of their previously issued Class A Common Stock. The total fair value of the Series C Convertible
Preferred Stock was $8,377 based on an independent valuation on the date of grant.
On March 22, 2014, the Company issued
1,821,052,632 shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 182,105 common shares,
consisting of 173,053 previously issued and unvested shares of Class A Common Stock and 9,052 shares of his previously issued
and vested Class A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the
Series C Convertible Preferred Stock was $1,116,041 based on an independent valuation on the date of grant.
Shares of Convertible Series C Preferred
Stock Issued for Loan Origination Fees to Related Parties
On January 15, 2014, the Company granted 5,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $43,000 short term promissory note. The total fair value of the common stock
was $3,064 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On February 8, 2014, the Company granted 1,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $13,000 short term promissory note. The total fair value of the common stock
was $613 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
On March 7, 2014, the Company granted 2,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost in consideration for a $22,000 short term promissory note. The total fair value of the common stock was $1,226
based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
On March 26, 2014, the Company granted 3,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost in consideration for a $37,500 short term promissory note. The total fair value of the common stock was $1,839
based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
On March 26, 2014, the Company granted 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock
was $1,839 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
On March 28, 2014, the Company granted 2,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost in consideration for a $18,750 short term promissory note. The total fair value of the common stock was $1,226
based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
On March 28, 2014, the Company granted 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock
was $1,839 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
Debt Conversions into Class A Common Stock
– Related Parties
On April 2, 2014, the Company issued 25,000
shares of Class A Common Stock pursuant to the conversion of $25,000 of convertible debt held by Vivienne Passley, a related party,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On April 7, 2014, the Company issued 12,500
shares of Class A Common Stock pursuant to the conversion of $18,750 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 3, 2014, the Company issued 20,000 shares
of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a related
party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
Class A Common
Stock Issuances, 2013:
Debt Conversions into Class A Common Stock
On January 3, 2013, the Company issued 400
shares of Class A Common Stock pursuant to the conversion of $12,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 19, 2013, the Company issued 882
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On February 26, 2013, the Company issued 1,075
shares of Class A Common Stock pursuant to the conversion of $17,200 of convertible debt, consisting of $15,500 of principal and
$1,700 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On March 4, 2013, the Company issued 1,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 6, 2013, the Company issued 1,446
shares of Class A Common Stock pursuant to the conversion of $18,800 of convertible debt, consisting of $17,500 of principal and
$1,300 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On March 12, 2013, the Company issued 450 shares
of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt, which consisted entirely of principal. The note
was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 14, 2013, the Company issued 5,000
shares of Class A Common Stock pursuant to the conversion of $46,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 2, 2013, the Company issued 1,515
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 10, 2013, the Company issued 5,000
shares of Class A Common Stock pursuant to the conversion of $40,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 27, 2013, the Company modified a related
party debt and issued 1,424 shares of Class A Common Stock in settlement of $14,239 of related party debt owed to Vivienne Passley,
which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest. The total fair value of the common stock was
$28,479 based on the closing price of the Company’s common stock on the date of grant, resulting in the recognition of a
$14,240 loss on debt settlement.
On April 24, 2013, the Company issued 1,587
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On June 24, 2013, the Company issued 4,086 shares
of Class A Common Stock pursuant to the conversion of $17,160 of convertible debt, consisting of $16,500 of principal and $660
of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been
recognized.
On July 9, 2013, the Company issued 8,000 shares
of Class A Common Stock pursuant to the conversion of $26,400 of convertible debt owed to a related party, which consisted entirely
of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 10, 2013, the Company issued 2,222
shares of Class A Common Stock pursuant to the conversion of $8,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 30, 2013, the Company issued 15,478
shares of Class A Common Stock pursuant to the conversion of $13,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On August 7, 2013, the Company issued 4,000
shares of Class A Common Stock pursuant to the conversion of $32,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On August 19, 2013, the Company issued 1,955
shares of Class A Common Stock pursuant to the conversion of $14,663 of convertible debt, which consisted of $10,900 of principal
and $3,763 of accrued interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been
recognized.
On August 27, 2013, the Company issued 4,686
shares of Class A Common Stock pursuant to the conversion of $14,838 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Shares of Class A Common Stock Issued for
Services to Related Parties
On March 5, 2013, the Company issued 1,250
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on an acquisition loan that
originated on September 30, 2010. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.
On March 5, 2013, the Company issued 1,250
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on two acquisition loans
that originated on October 26, 2011. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.
On March 5, 2013, the Company issued 2,000
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The shares
will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock was
$400,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction
against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied.
The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares.
On March 20, 2013, the Company issued 3,550
shares of Class A Common Stock to Vivienne Passley, a related party, for providing collateral on acquisition loans that originated
on September 30, 2010 and October 26, 2011. The total fair value of the common stock was $35,500 based on the closing price of
the Company’s common stock on the date of grant.
On March 20, 2013, the Company issued 6,000
shares of Class A Common Stock to Craig Passley, a related party, for providing corporate secretary services from 2012 to 2021.
The total fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the date
of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until
the terms of the vesting periods are satisfied. A total of $6,000 was expensed related to the vested services for the year ended
December 31, 2012. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares
for Convertible Series C Preferred shares.
On May 16, 2013, the Company issued 71,053
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The total
fair value of the common stock was $1,350,000 based on the closing price of the Company’s common stock on the date of grant.
On May 24, 2013, the Company issued 3,550 shares
of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on September
30, 2010 and October 26, 2011. The total fair value of the common stock was $71,000 based on the closing price of the Company’s
common stock on the date of grant.
On July 5, 2013, the Company issued 2,500 shares
of Class A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value of the
common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.
On July 8, 2013, the Company issued 71,053
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services, of which
20,000 shares vested immediately and the remaining 510,526,316 shares will be vested once the Company reports revenue of $10 million
in a calendar year. The total fair value of the common stock was $497,368 based on the closing price of the Company’s common
stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional paid
in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions
were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Shares of Class A Common Stock Issued for
Loan Origination Fees to Related Parties
On July 19, 2013, the Company issued 250 shares
of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $23,000 short term
promissory note. The total fair value of the common stock was $4,250 based on the closing price of the Company’s common stock
on the date of grant.
On July 31, 2013, the Company issued 300 shares
of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination
cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $4,200 based on the
closing price of the Company’s common stock on the date of grant.
On August 2, 2013, the Company issued 300 shares
of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination
cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $5,100 based on the
closing price of the Company’s common stock on the date of grant.
On August 7, 2013, the Company granted 250
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $24,000 short term promissory note. The total fair value of the common stock was $4,250
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November
13, 2013.
On August 12, 2013, the Company issued 500
shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $51,000
short term promissory note. The total fair value of the common stock was $7,000 based on the closing price of the Company’s
common stock on the date of grant.
On August 20, 2013, the Company granted 250
shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party, as
a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock was
$3,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
On August 27, 2013, the Company granted 125
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $12,500 short term promissory note. The total fair value of the common stock was $1,500
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November
13, 2013.
On September 7, 2013, the Company granted 600
shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party, as
a loan origination cost in consideration for a $65,000 short term promissory note. The total fair value of the common stock was
$6,600 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
Dividends Payable
On January 1, 2013, the Company declared and
accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1
million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the
year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which can be paid in cash or in shares
of Class A Common Stock in lieu of cash.
Beneficial Conversion Feature
On June 12, 2013, the Company entered into
a convertible promissory note with JMJ Financial. The beneficial conversion feature discount resulting from the conversion price
that was $0.00518 below the market price of $0.0017 on the June 12, 2013 origination date resulted in a debt discount value of
$33,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On August 19, 2013, the Company entered into
a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion
price that was $0.0006 below the market price of $0.0014 on the August 19, 2013 origination date resulted in a debt discount value
of $39,021 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On August 20, 2013, the Company entered into
a convertible promissory note with GG Mars Capital, Inc., a company owned by our CEO’s family member. The beneficial conversion
feature discount resulting from the conversion price that was $0.001 below the market price of $0.0013 on the August 20, 2013 origination
date resulted in a debt discount value of $14,838 that was recognized as additional paid in capital and is being amortized on a
straight line basis over the life of the loan.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On September 5, 2013, the Company entered into
a convertible promissory note with St. George Investments, Inc. The beneficial conversion feature discount resulting from the conversion
price that was $0.0005 below the market price of $0.001 on the September 5, 2013 origination date resulted in a debt discount
value of $46,555 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life
of the loan.
On September 18, 2013, the Company entered
into a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion
price that was $0.0004 below the market price of $0.001 on the September 18, 2013 origination date resulted in a debt discount
value of $27,210 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life
of the loan.
On October 20, 2014, the Company entered into
a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion
price that was $0.0333 below the market price of $0.20 on the October 20, 2014 origination date resulted in a debt discount value
of $43,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On October 31, 2014, the Company entered into
a convertible promissory note with LG Capital. The beneficial conversion feature discount resulting from the conversion price that
was $0.04329 below the market price of $0.125 on the October 31, 2014 origination date resulted in a debt discount value of $50,239
that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.
On November 6, 2014, the Company entered into
a convertible promissory note with LG Capital. The beneficial conversion feature discount resulting from the conversion price that
was $0.04329 below the market price of $0.08171 on the November 6, 2014 origination date resulted in a debt discount value of $33,600
that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.
On December 3, 2014, the Company entered into
a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion
price that was $0.005 below the market price of $0.03 on the December 3, 2014 origination date resulted in a debt discount value
of $33,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On December 31, 2013, the Company entered into
a convertible promissory note with Magna Group, LLC. The beneficial conversion feature discount resulting from the conversion price
that was $0.0003 below the market price of $0.0006 on the December 31, 2013 origination date resulted in a debt discount value
of $35,028 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
Loss on Convertible Debt Modification to
Related Party
On March 5, 2013, we amended a convertible
promissory note with Star Financial Corporation, which then carried a balance of $190,849, to revise the conversion terms from
a $0.005 floor and 75% discount to market to conversion terms consisting of, "equal to the greater of, (a) 50% of the Market
Price, or (b) the fixed conversion price of $0.00075 per share". The Company compared the fair value of the debt immediately
preceding the modification to the fair value after the modification to determine the loss on modification of $81,792. This value
was determined using the value of the shares assuming the note was converted pursuant to the respective conversion terms on the
date of modification. The total value of the shares after modification was $272,641, compared to the $190,849 value preceding the
modification, resulting in a loss on modification of $81,792.
Note 18 – Income Taxes
The Company accounts for income taxes under
FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities
are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences.
As of December 31, 2014, the Company incurred
a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes
has been recorded due to the uncertainty of the realization of any tax assets. The Company had approximately $2,437,058 and $1,554,000
of federal net operating loss carryforwards at December 31, 2014 and 2013, respectively. The net operating loss carryforwards,
if not utilized, will begin to expire in 2029.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the Company’s deferred
tax asset are as follows:
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Deferred tax assets: | |
| | | |
| | |
Net operating loss carryforwards | |
$ | 2,437,058 | | |
$ | 1,554,000 | |
| |
| | | |
| | |
Net deferred tax assets before valuation allowance | |
$ | 852,970 | | |
$ | 543,900 | |
Less: Valuation allowance | |
| (852,970 | ) | |
| (543,900 | ) |
Net deferred tax assets | |
$ | – | | |
$ | – | |
Based on the available objective evidence,
including the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets
at December 31, 2014 and 2013. The Company had no uncertain tax positions as of December 31, 2014 and 2013.
A reconciliation between the amounts of income
tax benefit determined by applying the applicable U.S. and State statutory income tax rate to pre-tax loss is as follows:
|
December 31, |
|
December 31, |
|
|
2014 |
|
2013 |
|
Federal and state statutory rate |
35% |
|
35% |
|
Change in valuation allowance on deferred tax assets |
(35%) |
|
(35%) |
|
Note 19 – Restatement
The condensed consolidated financial statements contained in
our Quarterly Report on Form 10-Q for the nine months ended September 30, 2014 requires restatement in order to correct errors related
to the following:
The company determined that it had not properly accounted for
the September 10, 2014 amendment to its articles of incorporation which affected the valuation of various classes of its common
and preferred stock. This resulted in an understatement of the amounts recorded for stock based compensation in the third quarter
of 2014. On September 10, 2014, an amendment to the corporation’s Articles of Incorporation was approved and accepted with
respect to the Series B Preferred stock and Series C Preferred Stock. Per the amendment which was approved and adopted by the company’s
board, the corporation shall not without first obtaining the approval, by written consent, as provided by law, of the holders of
2/3rds of the then outstanding shares of Series B Preferred stock or the Series C Preferred Stock, to increase or decrease, other
than by redemption or conversion, the total number of authorized shares of the Series B Preferred stock or the Series C Preferred
Stock, to effect an exchange, reclassification, or cancellation of all or a part of the Series B Preferred stock or the Series
C Preferred Stock, but excluding a stock split, forward split or reverse stock split of the Corporation’s Common Stock, Series
B Preferred stock or the Series C Preferred Stock, to effect an exchange, or create a right of exchange, of all or part of the
shares of another class of shares into shares of Series B Preferred Stock or Series C Preferred stock, or to alter or change the
rights, preferences or privileges of the shares of Series B Preferred Stock so as to affect adversely the shares of such series.
A valuation of the various classes of
stock was performed by an independent third party to provide an estimated change in the fair value of each class affected by the
amendment. The estimated change to the fair value of the various classes of stock is $721,207.
EPAZZ, INC.
CONSOLIDATED BALANCE SHEETS
| |
As Originally Reported | | |
| | |
AS RESTATED | |
| |
September 30, 2014 | | |
Adjustments | | |
September 30, 2014 | |
Assets | |
| | | |
| | | |
| | |
Current assets: | |
| | | |
| | | |
| | |
Cash | |
$ | 71,963 | | |
$ | – | | |
$ | 71,963 | |
Accounts receivable, net | |
| 256,617 | | |
| – | | |
| 256,617 | |
Other current assets | |
| 131,392 | | |
| – | | |
| 131,392 | |
Total current assets | |
| 459,972 | | |
| – | | |
| 459,972 | |
| |
| | | |
| | | |
| | |
Property and equipment, net | |
| 115,470 | | |
| – | | |
| 115,470 | |
Intangible assets, net | |
| 451,391 | | |
| – | | |
| 451,391 | |
Goodwill | |
| 1,355,361 | | |
| – | | |
| 1,355,361 | |
| |
| | | |
| | | |
| | |
Total assets | |
$ | 2,382,194 | | |
$ | – | | |
$ | 2,382,194 | |
| |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Liabilities and Stockholders' Equity (Deficit) | |
| | | |
| | | |
| | |
Current liabilities: | |
| | | |
| | | |
| | |
Dividends payable | |
$ | – | | |
$ | – | | |
$ | – | |
Accounts payable | |
| 339,540 | | |
| – | | |
| 339,540 | |
Accrued expenses | |
| 213,022 | | |
| – | | |
| 213,022 | |
Accrued expenses, related parties | |
| – | | |
| – | | |
| – | |
Deferred revenue | |
| 592,408 | | |
| – | | |
| 592,408 | |
Lines of credit | |
| 83,260 | | |
| – | | |
| 83,260 | |
Current maturities of capital lease obligations payable | |
| 7,031 | | |
| – | | |
| 7,031 | |
Current maturities of notes payable, related parties ($1,066,073 currently in default) | |
| 1,186,618 | | |
| – | | |
| 1,186,618 | |
Convertible debts, net of discounts of $131,774 and $105,300, respectively ($60,674 currently in default) | |
| 152,275 | | |
| – | | |
| 152,275 | |
Current maturities of long term debts | |
| 809,177 | | |
| – | | |
| 809,177 | |
Derivative Liabilities | |
| – | | |
| – | | |
| – | |
Total current liabilities | |
| 3,383,331 | | |
| – | | |
| 3,383,331 | |
| |
| | | |
| | | |
| | |
Notes payable, related parties | |
| – | | |
| – | | |
| – | |
Convertible debts, net of discounts of $0 and $4,283, respectively | |
| – | | |
| – | | |
| – | |
Long term debts, net of current maturities | |
| 911,467 | | |
| – | | |
| 911,467 | |
Total liabilities | |
| 4,294,798 | | |
| – | | |
| 4,294,798 | |
| |
| | | |
| | | |
| | |
Stockholders' equity (deficit): | |
| | | |
| | | |
| | |
Convertible preferred stock, Series A, $0.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding | |
| – | | |
| – | | |
| – | |
Convertible preferred stock, Series B, $0.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding | |
| – | | |
| – | | |
| – | |
Convertible preferred stock, Series C, $0.0001 par value, 3,000,000,000 shares authorized, 2,932,755,533 shares issued and outstanding | |
| 294,372 | | |
| – | | |
| 294,372 | |
Common stock, Class A, $0.0001 par value, 9,000,000,000 shares authorized, 37,557,842 and 346,836 shares issued and outstanding, respectively | |
| 721,338 | | |
| – | | |
| 721,338 | |
Convertible common stock, Class B, $0.0001 par value, 60,000,000 shares authorized, 23,000,000 and 10,500,000 shares issued and outstanding, respectively | |
| 2,300 | | |
| – | | |
| 2,300 | |
Additional paid in capital | |
| 9,290,110 | | |
| 721,207 | | |
| 10,011,317 | |
Stockholders' payable, consisting of 19,000,000 shares of Series C Convertible Preferred Stock and 28,875,000 shares of Class A Common Stock | |
| – | | |
| | | |
| – | |
Stockholders' receivable, consisting of -0- and 20,000,000 shares of Class A Common Stock, respectively | |
| – | | |
| – | | |
| – | |
Accumulated deficit | |
| (12,220,724 | ) | |
| (721,207 | ) | |
| (12,941,931 | ) |
Total stockholders' equity (deficit) | |
| (1,912,604 | ) | |
| – | | |
| (1,912,604 | ) |
| |
| | | |
| | | |
| | |
Total liabilities and stockholders' equity (deficit) | |
$ | 2,382,194 | | |
$ | – | | |
$ | 2,382,194 | |
EPAZZ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
For the Three Months Ending September 30, 2014 | |
| |
As Originally Reported | | |
Adjustments | | |
As RESTATED | |
| |
| | |
| | |
| |
Revenue | |
$ | 361,150 | | |
$ | – | | |
$ | 361,150 | |
| |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | |
General and administrative | |
| 113,308 | | |
| – | | |
| 113,308 | |
Salaries and wages | |
| 209,667 | | |
| 721,207 | | |
| 930,874 | |
Depreciation and amortization | |
| 55,156 | | |
| – | | |
| 55,156 | |
Bad debts (recoveries) | |
| 30,813 | | |
| – | | |
| 30,813 | |
Total operating expenses | |
| 408,944 | | |
| 721,207 | | |
| 1,130,151 | |
| |
| | | |
| | | |
| | |
Net operating loss | |
| (47,794 | ) | |
| (721,207 | ) | |
| (769,001 | ) |
| |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | |
Interest Income | |
| – | | |
| – | | |
| – | |
Interest expense | |
| (194,583 | ) | |
| – | | |
| (194,583 | ) |
Loss on debt modifications, related parties | |
| – | | |
| – | | |
| – | |
Other Income / (Expense) | |
| 19,251 | | |
| | | |
| 19,251 | |
Change in derivative liabilities | |
| – | | |
| – | | |
| – | |
Total other income (expense) | |
| (175,332 | ) | |
| – | | |
| (175,332 | ) |
| |
| | | |
| | | |
| | |
Net loss | |
$ | (223,126 | ) | |
$ | (721,207 | ) | |
$ | (944,333 | ) |
| |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding - basic and fully diluted | |
| 7,052,068,854 | | |
| 7,052,068,854 | | |
| 7,052,068,854 | |
| |
| | | |
| | | |
| | |
Net loss per share - basic and fully diluted | |
$ | (0.00 | ) | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
EPAZZ, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
For the Nine Months Ending September 30, 2014 | |
| |
As Originally Reported | | |
Adjustments | | |
As RESTATED | |
| |
| | |
| | |
| |
Revenue | |
$ | 941,227 | | |
$ | – | | |
$ | 941,227 | |
| |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | |
General and administrative | |
| 683,447 | | |
| – | | |
| 683,447 | |
Salaries and wages | |
| 2,654,666 | | |
| 721,207 | | |
| 3,375,873 | |
Depreciation and amortization | |
| 152,711 | | |
| – | | |
| 152,711 | |
Bad debts (recoveries) | |
| 25,551 | | |
| – | | |
| 25,551 | |
Total operating expenses | |
| 3,516,375 | | |
| 721,207 | | |
| 4,237,582 | |
| |
| | | |
| | | |
| | |
Net operating loss | |
| (2,575,148 | ) | |
| (721,207 | ) | |
| (3,296,355 | ) |
| |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | |
Interest income | |
| 55 | | |
| – | | |
| 55 | |
Interest expense | |
| (1,212,360 | ) | |
| – | | |
| (1,212,360 | ) |
Loss on debt modifications, related parties | |
| (172,864 | ) | |
| – | | |
| (172,864 | ) |
Other Income / (Expense) | |
| 19,251 | | |
| | | |
| 19,251 | |
Change in derivative liabilities | |
| (777,664 | ) | |
| – | | |
| (777,664 | ) |
Total other income (expense) | |
| (2,143,582 | ) | |
| – | | |
| (2,143,582 | ) |
| |
| | | |
| | | |
| | |
Net loss | |
$ | (4,718,730 | ) | |
$ | (721,207 | ) | |
$ | (5,439,937 | ) |
| |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding - basic and fully diluted | |
| 5,563,139,967 | | |
| 5,563,139,967 | | |
| 5,563,139,967 | |
| |
| | | |
| | | |
| | |
Net loss per share - basic and fully diluted | |
$ | (0.00 | ) | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
EPAZZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
As Originally Reported | | |
| | |
As RESTATED | |
| |
September 30, 2014 | | |
Adjustments | | |
September 30, 2014 | |
Cash flows from operating activities | |
| | | |
| | | |
| | |
Net loss | |
$ | (4,718,730 | ) | |
$ | (721,207 | ) | |
$ | (5,439,937 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
| | |
Bad debts (recoveries) | |
| 25,551 | | |
| – | | |
| 25,551 | |
Depreciation and amortization | |
| 41,452 | | |
| – | | |
| 41,452 | |
Impairment of intangible assets | |
| 111,259 | | |
| – | | |
| 111,259 | |
Amortization of deferred financing costs | |
| 317,789 | | |
| – | | |
| 317,789 | |
Amortization of discounts on convertible debts | |
| 495,683 | | |
| – | | |
| 495,683 | |
Loss on debt modifications, related parties | |
| 172,864 | | |
| – | | |
| 172,864 | |
Loss on default provisions of convertible debt | |
| 77,375 | | |
| – | | |
| 77,375 | |
Change in fair market value of derivative liabilities | |
| 777,664 | | |
| – | | |
| 777,664 | |
Stock based compensation issued for services | |
| 93,056 | | |
| – | | |
| 93,056 | |
Stock based compensation issued for services, related parties | |
| 2,243,402 | | |
| 721,207 | | |
| 2,964,609 | |
Decrease (increase) in assets: | |
| | | |
| | | |
| | |
Accounts receivable | |
| 1,130 | | |
| – | | |
| 1,130 | |
Other current assets | |
| 48,035 | | |
| – | | |
| 48,035 | |
Increase (decrease) in liabilities: | |
| | | |
| | | |
| – | |
Accounts payable | |
| (395,307 | ) | |
| – | | |
| (395,307 | ) |
Accrued expenses | |
| 81,049 | | |
| – | | |
| 81,049 | |
Accrued expenses, related parties | |
| 57,450 | | |
| – | | |
| 57,450 | |
Deferred revenues | |
| 270,277 | | |
| – | | |
| 270,277 | |
Net cash provided by (used in) operating activities | |
| (300,001 | ) | |
| – | | |
| (300,001 | ) |
| |
| | | |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | | |
| | |
Cash acquired in merger | |
| 736 | | |
| – | | |
| 736 | |
Purchase of equipment | |
| (43,512 | ) | |
| – | | |
| (43,512 | ) |
Acquisition of subsidiaries | |
| (582,945 | ) | |
| – | | |
| (582,945 | ) |
Net cash used in investing activities | |
| (625,721 | ) | |
| – | | |
| (625,721 | ) |
| |
| | | |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | | |
| | |
Payments on capital lease obligations payable | |
| (10,392 | ) | |
| – | | |
| (10,392 | ) |
Proceeds from notes payable, related parties | |
| 774,524 | | |
| – | | |
| 774,524 | |
Repayment of notes payable, related parties | |
| (82,879 | ) | |
| – | | |
| (82,879 | ) |
Proceeds from convertible notes | |
| – | | |
| – | | |
| – | |
Repayment of convertible notes | |
| (1,500 | ) | |
| – | | |
| (1,500 | ) |
Proceeds from long term debts | |
| 582,206 | | |
| – | | |
| 582,206 | |
Repayment of long term debts | |
| (472,841 | ) | |
| – | | |
| (472,841 | ) |
Net cash provided by financing activities | |
| 789,118 | | |
| – | | |
| 789,118 | |
| |
| | | |
| | | |
| | |
Net increase (decrease) in cash | |
| (136,604 | ) | |
| – | | |
| (136,604 | ) |
Cash - beginning | |
| 208,567 | | |
| – | | |
| 208,567 | |
Cash - ending | |
$ | 71,963 | | |
$ | – | | |
$ | 71,963 | |
| |
| | | |
| | | |
| | |
Supplemental disclosures: | |
| | | |
| | | |
| | |
Interest paid | |
| 187,563 | | |
| – | | |
| 187,563 | |
Income taxes paid | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | | |
| | |
Acquisition of subsidiary in exchange for debt | |
$ | 611,988 | | |
$ | – | | |
$ | 611,988 | |
Value of shares issued for conversion of debt | |
$ | 533,360 | | |
$ | – | | |
$ | 533,360 | |
Value of shares issued for conversion of debt, related parties | |
$ | 112,183 | | |
$ | – | | |
$ | 112,183 | |
Shares issued for dividend payable | |
$ | 11,000 | | |
$ | – | | |
$ | 11,000 | |
Discount on derivatives | |
$ | 422,240 | | |
$ | – | | |
$ | 422,240 | |
Beneficial conversion feature | |
$ | 35,028 | | |
$ | – | | |
$ | 35,028 | |
Deferred financing costs | |
$ | 391,102 | | |
$ | – | | |
$ | 391,102 | |
Value of derivative adjustment due to debt conversions | |
$ | 1,199,904 | | |
$ | – | | |
$ | 1,199,904 | |
Dividends payable declared | |
$ | – | | |
$ | – | | |
$ | – | |
Note 20 – Subsequent Events
Formation of Subsidiary – ZCollars,
Inc., March 11, 2015
On March 11, 2015, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named ZCollars, Inc. The Company plans to file a non-provisional patent application to develop a dog
collars that allows for better tracking dogs.
Debt Financing
On January 30, 2015, the Company entered into
an equipment financing agreement with CIT Finance for a total of $100,000 bearing an effective interest rate of 10.9%, consisting
of 36 monthly payments of $3,210; maturing on January 30, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On January 27, 2015, the Company entered into
an equipment financing agreement with Direct Credit for a total of $50,000 bearing an effective interest rate of 19.7%, consisting
of 36 monthly payments of $1,793; maturing on January 27, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On February 20, 2015, the Company entered into
an equipment financing agreement with Safe Leasing for a total of $37,500 bearing an effective interest rate of 31.625%, consisting
of 36 monthly payments of $1,549; maturing on February 20, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
Convertible Debt Financing
Originated March 18, 2015, a $6,250 unsecured
promissory note payable, including a $1,250 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 18, 2015. The note also carries
a liquidated damages fee of $1,000 upon default.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Originated January 22, 2015, an unsecured $47,000
promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries
a liquidated damages fee of $1,500 upon default.
Originated February 24, 2015, an unsecured
$48,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries
a liquidated damages fee of $1,500 upon default.
Originated March 3, 2015, an unsecured $21,875
promissory note payable, including a $4,375 loan origination fee, owed to Star Financial, a corporation owned by an immediate family
member of the Company’s CEO. The note carries a 15% interest rate, matured on October 3, 2015. The note also carries a liquidated
damages fee of $1,500 upon default.
Convertible Debt Financing
Originated January 7, 2015, an unsecured $42,323.64
convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“One Magna Group Note”) owed
to Magna Group, LLC, consisting of one partial note acquired and assigned from Star Financial Corporation, a related party, consisting
of a total of $75,000 of principal and $9,647.28 of accrued interest. The acquired promissory notes did not carry conversion terms,
and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common
stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the 3 lowest trading price
of the Company’s common stock for the ten (10) days prior to the conversion date, or $0.000075 per share, whichever is greater.
The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal of $42,323.64
was subsequently converted to a total of 30,945 shares of common stock over various dates from January 7, 2015 to March 18, 2015
in complete satisfaction of the debt.
Originated January 7, 2015, an unsecured $17,500
convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“Two Magna Group Note”) owed
to Magna Group, LLC. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible
note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price
equal to fifty percent (50%) of the average of the 3 lowest trading price of the Company’s common stock for the ten (10)
days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 4.99% of
the Company’s issued and outstanding shares.
On January 29, 2015,
we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible Promissory
Note in the original principal amount of $43,000. The One KBM Note had a maturity date of November 2, 2015, and was convertible
into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable
Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price”
means the average of the lowest three (3) Trading Prices for the Common Stock during the thirty (30) Trading Day period ending
on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share.
The shares of common stock issuable upon conversion of the One KBM Note were restricted securities as defined in Rule 144 promulgated
under the Securities Act of 1933. The issuance of the One KBM Note was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor,
familiar with our operations, and there was no solicitation.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Originated February 13, 2015, an unsecured
$127,812.50 convertible promissory note, carries a 15% interest rate, matures on January 7, 2016, (“IBC Note”) owed
to IBC Funds, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of
a total of $106,000 of principal and $21,812.5 of accrued interest and fees. The acquired promissory notes did not carry conversion
terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares
of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest
trading price of the Company’s common stock for the fifteen (15) days prior to the conversion date. The debt holder was
limited to owning 4.99% of the Company’s issued and outstanding shares. IBC Funds did not complete the require payments
under the debt purchase agreement, therefore the ownership of the note was returned to Star Financial Corporation.
Originated February 17, 2015, an unsecured
$22,542.47 convertible promissory note, carries a 5% interest rate, matures on February 17, 2016, (“Blackbridge Note”)
owed to Blackbridge Capital, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party,
consisting of a total of $20,000 of principal and $2,542.47 of accrued interest. The acquired promissory notes did not carry conversion
terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares
of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest
trading price of the Company’s common stock for the fifteen (15) days prior to the conversion date. The debt holder was limited
to owning 9.99% of the Company’s issued and outstanding shares. The assigned principal of $22,542.47 was subsequently converted
to a total of 187,300,733 shares of common stock over various dates from February 17, 2015 to March 5, 2015 in complete satisfaction
of the debt.
Originated March 2, 2015, an unsecured $5,000
convertible promissory note, carries a 15% interest rate, matures on May 20, 2015, (“Star Note”) owed to Star Financial
Corporation, a related party, consisting of a total of $5,000 of principal and $447.95 of accrued interest. The October 20, 2014
promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued
interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.000075. The debt
holder was limited to owning 9.99% of the Company’s issued and outstanding shares.
Originated March 2, 2015, an unsecured $18,750
convertible promissory note, carries a 15% interest rate, matures on May 28, 2014, (“GG Note”) owed to GG Mars, Inc.,
a related party, consisting of a total of $18,750 of principal and $2,196.06 of accrued interest. The March 28, 2014 promissory
notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest
is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was
limited to owning 9.99% of the Company’s issued and outstanding shares.
Originated March 31, 2015, an unsecured $30,000
convertible promissory note, carries a 15% interest rate, matures on May 7, 2014, (“Star Note”) owed to Star Financial
Corporation, a related party, consisting of a total of $30,000 of principal and $3,772.60 of accrued interest. The March 7, 2014
promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued
interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt
holder was limited to owning 9.99% of the Company’s issued and outstanding shares.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Conversions into Class A Common
Stock
Debt Conversion by JMJ Financial
On
January 2, 2015, the Company issued 1,695,000 shares of Class A Common Stock
pursuant to the conversion of $2,542.50 of convertible debt held by JMJ Financial which consisted of $2,542.50 of principal. The
note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On January 21, 2015, the Company issued
1,950,000 shares of Class A Common Stock pursuant to the conversion of $2,925 of convertible debt held by JMJ Financial, which
consisted of $2,925 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 4, 2015, the Company issued
1,958,000 shares of Class A Common Stock pursuant to the conversion of $1,762.20 of convertible debt held by JMJ Financial, which
consisted of $1,762.20 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
Debt Conversion by LG Capital Funding
LLC
On January 7, 2015, the Company issued
1,774,082 shares of Class A Common Stock pursuant to the conversion of $2,998.20 of convertible debt held by LG Capital Funding
LLC, which consisted of $2,958 of principal, $40.20 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
On March 19, 2015, the Company issued 35,360,512
shares of Class A Common Stock pursuant to the conversion of $3,447.65 of convertible debt held by LG Capital Funding LLC, which
consisted of $3,350 of principal, $97.65 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On February 12, 2015, the Company issued
1,757,230 shares of Class A Common Stock pursuant to the conversion of $1,256.42 of convertible debt held by LG Capital Funding,
LLC, which consisted of $1,230 of principal, $26.42 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
Debt Conversion by St. George Investments,
LLC
On January 9, 2015, the Company issued
3,400,000 shares of Class A Common Stock pursuant to the conversion of $4,896 of convertible debt held by St. George Investments,
LLC, which consisted of $4,896 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 5, 2015, the Company issued
3,550,000 shares of Class A Common Stock pursuant to the conversion of $3,408 of convertible debt held by St. George Investments,
LLC, which consisted of $3,408 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 11, 2015, the Company issued
3,550,000 shares of Class A Common Stock pursuant to the conversion of $3,408 of convertible debt held by St. George Investments,
LLC, which consisted of $3,408 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 18, 2015, the Company issued
3,750,000 shares of Class A Common Stock pursuant to the conversion of $2,700 of convertible debt held by St. George Investments,
LLC, which consisted of $2,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 26, 2015, the Company issued 70,000,000
shares of Class A Common Stock pursuant to the conversion of $8,400 of convertible debt held by St. George Investment LLC, which
consisted of $8,400 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On April 24, 2015, the Company issued 89,000,000
shares of Class A Common Stock pursuant to the conversion of $5,340 of convertible debt held by St. George Investment LLC, which
consisted of $5,340 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Conversion by Magna Equities LLC
On January 7, 2015, the Company issued
3,756,980 shares of Class A Common Stock pursuant to the conversion of $7,323.64 of convertible debt held by Magna Equities LLC,
which consisted of $7,323.64 principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On January 30, 2015, the Company issued
4,090,910 shares of Class A Common Stock pursuant to the conversion of $4,500 of convertible debt held by Magna Equities LLC, which
consisted of $4,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 12, 2015, the Company issued
3,756,980 shares of Class A Common Stock pursuant to the conversion of $2,800 of convertible debt held by Magna Equities LLC, which
consisted of $2,800 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 20, 2015, the Company issued
5,291,006 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Magna Equities LLC, which
consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 25, 2015, the Company issued
28,000,000 shares of Class A Common Stock pursuant to the conversion of $14,000 of convertible debt held by Magna Equities LLC,
which consisted of $14,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On March 3, 2015, the Company issued 15,003,751
shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by Magna Equities LLC, which consisted
of $2,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 10, 2015, the Company issued 52,238,806
shares of Class A Common Stock pursuant to the conversion of $3,500 of convertible debt held by Magna Equities LLC, which consisted
of $3,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 13, 2015, the Company issued 54,135,139
shares of Class A Common Stock pursuant to the conversion of $7,200 of convertible debt held by Magna Equities LLC, which consisted
of $7,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 16, 2015, the Company issued 53,731,344
shares of Class A Common Stock pursuant to the conversion of $3,600 of convertible debt held by Magna Equities LLC, which consisted
of $3,600 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by IBC Funds LLC
On February 13, 2015, the Company issued
12,000,000 shares of Class A Common Stock pursuant to the conversion of $7,260 of convertible debt held by IBC Funds LLC, which
consisted of $7,260 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 24, 2015, the Company issued
12,000,000 shares of Class A Common Stock pursuant to the conversion of $5,280 of convertible debt held by IBC Funds LLC, which
consisted of $5,280 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 3, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted
of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 5, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted
of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 9, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On March 13, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 18, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 23, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 25, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 27, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 31, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 1, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 5, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by Blackbridge Capital LLC
On February 18, 2015, the Company issued
14,876,033 shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt held by Blackbridge Capital
LLC, which consisted of $9,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 24, 2015, the Company issued
30,000,000 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Blackbridge Capital
LLC, which consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 26, 2015, the Company issued
37,000,000 shares of Class A Common Stock pursuant to the conversion of $3,700 of convertible debt held by Blackbridge Capital
LLC, which consisted of $3,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 2, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $4,000 of convertible debt held by Blackbridge Capital LLC, which
consisted of $4,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 5, 2015, the Company issued 28,424,700
shares of Class A Common Stock pursuant to the conversion of $2,842.47 of convertible debt held by Blackbridge Capital LLC, which
consisted of $2,842.47 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
Preferred C Stock
On January 21, 2015, the Company issued
12,564,800 shares of Preferred C Stock pursuant to the exchange agreement with our CEO in exchange for 12,564,800 shares of Class
A Common Stock.
On February 13, 2015, the Company issued
210,000,000 shares of Class A Stock pursuant to the exchange agreement with our CEO in exchange for 70,000,000 shares of Preferred
C Stock.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Common A Issuance
On April 30, 2015, the Company issued 450,000,000 shares of
Common A Stock to our CEO for services.
Debt Conversion by Related Party
On March 2, 2015, the Company issued 64,000,000
shares of Class A Common Stock pursuant to the conversion of $21,416.10 of convertible debt held by GG Mars, a company owned by
our CEO’s family member, a related party, which consisted of $18,750 of principal and $2,666.10 of interest. The note was
converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 3, 2015, the Company issued 44,000,000
shares of Class A Common Stock pursuant to the conversion of $3,300 of convertible debt held by Star Financial, a company owned
by our CEO’s family member, a related party, which consisted of $3,300 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On March 11, 2015, the Company issued 22,000,000
shares of Class A Common Stock pursuant to the conversion of $1,650 of convertible debt held by Star Financial, a company owned
by our CEO’s family member, a related party, which consisted of $1,650 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On March 24, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $4,666.10 of convertible debt held by GG Mars, a company owned by
our CEO’s family member, a related party, which consisted of $2,000 of principal and $2,666.10 of interest. The note
was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 3, 2015, the Company issued 57,000,000
shares of Class A Common Stock pursuant to the conversion of $2,850 of convertible debt held by Star Financial, a company owned
by our CEO’s family member, a related party, which consisted of $2,850 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On April 7, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by GG Mars, a company owned by our
CEO’s family member, a related party, which consisted of $2,000 of principal. The note was converted in accordance with the
conversion terms; therefore no gain or loss has been recognized.
On April 14, 2015, the Company issued 100,000,000
shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt held by GG Mars, a company owned by our
CEO’s family member, a related party, which consisted of $5,000 of principal. The note was converted in accordance with the
conversion terms; therefore no gain or loss has been recognized.
Debt Conversion
On April 13, 2015, the Company issued 110,500,000
shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Michael Dobbs, which consisted
of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On April 13, 2015, the Company issued 110,500,000
shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Ronald Aarons, which consisted
of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On April 13, 2015, the Company issued
110,500,000 shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Scott Sanchez, which
consisted of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive
officer and principal financial officer, Shaun Passley, Ph.D., evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the
end of the period covered by this Report. Based on that evaluation, Dr. Passley concluded that our disclosure controls and procedures
are not effective, which are discussed below in more detail, in timely alerting him to material information relating to us being
required to be included in our periodic SEC filings and in ensuring that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive
and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses
in internal control over financial reporting as identified below under the heading “Management’s Report on Internal
Control over Financial Reporting.” Management anticipates that such disclosure controls and procedures will not be effective
until the material weaknesses are remediated.
Our management, including our principal executive
officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will
prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures
in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with
generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report
fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Management’s Report on Internal Control
over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment,
our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in Internal Control-Integrated Framework. Based upon this evaluation, management concluded that our internal control over financial
reporting was not effective as of December 31, 2014 for the following reasons.
| · | The Company does not have an independent board of directors or audit committee or adequate segregation
of duties due to the limited nature and resources of the Company; |
| · | All of our financial reporting and review of critical accounting areas and disclosures and material
non-standard transactions is carried out by our financial reporting consultant; and |
| · | We have inadequate separation of duties. |
We intend to rectify these weaknesses by implementing
an independent board of directors and hiring of additional accounting personnel once we have sufficient resources available.
This annual report does not include an attestation
report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report
was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's report in this annual report.
Changes in Internal Control Over Financial
Reporting
There have been no changes in our internal
control over financial reporting through the date of this report or during the quarter ended December 31, 2014, that materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
No Attestation Report by Independent Registered Accountant
The effectiveness of our internal control over
financial reporting as of December 31, 2014 has not been audited by our independent registered public accounting firm by virtue
of our exemption from such requirement as a smaller reporting company.
ITEM 9B. OTHER INFORMATION
Formation of Subsidiary – Terran Power,
Inc., September 19, 2013
On September 19, 2013, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Terran Power, Inc. The Company plans to file a non-provisional patent application to develop a
mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing an outlet or
a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.
Subsidiary Formation – FlexFridge,
Inc., March 4, 2013
On March 4, 2013, the Board of Directors of
Epazz, Inc. (the “Company”), consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved
the formation of a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc., which was later renamed,
Z Fridge, Inc., and ultimately again renamed as, FlexFridge, Inc. (“FlexFridge”) on May 29, 2014. The Company
has filed a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge.
On November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz,
Inc. received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial
interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards
Codification (“ASC”) 810-10.
Telecorp Products, Inc., Stock Purchase
Agreement
On February 28, 2014, the Company entered into
a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario Canada
corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder and the
sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding shares
of Telecorp from Troy Holdings, for an aggregate purchase price of $320,000 (the “Purchase Price”). The Purchase Price
was payable as follows:
|
(a) |
The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and |
|
(b) |
The Company provided Troy Holdings with a Promissory Note in the amount of $120,000 (the “Telecorp Note”), which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum. |
Additionally, the Company agreed to assume
aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. As a result of the Closing, Telecorp
became a wholly-owned subsidiary of the Company.
In connection with the Stock Purchase Agreement,
the shareholders of Telecorp and the Company entered into a Non-Disclosure/Non-Compete Agreement, pursuant to which the shareholders
of Telecorp and the Company, each agreed to not for a period of one (1) year, communicate or divulge to, or use for the benefit
of itself or any other person, firm, association or corporation, any information in any way relating to the Proprietary Property,
in competition with the business of the Company, and pursuant to the agreement, the shareholders of Telecorp agreed not to compete
against the Company for one (1) year from the closing of the acquisition.
Zinergy (DBA) formerly Cynergy Software,
Asset Purchase
On March 13, 2014, the Company entered into
an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase
Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s
help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers,
software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing,
$25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the
closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation.
The acquisition was financed in part with a software financing agreement. Financing agreement has a lien against the software assets.
Zinergy Service Desk Software is very customizable
for your business processes. Integrate Zinergy with just about every other business tool you can think of. Help Desk Support Software,
Help Desk Ticketing Software, Customer Support Software, HRIS Ticketing Solution and much more.
Jadian Enterprises, Inc., Asset Purchase
Agreement
On May 16, 2014, the Company, through a newly-formed
wholly-owned Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset Purchase Agreement
(“APA”) with Jadian, Inc., a Michigan corporation (“Jadian”). Pursuant to the APA, we purchased substantially
all of the intangible assets and certain tangible assets used in connection with Jadian’s software business, including all
of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable
in consideration for an aggregate of $425,000, of which $215,000 was paid at the closing and $210,000 was financed by way of a
Promissory Note (the “Jadian Note”). The terms of the Jadian Note include interest at 6% per annum, a ten (10) year
amortization, full right of offset, no payments of either principal or interest for thirty (30) days after Closing and equal payments
of principal and interest commencing thereafter, no prepayment penalty, and a balloon payment consisting of full payment of all
amounts due after three (3) years, subject to certain offsets, including an offset for $40,760 for prepaid maintenance contracts
received by the seller prior to Closing. The Jadian Note is secured by a lien on the assets of Jadian. We did not purchase and
Jadian agreed to retain and be responsible for any and all liabilities of Jadian. We did not purchase and Jadian agreed to retain
and be responsible for any and all liabilities of Jadian.
The Company also agreed to provide the seller
with additional earn-out rights in connection with the purchase, which provide that the seller will receive up to a maximum of
$100,000 per year for the three twelve month periods following the Closing (any delinquent earn-out payment shall bear interest
at the rate of 10% per annum until the delinquent amount is paid), based on the gross revenues generated by Jadian during such
applicable year based on the following schedule (the “Earn-Out”):
Revenue for the Relevant Year |
Earn-Out |
$-0- to $500,000 |
$ |
- |
$500,000 to $600,000 |
$ |
25,000 |
$600,000 to $700,000 |
$ |
50,000 |
$700,000 to $800,000 |
$ |
75,000 |
$800,000 or more |
$ |
100,000 |
Provided that in no event shall the total amount
payable to Jadian Enterprises in connection with the Earn-Out exceed $100,000 per year, or $300,000 in aggregate.
Strand, Inc., Asset Purchase Agreement
On July 31, 2014, one of the Company’s
subsidiaries, Telecorp Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Strantin, Inc. (“Strantin”),
closed on an Asset Purchase Agreement (“APA”) with Strand, Inc., an Illinois corporation (“Strand”). Pursuant
to the APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets
used in connection with Strand’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $185,000, of
which $100,000 was paid at the closing, and $85,000 was financed by way of a Convertible Promissory Note (the “Strand Note”).
The terms of the Strand Note include interest at 6% per annum, no payments of either principal or interest for thirty (30) days
after Closing and monthly principal and interest payments of $2,586 commencing thereafter, no prepayment penalty, and a balloon
payment consisting of full payment of all amounts due after one (1) year. In the event we default on the July 31, 2015 balloon
payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the
parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid
price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever
is greater. The Strand Note is secured by a lien on the assets of Strand. We did not purchase and Strand agreed to retain and be
responsible for any and all liabilities of Strand. We did not purchase and Strand agreed to retain and be responsible for any and
all liabilities of Strand.
Interaction Technology, Inc., Asset Purchase
Agreement
On December 29, 2014, The Company through a
newly-formed wholly-owned Illinois subsidiary, Interaction Technology, Inc. (“Interact”), closed on an Asset Purchase
Agreement (“APA”) with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the
APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used
in connection with Interaction’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $600,000, of
which $250,000 was paid at the closing, and $150,000 was financed by way of a Promissory Note (the “Inter Note1”) and
$200,000 was financed by way of a Promissory Note (the "Inter Note2"). The terms of the Inter Note1 include interest
at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal payments
of $37,500 commencing thereafter, no prepayment penalty. The terms of the Inter Note2 include interest at 6% per annum, no payments
of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $11,881.03
commencing thereafter, no prepayment penalty. The Inter Note 1 and Inter Note2 is unsecured. We did not purchase and Inter agreed
to retain and be responsible for any and all liabilities of Inter.
Amendment to the $400,000 Convertible Promissory
Note, JMJ Financial
On July 11, 2014, the Company and JMJ Financial
amended the $400,000 convertible promissory note, originally dated November 13, 2013, of which $33,000, including a $3,000
OID, remains outstanding. The amendment specifies that due to the delinquent Form 10-K for the year ended December 31, 2013 and
the Form 10-Q for the three months ended March 31, 2014, any future borrowings shall only be made by mutual agreement of both the
borrow and lender.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our executive officers and director and their ages as of May 6,
2015 are as follows:
NAME |
AGE |
POSITION |
|
|
|
Shaun Passley, Ph.D. |
37 |
President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors |
|
|
|
Craig Passley |
43 |
Secretary |
Set forth below is a brief description of the
background and business experience of our executive officers and director.
Shaun Passley, Ph.D.
Shaun Passley, Ph.D. has been the President,
Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors since our inception in March 2000. Dr.
Passley obtained his Bachelor’s degree from De Paul University in Finance in 2000, his Master’s Degree from DePaul
University in Information Technology in 2006, his MBA from Benedictine University in 2007, Master’s Degree from Northwestern
University in Product Development in 2011 and Ph.D. from Benedictine University in 2014. Dr. Passley is a candidate for Masters
of Law in Intellectual Property for Northwestern University expected to graduate in 2016.
Directors Qualifications:
Dr. Passley is a college graduate with one
Ph.D. and three master’s degrees in software, information technology and an MBA. Dr. Passley has over 15 years of experience
in the software industry.
Craig Passley
Craig Passley has served as our Secretary since
May 2005. Since November 2000, Mr. Passley has worked for KB Builders. Mr. Passley obtained his Bachelor’s degree from Bradley
University in 1997 and his Master’s Degree from the Keller Graduate School of Management in 2000 and MBA from Lake Forest
School of Management in 2008.
Shaun Passley, Ph.D. and Craig Passley are
brothers.
The Board of Directors and Committees
Our Board of Directors does not maintain a
separate audit, nominating or compensation committee. Functions customarily performed by such committees are performed by our Board
of Directors as a whole. Our director is elected annually and holds office until our next annual meeting of the shareholders and
until his successors are elected and qualified. Officers will hold their positions at the pleasure of the Board of Directors, absent
any employment agreement. Our officers and director may receive compensation as determined by us from time to time by vote of the
Board of Directors. Such compensation might be in the form of stock options. Directors may be reimbursed by the Company for expenses
incurred in attending meetings of the Board of Directors. Vacancies in the Board are filled by majority vote of the remaining director(s).
Independence of Directors
We are not required to have independent members
of our Board of Directors, and do not anticipate having independent directors until such time as we are required to do so.
Involvement in Certain Legal Proceedings
No Executive Officer or director of the Company
has been the subject of any order, judgment, or decree of any Court of competent jurisdiction, or any regulatory agency permanently
or temporarily enjoining, barring suspending or otherwise limiting him from acting as an investment advisor, underwriter, broker
or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings
and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such
activity or in connection with the purchase or sale of any securities.
No executive officer or director of the Company
has been convicted in any criminal proceeding (excluding traffic violations) or is the subject of a criminal proceeding which is
currently pending.
No current executive officer or director of
the Company is the subject of any pending legal proceedings.
Limitation of Liability and Indemnification of Officers and Directors
Under the Illinois Business Corporation Act
of 1983, we have the authority to indemnify any person who was or is a party, or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of
the Company, or who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such
person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere
or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal action
or proceeding, that the person had reasonable cause to believe that his or her conduct was unlawful. Provided further that no indemnification
shall be made with respect to any claim, issue, or matter as to which such person has been adjudged to have been liable to the
Company, unless, and only to the extent that the court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper.
Any indemnification by the Company shall be
made upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances
because he or she has met the applicable standard of conduct set forth as described above. Such determination shall be made with
respect to a person who is a director or officer at the time of the determination: (1) by the majority vote of the directors who
are not parties to such action, suit or proceeding, even though less than a quorum, (2) by a committee of the directors who are
not parties to such action, suit, or proceeding, even though less than a quorum, designated by a majority vote of the directors,
(3) if there are no such directors, or if the directors so direct, by independent legal counsel in a written opinion, or (4) by
the shareholders.
Expenses (including attorney's fees) incurred
by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of
the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer
to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Company. Such
expenses (including attorney's fees) incurred by former directors and officers or other employees and agents may be so paid on
such terms and conditions, if any, as the Company deems appropriate.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended (the “Securities Act”), may be permitted to directors, officers
or persons controlling Epazz pursuant to the foregoing provisions, Epazz has been informed that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Board Committees
Director Independence. The board of
directors (consisting solely of Dr. Passley) has analyzed the independence of each director and has concluded that we currently
don’t have any directors that are considered independent directors in accordance with the director independence standards
of the NYSE Amex Equities.
Audit Committee. Currently, we do not
have an audit committee. At this time, the board of directors (consisting solely of Dr. Passley) will perform the necessary functions
of an audit committee, such as: recommending an independent registered public accounting firm to audit the annual financial statements;
reviewing the independence of the independent registered public accounting firm; review of the financial statements and other required
regulatory financial reporting; and reviewing management’s policies and procedures in connection with its internal control
over financial reporting.
Additionally, we do not have a financial expert.
We believe the cost related to retaining a financial expert at this time is prohibitive. However, at such time the Company has
the financial resources; a financial expert will be hired.
Compensation Committee. We currently
do not have a compensation committee of the board of directors. Until a formal committee is established our board of directors
will review all forms of compensation provided to our executive officers, directors, consultants and employees, including stock
compensation. The board (consisting solely of Dr. Passley) makes all compensation decisions for the Executives and approves recommendations
regarding equity awards to all elected officers of Epazz. Decisions regarding the non-equity compensation of other executive officers
are made by the board.
Nominating Committee. We do not have
a Nominating Committee or Nominating Committee Charter. Our board of directors (consisting solely of Dr. Passley) performs some
of the functions associated with a Nominating Committee. We elected not to have a Nominating Committee during the year ended December
31, 2014, in that we had only two officers and one director.
Director Nomination Procedures. Generally,
nominees for directors are identified and suggested by the members of the board or management using their business networks. The
board has not retained any executive search firms or other third parties to identify or evaluate director candidates in the past
and does not intend to in the near future. In selecting a nominee for director, the board or management considers the following
criteria:
| · | whether the nominee has the personal attributes for successful service on the board, such as demonstrated
character and integrity; experience at a strategy/policy setting level; managerial experience dealing with complex problems; an
ability to work effectively with others; and sufficient time to devote to the affairs of the Company; |
| · | whether the nominee has been the chief executive officer or senior executive of a public company
or a leader of a similar organization, including industry groups, universities or governmental organizations; |
| · | whether the nominee, by virtue of particular experience, technical expertise or specialized skills
or contacts relevant to the Company’s current or future business, will add specific value as a board member; and |
| · | whether there are any other factors related to the ability and willingness of a new nominee to
serve, or an existing board member to continue his service. |
The board or management has not established
any specific minimum qualifications that a candidate for director must meet in order to be recommended for board membership. Rather,
the board or management will evaluate the mix of skills and experience that the candidate offers, consider how a given candidate
meets the board’s current expectations with respect to each such criterion and make a determination regarding whether a candidate
should be recommended to the stockholders for election as a director. During 2013, the Company received no recommendation for directors
from its stockholders.
Report of the Audit Committee
Our board of directors has reviewed and discussed
our audited financial statements for the fiscal year ended December 31, 2014 with senior management. The board of directors has
also discussed with M&K CPAS, PLLC, our independent auditors, the matters required to be discussed by the statement on Auditing
Standards No. 61 (Communication with Audit Committees) and received the written disclosures and the letter from M&K required
by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees). The board of directors has discussed
with M&K the independence of M&K as our auditors. Finally, in considering whether the independent auditors provision of
non-audit services to us is compatible with the auditors’ independence for M&K, our board of directors has recommended
that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014
for filing with the United States Securities and Exchange Commission. Our board of directors did not submit a formal report regarding
its findings.
BOARD OF DIRECTORS
Shaun Passley, Ph.D.
Notwithstanding anything to the contrary set
forth in any of our previous or future filings under the United States Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate this report in future filings with the Securities and Exchange Commission, in whole
or in part, the foregoing report shall not be deemed to be incorporated by reference into any such filing.
ITEM 11. EXECUTIVE COMPENSATION
Stock Option Grants
We have not granted any stock options to our
executive officers since our incorporation.
Employment Agreements
On September 6, 2012, we entered into an employment
agreement with Shaun Passley, Ph.D., our Chief Executive Officer, President, and Chairman of the Board of Directors which had a
term of ten (10) years. Compensation pursuant to the agreement calls for a base salary of $180,000 per year; of which $30,000 shall
be payable annually in cash and $150,000 shall be payable in shares of the Company’s Common Stock at the rate of $0.006 per
share, or 25,000,000 shares per year. In addition, the Company issued 1 billion shares of Class A Common Stock to the Company’s
CEO as a bonus in consideration for various services performed, and to be performed over a ten year period beginning on September
6, 2012, provided that all of the shares remain subject to forfeiture until such time, if ever, as we generate annual revenues
of at least $10 million, subject to the below termination provisions. The total fair value of the common stock was $6,000,000 based
on the closing price of the Company’s common stock on the date of grant, which has been presented as a deduction against
additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The
vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares. In the event of the termination of Dr. Passley’s employment agreement for cause by the Company or without
good reason by Dr. Passley, any non-vested shares are to be cancelled and he is to be paid any consideration he is owed through
the date of termination. In the event of the termination of Dr. Passley’s employment agreement for good reason (as described
in the agreement) by Dr. Passley or without cause by the Company, he is due eight additional weeks of compensation and all non-vested
shares vest to him immediately. In the event of the termination of Dr. Passley’s employment agreement for any other reason,
he is due eight weeks of additional salary and any non-vested shares are to be cancelled.
On August 16, 2013, the Company amended Shaun
Passley, Ph.D.’s employment agreement to increase the cash portion of his compensation from $30,000 per year to $100,000
in the initial year of the agreement only. All other terms remain in effect, and the shares of stock awarded as a bonus as previously
disclosed were granted in addition to the stock based compensation outlined in the original agreement.
We do not have an employment or consultant
agreement with Craig Passley, our Secretary, however on March 20, 2013, we granted 60 million shares to Craig Passley for services
rendered between 2012 and 2021. The shares vest annually over the 10 year period with the first 6 million vesting upon the grant
date. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible
Series C Preferred shares.
COMPENSATION DISCUSSION AND ANALYSIS
Director Compensation
Our Board of Directors, currently consisting
solely of Shaun Passley, Ph.D., does not currently receive any consideration for its service as a member of the Board of Directors.
The Board of Directors reserves the right in the future to award the members of the Board of Directors cash or stock based consideration
for their services to the Company, which awards, if granted shall be in the sole determination of the Board of Directors.
Executive Compensation Philosophy
Our Board of Directors, consisting solely of
Dr. Passley, determines the compensation given to our executive officers in its sole determination. Dr. Passley in his capacity
as our sole director has the power to set his own compensation, without the required approval of any other individual or shareholder.
Additionally, our Board of Directors, currently consisting solely of Dr. Passley, reserves the right to issue our executives shares
of Common Stock issued in consideration for services rendered and/or to award incentive bonuses which are linked to our performance,
as well as to the individual executive officer’s performance in the future. This package may also include long-term stock
based compensation to certain executives which is intended to align the performance of our executives with our long-term business
strategies. Additionally, while our Board of Directors has not granted any performance based stock options to date, the Board of
Directors reserves the right to grant such options in the future, if the Board in its sole determination believes such grants would
be in the best interests of the Company.
Incentive Bonus
The Board of Directors may grant incentive
bonuses to our executive officers in its sole discretion, if the Board of Directors believes such bonuses are in the Company’s
best interest, after analyzing our current business objectives and growth, if any, and the amount of revenue we are able to generate
each month, which revenue is a direct result of the actions and ability of such executives.
Long-term, Stock Based Compensation
In order to attract, retain and motivate executive
talent necessary to support the Company’s long-term business strategy we may award certain executives with long-term, stock-based
compensation in the future, in the sole discretion of our Board of Directors, which we do not currently have any immediate plans
to award.
Summary Compensation Table
The following table sets forth the compensation
of our executive officers for the years ended December 31, 2014, 2013 and 2012, respectively:
|
|
|
Stock |
All Other |
|
Name and Principal Position |
Year |
Salary |
Awards |
Compensation |
Total |
Shaun Passley, Ph.D.,(1) |
2014 |
$23,000 |
$2,280,979(2-5) |
$-0- |
$2,303,979 |
Chief Executive Officer, Chief Financial Officer, |
2013 |
$108,016 |
$1,499,500(2-5) |
$-0- |
$1,607,516 |
and Chairman of the Board of Directors |
2012 |
$82,816 |
$758,236(6-10) |
$-0- |
$841,052 |
_______________
(1) | Other than the named executive officer above, the Company had no other executive officers who made
more than $100,000 in total compensation for the years ended December 31, 2014, 2013 or 2012. |
(2) | On January 17, 2014, the Company issued 600,000,000 of Preferred C Stock to the Company’s
CEO in exchange for 60,000 of Common A in consideration of the employment and shares vested immediately. |
(3) | On March 22, 2014, the Company issued 1,821,052,632 of Preferred C Stock to the Company’s
CEO in exchange for 182,105 of Common A in consideration of the employment and shares vested immediately. |
(4) | On July 8, 2013, the Company issued 7 shares of Class A Common Stock to the Company’s CEO
in consideration for providing product development services, of which 20,000 shares vested immediately and the remaining 51,052
shares will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock
was $497,368 based on the closing price of the Company’s common stock on the date of grant, of which $140,000 was expensed
during 2013 and $357,368 is presented as a deduction against additional paid in capital in the equity section of the balance sheet
until the terms of the vesting periods are satisfied. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant
to the exchange of these shares for Convertible Series C Preferred shares. |
(5) | On May 16, 2013, the Company issued 7 shares of Class A Common Stock to the Company’s CEO
in consideration for providing product development services. The total fair value of the common stock was $1,350,000 based on the
closing price of the Company’s common stock on the date of grant. |
(6) | On March 16, 2013, the Company issued 5,000,000 shares of Convertible Class B Common Stock to the
Company’s CEO in consideration for providing product development services. The total fair value of the common stock was $9,500
based on the closing price of the Company’s common stock on the date of grant. |
(7) | On March 5, 2013, the Company issued 2 shares of Class A Common Stock to the Company’s CEO
in consideration for providing product development services. The shares will be vested once the Company reports revenue of $10
million in a calendar year. The total fair value of the common stock was $400,000 based on the closing price of the Company’s
common stock on the date of grant, which is presented as a deduction against additional paid in capital in the equity section of
the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions were subsequently lifted on March
22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares. |
(8) | On July 1, 2012, the Company issued 3,000,000 shares of Convertible Class B Common Stock to Shaun
Passley, Ph.D., the Company’s sole director and Chief Executive Officer for services provided and personal guaranties associated
with previous acquisition activities. The fair value of the class B common stock was $24,000 based on valuations performed using
an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for
lack of marketability. |
(9) | On July 2, 2012, the Company issued 1,000 shares of convertible Series A Preferred Stock to Shaun
Passley, Ph.D., the Company’s sole director and Chief Executive Officer for services provided and personal guaranties associated
with previous acquisition activities. The total fair value of the preferred stock was $229,236 based on valuations performed using
an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for
lack of marketability. |
(10) | On July 19, 2012, the Company issued 1 shares of Class A Common Stock to Shaun Passley, Ph.D.,
the Company’s sole director and Chief Executive Officer in consideration for providing a personal guaranty and collateral
on twelve loans over the past 10 years. The total fair value of the common stock was $375,000 based on the closing price of the
Company’s common stock on the date of grant. |
(11) | On August 27, 2012, the Company issued 1 shares of Class A Common Stock to Shaun Passley, Ph.D.,
the Company’s sole director and Chief Executive Officer in consideration for providing product development services. The
total fair value of the common stock was $130,000 based on the closing price of the Company’s common stock on the date of
grant. |
(12) | On September 6, 2012, the Company issued 100,000shares of Class A Common Stock to Shaun Passley,
Ph.D., the Company’s sole director and Chief Executive Officer in consideration for various services performed, and to be
performed over a ten year period beginning on September 6, 2012. The total fair value of the common stock was $6,000,000 based
on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction against additional
paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. No shares have
yet vested; therefore the fair value of $6,000,000 was excluded from compensation. The services performed and vesting periods are
as follows: |
Vesting |
Shares |
Fair |
|
Terms |
Granted |
Value(e) |
Services Performed |
(a) |
25,000 |
$ 1,500,000 |
Base salary of 25 million shares per year over a ten year term |
(b) |
22,504 |
1,350,000 |
Compensation bonus for services provided |
(b) |
2500 |
150,000 |
Compensation for services provided related to the acquisition of IntelliSys |
(b) |
2500 |
150,000 |
Compensation for services provided related to the acquisition of PRM |
(b) |
2500 |
150,000 |
Compensation for services provided related to the acquisition of DFI |
(b) |
2500 |
150,000 |
Compensation for services provided related to the acquisition of K9 Bytes |
(b) |
2500 |
150,000 |
Compensation for services provided related to the acquisition of AutoHire Software |
(b) |
3,333 |
200,000 |
Compensation for services provided related to the acquisition of MS Health |
(c) |
3,333 |
200,000 |
Compensation for services provided related to the acquisition of a future acquisition |
(b) |
3,333 |
200,000 |
Compensation for use of the CEO's personal residence as collateral on various loans |
(d) |
29,999 |
1,800,000 |
Compensation for future use of the CEO's personal residence as collateral on various loans |
|
100,002 |
$ 6,000,000 |
|
(a)
Vests annually at a rate of 1/10th per year from the anniversary date of the employment agreement (September 6, 2012), subject
to the recognition of at least $10 million in revenues for any calendar year.
(b)
Vests subject to the recognition of at least $10 million in revenues for any calendar year.
(c)
Vests upon the latter of both, a) the future closing of an acquisition, and b) the recognition of at least $10 million in revenues
for any calendar year.
(d) Vests
annually at a rate of 1/9th per year from the anniversary date of the employment agreement (September 6, 2012), subject to the
recognition of at least $10 million in revenues for any calendar year.
(e) The
vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares.
(13) | On July 29, 2010, the Company issued 1 shares of Class A Common Stock to Shaun Passley, Ph.D.,
the Company’s sole director and Chief Executive Officer as compensation for management services rendered. On May 11, 2011,
the compensation agreement was amended such that the 1 shares will be earned over five years, monthly, following the first year
when revenues exceed $2 million. The fair value of the common stock exchanged was $800,000 based on the closing stock price at
the date of agreement. None of these shares have vested as of the date of this report. |
CORPORATE GOVERNANCE
The Company promotes accountability for adherence
to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents
that the Company files with the Securities and Exchange Commission (the “SEC”) and in other public communications made
by the Company; and strives to be compliant with applicable governmental laws, rules and regulations. The Company has not formally
adopted a written code of business conduct and ethics that governs the Company’s employees, officers and directors as the
Company is not required to do so.
In lieu of an Audit Committee, the Company’s
Board of Directors is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing
the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the
Company’s independent public accountants. The Board of Directors reviews the Company's internal accounting controls, practices
and policies.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table presents information, to
the best of our knowledge, about the beneficial ownership of our common stock on July 13, 2014, held by those persons
known to beneficially own more than 5% of our capital stock and by our directors and executive officers. The percentage of beneficial
ownership for the following table is based on 679,673 shares of Class A Common Stock issued and outstanding, 23,000,000 shares
of our Convertible Class B Common Stock issued and outstanding (which each vote 10,000 voting shares), 1,000 shares of Series A
Convertible Preferred Stock (which are convertible at any time into shares totaling 60% of our outstanding Class A Common Stock)
and 1,000 shares of Series B Convertible Preferred Stock (which are convertible at any time into shares totaling 10% of our outstanding
Class A Common Stock) issued and outstanding as of July 13, 2014.
Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting
or investment power. It also includes (unless footnoted) shares of common stock that the stockholder has a right to acquire within
60 days after July 13, 2014, through the exercise of any option, warrant or other right (including the conversion of the preferred
stock). The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the
rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted
options, warrants or other convertible securities into shares of our common stock, unless otherwise stated. Inclusion of shares
in the table does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of
those shares. Unless otherwise indicated, (i) each person or entity named in the table has sole voting power and investment power
(or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person
or entity, and (ii) the address of each person or entity named in the table is c/o Epazz, Inc., 205W. Wacker Dr., Suite 1320, Chicago,
Illinois 60606.
* less than 1%
(1) Except as indicated in the footnotes
to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment
power with respect to all securities owned by such person.
(2) Does not include shares of Class
A Common Stock issuable upon conversion of outstanding shares of Convertible Class B Common Stock, Convertible Series A Preferred
Stock or Convertible Series B Preferred Stock which are reported separately in the table or described in the footnotes below.
(3) Percentage of beneficial ownership
is based upon 10,500,000 shares of Convertible Class B Common Stock outstanding as of July 13, 2014. Each share of Convertible
Class B Common Stock votes 10,000 voting shares on all shareholder matters and converts at the option of the holder thereof into
Class A Common Stock on a one-for-one basis.
(4) Percentage of beneficial ownership
is based upon 1,000 shares of Convertible Series A Preferred Stock outstanding as of July 13, 2014. The Convertible Series
A Preferred Stock does not have any voting rights (other than specifically to matters associated with the Convertible Series A
Preferred Stock) and all Convertible Series A Preferred Stock shares are convertible at the option of the holders thereof into
60% of our then outstanding Class A Common Stock.
(5) Percentage of beneficial ownership
is based upon 1,000 shares of Convertible Series B Preferred Stock outstanding as of July 13, 2014. The Convertible Series
B Preferred Stock does not have any voting rights (other than specifically to matters associated with the Convertible Series B
Preferred Stock) and all Convertible Series B Preferred Stock shares are convertible at the option of the holders thereof into
10% of our then outstanding Class A Common Stock.
(6) Percentage of beneficial ownership
is based upon 2,943,722,200 shares of Convertible Series C Preferred Stock outstanding as of July 13, 2014. The Convertible
Series C Preferred Stock carries 3 voting rights for each share issued and outstanding and all Convertible Series C Preferred Stock
shares are convertible at the option of the holders thereof into 3 shares of Class A Common Stock.
(7) Related Party, Vivienne Passley
is the aunt of the Company’s CEO, Shaun Passley, Ph.D..
(8) Includes 50 shares held in the
name of IT Business Solutions Group, Inc., which is a defunct entity. Dr. Passley beneficially owns the shares.
(9) Includes 2,823 million shares
held in the name of GG Mars Capital, Inc., which is 100% owned by Vivienne Passley.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, DIRECTOR INDEPENDENCE
Related Party Debt Financing Arrangements
On August 15, 2013, GG Mars Capital, Inc.,
a corporation owned by an immediate family member of the Company’s CEO, acquired a note from another independent lender and
the Company subsequently exchanged the promissory note for an unsecured $14,838 convertible promissory note that carried an 11%
interest rate (“First GG Mars Note”). The principal and interest was convertible into shares of common stock at the
discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the
Company’s common stock for the one hundred and twenty (120) days prior to the conversion date, or $0.00001 per share, whichever
was greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of
$14,838 was immediately converted at the election of the note holder into 46,857 shares.
On July 7, 2012, the Company issued an unsecured
$440,849 convertible promissory note due to a related party, which carries a 10% interest rate (“Star Convertible Note”),
and matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of
the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive
trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note
carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s
issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal
to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification
resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000
shares pursuant to debt conversion on September 15, 2012, $46,000 into 5,000 shares pursuant to debt conversion on March 14, 2013,
$40,000 into 5,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 8,000 shares pursuant to debt conversion
on July 9, 2013 and $32,000 into another 4,000 shares pursuant to debt conversion on August 7, 2013, $18,750 into 12,500 shares
pursuant to debt conversion on April 7, 2014, $20,000 into 20,000 shares pursuant to debt conversion on May 3, 2014, and $15,000,
consisting of $7,699 of principal and $7,301 of interest into 15,000 shares pursuant to the final debt conversion on May 22, 2014.
The outstanding balance of this note is $-0- and $46,449 at December 31, 2014 and December 31, 2013 respectively.
We borrow money from our Chief Executive Officer,
Shaun Passley, Ph.D. and other related parties periodically under verbal agreements. We owed $-0- and $46,449 as of December 31,
2014 and 2013, respectively. A total of $46,449 was repaid by the CEO during the year ended December 31, 2014.
On September 10, 2014, an amendment to
the corporation’s Articles of Incorporation was approved with respect to the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock. With regard to each series of preferred stock, the Corporation shall not without first obtaining
the approval, by written consent, as provided by law, of the holders of 2/3rds of the then outstanding shares of each respective
series of Preferred Stock, to increase or decrease, other than by redemption or conversion, the total number of authorized shares
of each respective series of Preferred Stock , to effect an exchange, reclassification, or cancellation of all or a part of each
respective series of Preferred Stock, but excluding a stock split, forward split or reverse stock split of the Corporation’s
Common Stock or series B Preferred Stock, to effect an exchange, or create a right of exchange, of all or part of the shares of
another class of shares into shares of any series of Preferred Stock, or to alter or change the rights, preferences or privileges
of the shares of any series of Preferred Stock so as to affect adversely the shares of such series. With respect to the Class
B Common Stock, the amendment as approved stipulates that The Corporation will take all such action as may be necessary or appropriate
in order to protect the Conversion rights of the holders of Class B Common Stock against impairment as a result of any reorganization,
transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action.
A valuation of the various classes of stock
was performed by an independent third party to provide an estimated change in the fair value of each class affected by the amendment.
The estimated change to the fair value of the various classes of stock is $721,207. The market value of equity was estimated with
the market price of the Company's Class A common stock as of September 10, 2014 according to Capital IQ.
Related Party Equity Issuances
Debt Conversions into Class A Common
Stock
On April 2, 2014, the Company issued 25,000
shares of Class A Common Stock pursuant to the conversion of $25,000 of convertible debt held by Vivienne Passley, a related party,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On April 7, 2014, the Company issued 12,500
shares of Class A Common Stock pursuant to the conversion of $18,750 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 3, 2014, the Company issued 20,000 shares
of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a related
party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On May 22, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On June 17, 2014, the Company issued 33,433
shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party,
which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
Conversions of Series C Preferred Stock
into Class A Common Stock
On October 10, 2014 the Company issued 30,000,000
shares of Class A Common to our CEO from a conversion notice from Preferred C. As this was a conversion within the terms of the
Preferred C equity instrument no additional value was recognized as a result of this conversion
On October 10, 2014 the Company issued 1,500,000
shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party, from a conversion
notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was
recognized as a result of this conversion
On October 10, 2014 the Company issued 1,400,000
shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from a conversion
notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was
recognized as a result of this conversion
Loss on Convertible Debt Modification
to Related Party
On March 5, 2013, we amended a convertible
promissory note with Star Financial Corporation, which then carried a balance of $190,849, to revise the conversion terms from
a $0.005 floor and 75% discount to market to conversion terms consisting of, "equal to the greater of, (a) 50% of the Market
Price, or (b) the fixed conversion price of $0.00075 per share". The Company compared the fair value of the debt immediately
preceding the modification to the fair value after the modification to determine the loss on modification of $81,792. This value
was determined using the value of the shares assuming the note was converted pursuant to the respective conversion terms on the
date of modification. The total value of the shares after modification was $272,641, compared to the $190,849 value preceding the
modification, resulting in a loss on modification of $81,792.
Shares of Class A Common Stock Issued
for Services to Related Parties
On March 5, 2013, the Company issued 1250 shares
of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on an acquisition loan that originated
on September 30, 2010. The total fair value of the common stock was $25,000 based on the closing price of the Company’s common
stock on the date of grant.
On March 5, 2013, the Company issued 1250 shares
of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on two acquisition loans that originated
on October 26, 2011. The total fair value of the common stock was $25,000 based on the closing price of the Company’s common
stock on the date of grant.
On March 5, 2013, the Company issued 20,000
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The shares
will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock was
$400,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction
against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied.
The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares.
On March 20, 2013, the Company issued 3550
shares of Class A Common Stock to Vivienne Passley, a related party, for providing collateral on acquisition loans that originated
on September 30, 2010 and October 26, 2011. The total fair value of the common stock was $35,500 based on the closing price of
the Company’s common stock on the date of grant.
On March 20, 2013, the Company issued 6,000
shares of Class A Common Stock to Craig Passley, a related party, for providing corporate secretary services from 2012 to 2021.
The total fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the date
of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until
the terms of the vesting periods are satisfied. A total of $6,000 was expensed related to the vested services for the year ended
December 31, 2012. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares
for Convertible Series C Preferred shares.
On May 16, 2013, the Company issued 71,053
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The total
fair value of the common stock was $1,350,000 based on the closing price of the Company’s common stock on the date of grant.
On May 24, 2013, the Company issued 3,550 shares
of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on September
30, 2010 and October 26, 2011. The total fair value of the common stock was $71,000 based on the closing price of the Company’s
common stock on the date of grant.
On July 5, 2013, the Company issued 2,500 shares
of Class A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value of the
common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.
On July 8, 2013, the Company issued 71,052
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services, of which
200,000,000 shares vested immediately and the remaining 51,052 shares will be vested once the Company reports revenue of $10 million
in a calendar year. The total fair value of the common stock was $497,368 based on the closing price of the Company’s common
stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional paid
in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions
were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.
Shares of Class A Common Stock Issued
for Loan Origination Fees to Related Parties
On July 19, 2013, the Company issued 250 shares
of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $23,000 short term
promissory note. The total fair value of the common stock was $4,250 based on the closing price of the Company’s common stock
on the date of grant.
On July 31, 2013, the Company issued 300 shares
of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination
cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $4,200 based on the
closing price of the Company’s common stock on the date of grant.
On August 2, 2013, the Company issued 300 shares
of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination
cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $5,100 based on the
closing price of the Company’s common stock on the date of grant.
On August 7, 2013, the Company granted 250
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $24,000 short term promissory note. The total fair value of the common stock was $4,250
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November
13, 2013.
On August 12, 2013, the Company issued 500
shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $51,000
short term promissory note. The total fair value of the common stock was $7,000 based on the closing price of the Company’s
common stock on the date of grant.
On August 20, 2013, the Company granted 250
shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party, as
a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock was
$3,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
On August 27, 2013, the Company granted 125
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $12,500 short term promissory note. The total fair value of the common stock was $1,500
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November
13, 2013.
On September 7, 2013, the Company granted 600
shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party, as
a loan origination cost in consideration for a $65,000 short term promissory note. The total fair value of the common stock was
$6,600 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
Convertible
Common Stock, Class B, Related Parties
On March 22, 2014, the Company issued 12,500,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing services. The total fair value
of the common stock was $44,737 based on the closing price of the Company’s common stock on the date of grant.
Dividends Payable
On January 1, 2013, the Company declared and
accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1
million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the
year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which can be paid in cash or in shares
of Class A Common Stock in lieu of cash. These Dividends are payable to related parties. On September 11, 2014 the Company issued
a total of 11,000 shares of Class A Common Stock amongst three related party Convertible Series B Preferred Stockholders pursuant
to the dividend payable of $11,000 that was earned at a rate of 1.5% of the Company’s revenues for the 2013 calendar year.
The total fair value of the common stock was $11,000 based on the closing price of the Company’s common stock on the date
of grant.
On May 6, 2015, the Company declared and accrued
dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1 million
during the year ended December 31, 201. Dividends equal to 1.5% of the Company’s revenues per quarter during the year ending
December 31, 2015 accrue quarterly, resulting in a dividend payable of $23,404, which can be paid in cash or in shares of Class
A Common Stock in lieu of cash. These Dividends are payable to related parties. The dividend will be paid in the second quarter.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the fees paid or
accrued for the audit and other services provided by our independent auditors for 2014 and 2012.
| |
2014 | | |
2013 | |
Audit fees: | |
| | | |
| | |
M&K CPAS, PLLC | |
$ | 20,000 | | |
$ | 16,500 | |
Audit-related fees: | |
| | | |
| | |
M&K CPAS, PLLC | |
| – | | |
| – | |
Tax fees: | |
| | | |
| | |
M&K CPAS, PLLC | |
| – | | |
| – | |
All other fees: | |
| – | | |
| – | |
Total fees paid or accrued to our principal accountant | |
$ | 20,000 | | |
$ | 16,500 | |
We do not have an Audit Committee. Our board
of directors acted as the Company's Audit Committee during fiscal 2014, recommending a firm of independent certified public accountants
to audit the annual financial statements; reviewing the independent auditors’ independence, the financial statements and
their audit report; and reviewing management's administration of the system of internal accounting controls.
Audit Fees: Consist of the aggregate
fees, including expenses, billed by the Company's principal accountants for professional services rendered for the audit of the
Company's consolidated financial statements and for the review of the Company's financial information included in its quarterly
reports or services that are normally provided in connection with statutory and regulatory filings or engagements.
Audit Related Fees: Consist of the aggregate
fees, including expenses, billed by principal accountants for assurance and related services reasonably related to the performance
of the Company's audit or review of the Company's financial statements.
Tax Fees: Consist of the aggregate fees,
including expenses, billed by principal accountants for tax compliance, tax advice and tax planning.
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
|
Filed |
Incorporated by reference |
Exhibit |
Exhibit Description |
herewith |
Form |
Period ending |
Exhibit |
Filing date |
3.1 |
Articles of Incorporation |
|
SB-2 |
12/04/06 |
X |
12/04/06 |
3.2 |
Articles of Amendment |
|
SB-2 |
12/04/06 |
X |
12/04/06 |
3.3 |
Articles of Amendment |
|
SB-2 |
12/04/06 |
X |
12/04/06 |
3.4 |
Articles of Amendment |
|
SB-2 |
12/04/06 |
X |
12/04/06 |
3.5 |
Statement of Change of Registered Agent |
|
SB-2 |
12/04/06 |
X |
12/04/06 |
3.6 |
Articles of Amendment |
|
SB-2 |
12/04/06 |
X |
12/04/06 |
3.7 |
Amended and Restated By-Laws |
|
SB-2 |
12/04/06 |
X |
12/04/06 |
3.8 |
Articles of Amendment |
|
10-Q |
09/30/12 |
X |
12/18/12 |
3.9 |
Articles of Amendment |
|
10-K |
12/31/12 |
X |
06/03/13 |
4.1 |
Form of Stock Certificate |
|
SB-2 |
12/04/06 |
X |
12/04/06 |
10.1 |
February 22, 2013 – Equipment Finance Agreement with Summit Funding Group, Inc. |
|
10-Q |
03/31/13 |
X |
06/14/13 |
10.2 |
March 7, 2013 – Lease Agreement with Baytree National Bank & Trust Company |
|
10-Q |
03/31/13 |
X |
06/14/13 |
10.3 |
Promissory Note with Star Financial Corporation, April 1, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.4 |
Promissory Note with Star Financial Corporation, April 12, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.5 |
Promissory Note with Star Financial Corporation, May 16, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.6 |
Promissory Note with Star Financial Corporation, June 12, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.7 |
First JMJ Financial Convertible Promissory Note, June 12, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.8 |
Software Finance Agreement with CIT Finance, LLC, May 1, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.9 |
Loan and Security Agreement with Small Business Financial Solutions, LLC, April 5, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.10 |
Merchant Agreement with Horizon Business Funding, LLC, June 11, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.11 |
Business Loan Agreement with WebBank, June 19, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.12 |
First Amendment to Executive Employment Agreement, August 16, 2013 |
|
10-Q |
06/30/13 |
X |
08/19/13 |
10.13 |
Promissory Note with Vivienne Passley, July 19, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.14 |
Promissory Note with Vivienne Passley, August 12, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.15 |
Promissory Note with Star Financial Corporation, July 31, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.16 |
Promissory Note with Star Financial Corporation, August 2, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.17 |
Promissory Note with Star Financial Corporation, August 7, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.18 |
Promissory Note with Star Financial Corporation, August 27, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.19 |
Promissory Note with GG Mars Capital, Inc., August 20, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.20 |
Promissory Note with GG Mars Capital, Inc., September 7, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.21 |
Convertible Promissory Note with GG Mars Capital, Inc., August 20, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.22 |
Assignment Agreement with GG Mars Capital, Inc. and Accion Chicago, August 15, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.23 |
Convertible Promissory Note with St. George Investments, Inc., September 5, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.24 |
Note Purchase Agreement with St. George Investments, Inc., September 5, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.25 |
Convertible Promissory Note with Asher Enterprises (Seventh Asher Note), August 19, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.26 |
Securities Purchase Agreement with Asher Enterprises (Seventh Note), August 19, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.27 |
Amendment #1 to Promissory Note with Asher Enterprises (Seventh Asher Note), November 7, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.28 |
Convertible Promissory Note with Asher Enterprises (Eighth Asher Note), September 18, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.29 |
Securities Purchase Agreement with Asher Enterprises (Eighth Note), September 18, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.30 |
Amendment #1 to Promissory Note with Asher Enterprises (Eighth Asher Note), November 7, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
10.31 |
Amendment #1 to Promissory Note with JMJ Financial (First JMJ Note), August 13, 2013 |
|
10-Q |
09/30/13 |
X |
11/19/13 |
21.1 |
Subsidiaries |
X |
|
|
|
|
31.1 |
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
X |
|
|
|
|
32.1 |
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
X |
|
|
|
|
101.INS* |
XBRL Instance Document |
|
|
|
|
|
101.SCH* |
XBRL Schema Document |
|
|
|
|
|
101.CAL* |
XBRL Calculation Linkbase Document |
|
|
|
|
|
101.DEF* |
XBRL Definition Linkbase Document |
|
|
|
|
|
101.LAB* |
XBRL Labels Linkbase Document |
|
|
|
|
|
101.PRE* |
XBRL Presentation Linkbase Document |
|
|
|
|
|
___________
* To be filed by amendment.
SIGNATURES
In accordance with the requirements of the
Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
EPAZZ, INC. |
|
|
DATED: May 13, 2015 |
By: /s/ Shaun Passley |
|
Shaun Passley, Ph.D. |
|
Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director |
|
|
EXHIBIT 21.1
SUBSIDIARIES
|
|
State of |
|
|
|
Abbreviated |
Name of Entity(2) |
|
Incorporation |
|
Relationship(1) |
|
Reference |
Epazz, Inc. |
|
Illinois |
|
Parent |
|
Epazz |
IntelliSys, Inc. |
|
Wisconsin |
|
Subsidiary |
|
IntelliSys |
Professional Resource Management, Inc. |
|
Illinois |
|
Subsidiary |
|
PRMI |
Desk Flex, Inc. |
|
Illinois |
|
Subsidiary |
|
DFI |
K9 Bytes, Inc. |
|
Illinois |
|
Subsidiary |
|
K9 Bytes |
MS Health, Inc. |
|
Illinois |
|
Subsidiary |
|
MS Health |
FlexFridge, Inc.(3) |
|
Illinois |
|
Subsidiary(4) |
|
FlexFridge |
Terran Power, Inc.(5) |
|
Illinois |
|
Subsidiary |
|
Terran |
Telecorp Products, Inc. |
|
Michigan |
|
Subsidiary |
|
Telecorp |
Jadian, Inc. |
|
Illinois |
|
Subsidiary |
|
Jadian |
Strantin, Inc. |
|
Illinois |
|
Subsidiary |
|
Strantin |
Interaction Technology, Inc. |
|
Illinois |
|
Subsidiary |
|
Interaction |
_______________
(1) All subsidiaries, with the
exception of FlexFridge, are wholly-owned subsidiaries.
(2) All entities are in the
form of Corporations.
(3) Formerly Z Fridge, Inc.
and Cooling Technology Solutions, Inc.
(4) FlexFridge, Inc. was
spun-off on November 21, 2013, and distributed on a 1:10 basis to shareholders of record on September 15, 2014.
Epazz has a controlling financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial
statements pursuant to Accounting Standards Codification (“ASC”) 810-10.
(5) Entity formed for prospective
purposes, but has not incurred any income or expenses to date.
EXHIBIT 31.1
SECTION 302 CERTIFICATION
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND PRINCIPAL ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Shaun Passley, Ph.D., certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Epazz, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting. |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on Epazz’s
most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (of persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the small business issuer’s internal control over financial reporting. |
Dated: May 13, 2015
By: /s/ Shaun Passley
Shaun Passley, Ph.D., Chief Executive Officer and Chief
Financial Officer
(Principal Executive Officer and Principal Accounting
Officer)
EXHIBIT 32.1
SECTION 906 CERTIFICATION
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Annual Report
of Epazz, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2014 (the “Report”), I,
Shaun Passley, Ph.D., Chief Executive Officer of the Company, certify, pursuant to 18 USC Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: May 13, 2015
By:
/s/ Shaun Passley
Shaun Passley, Ph.D., Chief Executive Officer and Chief
Financial Officer
(Principal Executive Officer and Principal Accounting
Officer)
This certification accompanies the
Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley
Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit M1-35
PROMISSORY NOTE
US $60,000 |
November 9, 2014 |
FOR VALUE RECEIVED, the undersigned, Epazz, Inc.., an Illinois
corporation, ("Maker") hereby promises to pay to the order of Star Financial Corporation, Inc. ("Payee"), the
principal sum of sixty thousand dollars ($60,000), in lawful money in United States of America, which shall be legal tender, bearing
interest and payable as provided herein. This Promissory Note (this “Note” or “Promissory Note”) has an
effective date of November 9, 2014. Payee will forever forgive and discharge any difference between the outstanding balance of
the fees owed to Payee by Maker as of the effective date of this Note and the principal amount of this Note upon repayment of this
Note in its entirety.
| 1. | Interest on the unpaid balance of this Note shall bear interest at the rate of fifteen percent (15%) per annum, which interest
shall accrue from the effective date until the Maturity Date (as defined below), unless prepaid prior to such Maturity Date. All
past-due principal and interest (which failure to pay such amounts after a fifteen (15) day cure period, shall be defined herein
as an “Event of Default”) shall bear interest at the rate of twenty percent (20%) per annum until paid in full (the
“Default Interest Rate”), with it being understood that Maker shall have an additional fifteen day cure periods during
the term of the Note before an Event of Default occurs. Upon an Event of Default, Payee may declare the entire amount of this Note
due and payable and shall be able to take whatever action available to it in law or equity to enforce its rights to collect an
additional $1,500 as liquidated damages in addition to the amounts owed pursuant to this Note. Interest will be computed on the
basis of a 360-day year. |
| 2. | The principal amount of this Note shall be due and payable on June 9, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be twelve thousand dollars ($12,000), as deducted from principal proceeds of this note (Net proceeds
of $48,000). |
| 4. | This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. |
| 5. | If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national
banks are not open for business, such payment shall be made on the next succeeding business day. |
| 6. | This Note shall be binding upon and inure to the benefit of the Payee named herein and Payee’s respective successors
and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note.
Payee may assign this Note or any of its rights, interests or obligations to this Note without the prior written approval of Maker. |
| 7. | No provision of this Note shall alter or impair the obligation of Maker to pay the principal of and interest on this Note at
the times, places and rates, and in the coin or currency, herein prescribed. |
| 8. | The Maker will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and comply with all laws applicable to the Maker, except where the failure to comply could not
reasonably be expected to have a material adverse effect on the Maker. Failure to comply with this provision shall constitute an
Event of Default. |
| 9. | Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now
existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges
constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or
otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate. |
| 10. | In the event the maturity of this Note is accelerated by reason of an Event of Default under this Note, any other agreement
entered into in connection herewith or therewith, or by voluntary prepayment by Maker or otherwise, then earned interest may never
include more than the Maximum Rate allowable by law, computed from the dates of each advance of the loan proceeds outstanding until
payment. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest,
or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction
of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid
balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be
refunded to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted
by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and
(ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated,
allocated and spread in equal parts during the period of the full stated term of this Note. The term "Maximum Rate" shall
mean the maximum rate of interest allowed by applicable federal or state law. |
| 11. | Except as provided herein, Maker and any sureties, guarantors and endorsers of this Note jointly and severally waive demand,
presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting,
grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments,
before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any
time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of
time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any
other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect
or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable
attorney's fees. |
| 12. | A copy of this Promissory Note signed by one party and faxed to another party shall be deemed to have been executed and delivered
by the signing party as though an original. A photocopy of this Promissory Note shall be effective as an original for all purposes. |
| 13. | This Note shall be construed and enforced under and in accordance with the laws of the State of Texas, without regard to choice-of-law
rules of any jurisdiction. |
IN WITNESS WHEREOF, Maker has duly executed this Note as of the
day and year first written above.
Epazz, INC. |
|
|
|
/s/ Shaun Passley |
November 9, 2014 |
Shaun Passley |
|
Chief Executive Officer |
|
|
|
Exhibit M1-36
PROMISSORY NOTE
US $47,000 |
January 22, 2015 |
FOR VALUE RECEIVED, the undersigned, Epazz, Inc.., an Illinois
corporation, ("Maker") hereby promises to pay to the order of Star Financial Corporation, Inc. ("Payee"), the
principal sum of forty-seven thousand dollars ($47,000), in lawful money in United States of America, which shall be legal tender,
bearing interest and payable as provided herein. This Promissory Note (this “Note” or “Promissory Note”)
has an effective date of January 22, 2015. Payee will forever forgive and discharge any difference between the outstanding balance
of the fees owed to Payee by Maker as of the effective date of this Note and the principal amount of this Note upon repayment of
this Note in its entirety.
| 1. | Interest on the unpaid balance of this Note shall bear interest at the rate of fifteen percent (15%) per annum, which interest
shall accrue from the effective date until the Maturity Date (as defined below), unless prepaid prior to such Maturity Date. All
past-due principal and interest (which failure to pay such amounts after a fifteen (15) day cure period, shall be defined herein
as an “Event of Default”) shall bear interest at the rate of twenty percent (20%) per annum until paid in full (the
“Default Interest Rate”), with it being understood that Maker shall have an additional fifteen day cure periods during
the term of the Note before an Event of Default occurs. Upon an Event of Default, Payee may declare the entire amount of this Note
due and payable and shall be able to take whatever action available to it in law or equity to enforce its rights to collect an
additional $1,500 as liquidated damages in addition to the amounts owed pursuant to this Note. Interest will be computed on the
basis of a 360-day year. |
| 2. | The principal amount of this Note shall be due and payable on August 22, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be ten thousand dollars ($10,000), as deducted from principal proceeds of this note (Net proceeds
of $37,000). |
| 4. | This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. |
| 5. | If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national
banks are not open for business, such payment shall be made on the next succeeding business day. |
| 6. | This Note shall be binding upon and inure to the benefit of the Payee named herein and Payee’s respective successors
and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note.
Payee may assign this Note or any of its rights, interests or obligations to this Note without the prior written approval of Maker. |
| 7. | No provision of this Note shall alter or impair the obligation of Maker to pay the principal of and interest on this Note at
the times, places and rates, and in the coin or currency, herein prescribed. |
| 8. | The Maker will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and comply with all laws applicable to the Maker, except where the failure to comply could not
reasonably be expected to have a material adverse effect on the Maker. Failure to comply with this provision shall constitute an
Event of Default. |
| 9. | Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now
existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges
constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or
otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate. |
| 10. | In the event the maturity of this Note is accelerated by reason of an Event of Default under this Note, any other agreement
entered into in connection herewith or therewith, or by voluntary prepayment by Maker or otherwise, then earned interest may never
include more than the Maximum Rate allowable by law, computed from the dates of each advance of the loan proceeds outstanding until
payment. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest,
or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction
of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid
balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be
refunded to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted
by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and
(ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated,
allocated and spread in equal parts during the period of the full stated term of this Note. The term "Maximum Rate" shall
mean the maximum rate of interest allowed by applicable federal or state law. |
| 11. | Except as provided herein, Maker and any sureties, guarantors and endorsers of this Note jointly and severally waive demand,
presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting,
grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments,
before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any
time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of
time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any
other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect
or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable
attorney's fees. |
| 12. | A copy of this Promissory Note signed by one party and faxed to another party shall be deemed to have been executed and delivered
by the signing party as though an original. A photocopy of this Promissory Note shall be effective as an original for all purposes. |
| 13. | This Note shall be construed and enforced under and in accordance with the laws of the State of Texas, without regard to choice-of-law
rules of any jurisdiction. |
IN WITNESS WHEREOF, Maker has duly executed this Note as of the
day and year first written above.
Epazz, INC. |
|
|
|
|
|
/s/ Shaun Passley |
January 22, 2015 |
Shaun Passley |
|
Chief Executive Officer |
|
|
|
Exhibit M1-37
PROMISSORY NOTE
US $48,000 |
February 24, 2015 |
FOR VALUE RECEIVED, the undersigned, Epazz, Inc.., an Illinois
corporation, ("Maker") hereby promises to pay to the order of Star Financial Corporation, Inc. ("Payee"), the
principal sum of forty-eight thousand dollars ($48,000), in lawful money in United States of America, which shall be legal tender,
bearing interest and payable as provided herein. This Promissory Note (this “Note” or “Promissory Note”)
has an effective date of February 24, 2015. Payee will forever forgive and discharge any difference between the outstanding balance
of the fees owed to Payee by Maker as of the effective date of this Note and the principal amount of this Note upon repayment of
this Note in its entirety.
| 1. | Interest on the unpaid balance of this Note shall bear interest at the rate of fifteen percent (15%) per annum, which interest
shall accrue from the effective date until the Maturity Date (as defined below), unless prepaid prior to such Maturity Date. All
past-due principal and interest (which failure to pay such amounts after a fifteen (15) day cure period, shall be defined herein
as an “Event of Default”) shall bear interest at the rate of twenty percent (20%) per annum until paid in full (the
“Default Interest Rate”), with it being understood that Maker shall have an additional fifteen day cure periods during
the term of the Note before an Event of Default occurs. Upon an Event of Default, Payee may declare the entire amount of this Note
due and payable and shall be able to take whatever action available to it in law or equity to enforce its rights to collect an
additional $1,500 as liquidated damages in addition to the amounts owed pursuant to this Note. Interest will be computed on the
basis of a 360-day year. |
| 2. | The principal amount of this Note shall be due and payable on September 24, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be ten thousand dollars ($10,000), as deducted from principal proceeds of this note (Net proceeds
of $38,000). |
| 4. | This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. |
| 5. | If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national
banks are not open for business, such payment shall be made on the next succeeding business day. |
| 6. | This Note shall be binding upon and inure to the benefit of the Payee named herein and Payee’s respective successors
and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note.
Payee may assign this Note or any of its rights, interests or obligations to this Note without the prior written approval of Maker. |
| 7. | No provision of this Note shall alter or impair the obligation of Maker to pay the principal of and interest on this Note at
the times, places and rates, and in the coin or currency, herein prescribed. |
| 8. | The Maker will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and comply with all laws applicable to the Maker, except where the failure to comply could not
reasonably be expected to have a material adverse effect on the Maker. Failure to comply with this provision shall constitute an
Event of Default. |
| 9. | Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now
existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges
constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or
otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate. |
| 10. | In the event the maturity of this Note is accelerated by reason of an Event of Default under this Note, any other agreement
entered into in connection herewith or therewith, or by voluntary prepayment by Maker or otherwise, then earned interest may never
include more than the Maximum Rate allowable by law, computed from the dates of each advance of the loan proceeds outstanding until
payment. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest,
or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction
of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid
balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be
refunded to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted
by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and
(ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated,
allocated and spread in equal parts during the period of the full stated term of this Note. The term "Maximum Rate" shall
mean the maximum rate of interest allowed by applicable federal or state law. |
| 11. | Except as provided herein, Maker and any sureties, guarantors and endorsers of this Note jointly and severally waive demand,
presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting,
grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments,
before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any
time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of
time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any
other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect
or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable
attorney's fees. |
| 12. | A copy of this Promissory Note signed by one party and faxed to another party shall be deemed to have been executed and delivered
by the signing party as though an original. A photocopy of this Promissory Note shall be effective as an original for all purposes. |
| 13. | This Note shall be construed and enforced under and in accordance with the laws of the State of Texas, without regard to choice-of-law
rules of any jurisdiction. |
IN WITNESS WHEREOF, Maker has duly executed this Note as of the
day and year first written above.
Epazz, INC. |
|
|
|
/s/ Shaun Passley |
February 24, 2015 |
Shaun Passley |
|
Chief Executive Officer |
|
|
|
Exhibit M1-38
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, Epazz, Inc.., an Illinois
corporation, ("Maker") hereby promises to pay to the order of Star Financial Corporation, Inc. ("Payee"), the
principal sum of twenty-two thousand dollars ($22,000), in lawful money in United States of America, which shall be legal tender,
bearing interest and payable as provided herein. This Promissory Note (this “Note” or “Promissory Note”)
has an effective date of March 3, 2015. Payee will forever forgive and discharge any difference between the outstanding balance
of the fees owed to Payee by Maker as of the effective date of this Note and the principal amount of this Note upon repayment of
this Note in its entirety.
| 1. | Interest on the unpaid balance of this Note shall bear interest at the rate of fifteen percent (15%) per annum, which interest
shall accrue from the effective date until the Maturity Date (as defined below), unless prepaid prior to such Maturity Date. All
past-due principal and interest (which failure to pay such amounts after a fifteen (15) day cure period, shall be defined herein
as an “Event of Default”) shall bear interest at the rate of twenty percent (20%) per annum until paid in full (the
“Default Interest Rate”), with it being understood that Maker shall have an additional fifteen day cure periods during
the term of the Note before an Event of Default occurs. Upon an Event of Default, Payee may declare the entire amount of this Note
due and payable and shall be able to take whatever action available to it in law or equity to enforce its rights to collect an
additional $1,500 as liquidated damages in addition to the amounts owed pursuant to this Note. Interest will be computed on the
basis of a 360-day year. |
| 2. | The principal amount of this Note shall be due and payable on October 3, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be four thousand five hundred dollars ($4,500), as deducted from principal proceeds of this note
(Net proceeds of $17,500). |
| 4. | This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. |
| 5. | If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national
banks are not open for business, such payment shall be made on the next succeeding business day. |
| 6. | This Note shall be binding upon and inure to the benefit of the Payee named herein and Payee’s respective successors
and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note.
Payee may assign this Note or any of its rights, interests or obligations to this Note without the prior written approval of Maker. |
| 7. | No provision of this Note shall alter or impair the obligation of Maker to pay the principal of and interest on this Note at
the times, places and rates, and in the coin or currency, herein prescribed. |
| 8. | The Maker will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and comply with all laws applicable to the Maker, except where the failure to comply could not
reasonably be expected to have a material adverse effect on the Maker. Failure to comply with this provision shall constitute an
Event of Default. |
| 9. | Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now
existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges
constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or
otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate. |
| 10. | In the event the maturity of this Note is accelerated by reason of an Event of Default under this Note, any other agreement
entered into in connection herewith or therewith, or by voluntary prepayment by Maker or otherwise, then earned interest may never
include more than the Maximum Rate allowable by law, computed from the dates of each advance of the loan proceeds outstanding until
payment. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest,
or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction
of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid
balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be
refunded to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted
by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and
(ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated,
allocated and spread in equal parts during the period of the full stated term of this Note. The term "Maximum Rate" shall
mean the maximum rate of interest allowed by applicable federal or state law. |
| 11. | Except as provided herein, Maker and any sureties, guarantors and endorsers of this Note jointly and severally waive demand,
presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting,
grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments,
before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any
time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of
time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any
other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect
or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable
attorney's fees. |
| 12. | A copy of this Promissory Note signed by one party and faxed to another party shall be deemed to have been executed and delivered
by the signing party as though an original. A photocopy of this Promissory Note shall be effective as an original for all purposes. |
| 13. | This Note shall be construed and enforced under and in accordance with the laws of the State of Texas, without regard to choice-of-law
rules of any jurisdiction. |
IN WITNESS WHEREOF, Maker has duly executed this Note as of the
day and year first written above.
Epazz, INC. |
|
|
|
/s/ Shaun Passley |
March 3, 2015 |
Shaun Passley |
|
Chief Executive Officer |
|
Exhibit M1-45
PROMISSORY NOTE
US $10,500 |
December 17, 2014 |
FOR VALUE RECEIVED, the undersigned, Epazz, Inc.., an Illinois
corporation, ("Maker") hereby promises to pay to the order of L & F Lawn Service, Inc. ("Payee"), the principal
sum of ten thousand five hundred dollars ($10,500), in lawful money in United States of America, which shall be legal tender, bearing
interest and payable as provided herein. This Promissory Note (this “Note” or “Promissory Note”) has an
effective date of December 17, 2014. Payee will forever forgive and discharge any difference between the outstanding balance of
the fees owed to Payee by Maker as of the effective date of this Note and the principal amount of this Note upon repayment of this
Note in its entirety.
| 1. | Interest on the unpaid balance of this Note shall bear interest at the rate of fifteen percent (15%) per annum, which interest
shall accrue from the effective date until the Maturity Date (as defined below), unless prepaid prior to such Maturity Date. All
past-due principal and interest (which failure to pay such amounts after a five (5) day cure period, shall be defined herein as
an “Event of Default”) shall bear interest at the rate of twenty percent (20%) per annum until paid in full (the “Default
Interest Rate”), with it being understood that Maker shall have an additional fifteen day cure periods during the term of
the Note before an Event of Default occurs. Upon an Event of Default, Payee may declare the entire amount of this Note due and
payable and shall be able to take whatever action available to it in law or equity to enforce its rights to collect an additional
$1,000 as liquidated damages in addition to the amounts owed pursuant to this Note. Interest will be computed on the basis of a
360-day year. |
| 2. | The principal amount of this Note shall be due and payable on December 17, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be two thousand five hundred dollars ($2,500) as deducted from principal proceeds of this note (Net
proceeds of $8,000). |
| 4. | This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. |
| 5. | If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national
banks are not open for business, such payment shall be made on the next succeeding business day. |
| 6. | This Note shall be binding upon and inure to the benefit of the Payee named herein and Payee’s respective successors
and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note.
Payee may assign this Note or any of its rights, interests or obligations to this Note without the prior written approval of Maker. |
| 7. | No provision of this Note shall alter or impair the obligation of Maker to pay the principal of and interest on this Note at
the times, places and rates, and in the coin or currency, herein prescribed. |
| 8. | The Maker will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and comply with all laws applicable to the Maker, except where the failure to comply could not
reasonably be expected to have a material adverse effect on the Maker. Failure to comply with this provision shall constitute an
Event of Default. |
| 9. | Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now
existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges
constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or
otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate. |
| 10. | In the event the maturity of this Note is accelerated by reason of an Event of Default under this Note, any other agreement
entered into in connection herewith or therewith, or by voluntary prepayment by Maker or otherwise, then earned interest may never
include more than the Maximum Rate allowable by law, computed from the dates of each advance of the loan proceeds outstanding until
payment. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest,
or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction
of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid
balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be
refunded to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted
by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and
(ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated,
allocated and spread in equal parts during the period of the full stated term of this Note. The term "Maximum Rate" shall
mean the maximum rate of interest allowed by applicable federal or state law. |
| 11. | Except as provided herein, Maker and any sureties, guarantors and endorsers of this Note jointly and severally waive demand,
presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting,
grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments,
before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any
time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of
time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any
other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect
or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable
attorney's fees. |
| 12. | A copy of this Promissory Note signed by one party and faxed to another party shall be deemed to have been executed and delivered
by the signing party as though an original. A photocopy of this Promissory Note shall be effective as an original for all purposes. |
| 13. | This Note shall be construed and enforced under and in accordance with the laws of the State of Texas, without regard to choice-of-law
rules of any jurisdiction. |
IN WITNESS WHEREOF, Maker has duly executed this Note as of the
day and year first written above.
Epazz, INC. |
|
|
|
/s/ Shaun Passley |
December 17, 2014 |
Shaun Passley |
|
Chief Executive Officer |
|
|
|
Exhibit M1-59
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, Epazz, Inc.., an Illinois
corporation, ("Maker") hereby promises to pay to the order of Star Financial Corporation. ("Payee"), the
principal sum of twenty-one thousand eight hundred seventy-five dollars ($21,875), in lawful money in United States of America,
which shall be legal tender, bearing interest and payable as provided herein. This Promissory Note (this “Note” or
“Promissory Note”) has an effective date of March 3, 2015. Payee will forever forgive and discharge any difference
between the outstanding balance of the fees owed to Payee by Maker as of the effective date of this Note and the principal amount
of this Note upon repayment of this Note in its entirety.
| 1. | Interest on the unpaid balance of this Note shall bear interest at the rate of fifteen percent (15%) per annum, which interest
shall accrue from the effective date until the Maturity Date (as defined below), unless prepaid prior to such Maturity Date. All
past-due principal and interest (which failure to pay such amounts after a five (5) day cure period, shall be defined herein as
an “Event of Default”) shall bear interest at the rate of twenty percent (20%) per annum until paid in full (the “Default
Interest Rate”), with it being understood that Maker shall have an additional fifteen day cure periods during the term of
the Note before an Event of Default occurs. Upon an Event of Default, Payee may declare the entire amount of this Note due and
payable and shall be able to take whatever action available to it in law or equity to enforce its rights to collect an additional
$1,000 as liquidated damages in addition to the amounts owed pursuant to this Note. Interest will be computed on the basis of a
360-day year. |
| 2. | The principal amount of this Note shall be due and payable on October 3, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be four thousand three hundred seventy-fifty dollars ($4,375) as deducted from principal
proceeds of this note (Net proceeds of $17,500). |
| 4. | This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. |
| 5. | If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national
banks are not open for business, such payment shall be made on the next succeeding business day. |
| 6. | This Note shall be binding upon and inure to the benefit of the Payee named herein and Payee’s respective successors
and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note.
Payee may assign this Note or any of its rights, interests or obligations to this Note without the prior written approval of Maker. |
| 7. | No provision of this Note shall alter or impair the obligation of Maker to pay the principal of and interest on this Note at
the times, places and rates, and in the coin or currency, herein prescribed. |
| 8. | The Maker will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and comply with all laws applicable to the Maker, except where the failure to comply could not
reasonably be expected to have a material adverse effect on the Maker. Failure to comply with this provision shall constitute an
Event of Default. |
| 9. | Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now
existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges
constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or
otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate. |
| 10. | In the event the maturity of this Note is accelerated by reason of an Event of Default under this Note, any other agreement
entered into in connection herewith or therewith, or by voluntary prepayment by Maker or otherwise, then earned interest may never
include more than the Maximum Rate allowable by law, computed from the dates of each advance of the loan proceeds outstanding until
payment. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest,
or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction
of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid
balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be
refunded to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted
by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and
(ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated,
allocated and spread in equal parts during the period of the full stated term of this Note. The term "Maximum Rate" shall
mean the maximum rate of interest allowed by applicable federal or state law. |
| 11. | Except as provided herein, Maker and any sureties, guarantors and endorsers of this Note jointly and severally waive demand,
presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting,
grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments,
before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any
time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of
time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any
other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect
or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable
attorney's fees. |
| 12. | A copy of this Promissory Note signed by one party and faxed to another party shall be deemed to have been executed and delivered
by the signing party as though an original. A photocopy of this Promissory Note shall be effective as an original for all purposes. |
| 13. | This Note shall be construed and enforced under and in accordance with the laws of the State of Texas, without regard to choice-of-law
rules of any jurisdiction. |
IN WITNESS WHEREOF, Maker has duly executed this Note as of the
day and year first written above.
Epazz, INC. |
|
|
|
/s/ Shaun Passley |
March 3, 2015 |
Shaun Passley |
|
Chief Executive Officer |
|
|
|
|
|
Exhibit M1-60
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, Epazz, Inc.., an Illinois
corporation, ("Maker") hereby promises to pay to the order of GG Mars, Inc. ("Payee"), the principal sum
of six thousand two hundred fifty dollars ($6,250), in lawful money in United States of America, which shall be legal tender,
bearing interest and payable as provided herein. This Promissory Note (this “Note” or “Promissory Note”)
has an effective date of March 18, 2015. Payee will forever forgive and discharge any difference between the outstanding
balance of the fees owed to Payee by Maker as of the effective date of this Note and the principal amount of this Note upon repayment
of this Note in its entirety.
| 1. | Interest on the unpaid balance of this Note shall bear interest at the rate of fifteen percent (15%) per annum, which interest
shall accrue from the effective date until the Maturity Date (as defined below), unless prepaid prior to such Maturity Date. All
past-due principal and interest (which failure to pay such amounts after a five (5) day cure period, shall be defined herein as
an “Event of Default”) shall bear interest at the rate of twenty percent (20%) per annum until paid in full (the “Default
Interest Rate”), with it being understood that Maker shall have an additional fifteen day cure periods during the term of
the Note before an Event of Default occurs. Upon an Event of Default, Payee may declare the entire amount of this Note due and
payable and shall be able to take whatever action available to it in law or equity to enforce its rights to collect an additional
$1,000 as liquidated damages in addition to the amounts owed pursuant to this Note. Interest will be computed on the basis of a
360-day year. |
| 2. | The principal amount of this Note shall be due and payable on August 18, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be one thousand two hundred fifty dollars ($1,250) as deducted from principal proceeds of
this note (Net proceeds of $5,000). |
| 4. | This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. |
| 5. | If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national
banks are not open for business, such payment shall be made on the next succeeding business day. |
| 6. | This Note shall be binding upon and inure to the benefit of the Payee named herein and Payee’s respective successors
and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note.
Payee may assign this Note or any of its rights, interests or obligations to this Note without the prior written approval of Maker. |
| 7. | No provision of this Note shall alter or impair the obligation of Maker to pay the principal of and interest on this Note at
the times, places and rates, and in the coin or currency, herein prescribed. |
| 8. | The Maker will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and comply with all laws applicable to the Maker, except where the failure to comply could not
reasonably be expected to have a material adverse effect on the Maker. Failure to comply with this provision shall constitute an
Event of Default. |
| 9. | Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now
existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges
constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or
otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate. |
| 10. | In the event the maturity of this Note is accelerated by reason of an Event of Default under this Note, any other agreement
entered into in connection herewith or therewith, or by voluntary prepayment by Maker or otherwise, then earned interest may never
include more than the Maximum Rate allowable by law, computed from the dates of each advance of the loan proceeds outstanding until
payment. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest,
or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction
of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid
balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be
refunded to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted
by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and
(ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated,
allocated and spread in equal parts during the period of the full stated term of this Note. The term "Maximum Rate" shall
mean the maximum rate of interest allowed by applicable federal or state law. |
| 11. | Except as provided herein, Maker and any sureties, guarantors and endorsers of this Note jointly and severally waive demand,
presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting,
grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments,
before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any
time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of
time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any
other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect
or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable
attorney's fees. |
| 12. | A copy of this Promissory Note signed by one party and faxed to another party shall be deemed to have been executed and delivered
by the signing party as though an original. A photocopy of this Promissory Note shall be effective as an original for all purposes. |
| 13. | This Note shall be construed and enforced under and in accordance with the laws of the State of Texas, without regard to choice-of-law
rules of any jurisdiction. |
IN WITNESS WHEREOF, Maker has duly executed this Note as of the
day and year first written above.
Epazz, INC. |
|
|
|
/s/ Shaun Passley |
March 18, 2015 |
Shaun Passley |
|
Chief Executive Officer |
|
Exhibit M2-19
Exhibit A.
THIS FIFITEEN
PERCENT (15%) CONVERTIBLE PROMISSORY NOTE IS ISSUED IN EXCHANGE FOR THAT CERTAIN PROMISSORY NOTE ISSUED TO GG MARS, INC ON
March 28, 2014. FOR PURPOSES OF RULE 144, THIS NOTE SHALL BE DEEMED TO HAVE BEEN ISSUED ON March 28, 2014.
THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN
THE EVENT OF A PARTIAL REDEMPTION OR CONVERSION.
EPAZZ, INC.
$18,750
FIFITEEN PERCENT (15%) CONVERTIBLE PROMISSORY
NOTE
DATED March 2, 2015
FOR VALUE RECEIVED of $18,750, EPAZZ, INC.,
an Illinois corporation (hereinafter called “Borrower” or the “Company”),
hereby promises to pay to GG Mars, Inc. or its assigns or successors-in-interest (the “Holder”) or order,
without demand, the aggregate principal amount of EIGHTTEEN THOUSAND SEVEN HUNDRED FIFTY DOLLARS ($18,750.00) (the “Principal
Amount”), together with interest thereon from the Issue Date, payable on December 3, 2015 (the “Maturity
Date”). Interest shall accrue at a rate of fifteen percent (15%) per annum. All Interest calculations hereunder
shall be computed on the basis of a 360-day year comprised of twelve (12) thirty (30) day months, shall compound daily
and shall be payable in accordance with the terms of this Note. “Outstanding Balance” means the Principal
Amount, as reduced or increased, as the case may be, pursuant to the terms hereof for conversion, breach hereof or otherwise,
plus any accrued but unpaid interest (including with limitation Default Interest), collection and enforcements costs, and any
other fees or charges incurred under this Note.
Article
I
CONVERSION PRIVILEGES
The conversion privileges
set forth in Article II shall remain in full force and effect immediately from the date hereof and until Note is paid in full
regardless of the occurrence of an Event of Default but subject to Article II. The Holder shall be able to convert this Note starting
from today’s date and ending until the full amount of the Note has been converted. The Principal Amount of Note together
with all unpaid interest accrued thereon and any other amounts payable hereunder, or such portion thereof, that has not previously
been converted into common stock, of the Company (the “Common Stock”) in accordance with Article II
hereof, if any, shall be payable in full on the Maturity Date.
Article
II
CONVERSION RIGHTS
The Holder shall have
the right to convert the Principal Amount together with all unpaid interest accrued thereon of this Note into shares of the Borrower’s
Common Stock as set forth below.
2.1 Conversion into the Borrower’s Common Stock.
(a) Conversion Price. The conversion price (the “Conversion Price”) shall be .00005.
(b) Conversion. The Holder shall have the option, but shall not be required, to convert all or a portion of the Note
into a number of fully paid and non-assessable shares of Common Stock (the “Conversion Shares”). The
number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the
outstanding Principal Amount together with all unpaid interest accrued thereon of this Note to be converted by (y) the Conversion
Price. The Company may deliver an objection to any Notice of Conversion within one Business Day (as described in Section 5.7 (“Business
Day”) of delivery of such Notice of Conversion. To effect conversions hereunder, the Holder shall not be required
to physically surrender this Debenture to the Company.
(c) Mechanics of Conversion. As a condition to effecting the conversion set forth in Section 2.1(b) above, the Holder
shall properly complete and deliver to the Company a Notice of Conversion, a form of which is annexed hereto as Exhibit B.
The Notice of Conversion shall set forth the Principal Amount together with all unpaid interest accrued thereon of this Note to
be converted and the date on which such conversion shall be effected (such date, the “Conversion Date”).
If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder. Upon timely delivery to the Borrower of the Notice of Conversion, certificates evidencing that number
of shares of Common Stock for the portion of the Note converted in accordance herewith shall be transmitted by the Company’s
transfer agent to the Holder by crediting the account of the Holder’s broker with The Depository Trust Company through its
Deposit / Withdrawal at Custodian system if the Company is then a participant in such system and either (A) there is an effective
registration statement permitting the issuance of the Conversion Shares to, or resale of the Conversion Shares by, the Holder or
(B) the shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise
by physical delivery to the address specified by the Holder in the Notice of Conversion by the date that is three (3) Trading Days
after the Conversion Date (such third day being the “Share Delivery Date”). The Borrower will not issue
fraction shares or scrip representing fractions of shares upon conversion, but the Borrower will round the number of the she shares
up to the nearest whole share.
(d) Obligation to Deliver Conversion Shares Absolute; Certain Remedies.
(i) Obligation Absolute. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of
this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder
to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person
or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder
or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares. The Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. All payments under this Note (whether made by the Borrower or any other person) to or
for the account of the Holder hereunder shall be made free and clear of and without reduction by reason of any present and future
income, stamp, registration and other taxes, levies, duties, costs and charges whatsoever imposed, assessed, levied or collected
by the United States or any political subdivision or taxing authority thereof or therein, together with interest thereon and penalties
with respect thereto, if any on or in respect of this Note (such taxes, levies, duties, costs and charges being herein collectively
called “Taxes”).
Failure to Deliver Common Stock Prior to
Delivery Date. Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or
equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered
as required by Section 2.1(c) by the Share Delivery Date (a “Conversion Default”), the Borrower shall
pay in cash to the Holder for each calendar day beyond the Delivery Date that the Borrower fails to deliver such Common Stock an
amount equal to 100% of the product of (1) the sum of the number of shares of Common Stock not issued to the Holder on a timely
basis and to which the Holder is entitled multiplied by (2) the Closing Trading Price of the Common Stock on the Trading Day
immediately preceding the last possible date on which the Borrower could have issued such shares of Common Stock to the Holder
without violating Section 2.1(c) (the “Conversion Default Payment”). Such cash amount shall be paid to
the Holder by the fifth day of the month following the month in which it has accrued (the “Conversion Default Payment
Due Date”). In the event such cash amount is not received by the Holder by the Conversion Default Payment Due Date,
at the option of the Holder (without notice to the Borrower), the Conversion Default Payment shall be added to the Outstanding
Balance of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note. If the Company does
not request the issuance of the Conversion Shares underlying this Note from its transfer agent after receipt of a Notice of Conversion
within TWO (2) Business days following the period allowed for any objection, the Company shall be responsible for any differential
in the value of the converted shares underlying this Note between the value of the closing price on the date the shares should
have been delivered and the date the shares are delivered. In addition, if the Company fails to timely (within 72 hours, 3 Business
Days), issue a treasury order to its transfer agent or otherwise cause to be delivered, the Conversion Shares per the instructions
of the Holder, free and clear of all legends in legal free trading form, subject to all applicable securities laws, the Company
shall allow Holder to add two (2) days to the look-back (the mechanism used to obtain the conversion price along with discount)
for each day the Company fails to timely (within 72 hours, 3 Business Days)) deliver shares, on the next conversion.
(ii) Rescission. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to or
as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the
Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the
Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to
the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice.
(e) Adjustment. The number and kind of shares or other securities to be issued upon conversion determined pursuant to
Section 2.1(b), shall be subject to adjustment, from time to time, upon the happening of certain events while this conversion right
remains outstanding, as follows:
(f) Reservation of Shares. The Borrower represents at all times to have authorized and reserved four times the number
of shares that is actually issuable upon full conversion of this Note (based on the Conversion Price in effect from time to time)
(the “Reserved Amount”). The Reserved Amount shall be increased from time to time as required to insure
compliance with this provision. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully
paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure which
would change the number of shares of Common Stock into which this Note shall be convertible at the then current Conversion Price,
the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common
Stock authorized and reserved, free from preemptive rights, for conversion of this Note. The Borrower (i) acknowledges that it
has irrevocably instructed its transfer agent to issue shares of the Common Stock issuable upon conversion of this Note, and (ii)
agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty
of issuing the necessary shares of Common Stock in accordance with the terms and conditions of this Note. If, at any time the Borrower
does not maintain the Reserved Amount it will be considered an Event of Default.
2.2 Effect of Certain Events.
(a) Fundamental
Transaction Consent Right. The Borrower shall not enter into or be party to a Fundamental Transaction (as defined below), unless
the Borrower obtains the prior written consent of the Holder to enter into such Fundamental Transaction. For purposes of this Note,
“Fundamental Transaction” means that (i) (1) the Borrower or any of its subsidiaries shall, directly
or indirectly, in one or more related transactions, consolidate or merge with or into (whether or not the Borrower or any of its
subsidiaries is the surviving corporation) any other individual, corporation, limited liability company, partnership, association,
trust or other entity or organization (collectively, “Person”), or (2) the Borrower or any of its
subsidiaries shall, directly or indirectly, in one or more related transactions, sell, lease, license, assign, transfer, convey
or otherwise dispose of all or substantially all of its respective properties or assets to any other Person, or (3) the Borrower
or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, allow any other Person to make a
purchase, tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of voting stock of
the Borrower (not including any shares of voting stock of the Borrower held by the Person or Persons making or party to, or associated
or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (4) the Borrower or any of
its subsidiaries shall, directly or indirectly, in one or more related transactions, consummate a stock or share purchase agreement
or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement)
with any other Person whereby such other Person acquires more than 50% of the outstanding shares of voting stock of the Borrower
(not including any shares of voting stock of the Borrower held by the other Person or other Persons making or party to, or associated
or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination),
or (5) the Borrower or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, reorganize,
recapitalize or reclassify the Common Stock, other than an increase in the number of authorized shares of the Borrower’s
Common Stock, or (ii) any “person” or “group” (as these terms are used for purposes of Sections 13(d)
and 14(d) of the 1934 Act and the rules and regulations promulgated thereunder) is or shall become the “beneficial owner”
(as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented
by issued and outstanding voting stock of the Borrower. The provisions of this Section 2.2(a) shall apply similarly and equally
to successive Fundamental Transactions and shall be applied without regard to any limitations on the conversion of this Note. As
a condition to pre-approving any Fundamental Transaction in writing, which approval may be withheld in the Holder’s sole
discretion, Holder may require the resulting successor or acquiring entity (if not the Borrower) to assume by written instrument
all of the obligations of the Borrower under this Note with the same effect as if such successor or acquirer had been named as
the Borrower hereto and thereto.
(b) Adjustment Due
to Fundamental Transactions. If, at any time when this Note is issued and outstanding and prior to conversion of all of this
Note, there shall be any Fundamental Transaction that is pre-approved in writing by the Holder pursuant to Section 2.2(a) above,
as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another
class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially
all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder
of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities
or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately
prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion
of this Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter
deliverable upon the conversion hereof. The above provisions shall similarly apply to successive Fundamental Transactions.
(c) Adjustment Due
to Distribution. If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution
to the Borrower’s stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of
this Note after the date of record for determining stockholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder
been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to such Distribution.
(d) Adjustment Due
to Dilutive Issuance. If, at any time when this Note is issued and outstanding, the Borrower issues or sells, or in accordance
with this section hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions underwriting discounts or allowances in connection therewith)
less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive
Issuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the
consideration per share received by the Borrower in such Dilutive Issuance.
The Borrower shall be deemed
to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights or options (not
including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or
other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such warrants,
rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “Options”)
and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price
then in effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “price
per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount,
if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable,
by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion
of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance
of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon
exercise of such Options.
Additionally, the Borrower
shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or sells any Convertible Securities,
whether or not immediately convertible, and the price per share for which Common Stock is issuable upon such conversion or exchange
is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For the purposes
of the preceding sentence, the “price per share for which Common Stock is issuable upon such conversion or exchange”
is determined by dividing (1) the total amount, if any, received or receivable by the Borrower as consideration for the issuance
or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the
Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable,
by (2) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities.
No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange
of such Convertible Securities.
(e) Purchase Rights.
If, at any time when this Note is issued and outstanding, the Borrower issues any convertible securities or rights to purchase
stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders of any
class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock
acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately
before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f) Adjustment Due
to Non-DWAC Eligibility. If, at any time when this Note is issued and outstanding thereafter, the Holder delivers a Notice
of Conversion and at such time the Company’s Common Stock is not DWAC eligible the Borrower shall deliver certificated Conversion
Shares to the Holder pursuant to Section 2.1(c) and the Non-DWAC Eligible Adjustment Amount shall be added to the Outstanding Balance
of this Note, without limiting any other rights of the Holder under this Note. The “Non-DWAC Eligible Adjustment Amount”
is the amount equal to the number of applicable Conversion Shares multiplied by the excess, if any, of (i) the Trading Price of
the Common Stock on the Conversion Date, over (ii) the Trading Price of the Common Stock on the date the certificated Conversion
Shares are freely tradable, clear of any restrictive legend and deposited in the Holder’s brokerage account. In any such
case, Holder will use reasonable efforts to timely deposit such certificates in its brokerage account after it receives them and
cause such restrictive legends to be removed, and, without limiting any other provision hereof, Borrower agrees to fully cooperate
with Holder in accomplishing the same. Any fees charged to Holder for the stock being Non-DWAC Eligible shall be paid by the Borrower.
(g) Notice of Adjustments.
Upon the occurrence of each adjustment or readjustment of the Conversion Price or the addition of the Non-DWAC Eligible Adjustment
Amount to the Outstanding Balance as a result of the events described in this Note, the Borrower, the Non-DWAC Eligible Adjustment
Amount shall be added to the Outstanding Balance of this Note, without limiting any other rights of the Holder under this Note.
The “Non-DWAC Eligible Adjustment Amount” is the amount equal to the number of applicable Conversion Shares
multiplied by the excess, if any, of (i) the Trading Price of the Common Stock on the Conversion Date, over (ii) the Trading Price
of the Common Stock on the date the certificated Conversion Shares are freely tradable, clear of any restrictive legend and deposited
in the Holder’s brokerage account. at its expense, shall promptly compute such adjustment or readjustment and prepare and
furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder
a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii)
the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received
upon conversion of this Note.
2.3 Method of Conversion. This Note may be converted by the Holder, in whole or in part,
as described in Section 2.1(a) hereof. Upon partial conversion of Note, a new Note containing the same date and provisions of Note
shall, at the request of the Holder, be issued by the Borrower to the Holder for the principal balance of Note and interest which
shall not have been converted or paid.
2.4 Limitations on Conversion. Notwithstanding anything to the contrary contained in this
Note, this Note shall not be convertible by the Holder hereof, and the Company shall not effect any conversion of this Note or
otherwise issue any shares of Common Stock pursuant hereto, to the extent (but only to the extent) that the Holder or any of its
affiliates would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the Common Stock.
The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation
provision of this section, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares
of the Common Stock outstanding immediately after giving effect to the issuance of shares of common Stock upon conversion of this
Note held by the Holder and the Beneficial Ownership Limitation provision of this section shall continue to apply. To the extent
the above limitation applies, the determination of whether this Note shall be convertible (vis-à-vis other convertible,
exercisable or exchangeable securities owned by the Holder) shall, subject to such Maximum Percentage limitation, be determined
on the basis of the first submission to the Company for conversion, exercise or exchange (as the case may be). No prior inability
to convert this Note, or to issue shares of Common Stock, pursuant to this paragraph shall have any effect on the applicability
of the provisions of this paragraph with respect to any subsequent determination of convertibility. For purposes of this paragraph,
beneficial ownership and all determinations and calculations (including, without limitation, with respect to calculations of percentage
ownership) shall be determined in accordance with Section 13(d) of the Securities Act of 1934, as amended, and the rules and regulations
promulgated thereunder. The provisions of this paragraph shall be implemented in a manner otherwise than in strict conformity with
the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended
Maximum Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to
properly give effect to such Maximum Percentage limitation. The limitations contained in this paragraph shall apply to a successor
Holder of this Note. The holders of Common Stock shall be third party beneficiaries of this paragraph and the Company may not waive
this paragraph without the consent of holders of a majority of its Common Stock. For any reason at any time, upon the written or
oral request of the Holder, the Company shall within two (2) Trading Days confirm orally to the Holder and, if requested, in writing
to the Holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion or exercise of
convertible or exercisable securities into Common Stock, including, without limitation, pursuant to this Note.
Article
III
EVENT OF DEFAULT
The occurrence of
any of the following events of default (“Event of Default”) shall be an event of default hereunder (whatever
the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant
to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
3.1 Failure to Pay. The Borrower fails to pay the Principal Amount, interest, damages or
other sum due under this Note or any other note when due;
3.2 Breach of Covenant. The Borrower breaches any material covenant of the Note in any
material respect and such breach, if subject to cure, continues for a period of FIFTEEN (15) Trading Days after written notice
to the Borrower from the Holder;
3.3 Breach of Representations and Warranties. Any representation or warranty of the Borrower
made, in this Note, said statement or certificate given in writing pursuant hereto or in connection therewith or any other report,
financial statement or certificate shall be false or misleading in any material respect as of the date made;
3.4 Receiver or Trustee. The Borrower shall make an assignment for the benefit of creditors,
or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business;
or such a receiver or trustee shall otherwise be appointed;
3.5 Judgments. Any money judgment, writ or similar final process shall be entered or filed
against Borrower or any of its property or other assets for more than ONE MILLION DOLLARS ($1,000,000.00) and shall remain unvacated,
unbonded or unstayed for a period of THIRTY (30) days;
3.6 Bankruptcy. Bankruptcy, reorganization, insolvency proceeding, liquidation proceedings
or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for
the relief of debtors shall be instituted by or against the Borrower and if instituted against them are not dismissed within THIRTY
(30) days of initiation. The Borrower suffers any appointment of any custodian or the like for it or any substantial art of its
property that is not discharged or stayed within 30 days; the Borrower makes a general assignment of the benefit of creditors;
the Borrower fails to pay or states that it is unable to pay, or is unable to pay its debts generally as they become due;
3.7 Non-Payment. A default by the Borrower under any one or more obligations in, unless
the Borrower is contesting the validity of such obligation in good faith and has segregated cash funds equal to not less than one-half
of the contested amount;
3.8 Public Information Failure. A Public Information Failure occurs and continues for a
period of FIFTEEN (15) Days;
3.9 Beginning 30
days after the Issue Date, the failure of the Company’s Common Stock to be DWAC eligible, which failure continues for a period
of 30 days uncured, at any time during which the Borrower has obligations under this Note;
3.10 Reservation
Default. Failure by the Borrower to have reserved for issuance upon conversion of this Note the
amount of Common Stock as set forth in this Note;
3.11 Withdrawal
from registration of the Company under thelien Securities Exchange Act of 1934, as amended (the “Exchange Act”
or “1934 Act”), either voluntary or involuntary;
3.12 Any
cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts become
due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern” shall
not be an admission that the Borrower cannot pay its debts as they become due;
3.13 The
failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets which are necessary
to conduct its business (whether now or in the future;
3.14 The
Borrower shall fail to maintain the listing and/or quotation, as applicable, of the Common Stock on the Principal Market;
3.15 The
Borrower shall fail to comply with the reporting requirements of the 1934 Act; and/or the Borrower shall cease to be subject to
the reporting requirements of the 1934 Act;
3.16 Any
cessation of operations by the Borrower or the Borrower admits it is otherwise generally unable to pay its debts and such debts
become due;
3.17 The
restatement of any financial statements filed by the Borrower with the SEC for any date or period from two years prior to the
Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison to
the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to this
Note;
3.18 The
Borrower effectuates a reverse split of its Common Stock without twenty (20) calendar days prior written notice to the Holder;
3.19 In
the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, prior to the effective date
of such replacement, fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered (including but not
limited to the provision to irrevocable reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer
agent to Holder and the Borrower;
3.20 The
Company shall fail for any reason to deliver certificates to a Holder prior to the fifth Trading Day after a Conversion Date or
the company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention
to not honor requests for conversion of any Notes in accordance with the terms hereof or the Company shall fail to deliver documents
requested by the Holder or the Holder’s brokerage firm which the Holder or the Holder’s brokerage firm deem necessary
to allow Holder to sell the Company’s stock;
3.21 During the term of this Agreement, the Company enters into any Prohibited Transaction without the prior written consent
of the Holder, which consent may be withheld at the sole discretion of the Holder. For the purposes of this Note, the term “Prohibited
Transaction” shall refer to the issuance by the Company of any “future priced securities,” which shall
mean the issuance of shares of Common Stock or securities of any type whatsoever that are, or may become, convertible or exchangeable
into shares of Common Stock where the purchase, conversion or exchange price for such Common Stock is determined using any floating
discount or other post-issuance adjustable discount to the market price of Common Stock, including, without limitation, pursuant
to any equity line financing, stand-by equity distribution agreements, at the market transactions or convertible securities and
loans, securities in a registered direct public offering or an unregistered private placement where the price per share of such
securities is fixed concurrently with the execution of definitive documentation relating to the offering or placement, as applicable
and securities issued in connection with a secured debt financing, shall not be a Prohibited Transaction;
3.22 The Borrower fails to provide information requested by the Holder in order to enable the holder to have their converted
securities accepted and sold by their brokerage firm, or the Borrower attempts to prevent, block or frustrate in any manner, the
Holder from converting this Note; and
3.23 The Borrower breaches a negative covenant in Article IV of this Note
Upon the occurrence of
any Event of Default, (a) the Outstanding Balance shall immediately increase to 150% of the Outstanding Balance immediately prior
to the occurrence of the Event of Defaultand (b) this Note shall then accrue interest at the Default Rate which shall be the maximum
amount of interest available under state law during a default on a note (the “Default Rate” and collectively,
the “Default Effects”). The Default Effects shall automatically apply upon the occurrence of an Event
of Default without the need for any party to give any notice or take any other action. Further, upon the occurrence and during
the continuation of any Event of Default, the Holder may by written notice to the Borrower declare the entire Outstanding Balance
immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly
waived, anything contained herein to the contrary notwithstanding; provided, however, that upon the occurrence or
existence of any Event of Default, immediately and without notice, all outstanding obligations payable by the Borrower hereunder
shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all
of which are hereby expressly waived, anything contained herein to the contrary (“Automatic Acceleration”).
The Holder shall retain all rights under this Note, including the ability to convert the then Outstanding Balance of this Note
at all times following the occurrence of an Automatic Acceleration until the entire then Outstanding Balance has been paid in full.
If one or more of the “Events of Default” as described in the Agreement shall occur, the Borrower agrees to pay all
costs and expenses, including reasonable attorney’s fees, which the Holder may incur in collecting any amount due under,
or enforcing any terms of, this Note. The Borrower covenants that until all amounts due under this Note are paid in full, by conversion
or otherwise, the Borrower shall notify Holder in writing within one day of any of the above Events of Default.
ARTICLE IV
NEGATIVE COVENANTS
4.1 Negative
Covenants. As long as any portion of this Note remains outstanding, unless the Holder shall
have otherwise given prior written consent, the Company shall not, and shall not permit any of the Subsidiaries to, directly or
indirectly:
(a) other than Permitted Indebtedness (as defined below), enter into, create, incur, assume, guarantee or suffer to exist any
secured indebtedness for borrowed money of any kind, including, but not limited to, a guarantee, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
(b) other than Permitted Liens (as defined below), enter into, create, incur, assume or suffer to exist any liens of any kind,
on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits
therefrom;
(c) repay, repurchase or offer to repay, repurchase or otherwise acquire for cash more than a de minimis number of shares of
its Common Stock other than repurchases of Common Stock of departing officers and directors of the Company, provided that such
repurchases shall not exceed an aggregate of $100,000 during the term of this Note; or
(d) pay cash dividends or distributions on any equity securities of the Company.
(e) amend its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner that
materially and adversely affects any rights of the Holder;
(f) repay, repurchase or offer to repay, repurchase or otherwise acquire any indebtedness, other than the Debentures if on a
pro-rata basis, other than regularly scheduled principal and interest payments as such terms are in effect as of the Original Issue
Date, provided that such payments shall not be permitted if, at such time, or after giving effect to such payment, any Event of
Default exist or occur;
(g) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing
with the SEC, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested
directors of the Company (even if less than a quorum otherwise required for board approval; or
(h) enter into any agreement with respect to any of the foregoing.
4.2 Deinitions.
For the purpose of this Note, the following definitions shall apply:
(i) “Permitted Indebtedness” means (i) the Indebtedness evidenced by the Note, (ii) unsecured Indebtedness
incurred by the Company, which Indebtedness is not senior in rank to the Note and does not mature prior to six months from the
issue date of such Indebtedness, (iii) Indebtedness secured by Permitted Liens, and (iv) extensions, refinancings and renewals
of any items in clauses (i) through (iv) above, provided that the principal amount is not increased (other than with respect to
the addition of existing or future interest due and payable thereunder to the principal thereunder) or the terms modified to impose
materially more burdensome terms upon the Company or its subsidiaries, as the case may be.
(j) “Permitted Lien” means the individual and collective reference to the following: (i) any lien
for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have
been established in accordance with GAAP, (ii) any statutory lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any lien created by operation of law, such as materialmen's
liens, mechanics' liens and other similar liens, arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv) liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred
solely for the purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time of
its acquisition, provided that the lien is confined solely to the property so acquired and improvements thereon, and the proceeds
of such equipment, (v) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens
of the type described in clause (iv) above, provided that any extension, renewal or replacement lien shall be limited to the property
encumbered by the existing lien and the principal amount of the Indebtedness being extended, renewed or refinanced does not increase,
(vi) leases or subleases and licenses and sublicenses granted to others in the ordinary course of the Company's business, not interfering
in any material respect with the business of the Company and its Subsidiaries taken as a whole, (vii) liens in favor of customs
and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the importation of goods,
(viii) liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default, (ix) liens incurred
in connection with Permitted Indebtedness under clause (i) and, solely to the extent existing as of the Issue Date, clause (ii)
of the definition thereof (including any extensions, refinancings and renewals of such Indebtedness that constitute Permitted Indebtedness).
ARTICLE
V
REDEMPTION RIGHTS
5.1 Optional
Redemption Right. Subject to the provisions of this Article V, at any time (a) within ninety
(90) days after the Effective Date, the Company may deliver a notice to the Holder (an “Optional Redemption Notice”
and the date such notice is deemed delivered hereunder, the “Optional Redemption Notice Date”) of its
irrevocable election to redeem all of the then outstanding principal amount together with all unpaid interest accrued thereon
of this Note for cash at a redemption price equal to 150% multiplied by all of the then outstanding principal amount together
with all unpaid interest accrued thereon of this Note, on the 20th Trading Day following the Optional Redemption Notice
Date (such date, the “Optional Redemption Date”, such 20 Trading Day period, the “Optional
Redemption Period” and such redemption, the “Optional Redemption”), The Optional Redemption
Amount is payable in full on the Optional Redemption Date. The Company may only effect an Optional Redemption if each of the Equity
Conditions (as defined below) shall have been met (unless waived in writing by the Holder) on each Trading Day during the period
commencing on the Optional Redemption Notice Date through to the Optional Redemption Date and through and including the date payment
of the Optional Redemption Amount is actually made in full. If any of the Equity Conditions shall cease to be satisfied at any
time during the Optional Redemption Period, then the Holder may elect to nullify the Optional Redemption Notice by notice to the
Company after the day on which any such Equity Condition has not been met in which case the Optional Redemption Notice shall be
null and void, ab initio. The Company covenants and agrees that it will honor all Notices of Conversion tendered
from the time of delivery of the Optional Redemption Notice through the date all amounts owing thereon are due and paid in full.
“Equity Conditions” means, during the period in question, (a) the Company shall have duly honored all
conversions and redemptions scheduled to occur or occurring by virtue of one or more Notices of Conversion of the Holder, if any,
(b) the Company shall have paid all liquidated damages and other amounts owing to the Holder in respect of this Note, (c)(i) there
is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell
all of the Conversion Shares issuable upon conversion of such portion of this Note subject to an Optional Redemption (and the
Company believes, in good faith, that such effectiveness will continue uninterrupted for such period) or (ii) all of the Conversion
Shares issuable upon conversion of such portion of this Note subject to an Optional Redemption may be resold pursuant to Rule
144 during such period, (d) the Common Stock is trading on a Trading Market and all of the shares issuable pursuant to this Note
are listed or quoted for trading on such Trading Market (and the Company believes, in good faith, that trading of the Common Stock
on a Trading Market will continue uninterrupted for the foreseeable future), (e) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all of the Conversion Shares issuable upon conversion
of such portion of this Note being redeemed at such time, (f) there is no existing Event of Default and, to the actual knowledge
of the Company, no existing event which, with the passage of time or the giving of notice, would constitute an Event of Default,
(g) the issuance of the shares issuable to the Holder upon conversion of such portion of this Note subject to an Optional Redemption
would not violate the limitations set forth in Section 2.3 under this Note, (h) there has been no public announcement of a pending
or proposed Fundamental Transaction that has not been consummated or abandoned, and (i) the applicable Holder is not in possession
of any information provided by the Company that constitutes, or may constitute, material non-public information. Notwithstanding
the foregoing, the Holder may elect to convert the outstanding principal amount of the Note subject to an Optional Redemption
Notice pursuant to Article II at any time prior to actual payment in cash for any redemption under this Section 5 by the delivery
of an irrevocable Notice of Conversion to the Company.
Article
VI
UNSECURED NOTE
6.1 Unsecured Note. Note is an unsecured obligation of the Borrower.
Article
VII
MISCELLANEOUS
7.1 Failure
or Indulgence Not Waiver. No failure or delay on the part of Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative
to, and not exclusive of, any rights or remedies otherwise available. Notices. All notices, requests, demands, consents, instructions
or other communications required or permitted hereunder shall be in writing and either faxed, mailed, e-mailed or delivered to
each party at the respective addresses of the parties. All such notices and communications shall be effective (a) when sent by
Federal Express or other overnight service of recognized standing on the Trading Day following the deposit with such service;
(b) when mailed, by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States
Postal Service, upon receipt; (c) when delivered by hand, upon delivery; (d) when faxed, upon confirmation of receipt; (e) when
e-mailed, upon e-mail being sent.
7.2 Amendment Provision. No provision of this Note may be modified or amended without the
prior written consent of the Holder. The term “Note” and all reference thereto, as used throughout this instrument,
shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented.
7.3 Assignability. Note shall be binding upon the Borrower and its successors and assigns,
and shall inure to the benefit of the Holder and its successors and assigns. The Holder may assign or transfer this Note to any
transferee.
7.4 Cost of Collection. If default is made in the payment of Note, Borrower shall pay the
Holder hereof reasonable costs of collection, including reasonable attorneys’ fees.
7.5 Governing Law. Note shall only be governed by and construed in accordance with the
laws of the State of Delaware, including, but not limited to, Delaware’s statutes of limitations. Any action brought by either
party against the other concerning the transactions contemplated by this Agreement shall be brought only in the civil or state
courts in Delaware or in the federal courts located in Delaware. Both parties and the individual signing this Agreement on behalf
of the Borrower agree to submit only to the jurisdiction of such courts in Delaware. The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of Note is invalid
or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform to such statute or rule of law. Any such provision, which may
prove invalid or unenforceable under any law, shall not affect the validity or unenforceability of any other provision of Note.
Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against
the Borrower in any other jurisdiction to collect on the Borrower’s obligations to Holder, or to enforce a judgment or other
decision in favor of the Holder. This Note shall be deemed an unconditional obligation of Borrower for the payment of money
and, without limitation to any other remedies of Holder, may be enforced against Borrower by summary proceeding or summary judgment
or any similar rule or statute in the jurisdiction where enforcement is sought. For purposes of such rule or statute, any other
document or agreement to which Holder and Borrower are parties or which Borrower delivered to Holder, which may be convenient or
necessary to determine Holder’s rights hereunder or Borrower’s obligations to Holder are deemed a part of Note, whether
or not such other document or agreement was delivered together herewith or was executed apart from Note. If for any reason
a Delaware court of law deems that Delaware is not the proper venue, then the Note shall be governed by and construed only
in accordance with the laws of the State of Florida, including, but not limited to, Florida’s statutes of limitations and
any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought
only in the civil or state courts in Miami, Florida or in the federal courts located in Miami, Florida and the individual signing
this Agreement on behalf of the Borrower agree to submit only to the jurisdiction of such courts in Florida.
7.6 Non-Business Days. Whenever any payment or any action to be made shall be due on a
Saturday, Sunday or a public holiday under the laws of the State of Florida, such payment may be due or action shall be required
on the next succeeding Trading Day and, for such payment, such next succeeding day shall be included in the calculation of the
amount of accrued interest payable on such date.
7.7 Unenforceability.
If any term in this Note is found by a court of competent jurisdiction to be unenforceable, then the entire Note shall be rescinded,
the consideration proffered by the Holder for the remaining Outstanding Balance acquired by the Holder not converted by the Holder
in accordance with this Note shall be returned in its entirety and any Conversion Shares in the possession or control of the Holder
shall be returned to the Company.
7.8 Entire Understanding. The Note between the Borrower and the Holder (including all Exhibits thereto) constitute the
full and entire understanding and agreement between the Borrower and the Holder with respect to the subject hereof. Neither this
Note nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Borrower
and the Holder. Any questions regarding interpretation of this Note shall be solely construed by the Holder in their sole discretion.
7.9 Registration Rights. The Company hereby grants the right to the Holder, at Holder’s expense, to require Company
to register any and all issuances, past, present and future, directly connected to this specific Outstanding Balance. If the Holder
shall request the registration, the Company shall begin the registration process within 30 days and the Holder shall have the following
rights.
7.10 Recoupment of Registration Fees. If the Holder shall invoke his rights under section 5.11 of this Agreement, the
Company shall reimburse to the Holder all fees, costs, and disbursements, inclusive of attorney’s fees, paid for by Holder,
in common stock under the same terms and conditions provided for herein.
7.11 Legal Opinion. The Company’s counsel has provided an opinion regarding the applicable exemption from registration
under the Securities Act of 1933, as amended, for the issuance of the Conversion Shares pursuant to the terms and conditions of
this Agreement and the Note, which provides that upon conversion at any time following the date hereof, the shares received as
a result of the conversion shall be issued unrestricted in accordance with the appropriate exemption.
7.12 Post-Closing Expenses. The Borrower will bear any and all miscellaneous expenses of the Borrower and Holder that
may arise post-closing. These expenses include, but are not limited to, the cost of legal opinion production, transfer agent fees,
equity issuance fees, fees charged for delivering, vetting and accepting physical certificates, any and all fees and costs charged
by the Holder’s brokers in handling and transacting in the shares of the Company on behalf of the Holder. These fees may
be either deducted from future payments or added to the outstanding principal balance of this Note at the sole discretion of the
Holder. The failure to pay any and all Post-Closing Expenses will be deemed an Event of Default.
7.13 Savings Clause. In case any provision of this Note is held by a court of competent jurisdiction to be excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable
to the maximum extent possible, and the validity and enforceability of the remaining provision of this Note will not in any way
be affected or impaired thereby. In no event shall the amount of interest paid hereunder exceed the maximum rate of interest on
the unpaid principal balance hereof allowable by applicable law. If any sum is collected in excess of the applicable maximum rate,
the excess collected shall be applied to reduce the principal debt. If the interest actually collected hereunder is still in excess
of the applicable maximum rate, the interest rate shall be reduced so as not to exceed the maximum allowable under law.
7.14 Attorneys’ Fees and Cost of Collection. In the event of any action at law or in equity to enforce or interpret
the terms of this Note or any of the other documents related to this financing, the parties agree that the party who is awarded
the most money shall be deemed the prevailing party for all purposes and shall therefore be entitled to an additional award of
the full amount of the attorneys’ fees and expenses paid by such prevailing party in connection with the litigation
and/or dispute without reduction or apportionment based upon the individual claims or defenses giving rise to the fees and
expenses. Nothing herein shall restrict or impair a court’s power to award fees and expenses for frivolous or bad faith
pleading.
7.15 Fees and Charges. The parties acknowledge and agree that upon the Borrower’s failure to comply with the provisions
of this Note, the Holder’s damages would be uncertain and difficult (if not impossible) to accurately estimate because of
the parties’ inability to predict future interest rates, the Holder’s increased risk, and the uncertainty of the availability
of a suitable substitute investment opportunity for the Holder, among other reasons. Accordingly, any fees, charges, and interest
due under this Note are intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual
loss of its investment opportunity and not a penalty, and shall not be deemed in any way to limit any other right or remedy Holder
may have hereunder, at law or in equity.
7.16 Notice
of Corporate Events. Except as otherwise provided herein, the Holder of this Note shall have no rights as a Holder of Common
Stock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide the Holder with prior
notification of any meeting of the Borrower’s stockholders (and copies of proxy materials and other information sent to
stockholders). In the event of any taking by the Borrower of a record of its stockholders for the purpose of determining stockholders
who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities
or property, or to receive any other right, or for the purpose of determining stockholders who are entitled to vote in connection
with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation,
dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20) calendar days
prior to the record date specified therein (or thirty (30) calendar days prior to the consummation of the transaction or event,
whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right
or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event
to the extent known at such time. The Borrower shall make a public announcement of any event requiring notification to the Holder
hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this section.
7.17 Remedies.
The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for
a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the
Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law
or in equity, and in addition to the charges assessable herein, to an injunction or injunctions restraining, preventing or curing
any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic
loss and without any bond or other security being required.
[SIGNATURES ON THE
FOLLOWING PAGE]
IN WITNESS WHEREOF,
Borrower has caused Note to be signed in its name by an authorized officer as of Epazz, Inc..
EPAZZ,
INC.
By: /s/ Shaun Passley
Name: Shaun Passley
Title: CEO
Exhibit B
NOTICE OF CONVERSION
(To be executed by the Registered Holder
in order to convert the Note)
The undersigned
hereby elects to convert $_________ of the principal amount and $_________ of the interest due on the Note issued by EPAZZ, INC.
on December 12, 2013 into shares of common stock of EPAZZ, INC. (the “Borrower”) according to the conditions set forth
in such Note, as of the date written below.
Date of Conversion: ____________________________________________________
Conversion Price: ______________________________________________________
Shares to Be Delivered: __________________________________________________
Notwithstanding anything to the contrary
contained herein, this Conversion Notice shall constitute a representation by the Holder of the Note submitting this Conversion
Notice that, after giving effect to the conversion provided for in this Conversion Notice, such Holder (together with its affiliates)
will not have beneficial ownership (together with the beneficial ownership of such person's affiliates) of a number of shares Common
Stock which exceeds the Maximum Percentage (as defined in the Note) of the total outstanding shares Common Stock of the Company
as determined pursuant to the provisions of Section 2.3 of the Note.
Signature: ____________________________________________________________
GG Mars, Inc., President
Representation of Individual Officer
of Epazz, Inc.
Re: Convertible Promissory Note Between Epazz, Inc. (“Borrower”)
and GG Mars, Inc. Dated 3/28/2014 (“Note”)
In connection with the above referenced Note
and exhibits and related agreements and instruments, herein the Agreement, and any present and any future conversion requests of
GG Mars, Inc. ("GG") we irrevocably confirm:
1. Borrower is not, and has not been, a shell
issuer as described in Rule 144 promulgated with reference to the Securities Act of 1933, as amended (the "Securities Act")
nor is or was a "shell" as otherwise commonly understood;
2. Borrower is, unless noted "Not Applicable,"
subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of1934, as amended (the "Exchange
Act").
3. Borrower has to the extent it has been subject
to Exchange Act requirements for filing reports, filed all reports and other materials required to be filed by Section 13 or 15(d)
of the Exchange Act, as applicable, during the preceding 12 months and or has filed with the trading exchange or over the counter
disclosure system all such reports and information to be deeded current in all public reporting.
4. The original Outstanding Balances noted in the above referenced
Note, and the contents of the above referenced Note are accurate and Borrower did not and will not receive any new consideration
for the exchange note issued to GG.
5. Borrower is
now and will remain current with all obligations with its stock transfer agent and the U.S. Securities and Exchange Commission
and the state of incorporation. Neither GG Mars, Inc. nor GG is or has been an owner, affiliate or 10% or greater shareholder of
Borrower, as that term is defined by Rule 144(a) of the Securities Act of 1933. Neither GG
Mars, Inc. nor GG, is directly or indirectly through one or more intermediaries, in control of, controlled by, or under common
control with Borrower.
6. Any and all approvals needed in relation
to the above referenced Note, this letter, for the assistance of our transfer agent, etc., is obtained. The Note reflects, among
other things, conversion rights we otherwise afford to the nonaffiliated debt holders.
Representations herein survive the issuance
or closing of any instrument or matter, and we will cooperate as needed to give effect to and protect your rights including as
to the transfer agent and you may rely upon these promises and representations.
Effective Date: 3/9/2015
Very truly yours,
__________________________
Exhibit M2-19 (5,000)
Exhibit A.
THIS FIFITEEN
PERCENT (15%) CONVERTIBLE PROMISSORY NOTE IS ISSUED IN EXCHANGE FOR THAT CERTAIN PROMISSORY NOTE ISSUED TO STAR FINANCIAL CORPORATION
ON June 3, 2014. FOR PURPOSES OF RULE 144, THIS NOTE SHALL BE DEEMED TO HAVE BEEN ISSUED ON June 3, 2014.
THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN
THE EVENT OF A PARTIAL REDEMPTION OR CONVERSION.
EPAZZ, INC.
$5,000
FIFITEEN PERCENT (15%) CONVERTIBLE PROMISSORY
NOTE
DATED APRIL 2, 2014
FOR VALUE RECEIVED of $5,000, EPAZZ, INC.,
an Illinois corporation (hereinafter called “Borrower” or the “Company”), hereby
promises to pay to STAR FINANCIAL CORPORATION or its assigns or successors-in-interest (the “Holder”)
or order, without demand, the aggregate principal amount of FIVE THOUSAND DOLLARS ($5,000.00) (the “Principal Amount”),
together with interest thereon from the Issue Date, payable on December 3, 2014 (the “Maturity Date”).
Interest shall accrue at a rate of fifteen percent (15%) per annum. All Interest calculations hereunder shall be computed on the
basis of a 360-day year comprised of twelve (12) thirty (30) day months, shall compound daily and shall be payable in
accordance with the terms of this Note. “Outstanding Balance” means the Principal Amount, as reduced
or increased, as the case may be, pursuant to the terms hereof for conversion, breach hereof or otherwise, plus any accrued but
unpaid interest (including with limitation Default Interest), collection and enforcements costs, and any other fees or charges
incurred under this Note.
Article
I
CONVERSION PRIVILEGES
The conversion privileges
set forth in Article II shall remain in full force and effect immediately from the date hereof and until Note is paid in full regardless
of the occurrence of an Event of Default but subject to Article II. The Holder shall be able to convert this Note starting from
today’s date and ending until the full amount of the Note has been converted. The Principal Amount of Note together with
all unpaid interest accrued thereon and any other amounts payable hereunder, or such portion thereof, that has not previously been
converted into common stock, of the Company (the “Common Stock”) in accordance with Article II hereof,
if any, shall be payable in full on the Maturity Date.
Article
II
CONVERSION RIGHTS
The Holder shall have
the right to convert the Principal Amount together with all unpaid interest accrued thereon of this Note into shares of the Borrower’s
Common Stock as set forth below.
2.1 Conversion into the Borrower’s Common Stock.
(a) Conversion Price. The conversion price (the “Conversion Price”) shall be .000075.
(b) Conversion. The Holder shall have the option, but shall not be required, to convert all or a portion of the Note
into a number of fully paid and non-assessable shares of Common Stock (the “Conversion Shares”). The
number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the
outstanding Principal Amount together with all unpaid interest accrued thereon of this Note to be converted by (y) the Conversion
Price. The Company may deliver an objection to any Notice of Conversion within one Business Day (as described in Section 5.7 (“Business
Day”) of delivery of such Notice of Conversion. To effect conversions hereunder, the Holder shall not be required
to physically surrender this Debenture to the Company.
(c) Mechanics of Conversion. As a condition to effecting the conversion set forth in Section 2.1(b) above, the Holder
shall properly complete and deliver to the Company a Notice of Conversion, a form of which is annexed hereto as Exhibit B.
The Notice of Conversion shall set forth the Principal Amount together with all unpaid interest accrued thereon of this Note to
be converted and the date on which such conversion shall be effected (such date, the “Conversion Date”).
If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder. Upon timely delivery to the Borrower of the Notice of Conversion, certificates evidencing that number
of shares of Common Stock for the portion of the Note converted in accordance herewith shall be transmitted by the Company’s
transfer agent to the Holder by crediting the account of the Holder’s broker with The Depository Trust Company through its
Deposit / Withdrawal at Custodian system if the Company is then a participant in such system and either (A) there is an effective
registration statement permitting the issuance of the Conversion Shares to, or resale of the Conversion Shares by, the Holder or
(B) the shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise
by physical delivery to the address specified by the Holder in the Notice of Conversion by the date that is three (3) Trading Days
after the Conversion Date (such third day being the “Share Delivery Date”). The Borrower will not issue
fraction shares or scrip representing fractions of shares upon conversion, but the Borrower will round the number of the she shares
up to the nearest whole share.
(d) Obligation to Deliver Conversion Shares Absolute; Certain Remedies.
(i) Obligation Absolute. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of
this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder
to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person
or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder
or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares. The Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. All payments under this Note (whether made by the Borrower or any other person) to or
for the account of the Holder hereunder shall be made free and clear of and without reduction by reason of any present and future
income, stamp, registration and other taxes, levies, duties, costs and charges whatsoever imposed, assessed, levied or collected
by the United States or any political subdivision or taxing authority thereof or therein, together with interest thereon and penalties
with respect thereto, if any on or in respect of this Note (such taxes, levies, duties, costs and charges being herein collectively
called “Taxes”).
Failure to Deliver Common Stock Prior to
Delivery Date. Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or
equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered
as required by Section 2.1(c) by the Share Delivery Date (a “Conversion Default”), the Borrower shall
pay in cash to the Holder for each calendar day beyond the Delivery Date that the Borrower fails to deliver such Common Stock an
amount equal to 100% of the product of (1) the sum of the number of shares of Common Stock not issued to the Holder on a timely
basis and to which the Holder is entitled multiplied by (2) the Closing Trading Price of the Common Stock on the Trading Day
immediately preceding the last possible date on which the Borrower could have issued such shares of Common Stock to the Holder
without violating Section 2.1(c) (the “Conversion Default Payment”). Such cash amount shall be paid to
the Holder by the fifth day of the month following the month in which it has accrued (the “Conversion Default Payment
Due Date”). In the event such cash amount is not received by the Holder by the Conversion Default Payment Due Date,
at the option of the Holder (without notice to the Borrower), the Conversion Default Payment shall be added to the Outstanding
Balance of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note. If the Company does
not request the issuance of the Conversion Shares underlying this Note from its transfer agent after receipt of a Notice of Conversion
within TWO (2) Business days following the period allowed for any objection, the Company shall be responsible for any differential
in the value of the converted shares underlying this Note between the value of the closing price on the date the shares should
have been delivered and the date the shares are delivered. In addition, if the Company fails to timely (within 72 hours, 3 Business
Days), issue a treasury order to its transfer agent or otherwise cause to be delivered, the Conversion Shares per the instructions
of the Holder, free and clear of all legends in legal free trading form, subject to all applicable securities laws, the Company
shall allow Holder to add two (2) days to the look-back (the mechanism used to obtain the conversion price along with discount)
for each day the Company fails to timely (within 72 hours, 3 Business Days)) deliver shares, on the next conversion.
(ii) Rescission. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to or
as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the
Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the
Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to
the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice.
(e) Adjustment. The number and kind of shares or other securities to be issued upon conversion determined pursuant to
Section 2.1(b), shall be subject to adjustment, from time to time, upon the happening of certain events while this conversion right
remains outstanding, as follows:
(f) Reservation of Shares. The Borrower represents at all times to have authorized and reserved four times the number
of shares that is actually issuable upon full conversion of this Note (based on the Conversion Price in effect from time to time)
(the “Reserved Amount”). The Reserved Amount shall be increased from time to time as required to insure
compliance with this provision. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully
paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure which
would change the number of shares of Common Stock into which this Note shall be convertible at the then current Conversion Price,
the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common
Stock authorized and reserved, free from preemptive rights, for conversion of this Note. The Borrower (i) acknowledges that it
has irrevocably instructed its transfer agent to issue shares of the Common Stock issuable upon conversion of this Note, and (ii)
agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty
of issuing the necessary shares of Common Stock in accordance with the terms and conditions of this Note. If, at any time the Borrower
does not maintain the Reserved Amount it will be considered an Event of Default.
2.2 Effect of Certain Events.
(a) Fundamental
Transaction Consent Right. The Borrower shall not enter into or be party to a Fundamental Transaction (as defined below), unless
the Borrower obtains the prior written consent of the Holder to enter into such Fundamental Transaction. For purposes of this Note,
“Fundamental Transaction” means that (i) (1) the Borrower or any of its subsidiaries shall, directly
or indirectly, in one or more related transactions, consolidate or merge with or into (whether or not the Borrower or any of its
subsidiaries is the surviving corporation) any other individual, corporation, limited liability company, partnership, association,
trust or other entity or organization (collectively, “Person”), or (2) the Borrower or any of its
subsidiaries shall, directly or indirectly, in one or more related transactions, sell, lease, license, assign, transfer, convey
or otherwise dispose of all or substantially all of its respective properties or assets to any other Person, or (3) the Borrower
or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, allow any other Person to make a
purchase, tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of voting stock of
the Borrower (not including any shares of voting stock of the Borrower held by the Person or Persons making or party to, or associated
or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (4) the Borrower or any of
its subsidiaries shall, directly or indirectly, in one or more related transactions, consummate a stock or share purchase agreement
or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement)
with any other Person whereby such other Person acquires more than 50% of the outstanding shares of voting stock of the Borrower
(not including any shares of voting stock of the Borrower held by the other Person or other Persons making or party to, or associated
or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination),
or (5) the Borrower or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, reorganize,
recapitalize or reclassify the Common Stock, other than an increase in the number of authorized shares of the Borrower’s
Common Stock, or (ii) any “person” or “group” (as these terms are used for purposes of Sections 13(d)
and 14(d) of the 1934 Act and the rules and regulations promulgated thereunder) is or shall become the “beneficial owner”
(as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented
by issued and outstanding voting stock of the Borrower. The provisions of this Section 2.2(a) shall apply similarly and equally
to successive Fundamental Transactions and shall be applied without regard to any limitations on the conversion of this Note. As
a condition to pre-approving any Fundamental Transaction in writing, which approval may be withheld in the Holder’s sole
discretion, Holder may require the resulting successor or acquiring entity (if not the Borrower) to assume by written instrument
all of the obligations of the Borrower under this Note with the same effect as if such successor or acquirer had been named as
the Borrower hereto and thereto.
(b) Adjustment Due
to Fundamental Transactions. If, at any time when this Note is issued and outstanding and prior to conversion of all of this
Note, there shall be any Fundamental Transaction that is pre-approved in writing by the Holder pursuant to Section 2.2(a) above,
as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another
class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially
all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder
of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities
or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately
prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion
of this Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter
deliverable upon the conversion hereof. The above provisions shall similarly apply to successive Fundamental Transactions.
(c) Adjustment Due
to Distribution. If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution
to the Borrower’s stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of
this Note after the date of record for determining stockholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder
been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to such Distribution.
(d) Adjustment Due
to Dilutive Issuance. If, at any time when this Note is issued and outstanding, the Borrower issues or sells, or in accordance
with this section hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions underwriting discounts or allowances in connection therewith)
less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive
Issuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the
consideration per share received by the Borrower in such Dilutive Issuance.
The Borrower shall be deemed
to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights or options (not
including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or
other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such warrants,
rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “Options”)
and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price
then in effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “price
per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount,
if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable,
by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion
of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance
of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon
exercise of such Options.
Additionally, the Borrower
shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or sells any Convertible Securities,
whether or not immediately convertible, and the price per share for which Common Stock is issuable upon such conversion or exchange
is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For the purposes
of the preceding sentence, the “price per share for which Common Stock is issuable upon such conversion or exchange”
is determined by dividing (1) the total amount, if any, received or receivable by the Borrower as consideration for the issuance
or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the
Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable,
by (2) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities.
No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange
of such Convertible Securities.
(e) Purchase Rights.
If, at any time when this Note is issued and outstanding, the Borrower issues any convertible securities or rights to purchase
stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders of any
class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock
acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately
before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f) Adjustment Due
to Non-DWAC Eligibility. If, at any time when this Note is issued and outstanding thereafter, the Holder delivers a Notice
of Conversion and at such time the Company’s Common Stock is not DWAC eligible the Borrower shall deliver certificated Conversion
Shares to the Holder pursuant to Section 2.1(c) and the Non-DWAC Eligible Adjustment Amount shall be added to the Outstanding Balance
of this Note, without limiting any other rights of the Holder under this Note. The “Non-DWAC Eligible Adjustment Amount”
is the amount equal to the number of applicable Conversion Shares multiplied by the excess, if any, of (i) the Trading Price of
the Common Stock on the Conversion Date, over (ii) the Trading Price of the Common Stock on the date the certificated Conversion
Shares are freely tradable, clear of any restrictive legend and deposited in the Holder’s brokerage account. In any such
case, Holder will use reasonable efforts to timely deposit such certificates in its brokerage account after it receives them and
cause such restrictive legends to be removed, and, without limiting any other provision hereof, Borrower agrees to fully cooperate
with Holder in accomplishing the same. Any fees charged to Holder for the stock being Non-DWAC Eligible shall be paid by the Borrower.
(g) Notice of Adjustments.
Upon the occurrence of each adjustment or readjustment of the Conversion Price or the addition of the Non-DWAC Eligible Adjustment
Amount to the Outstanding Balance as a result of the events described in this Note, the Borrower, the Non-DWAC Eligible Adjustment
Amount shall be added to the Outstanding Balance of this Note, without limiting any other rights of the Holder under this Note.
The “Non-DWAC Eligible Adjustment Amount” is the amount equal to the number of applicable Conversion Shares
multiplied by the excess, if any, of (i) the Trading Price of the Common Stock on the Conversion Date, over (ii) the Trading Price
of the Common Stock on the date the certificated Conversion Shares are freely tradable, clear of any restrictive legend and deposited
in the Holder’s brokerage account. at its expense, shall promptly compute such adjustment or readjustment and prepare and
furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder
a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii)
the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received
upon conversion of this Note.
2.3 Method of Conversion. This Note may be converted by the Holder, in whole or in part,
as described in Section 2.1(a) hereof. Upon partial conversion of Note, a new Note containing the same date and provisions of Note
shall, at the request of the Holder, be issued by the Borrower to the Holder for the principal balance of Note and interest which
shall not have been converted or paid.
2.4 Limitations on Conversion. Notwithstanding anything to the contrary contained in this
Note, this Note shall not be convertible by the Holder hereof, and the Company shall not effect any conversion of this Note or
otherwise issue any shares of Common Stock pursuant hereto, to the extent (but only to the extent) that the Holder or any of its
affiliates would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the Common Stock.
The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation
provision of this section, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares
of the Common Stock outstanding immediately after giving effect to the issuance of shares of common Stock upon conversion of this
Note held by the Holder and the Beneficial Ownership Limitation provision of this section shall continue to apply. To the extent
the above limitation applies, the determination of whether this Note shall be convertible (vis-à-vis other convertible,
exercisable or exchangeable securities owned by the Holder) shall, subject to such Maximum Percentage limitation, be determined
on the basis of the first submission to the Company for conversion, exercise or exchange (as the case may be). No prior inability
to convert this Note, or to issue shares of Common Stock, pursuant to this paragraph shall have any effect on the applicability
of the provisions of this paragraph with respect to any subsequent determination of convertibility. For purposes of this paragraph,
beneficial ownership and all determinations and calculations (including, without limitation, with respect to calculations of percentage
ownership) shall be determined in accordance with Section 13(d) of the Securities Act of 1934, as amended, and the rules and regulations
promulgated thereunder. The provisions of this paragraph shall be implemented in a manner otherwise than in strict conformity with
the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended
Maximum Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to
properly give effect to such Maximum Percentage limitation. The limitations contained in this paragraph shall apply to a successor
Holder of this Note. The holders of Common Stock shall be third party beneficiaries of this paragraph and the Company may not waive
this paragraph without the consent of holders of a majority of its Common Stock. For any reason at any time, upon the written or
oral request of the Holder, the Company shall within two (2) Trading Days confirm orally to the Holder and, if requested, in writing
to the Holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion or exercise of
convertible or exercisable securities into Common Stock, including, without limitation, pursuant to this Note.
Article
III
EVENT OF DEFAULT
The occurrence of
any of the following events of default (“Event of Default”) shall be an event of default hereunder (whatever
the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant
to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
3.1
Failure to Pay. The Borrower fails to pay the Principal Amount, interest, damages or
other sum due under this Note or any other note when due;
3.2
Breach of Covenant. The Borrower breaches any material covenant of the Note in any
material respect and such breach, if subject to cure, continues for a period of FIFTEEN (15) Trading Days after written notice
to the Borrower from the Holder;
3.3 Breach of Representations and Warranties. Any representation or warranty of the Borrower
made, in this Note, said statement or certificate given in writing pursuant hereto or in connection therewith or any other report,
financial statement or certificate shall be false or misleading in any material respect as of the date made;
3.4 Receiver or Trustee. The Borrower shall make an assignment for the benefit of creditors,
or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business;
or such a receiver or trustee shall otherwise be appointed;
3.5 Judgments. Any money judgment, writ or similar final process shall be entered or filed
against Borrower or any of its property or other assets for more than ONE MILLION DOLLARS ($1,000,000.00) and shall remain unvacated,
unbonded or unstayed for a period of THIRTY (30) days;
3.6 Bankruptcy. Bankruptcy, reorganization, insolvency proceeding, liquidation proceedings
or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for
the relief of debtors shall be instituted by or against the Borrower and if instituted against them are not dismissed within THIRTY
(30) days of initiation. The Borrower suffers any appointment of any custodian or the like for it or any substantial art of its
property that is not discharged or stayed within 30 days; the Borrower makes a general assignment of the benefit of creditors;
the Borrower fails to pay or states that it is unable to pay, or is unable to pay its debts generally as they become due;
3.7 Non-Payment. A default by the Borrower under any one or more obligations in, unless
the Borrower is contesting the validity of such obligation in good faith and has segregated cash funds equal to not less than one-half
of the contested amount;
3.8 Public Information Failure. A Public Information Failure occurs and continues for a
period of FIFTEEN (15) Days;
3.9 Beginning 30
days after the Issue Date, the failure of the Company’s Common Stock to be DWAC eligible, which failure continues for a period
of 30 days uncured, at any time during which the Borrower has obligations under this Note;
3.10 Reservation
Default. Failure by the Borrower to have reserved for issuance upon conversion of this Note the
amount of Common Stock as set forth in this Note;
3.11 Withdrawal
from registration of the Company under thelien Securities Exchange Act of 1934, as amended (the “Exchange Act”
or “1934 Act”), either voluntary or involuntary;
3.12
Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts
become due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern”
shall not be an admission that the Borrower cannot pay its debts as they become due;
3.13
The failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets
which are necessary to conduct its business (whether now or in the future;
3.14
The Borrower shall fail to maintain the listing and/or quotation, as applicable, of the Common Stock on the Principal Market;
3.15
The Borrower shall fail to comply with the reporting requirements of the 1934 Act; and/or the Borrower shall cease to be
subject to the reporting requirements of the 1934 Act;
3.16
Any cessation of operations by the Borrower or the Borrower admits it is otherwise generally unable to pay its debts and
such debts become due;
3.17
The restatement of any financial statements filed by the Borrower with the SEC for any date or period from two years prior
to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison
to the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to
this Note;
3.18
The Borrower effectuates a reverse split of its Common Stock without twenty (20) calendar days prior written notice to
the Holder;
3.19
In the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, prior to the effective
date of such replacement, fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered (including but
not limited to the provision to irrevocable reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer
agent to Holder and the Borrower;
3.20
The Company shall fail for any reason to deliver certificates to a Holder prior to the fifth Trading Day after a Conversion
Date or the company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s
intention to not honor requests for conversion of any Notes in accordance with the terms hereof or the Company shall fail to deliver
documents requested by the Holder or the Holder’s brokerage firm which the Holder or the Holder’s brokerage firm deem
necessary to allow Holder to sell the Company’s stock;
3.21
During the term of this Agreement, the Company enters into any Prohibited Transaction without the prior written consent
of the Holder, which consent may be withheld at the sole discretion of the Holder. For the purposes of this Note, the term “Prohibited
Transaction” shall refer to the issuance by the Company of any “future priced securities,” which shall
mean the issuance of shares of Common Stock or securities of any type whatsoever that are, or may become, convertible or exchangeable
into shares of Common Stock where the purchase, conversion or exchange price for such Common Stock is determined using any floating
discount or other post-issuance adjustable discount to the market price of Common Stock, including, without limitation, pursuant
to any equity line financing, stand-by equity distribution agreements, at the market transactions or convertible securities and
loans, securities in a registered direct public offering or an unregistered private placement where the price per share of such
securities is fixed concurrently with the execution of definitive documentation relating to the offering or placement, as applicable
and securities issued in connection with a secured debt financing, shall not be a Prohibited Transaction;
3.22
The Borrower fails to provide information requested by the Holder in order to enable the holder to have their converted
securities accepted and sold by their brokerage firm, or the Borrower attempts to prevent, block or frustrate in any manner, the
Holder from converting this Note; and
3.23
The Borrower breaches a negative covenant in Article IV of this Note
Upon the occurrence of
any Event of Default, (a) the Outstanding Balance shall immediately increase to 150% of the Outstanding Balance immediately prior
to the occurrence of the Event of Defaultand (b) this Note shall then accrue interest at the Default Rate which shall be the maximum
amount of interest available under state law during a default on a note (the “Default Rate” and collectively,
the “Default Effects”). The Default Effects shall automatically apply upon the occurrence of an Event
of Default without the need for any party to give any notice or take any other action. Further, upon the occurrence and during
the continuation of any Event of Default, the Holder may by written notice to the Borrower declare the entire Outstanding Balance
immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly
waived, anything contained herein to the contrary notwithstanding; provided, however, that upon the occurrence or
existence of any Event of Default, immediately and without notice, all outstanding obligations payable by the Borrower hereunder
shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all
of which are hereby expressly waived, anything contained herein to the contrary (“Automatic Acceleration”).
The Holder shall retain all rights under this Note, including the ability to convert the then Outstanding Balance of this Note
at all times following the occurrence of an Automatic Acceleration until the entire then Outstanding Balance has been paid in full.
If one or more of the “Events of Default” as described in the Agreement shall occur, the Borrower agrees to pay all
costs and expenses, including reasonable attorney’s fees, which the Holder may incur in collecting any amount due under,
or enforcing any terms of, this Note. The Borrower covenants that until all amounts due under this Note are paid in full, by conversion
or otherwise, the Borrower shall notify Holder in writing within one day of any of the above Events of Default.
ARTICLE IV
NEGATIVE COVENANTS
4.1 Negative
Covenants. As long as any portion of this Note remains outstanding, unless the Holder shall
have otherwise given prior written consent, the Company shall not, and shall not permit any of the Subsidiaries to, directly or
indirectly:
(a) other than Permitted Indebtedness (as defined below), enter into, create, incur, assume, guarantee or suffer to exist any
secured indebtedness for borrowed money of any kind, including, but not limited to, a guarantee, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
(b) other than Permitted Liens (as defined below), enter into, create, incur, assume or suffer to exist any liens of any kind,
on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits
therefrom;
(c) repay, repurchase or offer to repay, repurchase or otherwise acquire for cash more than a de minimis number of shares of
its Common Stock other than repurchases of Common Stock of departing officers and directors of the Company, provided that such
repurchases shall not exceed an aggregate of $100,000 during the term of this Note; or
(d) pay cash dividends or distributions on any equity securities of the Company.
(e) amend its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner that
materially and adversely affects any rights of the Holder;
(f) repay, repurchase or offer to repay, repurchase or otherwise acquire any indebtedness, other than the Debentures if on a
pro-rata basis, other than regularly scheduled principal and interest payments as such terms are in effect as of the Original Issue
Date, provided that such payments shall not be permitted if, at such time, or after giving effect to such payment, any Event of
Default exist or occur;
(g) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing
with the SEC, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested
directors of the Company (even if less than a quorum otherwise required for board approval; or
(h) enter into any agreement with respect to any of the foregoing.
4.2 Definitions. For the purpose of this Note, the following definitions shall apply:
(i) “Permitted Indebtedness” means (i) the Indebtedness evidenced by the Note, (ii) unsecured Indebtedness
incurred by the Company, which Indebtedness is not senior in rank to the Note and does not mature prior to six months from the
issue date of such Indebtedness, (iii) Indebtedness secured by Permitted Liens, and (iv) extensions, refinancings and renewals
of any items in clauses (i) through (iv) above, provided that the principal amount is not increased (other than with respect to
the addition of existing or future interest due and payable thereunder to the principal thereunder) or the terms modified to impose
materially more burdensome terms upon the Company or its subsidiaries, as the case may be.
(j) “Permitted Lien” means the individual and collective reference to the following: (i) any lien
for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have
been established in accordance with GAAP, (ii) any statutory lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any lien created by operation of law, such as materialmen's
liens, mechanics' liens and other similar liens, arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv) liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred
solely for the purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time of
its acquisition, provided that the lien is confined solely to the property so acquired and improvements thereon, and the proceeds
of such equipment, (v) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens
of the type described in clause (iv) above, provided that any extension, renewal or replacement lien shall be limited to the property
encumbered by the existing lien and the principal amount of the Indebtedness being extended, renewed or refinanced does not increase,
(vi) leases or subleases and licenses and sublicenses granted to others in the ordinary course of the Company's business, not interfering
in any material respect with the business of the Company and its Subsidiaries taken as a whole, (vii) liens in favor of customs
and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the importation of goods,
(viii) liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default, (ix) liens incurred
in connection with Permitted Indebtedness under clause (i) and, solely to the extent existing as of the Issue Date, clause (ii)
of the definition thereof (including any extensions, refinancings and renewals of such Indebtedness that constitute Permitted Indebtedness).
ARTICLE
V
REDEMPTION RIGHTS
5.1 Optional
Redemption Right. Subject to the provisions of this Article V, at any time (a) within ninety
(90) days after the Effective Date, the Company may deliver a notice to the Holder (an “Optional Redemption Notice”
and the date such notice is deemed delivered hereunder, the “Optional Redemption Notice Date”) of its
irrevocable election to redeem all of the then outstanding principal amount together with all unpaid interest accrued thereon
of this Note for cash at a redemption price equal to 150% multiplied by all of the then outstanding principal amount together
with all unpaid interest accrued thereon of this Note, on the 20th Trading Day following the Optional Redemption Notice
Date (such date, the “Optional Redemption Date”, such 20 Trading Day period, the “Optional
Redemption Period” and such redemption, the “Optional Redemption”), The Optional Redemption
Amount is payable in full on the Optional Redemption Date. The Company may only effect an Optional Redemption if each of the Equity
Conditions (as defined below) shall have been met (unless waived in writing by the Holder) on each Trading Day during the period
commencing on the Optional Redemption Notice Date through to the Optional Redemption Date and through and including the date payment
of the Optional Redemption Amount is actually made in full. If any of the Equity Conditions shall cease to be satisfied at any
time during the Optional Redemption Period, then the Holder may elect to nullify the Optional Redemption Notice by notice to the
Company after the day on which any such Equity Condition has not been met in which case the Optional Redemption Notice shall be
null and void, ab initio. The Company covenants and agrees that it will honor all Notices of Conversion tendered
from the time of delivery of the Optional Redemption Notice through the date all amounts owing thereon are due and paid in full.
“Equity Conditions” means, during the period in question, (a) the Company shall have duly honored all
conversions and redemptions scheduled to occur or occurring by virtue of one or more Notices of Conversion of the Holder, if any,
(b) the Company shall have paid all liquidated damages and other amounts owing to the Holder in respect of this Note, (c)(i) there
is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell
all of the Conversion Shares issuable upon conversion of such portion of this Note subject to an Optional Redemption (and the
Company believes, in good faith, that such effectiveness will continue uninterrupted for such period) or (ii) all of the Conversion
Shares issuable upon conversion of such portion of this Note subject to an Optional Redemption may be resold pursuant to Rule
144 during such period, (d) the Common Stock is trading on a Trading Market and all of the shares issuable pursuant to this Note
are listed or quoted for trading on such Trading Market (and the Company believes, in good faith, that trading of the Common Stock
on a Trading Market will continue uninterrupted for the foreseeable future), (e) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all of the Conversion Shares issuable upon conversion
of such portion of this Note being redeemed at such time, (f) there is no existing Event of Default and, to the actual knowledge
of the Company, no existing event which, with the passage of time or the giving of notice, would constitute an Event of Default,
(g) the issuance of the shares issuable to the Holder upon conversion of such portion of this Note subject to an Optional Redemption
would not violate the limitations set forth in Section 2.3 under this Note, (h) there has been no public announcement of a pending
or proposed Fundamental Transaction that has not been consummated or abandoned, and (i) the applicable Holder is not in possession
of any information provided by the Company that constitutes, or may constitute, material non-public information. Notwithstanding
the foregoing, the Holder may elect to convert the outstanding principal amount of the Note subject to an Optional Redemption
Notice pursuant to Article II at any time prior to actual payment in cash for any redemption under this Section 5 by the delivery
of an irrevocable Notice of Conversion to the Company.
Article
VI
UNSECURED NOTE
6.1 Unsecured Note. Note is an unsecured obligation of the Borrower.
Article
VII
MISCELLANEOUS
7.1 Failure or Indulgence Not Waiver. No failure or delay on the part of Holder hereof in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right
or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. Notices. All notices, requests,
demands, consents, instructions or other communications required or permitted hereunder shall be in writing and either faxed,
mailed, e-mailed or delivered to each party at the respective addresses of the parties. All such notices and communications shall
be effective (a) when sent by Federal Express or other overnight service of recognized standing on the Trading Day following the
deposit with such service; (b) when mailed, by registered or certified mail, first class postage prepaid and addressed as aforesaid
through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; (d) when faxed, upon confirmation
of receipt; (e) when e-mailed, upon e-mail being sent.
7.2 Amendment Provision. No provision of this Note may be modified or amended without the
prior written consent of the Holder. The term “Note” and all reference thereto, as used throughout this instrument,
shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented.
7.3 Assignability. Note shall be binding upon the Borrower and its successors and assigns,
and shall inure to the benefit of the Holder and its successors and assigns. The Holder may assign or transfer this Note to any
transferee.
7.4 Cost of Collection. If default is made in the payment of Note, Borrower shall pay the
Holder hereof reasonable costs of collection, including reasonable attorneys’ fees.
7.5 Governing Law. Note shall only be governed by and construed in accordance with the
laws of the State of Delaware, including, but not limited to, Delaware’s statutes of limitations. Any action brought by either
party against the other concerning the transactions contemplated by this Agreement shall be brought only in the civil or state
courts in Delaware or in the federal courts located in Delaware. Both parties and the individual signing this Agreement on behalf
of the Borrower agree to submit only to the jurisdiction of such courts in Delaware. The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of Note is invalid
or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform to such statute or rule of law. Any such provision, which may
prove invalid or unenforceable under any law, shall not affect the validity or unenforceability of any other provision of Note.
Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against
the Borrower in any other jurisdiction to collect on the Borrower’s obligations to Holder, or to enforce a judgment or other
decision in favor of the Holder. This Note shall be deemed an unconditional obligation of Borrower for the payment of money
and, without limitation to any other remedies of Holder, may be enforced against Borrower by summary proceeding or summary judgment
or any similar rule or statute in the jurisdiction where enforcement is sought. For purposes of such rule or statute, any other
document or agreement to which Holder and Borrower are parties or which Borrower delivered to Holder, which may be convenient or
necessary to determine Holder’s rights hereunder or Borrower’s obligations to Holder are deemed a part of Note, whether
or not such other document or agreement was delivered together herewith or was executed apart from Note. If for any reason
a Delaware court of law deems that Delaware is not the proper venue, then the Note shall be governed by and construed only
in accordance with the laws of the State of Florida, including, but not limited to, Florida’s statutes of limitations and
any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought
only in the civil or state courts in Miami, Florida or in the federal courts located in Miami, Florida and the individual signing
this Agreement on behalf of the Borrower agree to submit only to the jurisdiction of such courts in Florida.
7.6 Non-Business Days. Whenever any payment or any action to be made shall be due on a
Saturday, Sunday or a public holiday under the laws of the State of Florida, such payment may be due or action shall be required
on the next succeeding Trading Day and, for such payment, such next succeeding day shall be included in the calculation of the
amount of accrued interest payable on such date.
7.7 Unenforceability. If any term in this Note is found by a court of competent jurisdiction to be unenforceable, then
the entire Note shall be rescinded, the consideration proffered by the Holder for the remaining Outstanding Balance acquired by
the Holder not converted by the Holder in accordance with this Note shall be returned in its entirety and any Conversion Shares
in the possession or control of the Holder shall be returned to the Company.
7.8 Entire Understanding. The Note between the Borrower and the Holder (including all Exhibits thereto) constitute the
full and entire understanding and agreement between the Borrower and the Holder with respect to the subject hereof. Neither this
Note nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Borrower
and the Holder. Any questions regarding interpretation of this Note shall be solely construed by the Holder in their sole discretion.
7.9 Registration Rights. The Company hereby grants the right to the Holder, at Holder’s expense, to require Company
to register any and all issuances, past, present and future, directly connected to this specific Outstanding Balance. If the Holder
shall request the registration, the Company shall begin the registration process within 30 days and the Holder shall have the following
rights.
7.10 Recoupment of Registration Fees. If the Holder shall invoke his rights under section 5.11 of this Agreement, the
Company shall reimburse to the Holder all fees, costs, and disbursements, inclusive of attorney’s fees, paid for by Holder,
in common stock under the same terms and conditions provided for herein.
7.11 Legal Opinion. The Company’s counsel has provided an opinion regarding the applicable exemption from registration
under the Securities Act of 1933, as amended, for the issuance of the Conversion Shares pursuant to the terms and conditions of
this Agreement and the Note, which provides that upon conversion at any time following the date hereof, the shares received as
a result of the conversion shall be issued unrestricted in accordance with the appropriate exemption.
7.12 Post-Closing Expenses. The Borrower will bear any and all miscellaneous expenses of the Borrower and Holder that
may arise post-closing. These expenses include, but are not limited to, the cost of legal opinion production, transfer agent fees,
equity issuance fees, fees charged for delivering, vetting and accepting physical certificates, any and all fees and costs charged
by the Holder’s brokers in handling and transacting in the shares of the Company on behalf of the Holder. These fees may
be either deducted from future payments or added to the outstanding principal balance of this Note at the sole discretion of the
Holder. The failure to pay any and all Post-Closing Expenses will be deemed an Event of Default.
7.13 Savings Clause. In case any provision of this Note is held by a court of competent jurisdiction to be excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable
to the maximum extent possible, and the validity and enforceability of the remaining provision of this Note will not in any way
be affected or impaired thereby. In no event shall the amount of interest paid hereunder exceed the maximum rate of interest on
the unpaid principal balance hereof allowable by applicable law. If any sum is collected in excess of the applicable maximum rate,
the excess collected shall be applied to reduce the principal debt. If the interest actually collected hereunder is still in excess
of the applicable maximum rate, the interest rate shall be reduced so as not to exceed the maximum allowable under law.
7.14 Attorneys’ Fees and Cost of Collection. In the event of any action at law or in equity to enforce or interpret
the terms of this Note or any of the other documents related to this financing, the parties agree that the party who is awarded
the most money shall be deemed the prevailing party for all purposes and shall therefore be entitled to an additional award of
the full amount of the attorneys’ fees and expenses paid by such prevailing party in connection with the litigation
and/or dispute without reduction or apportionment based upon the individual claims or defenses giving rise to the fees and
expenses. Nothing herein shall restrict or impair a court’s power to award fees and expenses for frivolous or bad faith
pleading.
7.15 Fees
and Charges. The parties acknowledge and agree that upon the Borrower’s failure to comply with the provisions of this
Note, the Holder’s damages would be uncertain and difficult (if not impossible) to accurately estimate because of the parties’
inability to predict future interest rates, the Holder’s increased risk, and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder, among other reasons. Accordingly, any fees, charges, and interest due under
this Note are intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its
investment opportunity and not a penalty, and shall not be deemed in any way to limit any other right or remedy Holder may have
hereunder, at law or in equity.
7.16 Notice of Corporate Events. Except as otherwise provided herein, the Holder of this Note shall have no rights as
a Holder of Common Stock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide
the Holder with prior notification of any meeting of the Borrower’s stockholders (and copies of proxy materials and other
information sent to stockholders). In the event of any taking by the Borrower of a record of its stockholders for the purpose of
determining stockholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for,
purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any
class or any other securities or property, or to receive any other right, or for the purpose of determining stockholders who are
entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower
or any proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least
twenty (20) calendar days prior to the record date specified therein (or thirty (30) calendar days prior to the consummation of
the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right
or other event to the extent known at such time. The Borrower shall make a public announcement of any event requiring notification
to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this section.
7.17 Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm
to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges
that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach
or threatened breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other
available remedies at law or in equity, and in addition to the charges assessable herein, to an injunction or injunctions restraining,
preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity
of showing economic loss and without any bond or other security being required.
[SIGNATURES ON THE
FOLLOWING PAGE]
IN WITNESS WHEREOF,
Borrower has caused Note to be signed in its name by an authorized officer as of Epazz, Inc..
EPAZZ,
INC.
By: /s/ Shaun Passley
Name: Shaun Passley
Title:
CEO
Exhibit B
NOTICE OF CONVERSION
(To be executed by the Registered Holder
in order to convert the Note)
The undersigned
hereby elects to convert $_________ of the principal amount and $_________ of the interest due on the Note issued by EPAZZ, INC.
on December 12, 2013 into shares of common stock of EPAZZ, INC. (the “Borrower”) according to the conditions set forth
in such Note, as of the date written below.
Date of Conversion: ____________________________________________________
Conversion Price: ______________________________________________________
Shares to Be Delivered: __________________________________________________
Notwithstanding anything to the contrary
contained herein, this Conversion Notice shall constitute a representation by the Holder of the Note submitting this Conversion
Notice that, after giving effect to the conversion provided for in this Conversion Notice, such Holder (together with its affiliates)
will not have beneficial ownership (together with the beneficial ownership of such person's affiliates) of a number of shares Common
Stock which exceeds the Maximum Percentage (as defined in the Note) of the total outstanding shares Common Stock of the Company
as determined pursuant to the provisions of Section 2.3 of the Note.
Signature: ____________________________________________________________
Star Financial Corporation, President
Representation of Individual Officer
of Epazz, Inc.
Re: Convertible Promissory Note Between Epazz, Inc. (“Borrower”)
and Star Financial Corporation Dated 6/3/2014 (“Note”)
In connection with the above referenced Note
and exhibits and related agreements and instruments, herein the Agreement, and any present and any future conversion requests of
Star Financial Corporation ("SFC") we irrevocably confirm:
1. Borrower is not, and has not been, a shell
issuer as described in Rule 144 promulgated with reference to the Securities Act of 1933, as amended (the "Securities Act")
nor is or was a "shell" as otherwise commonly understood;
2. Borrower is, unless noted "Not Applicable,"
subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of1934, as amended (the "Exchange
Act").
3. Borrower has to the extent it has been subject
to Exchange Act requirements for filing reports, filed all reports and other materials required to be filed by Section 13 or 15(d)
of the Exchange Act, as applicable, during the preceding 12 months and or has filed with the trading exchange or over the counter
disclosure system all such reports and information to be deeded current in all public reporting.
4. The original Outstanding Balances noted in the above referenced
Note, and the contents of the above referenced Note are accurate and Borrower did not and will not receive any new consideration
for the exchange note issued to SFC.
5. Borrower is
now and will remain current with all obligations with its stock transfer agent and the U.S. Securities and Exchange Commission
and the state of incorporation. Neither Star Financial Corporation nor SFC is or has been an owner, affiliate or 10% or greater
shareholder of Borrower, as that term is defined by Rule 144(a) of the Securities Act of 1933. Neither
Star Financial Corporation nor SFC, is directly or indirectly through one or more intermediaries, in control of, controlled by,
or under common control with Borrower.
6. Any and all approvals needed in relation
to the above referenced Note, this letter, for the assistance of our transfer agent, etc., is obtained. The Note reflects, among
other things, conversion rights we otherwise afford to the nonaffiliated debt holders.
Representations herein survive the issuance
or closing of any instrument or matter, and we will cooperate as needed to give effect to and protect your rights including as
to the transfer agent and you may rely upon these promises and representations.
Effective Date: 6/3/2014
Very truly yours,
__________________________
Exhibit M2-50
Exhibit A.
THIS FIFITEEN
PERCENT (15%) CONVERTIBLE PROMISSORY NOTE IS ISSUED IN EXCHANGE FOR THAT CERTAIN PROMISSORY NOTE ISSUED TO STAR FINANCIAL CORPORATION
ON March 7, 2014. FOR PURPOSES OF RULE 144, THIS NOTE SHALL BE DEEMED TO HAVE BEEN ISSUED ON March 7, 2014.
THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN
THE EVENT OF A PARTIAL REDEMPTION OR CONVERSION.
EPAZZ, INC.
$30,000
FIFITEEN PERCENT (15%) CONVERTIBLE PROMISSORY
NOTE
DATED March 31, 2015
FOR VALUE RECEIVED of $30,000, EPAZZ, INC.,
an Illinois corporation (hereinafter called “Borrower” or the “Company”), hereby
promises to pay to STAR FINANCIAL CORPORATION or its assigns or successors-in-interest (the “Holder”)
or order, without demand, the aggregate principal amount of THIRTY THOUSAND DOLLARS ($30,000.00) (the “Principal Amount”),
together with interest thereon from the Issue Date, payable on May 7, 2014 (the “Maturity Date”).
Interest shall accrue at a rate of fifteen percent (15%) per annum. All Interest calculations hereunder shall be computed on the
basis of a 360-day year comprised of twelve (12) thirty (30) day months, shall compound daily and shall be payable in
accordance with the terms of this Note. “Outstanding Balance” means the Principal Amount, as reduced
or increased, as the case may be, pursuant to the terms hereof for conversion, breach hereof or otherwise, plus any accrued but
unpaid interest (including with limitation Default Interest), collection and enforcements costs, and any other fees or charges
incurred under this Note.
Article
I
CONVERSION PRIVILEGES
The conversion privileges
set forth in Article II shall remain in full force and effect immediately from the date hereof and until Note is paid in full regardless
of the occurrence of an Event of Default but subject to Article II. The Holder shall be able to convert this Note starting from
today’s date and ending until the full amount of the Note has been converted. The Principal Amount of Note together with
all unpaid interest accrued thereon and any other amounts payable hereunder, or such portion thereof, that has not previously been
converted into common stock, of the Company (the “Common Stock”) in accordance with Article II hereof,
if any, shall be payable in full on the Maturity Date.
Article
II
CONVERSION RIGHTS
The Holder shall have
the right to convert the Principal Amount together with all unpaid interest accrued thereon of this Note into shares of the Borrower’s
Common Stock as set forth below.
2.1 Conversion into the Borrower’s Common Stock.
(a) Conversion Price. The conversion price (the “Conversion Price”) shall be .00005.
(b) Conversion. The Holder shall have the option, but shall not be required, to convert all or a portion of the Note
into a number of fully paid and non-assessable shares of Common Stock (the “Conversion Shares”). The
number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the
outstanding Principal Amount together with all unpaid interest accrued thereon of this Note to be converted by (y) the Conversion
Price. The Company may deliver an objection to any Notice of Conversion within one Business Day (as described in Section 5.7 (“Business
Day”) of delivery of such Notice of Conversion. To effect conversions hereunder, the Holder shall not be required
to physically surrender this Debenture to the Company.
(c) Mechanics of Conversion. As a condition to effecting the conversion set forth in Section 2.1(b) above, the Holder
shall properly complete and deliver to the Company a Notice of Conversion, a form of which is annexed hereto as Exhibit B.
The Notice of Conversion shall set forth the Principal Amount together with all unpaid interest accrued thereon of this Note to
be converted and the date on which such conversion shall be effected (such date, the “Conversion Date”).
If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder. Upon timely delivery to the Borrower of the Notice of Conversion, certificates evidencing that number
of shares of Common Stock for the portion of the Note converted in accordance herewith shall be transmitted by the Company’s
transfer agent to the Holder by crediting the account of the Holder’s broker with The Depository Trust Company through its
Deposit / Withdrawal at Custodian system if the Company is then a participant in such system and either (A) there is an effective
registration statement permitting the issuance of the Conversion Shares to, or resale of the Conversion Shares by, the Holder or
(B) the shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise
by physical delivery to the address specified by the Holder in the Notice of Conversion by the date that is three (3) Trading Days
after the Conversion Date (such third day being the “Share Delivery Date”). The Borrower will not issue
fraction shares or scrip representing fractions of shares upon conversion, but the Borrower will round the number of the she shares
up to the nearest whole share.
(d) Obligation to Deliver Conversion Shares Absolute; Certain Remedies.
(i) Obligation Absolute. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of
this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder
to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person
or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder
or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares. The Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. All payments under this Note (whether made by the Borrower or any other person) to or
for the account of the Holder hereunder shall be made free and clear of and without reduction by reason of any present and future
income, stamp, registration and other taxes, levies, duties, costs and charges whatsoever imposed, assessed, levied or collected
by the United States or any political subdivision or taxing authority thereof or therein, together with interest thereon and penalties
with respect thereto, if any on or in respect of this Note (such taxes, levies, duties, costs and charges being herein collectively
called “Taxes”).
Failure to Deliver Common Stock Prior to
Delivery Date. Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or
equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered
as required by Section 2.1(c) by the Share Delivery Date (a “Conversion Default”), the Borrower shall
pay in cash to the Holder for each calendar day beyond the Delivery Date that the Borrower fails to deliver such Common Stock an
amount equal to 100% of the product of (1) the sum of the number of shares of Common Stock not issued to the Holder on a timely
basis and to which the Holder is entitled multiplied by (2) the Closing Trading Price of the Common Stock on the Trading Day
immediately preceding the last possible date on which the Borrower could have issued such shares of Common Stock to the Holder
without violating Section 2.1(c) (the “Conversion Default Payment”). Such cash amount shall be paid to
the Holder by the fifth day of the month following the month in which it has accrued (the “Conversion Default Payment
Due Date”). In the event such cash amount is not received by the Holder by the Conversion Default Payment Due Date,
at the option of the Holder (without notice to the Borrower), the Conversion Default Payment shall be added to the Outstanding
Balance of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note. If the Company does
not request the issuance of the Conversion Shares underlying this Note from its transfer agent after receipt of a Notice of Conversion
within TWO (2) Business days following the period allowed for any objection, the Company shall be responsible for any differential
in the value of the converted shares underlying this Note between the value of the closing price on the date the shares should
have been delivered and the date the shares are delivered. In addition, if the Company fails to timely (within 72 hours, 3 Business
Days), issue a treasury order to its transfer agent or otherwise cause to be delivered, the Conversion Shares per the instructions
of the Holder, free and clear of all legends in legal free trading form, subject to all applicable securities laws, the Company
shall allow Holder to add two (2) days to the look-back (the mechanism used to obtain the conversion price along with discount)
for each day the Company fails to timely (within 72 hours, 3 Business Days)) deliver shares, on the next conversion.
(ii) Rescission. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to or
as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the
Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the
Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to
the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice.
(e) Adjustment. The number and kind of shares or other securities to be issued upon conversion determined pursuant to
Section 2.1(b), shall be subject to adjustment, from time to time, upon the happening of certain events while this conversion right
remains outstanding, as follows:
(f) Reservation of Shares. The Borrower represents at all times to have authorized and reserved four times the number
of shares that is actually issuable upon full conversion of this Note (based on the Conversion Price in effect from time to time)
(the “Reserved Amount”). The Reserved Amount shall be increased from time to time as required to insure
compliance with this provision. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully
paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure which
would change the number of shares of Common Stock into which this Note shall be convertible at the then current Conversion Price,
the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common
Stock authorized and reserved, free from preemptive rights, for conversion of this Note. The Borrower (i) acknowledges that it
has irrevocably instructed its transfer agent to issue shares of the Common Stock issuable upon conversion of this Note, and (ii)
agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty
of issuing the necessary shares of Common Stock in accordance with the terms and conditions of this Note. If, at any time the Borrower
does not maintain the Reserved Amount it will be considered an Event of Default.
2.2 Effect of Certain Events.
(a) Fundamental
Transaction Consent Right. The Borrower shall not enter into or be party to a Fundamental Transaction (as defined below), unless
the Borrower obtains the prior written consent of the Holder to enter into such Fundamental Transaction. For purposes of this Note,
“Fundamental Transaction” means that (i) (1) the Borrower or any of its subsidiaries shall, directly
or indirectly, in one or more related transactions, consolidate or merge with or into (whether or not the Borrower or any of its
subsidiaries is the surviving corporation) any other individual, corporation, limited liability company, partnership, association,
trust or other entity or organization (collectively, “Person”), or (2) the Borrower or any of its
subsidiaries shall, directly or indirectly, in one or more related transactions, sell, lease, license, assign, transfer, convey
or otherwise dispose of all or substantially all of its respective properties or assets to any other Person, or (3) the Borrower
or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, allow any other Person to make a
purchase, tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of voting stock of
the Borrower (not including any shares of voting stock of the Borrower held by the Person or Persons making or party to, or associated
or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (4) the Borrower or any of
its subsidiaries shall, directly or indirectly, in one or more related transactions, consummate a stock or share purchase agreement
or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement)
with any other Person whereby such other Person acquires more than 50% of the outstanding shares of voting stock of the Borrower
(not including any shares of voting stock of the Borrower held by the other Person or other Persons making or party to, or associated
or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination),
or (5) the Borrower or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, reorganize,
recapitalize or reclassify the Common Stock, other than an increase in the number of authorized shares of the Borrower’s
Common Stock, or (ii) any “person” or “group” (as these terms are used for purposes of Sections 13(d)
and 14(d) of the 1934 Act and the rules and regulations promulgated thereunder) is or shall become the “beneficial owner”
(as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented
by issued and outstanding voting stock of the Borrower. The provisions of this Section 2.2(a) shall apply similarly and equally
to successive Fundamental Transactions and shall be applied without regard to any limitations on the conversion of this Note. As
a condition to pre-approving any Fundamental Transaction in writing, which approval may be withheld in the Holder’s sole
discretion, Holder may require the resulting successor or acquiring entity (if not the Borrower) to assume by written instrument
all of the obligations of the Borrower under this Note with the same effect as if such successor or acquirer had been named as
the Borrower hereto and thereto.
(b) Adjustment Due
to Fundamental Transactions. If, at any time when this Note is issued and outstanding and prior to conversion of all of this
Note, there shall be any Fundamental Transaction that is pre-approved in writing by the Holder pursuant to Section 2.2(a) above,
as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another
class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially
all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder
of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities
or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately
prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion
of this Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter
deliverable upon the conversion hereof. The above provisions shall similarly apply to successive Fundamental Transactions.
(c) Adjustment Due
to Distribution. If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution
to the Borrower’s stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of
this Note after the date of record for determining stockholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder
been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to such Distribution.
(d) Adjustment Due
to Dilutive Issuance. If, at any time when this Note is issued and outstanding, the Borrower issues or sells, or in accordance
with this section hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions underwriting discounts or allowances in connection therewith)
less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive
Issuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the
consideration per share received by the Borrower in such Dilutive Issuance.
The Borrower shall be deemed
to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights or options (not
including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or
other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such warrants,
rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “Options”)
and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price
then in effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “price
per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount,
if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable,
by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion
of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance
of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon
exercise of such Options.
Additionally, the Borrower
shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or sells any Convertible Securities,
whether or not immediately convertible, and the price per share for which Common Stock is issuable upon such conversion or exchange
is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For the purposes
of the preceding sentence, the “price per share for which Common Stock is issuable upon such conversion or exchange”
is determined by dividing (1) the total amount, if any, received or receivable by the Borrower as consideration for the issuance
or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the
Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable,
by (2) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities.
No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange
of such Convertible Securities.
(e) Purchase Rights.
If, at any time when this Note is issued and outstanding, the Borrower issues any convertible securities or rights to purchase
stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders of any
class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock
acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately
before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f) Adjustment Due
to Non-DWAC Eligibility. If, at any time when this Note is issued and outstanding thereafter, the Holder delivers a Notice
of Conversion and at such time the Company’s Common Stock is not DWAC eligible the Borrower shall deliver certificated Conversion
Shares to the Holder pursuant to Section 2.1(c) and the Non-DWAC Eligible Adjustment Amount shall be added to the Outstanding Balance
of this Note, without limiting any other rights of the Holder under this Note. The “Non-DWAC Eligible Adjustment Amount”
is the amount equal to the number of applicable Conversion Shares multiplied by the excess, if any, of (i) the Trading Price of
the Common Stock on the Conversion Date, over (ii) the Trading Price of the Common Stock on the date the certificated Conversion
Shares are freely tradable, clear of any restrictive legend and deposited in the Holder’s brokerage account. In any such
case, Holder will use reasonable efforts to timely deposit such certificates in its brokerage account after it receives them and
cause such restrictive legends to be removed, and, without limiting any other provision hereof, Borrower agrees to fully cooperate
with Holder in accomplishing the same. Any fees charged to Holder for the stock being Non-DWAC Eligible shall be paid by the Borrower.
(g) Notice of Adjustments.
Upon the occurrence of each adjustment or readjustment of the Conversion Price or the addition of the Non-DWAC Eligible Adjustment
Amount to the Outstanding Balance as a result of the events described in this Note, the Borrower, the Non-DWAC Eligible Adjustment
Amount shall be added to the Outstanding Balance of this Note, without limiting any other rights of the Holder under this Note.
The “Non-DWAC Eligible Adjustment Amount” is the amount equal to the number of applicable Conversion Shares
multiplied by the excess, if any, of (i) the Trading Price of the Common Stock on the Conversion Date, over (ii) the Trading Price
of the Common Stock on the date the certificated Conversion Shares are freely tradable, clear of any restrictive legend and deposited
in the Holder’s brokerage account. at its expense, shall promptly compute such adjustment or readjustment and prepare and
furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder
a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii)
the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received
upon conversion of this Note.
2.3 Method of Conversion. This Note may be converted by the Holder, in whole or in part,
as described in Section 2.1(a) hereof. Upon partial conversion of Note, a new Note containing the same date and provisions of Note
shall, at the request of the Holder, be issued by the Borrower to the Holder for the principal balance of Note and interest which
shall not have been converted or paid.
2.4 Limitations on Conversion. Notwithstanding anything to the contrary contained in this
Note, this Note shall not be convertible by the Holder hereof, and the Company shall not effect any conversion of this Note or
otherwise issue any shares of Common Stock pursuant hereto, to the extent (but only to the extent) that the Holder or any of its
affiliates would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the Common Stock.
The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation
provision of this section, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares
of the Common Stock outstanding immediately after giving effect to the issuance of shares of common Stock upon conversion of this
Note held by the Holder and the Beneficial Ownership Limitation provision of this section shall continue to apply. To the extent
the above limitation applies, the determination of whether this Note shall be convertible (vis-à-vis other convertible,
exercisable or exchangeable securities owned by the Holder) shall, subject to such Maximum Percentage limitation, be determined
on the basis of the first submission to the Company for conversion, exercise or exchange (as the case may be). No prior inability
to convert this Note, or to issue shares of Common Stock, pursuant to this paragraph shall have any effect on the applicability
of the provisions of this paragraph with respect to any subsequent determination of convertibility. For purposes of this paragraph,
beneficial ownership and all determinations and calculations (including, without limitation, with respect to calculations of percentage
ownership) shall be determined in accordance with Section 13(d) of the Securities Act of 1934, as amended, and the rules and regulations
promulgated thereunder. The provisions of this paragraph shall be implemented in a manner otherwise than in strict conformity with
the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended
Maximum Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to
properly give effect to such Maximum Percentage limitation. The limitations contained in this paragraph shall apply to a successor
Holder of this Note. The holders of Common Stock shall be third party beneficiaries of this paragraph and the Company may not waive
this paragraph without the consent of holders of a majority of its Common Stock. For any reason at any time, upon the written or
oral request of the Holder, the Company shall within two (2) Trading Days confirm orally to the Holder and, if requested, in writing
to the Holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion or exercise of
convertible or exercisable securities into Common Stock, including, without limitation, pursuant to this Note.
Article
III
EVENT OF DEFAULT
The occurrence of
any of the following events of default (“Event of Default”) shall be an event of default hereunder (whatever
the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant
to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
3.1 Failure to Pay. The Borrower fails to pay the Principal Amount, interest, damages or
other sum due under this Note or any other note when due;
3.2 Breach of Covenant. The Borrower breaches any material covenant of the Note in any
material respect and such breach, if subject to cure, continues for a period of FIFTEEN (15) Trading Days after written notice
to the Borrower from the Holder;
3.3 Breach of Representations and Warranties. Any representation or warranty of the Borrower
made, in this Note, said statement or certificate given in writing pursuant hereto or in connection therewith or any other report,
financial statement or certificate shall be false or misleading in any material respect as of the date made;
3.4 Receiver or Trustee. The Borrower shall make an assignment for the benefit of creditors,
or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business;
or such a receiver or trustee shall otherwise be appointed;
3.5 Judgments. Any money judgment, writ or similar final process shall be entered or filed
against Borrower or any of its property or other assets for more than ONE MILLION DOLLARS ($1,000,000.00) and shall remain unvacated,
unbonded or unstayed for a period of THIRTY (30) days;
3.6 Bankruptcy. Bankruptcy, reorganization, insolvency proceeding, liquidation proceedings
or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for
the relief of debtors shall be instituted by or against the Borrower and if instituted against them are not dismissed within THIRTY
(30) days of initiation. The Borrower suffers any appointment of any custodian or the like for it or any substantial art of its
property that is not discharged or stayed within 30 days; the Borrower makes a general assignment of the benefit of creditors;
the Borrower fails to pay or states that it is unable to pay, or is unable to pay its debts generally as they become due;
3.7 Non-Payment. A default by the Borrower under any one or more obligations in, unless
the Borrower is contesting the validity of such obligation in good faith and has segregated cash funds equal to not less than one-half
of the contested amount;
3.8 Public Information Failure. A Public Information Failure occurs and continues for a
period of FIFTEEN (15) Days;
3.9 Beginning 30
days after the Issue Date, the failure of the Company’s Common Stock to be DWAC eligible, which failure continues for a period
of 30 days uncured, at any time during which the Borrower has obligations under this Note;
3.10 Reservation
Default. Failure by the Borrower to have reserved for issuance upon conversion of this Note
the amount of Common Stock as set forth in this Note;
3.11
Withdrawal from registration of the Company under the lien Securities Exchange Act of 1934, as amended (the “Exchange
Act” or “1934 Act”), either voluntary or involuntary;
3.12
Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts
become due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern”
shall not be an admission that the Borrower cannot pay its debts as they become due;
3.13
The failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets
which are necessary to conduct its business (whether now or in the future;
3.14
The Borrower shall fail to maintain the listing and/or quotation, as applicable, of the Common Stock on the Principal Market;
3.15
The Borrower shall fail to comply with the reporting requirements of the 1934 Act; and/or the Borrower shall cease to be
subject to the reporting requirements of the 1934 Act;
3.16
Any cessation of operations by the Borrower or the Borrower admits it is otherwise generally unable to pay its debts and
such debts become due;
3.17
The restatement of any financial statements filed by the Borrower with the SEC for any date or period from two years prior
to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison
to the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to
this Note;
3.18
The Borrower effectuates a reverse split of its Common Stock without twenty (20) calendar days prior written notice to
the Holder;
3.19
In the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, prior to the effective
date of such replacement, fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered (including but
not limited to the provision to irrevocable reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer
agent to Holder and the Borrower;
3.20
The Company shall fail for any reason to deliver certificates to a Holder prior to the fifth Trading Day after a Conversion
Date or the company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s
intention to not honor requests for conversion of any Notes in accordance with the terms hereof or the Company shall fail to deliver
documents requested by the Holder or the Holder’s brokerage firm which the Holder or the Holder’s brokerage firm deem
necessary to allow Holder to sell the Company’s stock;
3.21
During the term of this Agreement, the Company enters into any Prohibited Transaction without the prior written consent
of the Holder, which consent may be withheld at the sole discretion of the Holder. For the purposes of this Note, the term “Prohibited
Transaction” shall refer to the issuance by the Company of any “future priced securities,” which shall
mean the issuance of shares of Common Stock or securities of any type whatsoever that are, or may become, convertible or exchangeable
into shares of Common Stock where the purchase, conversion or exchange price for such Common Stock is determined using any floating
discount or other post-issuance adjustable discount to the market price of Common Stock, including, without limitation, pursuant
to any equity line financing, stand-by equity distribution agreements, at the market transactions or convertible securities and
loans, securities in a registered direct public offering or an unregistered private placement where the price per share of such
securities is fixed concurrently with the execution of definitive documentation relating to the offering or placement, as applicable
and securities issued in connection with a secured debt financing, shall not be a Prohibited Transaction;
3.22
The Borrower fails to provide information requested by the Holder in order to enable the holder to have their converted
securities accepted and sold by their brokerage firm, or the Borrower attempts to prevent, block or frustrate in any manner, the
Holder from converting this Note; and
3.23
The Borrower breaches a negative covenant in Article IV of this Note
Upon the occurrence of
any Event of Default, (a) the Outstanding Balance shall immediately increase to 150% of the Outstanding Balance immediately prior
to the occurrence of the Event of Defaultand (b) this Note shall then accrue interest at the Default Rate which shall be the maximum
amount of interest available under state law during a default on a note (the “Default Rate” and collectively,
the “Default Effects”). The Default Effects shall automatically apply upon the occurrence of an Event
of Default without the need for any party to give any notice or take any other action. Further, upon the occurrence and during
the continuation of any Event of Default, the Holder may by written notice to the Borrower declare the entire Outstanding Balance
immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly
waived, anything contained herein to the contrary notwithstanding; provided, however, that upon the occurrence or
existence of any Event of Default, immediately and without notice, all outstanding obligations payable by the Borrower hereunder
shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all
of which are hereby expressly waived, anything contained herein to the contrary (“Automatic Acceleration”).
The Holder shall retain all rights under this Note, including the ability to convert the then Outstanding Balance of this Note
at all times following the occurrence of an Automatic Acceleration until the entire then Outstanding Balance has been paid in full.
If one or more of the “Events of Default” as described in the Agreement shall occur, the Borrower agrees to pay all
costs and expenses, including reasonable attorney’s fees, which the Holder may incur in collecting any amount due under,
or enforcing any terms of, this Note. The Borrower covenants that until all amounts due under this Note are paid in full, by conversion
or otherwise, the Borrower shall notify Holder in writing within one day of any of the above Events of Default.
ARTICLE IV
NEGATIVE COVENANTS
4.1 Negative
Covenants. As long as any portion of this Note remains outstanding, unless the Holder shall
have otherwise given prior written consent, the Company shall not, and shall not permit any of the Subsidiaries to, directly or
indirectly:
(a) other than Permitted Indebtedness (as defined below), enter into, create, incur, assume, guarantee or suffer to exist any
secured indebtedness for borrowed money of any kind, including, but not limited to, a guarantee, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
(b) other than Permitted Liens (as defined below), enter into, create, incur, assume or suffer to exist any liens of any kind,
on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits
therefrom;
(c) repay, repurchase or offer to repay, repurchase or otherwise acquire for cash more than a de minimis number of shares of
its Common Stock other than repurchases of Common Stock of departing officers and directors of the Company, provided that such
repurchases shall not exceed an aggregate of $100,000 during the term of this Note; or
(d) pay cash dividends or distributions on any equity securities of the Company.
(e) amend its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner that
materially and adversely affects any rights of the Holder;
(f) repay, repurchase or offer to repay, repurchase or otherwise acquire any indebtedness, other than the Debentures if on a
pro-rata basis, other than regularly scheduled principal and interest payments as such terms are in effect as of the Original Issue
Date, provided that such payments shall not be permitted if, at such time, or after giving effect to such payment, any Event of
Default exist or occur;
(g) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing
with the SEC, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested
directors of the Company (even if less than a quorum otherwise required for board approval; or
(h) enter into any agreement with respect to any of the foregoing.
4.2 Definitions.
For the purpose of this Note, the following definitions shall apply:
(i) “Permitted Indebtedness” means (i) the Indebtedness evidenced by the Note, (ii) unsecured Indebtedness
incurred by the Company, which Indebtedness is not senior in rank to the Note and does not mature prior to six months from the
issue date of such Indebtedness, (iii) Indebtedness secured by Permitted Liens, and (iv) extensions, refinancings and renewals
of any items in clauses (i) through (iv) above, provided that the principal amount is not increased (other than with respect to
the addition of existing or future interest due and payable thereunder to the principal thereunder) or the terms modified to impose
materially more burdensome terms upon the Company or its subsidiaries, as the case may be.
(j) “Permitted Lien” means the individual and collective reference to the following: (i) any lien
for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have
been established in accordance with GAAP, (ii) any statutory lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any lien created by operation of law, such as materialmen's
liens, mechanics' liens and other similar liens, arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv) liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred
solely for the purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time of
its acquisition, provided that the lien is confined solely to the property so acquired and improvements thereon, and the proceeds
of such equipment, (v) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens
of the type described in clause (iv) above, provided that any extension, renewal or replacement lien shall be limited to the property
encumbered by the existing lien and the principal amount of the Indebtedness being extended, renewed or refinanced does not increase,
(vi) leases or subleases and licenses and sublicenses granted to others in the ordinary course of the Company's business, not interfering
in any material respect with the business of the Company and its Subsidiaries taken as a whole, (vii) liens in favor of customs
and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the importation of goods,
(viii) liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default, (ix) liens incurred
in connection with Permitted Indebtedness under clause (i) and, solely to the extent existing as of the Issue Date, clause (ii)
of the definition thereof (including any extensions, refinancings and renewals of such Indebtedness that constitute Permitted Indebtedness).
ARTICLE
V
REDEMPTION RIGHTS
5.1 Optional
Redemption Right. Subject to the provisions of this Article V, at any time (a) within ninety
(90) days after the Effective Date, the Company may deliver a notice to the Holder (an “Optional Redemption Notice”
and the date such notice is deemed delivered hereunder, the “Optional Redemption Notice Date”) of its
irrevocable election to redeem all of the then outstanding principal amount together with all unpaid interest accrued thereon
of this Note for cash at a redemption price equal to 150% multiplied by all of the then outstanding principal amount together
with all unpaid interest accrued thereon of this Note, on the 20th Trading Day following the Optional Redemption Notice
Date (such date, the “Optional Redemption Date”, such 20 Trading Day period, the “Optional
Redemption Period” and such redemption, the “Optional Redemption”), The Optional Redemption
Amount is payable in full on the Optional Redemption Date. The Company may only effect an Optional Redemption if each of the Equity
Conditions (as defined below) shall have been met (unless waived in writing by the Holder) on each Trading Day during the period
commencing on the Optional Redemption Notice Date through to the Optional Redemption Date and through and including the date payment
of the Optional Redemption Amount is actually made in full. If any of the Equity Conditions shall cease to be satisfied at any
time during the Optional Redemption Period, then the Holder may elect to nullify the Optional Redemption Notice by notice to the
Company after the day on which any such Equity Condition has not been met in which case the Optional Redemption Notice shall be
null and void, ab initio. The Company covenants and agrees that it will honor all Notices of Conversion tendered
from the time of delivery of the Optional Redemption Notice through the date all amounts owing thereon are due and paid in full.
“Equity Conditions” means, during the period in question, (a) the Company shall have duly honored all
conversions and redemptions scheduled to occur or occurring by virtue of one or more Notices of Conversion of the Holder, if any,
(b) the Company shall have paid all liquidated damages and other amounts owing to the Holder in respect of this Note, (c)(i) there
is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell
all of the Conversion Shares issuable upon conversion of such portion of this Note subject to an Optional Redemption (and the
Company believes, in good faith, that such effectiveness will continue uninterrupted for such period) or (ii) all of the Conversion
Shares issuable upon conversion of such portion of this Note subject to an Optional Redemption may be resold pursuant to Rule
144 during such period, (d) the Common Stock is trading on a Trading Market and all of the shares issuable pursuant to this Note
are listed or quoted for trading on such Trading Market (and the Company believes, in good faith, that trading of the Common Stock
on a Trading Market will continue uninterrupted for the foreseeable future), (e) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all of the Conversion Shares issuable upon conversion
of such portion of this Note being redeemed at such time, (f) there is no existing Event of Default and, to the actual knowledge
of the Company, no existing event which, with the passage of time or the giving of notice, would constitute an Event of Default,
(g) the issuance of the shares issuable to the Holder upon conversion of such portion of this Note subject to an Optional Redemption
would not violate the limitations set forth in Section 2.3 under this Note, (h) there has been no public announcement of a pending
or proposed Fundamental Transaction that has not been consummated or abandoned, and (i) the applicable Holder is not in possession
of any information provided by the Company that constitutes, or may constitute, material non-public information. Notwithstanding
the foregoing, the Holder may elect to convert the outstanding principal amount of the Note subject to an Optional Redemption
Notice pursuant to Article II at any time prior to actual payment in cash for any redemption under this Section 5 by the delivery
of an irrevocable Notice of Conversion to the Company.
Article
VI
UNSECURED NOTE
6.1 Unsecured Note. Note is an unsecured obligation of the Borrower.
Article
VII
MISCELLANEOUS
7.1 Failure or Indulgence Not Waiver. No failure or delay on the part of Holder hereof in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right
or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. Notices. All notices, requests,
demands, consents, instructions or other communications required or permitted hereunder shall be in writing and either faxed,
mailed, e-mailed or delivered to each party at the respective addresses of the parties. All such notices and communications shall
be effective (a) when sent by Federal Express or other overnight service of recognized standing on the Trading Day following the
deposit with such service; (b) when mailed, by registered or certified mail, first class postage prepaid and addressed as aforesaid
through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; (d) when faxed, upon confirmation
of receipt; (e) when e-mailed, upon e-mail being sent.
7.2 Amendment Provision. No provision of this Note may be modified or amended without the
prior written consent of the Holder. The term “Note” and all reference thereto, as used throughout this instrument,
shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented.
7.3 Assignability. Note shall be binding upon the Borrower and its successors and assigns,
and shall inure to the benefit of the Holder and its successors and assigns. The Holder may assign or transfer this Note to any
transferee.
7.4 Cost of Collection. If default is made in the payment of Note, Borrower shall pay the
Holder hereof reasonable costs of collection, including reasonable attorneys’ fees.
7.5 Governing Law. Note shall only be governed by and construed in accordance with the
laws of the State of Delaware, including, but not limited to, Delaware’s statutes of limitations. Any action brought by either
party against the other concerning the transactions contemplated by this Agreement shall be brought only in the civil or state
courts in Delaware or in the federal courts located in Delaware. Both parties and the individual signing this Agreement on behalf
of the Borrower agree to submit only to the jurisdiction of such courts in Delaware. The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of Note is invalid
or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform to such statute or rule of law. Any such provision, which may
prove invalid or unenforceable under any law, shall not affect the validity or unenforceability of any other provision of Note.
Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against
the Borrower in any other jurisdiction to collect on the Borrower’s obligations to Holder, or to enforce a judgment or other
decision in favor of the Holder. This Note shall be deemed an unconditional obligation of Borrower for the payment of money
and, without limitation to any other remedies of Holder, may be enforced against Borrower by summary proceeding or summary judgment
or any similar rule or statute in the jurisdiction where enforcement is sought. For purposes of such rule or statute, any other
document or agreement to which Holder and Borrower are parties or which Borrower delivered to Holder, which may be convenient or
necessary to determine Holder’s rights hereunder or Borrower’s obligations to Holder are deemed a part of Note, whether
or not such other document or agreement was delivered together herewith or was executed apart from Note. If for any reason
a Delaware court of law deems that Delaware is not the proper venue, then the Note shall be governed by and construed only
in accordance with the laws of the State of Florida, including, but not limited to, Florida’s statutes of limitations and
any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought
only in the civil or state courts in Miami, Florida or in the federal courts located in Miami, Florida and the individual signing
this Agreement on behalf of the Borrower agree to submit only to the jurisdiction of such courts in Florida.
7.6 Non-Business Days. Whenever any payment or any action to be made shall be due on a
Saturday, Sunday or a public holiday under the laws of the State of Florida, such payment may be due or action shall be required
on the next succeeding Trading Day and, for such payment, such next succeeding day shall be included in the calculation of the
amount of accrued interest payable on such date.
7.7 Unenforceability. If any term in this Note is found by a court of competent jurisdiction to be unenforceable, then
the entire Note shall be rescinded, the consideration proffered by the Holder for the remaining Outstanding Balance acquired by
the Holder not converted by the Holder in accordance with this Note shall be returned in its entirety and any Conversion Shares
in the possession or control of the Holder shall be returned to the Company.
7.8 Entire Understanding. The Note between the Borrower and the Holder (including all Exhibits thereto) constitute the
full and entire understanding and agreement between the Borrower and the Holder with respect to the subject hereof. Neither this
Note nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Borrower
and the Holder. Any questions regarding interpretation of this Note shall be solely construed by the Holder in their sole discretion.
7.9
Registration Rights. The Company hereby grants the right to the Holder, at Holder’s expense, to require Company
to register any and all issuances, past, present and future, directly connected to this specific Outstanding Balance. If the Holder
shall request the registration, the Company shall begin the registration process within 30 days and the Holder shall have the following
rights.
7.10 Recoupment of Registration Fees. If the Holder shall invoke his rights under section 5.11 of this Agreement, the
Company shall reimburse to the Holder all fees, costs, and disbursements, inclusive of attorney’s fees, paid for by Holder,
in common stock under the same terms and conditions provided for herein.
7.11 Legal Opinion. The Company’s counsel has provided an opinion regarding the applicable exemption from registration
under the Securities Act of 1933, as amended, for the issuance of the Conversion Shares pursuant to the terms and conditions of
this Agreement and the Note, which provides that upon conversion at any time following the date hereof, the shares received as
a result of the conversion shall be issued unrestricted in accordance with the appropriate exemption.
7.12 Post-Closing Expenses. The Borrower will bear any and all miscellaneous expenses of the Borrower and Holder that
may arise post-closing. These expenses include, but are not limited to, the cost of legal opinion production, transfer agent fees,
equity issuance fees, fees charged for delivering, vetting and accepting physical certificates, any and all fees and costs charged
by the Holder’s brokers in handling and transacting in the shares of the Company on behalf of the Holder. These fees may
be either deducted from future payments or added to the outstanding principal balance of this Note at the sole discretion of the
Holder. The failure to pay any and all Post-Closing Expenses will be deemed an Event of Default.
7.13 Savings Clause. In case any provision of this Note is held by a court of competent jurisdiction to be excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable
to the maximum extent possible, and the validity and enforceability of the remaining provision of this Note will not in any way
be affected or impaired thereby. In no event shall the amount of interest paid hereunder exceed the maximum rate of interest on
the unpaid principal balance hereof allowable by applicable law. If any sum is collected in excess of the applicable maximum rate,
the excess collected shall be applied to reduce the principal debt. If the interest actually collected hereunder is still in excess
of the applicable maximum rate, the interest rate shall be reduced so as not to exceed the maximum allowable under law.
7.14 Attorneys’ Fees and Cost of Collection. In the event of any action at law or in equity to enforce or interpret
the terms of this Note or any of the other documents related to this financing, the parties agree that the party who is awarded
the most money shall be deemed the prevailing party for all purposes and shall therefore be entitled to an additional award of
the full amount of the attorneys’ fees and expenses paid by such prevailing party in connection with the litigation
and/or dispute without reduction or apportionment based upon the individual claims or defenses giving rise to the fees and
expenses. Nothing herein shall restrict or impair a court’s power to award fees and expenses for frivolous or bad
faith pleading.
7.15 Fees and Charges. The parties acknowledge and agree that upon the Borrower’s failure to comply with the provisions
of this Note, the Holder’s damages would be uncertain and difficult (if not impossible) to accurately estimate because of
the parties’ inability to predict future interest rates, the Holder’s increased risk, and the uncertainty of the availability
of a suitable substitute investment opportunity for the Holder, among other reasons. Accordingly, any fees, charges, and interest
due under this Note are intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual
loss of its investment opportunity and not a penalty, and shall not be deemed in any way to limit any other right or remedy Holder
may have hereunder, at law or in equity.
7.16 Notice of Corporate Events. Except as otherwise provided herein, the Holder of this Note shall have no rights as
a Holder of Common Stock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide
the Holder with prior notification of any meeting of the Borrower’s stockholders (and copies of proxy materials and other
information sent to stockholders). In the event of any taking by the Borrower of a record of its stockholders for the purpose
of determining stockholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share
of any class or any other securities or property, or to receive any other right, or for the purpose of determining stockholders
who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder,
at least twenty (20) calendar days prior to the record date specified therein (or thirty (30) calendar days prior to the consummation
of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such
dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution,
right or other event to the extent known at such time. The Borrower shall make a public announcement of any event requiring notification
to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this
section.
7.17 Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm
to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges
that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach
or threatened breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other
available remedies at law or in equity, and in addition to the charges assessable herein, to an injunction or injunctions restraining,
preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity
of showing economic loss and without any bond or other security being required.
[SIGNATURES ON THE
FOLLOWING PAGE]
IN WITNESS WHEREOF,
Borrower has caused Note to be signed in its name by an authorized officer as of Epazz, Inc..
EPAZZ,
INC.
By: /s/ Shaun Passley
Name: Shaun Passley
Title: CEO
Exhibit B
NOTICE OF CONVERSION
(To be executed by the Registered Holder
in order to convert the Note)
The undersigned
hereby elects to convert $_________ of the principal amount and $_________ of the interest due on the Note issued by EPAZZ, INC.
on ___________ into shares of common stock of EPAZZ, INC. (the “Borrower”) according to the conditions set forth in
such Note, as of the date written below.
Date of Conversion: ____________________________________________________
Conversion Price: ______________________________________________________
Shares to Be Delivered: __________________________________________________
Notwithstanding anything to the contrary
contained herein, this Conversion Notice shall constitute a representation by the Holder of the Note submitting this Conversion
Notice that, after giving effect to the conversion provided for in this Conversion Notice, such Holder (together with its affiliates)
will not have beneficial ownership (together with the beneficial ownership of such person's affiliates) of a number of shares Common
Stock which exceeds the Maximum Percentage (as defined in the Note) of the total outstanding shares Common Stock of the Company
as determined pursuant to the provisions of Section 2.3 of the Note.
Signature: ____________________________________________________________
Star Financial Corporation, President
Representation of Individual Officer
of Epazz, Inc.
Re: Convertible Promissory Note Between Epazz, Inc. (“Borrower”)
and Star Financial Corporation Dated 4/23/2014 (“Note”)
In connection with the above referenced Note
and exhibits and related agreements and instruments, herein the Agreement, and any present and any future conversion requests of
Star Financial Corporation ("SFC") we irrevocably confirm:
1. Borrower is not, and has not been, a shell
issuer as described in Rule 144 promulgated with reference to the Securities Act of 1933, as amended (the "Securities Act")
nor is or was a "shell" as otherwise commonly understood;
2. Borrower is, unless noted "Not Applicable,"
subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of1934, as amended (the "Exchange
Act").
3. Borrower has to the extent it has been subject
to Exchange Act requirements for filing reports, filed all reports and other materials required to be filed by Section 13 or 15(d)
of the Exchange Act, as applicable, during the preceding 12 months and or has filed with the trading exchange or over the counter
disclosure system all such reports and information to be deeded current in all public reporting.
4. The original Outstanding Balances noted in the above referenced
Note, and the contents of the above referenced Note are accurate and Borrower did not and will not receive any new consideration
for the exchange note issued to SFC.
5. Borrower is
now and will remain current with all obligations with its stock transfer agent and the U.S. Securities and Exchange Commission
and the state of incorporation. Neither Star Financial Corporation nor SFC is or has been an owner, affiliate or 10% or greater
shareholder of Borrower, as that term is defined by Rule 144(a) of the Securities Act of 1933. Neither
Star Financial Corporation nor SFC, is directly or indirectly through one or more intermediaries, in control of, controlled by,
or under common control with Borrower.
6. Any and all approvals needed in relation
to the above referenced Note, this letter, for the assistance of our transfer agent, etc., is obtained. The Note reflects, among
other things, conversion rights we otherwise afford to the nonaffiliated debt holders.
Representations herein survive the issuance
or closing of any instrument or matter, and we will cooperate as needed to give effect to and protect your rights including as
to the transfer agent and you may rely upon these promises and representations.
Effective Date: 3/31/2015
Very truly yours,
__________________________
Exhibit ___
PROMISSORY NOTE
Principal Amount: |
Mesa, Arizona |
$150,000.00 |
December 29, 2014 |
1. Promise to Pay.
For Value Received, EPAZZ, Inc., an
Illinois corporation with its principal place of business located at 205 W. Wacker Drive, Chicago, IL 60606 (“Maker”),
promises to pay to the order of John Hopkins (“Payee”), at 10800
E. Cactus Road, #56, Scottsdale, AZ 85259, or at such other address as the holder of this Note at any given time (“Holder”)
may designate by written notice to Maker, in lawful money of the United States of America, the principal sum of $150,000.00, together
with all then accrued and unpaid interest and other amounts that are the Maker’s obligations under this Note.
2. Computation of
Interest. Any interest that may accrue on the outstanding balance of this Note shall be computed on the basis of a 360-day
year comprised of twelve 30-day months. There will be no interest if all payments required under this Note are timely paid.
3. Required Payments.
Principal and interest hereunder shall be paid as follows:
a. Beginning January 29, 2015, and continuing on the 29th of each and every month until the Maturity Date (as
defined below), Maker shall pay equal installments of principal in the amount of $37,500.00.
b. If not earlier due and payable, all unpaid principal, accrued but unpaid interest and all other amounts payable under
the provisions of this Note shall become due and payable in full on April 29, 2015 (“Maturity Date”).
c. If any payment set forth in this Paragraph 3 is not timely made, Holder shall provide written notice of delinquency
to Maker. Maker shall have 10 days from the date of notice of delinquency to cure. If Maker fails to cure within the 10-day cure
period, Maker shall be deemed in “Default” under this Agreement.
4. Application of Payments.
All payments by Maker shall be applied (a) first, to reimbursable fees, costs and expenses payable by Maker under this Note, (b)
second, to accrued and unpaid interest, and (c) third, to principal.
5. Late Charges;
Dishonored Payments. For each payment provided above that is not paid within ten (10) days after the date upon which such
payment first became due, Holder may charge, and Maker shall pay upon demand, a late charge equal to $1,300.00 to compensate Holder
for administrative expenses and other costs of delinquent payments. Maker’s payment of a late charge shall not excuse late
payment or constitute a waiver of any rights of Holder.
6. Collection Costs.
If suit, arbitration or other legal proceeding is instituted or any other action is taken by Holder to collect all or any part
of the indebtedness evidenced hereby, Maker promises to pay Holder’s reasonable attorneys’ fees and other costs (to
be determined by the court or arbitrator and not by jury, in the case of litigation or arbitration) incurred thereby. Such fees
and costs shall be included in any judgment or arbitration award obtained by Holder and shall bear interest at the Default Rate
(defined in Paragraph 10, below).
7. Optional Prepayment.
This Note may be prepaid at any time, in whole or in part, without penalty.
8. Waivers and Acknowledgments.
Failure of Holder to exercise any option hereunder shall not constitute a waiver of the right to exercise the same in the event
of any subsequent default or in the event of continuance of any existing default after demand for strict performance hereof. Without
limitation of the foregoing sentence, no acceptance of a past due installment shall be construed to waive Holder’s right
to insist upon prompt payment thereafter or to impose late charges retroactively or prospectively. Holder may apply any
payment of less than the total amount then due it receives from Maker (regardless of whether Maker has marked such payment to
indicate that its acceptance will constitute payment in full or an accord and satisfaction) on account to amounts then owing under
this Note, but acceptance and application of such amount will not cure any existing default, constitute a waiver by Holder or
an accord and satisfaction of any kind, or impair Holder’s ability to exercise any or all of its remedies.
9. Acceleration.
If Maker is in Default as defined in Paragraph 3(c), above (“Event of Default”), then, at the option
of Holder, Holder may exercise any remedy available, including, without limitation, declaring the total then unpaid indebtedness
evidenced by this Note to be immediately due and payable.
10. Default Interest.
After maturity, including maturity upon acceleration following any Event of Default as described in Paragraph 9, above,
or at any time that Maker is delinquent in the payment of money as required by this Note (whether or not Holder has given any
notice of default or any cure period has expired), then all amounts outstanding hereunder, including interest accrued between
the date of this Note and the Maturity Date, any late charges that are then due and payable under Paragraph 5, above, and
any accruing costs and reasonable attorneys’ fees shall thereafter bear interest at the rate (“Default Rate”)
of twelve percent (12%) per annum until paid.
11. Interest Limit.
All interest and other charges, fees, goods, things in action or any other sums, things of value and reimbursable costs that Maker
is or may become obligated to pay or reimburse in connection with the loan evidenced by this Note, and which may be deemed to
constitute “interest” within the meaning of Arizona Revised Statutes Sections 44-1201 et seq., shall be deemed to
constitute items of interest in addition to the rate(s) of interest specified above, which Maker hereby contracts in writing to
pay. If fulfillment of any provision of this Note or any other agreement between Maker and Holder would require Maker to pay amounts
in excess of the maximum amounts, if any, lawfully collectible under applicable law, then the obligation of Maker to be fulfilled
shall be automatically reduced to require the payment of only the maximum amounts lawfully collectible.
12. No Waiver by
Holder. Failure of Holder to exercise any option hereunder shall not constitute a waiver of the right to exercise the
same in the event of any subsequent default or in the event of continuance of any existing default after demand for strict performance
hereof.
13. Time of Essence. Time
is of the essence of this Note.
14. Notices.
Any demand or notice will be in writing and will be deemed (a) given and received upon personal delivery to the party, (b) given
upon deposit with a reputable national overnight commercial courier service, addressed to the party to be notified, and received
on the first business day after such deposit, or (c) given upon deposit of such notice in the United States mail by first class
mail, certified or registered, postage prepaid, addressed to the party, at the address designated in this Note, and received on
the second business day after such deposit or such earlier date as may be shown on the return receipt. Maker or Holder may change
its address from time to time by giving ten days’ prior written notice to the other party as described in this Paragraph
14.
15. Governing Law
and Venue. This Note is delivered in, and shall be construed according to the substantive laws and judicial decisions
of, the State of Arizona and applicable federal laws, rules and regulations. Any action brought to enforce this Note may be commenced
and maintained, at Holder’s option, in any state or federal district court in Arizona, or in any other court having personal
jurisdiction over Maker or any guarantor. Maker irrevocably consents to jurisdiction and venue in such court for such purposes
and agrees not to seek transfer or removal of any action commenced in accordance with the terms of this Paragraph 15. Maker
also waives the right to protest the domestication or collection of any judgment obtained against Maker with respect to this Note
or the loan evidenced hereby in any jurisdiction where Maker may now or hereafter maintain assets.
16. Waiver of Right to Jury Trial.
AS A MATERIAL PART OF THE CONSIDERATION FOR THE MAKING OF THE LOAN EVIDENCED HEREBY, MAKER (AND HOLDER, BY ACCEPTING THIS NOTE)
UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY JURY OF ANY PRESENT OR FUTURE CLAIMS, DEMANDS OR CAUSES OF ACTION OF ANY KIND ARISING
UNDER OR RELATING TO THE INDEBTEDNESS EVIDENCED BY THIS NOTE. MAKER ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND REPRESENTS
TO HOLDER THAT THIS WAIVER IS MADE KNOWINGLY AND VOLUNTARILY AFTER CONSULTATION WITH COUNSEL OF MAKER’S CHOICE. MAKER AND
HOLDER AGREE THAT ALL SUCH CLAIMS WILL BE TRIED BEFORE A JUDGE OF A COURT OF COMPETENT JURISDICTION WITHOUT A JURY.
DATED: December 29, 2014
MAKER:
EPAZZ, Inc., An Illinois
corporation
By:________________________________
Its:
Exhibit ___
PROMISSORY NOTE
Principal Amount: |
Mesa, Arizona |
$200,000.00 |
December 29, 2014 |
1. Promise to Pay.
For Value Received, EPAZZ, Inc., an
Illinois corporation with its principal place of business located at 205 W. Wacker Drive, Chicago, IL 60606 (“Maker”),
promises to pay to the order of John Hopkins (“Payee”), at 10800
E. Cactus Road, #56, Scottsdale, AZ 85259, or at such other address as the holder of this Note at any given time (“Holder”)
may designate by written notice to Maker, in lawful money of the United States of America, the principal sum of $200,000.00, plus
interest at the rate of six percent (6%) per annum, together with all then accrued and unpaid interest and other amounts that
are the Maker’s obligations under this Note.
2. Computation of
Interest. Interest shall accrue on the outstanding principal balance of this Note from time to time at the rate of six
percent (6%) per annum, from the date set forth above until the earlier of (i) the date that all amounts due under this Note
are paid in full; or (ii) the Maturity Date described in Paragraph 3(b), below. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months.
3. Required Payments.
Principal and interest hereunder shall be paid as follows:
a. Beginning June 8, 2015, and continuing on the 8th day of each and every month until the Maturity Date (as
defined below), Maker shall pay equal installments of principal and interest in the amount of $11,881.03.
b. If not earlier due and payable, all unpaid principal, accrued but unpaid interest and all other amounts payable under
the provisions of this Note shall become due and payable in full on November 8, 2016 (“Maturity Date”).
c. If any payment set forth in this Paragraph 3 is not timely made, Holder shall provide written notice of delinquency
to Maker. Maker shall have 10 days from the date of notice of delinquency to cure. If Maker fails to cure within the 10-day cure
period, Maker shall be deemed in “Default” under this Agreement. Maker is permitted three (3) delinquency notices and
the related rights to cure as provided in this Paragraph 3(c). After the third (3rd) delinquency notice is sent,
Holder is no longer obligated to provide for such notice in the future and Maker shall be in Default if a required payment under
this Paragraph 3 is not timely made.
d. The
principal balance of any payment due may be reduced pursuant to Section 2.2.1.2 of that certain Asset Purchase Agreement of even
date herewith, by and between Interaction Information Technology, Inc., an Arizona corporation (“Seller”), and Interaction
Information Technology, an Illinois corporation (“Buyer”).
4. Application of Payments.
All payments by Maker shall be applied (a) first, to reimbursable fees, costs and expenses payable by Maker under this Note, (b)
second, to accrued and unpaid interest, and (c) third, to principal.
5. Late Charges;
Dishonored Payments. For each payment provided above that is not paid within ten (10) days after the date upon which such
payment first became due, Holder may charge, and Maker shall pay upon demand, a late charge equal to $400.00 to compensate Holder
for administrative expenses and other costs of delinquent payments. Maker’s payment of a late charge shall not excuse late
payment or constitute a waiver of any rights of Holder.
6. Collection Costs.
If suit, arbitration or other legal proceeding is instituted or any other action is taken by Holder to collect all or any part
of the indebtedness evidenced hereby, Maker promises to pay Holder’s reasonable attorneys’ fees and other costs (to
be determined by the court or arbitrator and not by jury, in the case of litigation or arbitration) incurred thereby. Such fees
and costs shall be included in any judgment or arbitration award obtained by Holder and shall bear interest at the Default Rate
(defined in Paragraph 10, below).
7. Optional Prepayment.
This Note may be prepaid at any time, in whole or in part, without penalty.
8. Waivers and Acknowledgments.
Failure of Holder to exercise any option hereunder shall not constitute a waiver of the right to exercise the same in the event
of any subsequent default or in the event of continuance of any existing default after demand for strict performance hereof. Without
limitation of the foregoing sentence, no acceptance of a past due installment shall be construed to waive Holder’s right
to insist upon prompt payment thereafter or to impose late charges retroactively or prospectively. Holder may apply any
payment of less than the total amount then due it receives from Maker (regardless of whether Maker has marked such payment to
indicate that its acceptance will constitute payment in full or an accord and satisfaction) on account to amounts then owing under
this Note, but acceptance and application of such amount will not cure any existing default, constitute a waiver by Holder or
an accord and satisfaction of any kind, or impair Holder’s ability to exercise any or all of its remedies.
9. Acceleration.
If Maker is in Default as defined in Paragraph 3(c), above (“Event of Default”), then, at the option
of Holder, Holder may exercise any remedy available, including, without limitation, declaring the total then unpaid indebtedness
evidenced by this Note to be immediately due and payable.
10. Default Interest.
After maturity, including maturity upon acceleration following any Event of Default as described in Paragraph 9, above,
or at any time that Maker is delinquent in the payment of money as required by this Note (whether or not Holder has given any
notice of default or any cure period has expired), then all amounts outstanding hereunder, including interest accrued between
the date of this Note and the Maturity Date, any late charges that are then due and payable under Paragraph 5, above, and
any accruing costs and reasonable attorneys’ fees shall thereafter bear interest at the rate (“Default Rate”)
of twelve percent (12%) per annum until paid.
11. Interest Limit.
All interest and other charges, fees, goods, things in action or any other sums, things of value and reimbursable costs that Maker
is or may become obligated to pay or reimburse in connection with the loan evidenced by this Note, and which may be deemed to
constitute “interest” within the meaning of Arizona Revised Statutes Sections 44-1201 et seq., shall be deemed to
constitute items of interest in addition to the rate(s) of interest specified above, which Maker hereby contracts in writing to
pay. If fulfillment of any provision of this Note or any other agreement between Maker and Holder would require Maker to pay amounts
in excess of the maximum amounts, if any, lawfully collectible under applicable law, then the obligation of Maker to be fulfilled
shall be automatically reduced to require the payment of only the maximum amounts lawfully collectible.
12. No Waiver by Holder.
Failure of Holder to exercise any option hereunder shall not constitute a waiver of the right to exercise the same in the event
of any subsequent default or in the event of continuance of any existing default after demand for strict performance hereof.
13. Time of Essence. Time
is of the essence of this Note.
14. Notices.
Any demand or notice will be in writing and will be deemed (a) given and received upon personal delivery to the party, (b) given
upon deposit with a reputable national overnight commercial courier service, addressed to the party to be notified, and received
on the first business day after such deposit, or (c) given upon deposit of such notice in the United States mail by first class
mail, certified or registered, postage prepaid, addressed to the party, at the address designated in this Note, and received on
the second business day after such deposit or such earlier date as may be shown on the return receipt. Maker or Holder may change
its address from time to time by giving ten days’ prior written notice to the other party as described in this Paragraph
14.
15. Governing Law
and Venue. This Note is delivered in, and shall be construed according to the substantive laws and judicial decisions
of, the State of Arizona and applicable federal laws, rules and regulations. Any action brought to enforce this Note may be commenced
and maintained, at Holder’s option, in any state or federal district court in Arizona, or in any other court having personal
jurisdiction over Maker or any guarantor. Maker irrevocably consents to jurisdiction and venue in such court for such purposes
and agrees not to seek transfer or removal of any action commenced in accordance with the terms of this Paragraph 15. Maker
also waives the right to protest the domestication or collection of any judgment obtained against Maker with respect to this Note
or the loan evidenced hereby in any jurisdiction where Maker may now or hereafter maintain assets.
16. Waiver of Right to Jury Trial.
AS A MATERIAL PART OF THE CONSIDERATION FOR THE MAKING OF THE LOAN EVIDENCED HEREBY, MAKER (AND HOLDER, BY ACCEPTING THIS NOTE)
UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY JURY OF ANY PRESENT OR FUTURE CLAIMS, DEMANDS OR CAUSES OF ACTION OF ANY KIND ARISING
UNDER OR RELATING TO THE INDEBTEDNESS EVIDENCED BY THIS NOTE. MAKER ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND REPRESENTS
TO HOLDER THAT THIS WAIVER IS MADE KNOWINGLY AND VOLUNTARILY AFTER CONSULTATION WITH COUNSEL OF MAKER’S CHOICE. MAKER AND
HOLDER AGREE THAT ALL SUCH CLAIMS WILL BE TRIED BEFORE A JUDGE OF A COURT OF COMPETENT JURISDICTION WITHOUT A JURY.
DATED: December 29, 2014
MAKER:
EPAZZ, Inc., an Illinois
corporation
By:______________________________
Its:
Exhibit 3.__
ARTICLES OF AMENDMENT
1. | | Corporate Name (See Note 1 on page 4.): |
EPAZZ, INC.
2. | | Manner of Adoption of Amendment: |
The following amendment to the Articles of Incorporation
was adopted on April 9, 2015, in the manner indicated below:
o |
By a majority of the incorporators, provided no directors were named in the Articles of Incorporation and no directors have been elected. (See Note 2 on page 4.) |
o |
By a majority of the board of directors. in accordance with Section 10.10, the Corporation having issued no shares as of the time of adoption of this amendment. {See Note 2 on page 4.) |
o |
By a majority of the board of directors, in accordance with Section 10.15, shares having been issued but shareholder action not being required for the adoption of the amendment. (See Note 3 on page 4.) |
o |
By the shareholders, in accordance with Section 10.20, a resolution of the board of directors having been duly adopted and submitted to the shareholders. At a meeting of shareholders, not less than the minimum number of votes required statute and by the Articles of Incorporation were voted in favor of the amendment (See Note 4 on page 4.) |
x |
By the shareholders, in accordance with Sections 10.20 and 7.10, a resolution of the board of directors having been duly adopted and submitted to the shareholders. A consent in writing has been signed by shareholders having not less than the minimum number of votes required by statute and by the Articles of Incorporation. Shareholders who have not consented in writing have been given notice in accordance with Section 7.10. (See Notes 4 and 5 on page 4.) |
o |
By the shareholders, in accordance with Section 10.20, a resolution of the board of directors having been duly adopted and submitted to the shareholders. A consent in writing has been signed by all the shareholders entitled to vote on this amendment. (See Note 5 on page 4.) |
a. | | When amendment effects a name change, insert the New Corporate Name below. Use page
2 for all other amendments. |
Article I: Name of the Corporation:
_____________________________________
New Name
(All changes other than name include on
page 2.)
Text of Amendment
b. | | If amendment affects the corporate purpose, the amended purpose is required to be
set forth in its entirety. |
For more space, attach
additional sheets of this size.
Class |
Par Value |
Number of Shares Authorized |
|
|
|
Class A Common |
$0.01 |
9,000,000,000 |
Class B Common |
$0.01 |
60,000,000 |
Preferred Series A |
$0.01 |
1,000 |
Preferred Series B |
$0.01 |
1,000 |
Preferred Series C |
$0.01 |
3,000,000,000 |
Preferred Series D |
$0.01 |
1,000,000 |
Preferred (Undesigned) |
$0.01 |
39,998,000 |
4. | | The manner, if not set forth in Article 3b, in which any exchange, reclassification
or cancellation of issued shares, or a reduction of the number of authorized shares of any class below the number of issued shares
of that class, provided for or effected by this amendment, is as follows (If not applicable, insert “No change”): |
No Change
5.a. | | The manner, if not set forth in Article 3b, in which said amendment effects a change
in the amount of paid-in capital is as follows (if not applicable, insert “No change”): |
(Paid-in capital replaces the terms Stated Capital and Paid-in
Surplus and is equal to the total of these accounts.)
No Change
b. | | The amount of paid-in capital as changed by this amendment is as follows (if not applicable,
insert “No change”): (Paid-in Capital replaces the terms Stated Capital and Paid-in Surplus and is equal to the total
of these accounts.) (See Note 6 on page 4.) |
| |
Before Amendment | |
After Amendment |
| |
| |
|
Paid-in Capital: | |
$ _______ | |
$ _______ |
Complete either
Item 6 or Item 7 below. All signatures must be in BLACK INK.
6. | | The undersigned Corporation has caused this statement to be signed by a duly authorized
officer who affirms, under penalties of perjury, that the facts stated herein are true and correct. |
Dated April 9, |
2015 |
Epazz, Inc. |
Month & Day |
Year |
Exact Name of Corporation |
|
|
|
|
|
|
/s/ Shaun Passley
Any Authorized Officer’s Signature
Shaun Passley, President
Name
and Title (type or print)
7. | | If amendment is authorized pursuant to Section 10.10 by the incorporators, the incorporators
must sign below, and type or print name and title. |
OR
If amendment is authorized by the directors pursuant to Section
10.10 and there are no officers, a majority of the direc- tors, or such directors as may be designated by the board, must sign
below, and type or print name and title.
The undersigned affirms, under penalties of perjury, that the
facts stated herein are true and correct.
Dated: _________________________________, ____
Month &
Day Year
Section 4 of the Corporation’s
Articles of Incorporation shall be amended and restated in its entirety to read as follows:
The Corporation shall have authority to issue
12,101,000,000 shares of capital stock, consisting of 9,060,000,000 shares of common stock, par value $0.01 per share (“Common
Stock”), and 3,041,000,000 shares of “blank check” preferred stock par value $0.01 per
share (“Preferred Stock”). The Common Stock shall include 9,000,000,000 shares of Class A Common Stock,
$0.01 par value per share (the “Class A Common Stock”); 60,000,000 shares of Class B Common Stock, $0.01
par value per share (the “Class B Common Stock”).
The par value of each of the Corporation’s
outstanding Common Stock and Preferred Stock will not be adjusted in connection with the Reverse Stock Split. The Reverse Stock
split of one class of stock does not affect the other classes of stock.
Shares of Preferred Stock of the Corporation
may be issued from time to time in one or more series, each of which shall have such distinctive designation or title as shall
be determined by the Board of Directors of the Corporation (“Board of Directors”) prior to the issuance
of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences
and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as
shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be
adopted from time to time by the Board of Directors prior to the issuance of any shares thereof.
The number of authorized shares of Preferred
Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the voting power of all the then outstanding shares of the capital stock of the corporation entitled to
vote generally in the election of the directors (the “Voting Stock”), voting together as a single class,
without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required
pursuant to any Preferred Stock Designation.
Rights of Our Class A Common Stock and
Class B Common Stock
Rights to Dividends and on Liquidation.
Each share of Class A Common Stock and Class B Common Stock is entitled to share equally in dividends (other than dividends declared
with respect to any outstanding Preferred Stock) when and as declared by our Board of Directors. Upon liquidation, each share of
Class A Common Stock and Class B Common Stock is entitled to share equally in our assets available for distribution to the holders
of those shares. Any outstanding Preferred Stock would rank senior to the Class A Common Stock and Class B Common Stock in respect
of liquidation rights and could rank senior to that stock in respect of dividend rights.
Voting--General. Each holder of Class
A Common Stock is entitled to one vote per share, and each holder of Class B Common Stock is entitled to 10,000 votes per share.
Non-Cumulative Voting Rights. Our Class
A Common Stock and Class B Common Stock, do not have cumulative voting rights.
Voting by Class. Holders of our Class
A Common Stock and Class B Common Stock shall vote as one class on any and all shareholder matters.
Miscellaneous Rights and Provisions.
There are no preemptive rights, subscription rights, or redemption provisions relating to our Class A Common Stock and Class B
Common Stock and none of the shares carries any liability for further calls.
CONVERSION RIGHTS.
The Class B Common Stock shall be convertible into Common A Stock as follows (the "Conversion Rights"):
(a) Holder’s
Right to Convert.
(i) All shares
Class B Common Stock shall be convertible, at the option of the Holder thereof, with five (5) Business Days written notice to the
Corporation (a “Notice of Conversion“), at the office of the Corporation or any transfer agent for the
Class B Stock, into that number of fully-paid, non-assessable shares of Class B Common Stock determined by each vote of Class B
Common shares shall convert into one share of Class A Common Stock (the “Shares”). The Holder may only
affect a conversion of all of the Class B Stock shares which he, she or it owns pursuant to and in compliance with the restrictions
on conversion set forth herein (each a “Conversion”).
(ii) Mechanics
of Conversion. In order to effect a Conversion, a Holder shall: (i) fax (or otherwise deliver) a copy of the fully executed
Notice of Conversion to the Corporation (Attention: Corporate Secretary), and (ii) surrender or cause to be surrendered the original
Class B Common Stock Certificates being converted, duly endorsed, along with a copy of the Notice of Conversion as soon as practicable
thereafter to the Corporation which the Holder desires to convert. Upon receipt by the Corporation of a facsimile copy of a Notice
of Conversion from a Holder, the Corporation shall promptly send, via facsimile, a confirmation to such Holder stating that the
Notice of Conversion has been received, the date upon which the Corporation expects to deliver the Common Stock issuable upon such
conversion and the name and telephone number of a contact person at the Corporation regarding the conversion and/or any deficiencies
that exist in connection with such Notice of Conversion. The Corporation shall not be obligated to issue shares of Common Stock
upon a conversion unless the original Class B Common Stock Certificates Converted are delivered to the Corporation as provided
above. In the event the Holder has lost or misplaced the certificates evidencing the Class B Common Stock, the Holder shall be
required to provide the Corporation or the Corporation’s Transfer Agent (as applicable) with whatever documentation and fees
each may require to re-issue the Class B Common Stock Certificates and shall be required to provide such re-issued Class B Common
Stock Certificates to the Corporation in connection with such Notice of Conversion. Unless the Notice of Conversion provided by
the Holder includes a valid opinion from an attorney stating that such Shares of Common Stock issuable in connection with the Notice
of Conversion can be issued free of restrictive legend, which shall be determined by the Corporation in its sole discretion, such
shares shall be issued as Restricted Shares.
(iii) Delivery
of Common Stock Upon Conversion. Upon the surrender of Class B Common Stock Certificates accompanied by a Notice of Conversion,
the Corporation (itself, or through its transfer agent) shall, no later than the fifth (5th) Business Day following the date of
such surrender (the "Delivery Period"), issue and deliver (i.e., deposit with a nationally recognized
overnight courier service postage prepaid) to the Holder or its nominee (x) that number of shares of Class A Common Stock issuable
upon conversion of such shares of Series A Preferred Stock being converted and (y) the total amount of the accrued and unpaid Dividends.
(b) Taxes.
The Corporation shall not be required to pay any tax which may be payable in respect to any transfer involved in the issue
and delivery of shares of Common Stock upon conversion in a name other than that in which the shares of the Class B Common Stock
so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue or
delivery has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that
such tax has been paid. The Corporation shall withhold from any payment due whatsoever in connection with the Class B Common Stock
any and all required withholdings and/or taxes the Corporation, in its sole discretion deems reasonable or necessary, absent an
opinion from Holder’s accountant or legal counsel, acceptable to the Corporation in its sole determination, that such withholdings
and/or taxes are not required to be withheld by the Corporation.
(c) Adjustments
for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Class B Common Stock shall
be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares provided for above), then, in any such event,
in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive each Holder of
such Class B Common Stock shall have the right thereafter to convert such shares of Class B Common Stock into a number of shares
of such other class or classes of stock which a Holder of the number of shares of Common Stock deliverable upon conversion of such
series of Class B Common Stock immediately before that change would have been entitled to receive in such reorganization or reclassification,
all subject to further adjustment as provided herein with respect to such other shares.
(d) No Impairment.
The Corporation will not through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder
by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section and in
the taking of all such action as may be necessary or appropriate in order to protect the Conversion rights of the holders of Class
B Common Stock against impairment. Notwithstanding the foregoing, nothing in this Section shall prohibit the Corporation from amending
its Certificate of Incorporation with the requisite consent of its shareholders and the Board of Directors.
(e) Reservation
of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the Conversion of the shares of the Class B Common, such number
of its shares of Common Stock as shall from time to time be sufficient to effect the Conversion of all then outstanding shares
of the Class B Common Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the Conversion of all then outstanding shares of the Class B Common Stock, the Corporation will within a reasonable time
period make a good faith effort to take such corporate action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(f) Effect of
Conversion. On the date of any Conversion, all rights of any Holder with respect to the shares of the Class B Common Stock
so converted, including the rights, if any, to receive distributions of the Corporation’s assets or notices from the Corporation,
will terminate.
(g) Notices
of Record Date. In the event that the Corporation shall propose at any time:
(i) to effect
any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or
(ii) to voluntarily
liquidate or dissolve or to enter into any transaction deemed to be a liquidation, dissolution or winding up of the Corporation;
then, in connection
with each such event, the Corporation shall send to the holders of the Class B Common at least ten (10) Business Days prior written
notice of a record date for determining rights to vote in respect of the matters referred to above.
Such written notice
shall be given by first class mail (or express courier), postage prepaid, addressed to the holders of Class B Common Stock at the
address for each such Holder as shown on the books of the Corporation and shall be deemed given on the date such notice is mailed.
The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the vote or written
consent of the holders of a majority of the Class B Common Stock, voting together as a single class.
Designation of Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock and Series C Convertible Preferred Stock:
The Corporation shall have three classes of
Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, with such powers and preferences,
and the relative, participating, optional and other rights, and the qualifications, limitations, and restrictions thereon set forth
below:
CERTIFICATE OF DESIGNATIONS
ESTABLISHING THE DESIGNATIONS, PREFERENCES,
LIMITATIONS AND RELATIVE RIGHTS OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
Pursuant to Sections 6.10 and 10.20 of the
Illinois Business Corporation Act of 1983, the Corporation has adopted a designation of One Thousand (1,000) shares of Series A
Convertible Preferred Stock, par value $0.01 per share which have the powers and preferences, and the relative, participating,
optional and other rights, and the qualifications, limitations, and restrictions thereon set forth below (the “Designation”
or “Certificate of Designation”):
Section 1. DESIGNATION OF SERIES; RANK.
The shares of such series shall be designated as the "Series A Convertible Preferred Stock" (the "Series
A Preferred Stock") and the number of shares initially constituting such series shall be One Thousand (1,000) shares.
Section 2. DEFINITIONS.
For purposes of this
Designation, the following definitions shall apply:
(a) “Business
Day” means a day in which a majority of the banks in the State of Illinois in the United States of America are open
for business.
(b) “Common
Stock” means the Corporation’s $0.01 par value Class A Common Stock and Class B Common Stock.
(c) "Distribution"
shall mean the transfer of cash, Common Stock or other property without consideration whether by way of dividend or otherwise to
the shareholders of Common Stock.
(d) “First
Dividend Date” means January 1st of any year following a calendar year in which the Corporation has generated
revenue of over $2 million based on the Corporation’s audited statement of operations.
(e) “First
Dividend Rate” means 1.5% of the Company’s revenues per quarter, based on the revenues set forth in the Company’s
financial statements as filed with the Securities and Exchange Commission on Form 10-Q or Form 10-K.
(f) “Holder”
shall mean the person or entity in which the Series A Preferred Stock is registered on the books of the Corporation, which
shall initially be the person or entity which such Series A Preferred Stock is issued to, and shall thereafter be permitted and
legal assigns which the Corporation is notified of by the Holder and which the Holder has provided a valid legal opinion in connection
therewith to the Corporation.
(g) “Junior
Stock” shall mean the Common Stock and each other class of capital stock or series of preferred stock of the Corporation
established after the Original Issue Date, the terms of which do not expressly provide that such class or series ranks senior to
or on parity with the Series A Preferred Stock upon the liquidation, winding-up or dissolution of the Corporation.
(h) "Market
Price" means, for any security as of any date, the last sales price of such security on the principal trading market
where such security is listed or traded as reported by Bloomberg Financial Markets (or a comparable reporting service of national
reputation selected by the Corporation if Bloomberg Financial Markets is not then reporting closing sales prices of such security)
(collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sales price of
such security on a national exchange or in the over-the-counter market on the electronic bulletin board for such security as reported
by Bloomberg, or, if no such price is reported for such security by Bloomberg, the average of the bid prices of all market makers
for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc., in each case
for such date or, if such date was not a trading day for such security, on the next preceding date that was a trading day. If the
Market Price cannot be calculated for such security on any of the foregoing bases, the Market Price of such security on such date
shall be the fair market value as reasonably determined by a valuation firm, with experience in the valuation of securities similar
to the Corporation’s, chosen by the Board of Directors of the Corporation in its sole discretion, with the costs of such
appraisal to be borne by the Corporation.
(i) “Original
Issue Date” shall mean the date upon which the shares of Series A Preferred Stock are first issued.
(j) “Liquidation
Preference” shall be equal to $.01 per share for the Series A Convertible Preferred Stock (as appropriately adjusted
for any Recapitalizations).
(k) “Second
Dividend Date” means January 1st of any year following a calendar year in which the Corporation has generated
net income of over $2 million based on the Corporation’s audited statement of operations.
(l) “Second
Dividend Rate” means 24% of the Corporation’s net income based on the Corporation’s audited statement
of operations.
(m) “Senior
Securities” shall mean any senior debt or other security holders of the Corporation, including certain banks and/or
institutions, which hold security interests over the Corporation’s assets as of the Original Issue Date, or which the Corporation
may agree in the future to provide such first priority security interests to, which shall not require the approval and/or consent
of the Series A Preferred Stock Holders.
(n) “Class
A Common Stock” means the Corporation’s Class A Common Stock, $0.01 par value per share.
(o) “Series
A Preferred Stock Certificates” means the certificates, as replaced from time to time, evidencing the outstanding
Series A Preferred Stock shares.
(p) "Recapitalization"
shall mean any stock dividend, stock split, combination of shares, reorganization, recapitalization, reclassification or other
similar event.
(q) “Restricted
Shares” means shares of the Corporation’s Common Stock which are restricted from being transferred by the Holder
thereof unless the transfer is effected in compliance with the Securities Act of 1933, as amended and applicable state securities
laws (including investment suitability standards, which shares shall bear the following restrictive legend (or one substantially
similar):
"The securities represented by this
certificate have not been registered under the Securities Act of 1933 or any state securities act. The securities have been acquired
for investment and may not be sold, transferred, pledged or hypothecated unless (i) they shall have been registered under the Securities
Act of 1933 and any applicable state securities act, or (ii) the corporation shall have been furnished with an opinion of counsel,
satisfactory to counsel for the corporation, that registration is not required under any such acts."
SECTION 3. DIVIDENDS.
(a) Dividends
in General. Dividends shall accrue on the Series A Preferred Stock, Quarterly in arrears, for each Quarter that such Preferred
Stock is outstanding, (a) beginning on the First Dividend Date, equal to the First Dividend Rate, and additional dividends (b)
beginning effective on the Second Dividend Date, based on the Second Dividend Rate, until such dividends are paid in full
as provided below (“Dividends”).
(b) Payment
of Dividends. The Corporation shall pay the Holder of the Series A Preferred Stock the accrued Dividends in cash or shares
of common stock based on the Market Price, at the option of the Corporation from time to time, provided that until paid in the
sole discretion of the Corporation, such Dividends shall continue to accrue.
(c) Additional
Dividend Policies.
(i) In any calendar
year, the Holders of outstanding shares of Series A Preferred Stock shall be entitled to receive dividends, when, as and only if
declared by the Board of Directors, out of any assets at the time legally available therefor, payable in preference and priority
to any declaration or payment of any Distribution on Common Stock of the Corporation in such calendar year. No Distributions shall
be made with respect to the Common Stock until all declared Dividends on the Series A Preferred Stock have been paid or set aside
for payment to the Series A Preferred Stock holders.
(ii) Non-Cash
Distributions. Whenever a Distribution provided for in this Section 3 shall be payable in property other than cash, the value
of such Distribution shall be deemed to be the fair market value of such property as determined in good faith by the Board of Directors.
(iii) Other
Distributions. Subject to the terms of this Certificate of Designations, and to the fullest extent permitted by Illinois law,
the Corporation shall be expressly permitted to redeem, repurchase or make distributions on the shares of its capital stock in
all circumstances other than where doing so would cause the Corporation to be unable to pay its debts as they become due in the
usual course of business.
SECTION 4.
LIQUIDATION PREFERENCE.
(a) Liquidation
Preference. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary,
the Holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any Distribution of any of
the assets of the Corporation to the Holders of the Junior Stock by reason of their ownership of such stock, but not prior to any
holders of the Corporation’s Senior Securities, which holders shall have priority to the distribution of any assets of the
Corporation, an amount per share for each share of Series A Preferred Stock held by them equal to the sum of (i) the Liquidation
Preference specified for such share of Series A Preferred Stock, and (ii) all declared but unpaid Dividends (if any) on such shares
of Series A Preferred Stock. If upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation
legally available for distribution to the Holders of the Series A Preferred Stock are insufficient to permit the payment to such
Holders of the full amounts specified in this Section 4(a), subsequent to the payment to the Senior Securities then the
entire remaining assets of the Corporation following the payment to the Senior Securities legally available for distribution shall
be distributed with equal priority and pro rata among the Holders of the Series A Preferred Stock in proportion to the full amounts
they would otherwise be entitled to receive pursuant to this Section 4(a).
(b) Remaining
Assets. After the payment to the Holders of Series A Preferred Stock of the full preferential amounts specified above, the
entire remaining assets of the Corporation legally available for distribution by the Corporation shall be distributed with equal
priority and pro rata among the Holders of the Junior Stock in proportion to the number of shares of Junior Stock, and the terms
of such Junior Stock, held by them.
(c) Valuation
of Non-Cash Consideration. If any assets of the Corporation distributed to shareholders in connection with any liquidation,
dissolution, or winding up of the Corporation are other than cash, then the value of such assets shall be their fair market value
as determined in good faith by the Board of Directors. In the event of a merger or other acquisition of the Corporation by another
entity, the Distribution date shall be deemed to be the date such transaction closes.
SECTION 5. CONVERSION
RIGHTS. The Series A Preferred Stock shall be convertible into Common Stock as follows (the "Conversion Rights"):
(b) Holder’s
Right to Convert.
(i) All shares
Series A Preferred Stock shall be convertible, at the option of the Holder thereof, subject to Section 5(m) below, with five (5)
Business Days written notice to the Corporation (a “Notice of Conversion“), at the office of the Corporation
or any transfer agent for the Series A Preferred Stock, into that number of fully-paid, non-assessable shares of Class A Common
Stock determined by multiplying the total number of shares of Class A Common Stock issued and outstanding by 0.60 (the “Shares”).
The Holder may only affect a conversion of all of the Series A Preferred Stock shares which he, she or it owns pursuant to and
in compliance with the restrictions on conversion set forth herein (each a “Conversion”).
(ii) Mechanics
of Conversion. In order to effect a Conversion, a Holder shall: (i) fax (or otherwise deliver) a copy of the fully executed
Notice of Conversion to the Corporation (Attention: Corporate Secretary), and (ii) surrender or cause to be surrendered the original
Series A Preferred Stock Certificates being converted, duly endorsed, along with a copy of the Notice of Conversion as soon as
practicable thereafter to the Corporation which the Holder desires to convert. Upon receipt by the Corporation of a facsimile copy
of a Notice of Conversion from a Holder, the Corporation shall promptly send, via facsimile, a confirmation to such Holder stating
that the Notice of Conversion has been received, the date upon which the Corporation expects to deliver the Common Stock issuable
upon such conversion and the name and telephone number of a contact person at the Corporation regarding the conversion and/or any
deficiencies that exist in connection with such Notice of Conversion. The Corporation shall not be obligated to issue shares of
Common Stock upon a conversion unless the original Series A Preferred Stock Certificates Converted are delivered to the Corporation
as provided above. In the event the Holder has lost or misplaced the certificates evidencing the Series A Preferred Stock, the
Holder shall be required to provide the Corporation or the Corporation’s Transfer Agent (as applicable) with whatever documentation
and fees each may require to re-issue the Series A Preferred Stock Certificates and shall be required to provide such re-issued
Series A Preferred Stock Certificates to the Corporation in connection with such Notice of Conversion. Unless the Notice of Conversion
provided by the Holder includes a valid opinion from an attorney stating that such Shares of Common Stock issuable in connection
with the Notice of Conversion can be issued free of restrictive legend, which shall be determined by the Corporation in its sole
discretion, such shares shall be issued as Restricted Shares.
(iii) Delivery
of Common Stock Upon Conversion. Upon the surrender of Series A Preferred Stock Certificates accompanied by a Notice of Conversion,
the Corporation (itself, or through its transfer agent) shall, no later than the fifth (5th) Business Day following the date of
such surrender (the "Delivery Period"), issue and deliver (i.e., deposit with a nationally recognized
overnight courier service postage prepaid) to the Holder or its nominee (x) that number of shares of Class A Common Stock issuable
upon conversion of such shares of Series A Preferred Stock being converted and (y) the total amount of the accrued and unpaid Dividends.
(b) Taxes.
The Corporation shall not be required to pay any tax which may be payable in respect to any transfer involved in the issue
and delivery of shares of Common Stock upon conversion in a name other than that in which the shares of the Series A Preferred
Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue
or delivery has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation,
that such tax has been paid. The Corporation shall withhold from any payment due whatsoever in connection with the Series A Preferred
Stock any and all required withholdings and/or taxes the Corporation, in its sole discretion deems reasonable or necessary, absent
an opinion from Holder’s accountant or legal counsel, acceptable to the Corporation in its sole determination, that such
withholdings and/or taxes are not required to be withheld by the Corporation.
(h) Adjustments
for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Series A Preferred Stock
shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares provided for above), then, in any such event,
in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive each Holder of
such Series A Preferred Stock shall have the right thereafter to convert such shares of Series A Preferred Stock into a number
of shares of such other class or classes of stock which a Holder of the number of shares of Common Stock deliverable upon conversion
of such series of Series A Preferred Stock immediately before that change would have been entitled to receive in such reorganization
or reclassification, all subject to further adjustment as provided herein with respect to such other shares.
(i) No Impairment.
The Corporation will not through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder
by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in
the taking of all such action as may be necessary or appropriate in order to protect the Conversion rights of the holders of Series
A Preferred Stock against impairment. Notwithstanding the foregoing, nothing in this Section 5(d) shall prohibit the Corporation
from amending its Certificate of Incorporation with the requisite consent of its shareholders and the Board of Directors.
(j) Reservation
of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the Conversion of the shares of the Series A Preferred Stock,
such number of its shares of Common Stock as shall from time to time be sufficient to effect the Conversion of all then outstanding
shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the Conversion of all then outstanding shares of the Series A Preferred Stock, the Corporation will within
a reasonable time period make a good faith effort to take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(k) Effect of
Conversion. On the date of any Conversion, all rights of any Holder with respect to the shares of the Series A Preferred Stock
so converted, including the rights, if any, to receive distributions of the Corporation’s assets or notices from the Corporation,
will terminate.
(l) Notices
of Record Date. In the event that the Corporation shall propose at any time:
(i) to effect
any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or
(ii) to voluntarily
liquidate or dissolve or to enter into any transaction deemed to be a liquidation, dissolution or winding up of the Corporation;
then, in connection
with each such event, the Corporation shall send to the holders of the Series A Preferred Stock at least ten (10) Business Days
prior written notice of a record date for determining rights to vote in respect of the matters referred to above.
Such written notice
shall be given by first class mail (or express courier), postage prepaid, addressed to the holders of Series A Preferred Stock
at he address for each such Holder as shown on the books of the Corporation and shall be deemed given on the date such notice
is mailed. The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the vote
or written consent of the holders of a majority of the Series A Preferred Stock, voting together as a single class.
(m) Beneficial
Ownership Limitation. The applicable number of shares of Series A Preferred Stock shall not be convertible during any time
that, and only to the extent that, the number of Shares to be issued to the Holder upon such Conversion, when added to the number
of shares of Common Stock, if any, that the Holder otherwise beneficially owns (outside of the Series A Preferred Stock, and not
including any other securities of the Company held by the Holder having a provision substantially similar to this paragraph) at
the time of such Conversion, would exceed 9.99% (the “Maximum Percentage”) of the number of shares of
Common Stock of the Company outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon
Conversion of the Series A Preferred Stock held by the Holder, as determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Beneficial Ownership Limitation”). The Maximum Percentage and
Beneficial Ownership Limitation shall not apply to any duly appointed officers and/or directors of the Company, which individuals
shall have no limitation pursuant to this Section 5(m) on the number of Shares they can receive upon Conversion of the Series A
Preferred Stock. The provisions of this paragraph shall not be construed and implemented in a manner otherwise than in strict conformity
with the terms of this Section 5(m) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with
the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly
give effect to such limitation.
SECTION 6. VOTING. The
Series A Preferred Stock shall have no voting rights and shall have no right to vote on any shareholder matters (other than as
expressly stated below under Section 7) or as otherwise provided for by Illinois law.
SECTION 7. PROTECTIVE
PROVISIONS.
Subject to the rights
of series of Series A Preferred Stock which may from time to time come into existence, so long as any shares of Series A Preferred
Stock are outstanding, the Corporation shall not without first obtaining the approval (by written consent, as provided by law)
of the holders of 2/3rds of the then outstanding shares of Series A Preferred Stock, voting together as a class:
(a) Increase or
decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock;
(b) Effect an exchange,
reclassification, or cancellation of all or a part of the Series A Preferred Stock, but excluding a stock split, forward split
or reverse stock split of the Corporation’s Common Stock or Series A Preferred Stock;
(c) Effect an exchange,
or create a right of exchange, of all or part of the shares of another class of shares into shares of Series A Preferred Stock;
or
(d) Alter or change
the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely the shares of such series,
including the rights set forth in this Designation.
PROVIDED, HOWEVER,
that the Corporation may, by any means authorized by law and without any vote of the Holders of shares of the Series A Preferred
Stock, make technical, corrective, administrative or similar changes in this Statement of Designations that do not, individually
or in the aggregate, adversely affect the rights or preferences of the Holders of shares of the Series A Preferred Stock. The Corporation
may also designate and issue additional series of preferred stock from time to time in the sole discretion of the Corporation’s
Board of Directors, which such rights, privileges, preferences and limitations shall be determined by the Corporation’s Board
of Directors in its sole discretion, and which designations and issuances shall not require the approval of the holders of the
Series A Preferred Stock.
SECTION 8.
PREEMPTIVE RIGHTS. Holders of Series A Preferred Stock and holders of Common Stock shall not be entitled to any preemptive,
subscription or similar rights in respect to any securities of the Corporation, except as specifically set forth herein or in any
other document agreed to by the Corporation.
SECTION 9.
NOTICES. In addition to any other means of notice provided by law or in the Corporation's Bylaws, any notice required by
the provisions of this Designation to be given to the holders of Series A Preferred Stock shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each Holder of record at such Holder's address appearing on the books
of the Corporation.
SECTION
10. MISCELLANEOUS.
(a) The headings
of the various sections and subsections of this Certificate of Designation are for convenience of reference only and shall not
affect the interpretation of any of the provisions of this Certificate of Designation.
(b) Whenever
possible, each provision of this Certificate of Designation shall be interpreted in a manner as to be effective and valid under
applicable law and public policy. If any provision set forth herein is held to be invalid, unlawful or incapable of being enforced
by reason of any rule of law or public policy, such provision shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating or otherwise adversely affecting the remaining provisions of this Certificate of Designation. No provision
herein set forth shall be deemed dependent upon any other provision unless so expressed herein. If a court of competent jurisdiction
should determine that a provision of this Certificate of Designation would be valid or enforceable if a period of time were extended
or shortened, then such court may make such change as shall be necessary to render the provision in question effective and valid
under applicable law.
(c) Except
as may otherwise be required by law, the shares of the Series A Preferred Stock shall not have any powers, designations, preferences
or other special rights, other than those specifically set forth in this Certificate of Designation.
CERTIFICATE OF DESIGNATIONS
ESTABLISHING THE DESIGNATIONS, PREFERENCES,
LIMITATIONS AND RELATIVE RIGHTS OF THE
SERIES B CONVERTIBLE PREFERRED STOCK
Pursuant to Sections 6.10 and 10.20 of the
Illinois Business Corporation Act of 1983, the Corporation has adopted a designation of One Thousand (1,000) shares of Series B
Convertible Preferred Stock, par value $0.01 per share which have the powers and preferences, and the relative, participating,
optional and other rights, and the qualifications, limitations, and restrictions thereon set forth below (the “Designation”
or “Certificate of Designation”):
Section 1. DESIGNATION OF SERIES; RANK.
The shares of such series shall be designated as the "Series B Convertible Preferred Stock" (the "Series
B Preferred Stock") and the number of shares initially constituting such series shall be One Thousand (1,000) shares.
Section 2. DEFINITIONS.
For purposes of this Designation, the following
definitions shall apply:
(a) “Business Day”
means a day in which a majority of the banks in the State of Illinois in the United States of America are open for business.
(b) “Common
Stock” means the Corporation’s $0.01 par value Class A Common Stock and Class B Common Stock.
(c) "Distribution"
shall mean the transfer of cash, Common Stock or other property without consideration whether by way of dividend or otherwise to
the shareholders of Common Stock.
(d) “First
Dividend Date” means January 1st of any year following a calendar year in which the Corporation has generated
revenue of over $1 million based on the Corporation’s audited statement of operations.
(e) “First
Dividend Rate” means 1.5% of the Company’s revenues per quarter, based on the revenues set forth in the Company’s
financial statements as filed with the Securities and Exchange Commission on Form 10-Q or Form 10-K.
(f) “Holder”
shall mean the person or entity in which the Series B Preferred Stock is registered on the books of the Corporation, which
shall initially be the person or entity which such Series B Preferred Stock is issued to, and shall thereafter be permitted and
legal assigns which the Corporation is notified of by the Holder and which the Holder has provided a valid legal opinion in connection
therewith to the Corporation.
(g) “Junior
Stock” shall mean the Common Stock and each other class of capital stock or series of preferred stock of the Corporation
established after the Original Issue Date, the terms of which do not expressly provide that such class or series ranks senior
to or on parity with the Series B Preferred Stock upon the liquidation, winding-up or dissolution of the Corporation.
(h) "Market
Price" means, for any security as of any date, the last sales price of such security on the principal trading market
where such security is listed or traded as reported by Bloomberg Financial Markets (or a comparable reporting service of national
reputation selected by the Corporation if Bloomberg Financial Markets is not then reporting closing sales prices of such security)
(collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sales price of
such security on a national exchange or in the over-the-counter market on the electronic bulletin board for such security as reported
by Bloomberg, or, if no such price is reported for such security by Bloomberg, the average of the bid prices of all market makers
for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc., in each case
for such date or, if such date was not a trading day for such security, on the next preceding date that was a trading day. If the
Market Price cannot be calculated for such security on any of the foregoing bases, the Market Price of such security on such date
shall be the fair market value as reasonably determined by a valuation firm, with experience in the valuation of securities similar
to the Corporation’s, chosen by the Board of Directors of the Corporation in its sole discretion, with the costs of such
appraisal to be borne by the Corporation.
(i) “Original
Issue Date” shall mean the date upon which the shares of Series B Preferred Stock are first issued.
(j) ““Liquidation
Preference” shall be equal to $0.01 per share for the Series A Convertible Preferred Stock (as appropriately adjusted
for any Recapitalizations).
(k) “Second
Dividend Date” means January 1st of any year following a calendar year in which the Corporation has generated
net income of over $2 million based on the Corporation’s audited statement of operations.
(l) “Second
Dividend Rate” means 6% of the Corporation’s net income based on the Corporation’s audited statement
of operations.
(m) “Senior
Securities” shall mean (a) the Series A Convertible Preferred Stock of the Corporation; and (b) any senior debt
or other security holders of the Corporation, including certain banks and/or institutions, which hold security interests over
the Corporation’s assets as of the Original Issue Date, or which the Corporation may agree in the future to provide such
first priority security interests to, which shall not require the approval and/or consent of the Series B Preferred Stock Holders.
(n) “Class
A Common Stock” means the Corporation’s Class A Common Stock, $0.01 par value per share.
(o) “Series
B Preferred Stock Certificates” means the certificates, as replaced from time to time, evidencing the outstanding
Series B Preferred Stock shares.
(p) "Recapitalization"
shall mean any stock dividend, stock split, combination of shares, reorganization, recapitalization, reclassification or other
similar event.
(q) “Restricted
Shares” means shares of the Corporation’s Common Stock which are restricted from being transferred by the Holder
thereof unless the transfer is effected in compliance with the Securities Act of 1933, as amended and applicable state securities
laws (including investment suitability standards, which shares shall bear the following restrictive legend (or one substantially
similar):
"The securities represented by this
certificate have not been registered under the Securities Act of 1933 or any state securities act. The securities have been acquired
for investment and may not be sold, transferred, pledged or hypothecated unless (i) they shall have been registered under the Securities
Act of 1933 and any applicable state securities act, or (ii) the corporation shall have been furnished with an opinion of counsel,
satisfactory to counsel for the corporation, that registration is not required under any such acts."
SECTION 3. DIVIDENDS.
(a) Dividends
in General. Dividends shall accrue on the Series B Preferred Stock, Quarterly in arrears, for each Quarter that such Preferred
Stock is outstanding, (a) beginning on the First Dividend Date, equal to the First Dividend Rate, and additional dividends (b)
beginning effective on the Second Dividend Date, based on the Second Dividend Rate, until such dividends are paid in full
as provided below (“Dividends”).
(b) Payment
of Dividends. The Corporation shall pay the Holder of the Series B Preferred Stock the accrued Dividends in cash or shares
of common stock based on the Market Price, at the option of the Corporation from time to time, provided that until paid in the
sole discretion of the Corporation, such Dividends shall continue to accrue.
(c) Additional
Dividend Policies.
(i) In any calendar
year, the Holders of outstanding shares of Series B Preferred Stock shall be entitled to receive dividends, when, as and only if
declared by the Board of Directors, out of any assets at the time legally available therefor, payable in preference and priority
to any declaration or payment of any Distribution on Common Stock of the Corporation in such calendar year. No Distributions shall
be made with respect to the Common Stock until all declared Dividends on the Series B Preferred Stock have been paid or set aside
for payment to the Series B Preferred Stock holders.
(ii) Non-Cash
Distributions. Whenever a Distribution provided for in this Section 3 shall be payable in property other than cash, the value
of such Distribution shall be deemed to be the fair market value of such property as determined in good faith by the Board of Directors.
(iii) Other
Distributions. Subject to the terms of this Certificate of Designations, and to the fullest extent permitted by Illinois law,
the Corporation shall be expressly permitted to redeem, repurchase or make distributions on the shares of its capital stock in
all circumstances other than where doing so would cause the Corporation to be unable to pay its debts as they become due in the
usual course of business.
SECTION 4.
LIQUIDATION PREFERENCE.
(a) Liquidation
Preference. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary,
the Holders of the Series B Preferred Stock shall be entitled to receive, prior and in preference to any Distribution of any of
the assets of the Corporation to the Holders of the Junior Stock by reason of their ownership of such stock, but not prior to any
holders of the Corporation’s Senior Securities, which holders shall have priority to the distribution of any assets of the
Corporation, an amount per share for each share of Series B Preferred Stock held by them equal to the sum of (i) the Liquidation
Preference specified for such share of Series B Preferred Stock, and (ii) all declared but unpaid Dividends (if any) on such shares
of Series B Preferred Stock. If upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation
legally available for distribution to the Holders of the Series B Preferred Stock are insufficient to permit the payment to such
Holders of the full amounts specified in this Section 4(a), subsequent to the payment to the Senior Securities then the
entire remaining assets of the Corporation following the payment to the Senior Securities legally available for distribution shall
be distributed with equal priority and pro rata among the Holders of the Series B Preferred Stock in proportion to the full amounts
they would otherwise be entitled to receive pursuant to this Section 4(a).
(b) Remaining
Assets. After the payment to the Holders of Series B Preferred Stock of the full preferential amounts specified above, the
entire remaining assets of the Corporation legally available for distribution by the Corporation shall be distributed with equal
priority and pro rata among the Holders of the Junior Stock in proportion to the number of shares of Junior Stock, and the terms
of such Junior Stock, held by them.
(d) Valuation
of Non-Cash Consideration. If any assets of the Corporation distributed to shareholders in connection with any liquidation,
dissolution, or winding up of the Corporation are other than cash, then the value of such assets shall be their fair market value
as determined in good faith by the Board of Directors. In the event of a merger or other acquisition of the Corporation by another
entity, the Distribution date shall be deemed to be the date such transaction closes.
SECTION 5. CONVERSION
RIGHTS. The Series B Preferred Stock shall be convertible into Common Stock as follows (the "Conversion Rights"):
(a) Holder’s
Right to Convert.
(i) All shares
Series B Preferred Stock shall be convertible, at the option of the Holder thereof, subject to Section 5(h) below, with five (5)
Business Days written notice to the Corporation (a “Notice of Conversion“), at the office of the Corporation
or any transfer agent for the Series B Preferred Stock, into that number of fully-paid, non-assessable shares of Class A Common
Stock determined by multiplying the total number of shares of Class A Common Stock issued and outstanding by 0.10 (the “Shares”).
The Holder may only affect a conversion of all of the Series B Preferred Stock shares which he, she or it owns pursuant to and
in compliance with the restrictions on conversion set forth herein and only at such time as all other Holders of Series B Preferred
Stock desire to convert such shares of Series B Preferred Stock which they hold as provided in this Section 5(b)(i.e., no Conversion
shall take place unless all outstanding shares of Series B Preferred Stock are Converted at the same time)(each a “Conversion”).
(ii) Mechanics
of Conversion. In order to effect a Conversion, a Holder shall: (i) fax (or otherwise deliver) a copy of the fully executed
Notice of Conversion to the Corporation (Attention: Corporate Secretary), and (ii) surrender or cause to be surrendered the original
Series B Preferred Stock Certificates being converted, duly endorsed, along with a copy of the Notice of Conversion as soon as
practicable thereafter to the Corporation which the Holder desires to convert. Upon receipt by the Corporation of a facsimile copy
of a Notice of Conversion from a Holder, the Corporation shall promptly send, via facsimile, a confirmation to such Holder stating
that the Notice of Conversion has been received, the date upon which the Corporation expects to deliver the Common Stock issuable
upon such conversion and the name and telephone number of a contact person at the Corporation regarding the conversion and/or any
deficiencies that exist in connection with such Notice of Conversion. The Corporation shall not be obligated to issue shares of
Common Stock upon a conversion unless the original Series B Preferred Stock Certificates Converted are delivered to the Corporation
as provided above. In the event the Holder has lost or misplaced the certificates evidencing the Series B Preferred Stock, the
Holder shall be required to provide the Corporation or the Corporation’s Transfer Agent (as applicable) with whatever documentation
and fees each may require to re-issue the Series B Preferred Stock Certificates and shall be required to provide such re-issued
Series B Preferred Stock Certificates to the Corporation in connection with such Notice of Conversion. Unless the Notice of Conversion
provided by the Holder includes a valid opinion from an attorney stating that such Shares of Common Stock issuable in connection
with the Notice of Conversion can be issued free of restrictive legend, which shall be determined by the Corporation in its sole
discretion, such shares shall be issued as Restricted Shares.
(iii) Delivery
of Common Stock Upon Conversion. Upon the surrender of Series B Preferred Stock Certificates accompanied by a Notice of Conversion,
the Corporation (itself, or through its transfer agent) shall, no later than the fifth (5th) Business Day following the date of
such surrender (the "Delivery Period"), issue and deliver (i.e., deposit with a nationally recognized
overnight courier service postage prepaid) to the Holder or its nominee (x) that number of shares of Class A Common Stock issuable
upon conversion of such shares of Series B Preferred Stock being converted and (y) the total amount of the accrued and unpaid Dividends.
(b) Taxes.
The Corporation shall not be required to pay any tax which may be payable in respect to any transfer involved in the issue
and delivery of shares of Common Stock upon conversion in a name other than that in which the shares of the Series B Preferred
Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue
or delivery has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation,
that such tax has been paid. The Corporation shall withhold from any payment due whatsoever in connection with the Series B Preferred
Stock any and all required withholdings and/or taxes the Corporation, in its sole discretion deems reasonable or necessary, absent
an opinion from Holder’s accountant or legal counsel, acceptable to the Corporation in its sole determination, that such
withholdings and/or taxes are not required to be withheld by the Corporation.
(c) Adjustments
for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Series B Preferred Stock
shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares provided for above), then, in any such event,
in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive each Holder of
such Series B Preferred Stock shall have the right thereafter to convert such shares of Series B Preferred Stock into a number
of shares of such other class or classes of stock which a Holder of the number of shares of Common Stock deliverable upon conversion
of such series of Series B Preferred Stock immediately before that change would have been entitled to receive in such reorganization
or reclassification, all subject to further adjustment as provided herein with respect to such other shares.
(d) No Impairment.
The Corporation will not through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder
by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in
the taking of all such action as may be necessary or appropriate in order to protect the Conversion rights of the holders of Series
B Preferred Stock against impairment. Notwithstanding the foregoing, nothing in this Section 5(d) shall prohibit the Corporation
from amending its Certificate of Incorporation with the requisite consent of its shareholders and the Board of Directors.
(e) Reservation
of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the Conversion of the shares of the Series B Preferred Stock,
such number of its shares of Common Stock as shall from time to time be sufficient to effect the Conversion of all then outstanding
shares of the Series B Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the Conversion of all then outstanding shares of the Series B Preferred Stock, the Corporation will within
a reasonable time period make a good faith effort to take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(f) Effect of
Conversion. On the date of any Conversion, all rights of any Holder with respect to the shares of the Series B Preferred Stock
so converted, including the rights, if any, to receive distributions of the Corporation’s assets or notices from the Corporation,
will terminate.
(g) Notices
of Record Date. In the event that the Corporation shall propose at any time:
(i) to effect
any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or
(ii) to voluntarily
liquidate or dissolve or to enter into any transaction deemed to be a liquidation, dissolution or winding up of the Corporation;
then, in connection
with each such event, the Corporation shall send to the holders of the Series B Preferred Stock at least ten (10) Business Days
prior written notice of a record date for determining rights to vote in respect of the matters referred to above.
Such written notice
shall be given by first class mail (or express courier), postage prepaid, addressed to the holders of Series B Preferred Stock
at the address for each such Holder as shown on the books of the Corporation and shall be deemed given on the date such notice
is mailed. The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the vote
or written consent of the holders of a majority of the Series B Preferred Stock, voting together as a single class.
(h) Beneficial
Ownership Limitation. The applicable number of shares of Series B Preferred Stock shall not be convertible during any time
that, and only to the extent that, the number of Shares to be issued to the Holder upon such Conversion, when added to the number
of shares of Common Stock, if any, that the Holder otherwise beneficially owns (outside of the Series B Preferred Stock, and not
including any other securities of the Company held by the Holder having a provision substantially similar to this paragraph) at
the time of such Conversion, would exceed 9.99% (the “Maximum Percentage”) of the number of shares of
Common Stock of the Company outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon
Conversion of the Series B Preferred Stock held by the Holder, as determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Beneficial Ownership Limitation”). The Maximum Percentage and
Beneficial Ownership Limitation shall not apply to any duly appointed officers and/or directors of the Company, which individuals
shall have no limitation pursuant to this Section 5(h) on the number of Shares they can receive upon Conversion of the Series
B Preferred Stock. The provisions of this paragraph shall not be construed and implemented in a manner otherwise than in strict
conformity with the terms of this Section 5(h) to correct this paragraph (or any portion hereof) which may be defective or inconsistent
with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation.
SECTION 6. VOTING. The
Series B Preferred Stock shall have no voting rights and shall have no right to vote on any shareholder matters (other than as
expressly stated below under Section 7) or as otherwise provided for by Illinois law.
SECTION 7. PROTECTIVE
PROVISIONS.
Subject to the rights
of series of Series B Preferred Stock which may from time to time come into existence, so long as any shares of Series B Preferred
Stock are outstanding, the Corporation shall not without first obtaining the approval (by written consent, as provided by law)
of the holders of 2/3rds of the then outstanding shares of Series B Preferred Stock, voting together as a class:
(a) Increase or
decrease (other than by redemption or conversion) the total number of authorized shares of Series B Preferred Stock;
(b) Effect an exchange,
reclassification, or cancellation of all or a part of the Series B Preferred Stock, but excluding a stock split, forward split
or reverse stock split of the Corporation’s Common Stock or Series B Preferred Stock;
(c) Effect an exchange,
or create a right of exchange, of all or part of the shares of another class of shares into shares of Series B Preferred Stock;
or
(d) Alter or change
the rights, preferences or privileges of the shares of Series B Preferred Stock so as to affect adversely the shares of such series,
including the rights set forth in this Designation.
PROVIDED, HOWEVER,
that the Corporation may, by any means authorized by law and without any vote of the Holders of shares of the Series B Preferred
Stock, make technical, corrective, administrative or similar changes in this Statement of Designations that do not, individually
or in the aggregate, adversely affect the rights or preferences of the Holders of shares of the Series B Preferred Stock. The Corporation
may also designate and issue additional series of preferred stock from time to time in the sole discretion of the Corporation’s
Board of Directors, which such rights, privileges, preferences and limitations shall be determined by the Corporation’s Board
of Directors in its sole discretion, and which designations and issuances shall not require the approval of the holders of the
Series B Preferred Stock.
SECTION 8.
PREEMPTIVE RIGHTS. Holders of Series B Preferred Stock and holders of Common Stock shall not be entitled to any preemptive,
subscription or similar rights in respect to any securities of the Corporation, except as specifically set forth herein or in any
other document agreed to by the Corporation.
SECTION 9.
NOTICES. In addition to any other means of notice provided by law or in the Corporation's Bylaws, any notice required by
the provisions of this Designation to be given to the holders of Series B Preferred Stock shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each Holder of record at such Holder's address appearing on the books
of the Corporation.
SECTION
10. MISCELLANEOUS.
(a) The headings
of the various sections and subsections of this Certificate of Designation are for convenience of reference only and shall not
affect the interpretation of any of the provisions of this Certificate of Designation.
(b) Whenever
possible, each provision of this Certificate of Designation shall be interpreted in a manner as to be effective and valid under
applicable law and public policy. If any provision set forth herein is held to be invalid, unlawful or incapable of being enforced
by reason of any rule of law or public policy, such provision shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating or otherwise adversely affecting the remaining provisions of this Certificate of Designation. No provision
herein set forth shall be deemed dependent upon any other provision unless so expressed herein. If a court of competent jurisdiction
should determine that a provision of this Certificate of Designation would be valid or enforceable if a period of time were extended
or shortened, then such court may make such change as shall be necessary to render the provision in question effective and valid
under applicable law.
(c) Except
as may otherwise be required by law, the shares of the Series B Preferred Stock shall not have any powers, designations, preferences
or other special rights, other than those specifically set forth in this Certificate of Designation.”
CERTIFICATE OF DESIGNATIONS
ESTABLISHING THE DESIGNATIONS, PREFERENCES,
LIMITATIONS AND RELATIVE RIGHTS OF THE
SERIES C CONVERTIBLE PREFERRED STOCK
Pursuant to Sections 6.10 and 10.20 of the
Illinois Business Corporation Act of 1983, the Corporation has adopted a designation of Three Billion (3,000,000,000) shares of
Series C Convertible Preferred Stock, par value $0.01 per share which have the powers and preferences, and the relative, participating,
optional and other rights, and the qualifications, limitations, and restrictions thereon set forth below (the “Designation”
or “Certificate of Designation”):
Section 1. DESIGNATION OF SERIES; RANK.
The shares of such series shall be designated as the "Series C Convertible Preferred Stock" (the "Series
C Preferred Stock") and the number of shares initially constituting such series shall be Three Billion (3,000,000,000)
shares.
Section 2. DEFINITIONS.
For purposes of this Designation, the following
definitions shall apply:
(r) “Business Day”
means a day in which a majority of the banks in the State of Illinois in the United States of America are open for business.
(s) “Common
Stock” means the Corporation’s $0.01 par value Class A Common Stock and Class B Common Stock.
(t) "Distribution"
shall mean the transfer of cash, Common Stock or other property without consideration whether by way of dividend or otherwise to
the shareholders of Common Stock.
(u) “Dividend
Date” means January 1st of any year following a calendar year in which the Corporation has generated revenue
of over $1 million based on the Corporation’s audited statement of operations.
(v) “Dividend
Rate” means 1.5% of the Company’s revenues per quarter, based on the revenues set forth in the Company’s
financial statements as filed with the Securities and Exchange Commission on Form 10-Q or Form 10-K.
(w) “Holder”
shall mean the person or entity in which the Series C Preferred Stock is registered on the books of the Corporation, which
shall initially be the person or entity which such Series C Preferred Stock is issued to, and shall thereafter be permitted and
legal assigns which the Corporation is notified of by the Holder and which the Holder has provided a valid legal opinion in connection
therewith to the Corporation.
(x) “Junior
Stock” shall mean the Common Stock and each other class of capital stock or series of preferred stock of the Corporation
established after the Original Issue Date, the terms of which do not expressly provide that such class or series ranks senior to
or on parity with the Series C Preferred Stock upon the liquidation, winding-up or dissolution of the Corporation.
(y) "Market
Price" means, for any security as of any date, the last sales price of such security on the principal trading market
where such security is listed or traded as reported by Bloomberg Financial Markets (or a comparable reporting service of national
reputation selected by the Corporation if Bloomberg Financial Markets is not then reporting closing sales prices of such security)
(collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sales price of
such security on a national exchange or in the over-the-counter market on the electronic bulletin board for such security as reported
by Bloomberg, or, if no such price is reported for such security by Bloomberg, the average of the bid prices of all market makers
for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc., in each case
for such date or, if such date was not a trading day for such security, on the next preceding date that was a trading day. If the
Market Price cannot be calculated for such security on any of the foregoing bases, the Market Price of such security on such date
shall be the fair market value as reasonably determined by a valuation firm, with experience in the valuation of securities similar
to the Corporation’s, chosen by the Board of Directors of the Corporation in its sole discretion, with the costs of such
appraisal to be borne by the Corporation.
(z) “Original
Issue Date” shall mean the date upon which the shares of Series C Preferred Stock are first issued.
(aa) ““Liquidation
Preference” shall be equal to $.01 per share for the Series A Convertible Preferred Stock (as appropriately adjusted
for any Recapitalizations).
(bb) “Senior
Securities” shall mean (a) the Series A Convertible Preferred Stock of the Corporation; (b) the Series B Convertible
Preferred Stock of the Corporation; and (c) any senior debt or other security holders of the Corporation, including certain banks
and/or institutions, which hold security interests over the Corporation’s assets as of the Original Issue Date, or which
the Corporation may agree in the future to provide such first priority security interests to, which shall not require the approval
and/or consent of the Series C Preferred Stock Holders.
(cc) “Class
A Common Stock” means the Corporation’s Class A Common Stock, $0.01 par value per share.
(dd) “Series
C Preferred Stock Certificates” means the certificates, as replaced from time to time, evidencing the outstanding
Series C Preferred Stock shares.
(ee) "Recapitalization"
shall mean any stock dividend, stock split, combination of shares, reorganization, recapitalization, reclassification or other
similar event.
(ff) “Restricted
Shares” means shares of the Corporation’s Common Stock which are restricted from being transferred by the Holder
thereof unless the transfer is effected in compliance with the Securities Act of 1933, as amended and applicable state securities
laws (including investment suitability standards, which shares shall bear the following restrictive legend (or one substantially
similar):
"The securities represented by this
certificate have not been registered under the Securities Act of 1933 or any state securities act. The securities have been acquired
for investment and may not be sold, transferred, pledged or hypothecated unless (i) they shall have been registered under the Securities
Act of 1933 and any applicable state securities act, or (ii) the corporation shall have been furnished with an opinion of counsel,
satisfactory to counsel for the corporation, that registration is not required under any such acts."
SECTION 3. DIVIDENDS.
(c) Dividends
in General. Dividends shall accrue on the Series C Preferred Stock, Quarterly in arrears, for each Quarter that such Preferred
Stock is outstanding, beginning on the Dividend Date, equal to the Dividend Rate, until such dividends are paid in full as provided
below (“Dividends”).
(d) Payment
of Dividends. The Corporation shall pay the Holder of the Series C Preferred Stock the accrued Dividends in cash or shares
of common stock based on the Market Price, at the option of the Corporation from time to time, provided that until paid in the
sole discretion of the Corporation, such Dividends shall continue to accrue.
(c) Additional
Dividend Policies.
(i) In any calendar
year, the Holders of outstanding shares of Series C Preferred Stock shall be entitled to receive dividends, when, as and only if
declared by the Board of Directors, out of any assets at the time legally available therefor, payable in preference and priority
to any declaration or payment of any Distribution on Common Stock of the Corporation in such calendar year. No Distributions shall
be made with respect to the Common Stock until all declared Dividends on the Series C Preferred Stock have been paid or set aside
for payment to the Series C Preferred Stock holders.
(ii) Non-Cash
Distributions. Whenever a Distribution provided for in this Section 3 shall be payable in property other than cash, the value
of such Distribution shall be deemed to be the fair market value of such property as determined in good faith by the Board of Directors.
(iii) Other
Distributions. Subject to the terms of this Certificate of Designations, and to the fullest extent permitted by Illinois law,
the Corporation shall be expressly permitted to redeem, repurchase or make distributions on the shares of its capital stock in
all circumstances other than where doing so would cause the Corporation to be unable to pay its debts as they become due in the
usual course of business.
SECTION 4.
LIQUIDATION PREFERENCE.
(c) Liquidation
Preference. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary,
the Holders of the Series C Preferred Stock shall be entitled to receive, prior and in preference to any Distribution of any of
the assets of the Corporation to the Holders of the Junior Stock by reason of their ownership of such stock, but not prior to any
holders of the Corporation’s Senior Securities, which holders shall have priority to the distribution of any assets of the
Corporation, an amount per share for each share of Series C Preferred Stock held by them equal to the sum of (i) the Liquidation
Preference specified for such share of Series C Preferred Stock, and (ii) all declared but unpaid Dividends (if any) on such shares
of Series C Preferred Stock. If upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation
legally available for distribution to the Holders of the Series C Preferred Stock are insufficient to permit the payment to such
Holders of the full amounts specified in this Section 4(a), subsequent to the payment to the Senior Securities then the
entire remaining assets of the Corporation following the payment to the Senior Securities legally available for distribution shall
be distributed with equal priority and pro rata among the Holders of the Series C Preferred Stock in proportion to the full amounts
they would otherwise be entitled to receive pursuant to this Section 4(a).
(d) Remaining
Assets. After the payment to the Holders of Series C Preferred Stock of the full preferential amounts specified above, the
entire remaining assets of the Corporation legally available for distribution by the Corporation shall be distributed with equal
priority and pro rata among the Holders of the Junior Stock in proportion to the number of shares of Junior Stock, and the terms
of such Junior Stock, held by them.
(e) Valuation
of Non-Cash Consideration. If any assets of the Corporation distributed to shareholders in connection with any liquidation,
dissolution, or winding up of the Corporation are other than cash, then the value of such assets shall be their fair market value
as determined in good faith by the Board of Directors. In the event of a merger or other acquisition of the Corporation by another
entity, the Distribution date shall be deemed to be the date such transaction closes.
SECTION 5. CONVERSION
RIGHTS. The Series C Preferred Stock shall be convertible into Common Stock as follows (the "Conversion Rights"):
(b) Holder’s
Right to Convert.
(i) Subject to
the Conversion Restrictions (described in Section 5(m) below), each share of Series C Preferred Stock shall be convertible, at
the option of the Holder thereof, subject to Sections 5(n) and 5(o) below, with five (5) Business Days written notice to the Corporation
(a “Notice of Conversion“), at the office of the Corporation or any transfer agent for the Series C Preferred
Stock, into three fully-paid, non-assessable shares of Class A Common Stock (the “Shares” and each a
“Conversion”).
(ii) Mechanics
of Conversion. In order to effect a Conversion, a Holder shall: (i) fax (or otherwise deliver) a copy of the fully executed
Notice of Conversion to the Corporation (Attention: Corporate Secretary), and (ii) surrender or cause to be surrendered the original
Series C Preferred Stock Certificates being converted, duly endorsed, along with a copy of the Notice of Conversion as soon as
practicable thereafter to the Corporation which the Holder desires to convert. Upon receipt by the Corporation of a facsimile copy
of a Notice of Conversion from a Holder, the Corporation shall promptly send, via facsimile, a confirmation to such Holder stating
that the Notice of Conversion has been received, the date upon which the Corporation expects to deliver the Common Stock issuable
upon such conversion and the name and telephone number of a contact person at the Corporation regarding the conversion and/or any
deficiencies that exist in connection with such Notice of Conversion. The Corporation shall not be obligated to issue shares of
Common Stock upon a conversion unless the original Series C Preferred Stock Certificates Converted are delivered to the Corporation
as provided above. In the event the Holder has lost or misplaced the certificates evidencing the Series C Preferred Stock, the
Holder shall be required to provide the Corporation or the Corporation’s Transfer Agent (as applicable) with whatever documentation
and fees each may require to re-issue the Series C Preferred Stock Certificates and shall be required to provide such re-issued
Series C Preferred Stock Certificates to the Corporation in connection with such Notice of Conversion. Unless the Notice of Conversion
provided by the Holder includes a valid opinion from an attorney stating that such Shares of Common Stock issuable in connection
with the Notice of Conversion can be issued free of restrictive legend, which shall be determined by the Corporation in its sole
discretion, such shares shall be issued as Restricted Shares.
(iii) Delivery
of Common Stock Upon Conversion. Upon the surrender of Series C Preferred Stock Certificates accompanied by a Notice of Conversion,
the Corporation (itself, or through its transfer agent) shall, no later than the fifth (5th) Business Day following the date of
such surrender (the "Delivery Period"), issue and deliver (i.e., deposit with a nationally recognized
overnight courier service postage prepaid) to the Holder or its nominee (x) that number of shares of Class A Common Stock issuable
upon conversion of such shares of Series C Preferred Stock being converted and (y) the total amount of the accrued and unpaid Dividends.
(b) Taxes.
The Corporation shall not be required to pay any tax which may be payable in respect to any transfer involved in the issue
and delivery of shares of Common Stock upon conversion in a name other than that in which the shares of the Series C Preferred
Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue
or delivery has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation,
that such tax has been paid. The Corporation shall withhold from any payment due whatsoever in connection with the Series C Preferred
Stock any and all required withholdings and/or taxes the Corporation, in its sole discretion deems reasonable or necessary, absent
an opinion from Holder’s accountant or legal counsel, acceptable to the Corporation in its sole determination, that such
withholdings and/or taxes are not required to be withheld by the Corporation.
(i) Adjustments
for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Series C Preferred Stock
shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares provided for above), then, in any such event,
in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive each Holder of
such Series C Preferred Stock shall have the right thereafter to convert such shares of Series C Preferred Stock into a number
of shares of such other class or classes of stock which a Holder of the number of shares of Common Stock deliverable upon conversion
of such series of Series C Preferred Stock immediately before that change would have been entitled to receive in such reorganization
or reclassification, all subject to further adjustment as provided herein with respect to such other shares.
(j) No Impairment.
The Corporation will not through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder
by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in
the taking of all such action as may be necessary or appropriate in order to protect the Conversion rights of the holders of Series
C Preferred Stock against impairment. Notwithstanding the foregoing, nothing in this Section 5(d) shall prohibit the Corporation
from amending its Certificate of Incorporation with the requisite consent of its shareholders and the Board of Directors.
(k) Reservation
of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the Conversion of the shares of the Series C Preferred Stock,
such number of its shares of Common Stock as shall from time to time be sufficient to effect the Conversion of all then outstanding
shares of the Series C Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the Conversion of all then outstanding shares of the Series C Preferred Stock, the Corporation will within
a reasonable time period make a good faith effort to take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(l) Effect of
Conversion. On the date of any Conversion, all rights of any Holder with respect to the shares of the Series C Preferred Stock
so converted, including the rights, if any, to receive distributions of the Corporation’s assets or notices from the Corporation,
will terminate.
(m) Notices
of Record Date. In the event that the Corporation shall propose at any time:
(i) to effect
any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or
(ii) to voluntarily
liquidate or dissolve or to enter into any transaction deemed to be a liquidation, dissolution or winding up of the Corporation;
then, in connection
with each such event, the Corporation shall send to the holders of the Series C Preferred Stock at least ten (10) Business Days
prior written notice of a record date for determining rights to vote in respect of the matters referred to above.
Such written notice
shall be given by first class mail (or express courier), postage prepaid, addressed to the holders of Series C Preferred Stock
at the address for each such Holder as shown on the books of the Corporation and shall be deemed given on the date such notice
is mailed. The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the vote
or written consent of the holders of a majority of the Series C Preferred Stock, voting together as a single class.
(n) Conversion
Restrictions. The following “Conversion Restrictions” shall apply to any Conversion of the Series
C Preferred Stock hereunder:
(i) The Holder
(and any assigns) shall be prohibited from Converting any Series C Preferred Stock shares for a period of one (1) month from the
Original Issue Date;
(ii) The Holder
(and any assigns) shall be prohibited from Converting not more than 30% of the Series C Preferred Stock shares originally issued
to Holder (the “Total Original Holder Shares”) during the second (2nd) month following the Original
Issue Date;
(iii) The Holder
(and any assigns) shall be prohibited from Converting not more than an additional 30% (60% in total) of the Total Original Holder
Shares during the third (3rd) month following the Original Issue Date; and
(iv) The Holder
(and any assigns) shall be prohibited from Converting not more than an additional 40% (100% in total) of the Total Original Holder
Shares following the end of the third (3rd) month following the Original Issue Date.
(o) Beneficial
Ownership Limitation. The applicable number of shares of Series C Preferred Stock shall not be convertible during any time
that, and only to the extent that, the number of Shares to be issued to the Holder upon such Conversion, when added to the number
of shares of Common Stock, if any, that the Holder otherwise beneficially owns (outside of the Series C Preferred Stock, and not
including any other securities of the Company held by the Holder having a provision substantially similar to this paragraph) at
the time of such Conversion, would exceed 9.99% (the “Maximum Percentage”) of the number of shares of
Common Stock of the Company outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon
Conversion of the Series C Preferred Stock held by the Holder, as determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Beneficial Ownership Limitation”). The Maximum Percentage and
Beneficial Ownership Limitation shall not apply to any duly appointed officers and/or directors of the Company, which individuals
shall have no limitation pursuant to this Section 5(o) on the number of Shares they can receive upon Conversion of the Series C
Preferred Stock. The provisions of this paragraph shall not be construed and implemented in a manner otherwise than in strict conformity
with the terms of this Section 5(o) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with
the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly
give effect to such limitation.
SECTION 6. VOTING. Except
as otherwise provided herein, or as required by Illinois law, the Series C Preferred Stock shall each vote three voting shares
and shall vote together with the shares of the Common Stock of the Company, and not as a separate class, at any annual or special
meeting of shareholders of the Company, and may act by written consent in the same manner as the Common Stock, in either case upon
the following basis: each Holder of shares of Series C Preferred Stock shall be entitled to that number of votes as equals three
multiplied by the number of shares of Series C Preferred Stock which such Holder holds immediately after the close of business
on the record date fixed for such meeting or the effective date of such written consent.
SECTION 7. PROTECTIVE
PROVISIONS.
So long as any shares
of Series C Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by written consent,
as provided by law) of the holders of 2/3rds of the then outstanding shares of Series C Preferred Stock, voting together as a class:
(e) Increase or
decrease (other than by redemption or conversion) the total number of authorized shares of Series C Preferred Stock;
(f) Effect an exchange,
reclassification, or cancellation of all or a part of the Series C Preferred Stock, but excluding a stock split, forward split
or reverse stock split of the Corporation’s Common Stock or Series C Preferred Stock;
(g) Effect an exchange,
or create a right of exchange, of all or part of the shares of another class of shares into shares of Series C Preferred Stock;
or
(h) Alter or change
the rights, preferences or privileges of the shares of Series C Preferred Stock so as to affect adversely the shares of such series,
including the rights set forth in this Designation.
PROVIDED, HOWEVER,
that the Corporation may, by any means authorized by law and without any vote of the Holders of shares of the Series C Preferred
Stock, make technical, corrective, administrative or similar changes in this Statement of Designations that do not, individually
or in the aggregate, adversely affect the rights or preferences of the Holders of shares of the Series C Preferred Stock. The Corporation
may also designate and issue additional series of preferred stock from time to time in the sole discretion of the Corporation’s
Board of Directors, which such rights, privileges, preferences and limitations shall be determined by the Corporation’s Board
of Directors in its sole discretion, and which designations and issuances shall not require the approval of the holders of the
Series C Preferred Stock.
SECTION 8.
PREEMPTIVE RIGHTS. Holders of Series C Preferred Stock and holders of Common Stock shall not be entitled to any preemptive,
subscription or similar rights in respect to any securities of the Corporation, except as specifically set forth herein or in any
other document agreed to by the Corporation.
SECTION 9. NOTICES.
In addition to any other means of notice provided by law or in the Corporation's Bylaws, any notice required by the provisions
of this Designation to be given to the holders of Series C Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each Holder of record at such Holder's address appearing on the books of the Corporation.
SECTION
10. MISCELLANEOUS.
(a) The headings
of the various sections and subsections of this Certificate of Designation are for convenience of reference only and shall not
affect the interpretation of any of the provisions of this Certificate of Designation.
(b) Whenever
possible, each provision of this Certificate of Designation shall be interpreted in a manner as to be effective and valid under
applicable law and public policy. If any provision set forth herein is held to be invalid, unlawful or incapable of being enforced
by reason of any rule of law or public policy, such provision shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating or otherwise adversely affecting the remaining provisions of this Certificate of Designation. No provision
herein set forth shall be deemed dependent upon any other provision unless so expressed herein. If a court of competent jurisdiction
should determine that a provision of this Certificate of Designation would be valid or enforceable if a period of time were extended
or shortened, then such court may make such change as shall be necessary to render the provision in question effective and valid
under applicable law.
(c) Except
as may otherwise be required by law, the shares of the Series C Preferred Stock shall not have any powers, designations, preferences
or other special rights, other than those specifically set forth in this Certificate of Designation.”
CERTIFICATE OF DESIGNATIONS
ESTABLISHING THE DESIGNATIONS, PREFERENCES,
LIMITATIONS AND RELATIVE RIGHTS OF THE
SERIES D CONVERTIBLE PREFERRED STOCK
Pursuant to Sections 6.10 and 10.20 of the
Illinois Business Corporation Act of 1983, the Corporation has adopted a designation of One Million (1,000,000) shares of Series
D Convertible Preferred Stock, par value $0.01 per share which have the powers and preferences, and the relative, participating,
optional and other rights, and the qualifications, limitations, and restrictions thereon set forth below (the “Designation”
or “Certificate of Designation”):
Section 1. DESIGNATION OF SERIES; RANK.
The shares of such series shall be designated as the "Series D Convertible Preferred Stock" (the "Series
D Preferred Stock") and the number of shares initially constituting such series shall be One Million (1,000,000) shares.
Section 2. DEFINITIONS.
For purposes of this Designation, the following
definitions shall apply:
(gg) “Business Day”
means a day in which a majority of the banks in the State of Illinois in the United States of America are open for business.
(hh) “Common
Stock” means the Corporation’s $0.01 par value Class A Common Stock and Class B Common Stock.
(ii) "Distribution"
shall mean the transfer of cash, Common Stock or other property without consideration whether by way of dividend or otherwise to
the shareholders of Common Stock.
(jj) “Dividend
Date” means January 1st of any year following a calendar year.
(kk) “Dividend
Rate” The Preferred Shares shall carry an 8.0% dividend, payable semiannually at Issuer’s election in either
(i) cash or (ii) shares of common stock. If Issuer elects to pay the dividend in shares of common stock, the number of shares to
be issued to the Holders shall be equal to the dividend divided by 90% of the prior ten-trading-day volume weighted average stock
price. Such election to pay dividends in cash or stock shall be widely publicly disclosed by the Issuer with a minimum of 5-days’
notice prior to the date of election.
(ll) “Holder”
shall mean the person or entity in which the Series D Preferred Stock is registered on the books of the Corporation, which
shall initially be the person or entity which such Series D Preferred Stock is issued to, and shall thereafter be permitted and
legal assigns which the Corporation is notified of by the Holder and which the Holder has provided a valid legal opinion in connection
therewith to the Corporation.
(mm) “Junior
Stock” shall mean the Common Stock and each other class of capital stock or series of preferred stock of the Corporation
established after the Original Issue Date, the terms of which do not expressly provide that such class or series ranks senior to
or on parity with the Series D Preferred Stock upon the liquidation, winding-up or dissolution of the Corporation.
(nn) "Market
Price" means, for any security as of any date, the last sales price of such security on the principal trading market
where such security is listed or traded as reported by Bloomberg Financial Markets (or a comparable reporting service of national
reputation selected by the Corporation if Bloomberg Financial Markets is not then reporting closing sales prices of such security)
(collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sales price of
such security on a national exchange or in the over-the-counter market on the electronic bulletin board for such security as reported
by Bloomberg, or, if no such price is reported for such security by Bloomberg, the average of the bid prices of all market makers
for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc., in each case
for such date or, if such date was not a trading day for such security, on the next preceding date that was a trading day. If the
Market Price cannot be calculated for such security on any of the foregoing bases, the Market Price of such security on such date
shall be the fair market value as reasonably determined by a valuation firm, with experience in the valuation of securities similar
to the Corporation’s, chosen by the Board of Directors of the Corporation in its sole discretion, with the costs of such
appraisal to be borne by the Corporation.
(oo) “Original
Issue Date” shall mean the date upon which the shares of Series D Preferred Stock are first issued.
(pp) ““Liquidation
Preference” shall be equal to $.01 per share for the Series D Convertible Preferred Stock (as appropriately adjusted
for any Recapitalizations).
(qq) “Senior
Securities” shall mean (a) the Series A Convertible Preferred Stock of the Corporation; (b) the Series B Convertible
Preferred Stock of the Corporation; (c) the Series C Convertible Preferred Stock of the Corporation; and (c) any senior debt or
other security holders of the Corporation, including certain banks and/or institutions, which hold security interests over the
Corporation’s assets as of the Original Issue Date, or which the Corporation may agree in the future to provide such first
priority security interests to, which shall not require the approval and/or consent of the Series D Preferred Stock Holders.
(rr) “Class
A Common Stock” means the Corporation’s Class A Common Stock, $0.01 par value per share.
(ss) “Series
D Preferred Stock Certificates” means the certificates, as replaced from time to time, evidencing the outstanding
Series D Preferred Stock shares.
(tt) "Recapitalization"
shall mean any stock dividend, stock split, combination of shares, reorganization, recapitalization, reclassification or other
similar event.
(uu) “Restricted
Shares” means shares of the Corporation’s Common Stock which are restricted from being transferred by the Holder
thereof unless the transfer is effected in compliance with the Securities Act of 1933, as amended and applicable state securities
laws (including investment suitability standards, which shares shall bear the following restrictive legend (or one substantially
similar):
"The securities represented by this
certificate have not been registered under the Securities Act of 1933 or any state securities act. The securities have been acquired
for investment and may not be sold, transferred, pledged or hypothecated unless (i) they shall have been registered under the Securities
Act of 1933 and any applicable state securities act, or (ii) the corporation shall have been furnished with an opinion of counsel,
satisfactory to counsel for the corporation, that registration is not required under any such acts."
SECTION 3. DIVIDENDS.
(e) Dividends
in General. Dividends shall accrue on the Series D Preferred Stock, Quarterly in arrears, for each Quarter that such Preferred
Stock is outstanding, beginning on the Dividend Date, equal to the Dividend Rate, until such dividends are paid in full as provided
below (“Dividends”).
(f) Payment
of Dividends. The Preferred Shares shall carry an 8.0% dividend, payable semiannually at Issuer’s election in either
(i) cash or (ii) shares of common stock. If Issuer elects to pay the dividend in shares of common stock, the number of shares to
be issued to the Holders shall be equal to the dividend divided by 90% of the prior ten-trading-day volume weighted average stock
price. Such election to pay dividends in cash or stock shall be widely publicly disclosed by the Issuer with a minimum of 5-days’
notice prior to the date of election.
(c) Additional
Dividend Policies.
(i) In any calendar
year, the Holders of outstanding shares of Series D Preferred Stock shall be entitled to receive dividends, when, as and only if
declared by the Board of Directors, out of any assets at the time legally available therefor, payable in preference and priority
to any declaration or payment of any Distribution on Common Stock of the Corporation in such calendar year. No Distributions shall
be made with respect to the Common Stock until all declared Dividends on the Series D Preferred Stock have been paid or set aside
for payment to the Series C Preferred Stock holders.
(ii) Non-Cash
Distributions. Whenever a Distribution provided for in this Section 3 shall be payable in property other than cash, the value
of such Distribution shall be deemed to be the fair market value of such property as determined in good faith by the Board of Directors.
(iii) Other
Distributions. Subject to the terms of this Certificate of Designations, and to the fullest extent permitted by Illinois law,
the Corporation shall be expressly permitted to redeem, repurchase or make distributions on the shares of its capital stock in
all circumstances other than where doing so would cause the Corporation to be unable to pay its debts as they become due in the
usual course of business.
SECTION 4.
LIQUIDATION PREFERENCE.
(e) Liquidation
Preference. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary,
the Holders of the Series D Preferred Stock shall be entitled to receive, prior and in preference to any Distribution of any of
the assets of the Corporation to the Holders of the Junior Stock by reason of their ownership of such stock, but not prior to any
holders of the Corporation’s Senior Securities, which holders shall have priority to the distribution of any assets of the
Corporation, an amount per share for each share of Series D Preferred Stock held by them equal to the sum of (i) the Liquidation
Preference specified for such share of Series D Preferred Stock, and (ii) all declared but unpaid Dividends (if any) on such shares
of Series D Preferred Stock. If upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation
legally available for distribution to the Holders of the Series D Preferred Stock are insufficient to permit the payment to such
Holders of the full amounts specified in this Section 4(a), subsequent to the payment to the Senior Securities then the
entire remaining assets of the Corporation following the payment to the Senior Securities legally available for distribution shall
be distributed with equal priority and pro rata among the Holders of the Series D Preferred Stock in proportion to the full amounts
they would otherwise be entitled to receive pursuant to this Section 4(a).
(f) Remaining
Assets. After the payment to the Holders of Series D Preferred Stock of the full preferential amounts specified above, the
entire remaining assets of the Corporation legally available for distribution by the Corporation shall be distributed with equal
priority and pro rata among the Holders of the Junior Stock in proportion to the number of shares of Junior Stock, and the terms
of such Junior Stock, held by them.
(f) Valuation
of Non-Cash Consideration. If any assets of the Corporation distributed to shareholders in connection with any liquidation,
dissolution, or winding up of the Corporation are other than cash, then the value of such assets shall be their fair market value
as determined in good faith by the Board of Directors. In the event of a merger or other acquisition of the Corporation by another
entity, the Distribution date shall be deemed to be the date such transaction closes.
SECTION 5. CONVERSION
RIGHTS. The Series D Preferred Stock shall be convertible into Common Stock as follows (the "Conversion Rights"):
(c) Force Conversion.
Preferred Shares may be Force converted into Common Shares (with 5 business days’ notice from the Issuer) if and only if
the Issuer’s stock price exceeds 200% of the Fixed Conversion Price for ten (10) consecutive trading days and the Preferred
Shares are registered and the aggregate trading volume for the past ten (10) trading days exceeds $1,000,000 (“Forced Conversion”).
(d) Holder’s
Right to Convert.
(i) Subject to
the Conversion Restrictions (described in Section 5(m) below), each share of Series D Preferred Stock shall be convertible, at
the option of the Holder thereof, subject to Sections 5(n) and 5(o) below, with five (5) Business Days written notice to the Corporation
(a “Notice of Conversion“), at the office of the Corporation or any transfer agent for the Series D Preferred
Stock, into three fully-paid, non-assessable shares of Class A Common Stock (the “Shares” and each a
“Conversion”).
(ii) Mechanics
of Conversion. In order to effect a Conversion, a Holder shall: (i) fax (or otherwise deliver) a copy of the fully executed
Notice of Conversion to the Corporation (Attention: Corporate Secretary), and (ii) surrender or cause to be surrendered the original
Series D Preferred Stock Certificates being converted, duly endorsed, along with a copy of the Notice of Conversion as soon as
practicable thereafter to the Corporation which the Holder desires to convert. Upon receipt by the Corporation of a facsimile copy
of a Notice of Conversion from a Holder, the Corporation shall promptly send, via facsimile, a confirmation to such Holder stating
that the Notice of Conversion has been received, the date upon which the Corporation expects to deliver the Common Stock issuable
upon such conversion and the name and telephone number of a contact person at the Corporation regarding the conversion and/or any
deficiencies that exist in connection with such Notice of Conversion. The Corporation shall not be obligated to issue shares of
Common Stock upon a conversion unless the original Series D Preferred Stock Certificates Converted are delivered to the Corporation
as provided above. In the event the Holder has lost or misplaced the certificates evidencing the Series D Preferred Stock, the
Holder shall be required to provide the Corporation or the Corporation’s Transfer Agent (as applicable) with whatever documentation
and fees each may require to re-issue the Series D Preferred Stock Certificates and shall be required to provide such re-issued
Series D Preferred Stock Certificates to the Corporation in connection with such Notice of Conversion. Unless the Notice of Conversion
provided by the Holder includes a valid opinion from an attorney stating that such Shares of Common Stock issuable in connection
with the Notice of Conversion can be issued free of restrictive legend, which shall be determined by the Corporation in its sole
discretion, such shares shall be issued as Restricted Shares.
(iii) Delivery
of Common Stock Upon Conversion. Upon the surrender of Series D Preferred Stock Certificates accompanied by a Notice of Conversion,
the Corporation (itself, or through its transfer agent) shall, no later than the fifth (5th) Business Day following the date of
such surrender (the "Delivery Period"), issue and deliver (i.e., deposit with a nationally recognized
overnight courier service postage prepaid) to the Holder or its nominee (x) that number of shares of Class A Common Stock issuable
upon conversion of such shares of Series D Preferred Stock being converted and (y) the total amount of the accrued and unpaid Dividends.
(b) Taxes.
The Corporation shall not be required to pay any tax which may be payable in respect to any transfer involved in the issue
and delivery of shares of Common Stock upon conversion in a name other than that in which the shares of the Series D Preferred
Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue
or delivery has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation,
that such tax has been paid. The Corporation shall withhold from any payment due whatsoever in connection with the Series D Preferred
Stock any and all required withholdings and/or taxes the Corporation, in its sole discretion deems reasonable or necessary, absent
an opinion from Holder’s accountant or legal counsel, acceptable to the Corporation in its sole determination, that such
withholdings and/or taxes are not required to be withheld by the Corporation.
(n) Adjustments
for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Series D Preferred Stock
shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares provided for above), then, in any such event,
in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive each Holder of
such Series D Preferred Stock shall have the right thereafter to convert such shares of Series D Preferred Stock into a number
of shares of such other class or classes of stock which a Holder of the number of shares of Common Stock deliverable upon conversion
of such series of Series D Preferred Stock immediately before that change would have been entitled to receive in such reorganization
or reclassification, all subject to further adjustment as provided herein with respect to such other shares.
(o) No Impairment.
The Corporation will not through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder
by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in
the taking of all such action as may be necessary or appropriate in order to protect the Conversion rights of the holders of Series
D Preferred Stock against impairment. Notwithstanding the foregoing, nothing in this Section 5(d) shall prohibit the Corporation
from amending its Certificate of Incorporation with the requisite consent of its shareholders and the Board of Directors.
(p) Reservation
of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the Conversion of the shares of the Series D Preferred Stock,
such number of its shares of Common Stock as shall from time to time be sufficient to effect the Conversion of all then outstanding
shares of the Series D Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the Conversion of all then outstanding shares of the Series D Preferred Stock, the Corporation will within
a reasonable time period make a good faith effort to take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(q) Effect of
Conversion. On the date of any Conversion, all rights of any Holder with respect to the shares of the Series D Preferred Stock
so converted, including the rights, if any, to receive distributions of the Corporation’s assets or notices from the Corporation,
will terminate.
(r) Notices
of Record Date. In the event that the Corporation shall propose at any time:
(i) to effect
any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or
(ii) to voluntarily
liquidate or dissolve or to enter into any transaction deemed to be a liquidation, dissolution or winding up of the Corporation;
then, in connection
with each such event, the Corporation shall send to the holders of the Series D Preferred Stock at least ten (10) Business Days
prior written notice of a record date for determining rights to vote in respect of the matters referred to above.
Such written notice
shall be given by first class mail (or express courier), postage prepaid, addressed to the holders of Series D Preferred Stock
at the address for each such Holder as shown on the books of the Corporation and shall be deemed given on the date such notice
is mailed. The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the vote
or written consent of the holders of a majority of the Series D Preferred Stock, voting together as a single class.
(n) Conversion
Restrictions. The following “Conversion Restrictions” shall apply to any Conversion of the Series
D Preferred Stock hereunder:
(i) The Holder
(and any assigns) shall be prohibited from Converting any Series D Preferred Stock shares for a period of one (1) month from the
Original Issue Date;
(o) Beneficial
Ownership Limitation. The applicable number of shares of Series D Preferred Stock shall not be convertible during any time
that, and only to the extent that, the number of Shares to be issued to the Holder upon such Conversion, when added to the number
of shares of Common Stock, if any, that the Holder otherwise beneficially owns (outside of the Series D Preferred Stock, and not
including any other securities of the Company held by the Holder having a provision substantially similar to this paragraph) at
the time of such Conversion, would exceed 4.99% (the “Maximum Percentage”) of the number of shares of
Common Stock of the Company outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon
Conversion of the Series D Preferred Stock held by the Holder, as determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Beneficial Ownership Limitation”). The Maximum Percentage and
Beneficial Ownership Limitation shall not apply to any duly appointed officers and/or directors of the Company, which individuals
shall have no limitation pursuant to this Section 5(o) on the number of Shares they can receive upon Conversion of the Series D
Preferred Stock. The provisions of this paragraph shall not be construed and implemented in a manner otherwise than in strict conformity
with the terms of this Section 5(o) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with
the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly
give effect to such limitation.
SECTION 6. VOTING. Except
as otherwise provided herein, or as required by Illinois law, the Series D Preferred Stock shall each vote one voting shares and
shall vote together with the shares of the Common Stock of the Company, and not as a separate class, at any annual or special meeting
of shareholders of the Company, and may act by written consent in the same manner as the Common Stock, in either case upon the
following basis: each Holder of shares of Series D Preferred Stock shall be entitled to that number of votes as equals three multiplied
by the number of shares of Series D Preferred Stock which such Holder holds immediately after the close of business on the record
date fixed for such meeting or the effective date of such written consent.
SECTION 7. PROTECTIVE
PROVISIONS.
So long as any shares
of Series D Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by written consent,
as provided by law) of the holders of 2/3rds of the then outstanding shares of Series D Preferred Stock, voting together as a class:
(i) Increase or
decrease (other than by redemption or conversion) the total number of authorized shares of Series D Preferred Stock;
(j) Effect an exchange,
reclassification, or cancellation of all or a part of the Series D Preferred Stock, but excluding a stock split, forward split
or reverse stock split of the Corporation’s Common Stock or Series D Preferred Stock;
(k) Effect an exchange,
or create a right of exchange, of all or part of the shares of another class of shares into shares of Series D Preferred Stock;
or
(l) Alter or change
the rights, preferences or privileges of the shares of Series D Preferred Stock so as to affect adversely the shares of such series,
including the rights set forth in this Designation.
PROVIDED, HOWEVER,
that the Corporation may, by any means authorized by law and without any vote of the Holders of shares of the Series D Preferred
Stock, make technical, corrective, administrative or similar changes in this Statement of Designations that do not, individually
or in the aggregate, adversely affect the rights or preferences of the Holders of shares of the Series D Preferred Stock. The Corporation
may also designate and issue additional series of preferred stock from time to time in the sole discretion of the Corporation’s
Board of Directors, which such rights, privileges, preferences and limitations shall be determined by the Corporation’s Board
of Directors in its sole discretion, and which designations and issuances shall not require the approval of the holders of the
Series D Preferred Stock.
SECTION 8.
PREEMPTIVE RIGHTS. Holders of Series D Preferred Stock and holders of Common Stock shall not be entitled to any preemptive,
subscription or similar rights in respect to any securities of the Corporation, except as specifically set forth herein or in any
other document agreed to by the Corporation.
SECTION 9.
NOTICES. In addition to any other means of notice provided by law or in the Corporation's Bylaws, any notice required by
the provisions of this Designation to be given to the holders of Series D Preferred Stock shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each Holder of record at such Holder's address appearing on the books
of the Corporation.
SECTION
10. MISCELLANEOUS.
(a) The headings
of the various sections and subsections of this Certificate of Designation are for convenience of reference only and shall not
affect the interpretation of any of the provisions of this Certificate of Designation.
(b) Whenever
possible, each provision of this Certificate of Designation shall be interpreted in a manner as to be effective and valid under
applicable law and public policy. If any provision set forth herein is held to be invalid, unlawful or incapable of being enforced
by reason of any rule of law or public policy, such provision shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating or otherwise adversely affecting the remaining provisions of this Certificate of Designation. No provision
herein set forth shall be deemed dependent upon any other provision unless so expressed herein. If a court of competent jurisdiction
should determine that a provision of this Certificate of Designation would be valid or enforceable if a period of time were extended
or shortened, then such court may make such change as shall be necessary to render the provision in question effective and valid
under applicable law.
(c) Except
as may otherwise be required by law, the shares of the Series D Preferred Stock shall not have any powers, designations, preferences
or other special rights, other than those specifically set forth in this Certificate of Designation.”
Exhibit ____
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE
AGREEMENT ("Agreement") is entered into as of December 29, 2014, by and among Epazz, Inc., an Illinois corporation,
through its assignee (Interaction Information Technology, Inc., an Illinois corporation) ("Buyer"), Interaction
Information Technology, Inc., an Arizona corporation ("Seller"), and John Hopkins (“Hopkins”). Buyer,
Seller and Hopkins shall collectively be referred to herein as the “parties.”
RECITALS:
A. Upon the terms and subject to the conditions set forth in this Agreement, Seller desires to sell, assign, convey and transfer
to Buyer, and Buyer desires to purchase and acquire from Seller, substantially all of the intangible assets and certain tangible
assets used in connection with the business of Seller as more specifically described in this Agreement.
B. As a condition precedent, Hopkins, the sole shareholder of the Seller, has agreed not to compete with Buyer for a specified
time period, and in connection therewith to execute and deliver certain documents to Buyer, as more specifically described in this
Agreement.
NOW, THEREFORE, in consideration
of the premises, and the mutual representations, warranties, covenants and agreements hereinafter set forth, and each intending
to be legally bound hereby, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
Section 1.1 Assets To Be Acquired. Subject to the terms and conditions and in reliance upon the representations, warranties and
agreements hereinafter set forth, Seller hereby agrees to sell, assign, transfer, convey and deliver to Buyer, and Buyer hereby
agrees to purchase, acquire, and accept from Seller, all of the right, title and interest of Seller in and to all of Seller's assets,
including without limitation the following described assets, properties, rights, and contracts, wherever located, whether tangible
or intangible, which are owned by, licensed by, leased by, or in the possession of, Seller, whether or not reflected on
the books and records of Seller (the "Assets"), free and clear of all liens, claims, charges, security interests,
restrictions and other encumbrances of any kind or nature, except for those specifically set forth on the relevant schedules to
this Agreement or otherwise specifically assumed pursuant to the express terms of this Agreement, including without limitation,
the following Assets:
Section 1.1.1
Know-How. All right, title and interest in and to (i) all patents, patent applications and docketed inventions, domestic
and foreign (the "Patents") and (ii) all processes, trade secrets, methods, operating techniques, know-how, algorithms,
formulae, specifications, drawings, designs and all technical data and information and technology (the "Know-How")
and all documents, notebooks, logbooks, tapes, discs, records, reports and other media relating thereto.
Section 1.1.2
Trademarks and Copyrights. All right, title, interest and goodwill in and to all trademarks, trade names and service
marks, and registrations and applications for such trademarks, trade names and service marks domestic and foreign (the "Trademarks"),
including without limitation those that are listed on Schedule 1.1.2, and all right, title, and interest in and to all copyrights,
and registrations and applications for such copyrights, domestic and foreign (the "Copyrights"), including without
limitation those that are listed on Schedule 1.1.2.
Section 1.1.3
Equipment. All of the equipment, computers, machinery, and other tangible assets listed on Schedule 1.1.3
(collectively, the "Equipment").
Section 1.1.4
Computer Assets. All right, title and interest (including copyright interests) in and to all computer programs (including
computer modeling programs, design and operational and applications software and computer source and object codes), firmware, computer
data bases, and related documentation, acquired or developed or used for the use or operation of (i) products, systems or
components based on, derived from or incorporating the Patents, the Know-How or the Copyrights, (ii) communications, and (iii)
the Equipment, or (iv) for design, development, engineering, or manufacturing purposes, related thereto, or for any other purpose
(the "Computer Assets") including without limitation the computer programs identified on Schedule 1.1.4.
Section 1.1.5
Warranties and Other Rights. All rights under or pursuant to all warranties, representations, guarantees and service
contacts made by suppliers, manufacturers and contractors in connection with products or services purchased by Seller affecting
the Equipment or the Assets.
Section 1.1.6
Contracts. All accounts, contracts, subcontracts, licenses and sublicenses, and agreements and other arrangements,
proposals, bids, quotations, purchase orders and commitments, and sales orders and commitments, of any kind, whether written or
oral, including joint venture, teaming and partnership agreements (the "Contracts"), including without limitation
those Contracts identified on Schedule 1.1.6.
Section 1.1.7
Causes of Action. All causes of action, claims or rights of action against third parties arising from or based on
the infringement, misappropriation, misuse or unauthorized use of the Patents, the Know-How, the Assets, the Trademarks or the
Copyrights.
Section 1.1.8
Inventory. All merchantable inventory of the Assets as of the date hereof, as set forth on Schedule 1.1.8,
and updated as of the Closing Date.
Section 1.1.9
Prepaid Accounts. All amounts previously paid to Seller for prepaid contracts (whether maintenance, support or otherwise)
shall be prorated as set forth on Schedule 1.1.9.
Section 1.1.10 Prepaid Maintenance and Support Contracts. Seller shall maintain all prepaid maintenance and support contracts,
if any, up to the date of Closing and shall credit those contracts to the Buyer at Closing.
Section 1.1.11 Communication
Assets. Seller’s telephone number(s), facsimile number(s), website, domain name(s), and promotional material.
Section 1.1.12 Records.
A copy of Seller’s business records and files pertaining to the Assets.
Section 1.2 Excluded Assets. Seller shall not sell, and Buyer is not entitled to (i) any accounts receivable for goods or services
rendered to any customers prior to the Closing Date by Seller, whether or not such customers have been presented an invoice or
statement for such payment prior to the Closing Date, as set forth on Schedule 1.2, and updated as of the Closing Date;
(ii) any of Seller’s bank accounts; (iii) any 401K, retirement or similar accounts of Seller; and (iv) any refunds in regard
to income and other taxes, cash on hand as of the Closing Date, business records, stock book and charter documents and all real
estate (whether owned or leased) ("Excluded Assets").
Section 1.3 Liabilities Excluded. Buyer shall not and does not hereby assume or become liable for any obligations, liabilities
or indebtedness of Seller, whether due or to become due, asserted or unasserted, accrued or unaccrued, liquidated or unliquidated,
contingent, executory or otherwise, howsoever or whenever arising, which are not expressly assumed by Buyer in writing, including
but not limited to (a) any of Seller's accounts payable; and (b) Seller's obligations under its mortgages and its lines of credit,
if any (the "Lines of Credit"), all of which shall be satisfied by Seller on or before the Closing Date; and (c)
the agreements between Seller and MNK Info and Infoscriber.
Section 1.4 Assignment of Contracts and Rights. This Agreement shall not operate to assign any Asset or any claim, right or benefit
arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third party (including a
government or governmental unit), would constitute a breach, default or other contravention thereof or in any way adversely affect
the rights of Seller or Buyer thereunder. Seller and Buyer will each use their commercially reasonable efforts to obtain the consent
of such third parties for the assignment thereof to Buyer after Closing Date within 10 business days. Seller and Buyer shall continue
to cooperate and use their commercially reasonable efforts in order that Buyer would obtain all of such rights thereunder. To the
extent that the consents and waivers referred to herein are not obtained by Buyer and Seller or until the impediments to the sale,
assignment, transfer, delivery or sublease referred to therein are resolved, Seller shall use its commercially reasonable efforts
to (i) provide, at the request of Buyer, to Buyer the benefits of any such Asset referred to herein, (ii) cooperate in
any lawful arrangement designed to provide such benefits to Buyer, and (iii) enforce, at the request of and for the account
of Buyer, any rights of Seller arising from any Asset referred to herein against any third person (including a government or governmental
unit) including the right to elect to terminate in accordance with the terms thereof upon the advice of Buyer, and without
commission or other charge by Seller, whether to any third party or Buyer. Buyer shall not be required by this Section 1.4 to enter
into any arrangement that would impose any additional cost, expense or liability or that would deprive Buyer of any material benefits
or profits. Nothing in this section shall affect the conditions to Buyer's obligations under Article VII.
ARTICLE II
CLOSING; PURCHASE PRICE AND PAYMENT; ALLOCATION;
CONSULTING AGREEMENT; AGREEMENT NOT TO COMPETE
Section 2.1 Closing. The Closing ("Closing") of the sale and purchase of the Assets as well as the consummation
of the other transactions contemplated herein shall take place at the offices ofArizona Escrow and Financial Corporation, 3333
E Camelback Road, Suite 110, Phoenix, AZ 85018, attention Amy Boehnke, or at such other place as Seller and Buyer mutually agree
upon in writing. Buyer and Seller each agree to pay one-half (1/2) of the Escrow fees and expenses. The Closing shall be on or
before December 29, 2014, or as soon thereafter as is reasonably practicable under the circumstances (the “Closing Date”).
Section 2.2 Purchase Price.
Section 2.2.1 Amount
and Payment. In consideration for the Assets, Buyer will pay Seller the sum of Six Hundred Thousand Dollars ($600,000.00),
subject to adjustments (the "Purchase Price"), which sum shall be paid as follows:
2.2.1.1 Schedule of
Payments.
(a) Two Hundred
Fifty Thousand Dollars ($250,000.00) at Closing (the “Closing Funds”) deposited with Arizona Escrow and Financial Corporation
prior to Closing Date. Excess Funds shall be credited to the Buyer within one business day after closing.
(b) Three
Hundred Fifty Thousand Dollars ($350,000.00) by Buyer's delivery to Seller of two (2) fully subordinated promissory notes ("Notes"),
with the first Note in the amount of One Hundred Fifty Thousand Dollars ($150,000.00), providing for four (4) equal payments of
principal only in the amount of Thirty Seven Thousand Five Hundred Dollars ($37,500.00) per month commencing thirty (30)
days after Closing and without interest, and a second Note in the amount of Two Hundred Thousand Dollars ($200,000.00), payable
over eighteen (18) months, providing for interest at 6%, an 18 month amortization, no payments of either principal or interest
for one hundred sixty (160) days after Closing, equal payments of principal and interest commencing thereafter and no prepayment
penalty, as set forth on Schedule 2.2. Copies of the Notes are attached hereto as Exhibit A and incorporated herein.
2.2.1.2 Excluded
Equipment Assets. The Buyer shall receive a credit not to exceed $15,000.00 toward Closing Funds and Purchase Price for items
shown on the Excluded Equipment Assets Schedule 2.2.1.2. Any amount of Equipment Assets excluded from the sale less than $15,000.00,
shall reduce the Buyer’s credit dollar for dollar. Buyer shall not receive credit for any and all amounts of Equipment Assets
excluded from the sale in excess of $15,000, if any.
2.2.1.3 Allocation.
The parties agree to the following allocation of the price.
i. FF&E - $52,000.00
ii. Non-Compete - $10,000.00
iii. Business Trade
Name - $10,000.00
iv. Goodwill - $148,000.00
v. Customer Base - $380,000.00
2.2.1.2 Additional Terms
Effecting the Second Note. Seller presently holds a support/maintenance contract with Dallas Independent School District (“Dallas
Contract”) which expires on February 1, 2018, and a support/maintenance contract with Orange County, New York (“OCNY
Contract”) which expires on January 13, 2016, which Seller desires to assign to Buyer and Buyer desires to assume from Seller,
in conjunction with Buyer’s purchase of the Assets from Seller. It is the desire of the parties to potentially use the payments
due from Buyer to Seller under the $200,000 second Note (referenced in Section 2.2.1.1 above, hereafter the “Second Note”)
to be potentially held back by Buyer pending the assignment and assumption of the Dallas Contract and the OCNY Contract. If the
Dallas Independent School District does not consent to the assignment and assumption of the Dallas Contract, the principal balance
of the Second Note will be reduced by $25,000.00, which will be effective 30 days after termination of said contract by the Dallas
Independent School District. If OCNY does not consent to the assignment and assumption of the OCNY Contract, the principal balance
of the Second Note shall be reduced by $10,000.00, which will be effective 30 days after termination of said contract by Orange
County, New York. If the Dallas Contract has not been assigned by Seller to Buyer, with such assignment consented to in writing
by Dallas, but Buyer has nevertheless been able to fully perform under the Dallas Contract and received the advantages of such
contract, including payment by Dallas for services rendered by Buyer under such contract, then Buyer may not offset or deduct any
amounts from the principal balance of the Second Note as referenced above. If the OCNY Contract has not been assigned by Seller
to Buyer, with such assignment consented to in writing by OCNY, but Buyer has nevertheless been able to fully perform under the
OCNY Contract and received the advantages of such contract including payment by OCNY for such services rendered by Buyer under
such contract, then Buyer may not offset or deduct any amounts from the principal balance of the Second Note as referenced above.
2.2.2 Third Party
Financing Contingency. This Agreement is contingent upon Buyer obtaining a firm written commitment for satisfactory financing
from a lender or lenders of its choice, for the purchase of the Assets prior to the date of full execution of this Agreement. Any
funds sent directly to the Seller from Buyer’s lenders shall be transfer to the escrow agent within 2 business days. In the
event Buyer is unable to obtain such financing commitment, and provides written notice thereof to Seller, this Agreement shall
be null and void and any Closing Funds paid shall immediately be returned to Buyer less Escrow Agents fees and expense, if any.
Section 2.3 At Closing.
At Closing, Buyer shall execute and deliver (or cause to be delivered) to Seller:
Section 2.3.1 The
Closing Funds
Section 2.3.2
The Notes.
Section 2.4 Intentionally
Omitted.
Section 2.5 Closing
Adjustments.
Section 2.5.1 Destruction of any Asset. If between the date hereof and the Closing Date, there is any loss, destruction or other
physical damage to any Assets resulting from theft, fire, accident or any other casualty, whether or not insured, or any lien or
encumbrance exists or is placed on any Assets and is not removed or released on or prior to the Closing Date (collectively, a "Casualty
Loss"), then Seller shall promptly give notice to Buyer of such Casualty Loss and the amount of insurance, if any, payable
to Seller with respect thereto. If such Casualty Loss does not prevent the fulfillment of a condition to Buyer's obligations to
consummate the transactions contemplated by this Agreement, or if it does and Buyer waives such condition, Buyer shall have the
option, which shall be exercised by giving Seller written notice within ten (10) days after receipt of the above notice from Seller,
or if there is not ten (10) days prior to the Closing Date, as soon as possible but not less than (24) hours prior to the Closing,
of either (i) accepting the Assets with the affected Asset in its damaged condition (or without the affected Asset in the
case of theft, destruction, liens or encumbrances) in which event any insurance proceeds payable to Seller with respect to such
Asset (together with a payment by Seller at Closing of an amount equal to the deductible or retained amount with respect to such
Casualty Loss) shall be assigned and/or paid to Buyer, (ii) requiring Seller to pay Buyer at Closing an amount equal to a
binding estimate to be obtained by Seller from a qualified third party reasonably satisfactory to Buyer of the cost required to
restore the affected Asset substantially to its condition prior to such Casualty Loss or the reasonably estimated value of the
affected Asset, in which case Seller shall retain all such insurance proceeds, or (iii) causing the affected Asset to become
an Excluded Asset and Buyer shall be entitled to reduce the Purchase Price payable to Seller at Closing pursuant to Subsection
2.2.1 in an amount equal to a binding estimate to be obtained by Seller from a qualified third party reasonably acceptable to Buyer
of the cost required to restore the affected Asset substantially to its condition prior to such Casualty Loss or the reasonably
estimated value of the affected Asset.
Section 2.5.2 Prorations. The parties agree to prorate telephone and web hosting expenses and other similar expenses, if any,
prepaid by Seller for Assets purchased by Buyer; if not available at Closing, any such item will be reimbursed within thirty (30)
days after Closing, subject to Buyer’s approval.
Buyer shall invoice Ohio Department of Mental
Health and Addiction Services and Navajo Nation Division of Health Services for services rendered by Seller prior to December 29,
2014 under the terms of the contracts as provided. The prorated amount due Seller pertaining to Ohio Department of Mental Health
and Addiction Services is $10,610 and the prorated amount due Seller pertaining to Navajo Nation Division of Health Services is
$16,640. Buyer shall reimburse Seller within 7 business days of receipt of such payment(s) and/or all accounts recievable belonging
to Seller, if any.
ARTICLE III
Consulting
Agreement & Agreement Not to Compete
Section 3.1 At the Closing, each of Seller
and Hopkins shall deliver a consulting and non-compete agreement providing for a non-competition period as provided in the agreement,
executed by Seller and Hopkins (the "Consulting Agreement & Agreement Not to Compete"), pursuant to
which each shall assist with the transition to Epazz for a period of thirty (30) days at no charge and thereafter as needed by
phone or e-mail on an hourly basis at $75.00/hour. The Consulting Agreement & Agreement Not to Compete is attached hereto as
Exhibit B and incorporated herein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents
and warrants to Buyer, as of the date hereof and as of the Closing Date, as set forth below:
Section 4.1 Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the
State of Arizona and authorized to transact business in the State of Arizona, and has the requisite power and authority to own,
use, operate or lease the Assets as Seller is now conducting its business, operations and affairs. Seller has no subsidiaries.
Section 4.2 Qualification of Seller. Seller conducts business in multiple states outside of Arizona and is not aware of any licensing
or registration requirements to conduct such business.
Section 4.3 Authorization.
Section 4.3.1 Authority.
Seller has all requisite corporate power and authority to enter into and perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery, consummation and performance of this Agreement have been duly authorized and approved
by all necessary actions of Seller's board of directors. This Agreement is a valid and binding obligation of Seller, enforceable
against Seller in accordance with its terms.
Section 4.3.2 No Breach or Violation. Execution, delivery and performance of this Agreement by Seller and consummation of the transactions
contemplated hereby will not lead to or cause a violation, breach, or default or result in the termination of, or accelerate the
performance required by, or result in the creation or imposition of any Encumbrance, whether by notice or lapse of time or both,
or otherwise conflict with any term or provision of (a) Seller's articles or incorporation or bylaws, or (b) any note, bond, mortgage,
contract, indenture or agreement to lease, license or other instrument or obligation to which Seller is a party or is bound, or
any court or administrative order, writ or injunction or process or any permit, license or consent decree to which Seller is a
party or is bound: (i) where such violation, breach or default would have a material adverse effect on the Assets or financial
condition of Seller; or (ii) except as to which required consents, amendments or waivers shall have been obtained by Seller
prior to the Closing.
Section 4.4 Financial Statements.
Section 4.4.1 Schedules. The profit and loss statement for the period 2010 through Year to Date November 30, 2014, Bank Statements
for the preceding 24 months, and invoices (the "Seller Financial Statements") are true and correct, and fairly
present the assets, liabilities, financial condition and results of operations of the assets of the Seller for those time periods
(the "Financials Date").
Section 4.4.2 Accuracy.
The data set forth in the Seller Financial Statements fairly present the statement of income or loss of the assets of the Seller
for and the financial position of Seller for and as of the date or period covered thereby. The Seller Financial Statements were
prepared from the books and records of Seller, and on a basis consistent with prior periods. The books of account of Seller have
been maintained in accordance with sound business practices, and all transactions involving Seller set forth therein are true
and correct. Seller Financial Statements are not audited financial statements.
Section 4.4.3 No Undisclosed Liabilities. Seller is not aware of any material liabilities or material obligations which relate
to the Assets or the Assumed Liabilities of any nature, secured or unsecured (absolute, accrued, or unaccrued, liquidated or unliquidated,
executory, contingent or otherwise and whether due or to become due), of a nature required to be reflected in a balance sheet prepared
on a tax basis, the same basis used to file Seller’s tax return, which were not adequately and completely disclosed and reserved
for in Seller’s Financial Statements, except for those liabilities and obligations of Seller which relate to Seller or the
Assets and were incurred since the Financials Date in the ordinary course of business and which have been disclosed in writing
to Buyer. Buyer’s accountant will prepare the Seller’s financial statements in generally accepted accounting principles.
Buyer’s accountant will need 10 business days to prepare GAAP.
Section 4.4.4 Absence
of Changes. There has not been and, as of the Closing Date, there will not be: (a) any material adverse change in the Assets
or financial condition of Seller; (b) any change in the contingent obligations or liabilities of Seller which relate to Seller
or the Assets by way of guaranty, documentary credit, standby credit, endorsement, indemnity, warranty or otherwise; (c) any waiver
or cancellation by Seller of valuable rights or debts owed to it which, taken as a whole, are material to the Assets or financial
condition of Seller; (d) any amendment to any agreement, commitment, or transaction by Seller which, if such action were taken
on the date hereof, would require disclosure pursuant to this Agreement (including without limitation, any borrowing, lease, capital
expenditure or capital financing); or (e) any change by Seller in its accounting methods or practices, assumptions or methods
of calculating, or any change by Seller in its accounting principles, relating to the Assets.
Section 4.4.5 Discharge of Liabilities. Since the Financials Date and as of the Closing Date: (i) Seller has not paid, discharged
or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge,
or satisfaction in the ordinary course of business and consistent with past practice; and (ii) Seller has not terminated,
amended or suffered the termination or amendment of, or failed to perform all of its obligations under, any of the Contracts or
any agreement, contract, lease or license affecting the Assets.
Section 4.5 Leases/Real
Property. Seller acknowledges that Buyer is not assuming any lease of real property or is not purchasing any real property.
Seller acknowledges the business will be relocated to Illinois. However, Buyer anticipates operating the business at its current
location for a short duration during which it will enter into a lease with the landlord of the current location.
Section 4.6 Tangible
Assets. Seller has good, valid and marketable title to all of the Assets, and at Closing, Seller will convey good, valid and
marketable title to each of the Assets to Buyer. The title to each Asset is free and clear of all title defects, objections, liens,
mortgages, security interests, pledges, charges and encumbrances, adverse claims, equities, or any other rights of others or other
adverse interests of any kind including without limitation, leases, chattel mortgages, conditional sales contracts, collateral
security arrangements and other title or interest retention arrangements (collectively the "Encumbrances"). The
Assets constitute all of the assets and rights necessary for the conduct of the business of Seller as presently conducted. The
tangible Assets are free from known defects, have been maintained in accordance with normal industry practice, are in good operating
condition and repair (subject to normal wear and tear), and are suitable for the purposes for which it presently is used and presently
is proposed to be used.
Section 4.7 Equipment. Schedule 1.1.3 delivered hereunder sets forth in reasonable detail the Equipment by manufacturer,
model, functional use and serial number, and there exists no condition which interferes with the economic value or usefulness of
any item of Equipment, except as disclosed on Schedule 1.1.3.
Section 4.8 Accounts Receivable. Set forth on Schedule 1.2 is a complete and accurate list of all Receivables as of the
Closing showing the name of each account debtor and the amount due from each by invoice number and date. All Receivables arose
out of the sales of inventories or services in the ordinary course of business and, to the best of the knowledge of Seller, are
collectible in the face value thereof within 365 days of the date of the invoice, using normal collection procedures, net of the
reserve for doubtful accounts as set forth thereon, which reserve is adequate and was calculated in accordance with past practices
of Seller.
Section 4.9 Intellectual Property
Section 4.9.1 Software and Know-How. Schedule 1.1.1 sets forth a complete and accurate list of each license or licensing
agreement, by date, term and the parties thereto, for each patent, patent application, invention, trade-secret, rights to know-how,
processes, computer programs or use of technology, held or employed by Seller (each such patent, patent application, license or
licensing agreement listed thereon hereinafter termed the "Licenses"). With respect to the Licenses, and with
respect to all other technology including but not limited to all (i) processes, trade secrets, methods, operating techniques,
know-how, specifications, and (ii) operational, logistical, maintenance, Software and other technical data and information
and technology held or employed by Seller ("Seller's Technology") as set forth on Schedule l.l.l:
4.9.1.1 Seller owns, free and clear of all liens, pledges or other encumbrances, all right, title and interest in the Software
and Licenses and in Seller's Technology, with all rights to make, use, and sell products and other property embodied in or described
in the Software and Licenses and in Seller's Technology. No use of the Assets and Licenses and the Seller's Technology conflicts
with, infringes upon or violates any patent, patent license, patent application, or any pending application relating thereto,
or any trade secret, know-how, programs or processes of any third person, entity or corporation;
4.9.1.2 There are no outstanding
or threatened material governmental, judicial or adversary proceedings, hearings, arbitrations, disputes or other disagreements
and no notice of infringement has been served upon or otherwise come to the knowledge of Seller with respect to any of the Software
and Licenses or Seller's Technology;
4.9.1.3 Upon the consummation
of the Closing, Buyer will be vested with all right, title and interest, and rights and authority to use all of the Software and
Licenses and Seller's Technology.
Section 4.9.2 Trademarks
and Copyrights. Schedule 1.1.2 delivered hereunder sets forth a complete and accurate list of each unregistered trademark
and trade name, any trademark or trade name conceived or otherwise in process, and all trademark and trade name registrations
or applications, and copyright registration and application for copyright registration, by date and germane case or docket number
and country of origin, and the status of each of the foregoing trademarks, trade names and copyrights, and each license or licensing
agreement, by date and the parties thereto, for each trademark and copyright license or license of application, held or employed
by Seller (each such trademark, copyright, application, and license or licensing agreement hereafter termed the "Trademarks
and Licenses").
4.9.2.1 Seller owns, free and clear of all liens, pledges or other encumbrances, all right, title and interest in the Trademarks
and Licenses. Seller has no reason to know that the use of the Trademarks and Licenses conflicts with, infringes upon or violates
any trademark, trade name, trademark or trade name registration or application, copyright, copyright registration or application
relating thereto, of any third person, firm or corporation;
4.9.2.2 There
are no outstanding or threatened, governmental hearings, arbitrations, disputes or other judicial or adversary proceedings or
disagreements with respect to any of the Trademarks and Licenses; and
4.9.2.3 Upon
the consummation of the Closing, Buyer will be vested with all rights, title and interest, and rights and authority to use all
of the Trademarks and Licenses.
Section 4.10 Contracts and Obligations. Schedule 1.1.6 includes an accurate and complete list as of the date hereof and
as of the Closing Date, of the Contracts and identifies each Contract by the parties thereto and the date, subject matter and term
thereof. All Contracts are valid and binding upon Seller and are valid and binding on each other party thereto. With respect to
each of the Contracts, neither Seller, nor any other party thereto is in breach thereof or default thereunder, and there does not
exist any event, condition or omission which would constitute such breach or default (whether by lapse of time or notice or both),
except for such breaches, defaults and events as to which requisite waivers or consents have been obtained. Buyer shall have no
obligation to retain any employee and there are no employment contracts that will be binding on Buyer after Closing.
Section 4.11 Litigation. There are no claims, actions, suits, hearings, arbitrations, disputes, proceedings (public or private)
or governmental investigations pending or threatened, against or affecting the Assets, at law or in equity, before or by any federal,
state, municipal or other governmental or non-governmental department, commission, board, bureau, agency, court or other instrumentality,
or by any private person or entity, there is no basis for any such action, suit or proceeding, and there are no existing or overtly
threatened, orders, judgments or decrees of any court or governmental agency affecting any of the Assets. There are no legal, administrative,
arbitration or other proceedings or governmental investigations pending or overtly threatened, against Seller or the Assets which
seeks to enjoin or rescind the transactions contemplated by this Agreement or otherwise prevent Seller from complying with the
terms and provisions of this Agreement.
Section 4.12 Third Party Consents. Schedule 4.12 hereto lists all approvals, authorizations, certificates and consents
of all third parties necessary or required to effect the transfer to Buyer of all the rights, powers and franchises of Seller related
to the Assets.
Section 4.13 Permits; Compliance; Reports; Clearances. Schedule 4.13 sets forth all approvals, authorizations, certificates,
consents, licenses, orders and permits of all governmental agencies, whether Federal, state or local, necessary to the ownership,
use or operation of the Assets and all such approvals, authorizations, certificates, consents, licenses, orders and permits are
in full force and effect.
Section 4.14 Government Authorizations. Execution, delivery and performance of this Agreement by Seller, and consummation of the
transactions contemplated hereby, will not require any consent, approval, authorization, or permit from, or any filing with or
notification to, any United States, foreign, state or local governmental or regulatory authority.
Section 4.15 Taxes. As used in this Agreement, "Taxes" and all derivations thereof means any federal, state,
local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, ad valorem, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto. However, for purposes
of this Section 3.15, Taxes shall include only Taxes (i) that are or may become liens on the Assets or (ii) for which Buyer is
or may become liable as the purchaser of the Assets. The term "Tax Returns" shall include all federal, state, local and
foreign returns, declarations, statements, reports, schedules, and information returns required to be filed with any taxing authority
in connection with any Tax or Taxes. Seller has timely filed all Tax Returns and reports required to have been filed by it, and
has paid all Taxes due to any taxing authority required to have been paid by it on or prior to the date hereof. None of such Tax
Returns contain, or will contain, a disclosure statement under Section 6662 of the Code (or any equivalent or predecessor statute).
Seller has not received notice that the Internal Revenue Service or any other taxing authority has asserted or proposed to assert
against Seller any deficiency or claim for Taxes and no issue has been raised by any taxing authority in any audit which, by application
of similar principles, reasonably could be expected to result in a proposed deficiency of Seller for any period not so examined.
There are no pending or threatened, actions, audits, proceedings or investigations with respect to Seller involving the assessment
or collection of Taxes. There are no liens for Taxes due and payable upon the Assets. Seller has not applied for a ruling relating
to Taxes from any taxing authority or entered into any closing agreement with any taxing authority. None of the Assets is or will
be required to be treated as (i) owned by another person pursuant to the safe harbor leasing provisions of the Code or (ii) property
subject to Section 168(f), (g) or (h) of the Code. At Closing, Seller will pay all Taxes, if any, due upon the transfer of the
Assets, or the second position financing accepted by Seller.
Section 4.15.1 Seller
is an S corporation as defined in Code Section 1361. The only shareholder of Seller is Hopkins.
Section 4.16 Customers
and Suppliers. A list of all customers and suppliers of the Seller are set forth on Schedule 4.16. No single supplier
(singularly a "Supplier" and collectively "Suppliers") is of material importance to Seller.
The relationships of Seller with its material customers and its Suppliers are good commercial working relationships. No material
customer or Supplier (i) has canceled or threatened in writing to cancel or otherwise modify its relationship with Seller,
or (ii) to the best of Seller's knowledge, intends to cancel or otherwise modify its relationship with Seller. The acquisition
of the Assets by Buyer will not, to the best knowledge of Seller, adversely affect the relationship of Buyer (as successor to
the owner of the Assets) with any such Suppliers or material customers. The parties acknowledge that some contracts require the
approval of the customer or supplier for valid assignment from Seller to Buyer, and that Seller has no way of knowing prior to
the Closing Date whether such contracts will be permitted to be assigned to Buyer.
Section 4.17 Brokers. West USA Realty has acted for Seller in connection with this Agreement or the transactions contemplated
hereby. Seller may be obligated to pay a commission pursuant to separate agreement with West USA Realty in connection with the
transactions contemplated by this Agreement. Seller agrees to indemnify, defend and hold Buyer harmless from and against all claims,
demands, actions, liabilities, damages, costs and expenses (including reasonable attorneys’ fees) arising from a claim for
a fee or commission made by any broker claiming to have acted by or on behalf of Seller in connection with the transactions contemplated
by this Agreement.
Section 4.18 Disclosures. No statement, representation or warranty made by Seller in this Agreement, in any Exhibit hereto or
Schedule delivered hereunder, or in any certificate, statement, list, schedule or other document furnished or to be furnished to
Buyer hereunder, contains any untrue statement of a material fact, or fails to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they are made, not misleading.
Section 4.19 Audit/Inspections. Buyer has the right to have an audit and such other inspection(s) as it deems reasonably
necessary performed on the Seller’s accounting books, accounting system and financial statements for the last two fiscal
years and year to date financials and on the Assets. Buyer must conduct the audit or inspections, if at all, before Closing. Seller
must make a good faith effort to respond to any reasonable request for information within 24 hours of the request. This request
can include filling out surveys, questionnaires and forms and responding to emails or telephone calls. Seller will not charge Buyer
for any work in connection with audit or inspections.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents
and warrants to Seller, as of the date hereof, and as of the Closing Date, as follows:
Section 5.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of Illinois,
and has the requisite corporate power and authority to own, operate or lease the properties that Buyer requires to carry on its
businesses in all material respects as such is now being conducted.
Section 5.2 Corporate Authorization.
Section 5.2.1 Authority.
Buyer has all requisite corporate power and authority to enter into and perform this Agreement and to consummate the transactions
contemplated hereby. This Agreement is a valid and binding obligation of Buyer, enforceable in accordance with its terms. This
Agreement and all transactions contemplated hereby have been duly authorized by all requisite corporate authority and all corporate
proceedings required to be taken by the Buyer to authorize and to carry out this Agreement and the transactions contemplated hereby
have been duly and properly taken. The execution and delivery of this Agreement and the performance by the Buyer of its obligations
hereunder will not conflict with or violate any provisions of, or result in a default or acceleration of any obligation under,
any mortgage, lease, contract, agreement, indenture, or other instrument or undertaking, or other instrument or undertaking or
any order, decree or judgment to which the Buyer is a party or by which it or its property is bound.
Section 5.2.2 No Breach or Violation. Execution, delivery and performance of this Agreement by Buyer and consummation of the transactions
contemplated hereby will not cause a breach or default or otherwise conflict with any term or provision of the following: (a) Buyer's
Certificate of Incorporation or By-laws; (b) any court or administrative order, writ or injunction or process, or any consent decree
to which Buyer is a party or is bound (i) where such violation, breach or default would have a material adverse effect on
the business, results of operations or financial condition of Buyer, or (ii) except as to which required consents, amendments
or waivers shall have been obtained by Buyer prior to the Closing for any such violation, breach or default.
Section 5.3 Brokers. No broker or finder has acted for Buyer in connection with this Agreement or the transactions contemplated
hereby. Buyer has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary
in connection with the transactions contemplated by this Agreement.
ARTICLE VI
COVENANTS
Section 6.1 Seller’s
Affirmative Covenants. With respect to the Assets, except as may be agreed in writing by Buyer, Seller shall at all times from
the date hereof through the Closing Date use its commercially reasonable efforts to take all actions proper and advisable in order
to consummate the transaction contemplated by this Agreement, including without limitation:
Section 6.1.1
Operate the Assets in the ordinary course of business and use its best efforts to preserve and protect the goodwill, rights,
properties, assets and business organization of Seller and to prevent the occurrence of any event or condition which would have
a material adverse effect on the Assets or the financial condition or results of operations of Seller;
Section 6.1.2
Use its best efforts to preserve and protect the present goodwill and relationships of Seller with creditors, suppliers,
customers, licensors, licensees, contractors, distributors, lessors and lessees and others having business relationships with it;
Section 6.1.3
Maintain clear unencumbered title to the Assets and use its reasonable best efforts to maintain all tangible Assets in good
and customary repair, order and condition, reasonable wear and tear and damage by fire and other casualty excepted and promptly
repair, restore or replace any Assets which are damaged or destroyed by fire or other casualty, whether insured or uninsured. In
the event Seller shall fail to replace or repair any such damaged or destroyed Assets to the reasonable satisfaction of Buyer,
Buyer by written notice to Seller may terminate this Agreement and any Closing Funds paid shall be immediately returned to Buyer
less Escrow Agents fees and expense, if any.
Section 6.1.4
Comply in all material respects with all applicable Federal, state, foreign and local laws, rules and regulations germane
to the Seller and to this sales transaction;
Section 6.1.5
Maintain the books and records of Seller in the usual and ordinary course consistent with past practices in such manner
as is necessary to ensure satisfaction of the representations and warranties set forth in Article IV of this Agreement and in a
manner that fairly and accurately reflects its income, expenses, assets, and liabilities prepared on a tax basis, the same basis
used to file Seller’s tax return;
Section 6.1.6
File all Tax Returns required to be filed and make timely payment of all Taxes shown to be due on such returns;
Section 6.1.7
[Intentionally Left Blank];
Section 6.1.8
Promptly notify Buyer in writing of any material adverse change in the Assets of which it has knowledge, or any material
adverse change, of which it has knowledge, with respect to the relationships of Seller and its employees or its creditors, suppliers,
customers, subcontractors, licensors, licensees, lessors and lessees, and others having business relationships with it;
Section 6.1.9
Promptly notify Buyer in writing of the institution or receipt of any material claim, action, suit, inquiry, proceeding,
notice of violation, demand letter, subpoena, government audit or disallowance by or before any court or governmental or other
regulatory or administrative agency; and
Section 6.1.10 Promptly supplement or amend and deliver to Buyer the Schedules that Seller is required to prepare hereunder with respect
to any matter arising hereafter which, if existing or occurring as at the date of this Agreement, would have been required to
have been set forth and described in such Schedule. No supplement or amendment of a Schedule made pursuant to this Section 6.1.10
shall be deemed to cure any intentional fraud or deliberate breach of any representation or warranty made in this Agreement but
shall cure any inadvertent or negligent breach of any representation or warranty or covenant made in this Agreement.
Section 6.2 Seller’s Negative Covenants. With respect to Seller and the Assets, Seller will not do the following, without
the written consent of Buyer, from the date hereof through the Closing Date:
Section 6.2.1
Incur or agree to incur any obligation or liability (absolute or contingent) in connection with any of the Assets, except
liabilities arising out of, incurred in connection with, or related to the consummation of this Agreement;
Section 6.2.2
Sell, transfer, assign, license or otherwise dispose of, or encumber in any way, any of the Assets except in the ordinary
course of business, consistent with past practices;
Section 6.2.3
Amend in a material respect, modify in a material respect, or terminate any of the Contracts;
Section 6.2.4
Waive or cancel any of its material rights or claims relating to the Assets; or
Section 6.2.5
Seek, solicit or agree to any offer for the sale of the Assets or any material part thereof, or seek, solicit or agree to
any merger of Seller with any other entity whereby Seller or its successor shall not be fully capable of and obligated to perform
all of Seller's obligations under this Agreement;
Section 6.2.6
Undertake any transaction, including, but not limited to, the incurring of any indebtedness for borrowed money, except in
the ordinary course of business, consistent with past practices;
Section 6.2.7
Offer or enter into any contract, understanding, plan, or agreement to take any action described in this Section 6.2.
Section 6.3 Access to Information.
Section 6.3.1
Access. From and after the date of this Agreement and until the Closing Date, Buyer and its agents and representatives
shall have full and complete access outside of normal hours with reasonable notice (i) to all properties (whether real or
personal), books and records of Seller (the confidentiality of which Buyer agrees to maintain), for purposes of conducting such
investigations, appraisal or audits at its own expense as Buyer, in good faith, deems necessary or advisable under the circumstances,
and (ii) to discuss Seller, related business affairs, and condition (financial or otherwise) of Seller and the Assets with
Seller’s accountants and counsel as Buyer considers necessary for the purposes of conducting its investigations, appraisals
or audits in connection with the transactions contemplated by this Agreement. Any such investigation conducted by Buyer and its
agents and representatives shall be conducted in a manner that is not unduly or unreasonably disruptive to Seller's business.
Section 6.3.2
Customer Introductions. Seller shall, upon reasonable request of Buyer, introduce Buyer, or arrange for a personal
introduction of Buyer's representatives, to customers of Seller for the purpose of insuring good relationships with such parties
immediately following the Closing.
Section 6.3.3
After Closing. Seller shall furnish to Buyer, all financial and Tax Return information as reasonably may be requested
after the Closing for the purpose of filing or defending tax returns of Buyer, or a subsequent purchaser of any of the Assets.
Seller and Hopkins shall assist Buyer in the transfer of the Assets to Buyer for a period of thirty (30) days following the
Closing Date at no additional cost to Buyer. After the initial thirty (30) day period, Seller and Hopkins will assist Buyer with
the transition of the Assets on a consulting basis by telephone or email at the rate of $75.00 per hour.
Section 6.4 Filings and Authorizations. Seller and Buyer each shall use commercially reasonable efforts, promptly after the date
hereof, to comply with all Federal, state, and local laws and regulations and to obtain all necessary governmental authorizations,
approvals, permits, licenses and waivers, with regard to the transactions contemplated by this Agreement.
Section 6.5 Administration of Accounts. All payments and reimbursements made in the ordinary course by any third party in
the name of or to Seller after the Closing Date for any product sold or service performed after the Closing Date shall be held
by Seller in trust to the benefit of Buyer and, immediately upon receipt by Seller of any such payment or reimbursement, Seller
shall pay over to Buyer the amount of such payment or reimbursement without right of set off. All payments and reimbursements,
if any, made in the ordinary course by any third party in the name of or to Seller after the Closing Date for any product sold
(except prepaid contracts) or service performed prior to the Closing Date shall belong to Seller.
Section 6.6 Tax Matters.
Section 6.6.1
Seller Obligations. Seller acknowledges its legal obligations to pay Taxes relating to all items of income, loss,
gain, deduction and credit attributable to or relating to the ownership of the Assets up to and including the Effective Date, including
but not limited to any taxes, assessments and other amounts payable for all periods prior to the Effective Date.
Section 6.6.2
Buyer Obligations. Buyer acknowledges its legal obligations to pay Taxes relating to all items of income, loss, gain,
deduction and credit attributable to or relating to ownership of the Assets after the Effective Date.
Section 6.6.3
Tax on Transaction. Seller shall pay any and all Taxes imposed upon or assessed against Seller by the federal government
due to the sale, of the Assets under this Agreement. Seller shall promptly file when due any and all returns with respect to such
Taxes, assessments, fees, charges or penalties. Seller shall pay all sales or other taxes, if any, imposed by the State
of Arizona or its political subdivisions because of the sale of the Assets under this Agreement and all excise taxes and stamp
taxes and intangible taxes attributable to the Note.
Section 6.7 Further Assurances. Seller and Buyer shall each use commercially reasonable efforts to take all actions necessary,
proper, or deemed by them advisable, to fulfill promptly their obligations hereunder and to consummate the transactions contemplated
by this Agreement. Seller and Buyer will coordinate and cooperate with each other in exchanging such information and supplying
such reasonable assistance as may be requested by the other in connection with the foregoing. From time to time after the Closing,
each party will, at the expense of the other party, execute and deliver, or cause to be executed and delivered, such documents
to the other party as the other party may reasonably request in order to more effectively consummate the transactions contemplated
by this Agreement.
Section 6.8 Confidentiality. Buyer acknowledges that Seller would be irreparably damaged if confidential information concerning
Seller or the Assets were disclosed to or utilized by any person to the detriment of Seller prior to the Closing or if the Closing
does not occur. Therefore, Buyer shall not, at any time prior to the Closing, or at any time if the Closing does not occur, directly
or indirectly, without the prior written consent of Seller, make use of or divulge, or permit any of its affiliates, employees
or agents to make use of or divulge, any information concerning the Assets, or the financial or other affairs of Seller that would
be used to the detriment of Seller, including without limitation, the Customer Information and Know-How, except to the extent required
by law or in order to preserve or enforce its rights under this Agreement. Seller acknowledges that Buyer would be irreparably
damaged if confidential information concerning Buyer or the Assets were disclosed to or utilized by any person to the detriment
of Buyer. Therefore, Seller shall not, at any time directly or indirectly, without the prior written consent of Buyer, make use
of or divulge, or permit any of its affiliates, employees or agents to make use of or divulge, any information concerning the Assets,
the Assets or the financial or other affairs of Buyer that could be used to the detriment of Buyer, including without limitation,
the Customer Information and Know-How, except to the extent required by law or in order to preserve or enforce its rights under
this Agreement, or to consummate the Joint Venture Buyout required in Section 7.1.11, below.
Section 6.9 Searches.
At least five (5) days prior to Closing, at Seller’s cost, Seller shall obtain and deliver to Buyer:
Section 6.9.1
Current Uniform Commercial Code and Federal and State Tax Lien searches (State and County) showing any liens of any nature
that may affect the interest of Seller.
Section 6.9.2
Current State, Federal and Bankruptcy pending suit and judgment searches showing any judgments or suits that may affect
the interest of Seller and Hopkins.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
Section 7.1 Conditions.
The obligations of Buyer under this Agreement to perform under Articles I and II herein shall be subject to the fulfillment, to
its reasonable satisfaction, on or prior to the Closing Date, of all of the following conditions precedent:
Section 7.1.1
Inspection. This Agreement is contingent on Buyer or Buyer’s agents and/or representatives inspecting, reviewing
and approving the Assets and examining any other aspects of the business of Seller (Buyer’s Due Diligence), including without
limitation, Buyer’s onsite inspection(s).
Section 7.1.2
Representations and Warranties. All representations and warranties of Seller contained in this Agreement and in all
certificates, schedules and other documents delivered by Seller to Buyer or its representatives pursuant to this Agreement and
or in connection with the transactions contemplated hereby shall be true, complete and accurate in all material respects as of
the date when made and as of the Closing Date with the same force and effect as though such representations and warranties had
been made on and as of the Closing Date, except for changes expressly permitted by this Agreement.
Section 7.1.3
No Material Adverse Change. During the period from the date hereof to the Closing Date, Seller shall not have sustained
any material loss or damage to the Assets, whether or not insured, nor shall there have been any material adverse change in the
Assets or business of Seller. In the event of any such change, Buyer, upon written notice at or prior to Closing, may terminate
this Agreement, and the Escrowed Funds shall be immediately returned to Buyer.
Section 7.1.4
Schedules Delivered. All Schedules to be delivered prior to Closing to Buyer by Seller hereunder shall have been
so delivered with time sufficient for Buyer's review and in no event later than two (2) business days prior to Closing, and each
such Schedule shall be satisfactory in form, and content, to Buyer, such satisfaction to be determined at Buyer's reasonable discretion.
To the extent Seller updates any such Schedule immediately prior to Closing, each such update shall be satisfactory in form, and
content, to Buyer, such satisfaction to be determined at Buyer's reasonable discretion.
Section 7.1.5
No Adverse Facts Disclosed. No investigation of Seller by Buyer, no disclosure Schedule, and no other document delivered
to Buyer in connection with this Agreement shall have revealed any facts and circumstances that reflect in a material adverse way
on the Assets.
Section 7.1.6
Obtaining of Consents and Approvals. Except as otherwise contemplated by this Agreement, Seller shall have executed
and delivered to Buyer, or shall have caused to be executed and delivered, any consents, waivers, approvals, permits, licenses
or authorizations which, if not obtained on or prior to the Closing Date, would have a material adverse effect on the Assets.
Section 7.1.7
Performance by Seller. Seller shall have performed and complied in all material respects with all agreements, covenants,
obligations and conditions required by this Agreement to be performed or complied with by Seller on or before the Closing Date.
Section 7.1.8
Absence of Litigation. There shall not be in effect any order enjoining or restraining the transactions contemplated
by this Agreement, and there shall not be instituted or pending any action or proceeding before any Federal, state or foreign court
or governmental agency or other regulatory or administrative agency or instrumentality (i) challenging the acquisition by
Buyer of the Assets or otherwise seeking to restrain, materially condition or prohibit consummation of the transactions contemplated
by this Agreement, or seeking to impose any material limitations on any provision of this Agreement, or (ii) seeking to compel
Buyer or Seller to dispose of or hold separate a material portion or the Assets as a result of the transactions contemplated by
this Agreement.
Section 7.1.9
Officer's Certificates. Buyer shall have received a certificate, dated the Closing Date, executed on behalf of Seller
by an appropriate officer stating that the representations and warranties set forth herein continue to be true and correct in all
material respects and that the warrants and conditions set forth herein are true and correct and/or have been satisfied.
Section 7.1.10 Agreements Not to Compete. Buyer shall have received the delivery of the duly executed, valid and binding Consulting
Agreement & Agreement Not to Compete_ from Seller and Hopkins.
Section 7.1.11 Joint Venture Buyout. This Agreement and Buyer’s obligation to close are subject to Seller successfully buying
out its Joint Venture Partner. Seller will provide a copy of that contract prior to the Closing, which will become effective on
the Closing Date.
Section 7.1.12 Delivery
of Documents. The execution and delivery to the Buyer by Seller of the following, all dated as of the Closing Date:
7.1.12.1 A Bill of Sale with respect to the Assets in the form requested by Buyer; and all other documents required by the terms
of this Agreement to be executed and delivered by Seller;
7.1.12.2 Such other conveyances, instruments of title, assignments, consents, recordings, and other documents as may be, in the reasonable
opinion of the Buyer, necessary or proper to transfer to Buyer ownership of the Assets and rights being acquired by Buyer hereunder;
7.1.12.3 Certified resolutions of the Board of Directors and shareholder of Seller duly authorizing the execution and delivery of
this Agreement and the performance by Seller of its obligations hereunder;
7.1.12.4 A duly executed Assignment and Assumption Agreement for all assumed contracts, if any;
7.1.12.5 Certificates of good standing of Seller issued by the Arizona Corporation Commission dated within 10 days of the Closing
Date;
7.1.12.6 All files pertaining to the prepaid maintenance contracts, including without limitation, all vouchers, invoices, bills and
paid receipts, if any, in the possession of Seller to be picked up by Buyer at Seller’s office;
7.1.12.7 UCC, State and Federal Tax Lien and State and Federal (including bankruptcy) Pending Suit and Judgment searches covering
Seller and Hopkins;
7.1.12.8 Officer’s Certificates, dated the Closing Date, executed on behalf of Seller by an appropriate officer stating that
the representations and warranties set forth herein continue to be true and correct in all material respects and that the conditions
set forth herein have been satisfied;
7.1.12.9 Duly executed documentation, if any, for the transfer of the Telephone Number and web hosting from the Seller to the Buyer
and a transfer of all related advertising and promotional materials;
7.1.12.10 A list of all suppliers and creditors of Seller and amounts due, if any;
7.1.12.11 A tax certificate from the Arizona Department of Revenue indicating a satisfaction (tax clearance) of all sales, income
and other taxes due as of the actual date of Closing;
7.1.12.12 [Intentionally Left Blank];
7.1.12.13 The Consulting Agreement & Agreement Not to Compete;
7.1.12.14 Payment by Seller of any applicable State or local tax(es) regarding the transfer of the Assets and/or the financing hereof
by the subordinated two Notes accepted by Seller; and
7.1.12.15 Such other documents, instruments and certificates as may be reasonably requested by Buyer or its counsel to effectuate
the transactions contemplated by this Agreement.
Section 7.2 Waiver. Buyer may, in its sole discretion, waive in writing fulfillment of any or all of the conditions set forth
in Section 7.1 of this Agreement, provided that such waiver granted by the Buyer pursuant to this Section 7.2 shall have no effect
upon or as against any of the other conditions not so waived.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
Section 8.1 Conditions. The obligations of Seller under this Agreement to perform under Articles I and II herein shall be subject
to the fulfillment, to its reasonable satisfaction, on or prior to the Closing Date, of all of the following conditions precedent:
Section 8.1.1
Representations and Warranties. The representations and warranties of the Buyer contained in this Agreement shall
be true and correct in all material respects on and as of the Closing Date with the same force and effect as though such representations
and warranties had been made on and as of the Closing Date.
Section 8.1.2
Performance by Buyer. Buyer shall have performed and complied in all material respects with all agreements, covenants,
obligations and conditions required by this Agreement to be performed or complied with by Buyer on or before the Closing Date.
Section 8.1.3
Officer's Certificates. Seller shall have received a certificate, dated the Closing Date, executed on behalf of
Buyer by an appropriate officer stating that the representations and warranties set forth in Article V hereof continue to be true
and correct in all material respects and that the conditions set forth in this Article VIII hereof have been satisfied
Section 8.1.4
Absence of Litigation. There shall not be in effect any judicial or regulatory order enjoining or restraining Buyer
from engaging in the transactions contemplated by this Agreement.
Section 8.1.5
Delivery of Documents. The execution and delivery to Seller by the Buyer of the following:
8.1.5.1 Certified resolutions of the directors of Buyer duly authorizing the execution and delivery of this Agreement and the performance
by Buyer of its obligations hereunder;
8.1.5.2 The Notes; and
8.1.5.3 Such documents, instruments and certificates as may be reasonably requested by Seller or its counsel to effectuate the
transactions contemplated by this Agreement.
Section 8.2 Waiver. Seller may, in its sole discretion, waive in writing fulfillment of any or all of the conditions set forth
in Section 7.1 of this Agreement, provided that such waiver granted pursuant to this Section 8.2 shall not constitute a waiver
by Seller of any other conditions not so waived.
ARTICLE IX
INDEMNIFICATION
Section 9.1 Survival of Certain Provisions.
Section 9.1.1
Survival of Representations and Warranties. Each and every such representation and warranty shall survive Closing
and remain in full force and effect until the first anniversary of the Closing Date, except for those representations and warranties
made in connection with or arising out of the first two sentences of Section 4.6, (Title) and Section 4.15 (Taxes) (collectively,
the "Non-Expiring Warranties"), which shall survive Closing and remain in full force and effect either (i) until
expiration of any rights of Buyer or any third party under law or equity with respect thereto, it being understood and agreed that
Buyer, upon written notice to Seller, may waive or toll any applicable statute of limitation in Buyer's sole discretion, or (ii) for
an indefinite period without end if no statute of limitation applies.
Section 9.1.2
Covenants and Indemnification Provisions. Each of Seller’s covenants and each of Seller’s indemnification
provisions contained herein shall survive Closing and remain in full force and effect in accordance with its terms until the first
anniversary of the Closing Date. Each of Buyer’s covenants in Section 6.9 shall survive Closing and remain in full
force and effect in accordance with its terms until the first anniversary of the Closing Date.
Section 9.2 Seller’s Indemnification of Buyer. After the Closing Date, Seller shall indemnify and hold Buyer harmless
on demand for, from and against all losses, actual damages, liabilities, claims, demands, obligations, deficiencies, payments,
judgments, settlements, costs and expenses of any nature whatsoever (including without limitation the costs and expenses of any
and all investigations, actions, suits, proceedings, demands, assessments, judgments, settlements and compromises relating thereto,
and reasonable attorneys' and others fees in connection therewith) ("Losses") resulting or arising, directly
or indirectly from the following: (a) Any inaccuracy or misrepresentation in, or breach or nonfulfillment of, any representation
or warranty of Seller or any breach or nonfulfillment of any covenant of Seller, contained in this Agreement, in any Exhibit or
Schedule delivered hereunder by Seller, or in any certificates or documents delivered by Seller pursuant to this Agreement; (b)
Any and all employment obligations and excluded liabilities including but not limited to all liabilities delineated in Section
1.3 (whether or not disclosed to Buyer); and (c) The use, ownership or operation of the Assets or the conduct of business prior
to Closing.
Section 9.3 Buyer’s Indemnification of Seller. Buyer will indemnify and hold harmless Seller, and will reimburse Seller,
for any damages (including without limitation, reasonable attorneys’ fees and costs) arising from or in connection with:
Section 9.3.1
any material breach of any representation or warranty made by Buyer in this Agreement or in any certificate, document,
writing or instrument delivered by Buyer pursuant to this Agreement not cured by Buyer within 30 days after written notice from
Seller;
Section 9.3.2
any material breach of any covenant or obligation of Buyer in this Agreement or in any other certificate, document, writing
or instrument delivered by Buyer pursuant to this Agreement not cured by Buyer within 30 days after written notice from Seller;
Section 9.3.3
any claim by any person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding
alleged to have been made by such person with Buyer (or any person acting on Buyer's behalf) in connection with this transaction.
Section 9.3.4
any claim related to or arising from Buyer’s use, ownership or operation of the Assets or the conduct of business
after the Closing.
Section 9.4 Matters
Involving Third Parties.
Section 9.4.1
If any third party notifies any Party (the ‘‘Indemnified Party’’) with respect to any matter (a
‘‘Third-Party Claim’’) that may give rise to a claim for indemnification against any other Party (the ‘‘Indemnifying
Party’’) under this Section 9.4, then the Indemnified Party shall promptly notify each Indemnifying Party thereof in
writing; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve
the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party is thereby prejudiced.
Section 9.4.2
Any Indemnifying Party shall have the right to defend the Indemnified Party against the Third-Party Claim with counsel
of its choice, reasonably satisfactory to the Indemnified Party, so long as (A) the Indemnifying Party notifies the Indemnified
Party in writing within 15 days after the Indemnified Party has given notice of the Third-Party Claim that the Indemnifying Party
shall indemnify the Indemnified Party from and against the entirety of any adverse consequences the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of, or caused by the Third-Party Claim, (B) the Indemnifying Party provides
the Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the Indemnifying Party will have the financial
resources to defend against the Third-Party Claim and fulfill its indemnification obligations hereunder, (C) the Third-Party Claim
involves only money damages and does not seek an injunction or other equitable relief, (D) settlement of, or an adverse judgment
with respect to, the Third-Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential
custom or practice materially adverse to the continuing business interests or the reputation of the Indemnified Party, and (E)
the Indemnifying Party conducts the defense of the Third-Party Claim actively and diligently.
Section 9.4.3
So long as the Indemnifying Party is conducting the defense of the Third-Party Claim in accordance with Section 9.4.2 above,
(A) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third-Party
Claim, (B) the Indemnified Party shall not consent to the entry of any judgment on or enter into any settlement with respect to
the Third-Party Claim without the prior written consent of the Indemnifying Party (not to be unreasonably withheld) and (C) the
Indemnifying Party shall not consent to the entry of any judgment on or enter into any settlement with respect to the Third-Party
Claim without the prior written consent of the Indemnified Party (not to be unreasonably withheld).
Section 9.4.4
In the event any of the conditions in Section 9.4.2 above is or becomes unsatisfied, however, (A) the Indemnified Party
may defend against, and consent to the entry of any judgment on or enter into any settlement with respect to, the Third-Party Claim
in any manner it may reasonably deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from,
any Indemnifying Party in connection therewith), (B) the Indemnifying Party shall reimburse the Indemnified Party promptly and
periodically for the costs of defending against the Third-Party Claim (including reasonable attorneys’ fees and expenses),
and (C) the Indemnifying Parties shall remain responsible for any adverse consequences the Indemnified Party may suffer resulting
from, arising out of, relating to, in the nature of, or caused by the Third-Party Claim to the fullest extent provided in this
Article IX.
ARTICLE X
TERMINATION
Section 10.1 Termination Events. Subject to the provisions of Section 9.2, this Agreement may, by written notice given at or prior
to the Closing in the manner hereinafter provided, be terminated and abandoned only as follows:
Section 10.1.1 By Seller, upon written notice, if a material default or breach shall be made by the Buyer, with respect to the due and
timely performance of any of the Buyer’s covenants and agreements contained herein, or with respect to the due compliance
with any of Buyer’s representations and warranties, as applicable, unless such default has been cured prior to Closing or
has been waived by Seller in writing;
Section 10.1.2 By written mutual consent of Seller and Buyer; or
Section 10.1.3 In addition to, and not in limitation of its termination rights regarding Due Diligence and Financing, Buyer may
terminate this Agreement by giving written notice to Seller at any time prior to the Closing in the event a material default or
breach made by Seller, with respect to the due and timely performance of any of the Seller’s covenants and agreements contained
herein, or with respect to the due compliance with any of Seller’s representations and warranties, as applicable, unless
such default has been cured prior to Closing or has been waived by Buyer in writing.
Section 10.1.4 Closing Date. On December 29, 2014, or such earlier or later date as may be agreed upon by the parties.
Section 10.2 Effect
of Termination. In the event this Agreement is terminated pursuant to Section 10.1 herein, all further rights and obligations
of the parties hereunder shall terminate, and neither Buyer nor Seller, nor any of their affiliates, nor any of the respective
directors, officers or employees of Buyer or Seller or their affiliates shall have any liability to any of the others; it being
specifically agreed that if this Agreement is so terminated by either Buyer or Seller because one or more of the conditions to
its obligations hereunder as set forth in Articles VI and VII herein is not satisfied as a result of the other party's failure
to comply with its obligations under this Agreement, the rights of the terminating party to pursue all legal remedies for breach
of contract and damages shall survive such termination and the breaching party shall be fully liable for any and all damages,
costs and expenses sustained or incurred by the terminating party as a result of such breach. Notwithstanding the foregoing, Seller’s
sole remedy upon a breach of this Agreement by Buyer shall be termination of this Agreement.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Expenses. Except as otherwise provided in this Agreement, Buyer shall pay Buyer’s own costs and expenses (including
all legal, accounting, broker, finder and investment banker fees) relating to this Agreement, the negotiations leading up to this
Agreement, and the closing of the transaction contemplated by this Agreement. Seller shall pay all liabilities of Seller
and of Hopkins for costs and expenses (including but not limited to legal fees, paralegal fees, CPA fees, and similar expenses)
that Seller and Hopkins have incurred in connection with the consummation of the transaction contemplated hereby
Section 11.2 Amendment. This Agreement shall not be amended or modified except by a writing duly executed by Seller and Buyer.
Section 11.3 Entire Agreement. This Agreement, including the Exhibits hereto and the Schedules delivered hereunder, contain all
of the terms, conditions and representations and warranties agreed upon by the parties relating to the subject matter of this Agreement
and supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written,
respecting such subject matter.
Section 11.4 Notices. All notices, requests, demands and other communications made in connection with this Agreement shall be
in writing and shall be deemed to have been duly given on the date of delivery, if delivered by hand or by telex or telecopy (with
machine confirmation) to the persons identified below, or three (3) days after mailing if mailed by certified or registered mail,
postage prepaid, return receipt requested, addressed as follows:
If to Buyer: |
Shaun Passley |
|
205 W. Wacker Dr., Suite 1320 |
|
Chicago, Illinois 60606 |
|
Fax (312) 873-4283 |
|
|
With a copy to: |
Daniel M. Loewenstein, Esq. |
|
Evans, Loewenstein, Shimanovsky |
|
& Moscardini, Ltd. |
|
130 South Jefferson Street, Suite 350 |
|
Chicago, Illinois 60661 |
|
Fax (312) 466-0819 |
|
|
If to Seller: |
John Hopkins |
|
10800 E. Cactus Rd., Lot 56 |
|
Scottsdale, AZ 85259 |
|
|
With a copy to: |
Mark D. Chester, Esq. |
|
Chester & Shein, PC |
|
8777 N. Gainey Center Dr., Suite 191 |
|
Scottsdale, AZ 85258 |
|
Fax (480) 922-3969 |
Such addresses may be changed, from time to
time, by means of a notice given in the manner provided in this Section. Copies to counsel shall not constitute notice.
Section 11.5 Severability. If any term, provision, condition or covenant of this Agreement or the application thereof to any party
or circumstances shall be held to be invalid or unenforceable to any extent in any jurisdiction, then the remainder of this Agreement
and the application of such term, provision, condition or covenant in any other jurisdiction or to persons or circumstances other
than those as to whom or which it is held to be invalid or unenforceable, shall not be affected thereby, and each term, provision,
condition and covenant of this Agreement shall be valid and enforceable to the fullest extent permitted by law.
Section 11.6 Cumulative Remedies. The remedies provided herein are cumulative and not exclusive and shall not preclude assertion
by either party hereto of any other rights or the seeking of any other remedies against the other party.
Section 11.7 Waiver. Waiver of any term or condition of this Agreement by either of the respective parties shall only be effective
if in writing and shall not be construed as a waiver of any subsequent breach or failure of the same term or condition, or a waiver
of any other term or condition, of this Agreement.
Section 11.8 Successors and Assigns. The rights, liabilities and obligations of the parties hereto arising under this Agreement
shall attach to and be binding upon the respective parties’ successors and assigns.
Section 11.9 Assignment. This Agreement shall not be assignable by Seller without first having obtained the prior written consent
of the Buyer, which shall not be unreasonably withheld or unduly delayed.
Section 11.10 No
Third Party Beneficiaries. Nothing in this Agreement shall confer any rights upon any person or entity who is not a party
to this Agreement.
Section 11.11 Counterparts.
This Agreement may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were
upon a single instrument, and all such counterparts together shall be deemed an original of this Agreement.
Section 11.12 Governing
Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona and of the United
States without giving effect to the doctrine of conflicts of laws.
Section 11.13 Attorneys’
Fees. In the event any proceeding is instituted by any of the parties hereto for the enforcement of any of the rights or remedies
in and under this Agreement, the party in whose favor an award shall be rendered shall be entitled to recover from the losing
party or parties all costs reasonably incurred by said prevailing party in said action, including, but not limited to, reasonable
attorneys’ fees and court costs.
Section 11.14 JURISDICTION
AND VENUE. THE PARTIES HEREBY AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT SHALL
BE LITIGATED IN THE SUPERIOR COURT OF MARICOPA COUNTY, ARIZONA, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA.
THE PARTIES HEREBY EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH EXCLUSIVE JURISDICTION IN ANY ACTION OR PROCEEDING.
Section 11.15 EXECUTION
AND DELIVERY
IN WITNESS WHEREOF, the
parties hereto have executed and delivered this Agreement with legal and binding effect as of the date and year first above written.
Interaction Information Technology,
Inc., an Arizona corporation
____________________________________
By: John Hopkins, President
Epazz, Inc., an Illinois corporation
____________________________________
By: Shaun Passley, President
____________________________________
John Hopkins, Individually
Interaction Information Technology,
Inc.,
an Illinois corporation
____________________________________
By: Shaun Passley, President
EXHIBIT A
NOTES
EXHIBIT B
CONSULTING AGREEMENT
AGREEMENT NOT TO COMPETE
Schedule 1.1.2
Trademarks and Copyrights
Trademark and Trade Names:
ContentDistributor- registered
trademark
Pace Plus-registered name
in the State of Arizona
ContentDistributor-registered
name in the State of Arizona
Copyrights:
Interaction Information
Technology (IIT) website content only- www.interactiontech.com
Schedule 1.1.3
Equipment
Schedule 1.1.3 Continued
Equipment
Schedule 1.1.4
Computer Assets
Schedule 1.1.4 Continued
Computer Assets
Schedule 1.1.4 Continued
Computer Assets
Schedule 2.2.1.2
Excluded Equipment Assets
Schedule 2.2.1.2 Continued
Excluded Equipment Assets
Schedule 1.1.6
Contracts and Obligations
PACE+/PACE+SOC Intellectual Property co-owned
(50%/50%) by Joint Venture (JV) entity and IIT
Independent Contractor Agreement (Roger Carlson)
- Attachment 26
Limited Use of Software Ownership/Agreement
– Attachment 27
Employment Agreements- Attachment 28
Company Simple IRA Plan- Attachment 31
Employee Health and Welfare Insurance Policies,
Aetna Small Business Insurance-Attachment 32.1
Netsmart (Infoscriber) to resell E-Prescription
Software that works with PACE+ Software –Attachment 46
Cox Business Commercial Services Agreement
for Internet Services –Attachment 47
Integra Communications Commercial Services
Agreement-Attachment 48
MNK Info Subcontractor Service Agreement, Project
Management and Hosting Services-Attachment 49
Payroll Experts, LLC Payroll & Fillings
– Attachment 34a
Horizon Human Services (11/22/2010) Non-Disclosure
Agreement- Attachment 53
Four Directions, LLC (a.k.a. 4 Directions)
Content Distributor PACE+ Subscription License Agreement-Attachment 55
Dallas Independent School District Electronic
Medical Records Software Installation and License Contract-Attachment 56
Dallas Independent School District Application
Service Provider Service Agreement for PACE+ SaaS Subscription License – Attachment 56a
Dallas Independent School District EDI IIT
Component Agreement– Attachment 56b (New Contact)
Human Services Consultant Service Agreement-Attachment
57
Little Colorado Behavioral Health Centers (a.k.a.
Little Colorado or LCVHC), Application Service Provider Agreement for ContentDistributor PACE+ SaaS Prescription License-Attachment
58
Community Counseling Centers (CCC) Service
Agreement-Attachment 59
City of Fort Worth Professional Services Agreement-Attachment
60 Contract through September 30th, 2014.
Schedule 1.1.6 Continued
Contracts and Obligations
The Excel Group (a.k.a. Achieve Human Services)
Application Subscription Agreement ContentDistributor PACE+ Subscription License (Self Hosting)-Attachment 61
Corazon Behavioral Health (a.k.a. Corazon)
Application Service Provider and Professional Service Agreement ContentDistributor PACE-Attachment 62
Helping Associates Application Service Provider
Agreement Content Distributor, PACE/PACE+ - Attachment 63
Marc Center Service Agreement (a.k.a. Marc
Community Resources) ContentDistributor PACE+-Attachment 64
Mental Health Mental Retardation of Tarrant
County Professional Services Agreement Support Services for PACE+- Contract through September 30th, 2014-Attachment
65
Navajo Nation Division of Health Services Contract
for PACE+ -Attachment 66
County of Orange NY Agreement for Vendor Services
for PACE+ SOC-Attachment 67
Pete’s Fish and Chips Service Agreement-Attachment
68
B & G Equipment Service Agreement-Attachment
69
San Tan Behavioral Health Services Application
Service Provider Agreement ContentDistributor PACE+ SaaS Subscription License-Attachment 70
N.E.W. Mental Health Connection (a.k.a. NEW
MHC) Application Service Provider Agreement ContentDistributor PACE+/PACE+ System of Care SaaS Subscription License-Attachment
71
Ohio Department of Mental Health and Addiction
Service PACE+ SOC Attachment 77 (NEW CONTRACT)
Joint Partnership Agreement-Proprietary information,
not disclosed.
Webzilla (data center hosting) lease month
to month
Orange County Addendum- Attachment 67a (NEW
CONTRACT)
The Art Station Agreement- Attachment 78 (NEW
CONTRACT)
Santa Fe Youth Services Agreement- Attachment
79 (NEW CONTRACT)
The Parenting Center Agreement- Attachment
80 (NEW CONTRACT)
Schedule 1.1.8
Inventory
None
Schedule 1.1.9
Prepaid Accounts
Seller will provide when closing date is finalized.
Schedule 1.2
Excluded Assets
Accounts Receivable as of closing date:
4-Directions (Nov services - invoice 101705) $1750.00
Dallas ISD (Claims Processing engine -
invoice 101692) $22,000.00
Other:
Video Surveillance System
Kitchen & Conference Room Refrigerators
Portable A/C Unit in Server Room
Water Cooler in Kitchen
Pictures (Lexus Challenge, family, certificates
& diplomas) & personal books in owner's office
Safe & Contents
Computer Rack in Server Room
Sony Laptop PCG-81114L
TechSolution Paper Shredder
Cisco DPC3010 Modem (property of Cox Communication)
Linksys Wireless G Access Point (WAP54G)
White Boards and Screens attached to walls
Vacuum, cleaning supplies and tools
Aiwa Stereo
Keurig Coffee Maker & Carousel & Melitta
Coffee Maker
QuickBooks Software 2012
Filing Cabinets
Samsung microwave
Schedule 1.1.1
Intellectual Property
ContentDistributor
PACE+
PACE+ SOC
Description of important technical know-how
ContentDistributor (CMS), security and workflow
engine
See Schedule 1.1.6 Contracts and Obligation for
Customer Agreement/Licenses
Schedule 4.12
Third Party Consents
Joint Venture Partner owns PACE+/PACE+ SOC
Intellectual Property
Dallas Independent School District Electronic
Medical Records Software Installation and License Contract
Dallas Independent School District Application
Service Provider Service Agreement for PACE+ SaaS Subscription License
County of Orange NY Agreement for Vendor Services
Ohio Department of Mental Health and Addiction
Services (NEW Contract)
Infoscriber (3rd party e-prescription
software) (Netsmart)
Third Party Controls (Telerek, Orion/Oop Factory,
EVO PDF Converter)
Schedule 4.13
Permits; Compliance; Reports; Clearances
State of Arizona, Arizona Department of Revenue
License and Registration-Attachment 35
City of Mesa, Revenue Collection Operations
Licensing Office-Attachment 36
SBA Certificate-Attachment 37
ONC-STCB PACE+ Version 4.1 Product Certification-Attachment
38
Schedule 4.16
Customers and Suppliers
Customers:
Four Directions, LLC (a.k.a.
4 Directions)
Dallas Independent School
District (DISD)
Human Services Consultant
Little Colorado Behavioral
Health Centers (a.k.a. Little Colorado or LCVHC)
Community Counseling Centers
(CCC)
City of Fort Worth (inactive/contract
ended 9/30/2014)
Santa Fe Youth Services
The Excel Group (a.k.a.
Achieve Human Services)
Corazon Behavioral Health
Ohio Department of Mental
Health and Addiction Services
Helping Associates
Marc Center (a.k.a. Marc
Community Resources)
Mental Health Mental Retardation
of Tarrant County (inactive/contract ended 9/30/2014)
Navajo Nation Division
of Health Services
County of Orange NY
Pete’s Fish and Chips
B & G Equipment
San Tan Behavioral Health
Services
The Parenting Center
The Art Station
Hensley
N.E.W. Mental Health Connection
(a.k.a. NEW MHC)
Schedule 4.16 Continued
Customers and Suppliers
Suppliers:
Webzilla (a.k.a. 1-800
hosting)
Cortex
Cox Communications
Integra
Aetna Small Business Insurance/BofA
HSA
Digium
Google Adword/Gmail
Payroll Experts
Hartford Insurance
Verizon Wireless
Atlassian JIRA
Telerik Software Controls
Orion Systems EDI Software
EVO PDF Converter
John Hopkins (JL Hopkins,
LLC)(building rent)
KineticD – Acpana
Business Systems
Hoffmann Cleaning Services
(Building)
Federal Express
Dun & Bradstreet Monitoring
Gov Directions (Government
RFP monitoring)
Epazz (PK) (USOTC:EPAZ)
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