UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014 |
[_] |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
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
Drive. Suite 1320
Chicago, IL 60606
(Address of principal executive offices)
(312) 955-8161
(Registrant's telephone number)
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 Web site, 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 whether the registrant is a large accelerated
filer, and 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 number of shares of the issuer’s Class A common stock
outstanding as of November 19, 2014, was 34,059,195 shares, par value $0.01 per share.
EPAZZ, INC.
FORM 10-Q
Quarterly Period Ended September 30, 2014
INDEX
|
Page |
|
|
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS |
|
PART I. FINANCIAL INFORMATION |
2 |
Item 1. |
Financial Statements |
2 |
|
Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013 |
2 |
|
Statements of Operations for the Three and Nine Months ended September 30, 2014 and 2013 (Unaudited) |
3 |
|
Statements of Cash Flows for the Three and Nine Months ended September 30, 2014 and 2013 (Unaudited) |
4 |
|
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
5 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
53 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
63 |
Item 4. |
Controls and Procedures |
63 |
|
|
|
PART II. OTHER INFORMATION |
64 |
Item 1. |
Legal Proceedings |
64 |
Item 1A. |
Risk Factors |
64 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
64 |
Item 3. |
Defaults Upon Senior Securities |
65 |
Item 4. |
Mine Safety Disclosures |
66 |
Item 5. |
Other Information |
66 |
Item 6. |
Exhibits |
66 |
|
|
|
SIGNATURES |
68 |
PART II –
OTHER INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EPAZZ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
Assets | |
(Unaudited) | | |
| |
Current assets: | |
| | | |
| | |
Cash | |
$ | 71,963 | | |
$ | 208,567 | |
Accounts receivable, net | |
| 256,617 | | |
| 25,248 | |
Other current assets | |
| 131,392 | | |
| 106,114 | |
Total current assets | |
| 459,972 | | |
| 339,929 | |
| |
| | | |
| | |
Property and equipment, net | |
| 115,470 | | |
| 113,410 | |
Intangible assets, net | |
| 451,391 | | |
| 374,162 | |
Goodwill | |
| 1,355,361 | | |
| 255,460 | |
| |
| | | |
| | |
Total assets | |
$ | 2,382,194 | | |
$ | 1,082,961 | |
| |
| | | |
| | |
Liabilities and Stockholders' Equity (Deficit) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Dividends payable | |
$ | – | | |
$ | 11,000 | |
Accounts payable | |
| 339,540 | | |
| 258,163 | |
Accrued expenses | |
| 213,022 | | |
| 45,298 | |
Accrued expenses, related parties | |
| – | | |
| 28,741 | |
Deferred revenue | |
| 592,408 | | |
| 322,130 | |
Lines of credit | |
| 83,260 | | |
| 73,232 | |
Current maturities of capital lease obligations payable | |
| 7,031 | | |
| 17,421 | |
Current maturities of notes payable, related parties ($841,618 currently in default) | |
| 1,186,618 | | |
| 397,368 | |
Convertible debts, net of discounts of $0 and $105,300, respectively ($119,275 currently in default) | |
| 152,275 | | |
| 115,128 | |
Current maturities of long term debts | |
| 809,177 | | |
| 354,786 | |
Total current liabilities | |
| 3,383,331 | | |
| 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 | |
| 911,467 | | |
| 857,143 | |
Total liabilities | |
| 4,294,798 | | |
| 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, 2,943,722,200 shares issued and outstanding | |
| 294,372 | | |
| – | |
Common stock, Class A, $0.0001 par value, 9,000,000,000 shares authorized, 7,213,383,508 and 3,468,358,708 shares issued and outstanding, respectively | |
| 721,338 | | |
| 346,836 | |
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 | |
| 9,290,110 | | |
| 6,429,493 | |
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 | |
| – | | |
| (800,000 | ) |
Accumulated deficit | |
| (12,220,724 | ) | |
| (7,501,994 | ) |
Total stockholders' equity (deficit) | |
| (1,912,604 | ) | |
| (1,524,615 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' equity (deficit) | |
$ | 2,382,194 | | |
$ | 1,082,961 | |
See accompanying notes to financial statements.
EPAZZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
For the Three Months Ended | | |
For the Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 361,150 | | |
$ | 156,750 | | |
$ | 941,227 | | |
$ | 643,879 | |
| |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | |
General and administrative | |
| 113,308 | | |
| 231,705 | | |
| 683,447 | | |
| 519,339 | |
Salaries and wages | |
| 209,667 | | |
| 303,716 | | |
| 2,654,666 | | |
| 2,074,950 | |
Depreciation and amortization | |
| 55,156 | | |
| 60,682 | | |
| 152,711 | | |
| 204,842 | |
Bad debts (recoveries) | |
| 30,813 | | |
| 5,407 | | |
| 25,551 | | |
| (3,333 | ) |
Total operating expenses | |
| 408,944 | | |
| 601,510 | | |
| 3,516,375 | | |
| 2,795,798 | |
| |
| | | |
| | | |
| | | |
| | |
Net operating loss | |
| (47,794 | ) | |
| (444,760 | ) | |
| (2,575,148 | ) | |
| (2,151,919 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| – | | |
| – | | |
| 55 | | |
| – | |
Interest expense | |
| (194,583 | ) | |
| (140,705 | ) | |
| (1,212,360 | ) | |
| (403,663 | ) |
Loss on debt modifications, related parties | |
| – | | |
| – | | |
| (172,864 | ) | |
| (96,032 | ) |
Other Income / (Expense) | |
| 19,251 | | |
| – | | |
| 19,251 | | |
| – | |
Change in derivative liabilities | |
| – | | |
| – | | |
| (777,664 | ) | |
| – | |
Total other income (expense) | |
| (175,332 | ) | |
| (140,705 | ) | |
| (2,143,582 | ) | |
| (499,695 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (223,126 | ) | |
$ | (585,465 | ) | |
$ | (4,718,730 | ) | |
$ | (2,651,614 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding - basic and fully diluted | |
| 7,052,068,854 | | |
| 3,319,614,527 | | |
| 5,563,139,967 | | |
| 2,223,857,269 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss per share - basic and fully diluted | |
$ | (0.00 | ) | |
$ | (0.00 | ) | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
See accompanying notes to financial statements.
EPAZZ, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
| |
For the Nine Months | |
| |
Ended September 30, | |
| |
2014 | | |
2013 | |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (4,718,730 | ) | |
$ | (2,651,614 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Bad debts (recoveries) | |
| 25,551 | | |
| (3,333 | ) |
Depreciation and amortization | |
| 41,452 | | |
| 74,548 | |
Amortization of intangible assets | |
| 111,259 | | |
| 130,294 | |
Amortization of deferred financing costs | |
| 317,789 | | |
| 35,035 | |
Amortization of discounts on convertible debts | |
| 495,683 | | |
| 197,156 | |
Loss on debt modifications, related parties | |
| 172,864 | | |
| 96,032 | |
Loss on default provisions of convertible debt | |
| 77,375 | | |
| – | |
Change in fair market value of derivative liabilities | |
| 777,664 | | |
| – | |
Stock based compensation issued for services | |
| 93,056 | | |
| – | |
Stock based compensation issued for services, related parties | |
| 2,243,402 | | |
| 1,713,150 | |
Decrease (increase) in assets: | |
| | | |
| | |
Accounts receivable | |
| 1,130 | | |
| 26,347 | |
Other current assets | |
| 48,035 | | |
| (4,884 | ) |
Increase (decrease) in liabilities: | |
| | | |
| | |
Accounts payable | |
| (395,307 | ) | |
| 32,176 | |
Accrued expenses | |
| 81,049 | | |
| – | |
Accrued expenses, related parties | |
| 57,450 | | |
| 20,224 | |
Deferred revenues | |
| 270,277 | | |
| (68,940 | ) |
Net cash provided by (used in) operating activities | |
| (300,001 | ) | |
| (403,809 | ) |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Cash acquired in merger | |
| 736 | | |
| – | |
Purchase of equipment | |
| (43,512 | ) | |
| (2,376 | ) |
Acquisition of subsidiaries | |
| (582,945 | ) | |
| – | |
Net cash used in investing activities | |
| (625,721 | ) | |
| (2,376 | ) |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Payments on capital lease obligations payable | |
| (10,392 | ) | |
| (16,308 | ) |
Proceeds from notes payable, related parties | |
| 774,524 | | |
| 427,950 | |
Repayment of notes payable, related parties | |
| (82,879 | ) | |
| (119,167 | ) |
Proceeds from convertible notes | |
| – | | |
| 170,000 | |
Repayment of convertible notes | |
| (1,500 | ) | |
| (60,500 | ) |
Proceeds from long term debts | |
| 582,206 | | |
| 273,935 | |
Repayment of long term debts | |
| (472,841 | ) | |
| (272,741 | ) |
Net cash provided by financing activities | |
| 789,118 | | |
| 403,169 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| (136,604 | ) | |
| (3,016 | ) |
Cash - beginning | |
| 208,567 | | |
| 46,101 | |
Cash - ending | |
$ | 71,963 | | |
$ | 43,085 | |
| |
| | | |
| | |
Supplemental disclosures: | |
| | | |
| | |
Interest paid | |
$ | 187,563 | | |
$ | 156,847 | |
Income taxes paid | |
| – | | |
| – | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Acquisition of subsidiary in exchange for debt | |
$ | 611,988 | | |
$ | – | |
Value of shares issued for conversion of debt | |
$ | 533,360 | | |
$ | 155,823 | |
Value of shares issued for conversion of debt, related parties | |
$ | 112,183 | | |
$ | 173,477 | |
Shares issued for dividend payable | |
$ | 11,000 | | |
$ | – | |
Discount on derivatives | |
$ | 422,240 | | |
$ | 150,624 | |
Beneficial conversion feature | |
$ | 35,028 | | |
$ | – | |
Deferred financing costs | |
$ | 391,102 | | |
$ | 78,076 | |
Value of derivative adjustment due to debt conversions | |
$ | 1,199,904 | | |
$ | – | |
Dividends payable declared | |
$ | – | | |
$ | 18,000 | |
See accompanying notes to financial statements.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation and Consolidation
The interim condensed consolidated financial
statements of Epazz, Inc. (“Epazz” or the “Company”), an Illinois corporation, included herein, presented
in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate
to not make the information presented misleading.
These statements reflect all adjustments, which
in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise disclosed,
all such adjustments are of a normal recurring nature. It is suggested that these interim condensed financial statements be read
in conjunction with the financial statements of the Company for the year ended December 31, 2013 and notes thereto included in
the Company's 10-K annual report. The Company follows the same accounting policies in the preparation of interim reports.
Principles of Consolidation
The accompanying condensed 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 |
Terran Power, Inc.(5) |
|
Illinois |
|
Subsidiary |
|
Terran |
Telecorp Products, Inc. |
|
Michigan |
|
Subsidiary |
|
Telecorp |
Jadian, Inc. |
|
Illinois |
|
Subsidiary |
|
Jadian |
FlexFridge, Inc.(3) |
|
Illinois |
|
Subsidiary(4) |
|
FlexFridge |
Strantin, Inc. |
|
Illinois |
|
Subsidiary |
|
Strand |
______________
(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, 2013.
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.
(5) Entity formed for
prospective purposes, but has not incurred any income or expenses to date.
The condensed 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, Terran, Telecorp, Jadian, FlexFridge and Strantin 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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. The Company had debt instruments that required fair value measurement
on a recurring basis.
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. No material impairments of intangible assets have been identified during
any of the periods presented. Amortization expense on intangible assets totaled $111,259 and $130,294 for the nine months ended
September 30, 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 ended December 31, 2013 resulted in no impairment losses.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Derivative Liability
The Company evaluates its convertible instruments,
options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives
to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment
is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event
that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income
(expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date
and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject
to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification
date. We analyzed the derivative financial instruments (the Convertible Note and tainted Warrant), in accordance with ASC 815.
The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s
own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under
the accrual method. The classification of a non-derivative instrument that falls within the scope of ASC 815-40-05 “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on
whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s
own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining
whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument's contingent exercise
provisions, if any, must be evaluated, followed by an evaluation of the instrument's settlement provisions. The Company utilized
multinomial lattice models that value the derivative liability within the notes based on a probability weighted discounted cash
flow model. The Company utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the
amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing
parties, that is, other than in a forced or liquidation sale.
Basic and Diluted Net Earnings per Share
Basic net earnings (loss) per common share
is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be
issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common shares
outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. There were no outstanding potential
common stock equivalents for the periods presented. As such, basic and diluted earnings per share resulted in the same figure for
the nine months ending September 30, 2014 and 2013.
Stock-Based Compensation
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 $2,243,402
and $1,713,150 for the nine months ended September 30, 2014 and 2013, respectively.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
The Company designs and sells various software
programs to business enterprises including, among others, hospitals, pet stores, 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, 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.
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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Note 2 – Going Concern
As shown in the accompanying condensed consolidated financial statements, the Company has incurred recurring
losses from operations resulting in an accumulated deficit of $12,220,724, and as of September 30, 2014, the Company’s current
liabilities exceeded its current assets by $3,383,331 and its total liabilities exceeded its total assets by $1,912,604. These
factors raise substantial doubt about the Company’s ability to continue as a going concern.
The financial statements do not include any
adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern.
These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classifications of liabilities that might be necessary should the Company 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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 – Mergers and Acquisitions
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 | |
Goodwill | |
| 206,321 | |
Total fair value of assets assumed | |
| 221,638 | |
Consideration paid in excess of fair value (Goodwill)(3) | |
$ | – | |
______________
(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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months ended
September 30, |
|
|
|
2014 |
|
|
2013 |
|
Revenue: |
|
$ |
1,039,287 |
|
|
$ |
990,049 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
3,620,536 |
|
|
|
2,687,554 |
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) |
|
|
(2,581,249 |
) |
|
|
(1,697,505 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
(2,141,440 |
) |
|
|
(366,946 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,472,880 |
) |
|
$ |
(2,064,451 |
) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic and fully diluted |
|
|
5,563,139,967 |
|
|
|
1,666,897,778 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic and fully diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months ended
September 30, |
|
|
|
2014 |
|
|
2013 |
|
Revenue: |
|
$ |
1,112,167 |
|
|
$ |
1,274,813 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
3,658,633 |
|
|
|
2,941,345 |
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) |
|
|
(2,546,466 |
) |
|
|
(1,666,532 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
(2,153,780 |
) |
|
|
(368,430 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,700,246 |
) |
|
$ |
(2,034,962 |
) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic and fully diluted |
|
|
4,783,826,881 |
|
|
|
1,666,897,778 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic and fully diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months ended
September 30, |
|
|
|
2014 |
|
|
2013 |
|
Revenue: |
|
$ |
1,029,930 |
|
|
$ |
1,311,150 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
3,615,415 |
|
|
|
2,883,930 |
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) |
|
|
(2,585,485 |
) |
|
|
(1,572,780 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
(2,228,419 |
) |
|
|
(367,836 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,813,904 |
) |
|
$ |
(1,940,616 |
) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic and fully diluted |
|
|
5,563,139,967 |
|
|
|
1,666,897,778 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic and fully diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Related Parties
Debt Financings
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 13
below.
In addition to the debts disclosed in Note
13, we had a convertible note with a related party that is disclosed in Note 14 as follows:
|
|
September 30,
2014 |
|
|
December 31,
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. |
|
$ |
– |
|
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
Total convertible debts, related parties |
|
|
– |
|
|
|
46,449 |
|
Less: unamortized discount on beneficial conversion feature |
|
|
– |
|
|
|
(5,653 |
) |
Convertible debts |
|
|
– |
|
|
|
40,796 |
|
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 110,000,000 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 600,000,000 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 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 $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 1,821,052,632 shares, consisting
of 1,730,526,316 previously issued and unvested shares of Class A Common Stock and 90,526,316 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 13,669,568 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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
54,000,000 previously issued and unvested shares of Class A Common Stock and 6,000,000 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.
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.
Debt Conversions into Class A Common Stock
– Related Parties
On April 2, 2014, the Company issued 250,000,000
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 125,000,000
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 200,000,000
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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 22, 2014, the Company issued 150,000,000
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 334,333,745
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.
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.
Subscriptions Payable Issued for Shares
of Class A Common Stock Granted for Services
On April 23, 2014, the Company granted 3,500,000
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 10,000,000
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 10,000,000
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 28, 2014, the Company granted 3,250,000
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 2,125,000
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 July 30, 2014 the Company issued 277,777,778
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 3,500,000
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 August 29, 2014 the Company issued 10,000,000
shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost
that was previously granted on April 24, 2014 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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 29, 2014 the Company issued 10,000,000
shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost
that was previously granted on May 7, 2014 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.
On August 29, 2014 the Company issued 3,250,000
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 May 28, 2014 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.
On August 29, 2014 the Company issued 2,125,000
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 June 12, 2014 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.
Issuance of Dividends Paid via Class A Common
Stock in Lieu of Cash
On September 11, 2014 the Company issued a
total of 110,000,000 shares of Class A Common Stock amongst three related party Convertible Series B Preferred Stockholders pursuant
to a 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.
Subscriptions Payable Issued for Shares
of Convertible Series C Preferred Stock Granted for Services
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 $6,465 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
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 $1,193 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 $1,942
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 $2,928
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 $2,928 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 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. 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 $2,390 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 75,000,000 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 3,040,823,600 shares of Class A Common Stock was issued, in addition to the 75,000,000 settlement shares, in complete
satisfaction of the debt, as disclosed in detail below.
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 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.
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.
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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2014 and December 31,
2013:
|
|
Fair Value Measurements at September 30, 2014 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
71,963 |
|
|
$ |
– |
|
|
$ |
– |
|
Intangible assets |
|
|
– |
|
|
|
– |
|
|
|
451,391 |
|
Goodwill |
|
|
– |
|
|
|
– |
|
|
|
1,355,361 |
|
Total assets |
|
|
71,963 |
|
|
|
– |
|
|
|
1,806,752 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
|
– |
|
|
|
83,260 |
|
|
|
– |
|
Capital leases |
|
|
– |
|
|
|
7,031 |
|
|
|
– |
|
Notes payable, related parties |
|
|
– |
|
|
|
1,186,618 |
|
|
|
– |
|
Convertible debts, net of discount of $0.00 |
|
|
– |
|
|
|
152,275 |
|
|
|
– |
|
Long term debts, including current maturities |
|
|
– |
|
|
|
911,467 |
|
|
|
– |
|
Total Liabilities |
|
|
– |
|
|
|
2,340,651 |
|
|
|
– |
|
|
|
$ |
71,963 |
|
|
$ |
(2,340,651 |
) |
|
$ |
1,806,752 |
|
|
|
Fair Value Measurements at December 31, 2013 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
208,567 |
|
|
$ |
– |
|
|
$ |
– |
|
Intangible assets |
|
|
– |
|
|
|
– |
|
|
|
374,162 |
|
Goodwill |
|
|
– |
|
|
|
– |
|
|
|
255,460 |
|
Total assets |
|
|
208,567 |
|
|
|
– |
|
|
|
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 $109,583 |
|
|
– |
|
|
|
157,294 |
|
|
|
– |
|
Total Liabilities |
|
|
– |
|
|
|
1,942,244 |
|
|
|
– |
|
|
|
$ |
208,567 |
|
|
$ |
(1,942,244 |
) |
|
$ |
629,622 |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the nine months ended September 30, 2014 and the year ended December
31, 2013.
Level 2 liabilities consist of various debt
arrangements, and Level 3 assets consist of intangible assets and goodwill. Fair value adjustments related to the measurement of
intangible assets of $-0- and $276,282 were necessary during the nine months ended September 30, 2014 and December 31,
2013, respectively.
Note 7 – Other Current Assets
As of September 30, 2014 and December 31,
2013, other current assets included the following:
|
|
September 30, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
Deferred financing costs |
|
$ |
118,299 |
|
|
$ |
44,986 |
|
Other receivable |
|
|
3,215 |
|
|
|
51,250 |
|
Security deposits |
|
|
9,878 |
|
|
|
9,878 |
|
|
|
$ |
131,392 |
|
|
$ |
106,114 |
|
The Company recognized $317,789 and $35,035
of amortization expense related to the deferred financing costs during the nine months ended September 30, 2014 and 2013, respectively.
Note 8 – Property and Equipment
Property and Equipment consists of the following
at September 30, 2014 and December 31, 2013, respectively:
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
Furniture and fixtures | |
$ | 23,279 | | |
$ | 2,187 | |
Computers and equipment | |
| 182,074 | | |
| 325,105 | |
Software | |
| 15,660 | | |
| 67,986 | |
Assets held under capital leases | |
| 17,855 | | |
| 134,800 | |
| |
| 238,868 | | |
| 530,078 | |
Less accumulated depreciation and amortization | |
| (123,398 | ) | |
| (416,668 | ) |
| |
$ | 115,470 | | |
$ | 113,410 | |
Depreciation expense totaled $41,452 and $74,548
for the nine months ended September 30, 2014 and 2013, respectively.
A total of $334,722 of fully depreciated assets
no longer in service was disposed of on March 31, 2014. No proceeds were received on disposal, resulting in no gain or loss on
disposal during the nine months ending September 30, 2014.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 – Intangible Assets
Intangible assets consisted of the following at September 30, 2014
and December 31, 2013, respectively:
|
|
Useful |
|
|
September 30, |
|
|
December 31, |
|
Description |
|
Life |
|
|
2014 |
|
|
2013 |
|
Technology-based intangible assets - IntelliSys |
|
|
5 Years |
|
|
$ |
200,000 |
|
|
$ |
200,000 |
|
Technology-based intangible assets - K9 Bytes |
|
|
5 Years |
|
|
|
42,000 |
|
|
|
42,000 |
|
Technology-based intangible assets – MS Health |
|
|
5 Years |
|
|
|
124,000 |
|
|
|
124,000 |
|
Technology-based intangible assets – Telecorp |
|
|
5 Years |
|
|
|
72,490 |
|
|
|
– |
|
Technology-based intangible assets – Cynergy |
|
|
5 Years |
|
|
|
8,035 |
|
|
|
– |
|
Technology-based intangible assets – Jadian |
|
|
5 Years |
|
|
|
37,180 |
|
|
|
– |
|
Technology-based intangible assets – Strantin |
|
|
5 Years |
|
|
|
9,447 |
|
|
|
– |
|
Contracts – MS Health |
|
|
6 Years |
|
|
|
258,000 |
|
|
|
258,000 |
|
Trade name - K9 Bytes |
|
|
5 Years |
|
|
|
22,000 |
|
|
|
22,000 |
|
Trade name - Telecorp |
|
|
5 Years |
|
|
|
29,390 |
|
|
|
– |
|
Trade name - Cynergy |
|
|
5 Years |
|
|
|
1,826 |
|
|
|
– |
|
Trade name - Jadian |
|
|
5 Years |
|
|
|
24,941 |
|
|
|
– |
|
Trade name - Strand |
|
|
5 Years |
|
|
|
5,870 |
|
|
|
|
|
Other intangible assets – MS Health |
|
|
2 Years |
|
|
|
18,000 |
|
|
|
18,000 |
|
Other intangible assets - K9 Bytes |
|
|
2 Years |
|
|
|
26,000 |
|
|
|
26,000 |
|
Other intangible assets – Telecorp |
|
|
2 Years |
|
|
|
13,750 |
|
|
|
– |
|
Other intangible assets - Jadian |
|
|
2 Years |
|
|
|
15,417 |
|
|
|
– |
|
Total intangible assets |
|
|
|
|
|
|
879,179 |
|
|
|
690,000 |
|
Less: accumulated amortization |
|
|
|
|
|
|
(427,788 |
) |
|
|
(315,838 |
) |
Intangible assets, net |
|
|
|
|
|
$ |
451,391 |
|
|
$ |
374,162 |
|
Amortization expense on intangible assets
totaled $111,259 and $130,294 for the nine months ended September 30, 2014 and 2013, respectively.
Note 10 – Convertible Settlement
On February 14, 2014, the Circuit Court of
the Twelfth Judicial Circuit in and for Sarasota County, Florida approved the February 12, 2014, Settlement Agreement, entered
into between the Company and IBC Funds, LLC (“IBC”) whereby a total of $314,021 of outstanding debts that were acquired
by IBC from various creditors, including $288,071 of outstanding debts previously owed to related parties was sold and assigned
to IBC. In satisfaction of the outstanding debts acquired by IBC, we agreed to issue IBC shares of our common stock at a 50% discount
to the lowest trading price during the fifteen (15) trading days preceding the share request (“Settlement Shares”)
in various tranches in an aggregate amount equal to the claim amount of $314,021 until such time as the debts were satisfied. A
total of 3,040,823,600 Settlement Shares were subsequently issued pursuant to the Settlement Agreement, in addition to 75,000,000
shares that were issued in consideration pursuant to the settlement agreement. IBC is precluded from owning more than 9.99% of
the Company’s common stock in aggregate at any given time. The net proceeds, less the 50% discount retained by IBC, received
from the sale of the Settlement Shares in the market were used to satisfy the Company’s outstanding obligations that were
acquired by IBC. The convertible settlements liability was fully converted as of June 30, 2014.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 – Lines of Credit
Lines of credit consisted of the following
at September 30, 2014 and December 31, 2013, respectively:
|
|
September 30, |
|
|
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. |
|
$ |
47,685 |
|
|
$ |
49,508 |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
15,290 |
|
|
|
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. |
|
|
– |
|
|
|
5,637 |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
20,285 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
Total line of credit |
|
|
83,260 |
|
|
|
73,232 |
|
Less: current portion |
|
|
(83,260 |
) |
|
|
(73,232 |
) |
Line of credit, less current portion |
|
$ |
– |
|
|
$ |
– |
|
Note 12 – 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 46 months.
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 September 30, 2014 and December 31,
2013, respectively. Accumulated amortization of the leased equipment was $2,678 and $124,087 at September 30, 2014 and December
31, 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 September 30, 2014, are as follows:
Nine Months Ending September 30, |
|
Amount |
|
2015 |
|
$ |
7,196 |
|
2016 |
|
|
428 |
|
Total minimum payments |
|
$ |
7,624 |
|
Less: amount representing interest |
|
|
(593 |
) |
Present value of net minimum lease payments |
|
|
7,031 |
|
Less: Current maturities of capital lease obligations |
|
|
(7,031 |
) |
Long-term capital lease obligations |
|
|
– |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 – Notes Payable, Related Parties
Notes payable, related parties consist of
the following at September 30, 2014 and December 31, 2013, respectively:
|
|
September 30, |
|
|
December 31, |
|
|
|
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 nine months ending September 30, 2014 and the year ending December 31, 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 |
|
|
|
– |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
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 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
– |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
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 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
– |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
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 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
– |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
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 |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
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 |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
Total notes payable, related parties |
|
|
1,186,618 |
|
|
|
482,368 |
|
Less: current portion |
|
|
(1,186,618 |
) |
|
|
(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 $39,766 and $11,418 during the nine months ended September 30, 2014 and 2013, respectively.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 14 – Convertible Debts
Convertible debts consist of the following
at September 30, 2014 and December 31, 2013, respectively:
| |
September 30, | | |
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. | |
| – | | |
| – | |
| |
| | | |
| | |
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. | |
| 33,000 | | |
| 33,000 | |
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. | |
| 119,275 | | |
| 56,900 | |
| |
| | | |
| | |
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 | |
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 |
|
Total convertible debts |
|
|
152,275 |
|
|
|
266,877 |
|
Less: unamortized discount on beneficial conversion feature |
|
|
– |
|
|
|
(103,188 |
) |
Less: unamortized OID |
|
|
– |
|
|
|
(6,395 |
) |
Convertible debts |
|
|
152,275 |
|
|
|
157,294 |
|
Less: current maturities of convertible debts |
|
|
(152,275 |
) |
|
|
(115,128 |
) |
Long term convertible debts |
|
$ |
– |
|
|
$ |
42,166 |
|
The Company recognized
interest expense in the amount of $43,648 and $30,867 for the nine months ended September 30, 2014 and 2013, respectively related
to convertible debts.
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 $-0- and $195,652 during the nine months ended September 30, 2014 and the year ended
December 31, 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, consisting of total
original face values of $440,849 from Star Financial, $95,500 from Asher Enterprises, $33,000 from JMJ Financial, Inc., and $56,900
from St. George Investments 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 of
9.99% of the issued and outstanding shares of Epazz.
During the nine months ended September
30, 2014 and 2013, the Company recorded debt amortization expense in the amount of $66,725 and $128,612, respectively, attributed
to the aforementioned debt discount, including $355,037 and $197,156 of amortization on Original Issue Discounts during the nine
months ended September 30, 2014 and 2013, respectively.
During the nine months ended September
30, 2014, the Company issued a total of 4,688,760,477 shares pursuant to debt conversions in settlement of $533,360, consisting
of $531,240 of outstanding principal and $2,120 of unpaid interest. In addition, the Company issued a total of 1,059,333,745 shares
pursuant to related party debt conversions in settlement of $112,183, consisting of $97,449 of outstanding principal, $12,234 of
unpaid interest and $2,500 of liquidated damages during the nine months ended September 30, 2014. The principal and interest was
converted in accordance with the conversion terms, therefore no gain or loss has been recognized.
During year ended December 31, 2013, the
Company issued a total of 462,766,951 shares pursuant to debt conversions in settlement of $343,540, consisting of $336,094 of
outstanding principal and $7,446 of unpaid interest, including 220,000,000 shares pursuant to debt conversion in settlement of
$144,400 of outstanding principal owed to a related party (“Star Convertible Note”) and 46,856,526 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 14,239,500 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $16,920 and $-0- was amortized during
the six months ended June 30, 2014 and 2013, respectively.
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 $-0- was amortized during the nine
months ended September 30, 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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $24,176 was amortized
during the nine months ended September 30, 2014 and 2013, respectively.
JMJ Financial,
Inc. Convertible Note
On June 12, 2013,
we entered into a Securities Purchase Agreement with JMJ Financial, Inc., (“JMJ”) pursuant to which we sold to JMJ
a 12% Convertible Promissory Note in the original principal amount of $33,000. The First JMJ Note had a maturity date of June 11, 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 First JMJ Note were restricted securities
as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First 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.
The Company evaluated
the First 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 $0.00518
below the market price on June 12, 2013 of $0.0017 provided a value of $33,000, of which $-0- and $9,581 was amortized during the
nine months ended September 30, 2014 and 2013, respectively.
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.
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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On September 24, 2014, St. George Investments,
LLC (“note holder”) presented the Company with a notice of default. In accordance with the default provisions, the
note began to accrue interest at twenty two percent (22%) per annum effective March 31, 2014. The unsecured convertible promissory
note with $41,900 of principal outstanding (“First St. George Note”) matured on June 5, 2014 and was in default effective
April 1, 2014 pursuant to Section 3.2 of the Note. In accordance with the default provisions, the outstanding balance prior to
the occurrence of default shall increase to 150% of the outstanding balance of principal and interest a maximum of two times. In
addition, the note holder was precluded from clearing the conversion of 125,000,000 shares of common stock received pursuant to
a March 7, 2014 conversion of $15,000 of outstanding principal until September 10, 2014 (“Late Clearing Adjustment Amount”).
Pursuant to Section 1.6(g) of the Note, the note holder was entitled to increase the outstanding balance of the Note by the Late
Clearing Adjustment Amount of $25,000. As a result of the Late Clearing Adjustment Amount and Note defaults on April 1, 2014
and June 5, 2014, the principal and interest on the First St. George Note has increased to $136,738 as of September 24, 2014.
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 $-0- was amortized
during the nine months ended September 30, 2014 and 2013, respectively.
Derivative Liabilities
In accordance with ASC 815-15, the Company
determined that the variable conversion feature and shares to be issued with respect to the Magna Group, LLC convertible notes
and the convertible debt with IBC Funds, LLC represented embedded derivative features, and these are shown as derivative liabilities
on the balance sheet. The Company calculated the fair value of the compound embedded derivatives associated with the convertible
debentures utilizing a lattice model.
The aforementioned accounting treatment
resulted in a total debt discount equal to $422,240 and $-0- during the nine months ended September 30, 2014 and the year ended
December 31, 2013, respectively. The discount was amortized using the effective interest method from the dates of issuance until
the stated redemption date of the debts, or the accelerated dates of conversion. A total of $422,240 and $-0- was amortized during
the nine months ended September 30, 2014 and 2013, respectively.
Note 15 – Long Term Debts
Long term debts consist of the following
at September 30, 2014 and December 31, 2013, respectively:
| |
| September 30, | | |
| 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 amend 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. | |
| 28,099 | | |
| – | |
| |
| | | |
| | |
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. | |
| 31,380 | | |
| 4,202 | |
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. | |
| 89,963 | | |
| – | |
| |
| | | |
| | |
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. | |
| 77,242 | | |
| – | |
| |
| | | |
| | |
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, 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. | |
| 90,015 | | |
| – | |
| |
| | | |
| | |
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. | |
| – | | |
| – | |
| |
| | | |
| | |
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. | |
| 199,836 | | |
| – | |
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. |
|
|
31,720 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
48,297 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
20,253 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
21,611 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
21,688 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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”). |
|
|
10,212 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
104,525 |
|
|
|
98,984 |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. |
|
|
34,869 |
|
|
|
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. |
|
|
26,776 |
|
|
|
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. |
|
|
27,483 |
|
|
|
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. |
|
|
23,552 |
|
|
|
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. |
|
|
27,742 |
|
|
|
40,108 |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. |
|
|
6,686 |
|
|
|
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. |
|
|
45,473 |
|
|
|
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. |
|
|
292,308 |
|
|
|
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. |
|
|
101,348 |
|
|
|
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. |
|
|
0 |
|
|
|
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 |
|
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. |
|
|
45,283 |
|
|
|
60,573 |
|
|
|
|
|
|
|
|
|
|
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. |
|
|
124,128 |
|
|
|
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. |
|
|
181,700 |
|
|
|
197,062 |
|
Total long term debt |
|
|
1,720,644 |
|
|
|
1,211,929 |
|
Less: current portion |
|
|
(809,177 |
) |
|
|
(354,786 |
) |
Long term debt, less current portion |
|
$ |
911,467 |
|
|
$ |
857,143 |
|
The Company recorded interest expense on
long term debts, credit lines and capital leases in the amount of $196,813 and $100,160 for the nine months ended September 30,
2014 and 2013, respectively.
Note 16 – Derivative Liabilities
As discussed in Note 14 under Convertible
Debts, the Company issued convertible debts with variable conversion provisions. The conversion terms of the convertible debts
are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common
stock to be issued is based on the future price of the Company’s common stock. As such, the number of shares of common stock
issuable upon conversion of the debts is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable
conversion debts and shares to be issued were recorded as derivative liabilities on the issuance date.
The fair values of the Company’s
derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date, using a lattice
model. The Company recorded current derivative liabilities of $-0- and $-0- at September 30, 2014 and December 31, 2013,
respectively. The change in fair value of the derivative liabilities resulted in a net loss of $777,664 and $-0- for the nine months
ended September 30, 2014 and 2013, respectively, which has been reported as other income (expense) in the statements of operations.
The net loss of $777,664 for the nine months ended September 30, 2014 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.
The aforementioned accounting treatment
resulted in a total debt discount equal to $422,240 and $-0- during the nine months ended September 30, 2014 and the year ended
December 31, 2013, respectively. The discount was amortized using the effective interest method from the dates of issuance until
the stated redemption date of the debts, or the accelerated dates of conversion. A total of $422,240 and $-0- was amortized during
the nine months ended September 30, 2014 and 2013, respectively.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following presents the derivative liability
value by instrument type at September 30, 2014 and December 31, 2013, respectively:
| |
| September 30, 2014 | | |
| December 31, 2013 | |
Convertible notes, Magna Group | |
$ | – | | |
$ | – | |
Convertible debt, IBC Funds, LLC | |
| – | | |
| – | |
| |
$ | – | | |
$ | – | |
The following is a summary of changes in
the fair market value of the derivative liability during the nine months ended September 30, 2014 and the years ended December
31, 2013, respectively:
| |
Derivative Liability Total | |
Balance, December 31, 2012 | |
$ | – | |
Increase in derivative value due to issuances of convertible promissory notes, Magna Group | |
| – | |
Increase in derivative value due to issuances of debt, IBC Funds, LLC | |
| – | |
Change in fair market value of derivative liabilities due to the mark to market adjustment | |
| – | |
Debt conversions | |
| – | |
Balance, December 31, 2013 | |
$ | – | |
Increase in derivative value due to issuances of convertible promissory notes, Magna Group | |
| 124,323 | |
Increase in derivative value due to issuances of debt, IBC Funds, LLC | |
| 1,134,927 | |
Change in fair market value of derivative liabilities due to the mark to market adjustment | |
| (59,346 | ) |
Debt conversions | |
| (1,199,904 | ) |
Balance, September 30, 2014 | |
$ | – | |
Key inputs and assumptions
used to value the convertible debentures and warrants issued during the nine months ended September 30, 2014:
|
· |
Stock prices on all measurement dates were based on the fair market value and would fluctuate with projected volatility. |
|
· |
The holders of the securities would convert monthly to the ownership limit starting at 4.99% increasing by 10% per month. |
|
· |
The holders would automatically convert the note at the maximum of 3 times the conversion price if the Company was not in default. |
|
· |
The monthly trading volume would reflect historical averages and would increase at 1% per month. |
|
· |
The Company would redeem the notes based on availability of alternative financing, increasing 2% monthly to a maximum of 10%. |
|
· |
The holder would automatically convert the note at maturity if the registration was effective and the Company was not in default. |
|
· |
The computed volatility was projected based on historical volatility. |
|
· |
The expected risk-free interest rate is based on the yield of the 1-year U.S. Treasury note. |
|
· |
The estimated value represents the average or expected value from the Monte Carlo simulation. The simulation was specified to run until the expected value was within 1.0 percent of the true value using a 95% confidence interval. A total of 8,020,000 trials were necessary to reach the specified level of precision. |
Note 17 – Changes in Stockholder’s
Equity (Deficit)
On January 14, 2014 and May 17, 2013, 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 third class of preferred stock, Series C 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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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.
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.
Shares of Convertible Series C Preferred
Stock Issued for Services to Related Parties
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 in consideration for a $43,000 short term promissory note. The shares were granted on January 15, 2014.
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 in consideration for a $13,000 short term promissory note. The shares were granted on February 8, 2014.
The total fair value of the common stock was $1,193 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 in consideration for a $22,000 short term promissory note. The shares were granted on March 26, 2014. 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 in consideration for a $37,500 short term promissory note. The shares were granted on March 26, 2014. 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 in consideration for a $25,000 short term promissory note. The shares were granted on March 26, 2014.
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 in consideration for a $18,750 short term promissory note. The shares were granted on March 28, 2014. 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 in consideration for a $25,000 short term promissory note. The shares were granted on March
28, 2014. The total fair value of the common stock was $2,390 based on an independent valuation on the date of grant.
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 600,000,000
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
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 $9,562 based on an independent valuation on the date of grant.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 1,821,052,632 shares, consisting
of 1,730,526,316 previously issued and unvested shares of Class A Common Stock and 90,526,316 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 13,669,568 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 $5,307 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
54,000,000 previously issued and unvested shares of Class A Common Stock and 6,000,000 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.
Subscriptions Payable Issued for Shares
of Convertible Series C Preferred Stock Granted for Services 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 $6,465 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7,
2014.
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 $1,193 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 $1,942
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 $2,928 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $2,928 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 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. 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 $2,390 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7,
2014.
Common Stock, Class A
The Company has 9 billion authorized shares
of $0.0001 par value Class A Common Stock.
Class A Common
Stock Issuances:
Shares of Class A Common Stock Issued for
Loan Origination Fees to Related Parties
On August 29, 2014, the Company issued 2,125,000
shares of Class A Common Stock to Star Financial Corporation, a related party, as a loan origination cost in consideration for
a $21,250 short term promissory note. The total fair value of the common stock was $425 based on the closing price of the Company’s
common stock on the date of grant.
On August 29, 2014, the Company issued 3,250,000
shares of Class A Common Stock to Star Financial Corporation, 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.
On August 29, 2014, the Company issued 10,000,000
shares of Class A Common Stock to GG Mars, Inc., a related party, as a loan origination cost in consideration for a $150,000 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.
On August 29, 2014, the Company issued 10,000,000
shares of Class A Common Stock to GG Mars, Inc., a related party, as a loan origination cost in consideration for a $125,000 short
term promissory note. The total fair value of the common stock was $2000 based on the closing price of the Company’s common
stock on the date of grant.
On August 29, 2014, the Company issued 3,500,000
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 $25,000 short term promissory note. The total fair value of the common stock was $700 based
on the closing price of the Company’s common stock on the date of grant.
Shares of Class A Common Stock Issued for
Services to Related Parties
On July 30, 2014 the Company issued 277,777,778
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.
Debt Conversions into Class A Common
Stock – Related Parties
On April 2, 2014, the Company issued 250,000,000
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 125,000,000
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 200,000,000
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 150,000,000
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 334,333,745
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.
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 75,000,000 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 3,040,823,600 shares of Class A Common Stock was issued, in addition to the 75,000,000 settlement shares, in complete
satisfaction of the debt, as disclosed in detail below.
On February 14, 2014, the Company issued
75,000,000 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On February 14, 2014, the Company issued
25,000,000 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
100,000,000 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
100,000,000 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
150,000,000 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
142,900,000 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 150,000,000
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 150,000,000
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 101,900,000
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 200,000,000
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 200,000,000
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 2, 2014, the Company issued 151,900,000
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 200,000,000
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 200,000,000
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 16, 2014, the Company issued 200,000,000
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 200,000,000
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On April 28, 2014, the Company issued 200,000,000
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 200,000,000
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 6, 2014, the Company issued 200,000,000
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 169,123,600
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.
Debt Conversions into Class A Common
Stock – Magna Group, LLC
On January 7, 2014, the Company issued
25,140,000 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
25,000,000 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
66,666,667 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
100,000,000 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
103,273,067 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
133,333,333 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 180,000,000
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 197,000,000
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.
Debt Conversions into Class A Common
Stock – Asher Enterprises
On March 3, 2014, the Company issued 150,000,000
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 200,857,143
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.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 25, 2014, the Company issued 341,666,667
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.
Debt Conversions into Class A Common
Stock – St. George Investments, LLC
On March 7, 2014, the Company issued 125,000,000
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.
Subscriptions Payable Issued for Shares
of Class A Common Stock Granted for Services
On April 23, 2014, the Company granted
3,500,000 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
10,000,000 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 10,000,000
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 28, 2014, the Company granted 3,250,000
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 2,125,000
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 July 30, 2014 the Company issued 277,777,778
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.
Convertible
Common Stock, Class B
The Company has 60,000,000 authorized shares
of $0.0001 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 1:1 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.
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.
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 110,000,000 shares of Class A Common Stock in lieu of cash.
EPAZZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 18 – Subsequent Events
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. Following
the reverse stock split, the Company has 33,621,390 shares of common stock issued and outstanding and 100,000,000 shares of Class
A common stock authorized. The Company’s new CUSIP number is 29413V 309.
Forbearance Agreement
In November 2014, Epazz, Inc’s (the
“Company’s”) signed a forbearance agreement with St. George Investments, LLC, which changed the outstanding balance
to $75,000 with interest accruing at the rate of 8% per annum, compounding daily, based on a 360-day year, commencing on the date.
The Company has the right to repay the note at any time.
Debt Conversions into Class A Common
Stock
On November 3, 2014, the Company issued
1,500,000,000 pre-reverse split shares of Class A Common Stock pursuant to the conversion of $5,994 of convertible debt held by
JMJ Financial, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On November 3, 2014, the Company issued 350,000,000
pre-reverse split shares of Class A Common Stock pursuant to the conversion of $1,399 of convertible debt held by JMJ Financial,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On November 10, 2014, the Company issued 2,272,730,000 pre-reverse
split 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.
Issuances of Class A Common Stock for
Stock Class Conversion
On October 10, 2014 the Company issued 30,000,000
post reverse split shares of Class A Common to our CEO from a conversion notice from Preferred C.
On October 10, 2014 the Company issued 1,500,000
post reverse split 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.
On October 10, 2014 the Company issued 1,400,000
post reverse split 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.
Debt Financing, Related Parties,
Originated November 10, 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, matures on February 15, 2015. The note
also carried a liquidated damages fee of $1,000 upon default.
On November 10, 2014 the Company
issued 250,000,000 pre reverse split 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 $5,000 based on the closing price of the Company’s
common stock on the date of grant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
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 PROVIDED BY LAW. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO September 30, 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. (“PRM”), AN ILLINOIS CORPORATION, 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, INC., AN ILLINOIS CORPORATION (“STRAND”) AND FLEXFRIDGE,
INC., AN ILLINOIS CORPORATION (“FLEXFRIDGE”), UNLESS OTHERWISE STATED, OR THE CONTEXT SUGGESTS OTHERWISE.
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 acquired
Desk Flex, Inc., an Illinois corporation (“DFI”), and Professional Resource Management, Inc., an Illinois corporation
(“PRMI”).
Professional Resource Management, Inc. and Desk Flex, Inc.
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 Resources Management, Inc. (“PRMI”). The transfer was executed in an effort by Mr. Goes to
better promote the Desk/Flex product.
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.
Autohire Software
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 and the intellectual property of Igenti associated therewith (the “AutoHire
Software”). The AutoHire system provides a tool to power career centers, post job ads to sites and job boards, and to collect
resumes online. The online processes supported by the system provide the mechanism to comply with the record keeping requirements
of Title VII of the Civil Rights Act of 1964, which apply to organizations employing fifteen (15) or more persons.
IntelliSys, Inc.
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. The IntelliSys Purchase Agreement closed on March
31, 2011 (“Closing”). As a result of the Closing, IntelliSys became a wholly-owned subsidiary of the Company. 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, Inc.
On October 26, 2011, we, through a newly-formed
wholly-owned Illinois subsidiary, K9 Bytes, Inc. (“K9 Sub”), 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, we purchased all of K9 Bytes assets, including all of its intellectual property, its business trade name, website (k9bytessoftware.com),
furniture, fixtures, equipment and inventory, accounts receivable and goodwill.
MS Health, Inc.
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.
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.
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.
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.
Telecorp Products, Inc.
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.
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.
This acquisition was
accounted for as a business combination under the purchase method of accounting. 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,
consisting of $8,035 of software and $1,826 of an intangible asset for the trade name.
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.
Jadian, Inc.
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.
Jadian sells Enterprise Quality Manager (EQ/M)
software. EQ/M is a web-based solution with remote tools that enables enforcement bodies to electronically manage compliance, audit,
inspection, work order, and licensing/certification/permits, and enforcement activities. The first version of the software was
written in 1990 to help manage the activities related to auditing and corrective actions. The software is now in its third generation,
with the current Microsoft .NET™ version released commercially in 2003.
Strand, Inc.
On July 31, 2014, one of the Company’s
subsidiaries, Telecorp Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Stratin, Inc. (“Stratin”),
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.
Strand's surveillance management system is
a "lean client," which designates the server for a majority of the data processing. This setup ensures stability in the
surveillance system, and allows users to control their system from any location in the world without having to download client
software.
PLAN OF OPERATION
During the next twelve months, we plan to integrate
our recent acquisitions, including Zinergy, Telecorp, Jadian and Strand, 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 THREE MONTHS
ENDED SEPTEMBER 30, 2014, AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2013:
|
|
For the Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Increase / |
|
|
|
2014 |
|
|
2013 |
|
|
(Decrease) |
|
Revenues |
|
$ |
361,150 |
|
|
$ |
156,750 |
|
|
$ |
204,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative |
|
|
113,308 |
|
|
|
231,705 |
|
|
|
(118,397) |
|
Salaries and Wages |
|
|
209,667 |
|
|
|
303,716 |
|
|
|
(94,049 |
) |
Depreciation and Amortization |
|
|
55,156 |
|
|
|
60,682 |
|
|
|
(5,526) |
|
Bad Debts (Recoveries) |
|
|
30,813 |
|
|
|
5,407 |
|
|
|
25,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
408,944 |
|
|
|
601,510 |
|
|
|
(192,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss |
|
|
(47,794 |
) |
|
|
(444,760 |
) |
|
|
396,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
|
(175,332 |
) |
|
|
(140,705 |
) |
|
|
(34,627) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(223,126 |
) |
|
$ |
(585,465 |
) |
|
$ |
(527.181) |
|
Revenues:
For the three months ended September 30, 2014
we had revenue of 361,150 compared to revenue of $156,750 for the three months ended September 30, 2013, an increase of $204,400,
or 130% from the comparative period. The increase in revenues was due primarily to the acquisition of our new subsidiaries.
General and Administrative:
General
and administrative expenses decreased by $118,397, or 51% to $113,308 for the three months ended September 30, 2014 compared to
general and administrative expense of $231,705 for the three months ended September 30, 2013. The decrease in general and administrative
expense is due primarily to decreased public relations fees and stock based compensation during the three months ending September
30, 2014 that wasn’t incurred during the three months ending September 30, 2013.
Salaries and Wages:
Salaries and wages decreased by $94,049, or
31% to $209,667 for the three months ended September 30, 2014 compared to salaries and wages of $303,716 for the three months ended
September 30, 2013. The decrease in salaries and wages is due primarily to decrease in professional services.
Depreciation and Amortization:
We
had depreciation and amortization expense of $55,156 for the three months ended September 30, 2014 as compared to $60,682 for
the three months ended September 30, 2013, a decrease of $5,526, or 9% from the comparative period. This decrease is principally
due to certain assets reaching the end of their depreciable life cycle and intangible assets that were impaired on December 31,
2013 that are no longer being amortized. We anticipate the replacement of these assets as resources become available.
Bad Debts (Recoveries):
We
had bad debts (recoveries) of $30,813 for the three months ended September 30, 2014 as compared to bad debts (recoveries) of $5,407
for the three months ended September 30, 2013, an increase in bad debts (recoveries) of $25,406, or 470% from the comparative
period. This decrease is due to changes in our allowance for doubtful accounts. We provide an allowance for doubtful accounts
of all accounts receivable aging greater than 30 days old, and are actively managing our receivables.
Net Operating Loss:
Total
operating expenses for the three months ended September 30, 2014 were $408,944, compared to $601,510 for the three months ended
September 30, 2013, a decrease of $192,566, or 32% from the comparative period. We had net operating losses of $47,794, compared
to $444,760 for the three months ended September 30, 2013, a decrease of $396,966, or 89% from the comparative period. The decrease
in operating loss was primarily due to the decrease in stock based compensation to related parties.
Other Income (Expense):
Other Income (expense) was ($175,332) for
the three months ended September 30, 2014 compared to ($140,705) for the three months ended September 30, 2013, an increase
of $34,627, or 25% from the comparative period. Interest expense increased primarily due to significant increased borrowings since
the three months ended September 30, 2013.
Net Loss:
We had a net loss of $223,126 for the three
months ended September 30, 2014 compared to a net loss of $585,465 for the three months ended September 30, 2013, resulting in
a decreased net loss of $362,339, or 62% from the comparative period. The decreased net loss was primarily due increased revenues
and lowered PR Marketing and lower stock based compensation expense.
RESULTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2014, AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2013:
|
|
For the Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Increase / |
|
|
|
2014 |
|
|
2013 |
|
|
(Decrease) |
|
Revenues |
|
$ |
941,227 |
|
|
$ |
643,879 |
|
|
$ |
297,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative |
|
|
683,447 |
|
|
|
519,339 |
|
|
|
164,108 |
|
Salaries and Wages |
|
|
2,654,666 |
|
|
|
2,074,950 |
|
|
|
579,716 |
|
Depreciation and Amortization |
|
|
152,711 |
|
|
|
204,842 |
|
|
|
(52,131 |
) |
Bad Debts (Recoveries) |
|
|
25,551 |
|
|
|
(3,333 |
) |
|
|
28,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
3,516,375 |
|
|
|
2,795,798 |
|
|
|
720,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss |
|
|
(2,575,148 |
) |
|
|
(2,151,919 |
) |
|
|
423,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
|
(2,143,582 |
) |
|
|
(499,695 |
) |
|
|
1,643,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(4,718,730 |
) |
|
$ |
(2,651,614 |
) |
|
$ |
2,067,116 |
|
Revenues:
For the nine months ended September 30, 2014
we had revenue of $941,227 compared to revenue of $643,879 for the nine months ended September 30, 2013, an increase
of $297,348 or 46% from the comparative period. The increase in revenues was due primarily to the acquisition of our new subsidiaries.
General and Administrative:
General
and administrative expenses increased by $164,108 or 32% to $683,447 for the nine months ended September 30, 2014 compared to
general and administrative expense of $519,339 for the nine months ended September 30, 2013. The increase in general and administrative
expense is due primarily to increased public relations fees and general increases due to the acquisition of subsidiaries incurred
during the nine months ending September 30, 2014 that wasn’t incurred during the nine months ending September 30, 2013.
Salaries and Wages:
Salaries and wages increased by $579,716, or
28% to $2,654,666 for the nine months ended September 30, 2014 compared to salaries and wages of $2,074,950 for the nine months
ended September 30, 2013.
Depreciation and Amortization:
We
had depreciation and amortization expense of $152,711 for the nine months ended September 30, 2014 as compared to $204,842 for
the nine months ended September 30, 2013, a decrease of $52,131, or 25% from the comparative period. This decrease is principally
due to certain assets reaching the end of their depreciable life cycle and intangible assets that were impaired on December 31,
2013 that are no longer being amortized. We anticipate the replacement of these assets as resources become available.
Bad Debts (Recoveries):
We
had bad debts (recoveries) of $25,551 for the nine months ended September 30, 2014 as compared to bad debts (recoveries) of $3,333
for the nine months ended September 30, 2013, an increase in bad debts (recoveries) of $28,884, or 867% from the comparative period.
This decrease is due to changes in our allowance for doubtful accounts. We provide an allowance for doubtful accounts of all accounts
receivable aging greater than 30 days old, and are actively managing our receivables.
Net Operating Loss:
Total
operating expenses for the nine months ended September 30, 2014 were $3,516,375 compared to $2,795,798 for the nine months ended
September 30, 2013, an increase of $720,577, or 26% from the comparative period. We had net operating losses of $2,575,148,
compared to $2,151,919 for the nine months ended September 30, 2013, an increase of $423,229, or 20% from the comparative period.
The increase in operating loss was primarily due the increase in stock based compensation to related parties.
Other Income (Expense):
Other
expense was $2,143,582 for the nine months ended September 30, 2014 compared to $499,695 for the nine months ended September 30, 2013,
an increase of $1,643,887, or 329% from the comparative period. Interest expense increased primarily due to significant increased
borrowings, along with increased non-cash discounts of $611,988 attributable to the amortization of debt discounts, loan origination
costs and a loss on convertible debt default provisions incurred during the nine months ended September 30, 2014, compared to
the same period in 2013.
Loss on debt modifications, related parties
was $172,864 for the nine months ended September 30, 2014 compared to $96,032 for the nine months ended September 30, 2013, an
increase of $76,832 from the comparative period. The current period loss on debt modification was due to an amended promissory
note with Vivienne Passley, which at the time of modification carried a balance of $57,621, consisting principal of $51,000 and
$6,621 of interest. We amended the promissory note to include a fixed conversion price of $0.0001 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 $172,864. The prior period loss on debt modification was due to an amended convertible promissory note with
Star Financial Corporation, which at the time of modification carried a balance of $190,849. We amended the convertible promissory
note 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.
Change in derivative liabilities was a loss
of $777,664 for the nine months ended September 30, 2014 compared to $-0- for the nine months ended September 30, 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.
Net Loss:
We
had a net loss of $4,718,730 for the nine months ended September 30, 2014 compared to a net loss of $2,651,614 for the nine months
ended September 30, 2013, resulting in an increased net loss of $2,067,116, or 78% from the comparative period. The increased
net loss was primarily due the increase in stock based compensation to related parties and interest expense incurred with increased
borrowings, along with a $777,664 loss attributable to the change in derivative liabilities incurred during the nine months ended
September 30, 2014 compared to the nine months ended September 30, 2013.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes total assets,
accumulated deficit, stockholders’ equity (deficit) and working capital at September 30, 2014 compared to December 31, 2013.
|
|
September 30, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
Total Assets |
|
$ |
2,382,194 |
|
|
$ |
1,082,961 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
$ |
4,294,798 |
|
|
$ |
2,607,576 |
|
|
|
|
|
|
|
|
|
|
Accumulated (Deficit) |
|
$ |
(12,220,724 |
) |
|
$ |
(7,501,994 |
) |
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit) |
|
$ |
(1,912,604 |
) |
|
$ |
(1,524,615 |
) |
|
|
|
|
|
|
|
|
|
Working Capital (Deficit) |
|
$ |
(3,383,331 |
) |
|
$ |
(1,283,338 |
) |
We had total current assets of $459,972 as
of September 30, 2014, consisting of cash of $71,963, net accounts receivable of $256,617, and other current assets of $131,972.
We had non-current assets of $1,922,222 as
of September 30, 2014, consisting of $115,470 of property and equipment, net, including accumulated depreciation and amortization,
intangible assets of $451,391, net, including $423,017 of accumulated amortization and goodwill of $1,355,361 related to the purchase
of our subsidiaries.
We had total current liabilities of $3,383,331
as of September 30, 2014, consisting of $552,562 of accounts payable and accrued expenses, $592,408 of deferred revenues, current
portion of outstanding balances on lines of credit of $83,260, current portion of capitalized leases in the amount of $7,031, current
maturities of notes payable, related parties of $1,186,618 current maturities on convertible debts of $152,275, net of discounts
of $1,112, and current maturities on long term debts in the amount of $809,177.
We had negative working capital of $2,923,359
and a total accumulated deficit of $12,220,724 as of September 30, 2014.
We had total liabilities of $4,294,798 as of
September 30, 2014, which included total current liabilities of $3,383,331, long-term portion of capitalized leases of $0 and long-term
debts of $911,467, net of current portion.
We had net cash used in operating activities
of $300,001 for the nine months ended September 30, 2014, which was primarily due to our net loss of $4,718,730 after adjustments
for non-cash operating expenses, a decrease of $1,130 in accounts receivable and an increase of $48,035 of other current assets,
and an decrease of $395,307 in accounts payable and accrued expenses, and an increase of $270,277 in deferred revenues.
We had $625,721 of net cash used in investing
activities for the nine months ended September 30, 2014, which consisted of $43,512 of cash paid for the purchase of equipment,
$582,945 paid for the acquisition of subsidiaries, offset by $736 received in cash with the merger.
We had $789,118 of net cash provided by financing
activities during the nine months ended September 30, 2014, which represented proceeds from notes payable, related parties of $774,524
and proceeds from notes payable of $582,206 repayments on notes payable, related parties of $82,879 repayments on notes payable
of $472,841, repayments on convertible notes payable of $1,500 and principal payments on capital leases of $10,392.
Declaration of Dividends
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 with the
issuance of 110,000,000 shares of Class A Common Stock in lieu of cash.
Recent Financing Activities
Third quarter of 2014:
Debt Financing, Related Parties
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.
Originated August 1, 2014, a $36,000 unsecured
promissory note payable, including an $8,000 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, 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.
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, which was amended and removed on September 19, 2014.
Originated August 26, 2014, an unsecured $57,000
promissory note payable, including a $12,000 loan origination fee, owed to GG Mars, Inc., 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.
Originated September 2, 2014, an
unsecured $69,000 promissory note payable, including a $14,000 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, matures on
December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default.
Originated September 22, 2014, an
unsecured $53,750 promissory note payable, including a $12,000 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, matures on
December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default.
Recent Debt Conversions
Third quarter of 2014:
A total of $152,275 of convertible debentures
remain outstanding as of the date of this filing, and are convertible at various hypothetical prices discounted to market as depicted
in the table below:
|
|
|
|
|
|
|
Potential issuable shares at various conversion prices |
|
|
|
|
|
|
|
below the most recent market price of $0.0001 per share |
|
|
Conversion |
|
Principal |
|
100% |
|
75% |
|
50% |
|
25% |
Lender / Origination |
|
Terms |
|
Borrowed |
|
$0.0001 |
|
$0.000075 |
|
$0.00005 |
|
$0.000025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
|
$ |
33,000 |
|
330,000,000 |
|
440,000,000 |
|
660,000,000 |
|
1,320,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
|
$ |
119,275 |
|
1,192,750,000 |
|
1,590,333,333 |
|
2,385,500,000 |
|
4,771,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
152,275 |
|
1,522,750,000 |
|
2,030,333,333 |
|
3,045,500,000 |
|
6,091,000,000 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Pursuant to Item 305(e) of Regulation S-K (§
229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,”
as defined by Rule 229.10(f)(1).
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision
and with the participation of our management, including our principal executive officer, of the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a – 15(c) and 15d – 15(e)). Based upon that evaluation,
our principal executive officer concluded that, as of the end of the period covered in this report, our disclosure controls and
procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated
to our management, including our principal executive officer, as appropriate to allow timely decisions regarding required disclosure.
Inherent Limitations of Internal Controls
Our Principal Executive Officer does not expect
that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures
were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and
operated, can provide only reasonable, not absolute assurance that the objectives of the 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. Because of 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, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control
over financial reporting, other than those stated above, during our most recent quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II – OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become 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 1A. RISK FACTORS
As a smaller reporting company, we are not
required to provide the information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following sales of equity securities by
the Company occurred during the three month period ended September 30, 2014:
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 July 30, 2014 the Company issued 277,777,778
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 3,500,000
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 August 29, 2014 the Company issued 10,000,000
shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost
that was previously granted on April 24, 2014 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.
On August 29, 2014 the Company issued 10,000,000
shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost
that was previously granted on May 7, 2014 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.
On August 29, 2014 the Company issued 3,250,000
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 May 28, 2014 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.
On August 29, 2014 the Company issued 2,125,000
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 June 12, 2014 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.
Issuance of Dividends Paid via Class A Common
Stock in Lieu of Cash
On September 11, 2014 the Company issued a
total of 110,000,000 shares of Class A Common Stock amongst three related party Convertible Series B Preferred Stockholders pursuant
to a 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.
The Company claims an exemption from registration
afforded by Section 3(a)(10) of the Securities Act of 1933, as amended (the “Act”), for the above conversions, as the
securities were exchanged by the Company in exchange for securities, claims, or property interests, and not for cash and Section
4(2) of the Act for the issuances as the issuances did not involve a public offering, the recipients took the securities for investment
and not resale, the Company took appropriate measures to restrict transfer, and the recipients are (a) “accredited investors”;
or (b) have access to similar documentation and information as would be required in a Registration Statement under.
The Company claims an exemption from registration
afforded by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”), for the above conversions, as the
securities were exchanged by the Company with its existing security holders exclusively in transactions where no commission or
other remuneration was paid or given directly or indirectly for soliciting such exchange and Section 4(2) of the Act for the issuances
as the issuances did not involve a public offering, the recipients took the securities for investment and not resale, the Company
took appropriate measures to restrict transfer, and the recipients are (a) “accredited investors”; or (b) have access
to similar documentation and information as would be required in a Registration Statement under.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On September 24, 2014, St. George Investments,
LLC (“note holder”) presented the Company with a notice of default. In accordance with the default provisions, the
note shall accrue interest at twenty two percent (22%) per annum effective April 1, 2014. The unsecured convertible promissory
note with $41,900 of principal outstanding (“First St. George Note”) matured on June 5, 2014 and was in default effective
April 1, 2014 pursuant to Section 3.2 of the Note. 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 debt
holder is limited to owning 4.99% of the Company’s issued and outstanding shares. In accordance with the default provisions,
the outstanding balance prior to the occurrence of default shall increase to 150% of the outstanding balance of principal and interest
a maximum of two times. In addition, the note holder was precluded from clearing the conversion of 125,000,000 shares of common
stock received pursuant to a March 7, 2014 conversion of $15,000 of outstanding principal until September 10, 2014 (“Late
Clearing Adjustment Amount”). Pursuant to Section 1.6(g) of the Note, the note holder is entitled to increase the outstanding
balance of the Note by the Late Clearing Adjustment Amount of $25,000. As a result of the Late Clearing Adjustment Amount and Note
defaults on April 1, 2014 and June 5, 2014, the principal and interest on the First St. George Note has increased to $136,738 as
of September 24, 2014.
On
November 7, 2014, Epazz, Inc. (the “Company”) signed a forbearance agreement with St. George Investments, LLC, which
changed the outstanding balance to $75,000 with interest accruing at the rate of 8% per annum, compounding daily, based on a 360-day
year, commencing on the date. The Company has the right to repay the note at any time.
ITEM 4. MINE SAFETY DISCLOSURES
Mine safety disclosures are not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
|
|
Incorporated by reference |
Exhibit |
Exhibit Description |
Filed 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 |
3.10 |
Articles of Amendment, January 14, 2014 |
* |
|
|
|
|
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 |
|
|
|
Incorporated by reference |
Exhibit |
Exhibit Description |
Filed herewith |
Form |
Period ending |
Exhibit |
Filing date |
10.32 |
Stock Purchase Agreement (Telecorp Acquisition), February 28, 2014 |
* |
|
|
|
|
10.33 |
Closing Statement (Telecorp Acquisition), February 28, 2014 |
* |
|
|
|
|
10.34 |
Non-Disclosure/Non-Compete Agreement (Telecorp Acquisition), February 28, 2014 |
* |
|
|
|
|
10.35 |
Share Pledge Agreement (Telecorp Acquisition), February 28, 2014 |
* |
|
|
|
|
10.36 |
Seller Financed Promissory Note (Telecorp Acquisition), February 28, 2014 |
* |
|
|
|
|
10.37 |
Asset Purchase Agreement (Cynergy Acquisition), April 4, 2014 |
* |
|
|
|
|
10.38 |
Bill of Sale (Cynergy Acquisition) , April 4, 2014 |
* |
|
|
|
|
10.39 |
Asset Purchase Agreement (Jadian Acquisition), May 9, 2014 |
* |
|
|
|
|
10.40 |
Bill of Sale (Jadian Acquisition), May 9, 2014 |
* |
|
|
|
|
10.41 |
Closing Statement (Jadian Acquisition), May 9, 2014 |
* |
|
|
|
|
10.42 |
Security Agreement (Jadian Acquisition), May 9, 2014 |
* |
|
|
|
|
10.43 |
Consulting Agreement (Jadian Acquisition), May 9, 2014 |
* |
|
|
|
|
10.44 |
Employment Agreement (Jadian Acquisition), May 9, 2014 |
* |
|
|
|
|
10.45 |
Guaranty Agreement (Jadian Acquisition), May 9, 2014 |
* |
|
|
|
|
10.46 |
Seller Financed Promissory Note (Jadian Acquisition), May 9, 2014 |
* |
|
|
|
|
10.47 |
Asset Purchase Agreement (Strand Acquisition), July 31, 2014 |
* |
|
|
|
|
10.48 |
Bill of Sale (Strand Acquisition), July 31, 2014 |
* |
|
|
|
|
10.49 |
Guaranty Agreement (Strand Acquisition), July 31, 2014 |
* |
|
|
|
|
10.50 |
Seller Financed Promissory Note (Strand Acquisition), July 31, 2014 |
* |
|
|
|
|
10.51 |
Stock Exchange Agreement (S. Passley), January 17, 2014 |
* |
|
|
|
|
10.52 |
Stock Exchange Agreement (S. Passley), March 22, 2014 |
* |
|
|
|
|
10.53 |
Stock Exchange Agreement (C. Passley), March 22, 2014 |
* |
|
|
|
|
10.54 |
Stock Exchange Agreement (L&F Lawn Services, Inc.), March 22, 2014 |
* |
|
|
|
|
10.55 |
Convertible Promissory Note (Magna Group, LLC), February 4, 2014 |
* |
|
|
|
|
10.56 |
Convertible Promissory Note (Magna Group, LLC), February 19, 2014 |
* |
|
|
|
|
10.57 |
Convertible Promissory Note (V. Passley), April 2, 2014 |
* |
|
|
|
|
10.58 |
Settlement Agreement and Stipulation Pursuant to Section 3(a)(10) (IBC Funds, LLC), February 12, 2014 |
* |
|
|
|
|
10.59 |
Order Granting Approval of Settlement Agreement and Stipulation (IBC Funds, LLC), February 14, 2014 |
* |
|
|
|
|
10.60 |
Convertible Promissory Note Default Notice (St.
George Investments, LLC), September 24, 2014 |
* |
|
|
|
|
10.61 |
Forbearance Agreement (St. George Investments, LLC), November 7, 2014 |
X |
|
|
|
|
10.62 |
Promissory Note with Star Financial Corporation, August 21, 2014 |
X |
|
|
|
|
10.63 |
Promissory Note with Star Financial Corporation, August 01, 2014 |
X |
|
|
|
|
10.64 |
Promissory Note with Star Financial Corporation, September 22, 2014 |
X |
|
|
|
|
10.65 |
Promissory Note with Star Financial Corporation, September 02, 2014 |
X |
|
|
|
|
10.66 |
Promissory Note with Star Financial Corporation, August 26, 2014 |
X |
|
|
|
|
10.67 |
Promissory Note with Star Financial Corporation, July 28, 2014 |
X |
|
|
|
|
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 |
X |
|
|
|
|
101.SCH |
XBRL Schema Document |
X |
|
|
|
|
101.CAL |
XBRL Calculation Linkbase Document |
X |
|
|
|
|
101.DEF |
XBRL Definition Linkbase Document |
X |
|
|
|
|
101.LAB |
XBRL Labels Linkbase Document |
X |
|
|
|
|
101.PRE |
XBRL Presentation Linkbase Document |
X |
|
|
|
|
______________
* Previously filed.
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: November 24, 2014 |
By: /s/ Shaun Passley |
|
Shaun Passley, Ph.D. |
|
Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director |
EXHIBIT 10.61
FORBEARANCE AGREEMENT
This Forbearance
Agreement (this “Agreement”) is entered into as of November 6, 2014 by and between St. George Investments
LLC, a Utah limited liability company (formerly known as St George Investments LLC, an Illinois limited liability company) (“Buyer”),
and Epazz, Inc., an Illinois corporation (the “Company”). Capitalized terms used in this Agreement without
definition shall have the meanings given to them in the Note (defined below).
A. The Company previously sold and issued to Buyer that certain Convertible Promissory Note dated September 5, 2013 in the
original principal amount of $56,900.00 (the “Note”) pursuant to that certain Note Purchase Agreement
dated September 5, 2013 by and between Buyer and the Company (the “Purchase Agreement,” and together
with the Note and all other documents entered into in conjunction therewith, the “Transaction Documents”).
B. As set forth in more detail in a certain Default Notice given by Buyer to the Company on September 24, 2014 (the “Default
Notice”), the Company failed to timely file its Form 10-K for the period ending December 31, 2013, which failure
constitutes an Event of Default under the Note (the “First Default”).
C. As set forth in more detail in the Default Notice, the Company also failed to pay to Buyer the Outstanding Balance of the
Note that was due and payable on June 5, 2014 (the “Second Default,” and together with the First Default,
the “Defaults”).
D. As a result of the First Default, the interest rate on the Outstanding Balance increased to 22% per annum as of April 1,
2014 and the Outstanding Balance also increased by 150% (the “First Balance Increase”).
E. As a result of the Second Default, the Outstanding Balance again increased by 150% (the “Second Balance Increase,”
and together with the First Balance Increase, the “Balance Increases”).
F. On October 14, 2014, Buyer submitted a Conversion Notice under the Note to the Company, pursuant to which Buyer requested
to receive 267,953 shares of the Company’s Common Stock, which conversion request will be withdrawn and a new conversion
request will be provided (the “Conversion Shares”).
G. No new or additional consideration is being provided in connection with this Agreement other than the modification of terms
as provided herein.
H. Buyer has agreed, subject to the terms, conditions and understandings expressed in this Agreement, to refrain and forbear
temporarily from exercising and enforcing remedies against the Company with respect to the Defaults as provided in this Agreement.
NOW THEREFORE, for
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Recitals and Definitions. Each of the parties hereto acknowledges and agrees that the recitals set forth above in
this Agreement are true and accurate, are contractual in nature, and are hereby incorporated into and made a part of this Agreement.
2. Forbearance. Subject to the terms, conditions and understandings contained in this Agreement, Buyer hereby agrees
to refrain and forbear from exercising and enforcing its remedies under the Note, any of the Transaction Documents, or under applicable
laws, with respect to the Defaults (the “Forbearance”). For the avoidance of doubt, the Forbearance shall
only apply to the Defaults and not to any Events of Default that may occur subsequent to the date hereof or any Event of Default
(other than the Defaults) that occurred prior to the date hereof. Moreover, the Forbearance shall only apply to the extent and
for so long as the Company remains in compliance with the terms hereof and Buyer shall have no obligation to abide by the Forbearance
following any breach of this Agreement by the Company.
3. Forbearance Terms. Each of Buyer and the Company agree to the following with respect to the Forbearance:
(a) Delivery of Conversion Shares. The Company agrees to deliver the Conversion Shares in the manner prescribed in Section
1.4(d) of the Note as soon as possible following execution of this Agreement, but in no event later than the date that is three
(3) Trading Days from the date of this Agreement. For the avoidance of doubt, in order for the Conversion Shares to be deemed to
have been delivered to Buyer, (i) the Conversion Shares or certificate(s) representing the Conversion Shares must have been cleared
and approved for public resale by the compliance departments of Buyer’s brokerage firm and the clearing firm servicing such
brokerage, and (ii) the Conversion Shares must be held in the name of the clearing firm servicing Buyer’s brokerage firm
and must have been deposited into such clearing firm’s account for the benefit of Buyer.
(b) Volume Restriction. Buyer agrees that, with respect to any Common Stock received under the Note, in any given calendar
week its Net Sales (as defined below) of such Common Stock shall not exceed the greater of (i) twenty percent (20%) of the Company’s
weekly dollar trading volume in such week (which, for purposes hereof, means the number of shares traded during such calendar week
multiplied by the volume weighted average price per share for such week), and (ii) $10,000 (the “Volume Restriction”).
For illustration purposes only, if the Company’s weekly dollar trading volume was $60,000 each week for three (3) weeks,
Buyer would be entitled to Net Sales of $12,000 per week. However, if the Company’s weekly dollar trading volume was $40,000
each week for three (3) weeks, Buyer would be entitled to Net Sales of $10,000 per week. For purposes of this Agreement, the term
“Net Sales” means the gross proceeds from sales of shares of Common Stock sold in a calendar week minus
the purchase price paid for any shares of Common Stock purchased in such week.
(c) Breach of Volume Restriction.
(i) Buyer agrees that in the event it breaches the Volume Restriction where its Net Sales of Common Stock during any calendar
week exceed the dollar volume it is permitted to sell in any calendar week (such excess, the “Excess Sales”)
pursuant to the Volume Restriction by 20% or less of the dollar volume of Common Stock it is permitted to sell in any calendar
week pursuant to the Volume Restriction, then in such event the Company shall be entitled to reduce the Outstanding Balance of
the Note (and if the Note has been paid in full, it may require Buyer to pay the cash sum of such amount to the Company) by an
amount equal to 100% of the Excess Sales upon delivery of written notice to Buyer setting forth its basis for such reduction.
(ii) In the event Buyer’s Net Sales of Common Stock during any calendar week exceed the dollar volume it is permitted to
sell in any calendar week pursuant to the Volume Restriction by more than 20% but less than or equal to 50% of the dollar volume
of Common Stock it is permitted to sell in any calendar week pursuant to the Volume Restriction, then in such event the Company
shall be entitled to reduce the Outstanding Balance of the Note (and if the Note has been paid in full, it may require Buyer to
pay the cash sum of such amount to the Company) by an amount equal to 150% of the Excess Sales upon delivery of written notice
to Buyer setting forth its basis for such reduction.
(iii) In
the event Buyer’s Net Sales of Common Stock during any calendar week exceed the dollar volume it is permitted to sell in
any calendar week pursuant to the Volume Restriction by more than 50% of the dollar volume of Common Stock it is permitted to
sell in any calendar week pursuant to the Volume Restriction, then in such event the Company shall be entitled to reduce the Outstanding
Balance of the Note (and if the Note has been paid in full, it may require Buyer to pay the cash sum of such amount to the Company)
by an amount equal to 200% of the Excess Sales upon delivery of written notice to Buyer setting forth its basis for such reduction
(this subpart (iii) collectively with subparts (i) and (ii), the “Outstanding Balance Reduction”).
For illustration purposes
only, if the Company’s weekly dollar trading volume was $60,000 for a calendar week, Buyer would be entitled to Net Sales
of up to $12,000 during that week. If Buyer’s Net Sales for such week were equal to $13,000, and Buyer had sold the maximum
number of shares it could within the Volume Restriction during each prior week, then in such event the Company would be entitled
to reduce the Outstanding Balance of the Note by $1,000 (($13,000 - $12,000) x 100%). Notwithstanding the foregoing or anything
the contrary herein or in the Note or the other Transaction Documents, the Outstanding Balance Reduction shall be the Company’s
sole and exclusive remedy in the event Buyer breaches the Volume Restriction and any such breach may not be used as a defense to
the Company’s performance of its obligations hereunder or under the Note or any other Transaction Document, including without
limitation its obligation to honor future Conversion Notices delivered by Buyer, or as a reason, justification or excuse for the
Company’s nonperformance of such obligations.
(iv) Buyer agrees to authorize and instruct its broker to provide to the Company trading records related solely to Buyer’s
sales and purchases of the Company’s Common Stock on a weekly basis or such other interval as may be agreed to by Buyer’s
broker and the Company. The Company agrees that any such trading records from Buyer’s broker are and shall be conclusive
evidence as to Buyer’s compliance (or lack thereof) with the Volume Restriction. Accordingly, the Company acknowledges and
agrees that it will be responsible to monitor whether Buyer’s Net Sales exceed the dollar volume of Common Stock it is permitted
to sell in any calendar week pursuant to the Volume Restriction and further agrees to give written notice to Buyer in the event
it becomes aware of any excess sales of the Company’s Common Stock by Buyer in any given calendar week.
(d) Future Conversions. The Company agrees that according to the terms of this Agreement and the Note, it will honor
all of Buyer’s future Conversion Notices under the Note in a timely manner and that it shall deliver shares of Common Stock
in the manner and as and when required pursuant to the Note following its receipt of Conversion Notices from Buyer. Any failure
to so honor Conversion Notices from Buyer shall be deemed a breach of this Agreement and an Event of Default under the Note.
4. Ratification of the Note. The Note shall be and remains in full force and effect in accordance with its terms, and
is hereby ratified and confirmed in all respects. The Company acknowledges that it is unconditionally obligated to pay the remaining
balance of the Note and represents that such obligation is not subject to any defenses, rights of offset or counterclaims. Subject
to the terms of Section 5 below, notwithstanding the Balance Increases or whether any Events of Default have occurred under the
Note, the Company and Buyer agree that as of the date hereof, so long as the Company complies with the terms of this Agreement,
the Outstanding Balance of the Note will be deemed to be equal to $75,000.00 and a new conversion request for the Conversion Shares
will need to be provided following withdrawal of the prior conversion request, with interest accruing at the rate of eight percent
(8%) per annum, compounding daily, based on a 360-day year, commencing on the date hereof; provided, however, that in the
event the Company breaches any term or provision of this Agreement or any Event of Default occurs under the Note after the date
hereof, the parties agree that the terms of the Note would permit the full Balance Increases to apply upon the occurrence of such
an Event of Default and that in such event, any interest (if applicable, accruing at the default interest rate of twenty-two percent
(22%) per annum), fees or charges, if applicable, accrued and accruing thereafter shall be deemed to have began accruing on the
date any Event of Default occurred under the Note. For the avoidance of doubt, the Company may repay the Outstanding Balance of
the Note, as agreed upon in this Section 4, plus any accrued interest, fees, charges thereunder, at any time. No forbearance or
waiver other than as expressly set forth herein may be implied by this Agreement. Except as expressly set forth herein, the execution,
delivery, and performance of this Agreement shall not operate as a waiver of, or as an amendment to, any right, power or remedy
of Buyer under the Note or the Transaction Documents, as in effect prior to the date hereof.
5. Failure to Comply. The Company understands that the Forbearance shall terminate immediately upon the occurrence of
any material breach of this Agreement or upon the occurrence of any Event of Default after the date hereof (or any Event of Default
other than the Defaults that occurred prior to the date hereof) and that in any such case, Buyer may seek all recourse available
to it under the terms of the Note, this Agreement, any other Transaction Document, or applicable law. For the avoidance of any
doubt, the termination of the Forbearance pursuant to this Section shall not terminate, limit or modify any other provision of
this Agreement (including without limitation Section 4 hereof).
6. Representations, Warranties and Agreements. In order to induce Buyer to enter into this Agreement, the Company, for
itself, and for its affiliates, successors and assigns, hereby acknowledges, represents, warrants and agrees as follows:
(a) The Company has full power and authority to enter into this Agreement and to incur and perform all obligations and covenants
contained herein, all of which have been duly authorized by all proper and necessary action. No consent or approval of the Company,
and no consent, approval, filing or registration with or notice to any governmental authority is required as a condition to the
validity of this Agreement or the performance of any of the obligations of the Company hereunder.
(b) Any Event of Default which may have occurred under the Note has not been, is not hereby, and shall not be deemed to be waived
by Buyer, expressly, impliedly, through course of conduct or otherwise except upon full satisfaction of the Company’s obligations
under this Agreement. The agreement of Buyer to refrain and forbear from exercising any rights and remedies by reason of any existing
default or any future default shall not constitute a waiver of, consent to, or condoning of, any other existing or future default.
For the avoidance of any doubt, the Forbearance described herein only applies to the Defaults, and shall not constitute a waiver
or forbearance of any other rights or remedies available to Buyer with respect to any other defaults under the Note or other breach
of the Transaction Documents by the Company.
(c) All understandings, representations, warranties and recitals contained or expressed in this Agreement are true, accurate,
complete, and correct in all respects; and no such understanding, representation, warranty, or recital fails or omits to state
or otherwise disclose any material fact or information necessary to prevent such understanding, representation, warranty, or recital
from being misleading. The Company acknowledges and agrees that Buyer has been induced in part to enter into this Agreement based
upon Buyer’s justifiable reliance on the truth, accuracy, and completeness of all understandings, representations, warranties,
and recitals contained in this Agreement. There is no fact known to the Company or which should be known to the Company which the
Company has not disclosed to Buyer on or prior to the date hereof which would or could materially and adversely affect the understandings
of Buyer expressed in this Agreement or any representation, warranty, or recital contained in this Agreement.
(d) Except as expressly set forth in this Agreement, the Company acknowledges and agrees that neither the execution and delivery
of this Agreement nor any of the terms, provisions, covenants, or agreements contained in this Agreement shall in any manner release,
impair, lessen, modify, waive, or otherwise affect the liability and obligations of the Company under the terms of the Note or
any of the other Transaction Documents.
(e) The Company has no defenses, affirmative or otherwise, rights of setoff, rights of recoupment, claims, counterclaims, actions
or causes of action of any kind or nature whatsoever against Buyer, directly or indirectly, arising out of, based upon, or in any
manner connected with, the transactions contemplated hereby, whether known or unknown, which occurred, existed, was taken, permitted,
or begun prior to the execution of this Agreement and occurred, existed, was taken, permitted or begun in accordance with, pursuant
to, or by virtue of any of the terms or conditions of the Transaction Documents. To the extent any such defenses, affirmative or
otherwise, rights of setoff, rights of recoupment, claims, counterclaims, actions or causes of action exist or existed, such defenses,
rights, claims, counterclaims, actions and causes of action are hereby waived, discharged and released. The Company hereby acknowledges
and agrees that the execution of this Agreement by Buyer shall not constitute an acknowledgment of or admission by Buyer of the
existence of any claims or of liability for any matter or precedent upon which any claim or liability may be asserted.
(f) The Company hereby acknowledges that it has freely and voluntarily entered into this Agreement after an adequate opportunity
and sufficient period of time to review, analyze, and discuss (i) all terms and conditions of this Agreement, (ii) any and all
other documents executed and delivered in connection with the transactions contemplated by this Agreement, and (iii) all factual
and legal matters relevant to this Agreement and/or any and all such other documents, with counsel freely and independently selected
by the Company (or had the opportunity to be represented by counsel). The Company further acknowledges and agrees that it has actively
and with full understanding participated in the negotiation of this Agreement and all other documents executed and delivered in
connection with this Agreement after consultation and review with its counsel (or had the opportunity to be represented by counsel),
that all of the terms and conditions of this Agreement and the other documents executed and delivered in connection with this Agreement
have been negotiated at arm’s-length, and that this Agreement and all such other documents have been negotiated, prepared,
and executed without fraud, duress, undue influence, or coercion of any kind or nature whatsoever having been exerted by or imposed
upon any party by any other party. No provision of this Agreement or such other documents shall be construed against or interpreted
to the disadvantage of any party by any court or other governmental or judicial authority by reason of such party having or being
deemed to have structured, dictated, or drafted such provision.
(g) There are no proceedings or investigations pending or threatened before any court or arbitrator or before or by, any governmental,
administrative, or judicial authority or agency, or arbitrator, against the Company.
(h) There is no statute, regulation, rule, order or judgment and no provision of any mortgage, indenture, contract or other
agreement binding on the Company, which would prohibit or cause a default under or in any way prevent the execution, delivery,
performance, compliance or observance of any of the terms and conditions of this Agreement and/or any of the other documents executed
and delivered in connection with this Agreement.
(i) The terms and provisions of this Agreement and all other instruments and agreements entered into in connection herewith
are being given for full and fair consideration and exchange of value.
(j) To the best of its belief, after diligent inquiry, the Company represents and warrants that, as of the date hereof, no other
Event of Default under the Note (nor any material breach by the Company under any of the other Transaction Documents) exists.
(k) As a result of the Forbearance and the agreed upon Outstanding Balance set forth in Section 4 above, the Company acknowledges
that the Balance Increase described in Section 3.2 of the Note has not been applied with respect to any Events of Default. Accordingly,
such Balance Increase may still be applied to two (2) more Events of Default to the extent any Events of Default occur after the
date hereof or Buyer becomes aware of any Event of Default (other than the Defaults) that occurred prior to the date hereof; provided
that, for the avoidance of doubt, if the Balance Increases described in the recitals hereto are applied following any breach hereof,
such application of the Balance Increases shall count towards the limitation set forth in Section 3.2 of the Note.
7. Headings. The headings contained in this Agreement are for reference purposes only and do not affect in any way the
meaning or interpretation of this Agreement.
8. Governing Law; Venue. This Agreement shall be governed by and interpreted in accordance with the laws of the State
of Illinois without regard to the principles of conflict of laws. Each party consents to and expressly agrees that the exclusive
venue shall be the courts in Illinois of any dispute arising out of or relating to this Agreement or any Transaction Document or
the relationship of the parties or their affiliates shall be in Cook County, Illinois. Without modifying the parties obligations
to resolve disputes hereunder or under any Transaction Document, each party hereto submits to the exclusive jurisdiction of any
state or federal court sitting in Cook County, Illinois in any proceeding arising out of or relating to this Agreement and agrees
that all Claims (as defined in Exhibit A) in respect of the proceeding may only be heard and determined in any such
court and hereby expressly submits to the exclusive personal jurisdiction and venue of such court for the purposes hereof and expressly
waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party hereto hereby irrevocably
consents to the service of process of any of the aforementioned courts in any such proceeding by the mailing of copies thereof
by registered or certified mail, postage prepaid, to its address as set forth in the Purchase Agreement, such service to become
effective ten (10) days after such mailing. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT
MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING
OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. To the extent the terms of the Transaction Documents conflict
with the foregoing provisions of this Section 7 and Section 8 below, the Company and Buyer agree that these provisions shall govern
and the terms of the Transaction Documents shall be amended as necessary to comply with the provisions of Sections 7 and 8 of this
Agreement.
9. Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all signing
parties had signed the same document. All counterparts shall be construed together and constitute the same instrument. The exchange
of copies of this Agreement and of signature pages by facsimile transmission or other electronic transmission (including email)
shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement
for all purposes. Signatures of the parties transmitted by facsimile transmission or other electronic transmission (including email)
shall be deemed to be their original signatures for all purposes.
10. Severability. If any part of this Agreement is construed to be in violation of any law, such part shall be modified
to achieve the objective of the parties to the fullest extent permitted and the balance of this Agreement shall remain in full
force and effect.
11. Entire Agreement. This Agreement, together with the Transaction Documents, and all other documents referred to herein,
supersedes all other prior oral or written agreements between the Company, Buyer, its affiliates and persons acting on its behalf
with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding
of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein,
neither Buyer nor the Company makes any representation, warranty, covenant or undertaking with respect to such matters.
12. Amendments. This Agreement may be amended, modified, or supplemented only by written agreement of the parties. No
provision of this Agreement may be waived except in writing signed by the party against whom such waiver is sought to be enforced.
13. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective
successors and assigns. This Agreement or any of the severable rights and obligations inuring to the benefit of or to be performed
by Buyer hereunder may be assigned by Buyer to a third party, including its financing sources, in whole or in part. The Company
may not assign this Agreement or any of its obligations herein without the prior written consent of Buyer.
14. Continuing Enforceability; Conflict Between Documents. Except as otherwise modified by this Agreement, each of the
Note and all of the other Transaction Documents shall remain in full force and effect, enforceable in accordance with all of its
original terms and provisions. This Agreement shall not be effective or binding unless and until it is fully executed and delivered
by Buyer and the Company. If there is any conflict between the terms of this Agreement, on the one hand, and the Note or any other
Transaction Document, on the other hand, the terms of this Agreement shall prevail.
15. Time of Essence. Time is of the essence with respect to each and every provision of this Agreement.
16. Notices. Unless otherwise specifically provided for herein, all notices, demands or requests required or permitted
under this Agreement to be given to the Company or Buyer shall be given as set forth in the “Notices” section of the
Purchase Agreement.
17. Further Assurances. Each party shall do and perform or cause to be done and performed, all such further acts and
things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions
contemplated hereby.
[Remainder of page intentionally left
blank]
IN WITNESS WHEREOF,
the undersigned have executed this Agreement as of the date first set forth above.
COMPANY:
EPAZZ, INC.
By: _________________________________
Name: _______________________________
Title: ________________________________
BUYER:
ST. GEORGE INVESTMENTS LLC
By: Fife Trading, Inc., its Manager
By: ________________________________
John M. Fife, President
EXHIBIT 10.62
PROMISSORY NOTE
US $12,500 |
August 21, 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 twelve thousand five hundred dollars ($12,500), 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 August 21, 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 fifteen 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 21, 2014 (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 $10,000). |
| 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.
August 21, 2014
/s/ Shaun Passley
Shaun Passley
Chief Executive Officer
EXHIBIT 10.63
PROMISSORY NOTE
US $36,000 |
August 1, 2014 |
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
thirty-six thousand dollars ($36,000), 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 August 1, 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 fifteen 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 3, 2014 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be eight thousand dollars ($8,000) as deducted from principal proceeds of this note (Net proceeds
of $28,000). |
| 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.
August 1, 2014
/s/ Shaun Passley
Shaun Passley
Chief Executive Officer
EXHIBIT 10.64
PROMISSORY NOTE
US $43,750 |
September 22, 2014 |
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 forty-three thousand seven hundred fifty dollars ($43,750), 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 September 22, 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 fifteen 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 January 15, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be eight thousand seven hundred fifty dollars ($8,750) as deducted from principal proceeds
of this note (Net proceeds of $35,000). |
| 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.
September 22, 2014
/s/ Shaun Passley
Shaun Passley
Chief Executive Officer
EXHIBIT 10.65
PROMISSORY NOTE
US $69,000 |
September 2, 2014 |
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
sixty-nine thousand dollars ($69,000), 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 September 2, 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 fifteen 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 1, 2014 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be fourteen thousand dollars ($14,000) as deducted from principal proceeds of this note (Net proceeds
of $55,000). |
| 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.
September 2, 2014
/s/ Shaun Passley
Shaun Passley
Chief Executive Officer
EXHIBIT 10.66
PROMISSORY NOTE
US $57,000 |
August 26, 2014 |
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
fifty-seven thousand dollars ($57,000), 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 August 26, 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 fifteen 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 1, 2014 (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 $45,000). |
| 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.
August 26, 2014
/s/ Shaun Passley
Shaun Passley
Chief Executive Officer
EXHIBIT 10.67
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 thirty-seven thousand five hundred dollars ($37,500), 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 September 22, 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 fifteen 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 15, 2015 (the “Maturity Date”). |
| 3. | Loan Origination fee shall be seven thousand five hundred dollars ($7,500) as deducted from principal proceeds of this
note (Net proceeds of $30,000). |
| 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.
July 28, 2014
/s/ Shaun Passley
Shaun Passley
Chief Executive Officer
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Shaun Passley, Ph.D., certify that:
1. I have reviewed this report on Form 10-Q 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. I am 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 quarterly 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 quarter that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors
(or 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 registrant’s internal control over financial reporting.
Date: November 24, 2014
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
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
I, Shaun Passley, Ph.D., Chief Executive Officer and Principal Financial
Officer of Epazz, Inc., a Illinois corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The report on Form 10-Q of Epazz, Inc. (the "Registrant")
for the quarter ended September 30, 2014 (the "Report") which this statement accompanies fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) Information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company.
Date: November 24, 2014
By: /s/ Shaun Passley
Shaun Passley, Ph.D.
Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal Accounting Officer)
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