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 March 31, 2015 |
[_] |
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 June 11, 2015, was 2,726,392,485 shares, par value $0.01 per share.
EPAZZ, INC.
FORM 10-Q
Quarterly Period Ended March 31, 2015
INDEX
|
Page |
|
|
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS |
|
PART I. FINANCIAL INFORMATION |
2 |
Item 1. |
Financial Statements |
2 |
|
Condensed Consolidated Balance Sheets as of March 31, 2015
(Unaudited) and December 31, 2014 |
2 |
|
Condensed Consolidated Statements of Operations for the Three
Months ended March 31, 2015 and 2014 (Unaudited) |
3 |
|
Condensed Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2015 and 2014 (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 |
61 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
72 |
Item 4. |
Controls and Procedures |
72 |
|
|
|
PART II. OTHER INFORMATION |
73 |
Item 1. |
Legal Proceedings |
73 |
Item 1A. |
Risk Factors |
73 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
73 |
Item 3. |
Defaults Upon Senior Securities |
77 |
Item 4. |
Mine Safety Disclosures |
77 |
Item 5. |
Other Information |
77 |
Item 6. |
Exhibits |
78 |
|
|
|
SIGNATURES |
80 |
PART II. OTHER INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EPAZZ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
Assets | |
| (Unaudited) | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 32,765 | | |
$ | 106,708 | |
Accounts receivable, net | |
| 97,902 | | |
| 96,422 | |
Other current assets | |
| 53,566 | | |
| 64,607 | |
Total current assets | |
| 184,233 | | |
| 267,737 | |
| |
| | | |
| | |
Property and equipment, net | |
| 104,532 | | |
| 106,698 | |
Intangible assets, net | |
| 309,055 | | |
| 337,938 | |
Goodwill | |
| 374,818 | | |
| 374,818 | |
| |
| | | |
| | |
Total assets | |
$ | 972,638 | | |
$ | 1,087,191 | |
| |
| | | |
| | |
| |
| | | |
| | |
Liabilities and Stockholders' Equity (Deficit) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
| |
| | | |
| | |
Accounts payable | |
$ | 446,241 | | |
$ | 419,206 | |
Accrued expenses | |
| 87,777 | | |
| 88,026 | |
Accrued expenses, related parties | |
| 170,592 | | |
| 127,770 | |
Deferred revenue | |
| 401,254 | | |
| 469,937 | |
Lines of credit | |
| 72,138 | | |
| 80,239 | |
Current maturities of capital lease obligations payable | |
| 4,748 | | |
| 5,890 | |
Current maturities of notes payable, related parties ($972,823 and $1,066,073 currently in default, respectively) | |
| 1,271,198 | | |
| 1,221,323 | |
Convertible debts, net of discounts of $240,917 and $131,774, respectively ($32,749 and $60,674 currently in default, respectively) | |
| 147,885 | | |
| 88,739 | |
Current maturities of long term debts | |
| 1,155,689 | | |
| 1,219,669 | |
Derivative Liabilities | |
| 24,482 | | |
| – | |
Total current liabilities | |
| 3,782,004 | | |
| 3,720,799 | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
Long term debts, net of current maturities | |
| 1,121,885 | | |
| 1,284,702 | |
Total liabilities | |
| 4,903,889 | | |
| 5,005,501 | |
| |
| | | |
| | |
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, 2,875,320,333 shares issued and outstanding | |
| 287,531 | | |
| 293,275 | |
Common stock, Class A, $0.01 par value, 9,000,000,000 shares authorized, 1,171,092,485 and 37,557,842 shares issued and outstanding, respectively | |
| 11,710,924 | | |
| 375,578 | |
Convertible common stock, Class B, $0.01 par value, 60,000,000 shares authorized, 23,000,000 shares issued and outstanding, respectively | |
| 230,000 | | |
| 230,000 | |
Additional paid in capital | |
| (481,340 | ) | |
| 10,352,238 | |
Accumulated deficit | |
| (15,678,366 | ) | |
| (15,169,401 | ) |
Total stockholders' equity (deficit) | |
| (3,931,251 | ) | |
| (3,918,310 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' equity (deficit) | |
$ | 972,638 | | |
$ | 1,087,191 | |
See accompanying notes to financial statements.
EPAZZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Revenue | |
$ | 461,661 | | |
$ | 252,552 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
General and administrative | |
| 255,732 | | |
| 291,693 | |
Salaries and wages | |
| 150,146 | | |
| 2,336,497 | |
Depreciation and amortization | |
| 43,965 | | |
| 46,157 | |
Bad debts (recoveries) | |
| 152,455 | | |
| (12 | ) |
Total operating expenses | |
| 602,298 | | |
| 2,674,335 | |
| |
| | | |
| | |
Net operating loss | |
| (140,637 | ) | |
| (2,421,783 | ) |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Interest income | |
| 217 | | |
| 54 | |
Interest expense | |
| (291,435 | ) | |
| (516,065 | ) |
Change in derivative liabilities | |
| (77,110 | ) | |
| (793,579 | ) |
Total other expense | |
| (368,328 | ) | |
| (1,309,590 | ) |
| |
| | | |
| | |
Net loss | |
$ | (508,965 | ) | |
$ | (3,731,373 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding - basic and fully diluted | |
| 362,189,918 | | |
| 361,573 | |
| |
| | | |
| | |
Net loss per share - basic and fully diluted | |
$ | (0.00 | ) | |
$ | (10.32 | ) |
See accompanying notes to financial statements.
EPAZZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
| |
For the Three Months
Ended March 31,
| |
| |
2015 | | |
2014 | |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (508,965 | ) | |
$ | (3,731,373 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Bad debts (recoveries) | |
| 152,455 | | |
| (12 | ) |
Depreciation and amortization | |
| 43,965 | | |
| 46,156 | |
| |
| | | |
| | |
Amortization of deferred financing costs | |
| 39,791 | | |
| 106,341 | |
Amortization of discounts on convertible debts | |
| 197,786 | | |
| 316,907 | |
Change in fair market value of derivative liabilities | |
| 77,110 | | |
| 793,579 | |
Stock based compensation issued for services | |
| – | | |
| 37,500 | |
Stock based compensation issued for services, related parties | |
| – | | |
| 2,236,489 | |
Decrease (increase) in assets: | |
| | | |
| | |
Accounts receivable | |
| (153,935 | ) | |
| (9,052 | ) |
Other current assets | |
| – | | |
| 246 | |
Increase (decrease) in liabilities: | |
| | | |
| | |
Accounts payable | |
| 6,363 | | |
| 40,324 | |
Accrued expenses | |
| (85 | ) | |
| (8,460 | ) |
Accrued expenses, related parties | |
| 42,822 | | |
| 29,072 | |
Deferred revenues | |
| (68,683 | ) | |
| (25,903 | ) |
Net cash provided by (used in) operating activities | |
| (171,417 | ) | |
| (168,186 | ) |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Cash acquired in merger | |
| – | | |
| 736 | |
Purchase of equipment | |
| (7,236 | ) | |
| (2,211 | ) |
Acquisition of subsidiaries | |
| – | | |
| (200,000 | ) |
Net cash used in investing activities | |
| (7,236 | ) | |
| (201,475 | ) |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Payments on capital lease obligations payable | |
| (1,141 | ) | |
| (5,701 | ) |
Proceeds from notes payable, related parties | |
| 113,375 | | |
| 323,314 | |
Repayment of notes payable, related parties | |
| (38,500 | ) | |
| (54,879 | ) |
Proceeds from convertible notes | |
| 253,179 | | |
| – | |
| |
| | | |
| | |
Proceeds from long term debts | |
| 196,052 | | |
| 93,268 | |
Repayment of long term debts | |
| (418,255 | ) | |
| (90,371 | ) |
Net cash provided by financing activities | |
| 104,710 | | |
| 265,631 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| (73,943 | ) | |
| (104,030 | ) |
Cash - beginning | |
| 106,708 | | |
| 208,567 | |
Cash - ending | |
$ | 32,765 | | |
$ | 104,537 | |
| |
| | | |
| | |
Supplemental disclosures: | |
| | | |
| | |
Interest paid | |
$ | 291,435 | | |
$ | 94,163 | |
Income taxes paid | |
| – | | |
| – | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Acquisition of subsidiary in exchange for debt | |
$ | – | | |
$ | 102,000 | |
Value of shares issued for conversion of debt | |
$ | 138,803 | | |
$ | 369,714 | |
Beneficial conversion features | |
$ | 222,228 | | |
$ | 35,028 | |
Discount on derivatives | |
$ | 82,366 | | |
$ | – | |
Deferred financing costs | |
$ | 28,750 | | |
$ | 141,815 | |
Conversion of Preferred C to Common A | |
$ | 1,974,352 | | |
$ | – | |
Derivative adjustment due to debt conversions | |
$ | 134,994 | | |
$ | 642,481 | |
Dividends payable declared | |
$ | – | | |
$ | 11,000 | |
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, 2014 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.(3) | |
Illinois | |
Subsidiary | |
Terran |
Telecorp Products, Inc. | |
Michigan | |
Subsidiary | |
Telecorp |
Jadian, Inc. | |
Illinois | |
Subsidiary | |
Jadian |
Strantin, Inc. | |
Illinois | |
Subsidiary | |
Strand |
Interaction Technology, Inc. | |
Illinois | |
Subsidiary | |
Inter |
ZCollars, Inc.(3) | |
Delaware | |
Subsidiary | |
ZCollars |
______________
(1) All subsidiaries, are wholly-owned
subsidiaries.
(2) All entities are in the
form of Corporations.
(3) 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, Strantin and Inter 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 $27,591 and $34,098
for the three months ended March 31, 2015 and 2014, respectively.
Goodwill
The Company evaluates the carrying value
of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include,
but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair
value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. The
fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market
approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds its fair value, then the
amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of
reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value
of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess
of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of
goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company's
evaluation of goodwill completed during the year resulted in impairment losses of $1,489,078 for the year ended December 31, 2014.
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 three months ending March 31, 2015 and 2014.
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. Stock issued for services and compensation was $-0- and $2,273,989
for the three months ending March 31, 2015 and 2014, 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 $15,552,260, and as of March 31, 2015, the Company’s current liabilities exceeded its current assets by $3,471,665 and
its total liabilities exceeded its total assets by $3,805,145. 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 – Jadian,
Inc., May 6, 2014
On May 6, 2014, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Jadian, Inc. for the asset purchase agreement with Jadian Enterprises, Inc.
Formation of Subsidiary – Strantin,
Inc. July 31, 2014
On July 31, 2014, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Strantin, Inc. for the asset purchase agreement with Strand, Inc.
Formation of Subsidiary – Interaction
Technology, Inc. December 17, 2014
On December 17, 2014, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Interaction Technology, Inc. for the asset purchase agreement with Interaction Technology, Inc.
Formation of Subsidiary – ZCollars,
Inc., March 11, 2015
On March 11, 2015, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named ZCollars, Inc. The Company plans to file a non-provisional patent application to develop a dog
collars that allows for better tracking dogs.
EPAZZ, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4 – Acquisitions
Interaction Technology, Inc., Asset
Purchase Agreement
On December 29, 2014, The Company through
a newly-formed wholly-owned Illinois subsidiary, Interaction Technology, Inc. (“Interact”), closed on an Asset Purchase
Agreement (“APA”) with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the
APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used
in connection with Interaction’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $600,000, of
which $250,000 was paid at the closing, and $150,000 was financed by way of a Promissory Note (the “Inter Note 1”)
and $200,000 was financed by way of a Promissory Note (the “Inter Note 2”). The terms of the Inter Note 1 include interest
at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal payments
of $37,500 commencing thereafter, no prepayment penalty. The terms of the Inter Note 2 include interest at 6% per annum, no payments
of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $11,881.03
commencing thereafter, no prepayment penalty. The Inter Note 1 and Inter Note 2 are unsecured. We did not purchase and Inter agreed
to retain and be responsible for any and all liabilities of Inter.
This acquisition
was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s
assets and ongoing operations were acquired. The purchase resulted in $508,535 of goodwill. According to the purchase method of
accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
| |
December 29, | |
| |
2014 | |
Consideration: | |
| | |
Cash paid at closing | |
$ | 250,000 | |
Subordinated promissory note(1) | |
| 150,000 | |
Seller financed note payable (2) | |
| 200,000 | |
Fair value of total consideration exchanged | |
$ | 600,000 | |
| |
| | |
Fair value of identifiable assets/(liabilities) acquired assumed: | |
| | |
Current assets | |
$ | 4,175 | |
Software | |
| 52,200 | |
Contracts | |
| 24,800 | |
Trademark | |
| 18,000 | |
Deferred revenue liability | |
| (8,510 | ) |
Total fair value of assets assumed | |
| 91,465 | |
Consideration paid in excess of fair value (Goodwill)(3) | |
$ | 508,535 | |
(1)
$150,000 was financed by way of a Promissory Note (the “Inter Note 1”). The terms of the Inter Note1 include
interest at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly
principal payments of $37,500 commencing thereafter, no prepayment penalty. The Inter Note 1 is unsecured.
(2)
$200,000 was financed by way of a Promissory Note. The terms of the Inter Note 2 include interest at 6% per annum, no
payments of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments
of $11,881.03 commencing thereafter, no prepayment penalty. The Inter Note 2 is unsecured.
(3)
The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as
goodwill.
EPAZZ, INC.
NOTES
TO 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 are as follows:
| Combined Pro Forma: | |
| |
For the Three months ended March 31, | |
| |
| | |
2014 | |
Revenue: | |
| | | |
$ | 379,952 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| | | |
| 2,815,598 | |
| |
| | | |
| | |
Net operating loss | |
| | | |
| (2,435,646 | ) |
| |
| | | |
| | |
Other income (expense) | |
| | | |
| (1,309,578 | ) |
| |
| | | |
| | |
Net loss | |
| | | |
$ | (3,745,224 | ) |
| |
| | | |
| | |
Weighted average number of common shares Outstanding – basic and fully diluted | |
| | | |
| 361,573 | |
| |
| | | |
| | |
Net loss per share – basic and fully diluted | |
| | | |
$ | (10.36 | ) |
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 31, | |
| |
2014 | |
Consideration: | |
| | |
Cash paid at, and prior to, closing | |
$ | 100,000 | |
Seller financed note payable(1)(2) | |
| 85,000 | |
| |
| 185,000 | |
Fair value of identifiable liabilities acquired: | |
| | |
Deferred revenue | |
| 36,638 | |
Fair value of total consideration exchanged | |
$ | 221,638 | |
| |
| | |
Fair value of identifiable assets acquired assumed: | |
| | |
Software | |
$ | 9,447 | |
Trade name | |
| 5,870 | |
Total fair value of assets assumed | |
| 15,317 | |
Consideration paid in excess of fair value (Goodwill) | |
$ | 206,321 | |
______________
(1) Consideration included
an unsecured $85,000 seller financed note payable (“Strand Note”), which bears interest at 6% per annum until the maturity
date of July 31, 2015, and provides for equal monthly principal and interest payments of $2,585.86 commencing on August 31, 2014.
The Strand Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity
at July 31, 2015.
(2) The fair value of the
seller financed note in excess of the $85,000 principal balance attributable to the deferred payment terms will be amortized to
interest expense over the deferred financing period.
(3) The consideration paid
in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.
EPAZZ, INC.
NOTES
TO 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 are as follows:
| |
Combined Pro Forma: | |
| |
For the Three months ended March 31, | |
| |
| | |
2014 | |
Revenue: | |
| | | |
$ | 275,311 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| | | |
| (2,711,378 | ) |
| |
| | | |
| | |
Net operating income (loss) | |
| | | |
| (2,436,067 | ) |
| |
| | | |
| | |
Other income (expense) | |
| | | |
| (1,308,015 | ) |
| |
| | | |
| | |
Net income (loss) | |
| | | |
$ | (3,744,082 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and fully diluted | |
| | | |
| 361,573 | |
| |
| | | |
| | |
Net income (loss) per share – basic and fully diluted | |
| | | |
$ | (10.35 | ) |
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.
The unaudited supplemental pro forma results
of operations of the combined entities had the dates of the acquisitions been January 1, 2014 are as follows:
| |
Combined Pro Forma: | |
| |
For the Three months ended March 31, | |
| |
| | |
2014 | |
Revenue: | |
$ | | | |
$ | 367,599 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| | | |
| 2,798,474 | |
| |
| | | |
| | |
Net operating income (loss) | |
| | | |
| (2,430,875 | ) |
| |
| | | |
| | |
Other income (expense) | |
| | | |
| (1,308,299 | ) |
| |
| | | |
| | |
Net income (loss) | |
| | | |
$ | (3,739,174 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and fully diluted | |
| | | |
| 361,753 | |
| |
| | | |
| | |
Net income (loss) per share – basic and fully diluted | |
| | | |
$ | (10.34 | ) |
EPAZZ, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock Purchase Acquisition – Telecorp
Products, Inc., February 28, 2014
On February 28, 2014, the Company entered
into a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario
Canada corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder
and the sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding
shares of Telecorp from Troy Holdings, for an aggregate purchase price of $302,000 (the “Purchase Price”). The Purchase
Price was payable as follows:
|
(a) |
The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and |
|
(b) |
The Company provided Troy Holdings with a Promissory Note in the amount of $102,000 (the “Telecorp Note”), as adjusted from an original $120,000 by $18,000 of liabilities acquired in excess of the agreed upon limit of $50,000 of liabilities, which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum. |
Additionally, the Company agreed to assume
aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. A total of $68,000 of liabilities was
actually acquired, and the resulting $18,000 of excess liabilities was credited as payment against the Telecorp Note. As a result
of the Closing, Telecorp became a wholly-owned subsidiary of the Company.
Telecorp developed and sells software to
effectively operate contact centers. Telecorp’s solutions work with equipment from the giants of the computer telephony industry,
such as Avaya, Cisco and Nortel Networks. In connection with the Stock Purchase Agreement, the shareholders of Telecorp and the
Company entered into a Non-Disclosure/Non-Compete Agreement, pursuant to which the shareholders of Telecorp and the Company, each
agreed to not for a period of one (1) year, communicate or divulge to, or use for the benefit of itself or any other person, firm,
association or corporation, any information in any way relating to the Proprietary Property, in competition with the business of
the Company, and pursuant to the agreement, the shareholders of Telecorp agreed not to compete against the Company for one (1)
year from the closing of the acquisition.
This acquisition
was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s
assets and ongoing operations were acquired. The purchase resulted in $428,577 of goodwill. According to the purchase method of
accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
| |
February 28, | |
| |
2014 | |
Consideration: | |
| | |
Cash paid at, and prior to, closing | |
$ | 200,000 | |
Seller financed note payable(1)(2) | |
| 120,000 | |
Excess liability adjustment to seller financed note payable(3) | |
| (18,000 | ) |
| |
| 302,000 | |
Fair value of identifiable liabilities acquired: | |
| | |
Accounts payable and accrued expenses | |
| 43,500 | |
Deferred revenue | |
| 162,016 | |
Line of credit | |
| 24,500 | |
Fair value of total consideration exchanged | |
$ | 532,016 | |
| |
| | |
Fair value of identifiable assets acquired assumed: | |
| | |
Cash | |
$ | 736 | |
Other current assets | |
| 823 | |
Technology-based intangible assets | |
| 72,490 | |
Trade name | |
| 29,390 | |
Total fair value of assets assumed | |
| 103,439 | |
Consideration paid in excess of fair value (Goodwill)(4) | |
$ | 428,577 | |
______________
(1) Consideration included
an unsecured $120,000 seller financed note payable (“Telecorp Note”), which provides for six (6) equal monthly payments
of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which
case the interest rate shall be 10% per annum.
EPAZZ, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 $18,000 of excess liabilities was credited as payment against the Telecorp Note.
(4) The consideration paid
in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.
Management believes the product line of
Telecorp, customer base and other assets acquired will enable the Company to enhance their business model and strengthen its future
cash flows to fund operations and take advantage of additional growth opportunities.
The unaudited supplemental pro forma results
of operations of the combined entities had the dates of the acquisitions been January 1, 2014 are as follows:
| |
Combined Pro Forma: | |
| |
For the Three months ended
March 31, | |
| |
| | |
2014 | |
Revenue:$ | |
| | | |
$ | 341,573 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| | | |
| 2,752,907 | |
| |
| | | |
| | |
Net operating loss | |
| | | |
| (2,411,334 | ) |
| |
| | | |
| | |
Other income (expense) | |
| | | |
| (1,309,590 | ) |
| |
| | | |
| | |
Net loss | |
| | | |
$ | (3,720,924 | ) |
| |
| | | |
| | |
Weighted average number of common shares
Outstanding – basic and fully diluted | |
| | | |
| 361,573 | |
| |
| | | |
| | |
Net loss per share – basic and fully diluted | |
| | | |
$ | (10.29 | ) |
Note 5 – Related Parties
Debt Financing
From time to time we have received and
repaid loans from our CEO and his immediate family members to fund operations. These related party debts are fully disclosed in
Note 14 below.
EPAZZ, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In addition to the debts disclosed in
Note 14, we had three convertible notes with related parties that are disclosed in Note 15 as follows:
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
Originated March 2, 2015, an unsecured $5,000 convertible promissory note, carries a 15% interest rate, matures on May 20, 2015, (“Star Note”) owed to Star Financial Corporation, a related party, consisting of a total of $5,000 of principal and $447.95 of accrued interest. The October 20, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.000075. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. | |
$ | 5,000 | | |
$ | – | |
| |
| | | |
| | |
Originated March 2, 2015, an unsecured $18,750 convertible promissory note, carries a 15% interest rate, matures on May 28, 2014, (“GG Note”) owed to GG Mars, Inc., a related party, consisting of a total of $18,750 of principal and $2,196.06 of accrued interest. The March 28, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. | |
| 13,550 | | |
| | |
| |
| | | |
| | |
Originated March 31, 2015, an unsecured $30,000 convertible promissory note, carries a 15% interest rate, matures on May 7, 2014, (“Star Note”) owed to Star Financial Corporation, a related party, consisting of a total of $30,000 of principal and $3,772.60 of accrued interest. The March 7, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. | |
| 25,050 | | |
| – | |
| |
| | | |
| | |
Total convertible debts, related parties | |
| 43,600 | | |
| – | |
Less: unamortized discount on beneficial conversion feature | |
| (41,105 | ) | |
| – | |
Convertible debts | |
| 2,495 | | |
| – | |
Less: current maturities of convertible debts, related parties included in convertible debts | |
| (2,495 | ) | |
| – | |
Long term convertible debts, related parties included in convertible debts | |
$ | – | | |
$ | – | |
Changes in Stockholders’ Equity,
Related Parties
Shares of Convertible Series C Preferred
Stock Issued for Services to Related Parties
On January 17, 2014, the Company issued
600,000,000 shares of the recently designated Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000
shares of his previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $568,283
based on an independent valuation on the date of grant; therefore the Company recognized additional compensation expense of $345,427
due to the difference in the fair value of the Class A Common Stock exchanged.
On February 7, 2014, the Company issued
2,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley,
as a loan origination cost in consideration for a $26,000 short term promissory note. The total fair value of the common stock
was $2,385 based on an independent valuation on the date of grant.
On February 21, 2014, the Company issued
15,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member,
a related party, as a loan origination cost in consideration for a $75,000 short term promissory note. The total fair value of
the common stock was $9,562 based on an independent valuation on the date of grant.
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 182,105 Class A Common shares, consisting
of 173,053 previously issued and unvested shares of Class A Common Stock and 9,052 shares of his previously issued and vested Class
A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible
Preferred Stock was $1,163,162 based on an independent valuation on the date of grant; therefore the Company recognized additional
compensation expense of $707,025 due to the difference in the fair value of the Class A Common Stock exchanged.
On March 22, 2014, the Company issued 13,669,568
shares of the Series C Convertible Preferred Stock to L&F Lawn Services, a company owned by our CEO’s family member,
a related party, in exchange for 1,367 of their previously issued Class A Common Stock. The total fair value of the Series C Convertible
Preferred Stock was $8,731 based on an independent valuation on the date of grant; therefore the Company recognized additional
compensation expense of $5,370 due to the difference in the fair value of the Class A Common Stock exchanged.
On March 22, 2014, the Company issued 60,000,000
shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000,000 shares, consisting of
5,400 previously issued and unvested shares of Class A Common Stock and 600 shares of his previously issued and vested Class A
Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible
Preferred Stock was $38,324 based on an independent valuation on the date of grant; therefore the Company recognized additional
compensation expense of $23,295 due to the difference in the fair value of the Class A Common Stock exchanged.
On July 7, 2014 the Company issued 5,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost that was previously granted on January 15, 2014 in consideration for a $43,000 short term promissory
note. The total fair value of the common stock was $6,465 based on an independent valuation on the date of grant.
On July 7, 2014 the Company issued 1,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost that was previously granted on February 8, 2014 in consideration for a $13,000 short term promissory
note. The total fair value of the common stock was $1,193 based on an independent valuation on the date of grant.
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.
EPAZZ, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 7, 2014 the Company issued 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost that was previously granted on March 26, 2014 in consideration for a $25,000 short term promissory note.
The total fair value of the common stock was $2,928 based on an independent valuation on the date of grant.
On July 7, 2014 the Company issued 2,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost that was previously granted on March 28, 2014 in consideration for an $18,750 short term promissory note. The
total fair value of the common stock was $1,594 based on an independent valuation on the date of grant.
On July 7, 2014 the Company issued 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost that was previously granted on March 28, 2014 in consideration for a $25,000 short term promissory note.
The total fair value of the common stock was $2,928 based on an independent valuation on the date of grant.
On October 10, 2014 the Company issued
30,000,000 shares of Class A Common to our CEO from a conversion notice from Preferred C. As this was a conversion within the terms
of the Preferred C equity instrument no additional value was recognized as a result of this conversion.
On October 10, 2014 the Company issued
1,500,000 shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party, from a
conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional
value was recognized as a result of this conversion.
On October 10, 2014 the Company issued
1,400,000 shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from
a conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional
value was recognized as a result of this conversion.
On April 23, 2014, the Company granted
350 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $35,000 short term promissory note. The total fair value of the common stock was $1,050
based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August
29, 2014.
On April 24, 2014, the Company granted
1,000 shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination
cost in consideration for a $150,000 short term promissory note. The total fair value of the common stock was $3,000 based on the
closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
On May 7, 2014, the Company granted 1,000
shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost
in consideration for a $125,000 short term promissory note. The total fair value of the common stock was $2,000 based on the closing
price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
On May 28, 2014, the Company granted 325
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $32,500 short term promissory note. The total fair value of the common stock was $650 based
on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29,
2014.
On June 12, 2014, the Company granted 213
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $5,000 short term promissory note. The total fair value of the common stock was $213 based
on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29,
2014.
Convertible
Class B Common Stock Issuance for Services
On March 22, 2014, the Company issued 12,500,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing services. The total fair value
of the common stock was $44,737 based on the closing price of the Company’s common stock on the date of grant.
EPAZZ, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Debt Conversions into Class A Common
Stock – Related Parties
On April 2, 2014, the Company issued 25,000
shares of Class A Common Stock pursuant to the conversion of $25,000 of convertible debt held by Vivienne Passley, a related party,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On April 7, 2014, the Company issued 12,500
shares of Class A Common Stock pursuant to the conversion of $18,750 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 3, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 22, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On June 17, 2014, the Company issued 33,433
shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party,
which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On October 10, 2014 the Company issued
30,000,000 shares of Class A Common to our CEO from a conversion notice from Preferred C. As this was a conversion within the terms
of the Preferred C equity instrument no additional value was recognized as a result of this conversion.
On October 10, 2014 the Company issued
1,500,000 shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party, from a
conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional
value was recognized as a result of this conversion.
On October 10, 2014 the Company issued
1,400,000 shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from
a conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional
value was recognized as a result of this conversion.
Debt Conversion by Related Party
On March 2, 2015, the Company issued 64,000,000
shares of Class A Common Stock pursuant to the conversion of $3,200 of convertible debt held by GG Mars, a company owned by our
CEO’s family member, a related party, which consisted of $3,200 of principal.. The note was converted in accordance with
the conversion terms; therefore no gain or loss has been recognized.
On March 3, 2015, the Company issued 44,000,000
shares of Class A Common Stock pursuant to the conversion of $3,300 of convertible debt held by Star Financial, a company owned
by our CEO’s family member, a related party, which consisted of $3,300 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On March 11, 2015, the Company issued 22,000,000
shares of Class A Common Stock pursuant to the conversion of $1,650 of convertible debt held by Star Financial, a company owned
by our CEO’s family member, a related party, which consisted of $1,650 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On March 24, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by GG Mars, a company owned by our
CEO’s family member, a related party, which consisted of $2,000 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Employment Agreement
On September 6, 2012, we entered into an
employment agreement with Shaun Passley, Ph.D., our Chief Executive Officer, President, and Chairman of the Board of Directors
which had a term of ten (10) years. Compensation pursuant to the agreement calls for a base salary of $180,000 per year; of which
$30,000 shall be payable annually in cash and $150,000 shall be payable in shares of the Company’s Common Stock at the rate
of $0.006 per share, or 2,500 shares per year. In addition, the Company issued 1 billion shares of Class A Common Stock to the
Company’s CEO as a bonus in consideration for various services performed, and to be performed over a ten year period beginning
on September 6, 2012, provided that all of the shares remain subject to forfeiture until such time, if ever, as we generate annual
revenues of at least $10 million, subject to the below termination provisions. The total fair value of the common stock was $6,000,000
based on the closing price of the Company’s common stock on the date of grant, which has been presented as a deduction against
additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The
vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares. In the event of the termination of Dr. Passley’s employment agreement for cause by the Company or without
good reason by Dr. Passley, any non-vested shares are to be canceled and he is to be paid any consideration he is owed through
the date of termination. In the event of the termination of Dr. Passley’s employment agreement for good reason (as described
in the agreement) by Dr. Passley or without cause by the Company, he is due eight additional weeks of compensation and all non-vested
shares vest to him immediately. In the event of the termination of Dr. Passley’s employment agreement for any other reason,
he is due eight weeks of additional salary and any non-vested shares are to be canceled.
We do not have an employment or consultant
agreement with Craig Passley, our Secretary, however on March 20, 2013, we granted 60 million shares to Craig Passley for services
rendered between 2012 and 2021. The shares vest annually over the 10 year period with the first 6 million vesting upon the grant
date. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible
Series C Preferred shares.
Amendments to Employment Agreement
On August 16, 2013, the Company amended
Shaun Passley, Ph.D.’s employment agreement to increase the cash portion of his compensation from $30,000 per year to $100,000
in the initial year of the agreement only. All other terms remain in effect, and the shares of stock awarded as a bonus as previously
disclosed were granted in addition to the stock based compensation outlined in the original agreement.
Note 6 – Fair Value of Financial
Instruments
Under FASB ASC 820-10-5, fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value
hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under
GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required
for items measured at fair value.
The Company does not have any financial
instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured
using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.
Level 2 - Inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield
curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means
(market corroborated inputs).
Level 3 - Unobservable inputs
that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
EPAZZ, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following schedule summarizes the valuation
of financial instruments at fair value on a non-recurring basis in the balance sheets as of March 31, 2015 and December 31, 2014:
| |
Fair Value Measurements at March 31, 2015 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets | |
| | | |
| | | |
| | |
Intangible assets | |
$ | – | | |
$ | – | | |
$ | 309,055 | |
Goodwill | |
| – | | |
| – | | |
| 374,818 | |
Total assets | |
| – | | |
| – | | |
| 683,873 | |
Liabilities | |
| | | |
| | | |
| | |
Lines of credit | |
| – | | |
| 66,137 | | |
| – | |
Capital leases | |
| – | | |
| 4,748 | | |
| – | |
Promissory notes | |
| – | | |
| 2,157,469 | | |
| – | |
Notes payable, related parties | |
| – | | |
| 1,271,198 | | |
| – | |
Convertible debts, net of discount of $222,228 | |
| – | | |
| 147,885 | | |
| – | |
Derivative Liabilities | |
| – | | |
| 24,482 | | |
| – | |
Total Liabilities | |
| – | | |
| 3,671,919 | | |
| – | |
| |
$ | – | | |
$ | (3,671,919 | ) | |
$ | 683,873 | |
| |
Fair Value Measurements at December 31, 2014 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets | |
| | | |
| | | |
| | |
Intangible assets | |
$ | – | | |
$ | – | | |
$ | 337,938 | |
Goodwill | |
| – | | |
| – | | |
| 374,818 | |
Total assets | |
| – | | |
| – | | |
| 712,756 | |
Liabilities | |
| | | |
| | | |
| | |
Lines of credit | |
| – | | |
| 80,239 | | |
| – | |
Capital leases | |
| – | | |
| 5,889 | | |
| – | |
Long term debts | |
| – | | |
| 2,504,371 | | |
| – | |
Notes payable, related parties | |
| – | | |
| 1,221,323 | | |
| – | |
Convertible debts, net of discount of $131,774 | |
| – | | |
| 88,739 | | |
| – | |
Total Liabilities | |
| – | | |
| 3,900,561 | | |
| – | |
| |
$ | – | | |
$ | (3,900,561 | ) | |
$ | 712,756 | |
There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the periods ended March 31, 2015 and 2014.
Level 3 assets consist of intangible assets
and goodwill.
Note 7 – Other Current Assets
As of March 31, 2015 and December 31, 2014
other current assets included the following:
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
Deferred financing costs | |
$ | 43,688 | | |
$ | 54,729 | |
Security deposits | |
| 9,878 | | |
| 9,878 | |
| |
$ | 53,566 | | |
$ | 64,607 | |
The Company recognized $39,791 and $106,341
of amortization expense related to the deferred financing costs during the three months ended March 31, 2015 and 2014, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 8 – Property and Equipment
Property and Equipment consists of the
following at March 31, 2015 and December 31, 2014, respectively:
|
March 31, |
|
December 31, |
|
2015 |
|
2014 |
Furniture and fixtures |
$ |
22,006 |
|
$ |
22,006 |
Computers and equipment |
|
197,683 |
|
|
188,613 |
Software |
|
19,506 |
|
|
15,660 |
Assets held under capital leases |
|
17,855 |
|
|
17,855 |
|
|
257,050 |
|
|
244,134 |
Less accumulated depreciation and amortization |
|
(152,518) |
|
|
(137,436) |
|
$ |
104,532 |
|
$ |
106,698 |
Depreciation and amortization expense totaled
$15,082 and $12,058 for the periods ended March 31, 2015 and 2014, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 9 – Intangible Assets
Intangible assets consisted of the following at March 31, 2015
and December 31, 2014, respectively:
| |
Useful | |
March 31, | | |
December 31, | |
Description | |
Life | |
2015 | | |
2014 | |
Technology-based intangible assets | |
| |
| | | |
| | |
K9 Bytes | |
5 Years | |
$ | 31,569 | | |
$ | 31,569 | |
MS Health | |
5 Years | |
| 74,400 | | |
| 74,400 | |
Intellisys | |
5 Years | |
| 163,333 | | |
| 163,333 | |
Cynergy | |
5 Years | |
| 1,205 | | |
| 1,205 | |
Interaction | |
5 Years | |
| 466 | | |
| 466 | |
Jadian | |
5 Years | |
| 6,816 | | |
| 6,816 | |
Strand | |
5 Years | |
| 1,259 | | |
| 1,259 | |
Telecorp | |
5 Years | |
| 12,082 | | |
| 12,082 | |
| |
| |
| 291,130 | | |
| 291,130 | |
Contracts | |
| |
| | | |
| | |
MS Health | |
6 Years | |
| 129,000 | | |
| 129,000 | |
Interaction | |
6 Years | |
| 1,056 | | |
| 1,056 | |
| |
| |
| 130,056 | | |
| 130,056 | |
Trade Name | |
| |
| | | |
| | |
K9 Bytes | |
5 Years | |
| 16,536 | | |
| 16,536 | |
Cynergy | |
5 Years | |
| 274 | | |
| 274 | |
Jadian | |
5 Years | |
| 4,572 | | |
| 4,572 | |
Strand | |
5 Years | |
| 783 | | |
| 783 | |
Telecorp | |
5 Years | |
| 4,898 | | |
| 4,898 | |
| |
| |
| 27,063 | | |
| 27,063 | |
Other Intangible Assets | |
| |
| | | |
| | |
MS Health | |
2 Years | |
| 20,250 | | |
| 20,250 | |
K9 Bytes | |
2 Years | |
| 26,000 | | |
| 26,000 | |
Interaction | |
2 Years | |
| 686 | | |
| 686 | |
| |
| |
| 46,936 | | |
| 49,936 | |
| |
| |
| | | |
| | |
| |
| |
| | | |
| | |
Total intangible assets | |
| |
| 495,186 | | |
| 495,186 | |
Less: accumulated amortization | |
| |
| (186,131 | ) | |
| (157,248 | ) |
Intangible assets, net | |
| |
$ | 309,055 | | |
$ | 337,938 | |
Amortization expense on intangible assets
totaled $28,883 and $34,098 for the three months ended March 31, 2015 and March 31, 2014, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 10 – Goodwill
The changes in the carrying amount of goodwill
and accumulated impairment losses for the period ended March 31, 2015 and December 31, 2014, respectively, are as follows:
| |
K9 Bytes | | |
Jadian | | |
Strand | | |
Total | |
Balance, December 31, 2014: | |
$ | 87,244 | | |
$ | 81,253 | | |
$ | 206,321 | | |
$ | 374,818 | |
Goodwill acquired during the period | |
| – | | |
| – | | |
| – | | |
| – | |
Impairment loses | |
| – | | |
| – | | |
| – | | |
| – | |
Balance, March 31, 2015: | |
$ | 87,244 | | |
$ | 81,253 | | |
$ | 206,321 | | |
$ | 374,818 | |
Our subsidiaries operate as a single operating
segment. The fair value of the goodwill is tested for impairment in the fourth quarter, after the annual forecasting process. Our
annual forecasting resulted in impairment losses of $1,489,078 during the year ended December 31, 2014. We will perform our next
earnings forecast during the fourth quarter of 2015, unless events occur or circumstances change that would more likely than not
reduce the fair value of the reporting unit below its carrying amount. The fair value of our goodwill was estimated using the expected
present value of future cash flows.
Note 11 – Accrued Expenses
As of March 31, 2015 and December 31, 2014
accrued expenses included the following:
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
Accrued interest | |
$ | 63,524 | | |
$ | 63,697 | |
Accrued interest, related parties | |
| 170,592 | | |
| 127,770 | |
Accrued payroll and payroll taxes | |
| 23,769 | | |
| 23,769 | |
Other accrued expenses | |
| 484 | | |
| 560 | |
| |
$ | 258,369 | | |
$ | 215,796 | |
Note 12 – Line of Credit
Lines of credit consisted of the following
at March 31, 2015 and December 31, 2014, respectively:
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
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. | |
$ | 46,467 | | |
$ | 47,898 | |
| |
| | | |
| | |
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. | |
| 13,421 | | |
| 14,786 | |
| |
| | | |
| | |
Line of credit of $40,000 from Dell Business Credit available for the purchase of Dell products, such as computer and software equipment. The outstanding balance on the line of credit bears interest at a rate of 26.99%. Variable payments are due monthly. | |
| – | | |
| 5,305 | |
| |
| | | |
| | |
Line of credit of $25,000 from Bank of America. The outstanding balance on the line of credit bears interest at a rate of 4.25%. Variable payments are due monthly. A total of $24,500 was acquired with the acquisition of Telecorp. | |
| 12,250 | | |
| 12,250 | |
| |
| | | |
| | |
Total line of credit | |
| 72,138 | | |
| 80,239 | |
Less: current portion | |
| (72,138 | ) | |
| (80,239 | ) |
Line of credit, less current portion | |
$ | – | | |
$ | – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 13 – Capital Lease Obligations
Payable
The Company leases certain equipment under
agreements that are classified as capital leases as follows:
The cost of equipment under capital leases
is included in the Balance Sheets as property and equipment and was $16,962 and $17,855 at March 31, 2015 and December 31, 2014,
respectively. Accumulated amortization of the leased equipment was $11,606 and $10,713 at March 31, 2015 and 2014, 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 March 31, 2015 and December 31, 2014, are
as follows:
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
Lease #1 – Capital Lease from Marlin Bank Lease 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 outstanding balance on the Capital Lease bears interest at a rate of 13%.
| |
| 5,047 | | |
| 5,890 | |
Total minimum payments | |
$ | 5,047 | | |
$ | 5,890 | |
Less: amount representing interest | |
| (299 | ) | |
| (766 | ) |
Present value of net minimum lease payments | |
| 4,748 | | |
| 5,124 | |
Less: Current maturities of capital lease obligations | |
| (4,748 | ) | |
| (5,124 | ) |
Long-term capital lease obligations | |
$ | 0 | | |
$ | 0 | |
Note 14 – Notes Payable, Related Parties
Notes payable, related parties consist
of the following at March 31, 2015 and December 31, 2014, respectively:
| |
2015 | | |
2014 | |
Originated March 18, 2015, a $6,250 unsecured promissory note payable, including a $1,250 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 18, 2015. The note also carries a liquidated damages fee of $1,000 upon default. | |
$ | 6,250 | | |
$ | – | |
| |
| | | |
| | |
Originated January 22, 2015, an unsecured $47,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries a liquidated damages fee of $1,500 upon default. | |
| 47,000 | | |
| – | |
| |
| | | |
| | |
Originated February 24, 2015, an unsecured $48,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries a liquidated damages fee of $1,500 upon default. | |
| 48,000 | | |
| – | |
| |
| | | |
| | |
Originated March 3, 2015, an unsecured $21,875 promissory note payable, including a $4,375 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on October 3, 2015. The note also carries a liquidated damages fee of $1,500 upon default. | |
| 21,875 | | |
| – | |
| |
| | | |
| | |
On various dates, the Company’s CEO advanced and repaid short term loans to the Company. A total of $-52,564- and $77,879 was advanced and repaid during the periods ending March 31, 2015 and 2014, respectively. | |
| – | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 | | |
| 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 | | |
| 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 | | |
| 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 | | |
| 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 | | |
| 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 | | |
| 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 | | |
| 20,000 | |
| |
| | | |
| | |
Originated June 12, 2014, an unsecured $21,250 promissory note payable, including a $4,250 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on October 12, 2014. In addition, a loan origination fee consisting of 2,125,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014. | |
| 21,250 | | |
| 21,250 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 | | |
| 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 | | |
| 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 | | |
| 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 | | |
| 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 | | |
| 150,000 | |
| |
| | | |
| | |
Originated April 23, 2014, an unsecured $35,000 promissory note payable, including a $7,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 23, 2014. In addition, a loan origination fee consisting of 3,500,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014. | |
| 35,000 | | |
| 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 | | |
| 25,000 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. On March 2, 2015, the promissory note was subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. | |
| – | | |
| 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 | | |
| 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 | | |
| 25,000 | |
| |
| | | |
| | |
Originated March 7, 2014, a $22,000 unsecured promissory note payable, including a $7,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 7, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock valued at $1,942 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $7,000 upon default, which was amended and removed on September 19, 2014. | |
| 22,000 | | |
| 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 | | |
| 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 | | |
| 75,000 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 | | |
| 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 | | |
| 26,000 | |
| |
| | | |
| | |
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 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. | |
| 12,000 | | |
| 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. | |
| 15,500 | | |
| 32,000 | |
| |
| | | |
| | |
Originated October 9, 2012, unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matures on July 15, 2013. In addition, a loan origination fee, consisting of 144,928 shares of Series A Common Stock with a fair market value of $884 was issued as consideration for the loan on October 9, 2012. Currently in default. | |
| 2,868 | | |
| 2,868 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Originated August 11, 2014, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a zero percent (0%) interest rate, matures on December 1, 2014. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was issued as consideration for the loan on July 19, 2013. | |
| 5,705 | | |
| 3,705 | |
| |
| | | |
| | |
Originated October 20, 2014, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on May 20, 2014. In addition, a loan origination fee of $1,500 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. On March 2, 2015, the promissory note was subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.000075. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. | |
| – | | |
| 5,000 | |
| |
| | | |
| | |
Originated December 17, 2014, an unsecured $9,000 promissory note payable, including a $2,500 loan origination fee, owed to L & F Lawn Service, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 17, 2015. L & F Service loaned an additional $16,000 to the Company at the same interest rate. | |
| 25,000 | | |
| 9,000 | |
| |
| | | |
| | |
Originated November 9, 2014, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on June 9, 2015. In addition, a loan origination fee of $12,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. | |
| 60,000 | | |
| 60,000 | |
| |
| | | |
| | |
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. | |
| 9,000 | | |
| 18,000 | |
| |
| | | |
| | |
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. On March 31, 2015, the promissory note was subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.000075. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. | |
| – | | |
| 30,000 | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
Total notes payable, related parties | |
| 1,271,198 | | |
| 1,221,323 | |
Less: current portion | |
| (1,271,198 | ) | |
| (1,221,323 | ) |
Notes payable, related parties, less current portion | |
$ | – | | |
$ | – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recorded interest expense on
notes payable to related parties in the amounts of $47,797 and $29,072 during the three months ended March 31, 2015 and March 31,
2014, respectively. The Company recorded accrued interest of $170,592and $127,619 as of March 31, 2015 and December 31, 2014, respectively.
Note 15 – Convertible Debts
Convertible debts consist of the following
at March 31, 2015 and December 31, 2014, respectively:
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
Originated March 2, 2015, an unsecured $5,000 convertible promissory note, carries a 15% interest rate, matures on May 20, 2015, (“Star Note”) owed to Star Financial Corporation, a related party, consisting of a total of $5,000 of principal and $447.95 of accrued interest. The October 20, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.000075. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. | |
$ | 5,000 | | |
| – | |
| |
| | | |
| | |
Originated March 2, 2015, an unsecured $18,750 convertible promissory note, carries a 15% interest rate, matures on May 28, 2014, (“GG Note”) owed to GG Mars, Inc., a related party, consisting of a total of $18,750 of principal and $2,196.06 of accrued interest. The March 28, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. The principal of $5,200 was subsequently converted to a total of 104,000,000 shares of common stock over various dates from March 2, 2015 to March 24, 2015. | |
| 13,550 | | |
| – | |
| |
| | | |
| | |
Originated March 31, 2015, an unsecured $30,000 convertible promissory note, carries a 15% interest rate, matures on May 7, 2014, (“Star Note”) owed to Star Financial Corporation, a related party, consisting of a total of $30,000 of principal and $3,772.60 of accrued interest. The March 7, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. The principal of $4,950 was subsequently converted to a total of 66,000,000 shares of common stock over various dates from March 3, 2015 to March 11, 2015.. | |
| 25,050 | | |
| – | |
| |
| | | |
| | |
Originated January 7, 2015, an unsecured $42,323.64 convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“One Magna Group Note”) owed to Magna Group, LLC, consisting of one partial note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $75,000 of principal and $9,647.28 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the 3 lowest trading price of the Company’s common stock for the ten (10) days prior to the conversion date, or $0.000075 per share, whichever is greater. At no time shall the conversion price be lower than $0.000075. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal of $42,323.64 was subsequently converted to a total of 220,646,886 shares of common stock over various dates from January 7, 2015 to March 20, 2015 in complete satisfaction of the debt. | |
| – | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Originated January 7, 2015, an unsecured $17,500 convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“Two Magna Group Note”) owed to Magna Group, LLC. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the 3 lowest trading price of the Company’s common stock for the ten (10) days prior to the conversion date, or $0.000075 per share, whichever is greater. At no time shall the conversion price be lower than $0.000075. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. | |
| 17,500 | | |
| – | |
| |
| | | |
| | |
On January 29, 2015, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible Promissory Note in the original principal amount of $43,000. The One KBM Note had a maturity date of November 2, 2015, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the thirty (30) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the One KBM Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the One KBM Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation. | |
| 43,000 | | |
| – | |
| |
| | | |
| | |
Originated February 13, 2015, an unsecured $127,812.50 convertible promissory note, carries a 15% interest rate, matures on January 7, 2016, (“IBC Note”) owed to IBC Funds, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $106,000 of principal and $21,812.5 of accrued interest and fees. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest trading price of the Company’s common stock for the fifteen (15) days prior to the conversion date. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. IBC Funds did not complete the require payments under the debt purchase agreement, therefore the ownership of the note was returned to Star Financial Corporation. The assigned principal of $28,160 was subsequently converted to a total of 268,000,000 shares of common stock over various dates from February 7, 2015 to March 31, 2015. | |
| 99,653 | | |
| – | |
| |
| | | |
| | |
Originated February 17, 2015, an unsecured $22,542.47 convertible promissory note, carries a 5% interest rate, matures on February 17, 2016, (“Blackbridge Note”) owed to Blackbridge Capital, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $20,000 of principal and $2,542.47 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest trading price of the Company’s common stock for the fifteen (15) days prior to the conversion date. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. The assigned principal of $22,542.47 was subsequently converted to a total of 113,300,733 shares of common stock over various dates from February 17, 2015 to March 5, 2015. | |
| – | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The assigned principal of $8,521 was subsequently converted to a total of 7,560,000 shares of common stock over various dates from January 2, 2015 to February 23, 2015 in complete satisfaction of the debt. | |
| 7,604 | | |
| 16,125 | |
| |
| | | |
| | |
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 12,500,000 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. Principal of $19,404 was subsequently converted to a total of 80,700,000 shares of common stock over various dates from January 9, 2015 to March 26, 2015. | |
| 25,145 | | |
| 44,549 | |
| |
| | | |
| | |
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-three 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 34,166 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. | |
| – | | |
| – | |
| |
| | | |
| | |
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-three 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 15,000shares 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. | |
| – | | |
| – | |
EPAZZ, INC.
NOTES
TO 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 5,000shares pursuant to debt conversion on September 15, 2012, $46,000 into 5,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 5,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 8,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into 4,000 shares pursuant to debt conversion on August 7, 2013, $18,750 into 12,500 shares pursuant to debt conversion on April 7, 2014, $20,000 into 20,000 shares pursuant to debt conversion on May 3, 2014, and $15,000, consisting of $7,699 of principal and $7,301 of interest into 15,000 shares pursuant to the final debt conversion on May 22, 2014. | |
| – | | |
| – | |
| |
| | | |
| | |
Unsecured $43,000 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on September 5, 2015. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest trading bid prices of the Company’s common stock for the thirty (30) trading days prior to the conversion date. The note carries a twenty two percent (22%) interest rate in the event of default. | |
| 43,000 | | |
| 43,000 | |
| |
| | | |
| | |
Unsecured $33,000 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on July 22, 2015. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest trading bid prices of the Company’s common stock for the thirty (30) trading days prior to the conversion date. The note carries a twenty two percent (22%) interest rate in the event of default. | |
| 33,000 | | |
| 33,000 | |
| |
| | | |
| | |
Originated November 6, 2014, an unsecured $33,600 convertible promissory note, carries a 8% interest rate and matures on November 5, 2015 owed to LG Capital. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s issued and outstanding shares. The assigned principal of $7,702 was subsequently converted to a total of 38,891,824 shares of common stock over various dates from January 7, 2015 to March 19, 2015. | |
| 26,062 | | |
| 33,600 | |
| |
| | | |
| | |
Originated November 6, 2014, an unsecured $50,238.63 convertible promissory note, carries a 8% interest rate, matures on November 6, 2015, (“LG Note”) owed to LG Capital, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $43,000 of principal and $7,238.63 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s issued and outstanding shares. | |
| 50,239 | | |
| 50,239 | |
Total convertible debts | |
| 388,802 | | |
| 220,513 | |
Less: unamortized discount on beneficial conversion feature | |
| (240,917 | ) | |
| (131,774 | ) |
Less: unamortized OID | |
| – | | |
| – | |
Convertible debts | |
| 147,885 | | |
| 88,739 | |
Less: current maturities of convertible debts | |
| (147,885 | ) | |
| (88,739 | ) |
Long term convertible debts | |
$ | – | | |
$ | – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recognized interest expense
in the amount of $9,379 and $6,764 for the periods ended March 31, 2015 and 2014, respectively related to convertible debts. The
Company recorded accrued interest of $12,045 and $3,573 as of March 31, 2015 and December 31, 2014, respectively.
In addition, the Company recognized and
measured the embedded beneficial conversion feature present in the convertible debts by allocating a portion of the proceeds equal
to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment
date using the effective conversion price of the convertible debt. This intrinsic value is limited to the portion of the proceeds
allocated to the convertible debt.
The aforementioned accounting treatment
resulted in a total debt discount equal to $240,917 and $131,774 as of March 31, 2015 and December 31, 2014, respectively. The
discount is amortized on a straight line basis from the dates of issuance until the stated redemption date of the debts, as noted
above.
The convertible notes that created the
beneficial conversion feature carry default provisions that place a “maximum share amount” on the note holders that
can be owned as a result of the conversions to common stock by the note holders is 9.99% and 4.99%, respectively, of the issued
and outstanding shares of Epazz.
During the three months ended March 31,
2015 and March 31, 2014, the Company recorded debt amortization expense in the amount of $197,786 and $58,313, respectively.
Asher Enterprises,
Inc. Convertible Note
On August 19,
2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $53,000. The Seventh Asher Note had a maturity date of May 21, 2014, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the Seventh Asher Note were restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Seventh Asher Note was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Seventh Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0006
below the market price on August 19, 2013 of $0.0014 provided a value of $39,021, of which $-0- and $20,007 was amortized during
the three months ended March 31, 2015 and 2014, respectively.
On September 18,
2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $42,500. The Eighth Asher Note had a maturity date of June 20, 2014, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the Eighth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Eighth Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company evaluated
the Eighth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0004
below the market price on September 18, 2013 of $0.0010 provided a value of $27,210, of which $-0- and $16,920 was amortized during
the periods ended March 31, 2015 and 2014, respectively.
On October 20,
2014, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $43,000. The Seventh Asher Note had a maturity date of July 22, 2015, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the Ninth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Ninth Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated the Three Asher Note and determined that
the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not
constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion
occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The
beneficial conversion feature discount resulting from the conversion price of $0.03330 below the market price on October 20, 2014
of $0.20 provided a value of $43,000, of which $14,333 and $-0- was amortized during the periods ended March 31, 2015 and 2014,
respectively.
On December 3,
2014, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $33,000. The Tenth Asher Note had a maturity date of September 5, 2015, and
was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.
The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%).
“Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading
Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean
$0.00005 per share. The shares of common stock issuable upon conversion of the Tenth Asher Note were restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Tenth Asher Note was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Tenth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.005 below
the market price on December 3, 2014 of $0.03 provided a value of $33,000, of which $11,000 and $-0- was amortized during the periods
ended March 31, 2015 and 2014, respectively.
LG Capital,
Inc. Convertible Notes
On November 6,
2014, we entered into a Securities Purchase Agreement with LG Capital, Inc., pursuant to which we sold to LG Capital an 8% Convertible
Promissory Note in the original principal amount of $33,600. The First LG Capital Note had a maturity date of November 6, 2015,
and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.
The “Variable Conversion Price” shall mean 65% multiplied by the Market Price (representing a discount rate of 35%).
“Market Price” means the average of the lowest two (2) Trading Prices for the Common Stock during the twelve (12) Trading
Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean
$0.00005 per share. The shares of common stock issuable upon conversion of the First LG Capital were restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First LG Capital was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company evaluated
the First LG Capital and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.125 below
the market price on November 6, 2014 of $0.0817 provided a value of $33,600, of which $8,400 and $-0- was amortized during the
periods ended March 31, 2015 and 2014, respectively.
On October 31,
2014, we entered into a Securities Purchase Agreement with LG Capital, Inc., pursuant to which we sold to LG Capital an 8% Convertible
Promissory Note in the original principal amount of $50,239. The Second LG Capital Note had a maturity date of October 31, 2015,
and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.
The “Variable Conversion Price” shall mean 65% multiplied by the Market Price (representing a discount rate of 35%).
“Market Price” means the average of the lowest two (2) Trading Prices for the Common Stock during the twelve (12) Trading
Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean
$0.00005 per share. The shares of common stock issuable upon conversion of the Second LG Capital were restricted securities as
defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second LG Capital was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Second LG Capital and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.21 below
the market price on October 31, 2014 of $0.1667 provided a value of $50,239, of which $12,560 and $-0- was amortized during the
periods ended March 31, 2015 and 2014, respectively.
JMJ Financial, Inc. Convertible Note
On November 13,
2013, we drew additional funds on the June 12, 2013 Securities Purchase Agreement with JMJ Financial, Inc., (“JMJ”)
pursuant to which we sold to JMJ another 12% Convertible Promissory Note in the original principal amount of $33,000. The Second
JMJ Note has a maturity date of November 12, 2014, and was convertible into our common stock at the greater of (i) the Variable
Conversion Price and (ii) the Fixed Conversion Price, not less than $0.00009 per share. The “Variable Conversion Price”
shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the lowest
Trading Price for the Common Stock during the twenty five (25) Trading Day period ending on the latest complete Trading Day prior
to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009 per share. The shares of common stock issuable
upon conversion of the Second JMJ Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of
1933. The issuance of the Second JMJ Note was exempt from the registration requirements of the Securities Act of 1933 pursuant
to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our
operations, and there was no solicitation.
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 CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $-0- and $18,045 was amortized
during the years ended March 31, 2015 and 2014, respectively.
Magna Group, LLC Convertible Note
On December 31,
2013, we issued to Magna Group, LLC (“First Magna Group Note”) a 12% Convertible Promissory Note in the original principal
amount of $35,028. The note was issued in exchange for two notes totaling $33,000 of principal and $1,028 of accrued interest,
along with a $1,000 origination fee, that were acquired from, and assigned by, Star Financial on December 31, 2013. The First Magna
Group Note has a maturity date of December 31, 2014, and is convertible into our common stock at the greater of (i) the Variable
Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by
the Market Price (representing a discount rate of 50%). “Market Price” means the lowest Trading Price for the Common
Stock during the five (5) day period prior to delivery of the conversion notice. “Fixed Conversion Price” shall mean
$0.00004 per share. The shares of common stock issuable upon conversion of the First Magna Group Note are restricted securities
as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Magna Group Note is exempt from
the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser
is an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the First Magna Group Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.0003 below the market price on December 31, 2013 of $0.0006 provided a value of $35,028, of which $-0- and $35,028- was amortized
during the years ended March 31, 2015 and 2014, respectively.
KBM Worldwide,
Inc. Convertible Note
On January 29,
2015, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible
Promissory Note in the original principal amount of $43,000. The KBM Note had a maturity date of October 31, 2015 and was convertible
into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable
Conversion Price” shall mean 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 KBM Note were restricted securities as defined in Rule 144 promulgated
under the Securities Act of 1933. The issuance of the Seventh Asher Note was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor,
familiar with our operations, and there was no solicitation.
The Company evaluated
the KBM 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 $0.00126 below the market
price on January 29, 2015 of $0.0021 provided a value of $40,665, of which $9,020 and $-0- was amortized during the three months
ended March 31, 2015 and 2014, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
IBC Funds Convertible
Note
On February 13,
2015, we entered into a Securities Purchase Agreement with IBC Funds., pursuant to which we sold to IBC an 8% Convertible Promissory
Note in the original principal amount of $127,813. The IBC Note had a maturity date of August 14, 2015, and was convertible into
our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion
Price” shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). “Market Price” means
the average of the lowest one (1) 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 IBC Note were restricted securities as defined in Rule 144 promulgated under the
Securities Act of 1933. The issuance of the Seventh Asher Note was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor,
familiar with our operations, and there was no solicitation.
The Company evaluated
the IBC 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 $0.00072 below the market
price on February 13, 2015 of $0.0016 provided a value of $127,813, of which $60,464 and $-0- was amortized during the three months
ended March 31, 2015 and 2014, respectively.
Star Financial Corporation, Inc. Convertible
Note, Related Party
On March 2, 2015,
we entered into a Convertible Promissory Note Agreement with Star Financial Corporation (“Star”), a company owned by
our CEO’s family member, pursuant to which we sold to Star an 15% Convertible Promissory Note in the original principal amount
of $5,000. The Star was convertible into shares of common stock at the discretion of the note holder at a fix price $0.000075 per
share, whichever is greater. The shares of common stock issuable upon conversion of the Star Note were restricted securities as
defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Star 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 9.99% of the Company’s issued and outstanding shares.
The Company evaluated
the Star 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 $0.00023 below the market
price on March 2, 2015 of $0.0003 provided a value of $5,000, of which $525 and $-0- was amortized during the periods ended March
31, 2015 and 2014, respectively.
GG Mars, Inc. Convertible Note, Related
Party
On March 2, 2015,
we entered into a Convertible Promissory Note Agreement with Star Financial Corporation (“GG Mars”), a company owned
by our CEO’s family member, pursuant to which we sold to GG Mars an 15% Convertible Promissory Note in the original principal
amount of $18,750. The GG Mars was convertible into shares of common stock at the discretion of the note holder at a fix price
$0.00005 per share, whichever is greater. The shares of common stock issuable upon conversion of the GG Mars Note were restricted
securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the 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 9.99% of the Company’s issued and outstanding shares.
The Company evaluated
the 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 $0.00025 below the market
price on March 2, 2015 of $0.0003 provided a value of $18,750, of which $7,170 and $-0- was amortized during the periods ended
March 31, 2015 and 2014, respectively.
Star Financial Corporation Convertible
Note, Related Party
On March 31, 2015,
we entered into a Convertible Promissory Note Agreement with Star Financial Corporation (“Star”), a company owned by
our CEO’s family member, pursuant to which we sold to Star an 15% Convertible Promissory Note in the original principal amount
of $30,000. The Star was convertible into shares of common stock at the discretion of the note holder at a fix price $0.000075
per share, whichever is greater. The shares of common stock issuable upon conversion of the Star Note were restricted securities
as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Star 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 9.99% 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.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company evaluated
the Star 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 $0.00008 below the market
price on March 2, 2015 of $0.0002 provided a value of $30,000, of which $4,950 and $-0- was amortized during the years ended March
31, 2015 and 2014, respectively.
Magna Group, LLC Convertible Note
On January 7,
2015, we issued to Magna Group, LLC (“First Magna Group Note”) a 12% Convertible Promissory Note in the original principal
amount of $42,324. The note was issued in exchange for partial note $42,324 was acquired from, and assigned by, Star Financial
on January 7, 2015. The First Magna Group Note has a maturity date of January 7, 2016 and is convertible into our common stock
at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price”
shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the lowest
Trading Price for the Common Stock during the five (5) day period prior to delivery of the conversion notice. “Fixed Conversion
Price” shall mean $0.00004 per share. The shares of common stock issuable upon conversion of the First Magna Group Note are
restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Magna Group
Note is exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated
thereunder. The purchaser is an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the First Magna Group Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.004 below the market price on January 7, 2015 of $0.008 provided a value of $42,324, of which $42,324 and $-0- was amortized
during the years ended March 31, 2015 and 2014, respectively.
The First Magna Note has 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. See note 17 which derivatives liabilities.
Magna Group, LLC Convertible Note
On January 7,
2015, we issued to Magna Group, LLC (“Second Magna Group Note”) a 12% Convertible Promissory Note in the original principal
amount of $17,500. The Second Magna Group Note has a maturity date of January 7, 2016, and is convertible into our common stock
at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price”
shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the lowest
Trading Price for the Common Stock during the five (5) day period prior to delivery of the conversion notice. “Fixed Conversion
Price” shall mean $0.00004 per share. The shares of common stock issuable upon conversion of the Second Magna Group Note
are restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second Magna
Group Note is exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated
thereunder. The purchaser is an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Second Magna Group Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.004 below the market price on January 7, 2015 of $0.008 provided a value of $17,500, of which $3,979 and $-0- was amortized
during the years ended March 31, 2015 and 2014, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Second Magna Note has 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. See note 17 which derivatives liabilities.
Blackbridge, LLC Convertible Note
On February 17,
2015, we issued to Blackbridge Capital (“Blackbrdige”) a 5% Convertible Promissory Note in the original principal amount
of $22,542. The note was issued in exchange for partial note $22,252 was acquired from, and assigned by, Star Financial on February
17, 2015. The Blackbridge Note has a maturity date of February 17, 2016, and is convertible into our common stock at the greater
of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean
50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the lowest Trading Price
for the Common Stock during the five (5) day period prior to delivery of the conversion notice. “Fixed Conversion Price”
shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the Blackbridge Note are restricted securities
as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Blackbridge Note is exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser is an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Blackbridge 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 $0.00055
below the market price on February 17, 2015 of $0.0011 provided a value of $22,542, of which $22,542 and $-0- was amortized during
the years ended March 31, 2015 and 2014, respectively.
The Blackbridge Note has 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. See note 17 which derivatives liabilities.
Note 16 – Promissory Notes
Promissory notes consist of the following
at March 31, 2015 and December 31, 2014, respectively:
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
On January 30, 2015, the Company entered into an equipment financing agreement with CIT Finance for a total of $100,000 bearing an effective interest rate of 10.9%, consisting of 36 monthly payments of $3,210; maturing on January 30, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized. | |
$ | 100,000 | | |
$ | – | |
| |
| | | |
| | |
On January 27, 2015, the Company entered into an equipment financing agreement with Direct Credit for a total of $50,000 bearing an effective interest rate of 19.7%, consisting of 36 monthly payments of $1,793; maturing on January 27, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized. | |
$ | 50,000 | | |
| – | |
| |
| | | |
| | |
On February 20, 2015, the Company entered into an equipment financing agreement with Safe Leasing for a total of $37,500 bearing an effective interest rate of 31.625%, consisting of 36 monthly payments of $1,549; maturing on February 20, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized. | |
$ | 37,500 | | |
| – | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Can Capital Loan – K9 Bytes:
On February 20, 2014, the Company received a loan of $22,283 from WebBank, c/o CAN Capital Assets Servicing, Inc (“CAN Capital”) bearing an effective interest rate of 58.7%, consisting of 308 daily weekday payments of $130, maturing on December 25, 2014. The loan is collateralized with K9 Bytes’ receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. On July 10, 2014, we amended this loan agreement to increase the loan balance to $46,368, consisting of additional proceeds of $18,055, a rolled over balance of $15,545 to be paid over the restarted one year term of the loan via daily payments of $141. 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.
| |
| 27,071 | | |
| 29,085 | |
| |
| | | |
| | |
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. | |
| 64,181 | | |
| 79,926 | |
| |
| | | |
| | |
On July 31, 2014, the Company issued an unsecured $85,000 seller financed note payable as partial payment on an asset purchase (“Strand Note”), which bears interest at 6% per annum until the maturity date of July 31, 2015, and provides for equal monthly principal and interest payments of $2,586 commencing on August 31, 2014. The Strand Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity at July 15, 2015. In the event we default on the July 31, 2015 balloon payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever is greater. | |
| 69,484 | | |
| 69,484 | |
| |
| | | |
| | |
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. | |
| 194,041 | | |
| 201,035 | |
| |
| | | |
| | |
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. | |
| 38,735 | | |
| 43,226 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. | |
| 22,791 | | |
| 38,226 | |
| |
| | | |
| | |
On April 2, 2014, the Company received a loan of $25,000 from BSB Leasing, Inc. (“BSB Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 25%, consisting of monthly payments of $944, maturing on February 25, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| 24,544 | | |
| 27,376 | |
| |
| | | |
| | |
On March 20, 2014, the Company received a loan of $25,000 from BMT Leasing, Inc. (“BMT Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 21%, consisting of monthly payments of $910, maturing on March 20, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| 19,109 | | |
| 22,749 | |
| |
| | | |
| | |
On March 25, 2014, the Company received a loan of $25,000 from Navitas Leasing, Inc. (“Navitas Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 21%, consisting of monthly payments of $907, maturing on April 1, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. | |
| 21.754 | | |
| 24,475 | |
| |
| | | |
| | |
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”). | |
| 2,492 | | |
| 6,508 | |
| |
| | | |
| | |
Can Capital Loan – Epazz: On November 4, 2013, the Company received net proceeds of $75,381, and a direct payoff of $36,619 on the Rapid Advance Loan listed below, on a loan of $112,000 from CAN Capital Assets Servicing, Inc., (“CAN Capital #4”) bearing an effective interest rate of 53.1%, consisting of 370 daily weekday payments of $552, maturing on November 13, 2014. The loan is collateralized with Epazz’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. On April 23, 2014, we amended this loan agreement to increase the loan balance to $150,000, consisting of additional proceeds of $71,685, and a rolled over loan balance of $78,315, to be paid over the restarted term of the loan via 432 daily weekday payments of $648, maturing on July 7, 2015. | |
| 42,102 | | |
| 84,852 | |
| |
| | | |
| | |
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. | |
| 29,848 | | |
| 37,808 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. | |
| 27,461 | | |
| 31,925 | |
| |
| | | |
| | |
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. | |
| 16,025 | | |
| 21,677 | |
| |
| | | |
| | |
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. | |
| 16,928 | | |
| 24,888 | |
| |
| | | |
| | |
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. | |
| 25,590 | | |
| 31,074 | |
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. | |
| 3,512 | | |
| 5,267 | |
| |
| | | |
| | |
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. | |
| 34,384 | | |
| 44,165 | |
| |
| | | |
| | |
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. | |
| 272,118 | | |
| 283,868 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. | |
| 96,110 | | |
| 99,441 | |
| |
| | | |
| | |
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 | | |
| 8,454 | |
| |
| | | |
| | |
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. | |
| 33,936 | | |
| 39,471 | |
| |
| | | |
| | |
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. | |
| 113,538 | | |
| 120,062 | |
| |
| | | |
| | |
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. | |
| 168,374 | | |
| 176,702 | |
| |
| | | |
| | |
WLCC (Lendini) - Jadian: On December 15, 2014, the Company received a loan of $34,500 from Wakpamni Lake Community Corp, (“Lendini”), bearing an effective interest rate of 15.97%, consisting of 118 daily weekday payments of $293, maturing on September 11, 2015. The loan is collateralized with Jadian’s accounts receivable. | |
| 24,820 | | |
| 31,273 | |
| |
| | | |
| | |
Everest Business Funding (EBF Partners) - Epazz: On December 18, 2014, the Company received a loan of $34,500 from EBF Parters LLC, , bearing an effective interest rate of 15%, consisting of 120 daily weekday payments of $999, maturing on June 3, 2015. The loan is collateralized with Epazz accounts receivable. | |
| 39,883 | | |
| 112,925 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Knight Capital Funding II, LLC - Deskflex: On December 18, 2014, the Company received a loan of $35,830 from EBF Parters LLC, , bearing an effective interest rate of 12.5%, consisting of 143 daily weekday payments of $251, maturing on June 3, 2015. The loan is collateralized with Epazz accounts receivable. | |
| 16,411 | | |
| 22,049 | |
| |
| | | |
| | |
Direct Credit Funding Inc - Telecorp On December 26, 2014, the Company purchased $35,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 15%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment. | |
| 31,392 | | |
| 32,579 | |
| |
| | | |
| | |
Direct Credit Funding Inc - Telecorp On December 18, 2014, the Company purchased $45,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 17%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment. | |
| 37,404 | | |
| 43,101 | |
| |
| | | |
| | |
Maquerie Equipment Finance – Interaction Information Technology Inc On December 19, 2014, the Company purchased $50,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 16%, along with monthly principal and interest payments of $1,703. The loan is collateralized with the purchased equipment. | |
| 43,189 | | |
| 48,297 | |
| |
| | | |
| | |
Western Equipment Finance – Interaction Information Technology Inc On November 3, 2014, the Company purchased $50,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 8%, along with monthly principal and interest payments of $1,560. The loan is collateralized with the purchased equipment. | |
| 49,930 | | |
| 54,611 | |
| |
| | | |
| | |
Direct Credit Funding Inc - Epazz On December 18, 2014, the Company purchased $230,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 6%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment. | |
| 211,531 | | |
| 223,069 | |
| |
| | | |
| | |
Seller Note – Hopkins Unsecured $150,000 promissory note originated on December 29, 2014 between Epazz and J Hopkins, payable in equal monthly installments of $37,500 carries a 0% interest rate if paid in full by the maturity date of April 29, 2015. This Note may be prepaid at any time, in whole or in part, without penalty. | |
| 37,500 | | |
| 150,000 | |
| |
| | | |
| | |
Seller Note – Hopkins Unsecured $200,000 promissory note originated on December 29, 2014 between Epazz and J Hopkins. Beginning June 8, 2015, and continuing on the 8th day of each and every month until the Maturity Date, Epazz, Inc shall pay equal installments of principal and interest in the amount of $11,881.03. The interest rate on the note is 6% which matures on November 8, 2016. This Note may be prepaid at any time, in whole or in part, without penalty. | |
| 200,000 | | |
| 200,000 | |
| |
| | | |
| | |
Total promissory notes | |
| 2,277,574 | | |
| 2,504,371 | |
Less: current portion | |
| (1,155,689 | ) | |
| (1,219,669 | ) |
Promissory notes, less current portion | |
$ | 1,121,885 | | |
$ | 1,284,702 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recorded interest expense on
promissory notes of $291,435 and $251,794 for the three months ended March 31, 2015 and December 31, 2014, respectively. The Company
recorded accrued interest of $25,973 and $60,123 during the years ended March 31, 2015 and December 31, 2014, respectively.
Note 17 – Derivative Liabilities
As discussed in Note 15 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’s current derivative liabilities were $24,482 and $-0- at March 31, 2015 and December 31, 2014,
respectively.
The
change in fair value of the derivative liabilities resulted in losses of $77,110 and $793,579 for the three months ended March
31, 2015 and 2014, respectively, which has been reported as other income (expense) in the statements of operations. The
loss of $77,110 for the three months ended March 31, 2015 consisted of a loss of $91,791 due to the value in excess of the face
value of the convertible notes, as offset by a net gain in market value of $14,681 on the convertible debts. The loss of $793,579
for the three months ended March 31, 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 $43,431 on the convertible debts.
The following presents the derivative liability
value by loan at March 31, 2015 and December 31, 2014, respectively:
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
Convertible notes, Magna Group I | |
$ | – | | |
$ | – | |
Convertible notes, Magna Group II | |
| 24,482 | | |
| | |
Convertible debt, Blackbridge Capital | |
| – | | |
| – | |
| |
$ | 24,482 | | |
$ | – | |
The following is a summary of changes in
the fair market value of the derivative liability during the three months ended March 31, 2015 and the year ended December
31, 2014:
| |
Derivative | |
| |
Liability | |
| |
Total | |
Balance, December 31, 2013 | |
$ | – | |
Increase in derivative value due to issuances of convertible promissory notes, Magna Group I | |
| 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, December 31, 2014 | |
$ | – | |
Increase in derivative value due to issuances of convertible promissory notes, Magna Group I | |
| 78,508 | |
Increase in derivative value due to issuances of convertible promissory notes, Magna Group II | |
| 32,371 | |
Increase in derivative value due to issuances of convertible promissory notes, Blackbridge Capital | |
| 63,278 | |
Change in fair market value of derivative liabilities due to the mark to market adjustment | |
| (14,681 | ) |
Debt conversions | |
| (134,994 | ) |
Balance, March 31, 2015 | |
$ | 24,482 | |
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Key inputs and assumptions
used to value the convertible debentures and warrants issued during the three months ended March 31, 2015:
|
· |
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 2-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 1,000 to 60,000 trials were necessary to reach the specified level of precision. |
Key inputs and assumptions
used to value the convertible debentures and warrants issued during the year ended December 31, 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 18 – Stockholders’
Equity
On April 10, 2015 and December 1, 2014,
the Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, amended the Article
of Incorporation to change the par value and number of authorized shares of each class of common and series of preferred stock
and authorize a fourth class of preferred stock, Series D Convertible Preferred Stock, in addition to the modification of the attributes
and dividends. The disclosures herein reflect these modifications and the changes to the par value have been retroactively reflected
throughout.
Reverse Stock Split
In September 2014, Epazz, Inc.’s
(the “Company’s”) majority stockholder and sole director (Shaun Passley) approved a 1:10,000 reverse stock split
of the Company’s Class A common stock Effective October 6, 2014, the Company affected the 1:10,000 reverse stock split of
its Class A common stock. The Company’s Class B common stock and preferred stock were not affected by the reverse stock split.
The Company’s new symbol following the reverse split will be EPAZD. The D will be removed in 20 business days. The Company’s
new CUSIP number is 29413V 309. In order for the Company to be in compliance with the minimum bid price requirement of $0.01 per
share for listing on OTCQB OTC markets. The Company may need to be do reverse split, if the share price falls below $0.01 or if
the Company needs to qualify for a national stock exchange.
Convertible
Preferred Stock, Series A
The Company has one thousand (1,000) authorized
shares of $0.0001 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred
Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar
year in which the Company has generated revenue over $2 million, and an additional 24% of the Company’s net income beginning
on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are
payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes
a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible,
at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into
60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited
voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders. The Company
shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient
to effect the conversions.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 2, 2012, the Company issued 1,000
shares of convertible Series A Preferred Stock to the Company’s CEO for services provided and personal guarantees associated
with previous acquisition activities. The total fair value of the preferred stock was $229,236 based on valuations performed using
an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for
lack of marketability.
Convertible
Preferred Stock, Series B
The Company has one thousand (1,000) authorized
shares of $0.0001 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred
Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar
year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning
on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are
payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes
a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series B Preferred Stock is convertible,
at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into
10% of the total number of then issued and outstanding shares of Class A Common Stock, provided that no conversion will take place
until all holders of the Series B Preferred Stock consent to such conversion. The Series B Preferred Stock has limited voting rights,
relating solely to matters which adversely affect the rights of the Series B Preferred Stock holders. The Company shall reserve
and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect
the conversions.
On July 2, 2012, the Company issued a total
of 1,000 shares of convertible Series B preferred stock amongst three related parties pursuant to the exchange and extension of
a promissory note owed to Star Financial Corporation, a related party. The total fair value of the preferred stock was $61,130
based on valuations performed using an option-pricing method based on the Company’s publicly traded common stock on the date
of grant, and a 5% discount for lack of marketability.
Convertible
Preferred Stock, Series C
Effective January 14, 2014, the Company
has three billion (3,000,000,000) authorized shares of $0.0001 par value Series C Convertible Preferred Stock (“Series C
Preferred Stock”). The Series C Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter,
beginning on January 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional
6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated
net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue
until paid. The Series C Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid
dividends. Subject to certain conversion restrictions over the first three months from the original issuance date, each share of
Series C Preferred Stock is convertible, at the option of the holder into three (3) shares of the Company’s Class A Common
Stock, with five business days’ notice. The following conversion restrictions shall apply; (i) the holder shall be prohibited
from converting any Series C Preferred shares for a period of one (1) month from the original issuance date, (ii) the holder shall
be prohibited from converting not more than 30% of the Series C Preferred shares originally issued to holder during the second
(2nd) month following the original issuance date, (iii) the holder shall be prohibited from converting not more than
30% (60% in total) of the Series C Preferred shares originally issued to holder during the third (3rd) month following
the original issuance date, (iv) the holder shall be prohibited from converting not more than an additional 40% (100% in total)
of the Series C Preferred shares originally issued to holder following the end of the third month following the original issuance
date. The Series C Preferred Stock shall each vote three voting share and shall vote together with the Common Stock of the Company.
The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares
sufficient to effect the conversions.
Convertible Preferred Stock, Series
D
Effective December 18, 2014, the Company
has 1,000,000 authorized and zero outstanding shares of $0.01 par value Series D Convertible Preferred Stock (“Series D Preferred
Stock”). The Series D Preferred Stock shall carry an 8.0% dividend, payable semiannually at Issuer’s election in either
(i) cash or (ii) shares of common stock. Each share of Series D Preferred Stock is convertible, at the option of the holder into
three (3) shares of the Company’s Class A Common Stock, with five business days' notice, provided that no conversion will
take place until all holders of the Series C Preferred Stock consent to such conversion. The Series D Preferred Stock has preferential
voting rights that carry three (3) voting rights for each share issued and outstanding, and shall vote together with the shares
of the Common Stock of the Company, and not as a separate class.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Common Stock,
Class A
The Company has 9 billion authorized shares
of $0.01 par value Class A Common Stock.
Convertible
Common Stock, Class B
The Company has 60,000,000, authorized
shares of $0.01 par value Convertible Class B Common Stock, convertible at the option of the holder into shares of the Company’s
Class A Common Stock on a 1:10,000 basis. Effective January 14, 2014, the preferential voting rights of the Convertible Class B
Common Stock were changed from preferential voting rights of 2,000 votes to each Class A Common Stock vote (2,000:1) to 10,000
votes to each Class A Common Stock vote (10,000:1). The Company shall reserve and keep available out of its authorized but unissued
shares of Class A Common Stock such number of shares sufficient to effect the conversions. Common B was not part of the October
6, 2014 reversed stock split.
Convertible
Class B Common Stock Issuance for Services
On March 22, 2014, the Company issued 12,500,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing services. The total fair value
of the common stock was $44,737 based on the closing price of the Company’s common stock on the date of grant.
Class A Common
Stock Issuances, 2014:
On January 7, 2014, the Company issued
2,514 shares of Class A Common Stock pursuant to the conversion of $5,028 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On January 22, 2014, the Company issued
2,500 shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On January 31, 2014, the Company issued
6,667 shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt held by Magna Group, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 6, 2014, the Company issued
10,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Magna Group, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 13, 2014, the Company issued
10,327 shares of Class A Common Stock pursuant to the conversion of $15,491 of convertible debt held by Magna Group, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 27, 2014, the Company issued
13,333 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Magna Group, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 10, 2014, the Company issued 18,000
shares of Class A Common Stock pursuant to the conversion of $18,000 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 19, 2014, the Company issued 19,700
shares of Class A Common Stock pursuant to the conversion of $19,700 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 3, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $27,000 of convertible debt held by Asher Enterprises, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On March 5, 2014, the Company issued 20,086
shares of Class A Common Stock pursuant to the conversion of $28,120 of convertible debt held by Asher Enterprises, which consisted
of $26,000 of principal and $2,120 of interest. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 7, 2014, the Company issued 12,500
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by St. George Investments, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 25, 2014, the Company issued 34,167
shares of Class A Common Stock pursuant to the conversion of $41,000 of convertible debt held by Asher Enterprises, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 2, 2014, the Company issued 15,190
shares of Class A Common Stock pursuant to the conversion of $15,190 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 7, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $30,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 10, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 16, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 22, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 24, 2014, the Company granted
1,000 shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination
cost in consideration for a $150,000 short term promissory note. The total fair value of the common stock was $3,000 based on the
closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
On April 28, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 1, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 3, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 6, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 6, 2014, the Company issued 16,912
shares of Class A Common Stock pursuant to the conversion of $8,456 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On May 7, 2014, the Company granted 1,000
shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost
in consideration for a $125,000 short term promissory note. The total fair value of the common stock was $2,000 based on the closing
price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.
On May 22, 2014, the Company issued 15,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 28, 2014, the Company granted 325
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $32,500 short term promissory note. The total fair value of the common stock was $650 based
on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29,
2014.
On June 12, 2014, the Company granted 213
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $5,000 short term promissory note. The total fair value of the common stock was $213 based
on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29,
2014.
On June 17, 2014, the Company issued 33,433
shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party,
which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On July 30, 2014 the Company issued 27,778
shares of Class A Common Stock to Wellington Shields Holdings, LLC, as a fee for closing on an acquisition. The total fair value
of the common stock was $55,556 based on the closing price of the Company’s common stock on the date of grant.
On August 29, 2014 the Company issued 350
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost that was previously granted on April 23, 2014 in consideration for a $35,000 short term promissory note. The total
fair value of the common stock was $1,050 based on the closing price of the Company’s common stock on the date of grant.
On October 10, 2014 the Company issued
30,000,000 shares of Class A Common to our CEO from a conversion notice from 10,000,000 shares of Preferred C which convert at
the ratio of 1 to 3. As this was a conversion within the terms of the Preferred C equity instrument no additional value was recognized
as a result of this conversion
On October 10, 2014 the Company issued
1,500,000 shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party, from a
conversion notice from 500,000 shares of Preferred C which convert at the ratio of 1 to 3. As this was a conversion within the
terms of the Preferred C equity instrument no additional value was recognized as a result of this conversion
On October 10, 2014 the Company issued
1,400,000 shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from
a conversion notice from 466,667 shares of Preferred C which convert at the ratio of 1 to 3. As this was a conversion within the
terms of the Preferred C equity instrument no additional value was recognized as a result of this conversion
On November 3, 2014 the Company issued
150,000 shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $5,994. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.
On November 11, 2014 the Company issued
227,273 shares of Class A Common Stock pursuant to the September 5, 2013 promissory note entered into with St. George Investment.
The conversion amount was $15,000. As the conversion occurred within the terms of the conversion agreement; no gain or loss was
recognized.
On December 4, 2014 the Company issued
700,000 shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion
amount was $8,442. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.
On December 10,
2014 the Company issued 1,108,647 shares of Class A Common Stock pursuant to the September 5, 2013 promissory note entered into
with St. George Investment. The conversion amount was $15,000. As the conversion occurred within the terms of the conversion agreement;
no gain or loss was recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Class A Common
Stock Issuances, 2015:
Debt Conversions into Class A Common
Stock
Debt Conversion by JMJ Financial
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.
On January 2, 2015, the Company issued
1,695,000 shares of Class A Common Stock pursuant to the conversion of $2,542.50 of convertible debt held by JMJ Financial which
consisted of $2,542.50 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On January 21, 2015, the Company issued
1,950,000 shares of Class A Common Stock pursuant to the conversion of $2,925 of convertible debt held by JMJ Financial, which
consisted of $2,925 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 4, 2015, the Company issued
1,958,000 shares of Class A Common Stock pursuant to the conversion of $1,762 of convertible debt held by JMJ Financial, which
consisted of $1,762 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 23, 2015, the Company issued
1,957,000 shares of Class A Common Stock pursuant to the conversion of $1,292 of convertible debt held by JMJ Financial, which
consisted of $1,292 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
Debt Conversion by LG Capital Funding
LLC
On January 7, 2015, the Company issued
1,774,082 shares of Class A Common Stock pursuant to the conversion of $2,998.20 of convertible debt held by LG Capital Funding
LLC, which consisted of $2,958 of principal, $40.20 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
On March 19, 2015, the Company issued 35,360,512
shares of Class A Common Stock pursuant to the conversion of $3,447.65 of convertible debt held by LG Capital Funding LLC, which
consisted of $3,350 of principal, $97.65 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On February 12, 2015, the Company issued
1,757,230 shares of Class A Common Stock pursuant to the conversion of $1,256.42 of convertible debt held by LG Capital Funding,
LLC, which consisted of $1,230 of principal, $26.42 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
Debt Conversion by St. George Investments,
LLC
On January 9, 2015, the Company issued
3,400,000 shares of Class A Common Stock pursuant to the conversion of $4,896 of convertible debt held by St. George Investments,
LLC, which consisted of $4,896 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 5, 2015, the Company issued
3,550,000 shares of Class A Common Stock pursuant to the conversion of $3,408 of convertible debt held by St. George Investments,
LLC, which consisted of $3,408 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 18, 2015, the Company issued
3,750,000 shares of Class A Common Stock pursuant to the conversion of $2,700 of convertible debt held by St. George Investments,
LLC, which consisted of $2,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 26, 2015, the Company issued 70,000,000
shares of Class A Common Stock pursuant to the conversion of $8,400 of convertible debt held by St. George Investment LLC, which
consisted of $8,400 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Debt Conversion by Magna Equities LLC
On January 7, 2015, the Company issued
3,756,980 shares of Class A Common Stock pursuant to the conversion of $7,323.64 of convertible debt held by Magna Equities LLC,
which consisted of $7,323.64 principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On January 30, 2015, the Company issued
4,090,910 shares of Class A Common Stock pursuant to the conversion of $4,500 of convertible debt held by Magna Equities LLC, which
consisted of $4,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 12, 2015, the Company issued
4,802,745 shares of Class A Common Stock pursuant to the conversion of $2,800 of convertible debt held by Magna Equities LLC, which
consisted of $2,800 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 20, 2015, the Company issued
5,291,006 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Magna Equities LLC, which
consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 25, 2015, the Company issued
28,000,000 shares of Class A Common Stock pursuant to the conversion of $14,000 of convertible debt held by Magna Equities LLC,
which consisted of $14,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On March 3, 2015, the Company issued 15,003,751
shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by Magna Equities LLC, which consisted
of $2,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 10, 2015, the Company issued 41,996,249
shares of Class A Common Stock pursuant to the conversion of $3,500 of convertible debt held by Magna Equities LLC, which consisted
of $3,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 20, 2015, the Company issued 53,731,344
shares of Class A Common Stock pursuant to the conversion of $3,600 of convertible debt held by Magna Equities LLC, which consisted
of $3,600 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by IBC Funds LLC
On February 13, 2015, the Company issued
12,000,000 shares of Class A Common Stock pursuant to the conversion of $7,260 of convertible debt held by IBC Funds LLC, which
consisted of $7,260 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 24, 2015, the Company issued
12,000,000 shares of Class A Common Stock pursuant to the conversion of $5,280 of convertible debt held by IBC Funds LLC, which
consisted of $5,280 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 3, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted
of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 5, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted
of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On March 9, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 13, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 18, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 23, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 25, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 27, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 31, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 1, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 5, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by Blackbridge Capital LLC
On February 18, 2015, the Company issued
14,876,033 shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt held by Blackbridge Capital
LLC, which consisted of $9,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 24, 2015, the Company issued
30,000,000 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Blackbridge Capital
LLC, which consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 26, 2015, the Company issued
37,000,000 shares of Class A Common Stock pursuant to the conversion of $3,700 of convertible debt held by Blackbridge Capital
LLC, which consisted of $3,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 2, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $4,000 of convertible debt held by Blackbridge Capital LLC, which
consisted of $4,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 5, 2015, the Company issued 28,424,700
shares of Class A Common Stock pursuant to the conversion of $2,842.47 of convertible debt held by Blackbridge Capital LLC, which
consisted of $2,842.47 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Preferred C Stock
On January 21, 2015, the Company issued
12,564,800 shares of Preferred C Stock pursuant to the exchange agreement with our CEO in exchange for 12,564,800 shares of Class
A Common Stock. The total fair value of the common stock was $4,112 based on an independent valuation on the date of grant. Although
the common stock had a fair value higher than the preferred stock; as this was a related party transaction, no gain was recognized
as a result of this exchange.
On February 13, 2015, the Company issued
210,000,000 shares of Class A Stock pursuant to the exchange agreement with our CEO in exchange for 70,000,000 shares of Preferred
C Stock. As the stock was converted within the terms of the agreement, no gain or loss was recognized as a result of the exchange.
Debt Conversions into Class A Common
Stock – Related Parties
On April 2, 2014, the Company issued 25,000
shares of Class A Common Stock pursuant to the conversion of $25,000 of convertible debt held by Vivienne Passley, a related party,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On April 7, 2014, the Company issued 12,500
shares of Class A Common Stock pursuant to the conversion of $18,750 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 3, 2014, the Company issued 20,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
Beneficial Conversion Feature
On October 20, 2014, the Company entered
into a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion
price that was $0.0333 below the market price of $0.20 on the October 20, 2014 origination date resulted in a debt discount value
of $43,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On October 31, 2014, the Company entered
into a convertible promissory note with LG Capital. The beneficial conversion feature discount resulting from the conversion price
that was $0.04329 below the market price of $0.125 on the October 31, 2014 origination date resulted in a debt discount value of
$50,239 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On November 6, 2014, the Company entered
into a convertible promissory note with LG Capital. The beneficial conversion feature discount resulting from the conversion price
that was $0.04329 below the market price of $0.08171 on the November 6, 2014 origination date resulted in a debt discount value
of $33,600 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On December 3, 2014, the Company entered
into a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion
price that was $0.005 below the market price of $0.03 on the December 3, 2014 origination date resulted in a debt discount value
of $33,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On January 29, 2015, the Company entered
into a convertible promissory note with KBM Worldwide. The beneficial conversion feature discount resulting from the conversion
price that was $0.00126 below the market price of $0.0021 on the January 29, 2015 origination date resulted in a debt discount
value of $43,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life
of the loan.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On February 13, 2015, the Company entered
into a convertible promissory note with IBC Funds. The beneficial conversion feature discount resulting from the conversion price
that was $0.00088 below the market price of $0.0003 on the February 13, 2015 origination date resulted in a debt discount value
of $127,813 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of
the loan.
On March 2, 2015, the Company entered into
a convertible promissory note with Star Financial Corporation. The beneficial conversion feature discount resulting from the conversion
price that was $0.00008 below the market price of $0.0003 on the March 2, 2015 origination date resulted in a debt discount value
of $5,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On March 2, 2015, the Company entered into
a convertible promissory note with GG Mars. The beneficial conversion feature discount resulting from the conversion price that
was $0.00005 below the market price of $0.0003 on the March 2, 2015 origination date resulted in a debt discount value of $18,750
that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.
On March 31, 2015, the Company entered
into a convertible promissory note with Star Financial Corporation. The beneficial conversion feature discount resulting from the
conversion price that was $0.0002 below the market price of $0.00008 on the March 31, 2015 origination date resulted in a debt
discount value of $30,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over
the life of the loan.
Note 19 - Subsequent Events
Debt Financing
On April 8, 2015, the Company entered into
an equipment financing agreement with Marlin for a total of $50,000 bearing an effective interest rate of 10.9%, consisting of
36 monthly payments of $1,781; maturing on April 7, 2018. The loan is collateralized with software. Given the nature and status
of the software development, no equipment costs have been capitalized.
On April 29, 2015, the Company entered
into an equipment financing agreement with Macquarie for a total of $25,000 bearing an effective interest rate of 12%, consisting
of 36 monthly payments of $833; maturing on April 29, 2018. The loan is collateralized with software. Given the nature and status
of the software development, no equipment costs have been capitalized.
On March 26, 2015, the Company entered
into a loan for $65,250 from Pearl Capital (“Pearl”). The loan bears interest at an effective rate of 15%, consisting
of 100 daily weekday payments of $650, maturing on August 26, 2015. The loan is collateralized with future accounts receivable
of Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On April 3, 2015, the Company entered into
a loan for $63,000 from Capital Stack (“Capital Stack”). The loan bears interest at an effective rate of 15%, consisting
of 100 daily weekday payments of $599, maturing on September 3, 2015. The loan is collateralized with future accounts receivable
of Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On April 15, 2015, the Company entered
into a loan for $35,000 from 2 Dollars (“2 Dollars”). The loan bears interest at an effective rate of 15%, consisting
of 80 daily weekday payments of $434, maturing on August 15, 2015. The loan is collateralized with future accounts receivable of
Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On May 7, 2015, the Company entered into
a loan for $53,000 from Last Chance (“Last Chance”). The loan bears interest at an effective rate of 15%, consisting
of 80 daily weekday payments of $699, maturing on August 7, 2015. The loan is collateralized with future accounts receivable of
Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Related Party Financing
Originated April 7, 2015, a $31,250 unsecured
promissory note payable, including a $6,250 loan origination fee, to an immediate family member of the Company’s CEO. The
note carries a 15% interest rate, matured on April 7, 2016. The note also carries a liquidated damages fee of $1,500 upon default.
Originated May 7, 2015, an unsecured $13,750
promissory note payable, including a $2,750 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, matured on May 7, 2015. The note also carries a liquidated
damages fee of $1,500 upon default.
Originated May 20, 2015, a $25,000 unsecured
promissory note payable, including a $5,000 loan origination fee, to an immediate family member of the Company’s CEO. The
note carries a 15% interest rate, matured on May 20, 2016. The note also carries a liquidated damages fee of $1,500 upon default.
Debt Conversions into Class A Common
Stock
Debt Conversion by St. George Investments,
LLC
On April 24, 2015, the Company issued 89,000,000
shares of Class A Common Stock pursuant to the conversion of $5,340 of convertible debt held by St. George Investment LLC, which
consisted of $4,620 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On May 13, 2015, the Company issued 77,000,000
shares of Class A Common Stock pursuant to the conversion of $5,340 of convertible debt held by St. George Investment LLC, which
consisted of $5,340 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
Debt Conversion by IBC Funds LLC
On April 1, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 5, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 4, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 18, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $6,215 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by KBM Worldwide, Inc.
On May 13, 2015, the Company issued 227,100,000
shares of Class A Common Stock pursuant to the conversion of $11,355 of convertible debt held by IBC Funds LLC, which consisted
of $11,355 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Common A Issuance
On April 30, 2015, the Company issued 450,000,000 shares of
Common A Stock to our CEO for services.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Debt Conversion by Related Party
On April 3, 2015, the Company issued 5,700,000
shares of Class A Common Stock pursuant to the conversion of $2,850 of convertible debt held by Star Financial, a company owned
by our CEO’s family member, a related party, which consisted of $2,850 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On April 7, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by GG Mars, a company owned by our
CEO’s family member, a related party, which consisted of $2,000 of principal. The note was converted in accordance with the
conversion terms; therefore no gain or loss has been recognized.
On April 14, 2015, the Company issued 100,000,000
shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt held by GG Mars, a company owned by our
CEO’s family member, a related party, which consisted of $5,000 of principal. The note was converted in accordance with the
conversion terms; therefore no gain or loss has been recognized.
Debt Conversion
On April 13, 2015, the Company issued 110,500,000
shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Michael Dobbs, which consisted
of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On April 13, 2015, the Company issued 110,500,000
shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Ronald Aarons, which consisted
of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On April 13, 2015, the Company issued 110,500,000
shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Scott Sanchez, which consisted
of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
Issuances for Services
On April 24, 2015, the Company issued 1,080,000 shares of Class
A Common Stock for services to Eduardo Cabrera.
On April 24, 2015, the Company issued 1,000,000 shares of Class
A Common Stock for services to Wellington Shields Holding LLC.
On April 24, 2015, the Company issued 200,000 shares of Class
A Common Stock for services to Metaxas Georgatos
On April 24, 2015, the Company issued 320,000 shares of Class
A Common Stock for services to Vance Thinh.
On April 24, 2015, the Company issued 320,000 shares of Class
A Common Stock for services to Marc Estigarribia.
On April 24, 2015, the Company issued 50,000 shares of Class
A Common Stock for services to Juan Ramirez.
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 March 31, 2015. 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.
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.
Interaction Technology, Inc
On December 29, 2014, The Company through
a newly-formed wholly-owned Illinois subsidiary, Interaction Technology, Inc. (“Interact”), closed on an Asset Purchase
Agreement (“APA”) with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the
APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used
in connection with Interaction’s software business, including all of its intellectual property, its business trademarks and
copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $600,000, of
which $250,000 was paid at the closing, and $150,000 was financed by way of a Promissory Note (the “Inter Note1”) and
$200,000 was financed by way of a Promissory Note (the "Inter Note2"). The terms of the Inter Note1 include interest
at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal payments
of $37,500 commencing thereafter, no prepayment penalty. The terms of the Inter Note2 include interest at 6% per annum, no payments
of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $11,881.03
commencing thereafter, no prepayment penalty. The Inter Note 1 and Inter Note2 is unsecured. We did not purchase and Inter agreed
to retain and be responsible for any and all liabilities of Inter.
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 MARCH 31, 2015, AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2014:
| |
For the Three Months Ended | | |
| |
| |
March 31, | | |
Increase / | |
| |
2015 | | |
2014 | | |
(Decrease) | |
Revenues | |
$ | 461,661 | | |
$ | 252,552 | | |
$ | 209,109 | |
| |
| | | |
| | | |
| | |
General and Administrative | |
| 255,732 | | |
| 291,693 | | |
| (35,961 | ) |
Salaries and Wages | |
| 150,146 | | |
| 2,336,497 | | |
| (2,186,351 | ) |
Depreciation and Amortization | |
| 43,965 | | |
| 46,157 | | |
| (2,192 | ) |
Bad Debts (Recoveries) | |
| 152,455 | | |
| (12 | ) | |
| 152,467 | |
| |
| | | |
| | | |
| | |
Total Operating Expenses | |
| 602,298 | | |
| 2,674,335 | | |
| (2,072,037 | ) |
| |
| | | |
| | | |
| | |
Net Operating Loss | |
| (140,637 | ) | |
| (2,421,783 | ) | |
| 2,281,146 | |
| |
| | | |
| | | |
| | |
Total Other Expense | |
| (368,328 | ) | |
| (1,309,590 | ) | |
| 941,262 | |
| |
| | | |
| | | |
| | |
Net Loss | |
$ | (508,965 | ) | |
$ | (3,731,373 | ) | |
$ | (3,222,408 | ) |
Revenues:
For the three months ended March 31, 2015
we had revenue of $461,661 compared to revenue of $252,552 for the three months ended March 31, 2014, an increase of $209,109,
or 83% 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 $35,961, or 12% to $255,732 for the three months ended March 31, 2015 compared to general and administrative expense of $291,693
for the three months ended March 31, 2014. The decrease in general and administrative expense is due primarily to decreased public
relations fees and stock based compensation during the three months ending March 31, 2015 as compared to the three months ending
March 31, 2014.
Salaries and Wages:
Salaries and wages decreased by $2,186,351,
or 94% to $150,146 for the three months ended March 31, 2015 compared to salaries and wages of $2,336,497 for the three months
ended March 31, 2014. The decrease in salaries and wages is due primarily to decrease in professional services.
Depreciation and Amortization:
We had depreciation and amortization expense
of $43,965 for the three months ended March 31, 2015 as compared to $46,157 for the three months ended March 31, 2014, an increase
of $2,192, or 5% 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, 2014 that are no longer being amortized. We anticipate the
replacement of these assets as resources become available.
Bad Debts (Recoveries):
We had bad debt expense of $152,455 for
the three months ended March 31, 2015 as compared to bad debt recoveries of ($12) for the three months ended March 31, 2014, an
increase in bad debt expense of $152,467, 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 Gain (Loss):
Total operating expenses for the three
months ended March 31, 2015 were $602,298, compared to $2,674,335 for the three months ended March 31, 2014, a decrease of $22,072,037,
or 77% from the comparative period. We had net operating loss of $140,637, compared to $2,407,252 for the three months ended March
31, 2014, a decrease of $2,281,146, or 94% from the comparative period. The decrease in operating gain was primarily due to the
decrease in stock based compensation to related parties.
Other Income (Expense):
Other Income (expense) was ($368,328) for
the three months ended March 31, 2015 compared to ($1,309,590) for the three months ended March 31, 2014, a decrease of $941,262,
or 72% from the comparative period. Interest expense increased primarily due to significant increased borrowings since the three
months ended March 31, 2014.
Net Loss:
We had a net loss of $508,965 for the three
months ended March 31, 2015 compared to a net loss of $3,731,373 for the three months ended March 31, 2014, resulting in a decreased
net loss of $3,222,408, or 86% from the comparative period. The decreased net loss was primarily due increased revenues and lowered
PR Marketing and lower stock based compensation expense.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes total assets,
accumulated deficit, stockholders’ equity (deficit) and working capital at March 31, 2015 compared to December 31, 2014.
| |
March 31, | | |
December 31, | |
| |
2015 | | |
2014 | |
Total Assets | |
$ | 972,638 | | |
$ | 1,087,191 | |
| |
| | | |
| | |
Total Liabilities | |
$ | 4,903,889 | | |
$ | 5,005,501 | |
| |
| | | |
| | |
Accumulated (Deficit) | |
$ | (15,678,366 | ) | |
$ | (15,169,401 | ) |
| |
| | | |
| | |
Stockholders’ Equity (Deficit) | |
$ | (3,931,251 | ) | |
$ | (3,918,310 | ) |
| |
| | | |
| | |
Working Capital (Deficit) | |
$ | (3,597,771 | ) | |
$ | (3,453,062 | ) |
We had total current assets of $184,233
as of March 31, 2015, consisting of cash of $32,765, net accounts receivable of $97,902, and other current assets of $53,566.
We had non-current assets of $788,405 as
of March 31, 2015, consisting of $104,532 of property and equipment, net, including accumulated depreciation and amortization,
intangible assets of $309,055, net, including $495,186 of accumulated amortization and goodwill of $374,818 related to the purchase
of our subsidiaries.
We had total current liabilities of $3,782,004
as of March 31, 2015, consisting of $446,241 of accounts payable and accrued expenses, $401,254 of deferred revenues, current portion
of outstanding balances on lines of credit of $72,138, current portion of capitalized leases in the amount of $4,748, current maturities
of notes payable, related parties of $1,271,198 current maturities on convertible debts of $147,885, net of discounts of $222,228,
and current maturities on long term debts in the amount of $1,155,689.
We had negative working capital of $3,597,771
and a total accumulated deficit of $15,678,366 as of March 31, 2015.
We had total liabilities of $4,903,889
as of March 31, 2015, which included total current liabilities of $3,782,004, and long-term debts of $1,121,885, net of current
portion.
We had net cash used in operating activities
of negative $171,517 for the three months ended March 31, 2015, which was primarily due to our net loss of $508,965 after adjustments
for non-cash operating expenses, a decrease of $153,935 in accounts receivable and a decrease of $68,683 in deferred revenues.
We had negative $7,236 of net cash used
in investing activities for the three months ended March 31, 2015, which consisted of $7,236 of cash paid for the purchase of equipment.
We had $104,710 of net cash provided by
financing activities during the three months ended March 31, 2015, which represented proceeds from notes payable, related parties
of $113,375, proceeds from convertible notes of $253,179 and proceeds from notes payable of $196,052 offset by repayments on notes
payable, related parties of $38,500, repayments on notes payable of $418,255, and principal payments on capital leases of $1,141.
Recent Financing Activities
First quarter of 2015:
On January 30, 2015, the Company entered
into an equipment financing agreement with CIT Finance for a total of $100,000 bearing an effective interest rate of 10.9%, consisting
of 36 monthly payments of $3,210; maturing on January 30, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On January 27, 2015, the Company entered
into an equipment financing agreement with Direct Credit for a total of $50,000 bearing an effective interest rate of 19.7%, consisting
of 36 monthly payments of $1,793; maturing on January 27, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
On February 20, 2015, the Company entered
into an equipment financing agreement with Safe Leasing for a total of $37,500 bearing an effective interest rate of 31.625%, consisting
of 36 monthly payments of $1,549; maturing on February 20, 2018. The loan is collateralized with software. Given the nature and
status of the software development, no equipment costs have been capitalized.
Debt Financing, Related Parties
Originated March 18, 2015, a $6,250 unsecured
promissory note payable, including a $1,250 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 18, 2015. The note also carries
a liquidated damages fee of $1,000 upon default.
Originated January 22, 2015, an unsecured
$47,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries
a liquidated damages fee of $1,500 upon default.
Originated February 24, 2015, an unsecured
$48,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries
a liquidated damages fee of $1,500 upon default.
Originated March 3, 2015, an unsecured
$21,875 promissory note payable, including a $4,375 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on October 3, 2015. The note also carries
a liquidated damages fee of $1,500 upon default.
Convertible Debt Financing
Originated January 7, 2015, an unsecured
$42,323.64 convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“One Magna Group Note”)
owed to Magna Group, LLC, consisting of one partial note acquired and assigned from Star Financial Corporation, a related party,
consisting of a total of $75,000 of principal and $9,647.28 of accrued interest. The acquired promissory notes did not carry conversion
terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares
of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the 3 lowest trading
price of the Company’s common stock for the ten (10) days prior to the conversion date, or $0.000075 per share, whichever
is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal
of $42,323.64 was subsequently converted to a total of 309,445,417 shares of common stock over various dates from January 7, 2015
to March 18, 2015 in complete satisfaction of the debt.
Originated January 7, 2015, an unsecured
$17,500 convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“Two Magna Group Note”)
owed to Magna Group, LLC. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the
convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder
at a price equal to fifty percent (50%) of the average of the 3 lowest trading price of the Company’s common stock for the
ten (10) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning
4.99% of the Company’s issued and outstanding shares.
On January 29,
2015, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible
Promissory Note in the original principal amount of $43,000. The One KBM Note had a maturity date of November 2, 2015, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the thirty (30) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the One KBM Note were restricted securities as defined in Rule
144 promulgated under the Securities Act of 1933. The issuance of the One KBM Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.
Originated February 13, 2015, an unsecured
$127,812.50 convertible promissory note, carries a 15% interest rate, matures on January 7, 2016, (“IBC Note”) owed
to IBC Funds, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of
a total of $106,000 of principal and $21,812.5 of accrued interest and fees. The acquired promissory notes did not carry conversion
terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares
of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest
trading price of the Company’s common stock for the fifteen (15) days prior to the conversion date. The debt holder was limited
to owning 4.99% of the Company’s issued and outstanding shares. IBC Funds did not complete the require payments under the
debt purchase agreement and the note is currently in dispute.
Originated February 17, 2015, an unsecured
$22,542.47 convertible promissory note, carries a 5% interest rate, matures on February 17, 2016, (“Blackbridge Note”)
owed to Blackbridge Capital, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party,
consisting of a total of $20,000 of principal and $2,542.47 of accrued interest. The acquired promissory notes did not carry conversion
terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares
of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest
trading price of the Company’s common stock or $0.0001 which is greater for the fifteen (15) days prior to the conversion
date. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. The assigned principal
of $22,542.47 was subsequently converted to a total of 187,300,733 shares of common stock over various dates from February 17,
2015 to March 5, 2015 in complete satisfaction of the debt.
Originated March 2, 2015, an unsecured
$5,000 convertible promissory note, carries a 15% interest rate, matures on May 20, 2015, (“Star Note”) owed to Star
Financial Corporation, a related party, consisting of a total of $5,000 of principal and $447.95 of accrued interest. The October
20, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal
and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.000075.
The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares.
Originated March 2, 2015, an unsecured
$18,750 convertible promissory note, carries a 15% interest rate, matures on May 28, 2014, (“GG Note”) owed to GG Mars,
Inc., a related party, consisting of a total of $18,750 of principal and $2,196.06 of accrued interest. The March 28, 2014 promissory
notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest
is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was
limited to owning 9.99% of the Company’s issued and outstanding shares.
Originated March 31, 2015, an unsecured
$30,000 convertible promissory note, carries a 15% interest rate, matures on May 7, 2014, (“Star Note”) owed to Star
Financial Corporation, a related party, consisting of a total of $30,000 of principal and $3,772.60 of accrued interest. The March
7, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal
and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005.
The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares.
Recent Debt Conversions
Debt Conversions into Class A Common
Stock
Debt Conversion by JMJ Financial
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.
On January 2, 2015, the Company issued
1,695,000 shares of Class A Common Stock pursuant to the conversion of $2,542.50 of convertible debt held by JMJ Financial which
consisted of $2,542.50 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On January 21, 2015, the Company issued
1,950,000 shares of Class A Common Stock pursuant to the conversion of $2,925 of convertible debt held by JMJ Financial, which
consisted of $2,925 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 4, 2015, the Company issued
1,958,000 shares of Class A Common Stock pursuant to the conversion of $1,762 of convertible debt held by JMJ Financial, which
consisted of $1,762 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 23, 2015, the Company issued
1,957,000 shares of Class A Common Stock pursuant to the conversion of $1,292 of convertible debt held by JMJ Financial, which
consisted of $1,292 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
Debt Conversion by LG Capital Funding
LLC
On January 7, 2015, the Company issued
1,774,082 shares of Class A Common Stock pursuant to the conversion of $2,998.20 of convertible debt held by LG Capital Funding
LLC, which consisted of $2,958 of principal, $40.20 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
On March 19, 2015, the Company issued 35,360,512
shares of Class A Common Stock pursuant to the conversion of $3,447.65 of convertible debt held by LG Capital Funding LLC, which
consisted of $3,350 of principal, $97.65 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On February 12, 2015, the Company issued
1,757,230 shares of Class A Common Stock pursuant to the conversion of $1,256.42 of convertible debt held by LG Capital Funding,
LLC, which consisted of $1,230 of principal, $26.42 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
Debt Conversion by St. George Investments,
LLC
On January 9, 2015, the Company issued
3,400,000 shares of Class A Common Stock pursuant to the conversion of $4,896 of convertible debt held by St. George Investments,
LLC, which consisted of $4,896 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 5, 2015, the Company issued
3,550,000 shares of Class A Common Stock pursuant to the conversion of $3,408 of convertible debt held by St. George Investments,
LLC, which consisted of $3,408 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 18, 2015, the Company issued
3,750,000 shares of Class A Common Stock pursuant to the conversion of $2,700 of convertible debt held by St. George Investments,
LLC, which consisted of $2,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 26, 2015, the Company issued 70,000,000
shares of Class A Common Stock pursuant to the conversion of $8,400 of convertible debt held by St. George Investment LLC, which
consisted of $8,400 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
Debt Conversion by Magna Equities LLC
On January 7, 2015, the Company issued
3,756,980 shares of Class A Common Stock pursuant to the conversion of $7,323.64 of convertible debt held by Magna Equities LLC,
which consisted of $7,323.64 principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On January 30, 2015, the Company issued
4,090,910 shares of Class A Common Stock pursuant to the conversion of $4,500 of convertible debt held by Magna Equities LLC, which
consisted of $4,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 12, 2015, the Company issued
4,802,745 shares of Class A Common Stock pursuant to the conversion of $2,800 of convertible debt held by Magna Equities LLC, which
consisted of $2,800 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 20, 2015, the Company issued
5,291,006 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Magna Equities LLC, which
consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 25, 2015, the Company issued
28,000,000 shares of Class A Common Stock pursuant to the conversion of $14,000 of convertible debt held by Magna Equities LLC,
which consisted of $14,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On March 3, 2015, the Company issued 15,003,751
shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by Magna Equities LLC, which consisted
of $2,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 10, 2015, the Company issued 41,996,249
shares of Class A Common Stock pursuant to the conversion of $3,500 of convertible debt held by Magna Equities LLC, which consisted
of $3,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 20, 2015, the Company issued 53,731,344
shares of Class A Common Stock pursuant to the conversion of $3,600 of convertible debt held by Magna Equities LLC, which consisted
of $3,600 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by IBC Funds LLC
On February 13, 2015, the Company issued
12,000,000 shares of Class A Common Stock pursuant to the conversion of $7,260 of convertible debt held by IBC Funds LLC, which
consisted of $7,260 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 24, 2015, the Company issued
12,000,000 shares of Class A Common Stock pursuant to the conversion of $5,280 of convertible debt held by IBC Funds LLC, which
consisted of $5,280 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 3, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted
of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 5, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted
of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 9, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 13, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 18, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 23, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 25, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 27, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 31, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 1, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 5, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by Blackbridge Capital LLC
On February 18, 2015, the Company issued
14,876,033 shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt held by Blackbridge Capital
LLC, which consisted of $9,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 24, 2015, the Company issued
30,000,000 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Blackbridge Capital
LLC, which consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 26, 2015, the Company issued
37,000,000 shares of Class A Common Stock pursuant to the conversion of $3,700 of convertible debt held by Blackbridge Capital
LLC, which consisted of $3,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 2, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $4,000 of convertible debt held by Blackbridge Capital LLC, which
consisted of $4,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 5, 2015, the Company issued 28,424,700
shares of Class A Common Stock pursuant to the conversion of $2,842.47 of convertible debt held by Blackbridge Capital LLC, which
consisted of $2,842.47 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
First quarter of 2015:
A total of $147,885 of convertible debentures
remain outstanding as of March 31, 2015.
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 March 31, 2015:
Debt Conversion by JMJ Financial
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
On January 2, 2015, the Company issued
1,695,000 shares of Class A Common Stock pursuant to the conversion of $2,542.50 of convertible debt held by JMJ Financial which
consisted of $2,542.50 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On January 21, 2015, the Company issued
1,950,000 shares of Class A Common Stock pursuant to the conversion of $2,925 of convertible debt held by JMJ Financial, which
consisted of $2,925 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 4, 2015, the Company issued
1,958,000 shares of Class A Common Stock pursuant to the conversion of $1,762 of convertible debt held by JMJ Financial, which
consisted of $1,762 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 23, 2015, the Company issued
1,957,000 shares of Class A Common Stock pursuant to the conversion of $1,292 of convertible debt held by JMJ Financial, which
consisted of $1,292 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
Debt Conversion by LG Capital Funding
LLC
On January 7, 2015, the Company issued
1,774,082 shares of Class A Common Stock pursuant to the conversion of $2,998.20 of convertible debt held by LG Capital Funding
LLC, which consisted of $2,958 of principal, $40.20 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
On March 19, 2015, the Company issued 35,360,512
shares of Class A Common Stock pursuant to the conversion of $3,447.65 of convertible debt held by LG Capital Funding LLC, which
consisted of $3,350 of principal, $97.65 of interest. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On February 12, 2015, the Company issued
1,757,230 shares of Class A Common Stock pursuant to the conversion of $1,256.42 of convertible debt held by LG Capital Funding,
LLC, which consisted of $1,230 of principal, $26.42 of interest. The note was converted in accordance with the conversion terms;
therefore no gain or loss has been recognized.
Debt Conversion by St. George Investments,
LLC
On January 9, 2015, the Company issued
3,400,000 shares of Class A Common Stock pursuant to the conversion of $4,896 of convertible debt held by St. George Investments,
LLC, which consisted of $4,896 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 5, 2015, the Company issued
3,550,000 shares of Class A Common Stock pursuant to the conversion of $3,408 of convertible debt held by St. George Investments,
LLC, which consisted of $3,408 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 18, 2015, the Company issued
3,750,000 shares of Class A Common Stock pursuant to the conversion of $2,700 of convertible debt held by St. George Investments,
LLC, which consisted of $2,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 26, 2015, the Company issued 70,000,000
shares of Class A Common Stock pursuant to the conversion of $8,400 of convertible debt held by St. George Investment LLC, which
consisted of $8,400 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
by Magna Equities LLC
On January 7, 2015, the Company issued
3,756,980 shares of Class A Common Stock pursuant to the conversion of $7,323.64 of convertible debt held by Magna Equities LLC,
which consisted of $7,323.64 principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On January 30, 2015, the Company issued
4,090,910 shares of Class A Common Stock pursuant to the conversion of $4,500 of convertible debt held by Magna Equities LLC, which
consisted of $4,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 12, 2015, the Company issued
4,802,745 shares of Class A Common Stock pursuant to the conversion of $2,800 of convertible debt held by Magna Equities LLC, which
consisted of $2,800 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 20, 2015, the Company issued
5,291,006 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Magna Equities LLC, which
consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 25, 2015, the Company issued
28,000,000 shares of Class A Common Stock pursuant to the conversion of $14,000 of convertible debt held by Magna Equities LLC,
which consisted of $14,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On March 3, 2015, the Company issued 15,003,751
shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by Magna Equities LLC, which consisted
of $2,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 10, 2015, the Company issued 41,996,249
shares of Class A Common Stock pursuant to the conversion of $3,500 of convertible debt held by Magna Equities LLC, which consisted
of $3,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 20, 2015, the Company issued 53,731,344
shares of Class A Common Stock pursuant to the conversion of $3,600 of convertible debt held by Magna Equities LLC, which consisted
of $3,600 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by IBC Funds LLC
On February 13, 2015, the Company issued
12,000,000 shares of Class A Common Stock pursuant to the conversion of $7,260 of convertible debt held by IBC Funds LLC, which
consisted of $7,260 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 24, 2015, the Company issued
12,000,000 shares of Class A Common Stock pursuant to the conversion of $5,280 of convertible debt held by IBC Funds LLC, which
consisted of $5,280 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 3, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted
of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 5, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted
of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 9, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 13, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 18, 2015, the Company issued 20,000,000
shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted
of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 23, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 25, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 27, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 31, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 1, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 5, 2015, the Company issued 36,000,000
shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted
of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversion by Blackbridge Capital LLC
On February 18, 2015, the Company issued
14,876,033 shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt held by Blackbridge Capital
LLC, which consisted of $9,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 24, 2015, the Company issued
30,000,000 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Blackbridge Capital
LLC, which consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On February 26, 2015, the Company issued
37,000,000 shares of Class A Common Stock pursuant to the conversion of $3,700 of convertible debt held by Blackbridge Capital
LLC, which consisted of $3,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 2, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $4,000 of convertible debt held by Blackbridge Capital LLC, which
consisted of $4,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On March 5, 2015, the Company issued 28,424,700
shares of Class A Common Stock pursuant to the conversion of $2,842.47 of convertible debt held by Blackbridge Capital LLC, which
consisted of $2,842.47 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
Preferred C Stock
On January 21, 2015, the Company issued
12,564,800 shares of Preferred C Stock pursuant to the exchange agreement with our CEO in exchange for 12,564,800 shares of Class
A Common Stock. The total fair value of the common stock was $4,112 based on an independent valuation on the date of grant. Although
the common stock had a fair value higher than the preferred stock; as this was a related party transaction, no gain was recognized
as a result of this exchange.
On February 13, 2015, the Company issued
210,000,000 shares of Class A Stock pursuant to the exchange agreement with our CEO in exchange for 70,000,000 shares of Preferred
C Stock. As the stock was converted within the terms of the agreement, no gain or loss was recognized as a result of the exchange.
Debt Conversion by Related Party
On March 2, 2015, the Company issued 64,000,000
shares of Class A Common Stock pursuant to the conversion of $3,200 of convertible debt held by GG Mars, a company owned by our
CEO’s family member, a related party, which consisted of $3,200 of principal. The note was converted in accordance with the
conversion terms; therefore no gain or loss has been recognized.
On March 3, 2015, the Company issued 44,000,000
shares of Class A Common Stock pursuant to the conversion of $3,300 of convertible debt held by Star Financial, a company owned
by our CEO’s family member, a related party, which consisted of $3,300 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On March 11, 2015, the Company issued 22,000,000
shares of Class A Common Stock pursuant to the conversion of $1,650 of convertible debt held by Star Financial, a company owned
by our CEO’s family member, a related party, which consisted of $1,650 of principal. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
On March 24, 2015, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by GG Mars, a company owned by our
CEO’s family member, a related party, which consisted of $2,000 of principal. The note was converted in accordance with the
conversion terms; therefore no gain or loss has been recognized.
Issuance of Dividends Paid via Class A Common Stock in Lieu
of Cash
On September 11, 2014 the Company issued
a total of 11,000 shares of Class A Common Stock amongst three related party Convertible Series B Preferred Stockholders pursuant
to 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 |
** |
|
|
|
|
101.SCH |
XBRL Schema Document |
** |
|
|
|
|
101.CAL |
XBRL Calculation Linkbase Document |
** |
|
|
|
|
101.DEF |
XBRL Definition Linkbase Document |
** |
|
|
|
|
101.LAB |
XBRL Labels Linkbase Document |
** |
|
|
|
|
101.PRE |
XBRL Presentation Linkbase Document |
** |
|
|
|
|
______________
* Previously filed.
** To be filed by amendment.
SIGNATURES
In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
EPAZZ, INC. |
|
|
DATED: June 16, 2015 |
By: /s/ Shaun Passley |
|
Shaun Passley, Ph.D. |
|
Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director |
EXHIBIT 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: June 16, 2015
By: /s/ Shaun Passley
Shaun Passley, Ph.D.
Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal Accounting Officer)
EXHIBIT 32.1
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 March 31, 2015 (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: June 16, 2015
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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