ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS:
The following discussion of our financial condition
and plan of operations should be read in conjunction with our financial statements and the related notes, and the other financial
information included in this report. This Management’s Discussion and Analysis or Plan of Operations describes the matters
Epazz considers to be important to understanding Epazz’s history, technology, current position, financial condition and future
plans. Our fiscal year begins on January 1 and ends on December 31.
The following discussion includes forward looking
statements and uncertainties, including plans, objectives, goals, strategies, financial projections as well as known and unknown
uncertainties. The actual results of our future performance may differ materially from the results anticipated in these forward-looking
statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievement.
PLAN OF OPERATION
During the next twelve months, we plan to integrate
our recent acquisitions, including Zinergy, Telecorp and Jadian, and hope to expand our customer base for our Desk/Flex, Agent
Power, AutoHire, IntelliSys, K9 Bytes and MS Health software packages. In addition, we plan to develop our Project Flex product,
which consists of a patent pending foldable mini-fridge that has yet to be developed, and continue to pursue growth through additional
acquisitions. We believe we can satisfy our cash requirements for the next three months with our current cash on hand and revenues
generated from our operations. As such, continuing operations and completion of our plan of operation are contingent on finding
additional sources of capital. We cannot assure investors that adequate revenues will be generated. In the absence of our projected
revenues, we may be unable to proceed with our plan of operations. Even without significant revenues or additional funding within
the next several months, we still anticipate being able to continue with our present activities, but we may require financing to
potentially achieve our goals of growing our operations and increasing our revenues.
Results of Operations for the Years Ended December 31, 2013 and
December 31, 2012:
|
|
For the Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Increase /
|
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
Revenues
|
|
$
|
750,139
|
|
|
$
|
1,193,217
|
|
|
$
|
(443,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
758,353
|
|
|
|
698,895
|
|
|
|
59,458
|
|
Salaries and wages
|
|
|
2,201,161
|
|
|
|
1,665,429
|
|
|
|
535,732
|
|
Depreciation and amortization, including impairment
|
|
|
536,705
|
|
|
|
275,076
|
|
|
|
261,629
|
|
Bad debts (recoveries)
|
|
|
(27,129
|
)
|
|
|
2,957
|
|
|
|
(30,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
3,469,090
|
|
|
|
2,642,357
|
|
|
|
826,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income (Loss)
|
|
|
(2,718,951
|
)
|
|
|
(1,449,140
|
)
|
|
|
1,269,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(657,287
|
)
|
|
|
(457,549
|
)
|
|
|
199,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(3,376,238
|
)
|
|
$
|
(1,906,689
|
)
|
|
$
|
1,469,549
|
|
Revenue:
For the year ended December 31, 2013 we had
revenue of $750,139, compared to revenue of $1,193,217 for the year ended December 31, 2012, a decrease of $443,078, or 37%, from
the comparative year. The decrease in revenues is partially due to a $102,540 increase in deferred revenues over the prior year,
and approximately a $195,000, or approximately 50%, decrease in sales within our MS Health subsidiary, which was primarily attributable
to transitional deficiencies with the 2012 acquisition. MSHealth software was out dated and the Company is in the process of replacing
the software. Our Autohire and K9 Bytes operations accounted for the remaining decline of approximately $145,000. We entered into
a few strategic acquisitions in 2014 to rejuvenate our operations and expand our scope of products.
General and Administrative:
General and administrative expenses increased
by $59,458, or 9%, to $758,353 for the year ended December 31, 2013, compared to general and administrative expense of $698,895
for the year ended December 31, 2012. The increase in general and administrative expense is due mainly to increased marketing and
public relations expenses over the prior year.
Salaries and Wages:
Salaries and wages increased by $535,732, or
32%, to $2,201,161 for the year ended December 31, 2013, compared to salaries and wages of $1,665,429 for the year ended December
31, 2012. The increase in salaries and wages is due primarily to the increase in stock based compensation of approximately $435,000
pursuant to stock issuances to our CEO, Shaun Passley, Ph.D., Craig Passley, our Corporate Secretary and two other immediate family
members related to Shaun Passley, Ph.D., in addition to increased cash compensation paid to our CEO over the prior year.
Depreciation and Amortization:
We had depreciation and
amortization expense of $260,423 for the year ended December 31, 2013, compared to $275,076 for the year ended December 31,
2012, a decrease of $14,653, or 5%, from the comparative year. This decrease is due primarily to certain intangible assets
reaching the end of their useful lives without needing to being replaced by the end of the current year.
Impairment on intangible assets:
We had impairment on intangible assets of $276,282
for the year ended December 31, 2013, compared to $-0- for the year ended December 31, 2012. This increase is due to $276,282 of
impairments on intangible assets that are no longer generating an economic benefit within our PRMI subsidiary.
Bad Debts (recoveries):
We had bad debts (recoveries) of $(27,129)
for the year ended December 31, 2013 as compared to $2,957 of bad debts expense for the year ended December 31, 2012, a decrease
of $30,086, or 1,017%, from the comparative year. This decrease is due primarily to improved monitoring and collection efforts
over our accounts receivable. We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days
old.
Net Operating Income (Loss):
Total operating expenses for the year ended
December 31, 2013 were $3,469,090, compared to $2,642,357 for the year ended December 31, 2012, an increase of $1,269,811, or 88%,
from the comparative year. We had net operating losses of $2,718,951 for the year ended December 31, 2013 compared to $1,449,140
for the year ended December 31, 2012, an increase in operating loss of $1,269,811, or 88%, from the comparative year. The increase
in operating loss was primarily due to revenue reductions of approximately $443,000, the increase in stock based compensation of
approximately $435,000 pursuant to the issuance of shares of common stock to our CEO, Shaun Passley, Ph.D., and other related parties,
an increase in marketing and public relations of approximately $77,000, and $276,282 of impairments on intangible assets no longer
in service.
Other Income (Expense):
Interest income was $57 for the year ended
December 31, 2013, compared to $52 for the year ended December 31, 2012, an increase of $5, or 10%, from the comparative year.
Interest income increased slightly due to having more cash on hand in interest bearing accounts during 2013.
Interest expense was $526,586 for the year
ended December 31, 2013, compared to $320,402 for the year ended December 31, 2012, an increase of $242,184, or 76%, from the comparative
year. Interest expense increased due to increased borrowings to finance our operations, as well as an increase of approximately
$80,000 of finance costs related to the amortized discounts on beneficial conversion features over the $155,759 of amortized discounts
recognized during the year ended December 31, 2012.
Loss on debt modifications, related parties
was $94,758 for the year ended December 31, 2013, compared to $137,199 for the year ended December 31, 2012, a decrease of $42,441,
or 31%, from the comparative year. Loss on debt modifications for the year ended December 31, 2013 consisted of the modification
of a promissory note with Star Financial that resulted in a loss of $81,792, a loss of $14,240 on a debt conversion with Vivienne
Passley and a gain of $1,274 on debt settlements, and for the year ended December 31, 2012, consisted of a loss on debt
settlement of $38,671 related to the excess fair value of common stock exchanged in settlement of outstanding debt owed to a related
party, and $98,528 of finance costs incurred pursuant to the modification of a convertible note with Star Financial, a related
party.
Net Income (Loss):
We had a net loss of $3,376,238 for the year
ended December 31, 2013 compared to $1,906,689 for the year ended December 31, 2012, an increased net loss of $1,469,549,
or 77%, from the comparative year. The increased net loss was primarily due to revenue reductions of approximately $443,000, the
increase in stock based compensation of approximately $435,000 pursuant to the issuance of shares of common stock to our CEO, Shaun
Passley, Ph.D., and other related parties, an increase in marketing and public relations of approximately $77,000, and $276,282
of impairments on intangible assets no longer in service, and increased borrowing costs used to finance our recent acquisitions
and sustain operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes total assets,
accumulated deficit, stockholders’ equity and working capital at December 31, 2013, compared to December 31, 2012.
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Total Assets
|
|
$
|
1,082,961
|
|
|
$
|
1,378,030
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
2,607,576
|
|
|
$
|
1,849,541
|
|
|
|
|
|
|
|
|
|
|
Accumulated (Deficit)
|
|
$
|
(7,501,994
|
)
|
|
$
|
(4,114,756
|
)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit)
|
|
$
|
(1,524,615
|
)
|
|
$
|
(471,511
|
)
|
|
|
|
|
|
|
|
|
|
Working Capital (Deficit)
|
|
$
|
(1,283,338
|
)
|
|
$
|
(681,561
|
)
|
We had total current assets of $339,929 as
of December 31, 2013, consisting of cash of $208,567, net accounts receivable of $25,248, and other current assets of $106,114.
We had non-current assets of $743,032 as of
December 31, 2013, consisting of $113,410 of property and equipment, net of accumulated depreciation and amortization of $416,668,
intangible assets of $374,162, net of accumulated amortization of $796,558, and goodwill of $255,460 related to the purchase of
the Company’s subsidiaries.
We had total current liabilities of $1,623,267
as of December 31, 2013, consisting of $258,163 of accounts payable, $74,039 of accrued expenses, $322,130 of deferred revenues,
current portion of outstanding balances on lines of credit of $73,232, current portion of capitalized leases in the amount of $17,421,
notes payable, related parties of $397,368, current maturities on convertible debentures of $115,128, net of discounts of $105,300,
and current maturities on long term debts in the amount of $354,786.
We had negative working capital of $1,283,338
and a total accumulated deficit of $7,501,994 as of December 31, 2013.
We had total liabilities of $2,607,576 as of
December 31, 2013, which included total current liabilities of $1,623,267, long-term notes payable, related parties of $85,000,
long term convertible debentures of $42,166, net of discounts of $4,283 and the long-term portion of debts of $857,143.
We had net cash used in operating activities
of $463,980 for the year ended December 31, 2013, which was primarily due to our net loss of $3,376,238 after adjustments for non-cash
expenses, a decrease of $38,876 in accounts receivable and an increase of $56,134 of other current assets, an increase of $153,436
in accounts payable, and increase of $38,594 in accrued expenses and $102,540 in deferred revenues.
We had $6,830 of net cash used in investing
activities for the year ended December 31, 2013, which consisted entirely of cash paid for the purchase of equipment.
We had $633,276 of net cash provided in financing
activities during the year ended December 31, 2013, which represented proceeds from notes payable and convertible debts of $1,287,179,
repayments on long term debts of $567,704 and principal payments on capital leases of $25,699.
Recent Financing Activities
Fourth quarter of 2013:
Debt Financing, Related Parties
On various dates during the fourth quarter
of 2013, the Company’s CEO advanced and repaid funds to the Company. A total of $50,900 was advanced and repaid by the CEO
during the fourth quarter of 2013.
On October 15, 2013, the Company received $15,000
in exchange for an unsecured $18,000 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 added to the principal loan of $18,000, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500 upon default.
On November 1, 2013, the Company received $100,000
in exchange for an unsecured $125,000 promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matures on March 7, 2014. In addition, a loan origination
fee of $25,000 was issued as consideration for the loan and is being amortized on a straight line basis over the life of the loan.
The note also carries a liquidated damages fee of $2,500 upon default.
Convertible Debt Financing
On November 13, 2013, the Company received
$30,000 in exchange for an 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. On July 11, 2014, the Company and JMJ Financial amended the $400,000 convertible promissory note,
originally dated November 13, 2013, of which $33,000, including a $3,000 OID, remains outstanding. The amendment specifies
that due to the delinquent Form 10-K for the year ended December 31, 2013 and the Form 10-Q for the three months ended March 31, 2014,
any future borrowings shall only be made by mutual agreement of both the borrow and lender.
On December 31, 2013, the Company issued an
unsecured $35,028 convertible promissory note which, carries an 12% interest rate (“First Magna Group Note”) owed to
Magna Group, LLC. Two notes totaling $33,000 of principal and $1,028 of accrued interest were acquired from and assigned by Star
Financial on December 31, 2013 prior to being exchanged for the convertible note, including $1,000 of loan origination costs. The
principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal
to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion
date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and
outstanding shares.
Debt Financing
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.
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.
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 #2”) 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 MS Health’s receivables. The promissory
note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On November 20, 2013, DeskFlex received proceeds
of $10,550 in exchange for a demand promissory note bearing interest at 10.25%. The promissory note is payable in monthly installments
of $1,223 per month, maturing on August 20, 2014 (the “Maturity Date”).
First quarter of 2014:
Debt Financing, Related Parties, GG Mars
Capital, Inc.
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 was issued as consideration for the loan,
and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500
upon default.
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 was issued as consideration for the loan,
and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $35,000
upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $7,000 upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $1,500 upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $7,000 upon default.
Debt Financing, Related Parties, Star Financial
Corporation
Originated January 15, 2014, an unsecured $43,000
promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 20, 2014. In addition, a loan
origination fee consisting of 5,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan,
and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500
upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500 upon default.
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 was issued as consideration for the loan,
and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $25,000
upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $1,500 upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.
Convertible Debt Financing
Originated February 4, 2014, an unsecured $35,491
convertible promissory note, carries a 12% interest rate, matures on February 4, 2015, (“Second Magna Group Note”)
owed to Magna Group, LLC, consisting of two notes acquired and assigned from Star Financial Corporation, a related party, consisting
of a total of $33,000 of principal and $2,491 of accrued interest. The acquired promissory notes did not carry conversion terms,
and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common
stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s
common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was
limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was
subsequently converted to a total of 236,606,400 shares of common stock over various dates from February 13, 2014 to February 27,
2014 in complete satisfaction of the debt.
Originated February 19, 2014, an unsecured
$37,700 convertible promissory note, carries a 12% interest rate, matures on February 17, 2015, (“Third Magna Group Note”)
owed to Magna Group, LLC, consisting of a promissory note acquired and assigned from Star Financial Corporation, a related party,
consisting of $32,000 of principal and $5,700 of accrued interest. The acquired promissory note did not carry conversion terms,
and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common
stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s
common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was
limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was
subsequently converted to a total of 377,000,000 shares of common stock over various dates from March 10, 2014 to March 19, 2014
in complete satisfaction of the debt.
Equity Based Debt Settlement Financing,
Conversions into Class A Common Stock – IBC Funds, LLC
On February 14, 2014, IBC Funds, LLC (“IBC”)
filed a Joint Motion for Approval of Settlement Agreement and Stipulation, and Request for Fairness Hearing in the Circuit Court
of the Twelfth Judicial Circuit in and for Sarasota County, Florida, Case No. 2014-CA-000899. IBC has contracted with various note
holders of the Company to acquire approximately $314,021 of Company debt and subsequently converted the debt to common stock of
the Company at 50% of the lowest trading price over the 15 days prior to, and including the conversion request date pursuant to
Section 3(a)(10) of the Securities Act of 1933, which allows the exchange of claims, securities, or property for stock when the
arrangement is approved for fairness by a court proceeding. In addition, the Company agreed to issue 75,000,000 settlement shares
to IBC. The Company has agreed to these terms as the acquisition of these debts and subsequent conversion would alleviate a significant
portion of the Company’s liabilities. A fairness hearing was held on February 14, 2014 and the arrangement was approved.
Critical Accounting Policies:
The establishment and consistent application
of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with generally
accepted accounting principles in the United States (GAAP), as well as ensuring compliance with applicable laws and regulations
governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting
and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances
and a complex series of decisions.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the following entities, all of which are under common control and ownership:
|
|
State of
|
|
|
|
Abbreviated
|
Name of Entity
(2)
|
|
Incorporation
|
|
Relationship
(1)
|
|
Reference
|
Epazz, Inc.
|
|
Illinois
|
|
Parent
|
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Epazz
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IntelliSys, Inc.
|
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Wisconsin
|
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Subsidiary
|
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IntelliSys
|
Professional Resource Management, Inc.
|
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Illinois
|
|
Subsidiary
|
|
PRMI
|
Desk Flex, Inc.
|
|
Illinois
|
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Subsidiary
|
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DFI
|
K9 Bytes, Inc.
|
|
Illinois
|
|
Subsidiary
|
|
K9 Bytes
|
MS Health, Inc.
|
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Illinois
|
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Subsidiary
|
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MS Health
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FlexFridge, Inc.
(3)
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Illinois
|
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Subsidiary
(4)
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FlexFridge
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Terran Power, Inc.
(5)
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Illinois
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Subsidiary
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Terran
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____________
(1)
All subsidiaries, with the exception
of FlexFridge, are wholly-owned subsidiaries.
(2)
All entities are in the form
of Corporations.
(3)
Formerly Z Fridge, Inc. and Cooling
Technology Solutions, Inc.
(4)
FlexFridge, Inc. was spun-off
on November 21, 2013, and distributed on a 1:10 basis to shareholders of record on September 15, 2013. Epazz has a controlling
financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting
Standards Codification (“ASC”) 810-10. There has been no material activity within FlexFridge to date.
(5)
Entity formed for prospective
purposes, but has not incurred any income or expenses to date.
The consolidated financial statements herein
contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated
in the preparation of these financial statements. The parent company, Epazz and subsidiaries, IntelliSys, PRMI, DFI, K9 Bytes,
MS Health and FlexFridge will be collectively referred to herein as the “Company”, or “Epazz”. The Company's
headquarters are located in Chicago, Illinois and substantially all of its customers are within the United States.
These statements reflect all adjustments, consisting
of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained
therein.
Segment Reporting
FASB ASC 280-10-50 requires annual and interim
reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and
major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which
it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating
decision maker in deciding how to allocate resources. All of the Company’s software products are considered operating segments,
and will be aggregated into one reportable segment given the similarities in economic characteristics among the operations represented
by the common nature of the products, customers and methods of distribution.
Reclassifications
Certain amounts in the financial statements
of the prior year have been reclassified to conform to the presentation of the current year for comparative purposes.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Epazz maintains cash balances in non-interest-bearing
transaction accounts, which do not currently exceed federally insured limits. For the purpose of the statements of cash flows,
all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were
no cash equivalents on hand at December 31, 2013 and 2012.
Property and Equipment
Equipment is recorded at its acquisition cost,
which includes the costs to bring the equipment to the condition and location for its intended use, and equipment is depreciated
using the straight-line method over the estimated useful life of the related asset as follows:
Furniture and fixtures
|
|
5 years
|
Computers and equipment
|
|
3-5 years
|
Software
|
|
3 years
|
Assets held under capital leases
|
|
3-4 years
|
Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Assets held under capital leases are recorded
at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the
lease. Amortization expense is computed using the straight-line method over the useful lives of the assets due to transfer of ownership
after the lease term has expired.
Maintenance and repairs will be charged to
expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of
equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will
be reflected in operations.
Property and equipment are evaluated for impairment
whenever impairment indicators are prevalent. The Company will assess the recoverability of equipment by determining whether the
depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future
cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the
period in which such impairment is determined by management.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting
Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of
this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts
of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value
primarily due to the short term nature of the instruments.
Intangible Assets
Intangible assets are amortized using the straight-line
method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible assets periodically
and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
All of our intangible assets are subject to amortization. Amortization expense on intangible assets totaled $446,988 and $155,448
for the years ended December 31, 2013 and 2012, respectively, including impairments of $276,282 and $-0- for the years ended December
31, 2013 and 2012, respectively.
Goodwill
The Company evaluates the carrying value of
goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would
more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but
are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair
value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. The
fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market
approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds its fair value, then the
amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of
reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value
of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess
of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of
goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company's
evaluation of goodwill completed during the year resulted in no impairment losses.
Website Development Costs
The Company accounts for website development
costs in accordance with ASC 350-50, “Accounting for Website Development Costs” (“ASC 350-50”), wherein
website development costs are segregated into three activities:
|
1)
|
Initial stage (planning), whereby the related costs are expensed.
|
|
2)
|
Development (web application, infrastructure, and graphics), whereby the related costs are capitalized and amortized once the website is ready for use. Costs for development content of the website may be expensed or capitalized depending on the circumstances of the expenditures.
|
|
3)
|
Post-implementation (after site is up and running: security, training, and administration), whereby the related costs are expensed as incurred. Upgrades are usually expensed, unless they add additional functionality.
|
The Company didn’t have any capitalized
website development costs during the years ended December 31, 2013 and 2012.
Deferred Financing Costs
Costs relating to obtaining certain debts are
capitalized and amortized over the term of the related debt using the straight-line method. The unamortized capitalized balance
of deferred financing costs at December 31, 2013, and 2012, was $44,986 and $17,033, respectively. Amortization of deferred financing
costs charged to operations was $79,123 and $25,849 for the years ended December 31, 2013 and 2012, respectively. When a loan
is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.
Allowance for Doubtful Accounts
We generate the majority of our revenues and
corresponding accounts receivable from the sales of software products. We evaluate the collectability of our accounts receivable
considering a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its
financial obligations to us, we record a specific reserve for bad debts against amounts due in order to reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts
based on past write-off experience and the length of time the receivables are past due. Bad debts expense (recoveries) was $(27,129)
and $2,957 for the years ended December 31, 2013 and 2012, respectively. The allowance for doubtful accounts was $7,017 and $68,521
for the years ended December 31, 2013 and 2012, respectively.
Beneficial Conversion Features
From time to time, the Company may issue convertible
notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible
note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining
unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of
warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt
discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the
life of the note using the effective interest method.
Revenue Recognition
The Company designs and sells various software
programs to business enterprises, hospitals and Government and post-secondary institutions. Prior to shipment, each software product
is tested extensively to meet Company specifications. The software is shipped fully functional via electronic delivery, but some
installation and setup is required. No other entities sell the same or largely interchangeable software.
Installation is a standard process, outlined
in the owner's manual, consisting principally of setup, calibrating, and testing the software. A purchaser of the software could
complete the process using the information in the owner's manual, although it would probably take significantly longer than it
would take the Company’s technicians to perform the tasks. Although other vendors do not install the Company’s software,
they do provide largely interchangeable installation services for a fee. Historically, the Company has never sold the software
without installation. Most installations are performed by the Company within 7 to 24 days of shipment and are included in the overall
sales price of the software. In addition, the customer must pay for support contracts and training packages, depending on their
desired level of service. The Company is the only manufacturer of the software and it only sells software on a standalone basis
directly to the end user.
The sales price of the arrangement consists
of the software, installation, and training and support services, which the customer is obligated to pay in full upon delivery
of the software. In addition, there are no general rights of return involved in these arrangements. Therefore, the software is
accounted for as a separate unit of accounting.
The Company does not have vendor-specific objective
evidence of selling price for the software because it does not sell the software separately (without installation services and
support contracts). In addition, third-party evidence of selling price does not exist as no vendor separately sells the same or
largely interchangeable software. Therefore, the Company uses its best estimate of selling price when allocating such arrangement
consideration.
In estimating its selling price for the software,
the Company considers the cost to produce the software, profit margin for similar arrangements, customer demand, effect of competitors
on the Company’s software, and other market constraints. When applying the relative selling price method, the Company uses
its best estimate of selling price for the software, and third-party evidence of selling price for the installation. Accordingly,
without considering whether any portion of the amount allocable to the software is contingent upon delivery of the other items,
the Company allocates the selling price to the software, support, and installation.
The Company doesn’t currently provide
product warranties, but if it does in the future it will provide for specific product lines and accrue for estimated future warranty
costs in the period in which the revenue is recognized.
Advertising and Promotion
All costs associated with advertising and promoting
products are expensed as incurred. These expenses approximated $181,497 and $104,431 for the years ended December 31, 2013 and
2012, respectively.
Income Taxes
The Company recognizes deferred tax assets
and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a
valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Basic and Diluted Loss per Share
The basic net loss per common share is computed
by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed
by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding
plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and
therefore basic and diluted earnings per share result in the same figure.
Stock-Based Compensation
The Company adopted FASB guidance on stock
based compensation on January 1, 2006. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee
stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Common stock issued for services and compensation was $1,713,150 and $1,278,151 for the years ended December 31, 2013 and 2012,
respectively.
Uncertain Tax Positions
Effective January 1, 2009, the Company adopted
new standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
Various taxing authorities periodically audit
the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including
the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected
with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures.
A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved.
The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position
relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions. As
of December 31, 2013, the Company had no uncertain tax positions.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11:
Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
The new guidance requires that unrecognized tax
benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is effective for fiscal
years and interim periods within those years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to
have a material impact on our financial position or results of operations.
In February 2013, FASB issued ASU No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, to improve
the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially
excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive
income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive
income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in
the financial statements under U.S. GAAP. The new amendments will require an organization to:
|
-
|
Present (either on the face of the statement where net income is presented or in the notes) the
effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but
only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting
period; and
|
|
-
|
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification
items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting
period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially
transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
|
The amendments apply to all public and private
companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all
reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for
public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial
position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01,
Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
, which clarifies
which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11.
The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed
unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope
of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while
still giving financial statement users sufficient information to analyze the most significant presentation differences between
financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in
this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have
a material impact on our financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EPAZZ, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
Annual Financial Statements
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated Balance Sheets as of December 31, 2013 and 2012
|
F-2
|
|
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
|
F-3
|
|
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended December 31, 2013 and 2012
|
F-4
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
|
F-5
|
|
Notes to Consolidated Financial Statements
|
F-6
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors
EPAZZ, INC.
We have audited the accompanying consolidated
balance sheets of Epazz, Inc. (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The
Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Epazz, Inc. as of December 31,
2013 and 2012, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company has an accumulated deficit of $(7,501,994) and a working capital deficit of $(1,283,338), which raises
substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also
described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ M&K CPAS, PLLC
http://www.mkacpas.com
Houston, Texas
July 18, 2014
EPAZZ, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
208,567
|
|
|
$
|
46,101
|
|
Accounts receivable, net
|
|
|
25,248
|
|
|
|
36,995
|
|
Other current assets
|
|
|
106,114
|
|
|
|
22,027
|
|
Total current assets
|
|
|
339,929
|
|
|
|
105,123
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
113,410
|
|
|
|
196,297
|
|
Intangible assets, net
|
|
|
374,162
|
|
|
|
821,150
|
|
Goodwill
|
|
|
255,460
|
|
|
|
255,460
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,082,961
|
|
|
$
|
1,378,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Dividends payable
|
|
$
|
11,000
|
|
|
$
|
–
|
|
Accounts payable
|
|
|
258,163
|
|
|
|
104,727
|
|
Accrued expenses
|
|
|
45,298
|
|
|
|
24,924
|
|
Accrued expenses, related parties
|
|
|
28,741
|
|
|
|
19,205
|
|
Deferred revenue
|
|
|
322,130
|
|
|
|
219,590
|
|
Lines of credit
|
|
|
73,232
|
|
|
|
77,047
|
|
Current maturities of capital lease obligations payable
|
|
|
17,421
|
|
|
|
25,699
|
|
Current maturities of notes payable, related parties ($88,868 currently in default)
|
|
|
397,368
|
|
|
|
22,085
|
|
Convertible debts, net of discounts of $105,300 and $101,192, respectively
($56,900 currently in default
|
|
|
115,128
|
|
|
|
74,708
|
|
Current maturities of long term debts
|
|
|
354,786
|
|
|
|
218,699
|
|
Total current liabilities
|
|
|
1,623,267
|
|
|
|
786,684
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations payable, net of current maturities
|
|
|
–
|
|
|
|
17,421
|
|
Notes payable, related parties
|
|
|
85,000
|
|
|
|
–
|
|
Convertible debts, net of discounts of $4,283 and $37,876, respectively
|
|
|
42,166
|
|
|
|
152,973
|
|
Long term debts, net of current maturities
|
|
|
857,143
|
|
|
|
892,463
|
|
Total liabilities
|
|
|
2,607,576
|
|
|
|
1,849,541
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
–
|
|
|
|
–
|
|
Common stock, Class A, $0.0001 par value, 6,000,000,000 shares authorized,
3,468,358,708 and 1,177,789,125 shares issued and outstanding, respectively
|
|
|
346,836
|
|
|
|
117,779
|
|
Convertible common stock, Class B, $0.0001 par value, 60,000,000 shares
authorized, 10,500,000 and 5,500,000 shares issued and outstanding, respectively
|
|
|
1,050
|
|
|
|
550
|
|
Additional paid in capital
|
|
|
6,429,493
|
|
|
|
4,324,916
|
|
Stockholders' receivable, consisting of 20,000,000 shares
|
|
|
(800,000
|
)
|
|
|
(800,000
|
)
|
Accumulated deficit
|
|
|
(7,501,994
|
)
|
|
|
(4,114,756
|
)
|
Total stockholders' equity (deficit)
|
|
|
(1,524,615
|
)
|
|
|
(471,511
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
1,082,961
|
|
|
$
|
1,378,030
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EPAZZ, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
750,139
|
|
|
$
|
1,193,217
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
758,353
|
|
|
|
698,895
|
|
Salaries and wages
|
|
|
2,201,161
|
|
|
|
1,665,429
|
|
Depreciation and amortization
|
|
|
260,423
|
|
|
|
275,076
|
|
Impairment on intangible assets
|
|
|
276,282
|
|
|
|
–
|
|
Bad debts (recoveries)
|
|
|
(27,129
|
)
|
|
|
2,957
|
|
Total operating expenses
|
|
|
3,469,090
|
|
|
|
2,642,357
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(2,718,951
|
)
|
|
|
(1,449,140
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
57
|
|
|
|
52
|
|
Interest expense
|
|
|
(562,586
|
)
|
|
|
(320,402
|
)
|
Loss on debt modifications, related parties
|
|
|
(94,758
|
)
|
|
|
(137,199
|
)
|
Total other income (expense)
|
|
|
(657,287
|
)
|
|
|
(457,549
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,376,238
|
)
|
|
$
|
(1,906,689
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding -
basic and fully diluted
|
|
|
2,536,096,673
|
|
|
|
399,031,314
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and fully diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
EPAZZ, INC.
CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Convertible Series A
|
|
|
Convertible Series B
|
|
|
Class A
|
|
|
Convertible Class B
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Stockholders'
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in
|
|
|
Receivable
|
|
|
(Deficit)
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
30,900,281
|
|
|
$
|
3,090
|
|
|
|
2,500,000
|
|
|
$
|
250
|
|
|
$
|
2,668,032
|
|
|
$
|
(1,000,000
|
)
|
|
$
|
(2,208,067
|
)
|
|
$
|
(536,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
services, related parties
|
|
|
1,000
|
|
|
|
–
|
|
|
|
1,000
|
|
|
|
–
|
|
|
|
1,075,596,515
|
|
|
|
107,560
|
|
|
|
3,000,000
|
|
|
|
300
|
|
|
|
1,008,962
|
|
|
|
200,000
|
|
|
|
–
|
|
|
|
1,316,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
conversion of debt, related parties
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
59,370,640
|
|
|
|
5,937
|
|
|
|
–
|
|
|
|
–
|
|
|
|
288,791
|
|
|
|
–
|
|
|
|
–
|
|
|
|
294,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
conversion of debt
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
11,921,689
|
|
|
|
1,192
|
|
|
|
–
|
|
|
|
–
|
|
|
|
81,808
|
|
|
|
–
|
|
|
|
–
|
|
|
|
83,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion
feature of convertible debt
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
277,323
|
|
|
|
–
|
|
|
|
–
|
|
|
|
277,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) for the
year ended December 31, 2012
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,906,689
|
)
|
|
|
(1,906,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
1,000
|
|
|
$
|
–
|
|
|
|
1,000
|
|
|
$
|
–
|
|
|
|
1,177,789,125
|
|
|
$
|
117,779
|
|
|
|
5,500,000
|
|
|
$
|
550
|
|
|
$
|
4,324,916
|
|
|
$
|
(800,000
|
)
|
|
$
|
(4,114,756
|
)
|
|
$
|
(471,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
services, related parties
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,802,052,632
|
|
|
|
180,206
|
|
|
|
5,000,000
|
|
|
|
500
|
|
|
|
1,496,294
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,677,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
debt origination fees, related parties
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
25,750,000
|
|
|
|
2,575
|
|
|
|
–
|
|
|
|
–
|
|
|
|
33,575
|
|
|
|
–
|
|
|
|
–
|
|
|
|
36,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
conversion of debt, related parties
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
281,096,026
|
|
|
|
28,110
|
|
|
|
–
|
|
|
|
–
|
|
|
|
159,607
|
|
|
|
–
|
|
|
|
–
|
|
|
|
187,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
conversion of debt
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
181,670,925
|
|
|
|
18,166
|
|
|
|
–
|
|
|
|
–
|
|
|
|
137,657
|
|
|
|
–
|
|
|
|
–
|
|
|
|
155,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion
feature of convertible debt
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
195,652
|
|
|
|
–
|
|
|
|
–
|
|
|
|
195,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of debt
modification, related parties
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
81,792
|
|
|
|
–
|
|
|
|
–
|
|
|
|
81,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared,
1.5% of revenues
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(11,000
|
)
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) for the
year ended December 31, 2013
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,376,238
|
)
|
|
|
(3,376,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
1,000
|
|
|
$
|
–
|
|
|
|
1,000
|
|
|
$
|
–
|
|
|
|
3,468,358,708
|
|
|
$
|
346,836
|
|
|
|
10,500,000
|
|
|
$
|
1,050
|
|
|
$
|
6,429,493
|
|
|
$
|
(800,000
|
)
|
|
$
|
(7,501,994
|
)
|
|
$
|
(1,524,615
|
)
|
EPAZZ, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,376,238
|
)
|
|
$
|
(1,906,689
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Bad debts (recoveries)
|
|
|
(27,129
|
)
|
|
|
2,957
|
|
Depreciation and amortization
|
|
|
89,717
|
|
|
|
119,628
|
|
Amortization of intangible assets
|
|
|
170,706
|
|
|
|
155,448
|
|
Impairment of intangible assets
|
|
|
276,282
|
|
|
|
–
|
|
Amortization of deferred financing costs
|
|
|
79,123
|
|
|
|
25,849
|
|
Amortization of discounts on convertible notes payable
|
|
|
237,065
|
|
|
|
155,759
|
|
Finance costs on debt modifications, related party
|
|
|
–
|
|
|
|
98,528
|
|
Loss on debt modifications, related parties
|
|
|
96,032
|
|
|
|
38,671
|
|
Stock based compensation issued for services, related parties
|
|
|
1,713,150
|
|
|
|
1,278,151
|
|
Decrease (increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
38,876
|
|
|
|
108,466
|
|
Other current assets
|
|
|
(56,134
|
)
|
|
|
7,032
|
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
153,436
|
|
|
|
63,297
|
|
Accrued expenses
|
|
|
27,798
|
|
|
|
(4,039
|
)
|
Accrued expenses, related parties
|
|
|
10,796
|
|
|
|
(19,356
|
)
|
Deferred revenues
|
|
|
102,540
|
|
|
|
(103,438
|
)
|
Net cash provided by (used in) operating activities
|
|
|
(463,980
|
)
|
|
|
20,264
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Proceeds from the sale of equipment
|
|
|
–
|
|
|
|
14,175
|
|
Purchase of equipment
|
|
|
(6,830
|
)
|
|
|
(166,652
|
)
|
Acquisition of subsidiaries
|
|
|
–
|
|
|
|
(39,200
|
)
|
Net cash used in investing activities
|
|
|
(6,830
|
)
|
|
|
(191,677
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payments on capital lease obligations payable
|
|
|
(25,699
|
)
|
|
|
(36,066
|
)
|
Proceeds from notes payable, related parties
|
|
|
634,379
|
|
|
|
203,650
|
|
Repayment of notes payable, related parties
|
|
|
(210,596
|
)
|
|
|
(255,163
|
)
|
Proceeds from convertible debts
|
|
|
202,000
|
|
|
|
158,374
|
|
Repayment of convertible debts
|
|
|
(60,500
|
)
|
|
|
–
|
|
Proceeds from long term debts
|
|
|
450,800
|
|
|
|
386,041
|
|
Repayment of long term debts
|
|
|
(357,108
|
)
|
|
|
(251,990
|
)
|
Net cash provided by financing activities
|
|
|
633,276
|
|
|
|
204,846
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
162,466
|
|
|
|
33,433
|
|
Cash - beginning
|
|
|
46,101
|
|
|
|
12,668
|
|
Cash - ending
|
|
$
|
208,567
|
|
|
$
|
46,101
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
205,508
|
|
|
$
|
80,023
|
|
Income taxes paid
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition of subsidiary in exchange for debt
|
|
$
|
–
|
|
|
$
|
460,800
|
|
Acquisition of leased assets for debt
|
|
$
|
–
|
|
|
$
|
17,855
|
|
Value of shares issued for conversion of debt
|
|
$
|
155,823
|
|
|
$
|
333,000
|
|
Value of shares issued for conversion of debt, related parties
|
|
$
|
173,477
|
|
|
$
|
44,728
|
|
Discount on beneficial conversion feature of convertible debt
|
|
$
|
195,652
|
|
|
$
|
277,323
|
|
Deferred financing costs
|
|
$
|
107,076
|
|
|
$
|
–
|
|
Dividends payable declared
|
|
$
|
11,000
|
|
|
$
|
–
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Business and Summary of Significant
Accounting Policies
Nature of Business and Organization
Epazz, Inc. (“Epazz” or the “Company”),
an Illinois corporation, was formed on March 23, 2000 to create software to help college students organize their college information
and resources. 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.
On or about June 18, 2008, the Company entered
into a Stock Purchase Agreement (the “Purchase Agreement”) with Desk Flex, Inc., an Illinois corporation (“DFI”)
and Professional Resource Management, Inc., an Illinois corporation (“PRMI” and collectively with DFI, the “Target
Companies”) to acquire 100% of the outstanding shares of the Target Companies. Pursuant to the Purchase Agreement, the Company
purchased 100% of the outstanding shares of the Target Companies and DFI and PRMI became wholly-owned subsidiaries of the Company.
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. DFI developed the Desk/Flex Software (Desk/Flex) to enhance the value of businesses’ real estate investments
and modernize their office space. Desk/Flex lets businesses make better use of office space restrictions by enabling employees
to instantly access their workstation tools from multiple areas in and outside of the office. Desk/Flex lets employees reserve
space in advance or claim space instantly. It adjusts the telephone switch (Private Branch Exchange (PBX)) so that calls ring at
the desk du jour, or go directly to voice mail when a worker is not checked in. Desk/Flex is responsive to office size and needs,
servicing small to large businesses. Desk/Flex can be configured to administer a single site or multiple sites locally or remotely.
Agent Power Software (Agent Power) is PRMI’s software line. Agent Power is a suite of six applications. Each can operate
on a stand-alone basis, or can work in conjunction with the other applications. The applications feature workforce management components,
which include planning and scheduling; agent adherence; agent performance; automatic call distributor (ACD) group performance;
real-time agent status, and info screen. All modules of Agent Power have integration capabilities with Nortel, Avaya, and ROLM
ACDs, and the planning and scheduling module works with any modern ACD system.
On September 30, 2010, the Company acquired
IntelliSys, Inc., doing business as, AutoHire Software, a Florida-based company owned by Igenti, Inc. (“Intellisys”).
Intellisys had developed a Web portal infrastructure operating system product called BoxesOSv3.0. BoxesOS creates sources of revenue
for Alumni Associations and Non-Profit organizations by utilizing a Web platform to conduct e-commerce and provides e-commerce
tools for small businesses to create “
my accounts
” for their customers. BoxesOS also links a college or university’s
resources with the business community by allowing businesses to train their employees by utilizing courseware development from
higher education institutions. Epazz BoxesOS v3.0 (Web Infrastructure Operating System) is the Company’s flagship product.
Epazz BoxesOS integrates with each organization’s back-end system and provides a customizable personal information system
for each stakeholder. Its services include single sign-on, which provides a single-sign-on with security procedure to product users’
information and identity; course management system, which manages distance, traditional courses and calendar; enterprise Website
content management, which manages public sites with multi contributors; integration management services, which is integrated into
enterprise resource planning (ERP) and mainframes; e-mail management, which is an e-mail server and Web client; instant messenger
services, which includes instant messaging and alerts; customer relationship management, which includes prospective students and
alumni; calendar/scheduler management, which includes event directory, groupware, and personal calendar; administrative support
services, which includes online payment services, and business services, which includes facility management and online bookstore.
The AutoHire system provides a tool to power career centers, post job ads to sites and job boards, and to collect resumes online.
One feature of the AutoHire system is the interactive question, and online screening and ranking system. The interactive question
system provides a means for the client to maintain their own library of questions and to attach selected questions to job opportunities
posted. Responses obtained can be used to screen and rank candidates to permit hiring managers to focus their attention on only
the most suitable candidates.
On October 26, 2011, the Company, through a
newly-formed wholly-owned Illinois subsidiary, K9 Bytes, Inc., entered into an Asset Purchase Contract and Receipt Agreement with
K9 Bytes, Inc., a Florida corporation (“K9 Bytes” and the “Purchase Contract”). Pursuant to the Purchase
Contract, the Company purchased all of K9 Bytes assets, including all of its intellectual property, its business trade name, website
(k9bytessoftware.com), furniture, fixtures, equipment and inventory, and goodwill. The Company did not purchase, and K9 Bytes agreed
to retain and be responsible for, any and all liabilities of K9 Bytes. K9 Bytes sells Point of Sale software to retail pet stores
throughout the United States.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On March 28, 2012, we, through a newly-formed
wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), closed on an Asset Purchase Agreement (“APA”)
with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the APA, we purchased all of MSHSC’s
assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and
software. MS Health develops and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill,
and track behavioral healthcare and social services. 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.
FlexFridge, Inc. (“FlexFridge”),
an Illinois corporation, was formed as a wholly-owned subsidiary of Epazz on March 4, 2013 as Cooling Technology Solutions, Inc.
(“CTS”), and was renamed Z Fridge, Inc. (“Z Fridge”) on September 19, 2013 prior to being renamed again
to FlexFidge on May 27, 2014. The Company filed a non-provisional patent application and currently has limited activity. The Company
has filed a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge.
On November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz,
Inc. received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial
interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards
Codification (“ASC”) 810-10. There has been no material activity within FlexFridge to date.
Terran Power, Inc (“Terran”), an
Illinois corporation formed as a wholly-owned subsidiary of Epazz on September 19, 2013 to file a non-provisional patent application
to develop a mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing
an outlet or a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues
or expenses.
Basis of
Accounting
Our consolidated financial statements are prepared
using the accrual method of accounting as generally accepted in the United States of America (U.S. GAAP) and the rules of the Securities
and Exchange Commission (SEC).
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the following entities, all of which are under common control and ownership:
|
|
State of
|
|
|
|
Abbreviated
|
Name of Entity
(2)
|
|
Incorporation
|
|
Relationship
(1)
|
|
Reference
|
Epazz, Inc.
|
|
Illinois
|
|
Parent
|
|
Epazz
|
IntelliSys, Inc.
|
|
Wisconsin
|
|
Subsidiary
|
|
IntelliSys
|
Professional Resource Management, Inc.
|
|
Illinois
|
|
Subsidiary
|
|
PRMI
|
Desk Flex, Inc.
|
|
Illinois
|
|
Subsidiary
|
|
DFI
|
K9 Bytes, Inc.
|
|
Illinois
|
|
Subsidiary
|
|
K9 Bytes
|
MS Health, Inc.
|
|
Illinois
|
|
Subsidiary
|
|
MS Health
|
FlexFridge, Inc.
(3)
|
|
Illinois
|
|
Subsidiary
(4)
|
|
FlexFridge
|
Terran Power, Inc.
(5)
|
|
Illinois
|
|
Subsidiary
|
|
Terran
|
____________
(1)
All subsidiaries, with the exception
of FlexFridge, are wholly-owned subsidiaries.
(2)
All entities are in the form
of Corporations.
(3)
Formerly Z Fridge, Inc. and Cooling
Technology Solutions, Inc.
(4)
FlexFridge, Inc. was spun-off
on November 21, 2013, and distributed on a 1:10 basis to shareholders of record on September 15, 2013. Epazz has a controlling
financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting
Standards Codification (“ASC”) 810-10. There has been no material activity within FlexFridge to date.
(5)
Entity formed for prospective
purposes, but has not incurred any income or expenses to date.
The consolidated financial statements herein
contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated
in the preparation of these financial statements. The parent company, Epazz and subsidiaries, IntelliSys, PRMI, DFI, K9 Bytes,
MS Health and FlexFridge will be collectively referred to herein as the “Company”, or “Epazz”. The Company's
headquarters are located in Chicago, Illinois and substantially all of its customers are within the United States.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
These statements reflect all adjustments, consisting
of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained
therein.
Segment Reporting
FASB ASC 280-10-50 requires annual and interim
reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and
major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which
it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating
decision maker in deciding how to allocate resources. All of the Company’s software products are considered operating segments,
and will be aggregated into one reportable segment given the similarities in economic characteristics among the operations represented
by the common nature of the products, customers and methods of distribution.
Reclassifications
Certain amounts in the financial statements
of the prior year have been reclassified to conform to the presentation of the current year for comparative purposes.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Epazz maintains cash balances in non-interest-bearing
transaction accounts, which do not currently exceed federally insured limits. For the purpose of the statements of cash flows,
all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were
no cash equivalents on hand at December 31, 2013 and 2012.
Property and Equipment
Equipment is recorded at its acquisition cost,
which includes the costs to bring the equipment to the condition and location for its intended use, and equipment is depreciated
using the straight-line method over the estimated useful life of the related asset as follows:
Furniture and fixtures
|
|
5 years
|
Computers and equipment
|
|
3-5 years
|
Software
|
|
3 years
|
Assets held under capital leases
|
|
3-4 years
|
Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Assets held under capital leases are recorded
at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the
lease. Amortization expense is computed using the straight-line method over the useful lives of the assets due to transfer of ownership
after the lease term has expired.
Maintenance and repairs will be charged to
expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of
equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will
be reflected in operations.
Property and equipment are evaluated for impairment
whenever impairment indicators are prevalent. The Company will assess the recoverability of equipment by determining whether the
depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future
cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the
period in which such impairment is determined by management.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting
Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of
this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts
of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value
primarily due to the short term nature of the instruments.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Intangible assets are amortized using the straight-line
method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible assets periodically
and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
All of our intangible assets are subject to amortization. Amortization expense on intangible assets totaled $446,988 and $155,448
for the years ended December 31, 2013 and 2012, respectively, including impairments of $276,282 and $-0- for the years ended December
31, 2013 and 2012, respectively.
Goodwill
The Company evaluates the carrying value of
goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would
more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but
are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair
value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. The
fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market
approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds its fair value, then the
amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of
reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value
of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess
of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of
goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company's
evaluation of goodwill completed during the year resulted in no impairment losses.
Website Development Costs
The Company accounts for website development
costs in accordance with ASC 350-50, “Accounting for Website Development Costs” (“ASC 350-50”), wherein
website development costs are segregated into three activities:
|
1)
|
Initial stage (planning), whereby the related costs are expensed.
|
|
2)
|
Development (web application, infrastructure, and graphics), whereby the related costs are capitalized and amortized once the website is ready for use. Costs for development content of the website may be expensed or capitalized depending on the circumstances of the expenditures.
|
|
3)
|
Post-implementation (after site is up and running: security, training, and administration), whereby the related costs are expensed as incurred. Upgrades are usually expensed, unless they add additional functionality.
|
The Company didn’t have any capitalized
website development costs during the years ended December 31, 2013 and 2012.
Deferred Financing Costs
Costs relating to obtaining certain debts are
capitalized and amortized over the term of the related debt using the straight-line method. The unamortized capitalized balance
of deferred financing costs at December 31, 2013, and 2012, was $44,986 and $17,033, respectively. Amortization of deferred financing
costs charged to operations was $79,123 and $25,849 for the years ended December 31, 2013 and 2012, respectively. When a loan
is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.
Allowance for Doubtful Accounts
We generate the majority of our revenues and
corresponding accounts receivable from the sales of software products. We evaluate the collectability of our accounts receivable
considering a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its
financial obligations to us, we record a specific reserve for bad debts against amounts due in order to reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts
based on past write-off experience and the length of time the receivables are past due. Bad debts expense (recoveries) was $(27,129)
and $2,957 for the years ended December 31, 2013 and 2012, respectively. The allowance for doubtful accounts was $7,017 and $68,521
for the years ended December 31, 2013 and 2012, respectively.
Beneficial Conversion Features
From time to time, the Company may issue convertible
notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible
note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining
unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of
warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt
discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the
life of the note using the effective interest method.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
The Company designs and sells various software
programs to business enterprises, hospitals and Government and post-secondary institutions. Prior to shipment, each software product
is tested extensively to meet Company specifications. The software is shipped fully functional via electronic delivery, but some
installation and setup is required. No other entities sell the same or largely interchangeable software.
Installation is a standard process, outlined
in the owner's manual, consisting principally of setup, calibrating, and testing the software. A purchaser of the software could
complete the process using the information in the owner's manual, although it would probably take significantly longer than it
would take the Company’s technicians to perform the tasks. Although other vendors do not install the Company’s software,
they do provide largely interchangeable installation services for a fee. Historically, the Company has never sold the software
without installation. Most installations are performed by the Company within 7 to 24 days of shipment and are included in the overall
sales price of the software. In addition, the customer must pay for support contracts and training packages, depending on their
desired level of service. The Company is the only manufacturer of the software and it only sells software on a standalone basis
directly to the end user.
The sales price of the arrangement consists
of the software, installation, and training and support services, which the customer is obligated to pay in full upon delivery
of the software. In addition, there are no general rights of return involved in these arrangements. Therefore, the software is
accounted for as a separate unit of accounting.
The Company does not have vendor-specific objective
evidence of selling price for the software because it does not sell the software separately (without installation services and
support contracts). In addition, third-party evidence of selling price does not exist as no vendor separately sells the same or
largely interchangeable software. Therefore, the Company uses its best estimate of selling price when allocating such arrangement
consideration.
In estimating its selling price for the software,
the Company considers the cost to produce the software, profit margin for similar arrangements, customer demand, effect of competitors
on the Company’s software, and other market constraints. When applying the relative selling price method, the Company uses
its best estimate of selling price for the software, and third-party evidence of selling price for the installation. Accordingly,
without considering whether any portion of the amount allocable to the software is contingent upon delivery of the other items,
the Company allocates the selling price to the software, support, and installation.
The Company doesn’t currently provide
product warranties, but if it does in the future it will provide for specific product lines and accrue for estimated future warranty
costs in the period in which the revenue is recognized.
Advertising and Promotion
All costs associated with advertising and promoting
products are expensed as incurred. These expenses approximated $181,497 and $104,431 for the years ended December 31, 2013 and
2012, respectively.
Income Taxes
The Company recognizes deferred tax assets
and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a
valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Basic and Diluted Loss per Share
The basic net loss per common share is computed
by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed
by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding
plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and
therefore basic and diluted earnings per share result in the same figure.
Stock-Based Compensation
The Company adopted FASB guidance on stock
based compensation on January 1, 2006. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee
stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Common stock issued for services and compensation was $1,713,150 and $1,278,151 for the years ended December 31, 2013 and 2012,
respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Uncertain Tax Positions
Effective January 1, 2009, the Company adopted
new standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
Various taxing authorities periodically audit
the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including
the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected
with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures.
A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved.
The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position
relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions. As
of December 31, 2013, the Company had no uncertain tax positions.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11:
Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
The new guidance requires that unrecognized tax
benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is effective for fiscal
years and interim periods within those years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to
have a material impact on our financial position or results of operations.
In February 2013, FASB issued ASU No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, to improve
the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially
excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive
income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive
income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in
the financial statements under U.S. GAAP. The new amendments will require an organization to:
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-
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Present (either on the face of the statement where net income is presented or in the notes) the
effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but
only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting
period; and
|
|
-
|
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification
items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting
period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially
transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
|
The amendments apply to all public and private
companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all
reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for
public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial
position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01,
Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
, which clarifies
which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11.
The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed
unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope
of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while
still giving financial statement users sufficient information to analyze the most significant presentation differences between
financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in
this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have
a material impact on our financial position or results of operations.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Going Concern
As shown in the accompanying financial statements,
the Company has incurred recurring losses from operations resulting in an accumulated deficit of $(7,501,994), and as of December
31, 2013, the Company’s current liabilities exceeded its current assets by $1,283,338 and its total liabilities exceeded
its total assets by $1,524,615. These factors raise substantial doubt about the Company’s ability to continue as a going
concern.
Epazz will require substantial additional funding
for continuing research and development, obtaining regulatory approval and for the commercialization of its products. Management
expects to be able to raise enough funds to meet its working capital requirements through debt and/or equity financing. There is
no assurance that Epazz will be able to obtain sufficient additional funds when needed, or that such funds, if available, will
be obtainable on terms satisfactory to Epazz. The accompanying financial statements do not include any adjustments that might be
necessary should Epazz be unable to continue as a going concern.
Note 3 – Subsidiary Formation
Formation of Subsidiary – Terran Power,
Inc., September 19, 2013
On September 19, 2013, the Board of Directors,
consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned
subsidiary of the Company named Terran Power, Inc. The Company plans to file a non-provisional patent application to develop a
mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing an outlet or
a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.
Subsidiary Formation – FlexFridge,
Inc., March 4, 2013
On March 4, 2013, the Board of Directors of
Epazz, Inc. (the “Company”), consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved
the formation of a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc., which was later renamed,
Z Fridge, Inc., and ultimately again renamed as, FlexFridge, Inc. (“FlexFridge”) on May 29, 2014. The Company
has filed a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge.
On November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz,
Inc. received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial
interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards
Codification (“ASC”) 810-10. There has been no material activity within FlexFridge to date.
Note 4 – Asset Purchase Acquisitions
Asset Purchase Acquisition – MS Health,
Inc., March 28, 2012
On March 28, 2012, we, through a newly-formed
wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), closed on an Asset Purchase Agreement (“APA”)
with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the APA, we purchased all of MSHSC’s
assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and
software in consideration for an aggregate of $500,000, of which $39,200 was paid in cash at the closing, $360,800 was financed
using a small business loan and $100,000 was paid by way of a Promissory Note (the “MSHSC Note”). The terms of the
MSHSC Note include interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or
interest for two (2) years and equal payments of principal and interest commencing in year 3, no prepayment penalty, and full payment
of all amounts due after five (5) years. The MSHSC Note is secured by a security interest over the assets of MS Health. We did
not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC. The acquisition was financed in
part with a $360,800 Small Business Administration (“SBA”) loan, bearing interest at fixed and variable rates. The
initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of
the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate
over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly.
The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex,
Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 $114,627 of goodwill. According to the purchase method of
accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
|
|
March 28,
|
|
|
|
2012
|
|
Consideration:
|
|
|
|
|
Cash paid at closing
|
|
$
|
39,200
|
|
Small business loan
(1)
|
|
|
360,800
|
|
Seller financed note payable
(2)(3)
|
|
|
124,697
|
|
Fair value of total consideration exchanged
|
|
$
|
524,697
|
|
|
|
|
|
|
Fair value of identifiable assets acquired assumed:
|
|
|
|
|
Other current assets
|
|
$
|
7,367
|
|
Equipment
|
|
|
2,703
|
|
Contracts
|
|
|
258,000
|
|
Technology-based intangible assets
|
|
|
124,000
|
|
Non-compete agreement
|
|
|
18,000
|
|
Total fair value of assets assumed
|
|
|
410,070
|
|
Consideration paid in excess of fair value (Goodwill)
(4)
|
|
$
|
114,627
|
|
|
(1)
Consideration included partial proceeds obtained from a $360,800 Small Business Association (“SBA”) loan, bearing interest at fixed and variable rates. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.
|
|
|
(2)
Consideration 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 3, no prepayment penalty, and full payment of all amounts due after five (5) years. 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.
|
|
|
(3)
The fair value of the seller financed note in excess of the $100,000 principal balance attributable to the deferred payment terms will be amortized to interest expense over the deferred financing period.
|
|
|
(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
MS Health, customer base and other assets acquired will enable the Company to enhance their business model and strengthen its
future cash flows to fund operations and take advantage of additional growth opportunities.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited supplemental pro forma results
of operations of the combined entities had the dates of the acquisitions been January 1, 2012 are
as follows:
|
|
Combined Pro Forma:
|
|
|
|
For the years ended
December 31,
2012
|
|
|
|
|
|
Revenue:
|
|
$
|
1,256,054
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Operating expenses
|
|
|
2,710,529
|
|
|
|
|
|
|
Net operating loss
|
|
|
(1,454,475
|
)
|
|
|
|
|
|
Other income (expense)
|
|
|
(457,730
|
)
|
|
|
|
|
|
Net loss
|
|
$
|
(1,912,205
|
)
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
|
|
Outstanding – basic and fully diluted
|
|
|
399,031,314
|
|
|
|
|
|
|
Net loss per share – basic and fully diluted
|
|
$
|
(0.00
|
)
|
Note 5 – Related Parties
Debt Financings
From time to time we have received and
repaid loans from our CEO and his immediate family members to fund operations. These related party debts are fully disclosed in
Note 14 below.
In addition to the debts disclosed in
Note 14, we had two convertible notes with related parties that are disclosed in Note 15 as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Unsecured $14,838 convertible promissory note carries an 11% interest rate (“First GG Mars Note”) owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note was acquired from and assigned by another independent lender on August 15, 2013 prior to being exchanged for the convertible note. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for the one hundred and twenty (120) days prior to the conversion date, or $0.00001 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of $14,838 was immediately converted at the election of the note holder into 46,856,526 shares.
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into another 40,000,000 shares pursuant to debt conversion on August 7, 2013.
|
|
|
46,449
|
|
|
|
190,849
|
|
|
|
|
|
|
|
|
|
|
Total convertible debts, related parties
|
|
|
46,449
|
|
|
|
190,849
|
|
Less: unamortized discount on beneficial conversion feature
|
|
|
(5,653
|
)
|
|
|
(45,098
|
)
|
Convertible debts
|
|
|
40,796
|
|
|
|
145,751
|
|
Less: current maturities of convertible debts, related parties included in convertible debts
|
|
|
–
|
|
|
|
–
|
|
Long term convertible debts, related parties included in convertible debts
|
|
$
|
40,796
|
|
|
$
|
145,751
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in Stockholders’ Equity,
Related Parties
Dividends Payable
On January 1, 2013, the Company declared
and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of
$1 million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during
the year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which can be paid in cash or in
shares of Class A Common Stock in lieu of cash.
Beneficial Conversion Feature
On August 20, 2013, the Company entered
into a convertible promissory note with GG Mars Capital, Inc., a company owned by our CEO’s family member. The beneficial
conversion feature discount resulting from the conversion price that was $0.001 below the market price of $0.0013 on the August
20, 2013 origination date resulted in a debt discount value of $14,838 that was recognized as additional paid in capital and is
being amortized on a straight line basis over the life of the loan.
Debt Conversions into Class A Common
Stock
On March 14, 2013, the Company issued 50,000,000
shares of Class A Common Stock pursuant to the conversion of $46,000 of convertible debt owed to Star Financial Corporation, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On April 10, 2013, the Company issued 50,000,000
shares of Class A Common Stock pursuant to the conversion of $40,000 of convertible debt owed to Star Financial Corporation, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On May 27, 2013, the Company modified a
related party debt and issued 14,239,500 shares of Class A Common Stock in settlement of $14,239 of related party debt owed to
Vivienne Passley, which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest. The total fair value of the
common stock was $28,479 based on the closing price of the Company’s common stock on the date of grant, resulting in the
recognition of a $14,240 loss on debt settlement.
On July 9, 2013, the Company issued 80,000,000
shares of Class A Common Stock pursuant to the conversion of $26,400 of convertible debt owed to Star Financial Corporation, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On August 7, 2013, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $32,000 of convertible debt owed to Star Financial Corporation, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On August 27, 2013, the Company issued
46,856,526 shares of Class A Common Stock pursuant to the conversion of $14,838 of convertible debt owed to GG Mars Capital, Inc.,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
Loss on Convertible Debt Modification
to Related Party
On March 5, 2013, we amended a convertible
promissory note with Star Financial Corporation, which then carried a balance of $190,849, to revise the conversion terms from
a $0.005 floor and 75% discount to market to conversion terms consisting of, "equal to the greater of, (a) 50% of the Market
Price, or (b) the fixed conversion price of $0.00075 per share". The Company compared the fair value of the debt immediately
preceding the modification to the fair value after the modification to determine the loss on modification of $81,792. This value
was determined using the value of the shares assuming the note was converted pursuant to the respective conversion terms on the
date of modification. The total value of the shares after modification was $272,641, compared to the $190,849 value preceding the
modification, resulting in a loss on modification of $81,792.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Shares of Class A Common Stock Issued
for Services to Related Parties
On March 5, 2013, the Company issued 12,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on an acquisition loan that
originated on September 30, 2010. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.
On March 5, 2013, the Company issued 12,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on two acquisition loans
that originated on October 26, 2011. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.
On March 5, 2013, the Company issued 200,000,000
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The shares
will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock was
$400,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction
against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied.
The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares.
On March 20, 2013, the Company issued 35,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing collateral on acquisition loans that originated
on September 30, 2010 and October 26, 2011. The total fair value of the common stock was $35,500 based on the closing price of
the Company’s common stock on the date of grant.
On March 20, 2013, the Company issued 60,000,000
shares of Class A Common Stock to Craig Passley, a related party, for providing corporate secretary services from 2012 to 2021.
The total fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the date
of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until
the terms of the vesting periods are satisfied. A total of $6,000 was expensed related to the vested services for the year ended
December 31, 2012. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares
for Convertible Series C Preferred shares.
On May 16, 2013, the Company issued 710,526,316
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The total
fair value of the common stock was $1,350,000 based on the closing price of the Company’s common stock on the date of grant.
On May 24, 2013, the Company issued 35,500,000
shares of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on
September 30, 2010 and October 26, 2011. The total fair value of the common stock was $71,000 based on the closing price of the
Company’s common stock on the date of grant.
On July 5, 2013, the Company issued 25,000,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value
of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.
On July 8, 2013, the Company issued 710,526,316
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services, of which
200,000,000 shares vested immediately and the remaining 510,526,316 shares will be vested once the Company reports revenue of $10
million in a calendar year. The total fair value of the common stock was $497,368 based on the closing price of the Company’s
common stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional
paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions
were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.
Shares of Class A Common Stock Issued
for Loan Origination Fees to Related Parties
On July 19, 2013, the Company issued 2,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $23,000
short term promissory note. The total fair value of the common stock was $4,250 based on the closing price of the Company’s
common stock on the date of grant.
On July 31, 2013, the Company issued 3,000,000
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $4,200
based on the closing price of the Company’s common stock on the date of grant.
On August 2, 2013, the Company issued 3,000,000
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $5,100
based on the closing price of the Company’s common stock on the date of grant.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On August 7, 2013, the Company granted
2,500,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $24,000 short term promissory note. The total fair value of the common stock
was $4,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
On August 12, 2013, the Company issued
5,000,000 shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for
a $51,000 short term promissory note. The total fair value of the common stock was $7,000 based on the closing price of the Company’s
common stock on the date of grant.
On August 20, 2013, the Company granted
2,500,000 shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related
party, as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common
stock was $3,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently
issued on November 13, 2013.
On August 27, 2013, the Company granted
1,250,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $12,500 short term promissory note. The total fair value of the common stock
was $1,500 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
On September 7, 2013, the Company granted
6,000,000 shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related
party, as a loan origination cost in consideration for a $65,000 short term promissory note. The total fair value of the common
stock was $6,600 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently
issued on November 13, 2013.
Convertible
Common Stock, Class B, Related Parties
The Company has 60,000,000 authorized shares
of $0.0001 par value Convertible Class B Common Stock, convertible at the option of the holder into shares of the Company’s
Class A Common Stock on a 1:1 basis. The Convertible Class B Common Stock carries preferential voting rights of 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.
On March 16, 2013, the Company issued 5,000,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing product development services.
The total fair value of the common stock was $9,500 based on the closing price of the Company’s common stock on the date
of grant.
Employment Agreement
On September 6, 2012, we entered into an
employment agreement with Shaun Passley, Ph.D., our Chief Executive Officer, President, and Chairman of the Board of Directors
which had a term of ten (10) years. Compensation pursuant to the agreement calls for a base salary of $180,000 per year; of which
$30,000 shall be payable annually in cash and $150,000 shall be payable in shares of the Company’s Common Stock at the rate
of $0.006 per share, or 25,000,000 shares per year. In addition, the Company issued 1 billion shares of Class A Common Stock to
the Company’s CEO as a bonus in consideration for various services performed, and to be performed over a ten year period
beginning on September 6, 2012, provided that all of the shares remain subject to forfeiture until such time, if ever, as we generate
annual revenues of at least $10 million, subject to the below termination provisions. The total fair value of the common stock
was $6,000,000 based on the closing price of the Company’s common stock on the date of grant, which has been presented as
a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods
are satisfied. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for
Convertible Series C Preferred shares. In the event of the termination of Dr. Passley’s employment agreement for cause by
the Company or without good reason by Dr. Passley, any non-vested shares are to be cancelled and he is to be paid any consideration
he is owed through the date of termination. In the event of the termination of Dr. Passley’s employment agreement for good
reason (as described in the agreement) by Dr. Passley or without cause by the Company, he is due eight additional weeks of compensation
and all non-vested shares vest to him immediately. In the event of the termination of Dr. Passley’s employment agreement
for any other reason, he is due eight weeks of additional salary and any non-vested shares are to be cancelled.
We do not have an employment or consultant
agreement with Craig Passley, our Secretary, however on March 20, 2013, we granted 60 million shares to Craig Passley for services
rendered between 2012 and 2021. The shares vest annually over the 10 year period with the first 6 million vesting upon the grant
date. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible
Series C Preferred shares.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Amendments to Employment Agreement
On August 16, 2013, the Company amended
Shaun Passley, Ph.D.’s employment agreement to increase the cash portion of his compensation from $30,000 per year to $100,000
in the initial year of the agreement only. All other terms remain in effect, and the shares of stock awarded as a bonus as previously
disclosed were granted in addition to the stock based compensation outlined in the original agreement.
Note 6 – Fair Value of Financial
Instruments
Under FASB ASC 820-10-5, fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value
hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under
GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required
for items measured at fair value.
The Company does not have any financial
instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured
using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.
Level 2 - Inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield
curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means
(market corroborated inputs).
Level 3 - Unobservable inputs
that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation
of financial instruments at fair value on a non-recurring basis in the balance sheets as of December 31, 2013 and 2012:
|
|
Fair Value Measurements at December 31, 2013
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
374,162
|
|
Goodwill
|
|
|
–
|
|
|
|
–
|
|
|
|
255,460
|
|
Total assets
|
|
|
–
|
|
|
|
–
|
|
|
|
629,622
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit
|
|
|
–
|
|
|
|
73,232
|
|
|
|
–
|
|
Capital leases
|
|
|
–
|
|
|
|
17,421
|
|
|
|
–
|
|
Long term debts
|
|
|
–
|
|
|
|
1,211,929
|
|
|
|
–
|
|
Notes payable, related parties
|
|
|
–
|
|
|
|
482,368
|
|
|
|
–
|
|
Convertible debts, net of discount of $109,583
|
|
|
–
|
|
|
|
157,294
|
|
|
|
–
|
|
Total Liabilities
|
|
|
–
|
|
|
|
1,942,244
|
|
|
|
–
|
|
|
|
$
|
–
|
|
|
$
|
(1,942,244
|
)
|
|
$
|
629,622
|
|
|
|
Fair Value Measurements at December 31, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
821,150
|
|
Goodwill
|
|
|
–
|
|
|
|
–
|
|
|
|
255,460
|
|
Total assets
|
|
|
–
|
|
|
|
–
|
|
|
|
1,076,610
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit
|
|
|
–
|
|
|
|
77,047
|
|
|
|
–
|
|
Capital leases
|
|
|
–
|
|
|
|
43,120
|
|
|
|
–
|
|
Long term debts
|
|
|
–
|
|
|
|
1,111,162
|
|
|
|
–
|
|
Notes payable, related parties
|
|
|
–
|
|
|
|
22,085
|
|
|
|
–
|
|
Convertible debts, net of discount of $139,068
|
|
|
–
|
|
|
|
227,681
|
|
|
|
–
|
|
Total Liabilities
|
|
|
–
|
|
|
|
1,481,095
|
|
|
|
–
|
|
|
|
$
|
–
|
|
|
$
|
(1,481,095
|
)
|
|
$
|
1,076,610
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the years ended December 31, 2013 and 2012.
Level 3 assets consist of intangible assets
and goodwill. Fair value adjustments related to the measurement of intangible assets of $276,282 and $-0- were necessary during
the years ended December 31, 2013 and 2012.
Note 7 – Other Current Assets
As of December 31, 2013 and 2012 other
current assets included the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred financing costs
|
|
$
|
44,986
|
|
|
$
|
17,032
|
|
Prepaid expenses
|
|
|
–
|
|
|
|
1,743
|
|
Other receivable
|
|
|
51,250
|
|
|
|
–
|
|
Security deposits
|
|
|
9,878
|
|
|
|
3,252
|
|
|
|
$
|
106,114
|
|
|
$
|
22,027
|
|
The Company recognized $79,123 and $25,849
of amortization expense related to the deferred financing costs during the years ended December 31, 2013 and 2012, respectively.
Note 8 – Property and Equipment
Property and Equipment consists of the
following at December 31, 2013 and 2012, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Furniture and fixtures
|
|
$
|
2,187
|
|
|
$
|
2,187
|
|
Computers and equipment
|
|
|
325,105
|
|
|
|
318,275
|
|
Software
|
|
|
67,986
|
|
|
|
67,986
|
|
Assets held under capital leases
|
|
|
134,800
|
|
|
|
134,800
|
|
|
|
|
530,078
|
|
|
|
523,248
|
|
Less accumulated depreciation and amortization
|
|
|
(416,668
|
)
|
|
|
(326,951
|
)
|
|
|
$
|
113,410
|
|
|
$
|
196,297
|
|
Depreciation and amortization expense totaled
$89,717 and $119,628 for the years ended December 31, 2013 and 2012, respectively.
Note 9 – Intangible Assets
Intangible assets consisted of the following at December 31,
2013 and 2012, respectively:
|
|
Useful
|
|
December 31,
|
|
|
December 31,
|
|
Description
|
|
Life
|
|
2013
|
|
|
2012
|
|
Technology-based intangible assets - PRMI
|
|
15 Years
|
|
$
|
–
|
|
|
$
|
480,720
|
|
Technology-based intangible assets - IntelliSys
|
|
5 Years
|
|
|
200,000
|
|
|
|
200,000
|
|
Technology-based intangible assets - K9 Bytes
|
|
5 Years
|
|
|
42,000
|
|
|
|
42,000
|
|
Technology-based intangible assets – MS Health
|
|
5 Years
|
|
|
124,000
|
|
|
|
124,000
|
|
Contracts – MS Health
|
|
6 Years
|
|
|
258,000
|
|
|
|
258,000
|
|
Trade name - K9 Bytes
|
|
5 Years
|
|
|
22,000
|
|
|
|
22,000
|
|
Other intangible assets – MS Health
|
|
2 Years
|
|
|
18,000
|
|
|
|
18,000
|
|
Other intangible assets - K9 Bytes
|
|
2 Years
|
|
|
26,000
|
|
|
|
26,000
|
|
Total intangible assets
|
|
|
|
|
690,000
|
|
|
|
1,170,720
|
|
Less: accumulated amortization
|
|
|
|
|
(315,838
|
)
|
|
|
(349,570
|
)
|
Intangible assets, net
|
|
|
|
$
|
374,162
|
|
|
$
|
821,150
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense on intangible assets
totaled $446,988 and $155,448 for the years ended December 31, 2013 and 2012, respectively, including impairments of $276,282 and
$-0- for the years ended December 31, 2013 and 2012, respectively.
A total of $480,720 of fully amortized
intangible assets were removed during the year ended December 31, 2013, of which $276,282 was due to impairments and the remaining
$204,438 was the removal of the fully amortized remaining balance from the PRMI assets with the offset to accumulated amortization.
As these were due to the non-performance of the assets, there was no resulting gain or loss on the removal of intangible assets.
Note 10 – Goodwill
The changes in the carrying amount of goodwill
and accumulated impairment losses for the years ended December 31, 2013 and 2012, respectively, are as follows:
|
|
IntelliSys, Inc.
|
|
|
K9 Bytes, Inc.
|
|
|
MS Health
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
53,588
|
|
|
$
|
87,244
|
|
|
$
|
–
|
|
|
$
|
140,832
|
|
Accumulated impairment losses
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
53,588
|
|
|
|
87,244
|
|
|
|
–
|
|
|
|
140,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
–
|
|
|
|
–
|
|
|
|
114,628
|
|
|
|
114,628
|
|
Impairment losses
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
53,588
|
|
|
|
87,244
|
|
|
|
114,628
|
|
|
|
255,460
|
|
Accumulated impairment losses
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
53,588
|
|
|
|
87,244
|
|
|
|
114,628
|
|
|
|
255,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Impairment losses
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
53,588
|
|
|
|
87,244
|
|
|
|
114,628
|
|
|
|
255,460
|
|
Accumulated impairment losses
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
53,588
|
|
|
$
|
87,244
|
|
|
$
|
114,628
|
|
|
$
|
255,460
|
|
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 did not result in impairment losses during the years ended December 31, 2013 and 2012. We will perform our next
earnings forecast during the fourth quarter of 2013, unless events occur or circumstances change that would more likely than not
reduce the fair value of the reporting unit below its carrying amount. The fair value of our goodwill was estimated using the expected
present value of future cash flows.
Note 11 – Accrued Expenses
As of December 31, 2013 and 2012 accrued
expenses included the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accrued interest
|
|
$
|
28,628
|
|
|
$
|
19,509
|
|
Accrued interest, related parties
|
|
|
28,741
|
|
|
|
4,592
|
|
Accrued payroll and payroll taxes
|
|
|
16,610
|
|
|
|
19,980
|
|
Other accrued expenses
|
|
|
60
|
|
|
|
48
|
|
|
|
$
|
74,039
|
|
|
$
|
44,129
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Line of Credit
Lines of credit consisted of the following
at December 31, 2013 and 2012, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
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.
|
|
$
|
49,508
|
|
|
$
|
49,606
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
18,087
|
|
|
|
19,641
|
|
|
|
|
|
|
|
|
|
|
Line of credit of $40,000 from Dell Business Credit available for the purchase of Dell products, such as computer and software equipment. The outstanding balance on the line of credit bears interest at a rate of 26.99%. Variable payments are due monthly.
|
|
|
5,637
|
|
|
|
7,800
|
|
|
|
|
|
|
|
|
|
|
Total line of credit
|
|
|
73,232
|
|
|
|
77,047
|
|
Less: current portion
|
|
|
(73,232
|
)
|
|
|
(77,047
|
)
|
Line of credit, less current portion
|
|
$
|
–
|
|
|
$
|
–
|
|
Note 13 – Capital Lease Obligations
Payable
The Company leases certain equipment under
agreements that are classified as capital leases as follows:
Lease #1 - Commenced on March 12, 2010
with monthly lease payments of $2,455 and two months paid in advance, and the remaining payments paid over the following 43 months.
Lease #2 – Commenced on March 16,
2010 with monthly lease payments of $2,258 over the following 36 months. The lease was terminated on April 16, 2013 and the equipment
was purchased pursuant to the mutual release and final payment of $5,500.
Lease #3 – Commenced on January 12,
2012 with monthly lease payments of $480 over the next 48 months, and a bargain purchase price of $1 at the end of the lease.
The cost of equipment under capital leases
is included in the Balance Sheets as property and equipment and was $134,800 and $134,800 at December 31, 2013 and 2012, respectively.
Accumulated amortization of the leased equipment was $124,087 and $108,090 at December 31, 2013 and 2012, respectively. Amortization
of assets under capital leases is included in depreciation and amortization expense.
The future minimum lease payments required
under the capital leases and the present value of the net minimum lease payments as of December 31, 2013, are as follows:
Twelve Months
|
|
|
|
Ending
|
|
|
|
December 31,
|
|
Amount
|
|
2014
|
|
$
|
13,232
|
|
2015
|
|
|
5,757
|
|
2016
|
|
|
433
|
|
Total minimum payments
|
|
$
|
19,422
|
|
Less: amount representing interest
|
|
|
(2,001
|
)
|
Present value of net minimum lease payments
|
|
|
17,421
|
|
Less: Current maturities of capital lease obligations
|
|
|
(17,421
|
)
|
Long-term capital lease obligations
|
|
$
|
–
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Notes Payable, Related Parties
Notes payable, related parties consist
of the following at December 31, 2013 and 2012, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
On various dates the Company’s CEO advanced and repaid funds to the Company at a 15% interest rate, due on demand. A total of $209,380 was advanced and repaid by the CEO during the year ended December 31, 2013, and total proceeds and repayments were $349,560 and $411,073, respectively during the year ended December 31, 2012.
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated November 1, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on March 7, 2014. In addition, a loan origination fee of $25,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.
|
|
|
125,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated October 15, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500 upon default.
|
|
|
18,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated September 7, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on February 7, 2014. In addition, a loan origination fee of $10,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 6,000,000 shares of Series A Common Stock with a fair market value of $6,600 was granted as consideration for the loan on September 7, 2013 and the shares were subsequently issued on November 13, 2013.
|
|
|
65,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated August 20, 2013, unsecured promissory note payable owed to GG
Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15%
interest rate, matures on January 20, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the
loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee,
consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $3,250 was granted as consideration for
the loan on August 20, 2013 and the shares were subsequently issued on November 13, 2013. Currently in default.
|
|
|
25,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated August 12, 2013, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on February 15, 2014. In addition, a loan origination fee of $6,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 5,000,000 shares of Series A Common Stock with a fair market value of $7,000 was issued as consideration for the loan on August 12, 2013. The note was subsequently exchanged for a convertible note on April 2, 2014 and $58,433, consisting of $51,000 of principal, $4,933.33 of accrued interest and $2,500 of liquidated damages, was converted in exchange for 584,333,745 shares of common stock in complete satisfaction of the debt.
|
|
|
51,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated July 19, 2013, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was issued as consideration for the loan on July 19, 2013.
|
|
|
23,000
|
|
|
|
–
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Originated August 27, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 27, 2014. In addition, a loan origination fee of $2,500 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 1,250,000 shares of Series A Common Stock with a fair market value of $1,500 was granted as consideration for the loan on August 27, 2013 and the shares were subsequently issued on November 13, 2013.
|
|
|
12,500
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated August 7, 2013, unsecured promissory note payable owed to Star
Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a
15% interest rate, matures on January 20, 2014. In addition, a loan origination fee of $4,000 was issued as consideration for
the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee,
consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was granted as consideration for
the loan on August 7, 2013 and the shares were subsequently issued on November 13, 2013. Currently in default.
|
|
|
24,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated August 2, 2013, unsecured promissory note payable owed to Star
Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a
15% interest rate, matures on January 17, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for
the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee,
consisting of 3,000,000 shares of Series A Common Stock with a fair market value of $5,100 was issued as consideration for
the loan on August 2, 2013. Currently in default.
|
|
|
32,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated July 31, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 3,000,000 shares of Series A Common Stock with a fair market value of $4,200 was issued as consideration for the loan on July 31, 2013.
|
|
|
32,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated June 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $2,000 was issued as consideration for the loan on June 12, 2013, and is being amortized on a straight line basis over the life of the loan.
|
|
|
10,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated May 16, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 1, 2015. In addition, a loan origination fee of $2,000 was issued as consideration for the loan on May 16, 2013, and is being amortized on a straight line basis over the life of the loan. On December 31, 2013, the note holder sold and assigned the debt to Magna Group, LLC. The Company subsequently agreed to exchange the $14,000 of principal and $875 of accrued interest for a convertible note. The assigned note was combined with the assigned note, carrying an origination date of April 1, 2013 for a combined convertible note of $35,028. The assigned principal and interest of $35,028 was subsequently converted to a total of 216,806,667 shares of common stock over various dates from January 7, 2014 to February 6, 2014 in complete satisfaction of the debt.
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated April 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 12, 2015. In addition, a loan origination fee of $7,000 was issued as consideration for the loan on April 12, 2013, and is being amortized on a straight line basis over the life of the loan.
|
|
|
57,000
|
|
|
|
–
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Originated April 1, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 1, 2015. In addition, a loan origination fee of $3,000 was issued as consideration for the loan on April 1, 2013, and is being amortized on a straight line basis over the life of the loan. On December 31, 2013, the note holder sold and assigned the debt to Magna Group, LLC. The Company subsequently agreed to exchange the $19,000 of principal and $153 of accrued interest, and a $1,000 loan origination cost for a convertible note. The assigned note was combined with the assigned note, carrying an origination date of May 16, 2013 for a combined convertible note of $35,028. The assigned principal and interest of $35,028 was subsequently converted to a total of 216,806,667 shares of common stock over various dates from January 7, 2014 to February 6, 2014 in complete satisfaction of the debt.
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Originated October 9, 2012, unsecured promissory note payable owed to 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 1,088,957 shares of Series A Common Stock with a fair market value of $6,630 was issued as consideration for the loan on October 9, 2012.
|
|
|
–
|
|
|
|
13,000
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matured on July 31, 2007. Currently in default.
|
|
|
5,868
|
|
|
|
7,085
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, related parties
|
|
|
482,368
|
|
|
|
22,085
|
|
Less: current portion
|
|
|
(397,368
|
)
|
|
|
(22,085
|
)
|
Notes payable, related parties, less current portion
|
|
$
|
85,000
|
|
|
$
|
–
|
|
The Company recorded interest expense on
notes payable to related parties in the amounts of $26,416 and $41,417 during the years ended December 31, 2013 and 2012, respectively.
Note 15 – Convertible Debts
Convertible debts consist of the following
at December 31, 2013 and 2012, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
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 delinquent Form 10-K for the year ended December 31, 2013 and the Form 10-Q for the three months ended March 31, 2014, any future borrowings shall only be made by mutual agreement of both the borrow and lender.
|
|
$
|
33,000
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Unsecured $35,028 convertible promissory note originated on December 31, 2013, carries an 12% interest rate (“First Magna Group Note”) owed to Magna Group, LLC. Two notes totaling $33,000 of principal and $1,028 of accrued interest were acquired from and assigned by Star Financial on December 31, 2013 prior to being exchanged for the convertible note, including $1,000 of loan origination costs. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,028 was subsequently converted to a total of 216,806,667 shares of common stock over various dates from January 7, 2014 to February 6, 2014 in complete satisfaction of the debt.
|
|
|
35,028
|
|
|
|
–
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Unsecured $14,838 convertible promissory note carries an 11% interest rate (“First GG Mars Note”) owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note was acquired from and assigned by another independent lender on August 15, 2013 prior to being exchanged for the convertible note. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for the one hundred and twenty (120) days prior to the conversion date, or $0.00001 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of $14,838 was immediately converted at the election of the note holder into 46,856,526 shares.
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Unsecured $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 unamortized OID is $3,791 at December 31, 2013. Currently in default.
|
|
|
56,900
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Unsecured $42,500 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on June 20, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares.
|
|
|
42,500
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Unsecured $53,000 convertible promissory note carries an 8% interest rate (“Seventh Asher Note”), matures on May 21, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares.
|
|
|
53,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Unsecured $33,000 convertible promissory note originated on June 12, 2013, including an Original Issue Discount (“OID”) of $3,000, carries a 12% interest rate (“First JMJ Note”), matures on June 11, 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 principal of $33,000 and $333 of accrued interest on the note was subsequently repaid in full on August 12, 2013 & thus the 12% interest was not assessed per the terms of the note.
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into another 40,000,000 shares pursuant to debt conversion on August 7, 2013.
|
|
|
46,449
|
|
|
|
190,849
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Unsecured $56,900 convertible promissory note, including an Original Issue Discount (“OID”) of $4,400 and legal fees of $2,500, carries an 8% interest rate (“First Tonaquint Note”), matures on May 31, 2013. 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 $0.00009 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 $5,000 of outstanding principal into 4,504,505 shares pursuant to debt conversion on March 12, 2013, $10,000 of principal into 15,151,515 shares on April 2, 2013, $10,000 of principal into 15,873,016 shares on April 24, 2013, $8,000 of principal into 22,222,222 shares on July 10, 2013, $13,000 of principal into 15,476,190 shares on July 30, 2013 and another $10,900 of principal and $3,764 of accrued interest into 19,551,267 shares on August 19, 2013.
|
|
|
–
|
|
|
|
56,900
|
|
|
|
|
|
|
|
|
|
|
Unsecured $16,500 convertible promissory note carries an 8% interest rate (“Sixth Asher Note”), matures on September 14, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to forty-one percent (41%) of the average of the three lowest trading bid prices of the Company’s common stock for the ninety (90) 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 a total of $16,500 of principal and $660 of interest into a total of 40,857,143 shares in full settlement of the outstanding debt on June 24, 2013.
|
|
|
–
|
|
|
|
16,500
|
|
|
|
|
|
|
|
|
|
|
Unsecured $27,500 convertible promissory note carries an 8% interest rate (“Fifth Asher Note”), matures on July 18, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to forty-one percent (41%) of the average of the three lowest trading bid prices of the Company’s common stock for the ninety (90) 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 promissory note, consisting of $27,500 of principal and $21,716 of accrued interest and financing costs, was repaid in full with cash on April 15, 2013.
|
|
|
–
|
|
|
|
27,500
|
|
|
|
|
|
|
|
|
|
|
Unsecured $32,500 convertible promissory note carries an 8% interest rate (“Fourth Asher Note”), matured on April 26, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the five lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 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 subsequently converted a total of $32,500 of principal and $1,300 of interest into a total of 24,461,538 shares in settlement of the outstanding debt on March 4, 2013 and March 6, 2013.
|
|
|
–
|
|
|
|
32,500
|
|
|
|
|
|
|
|
|
|
|
Unsecured $42,500 convertible promissory note carries an 8% interest rate (“Third Asher Note”), matured on March 29, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 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 subsequently converted a total of $42,500 of principal and $1,700 of interest into a total of 23,573,529 shares of common stock in settlement of the outstanding debt between January 3, 2013 and February 26, 2013.
|
|
|
–
|
|
|
|
42,500
|
|
Total convertible debts
|
|
|
266,877
|
|
|
|
366,749
|
|
Less: unamortized discount on beneficial conversion feature
|
|
|
(103,188
|
)
|
|
|
(139,068
|
)
|
Less: unamortized OID
|
|
|
(6,395
|
)
|
|
|
–
|
|
Convertible debts
|
|
|
157,294
|
|
|
|
227,681
|
|
Less: current maturities of convertible debts
|
|
|
(115,128
|
)
|
|
|
(74,708
|
)
|
Long term convertible debts
|
|
$
|
42,166
|
|
|
$
|
152,973
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognized interest expense
in the amount of $38,614 and $20,965 for the years ended December 31, 2013 and 2012, respectively related to convertible debts.
In addition, the Company recognized and
measured the embedded beneficial conversion feature present in the convertible debts by allocating a portion of the proceeds equal
to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment
date using the effective conversion price of the convertible debt. This intrinsic value is limited to the portion of the proceeds
allocated to the convertible debt.
The aforementioned accounting treatment
resulted in a total debt discount equal to $195,652 and $277,323 during the years ended December 31, 2013 and 2012, respectively.
The discount is amortized on a straight line basis from the dates of issuance until the stated redemption date of the debts, as
noted above.
The convertible notes, consisting of total
original face values of $440,849 from Star Financial, $302,000 from Asher Enterprises, $56,900 from Tonaquint Inc. and $33,000
from JMJ Financial, Inc., $56,900 from St. George Investments, $35,028 from Magna Group, LLC and $14,838 from the related party,
GG Mars Capital, Inc., that created the beneficial conversion feature carry default provisions that place a “maximum share
amount” on the note holders that can be owned as a result of the conversions to common stock by the note holders is 9.99%
and 4.99%, respectively, of the issued and outstanding shares of Epazz.
During the years ended December 31, 2013
and 2012, the Company recorded debt amortization expense in the amount of $237,065 and $155,759, respectively, attributed to the
aforementioned debt discount, including $6,916 of amortization on the $17,300 OID during the year ended December 31, 2013.
During year ended December 31, 2013, the
Company issued a total of 462,766,951 shares pursuant to debt conversions in settlement of $343,540, consisting of $336,094 of
outstanding principal and $7,446 of unpaid interest, including 220,000,000 shares pursuant to debt conversion in settlement of
$144,400 of outstanding principal owed to a related party (“Star Convertible Note”) and 46,856,526 shares pursuant
to debt conversion in settlement of $14,838 of outstanding principal owed to a related party (“GG Mars Capital Convertible
Note”). The principal and interest was converted in accordance with the conversion terms, therefore no gain or loss has been
recognized. In addition, on May 27, 2013, the Company modified a related party debt and issued 14,239,500 shares of Class A Common
Stock in settlement of $14,239 of related party debt owed to Vivienne Passley, which consisted of $13,000 of principal and $1,239
of accrued and unpaid interest. The total fair value of the common stock was $28,479 based on the closing price of the Company’s
common stock on the date of grant, resulting in the recognition of a $14,240 loss on debt settlement.
During the year ended December 31, 2012,
the Company issued a total of 71,292,329 shares pursuant to debt conversions in settlement of $374,228 of outstanding principal
and $3,500 of unpaid interest, including 50,000,000 shares pursuant to debt conversion in settlement of $250,000 of outstanding
principal owed to a related party (“Star Convertible Note”). The principal and interest was converted in accordance
with the conversion terms, therefore no gain or loss has been recognized.
Asher Enterprises, Inc. Convertible
Notes
On May 27, 2011,
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 $50,000. The First Asher Note had a maturity date of February 28, 2012, 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 five (5) 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
$0.00009 per share. The shares of common stock issuable upon conversion of the First Asher Note were restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First 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
The Company evaluated
the First 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 $0.02603
below the market price on May 27, 2011 of $0.056 provided a value of $43,421, of which $-0- and $7,769 was amortized during the
years ended December 31, 2013 and 2012, respectively.
On June 28, 2011,
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 $37,500. The Second Asher Note had a maturity date of March 30, 2012, 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 five (5) 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 $0.00009
per share. The shares of common stock issuable upon conversion of the Second Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second 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 Second 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 $0.01298
below the market price on June 28, 2011 of $0.035 provided a value of $22,108, of which $-0- and $7,209 was amortized during the
years ended December 31, 2013 and 2012, respectively.
On July 2, 2012,
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 Third Asher Note had a maturity date of March 29, 2013, 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 $0.00009
per share. The shares of common stock issuable upon conversion of the Third Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Third 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 Third 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 $0.00551
below the market price on July 2, 2012 of $0.012 provided a value of $36,082, of which $11,760 and $24,322 was amortized during
the years ended December 31, 2013 and 2012, respectively.
On July 24, 2012,
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 $32,500. The Fourth Asher Note had a maturity date of April 26, 2013, 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 five (5) 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 $0.00009
per share. The shares of common stock issuable upon conversion of the Fourth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Fourth 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
The Company evaluated
the Fourth 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 $0.00583
below the market price on July 24, 2012 of $0.0126 provided a value of $27,959, of which $11,751 and $16,208 was amortized during
the years ended December 31, 2013 and 2012, respectively.
On October 16,
2012, 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 $27,500. The Fifth Asher Note had a maturity date of July 18, 2013, 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 41% multiplied by the Market Price (representing a discount rate of 59%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ninety (90) 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 Fifth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Fifth 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 Fifth 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 $0.00603
below the market price on October 16, 2012 of $0.008 provided a value of $27,500, of which $19,900 and $7,600 was amortized during
the years ended December 31, 2013 and 2012, respectively.
On December 12,
2012, 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 $16,500. The Sixth Asher Note had a maturity date of September 14, 2013, 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 41% multiplied by the Market Price (representing a discount rate of 59%).
“Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ninety (90)
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 Sixth Asher Note were restricted securities
as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Sixth 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 Sixth 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 $0.00518
below the market price on December 12, 2012 of $0.0064 provided a value of $16,500, of which $15,364 and $1,136 was amortized during
the years ended December 31, 2013 and 2012, respectively.
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.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 $19,014 and $-0- was amortized during
the years ended December 31, 2013 and 2012, respectively.
On September 18,
2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $42,500. The Eighth Asher Note had a maturity date of June 20, 2014, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the Eighth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Eighth Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Eighth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0004
below the market price on September 18, 2013 of $0.0010 provided a value of $27,210, of which $10,290 and $-0- was amortized during
the years ended December 31, 2013 and 2012, respectively.
GG Mars Capital, Inc. Convertible Note,
Related Party
On August 20,
2013, we entered into a Convertible Promissory Note Agreement with GG Mars Capital, Inc. (“GG Mars”), a company owned
by our CEO’s family member, pursuant to which we sold to GG Mars an 11% Convertible Promissory Note in the original principal
amount of $14,838. The note was acquired from and assigned by another independent lender on August 15, 2013 prior to being exchanged
for the convertible note. The First GG Mars Note was convertible into shares of common stock at the discretion of the note holder
at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for
the one hundred and twenty (120) days prior to the conversion date, or $0.0001 per share, whichever is greater. The shares of common
stock issuable upon conversion of the First GG Mars Note were restricted securities as defined in Rule 144 promulgated under the
Securities Act of 1933. The issuance of the First GG Mars Note was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The debt holder was limited to owning 4.99% of the Company’s
issued and outstanding shares. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there
was no solicitation.
The Company evaluated
the First GG Mars Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.001 below
the market price on August 20, 2013 of $0.0013 provided a value of $14,838, of which $14,838 and $-0- was amortized during the
years ended December 31, 2013 and 2012, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Star Financial, Inc. Convertible Note,
Related Party
On July 2, 2012,
we modified a previously outstanding non-convertible debt of $342,321, consisting of $296,103 of principal and $46,218 of accrued
interest in exchange for a Convertible Promissory Note with Star Financial Corporation (“Star”), a company owned by
our CEO’s family member, pursuant to which we issued to Star a 10% Convertible Promissory Note in the original principal
amount of $440,849. The modification resulted in a loss on debt modification of $98,528. The note was again modified on March 5, 2013,
resulting in a loss on debt modification of $81,792. The Star Convertible Note has a maturity date of July 2, 2017, and is convertible
into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable
Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price”
means the average of the five (5) Closing Prices for the Common Stock during the five (5) Trading Day period ending on the latest
complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00075 per share. The shares
of common stock issuable upon conversion of the Star Convertible Note will be restricted securities as defined in Rule 144 promulgated
under the Securities Act of 1933. The issuance of the Star Convertible Note was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated
investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the Star Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.00141 below the market price on July 2, 2012 of $0.012 provided a value of $112,382, of which $39,445 and $67,284 was amortized
during the years ended December 31, 2013 and 2012, respectively.
Tonaquint, Inc. Convertible Note
On September 10,
2012, we entered into a Securities Purchase Agreement with Tonaquint, Inc., pursuant to which we sold to Tonaquint an 8% Convertible
Promissory Note in the original principal amount of $56,900. The First Tonaquint Note has a maturity date of May 31, 2013, 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 lowest two (2) 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 $0.00009
per share. The shares of common stock issuable upon conversion of the First Tonaquint Note will be restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Tonaquint Note was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the First Tonaquint 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 $0.0047 below the market price on September 10, 2012 of $0.0033 provided a value of $56,900, of which $32,669 and $24,231 was
amortized during the years ended December 31, 2013 and 2012, respectively.
JMJ Financial, Inc. Convertible Note
On June 12, 2013,
we entered into a Securities Purchase Agreement with JMJ Financial, Inc., (“JMJ”) pursuant to which we sold to JMJ
a 12% Convertible Promissory Note in the original principal amount of $33,000. The First JMJ Note had a maturity date of June 11,
2014, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion
Price, not less than $0.00009 per share. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price
(representing a discount rate of 40%). “Market Price” means the lowest Trading Price for the Common Stock during the
twenty five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion
Price” shall mean $0.00009 per share. The shares of common stock issuable upon conversion of the First JMJ Note were restricted
securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First JMJ Note was exempt from
the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser
was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated
the First JMJ Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00518
below the market price on June 12, 2013 of $0.0017 provided a value of $33,000, of which $33,000 and $-0- was amortized during
the years ended December 31, 2013 and 2012, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 $20,975 and $-0- was amortized
during the years ended December 31, 2013 and 2012, 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 $-0- was amortized
during the years ended December 31, 2013 and 2012, respectively.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 – Long Term Debts
Long term debts consist of the following
at December 31, 2013 and 2012, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
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 #2”) 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 MS Health’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
|
|
$
|
98,984
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
On November 20, 2013, DeskFlex entered into a $10,550 demand promissory note bearing interest at 10.25%. The promissory note is payable in monthly installments of $1,223 per month, maturing on August 20, 2014 (the “Maturity Date”).
|
|
|
9,417
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On October 24, 2013, the Company purchased licenses to develop content management software in the total amount of $51,250 from Igenti, Inc., of which $51,250 was financed pursuant to an equipment financing agreement with Baytree National Bank & Trust Company bearing an effective interest rate of 13.235%, consisting of 36 monthly payments of $1,719; maturing on October 23, 2016. The loan is collateralized with the data management software. Igenti subsequently paid a total of $53,500, including $2,250 of penalties, to the Company for future payment for the development of the content management software. Given the nature and status of the software development, no equipment costs have been capitalized.
|
|
|
47,321
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On October 10, 2013, the Company purchased licenses to develop content management software in the total amount of $34,800 from Igenti, Inc., of which $34,800 was financed pursuant to an equipment financing agreement with Financial Pacific Leasing bearing an effective interest rate of 31.625%, consisting of 36 monthly payments of $1,438; maturing on October 9, 2016. The loan is collateralized with the content management software. Igenti retained a total of $1,300 of financing fees and paid the remaining proceeds of $33,500 to the Company for future payment for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.
|
|
|
32,025
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On June 24, 2013, the Company received a loan of $15,000 from WebBank, c/o NewLogic Business Loans, Inc., (“NewLogic”), which has been renamed to CAN Capital Assets Servicing, Inc (“CAN Capital”) bearing an effective interest rate of 5.71%, consisting of 176 daily weekday payments of $106, maturing on February 19, 2014. The loan is collateralized with MS Health’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
|
|
$
|
4,202
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
On June 11, 2013, the Company received a loan of $24,000, including $499 of loan origination costs, from Horizon Business Funding, LLC (“Horizon”) bearing an effective interest rate of 368.05%, consisting of 78 daily week day payments of $448, maturing on October 2, 2013. The loan is collateralized with the Epazz receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On April 11, 2013, the Company received a loan of $70,000, including $1,650 of loan origination costs, from Small Business Financial Solutions, LLC (“SBFS”) bearing an effective interest rate of 95.6%, consisting of 240 daily week day payments of $394, maturing on March 13, 2014. The loan is collateralized with the Epazz receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
41,167
|
|
|
|
–
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
|
|
|
38,361
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed with an equipment finance loan from Summit Funding Group, Inc. equipment with a three year loan term consisting of monthly loan payments of $1,828, with $2,078 paid at signing, maturing on February 21, 2016. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.
|
|
|
40,108
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
10,228
|
|
|
|
13,448
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
78,603
|
|
|
|
104,129
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
312,095
|
|
|
|
343,060
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
94,000
|
|
|
|
94,000
|
|
|
|
|
|
|
|
|
|
|
On Deck Capital Loan – DeskFlex, Inc.:
On November 7, 2011, DeskFlex entered into a four month $20,000 note payable agreement with On Deck Capital. Payments of $183 were originally due daily on the loan. Origination fees of $500 were added to the initial loan, agreed to pay additional fees of $387 per month in servicing fees during the term of the loan and to repay the loan via daily payments of $183. The total payments due on the loan equate to an annual interest rate of 18%.
|
|
|
|
|
|
|
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On February 15, 2012, we amended this loan agreement to increase the loan balance to $35,400, consisting of additional proceeds of $19,200, a rolled over loan balance of $10,050, an origination fee of $750 and interest amount of $5,400 to be paid over the restarted four month term of the loan via daily payments of $274.
On July 23, 2012, we amended this loan agreement again to increase the remaining unpaid loan balance to $35,400 again, consisting of additional proceeds of $23,883, a rolled over loan balance of $5,367, an origination fee of $750 and interest amount of $5,400 to be paid over the restarted four month term of the loan via daily payments of $274.
On October 30, 2012, we amended this loan agreement again to increase the remaining unpaid loan balance to $41,300, consisting of additional proceeds of $18,085, a rolled over loan balance of $16,040, an origination fee of $875 and interest amount of $6,300 to be paid over the restarted four month term of the loan via daily payments of $320.
On February 8, 2013, we again amended this loan agreement again to increase the remaining unpaid loan balance to $41,300, consisting of additional proceeds of $17,541, a rolled over loan balance of $16,584, an origination fee of $875 and interest amount of $6,300 to be paid over the restarted four month term of the loan via daily payments of $320.
The proceeds of all refinancing loans were received with substantially the same terms as the original debt.
|
|
|
–
|
|
|
|
28,173
|
|
|
|
|
|
|
|
|
|
|
On Deck Capital Loan – Epazz, Inc.:
On January 3, 2012, Epazz entered into a nine month $55,800 note payable agreement with On Deck Capital. Payments of $289 were originally due daily on the loan. Proceeds of $43,875 were received on the loan, origination fees of $1,125 were added to the initial loan, along with interest of $10,800. The total payments due on the loan equate to an annual interest rate of 18%.
On May 25, 2012, we amended this loan agreement to increase the loan balance to $63,000, consisting of additional proceeds of $25,043, a rolled over loan balance of $24,957 and interest of $13,000 to be paid over the restarted nine month term of the loan via daily payments of $326.
On September 10, 2012, we again amended this loan agreement to increase the loan balance to $76,800, consisting of additional proceeds of $22,613, a rolled over loan balance of $35,887, an origination fee of $1,500 and interest of $16,800 to be paid over the revised twelve month term of the loan via daily payments of $299.
The proceeds of all refinancing loans were received with substantially the same terms as the original debt.
|
|
|
–
|
|
|
|
54,088
|
|
|
|
|
|
|
|
|
|
|
On March 20, 2012, DeskFlex entered into a $25,000 three year promissory note bearing interest at 11%. The promissory note was payable in monthly installments of $843 per month, maturing on March 20, 2015 (the “Maturity Date”). The note was acquired and assigned by GG Mars Capital, Inc., a company owned by our CEO’s family member, on August 15, 2013 prior to being exchanged for a convertible note on August 20, 2013 and subsequently converted into 46,856,526 shares of Class A Common Stock.
|
|
|
–
|
|
|
|
19,483
|
|
|
|
|
|
|
|
|
|
|
Pursuant to an asset purchase agreement entered into on October 26, 2011, the Company granted K9 Bytes, Inc., a Florida corporation, a subordinated secured $30,750 promissory note carrying a 6% interest rate, payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the promissory note ($23,017, assuming no additional payments other than those scheduled) is due. The promissory note is secured by a secondary lien on all of the assets of Epazz’s subsidiary, K9 Bytes, Inc., an Illinois corporation formed to house the purchased assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
|
|
|
2,510
|
|
|
|
6,234
|
|
|
|
|
|
|
|
|
|
|
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
|
|
|
8,186
|
|
|
|
10,520
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
60,573
|
|
|
|
68,436
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
137,087
|
|
|
|
153,377
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
197,062
|
|
|
|
216,214
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
|
1,211,929
|
|
|
|
1,111,162
|
|
Less: current portion
|
|
|
(354,786
|
)
|
|
|
(218,699
|
)
|
Long term debt, less current portion
|
|
$
|
857,143
|
|
|
$
|
892,463
|
|
The Company recorded interest expense on
long term debts, credit lines and capital leases in the amount of $261,634 and $102,261 for the years ended December 31, 2013 and
2012, respectively.
Note 17 – Stockholders’
Equity
On January 14, 2014 and May 17, 2013, the
Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, amended the Article of
Incorporation to change the par value and number of authorized shares of each class of common and series of preferred stock and
authorize a third class of preferred stock, Series C Convertible Preferred Stock, in addition to the modification of the attributes
and dividends. The disclosures herein reflect these modifications and the changes to the par value have been retroactively reflected
throughout.
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 1
st
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 1
st
of any calendar year in which the Company has generated net income over $2 million. The dividends are
payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes
a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible,
at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into
60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited
voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders. The Company
shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient
to effect the conversions.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On July 2, 2012, the Company issued 1,000
shares of convertible Series A Preferred Stock to the Company’s CEO for services provided and personal guaranties associated
with previous acquisition activities. The total fair value of the preferred stock was $229,236 based on valuations performed using
an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for
lack of marketability.
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 1
st
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 1
st
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 1
st
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 1
st
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
(2
nd
) 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 (3
rd
) 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.
A total of 2,943,722,200 shares of Series
C Convertible Preferred Stock have been subsequently issued, as disclosed in the Subsequent Events footnote below.
Common Stock,
Class A
The Company has 9 billion authorized shares
of $0.0001 par value Class A Common Stock.
Class A Common
Stock Issuances, 2013:
Debt Conversions into Class A Common
Stock
On January 3, 2013, the Company issued
4,000,000 shares of Class A Common Stock pursuant to the conversion of $12,000 of convertible debt, which consisted entirely of
principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On February 19, 2013, the Company issued
8,823,529 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of
principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On February 26, 2013, the Company issued
10,750,000 shares of Class A Common Stock pursuant to the conversion of $17,200 of convertible debt, consisting of $15,500 of principal
and $1,700 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or
loss has been recognized.
On March 4, 2013, the Company issued 10,000,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 6, 2013, the Company issued 14,461,538
shares of Class A Common Stock pursuant to the conversion of $18,800 of convertible debt, consisting of $17,500 of principal and
$1,300 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On March 12, 2013, the Company issued 4,504,505
shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 14, 2013, the Company issued 50,000,000
shares of Class A Common Stock pursuant to the conversion of $46,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 2, 2013, the Company issued 15,151,515
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 10, 2013, the Company issued 50,000,000
shares of Class A Common Stock pursuant to the conversion of $40,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 27, 2013, the Company modified a
related party debt and issued 14,239,500 shares of Class A Common Stock in settlement of $14,239 of related party debt owed to
Vivienne Passley, which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest. The total fair value of the
common stock was $28,479 based on the closing price of the Company’s common stock on the date of grant, resulting in the
recognition of a $14,240 loss on debt settlement.
On April 24, 2013, the Company issued 15,873,016
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On June 24, 2013, the Company issued 40,857,143
shares of Class A Common Stock pursuant to the conversion of $17,160 of convertible debt, consisting of $16,500 of principal and
$660 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On July 9, 2013, the Company issued 80,000,000
shares of Class A Common Stock pursuant to the conversion of $26,400 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 10, 2013, the Company issued 22,222,222
shares of Class A Common Stock pursuant to the conversion of $8,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 30, 2013, the Company issued 15,476,190
shares of Class A Common Stock pursuant to the conversion of $13,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On August 7, 2013, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $32,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On August 19, 2013, the Company issued
19,551,267 shares of Class A Common Stock pursuant to the conversion of $14,663 of convertible debt, which consisted of $10,900
of principal and $3,763 of accrued interest. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On August 27, 2013, the Company issued
46,856,526 shares of Class A Common Stock pursuant to the conversion of $14,838 of convertible debt owed to a related party, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
Shares of Class A Common Stock Issued
for Services to Related Parties
On March 5, 2013, the Company issued 12,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on an acquisition loan that
originated on September 30, 2010. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.
On March 5, 2013, the Company issued 12,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on two acquisition loans
that originated on October 26, 2011. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.
On March 5, 2013, the Company issued 200,000,000
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The shares
will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock was
$400,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction
against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied.
The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series
C Preferred shares.
On March 20, 2013, the Company issued 35,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing collateral on acquisition loans that originated
on September 30, 2010 and October 26, 2011. The total fair value of the common stock was $35,500 based on the closing price of
the Company’s common stock on the date of grant.
On March 20, 2013, the Company issued 60,000,000
shares of Class A Common Stock to Craig Passley, a related party, for providing corporate secretary services from 2012 to 2021.
The total fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the date
of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until
the terms of the vesting periods are satisfied. A total of $6,000 was expensed related to the vested services for the year ended
December 31, 2012. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares
for Convertible Series C Preferred shares.
On May 16, 2013, the Company issued 710,526,316
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The total
fair value of the common stock was $1,350,000 based on the closing price of the Company’s common stock on the date of grant.
On May 24, 2013, the Company issued 35,500,000
shares of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on
September 30, 2010 and October 26, 2011. The total fair value of the common stock was $71,000 based on the closing price of the
Company’s common stock on the date of grant.
On July 5, 2013, the Company issued 25,000,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value
of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.
On July 8, 2013, the Company issued 710,526,316
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services, of which
200,000,000 shares vested immediately and the remaining 510,526,316 shares will be vested once the Company reports revenue of $10
million in a calendar year. The total fair value of the common stock was $497,368 based on the closing price of the Company’s
common stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional
paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions
were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Shares of Class A Common Stock Issued
for Loan Origination Fees to Related Parties
On July 19, 2013, the Company issued 2,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $23,000
short term promissory note. The total fair value of the common stock was $4,250 based on the closing price of the Company’s
common stock on the date of grant.
On July 31, 2013, the Company issued 3,000,000
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $4,200
based on the closing price of the Company’s common stock on the date of grant.
On August 2, 2013, the Company issued 3,000,000
shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan
origination cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $5,100
based on the closing price of the Company’s common stock on the date of grant.
On August 7, 2013, the Company granted
2,500,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $24,000 short term promissory note. The total fair value of the common stock
was $4,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
On August 12, 2013, the Company issued
5,000,000 shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for
a $51,000 short term promissory note. The total fair value of the common stock was $7,000 based on the closing price of the Company’s
common stock on the date of grant.
On August 20, 2013, the Company granted
2,500,000 shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related
party, as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common
stock was $3,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently
issued on November 13, 2013.
On August 27, 2013, the Company granted
1,250,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $12,500 short term promissory note. The total fair value of the common stock
was $1,500 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued
on November 13, 2013.
On September 7, 2013, the Company granted
6,000,000 shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related
party, as a loan origination cost in consideration for a $65,000 short term promissory note. The total fair value of the common
stock was $6,600 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently
issued on November 13, 2013.
Class A Common
Stock Issuances, 2012:
Debt Conversions into Class A Common
Stock
On March 13, 2012, the Company issued 1,075,269
shares of Class A Common Stock pursuant to the partial conversion in the amount of $10,000 of a $50,000 convertible debt, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On June 26, 2012, the Company issued 1,538,462
shares of Class A Common Stock pursuant to the partial conversion in the amount of $10,000 of a $50,000 convertible debt, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On July 9, 2012, the Company issued 1,578,947
shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 16, 2012, the Company issued 1,525,424
shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On July 24, 2012, the Company issued 789,474
shares of Class A Common Stock pursuant to the conversion of $6,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 31, 2012, the Company issued 1,898,734
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On August 7, 2012, the Company issued 1,481,481
shares of Class A Common Stock pursuant to the conversion of $12,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On August 21, 2012, the Company issued
2,033,898 shares of Class A Common Stock pursuant to the conversion of $12,000 of convertible debt, consisting of $10,500 of principal
and $1,500 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or
loss has been recognized.
On September 15, 2012, the Company issued
50,000,000 shares of Class A Common Stock pursuant to the conversion of $250,000 of convertible debt owed to 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 September 24, 2012, the Company issued
10,343,963 shares of Class A Common Stock in settlement of $53,968 of accounts payable owed for the purchase of computer equipment
on June 16, 2012 from L&F Lawn Services, a related party. The total fair value of the common stock was $116,887 based on the
closing price of the Company’s common stock on the date of grant, resulting in additional compensation of $62,919.
On October 1, 2012, the Company issued
9,370,640 shares of Class A Common Stock in settlement of $44,728 of related party debt owed to Fay Passley, which consisted of
$34,700 of principal and $10,028 of accrued and unpaid interest. The total fair value of the common stock was $83,399 based on
the closing price of the Company’s common stock on the date of grant, resulting in the recognition of a $38,671 loss on debt
settlement.
Shares of Class A Common Stock Issued
for Services to Related Parties
On July 19, 2012, the Company issued 30,000,000
shares of Class A Common Stock to the Company’s CEO in consideration for providing a personal guaranty and collateral on
twelve loans over the past 10 years. The total fair value of the common stock was $375,000 based on the closing price of the Company’s
common stock on the date of grant.
On July 19, 2012, the Company issued 3,000,000
shares of Class A Common Stock to a related party in consideration for providing a personal guaranty and collateral on two acquisition
loans during 2010 and 2011. The total fair value of the common stock was $37,500 based on the closing price of the Company’s
common stock on the date of grant.
On July 19, 2012, the Company issued 3,000,000
shares of Class A Common Stock to another related party in consideration for providing a personal guaranty and collateral on two
acquisition loans during 2010 and 2011. The total fair value of the common stock was $37,500 based on the closing price of the
Company’s common stock on the date of grant.
On August 27, 2012, the Company issued
20,000,000 shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services.
The total fair value of the common stock was $130,000 based on the closing price of the Company’s common stock on the date
of grant.
On August 27, 2012, the Company issued
2,500,000 shares of Class A Common Stock to a family member of the Company’s CEO in consideration for providing a personal
guaranty and collateral on two loans obtained during 2012. The total fair value of the common stock was $16,250 based on the closing
price of the Company’s common stock on the date of grant.
On August 27, 2012, the Company issued
2,500,000 shares of Class A Common Stock to a family member of the Company’s CEO in consideration for providing a personal
guaranty and collateral on two loans obtained during 2012. The total fair value of the common stock was $16,250 based on the closing
price of the Company’s common stock on the date of grant.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On September 6, 2012, the Company issued
1 billion shares of Class A Common Stock to the Company’s CEO in consideration for various services performed, and to be
performed over a ten year period beginning on September 6, 2012. The total fair value of the common stock was $6,000,000 based
on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction against additional
paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. Effective March
22, 2014, the vesting was accelerated on all unvested shares and they were subsequently exchanged for shares of Series C Convertible
Preferred Stock on a 1:1 basis. The services performed and vesting periods were as follows:
Vesting
|
|
Shares
|
|
|
Fair
|
|
|
|
Terms
|
|
Granted
|
|
|
Value
|
|
|
Services Performed
|
(1)
|
|
|
250,000,000
|
|
|
$
|
1,500,000
|
|
|
Base salary of 25 million shares per year over a ten year term
|
(2)
|
|
|
225,000,004
|
|
|
|
1,350,000
|
|
|
Compensation bonus for services provided
|
(2)
|
|
|
25,000,000
|
|
|
|
150,000
|
|
|
Compensation for services provided related to the acquisition of IntelliSys
|
(2)
|
|
|
25,000,000
|
|
|
|
150,000
|
|
|
Compensation for services provided related to the acquisition of PRM
|
(2)
|
|
|
25,000,000
|
|
|
|
150,000
|
|
|
Compensation for services provided related to the acquisition of DFI
|
(2)
|
|
|
25,000,000
|
|
|
|
150,000
|
|
|
Compensation for services provided related to the acquisition of K9 Bytes
|
(2)
|
|
|
25,000,000
|
|
|
|
150,000
|
|
|
Compensation for services provided related to the acquisition of AutoHire Software
|
(2)
|
|
|
33,333,333
|
|
|
|
200,000
|
|
|
Compensation for services provided related to the acquisition of MS Health
|
(3)
|
|
|
33,333,333
|
|
|
|
200,000
|
|
|
Compensation for services provided related to the acquisition of a future acquisition
|
(2)
|
|
|
33,333,333
|
|
|
|
200,000
|
|
|
Compensation for use of the CEO's personal residence as collateral on various loans
|
(4)
|
|
|
299,999,997
|
|
|
|
1,800,000
|
|
|
Compensation for future use of the CEO's personal residence as collateral on various loans
|
|
|
|
1,000,000,000
|
|
|
$
|
6,000,000
|
|
|
|
(1)
Vested
annually at a rate of 1/10th per year from the anniversary date of the employment agreement (September 6, 2012), subject to the
recognition of at least $10 million in revenues for any calendar year.
(2)
Vested
subject to the recognition of at least $10 million in revenues for any calendar year.
(3)
Vested
upon the latter of both, a) the future closing of an acquisition, and b) the recognition of at least $10 million in revenues for
any calendar year.
(4)
Vested
annually at a rate of 1/9th per year from the anniversary date of the employment agreement (September 6, 2012), subject to the
recognition of at least $10 million in revenues for any calendar year.
On October 1, 2012, the Company issued
3,020,667 shares of Class A Common Stock to L&F Lawn Services, a related party, in consideration for providing a personal guaranty
on a loan obtained during 2012. The total fair value of the common stock was $26,884 based on the closing price of the Company’s
common stock on the date of grant.
On October 9, 2012, the Company issued
144,928 shares of Class A Common Stock to L&F Lawn Services, a related party, as an origination fee in consideration for providing
a $2,000 loan to the Company. The total fair value of the common stock was $884 based on the closing price of the Company’s
common stock on the date of grant.
Shares of Class A Common Stock Issued
for Loan Origination Fees to Related Parties
On October 9, 2012, the Company issued
1,086,957 shares of Class A Common Stock to Vivienne Passley, a related party, as an origination fee in consideration for providing
a $13,000 loan to the Company. The total fair value of the common stock was $6,630 based on the closing price of the Company’s
common stock on the date of grant.
Convertible
Common Stock, Class B
The Company has 60,000,000 authorized shares
of $0.0001 par value Convertible Class B Common Stock, convertible at the option of the holder into shares of the Company’s
Class A Common Stock on a 1:1 basis. Effective January 14, 2014, the preferential voting rights of the Convertible Class B Common
Stock were changed from preferential voting rights of 2,000 votes to each Class A Common Stock vote (2,000:1) to 10,000 votes to
each Class A Common Stock vote (10,000:1). The Company shall reserve and keep available out of its authorized but unissued shares
of Class A Common Stock such number of shares sufficient to effect the conversions.
Convertible
Class B Common Stock Issuances, 2013
On March 16, 2013, the Company issued 5,000,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing product development services.
The total fair value of the common stock was $9,500 based on the closing price of the Company’s common stock on the date
of grant.
Convertible
Class B Common Stock Issuances, 2012
On July 1, 2012, the Company issued 3,000,000
shares of Convertible Class B Common Stock to the Company’s CEO for services provided and personal guaranties associated
with previous acquisition activities. The fair value of the class B common stock was $24,000 based on valuations performed using
an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for
lack of marketability.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends Payable
On January 1, 2013, the Company declared
and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of
$1 million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during
the year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which can be paid in cash or in
shares of Class A Common Stock in lieu of cash.
Beneficial Conversion Feature
On June 12, 2013, the Company entered into
a convertible promissory note with JMJ Financial. The beneficial conversion feature discount resulting from the conversion price
that was $0.00518 below the market price of $0.0017 on the June 12, 2013 origination date resulted in a debt discount value of
$33,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On August 19, 2013, the Company entered
into a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion
price that was $0.0006 below the market price of $0.0014 on the August 19, 2013 origination date resulted in a debt discount value
of $39,021 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.
On August 20, 2013, the Company entered
into a convertible promissory note with GG Mars Capital, Inc., a company owned by our CEO’s family member. The beneficial
conversion feature discount resulting from the conversion price that was $0.001 below the market price of $0.0013 on the August
20, 2013 origination date resulted in a debt discount value of $14,838 that was recognized as additional paid in capital and is
being amortized on a straight line basis over the life of the loan.
On September 5, 2013, the Company entered
into a convertible promissory note with St. George Investments, Inc. The beneficial conversion feature discount resulting from
the conversion price that was $0.0005 below the market price of $0.001 on the September 5, 2013 origination date resulted
in a debt discount value of $46,555 that was recognized as additional paid in capital and is being amortized on a straight line
basis over the life of the loan.
On September 18, 2013, the Company entered
into a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion
price that was $0.0004 below the market price of $0.001 on the September 18, 2013 origination date resulted in a debt discount
value of $27,210 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life
of the loan.
On December 31, 2013, the Company entered
into a convertible promissory note with Magna Group, LLC. The beneficial conversion feature discount resulting from the conversion
price that was $0.0003 below the market price of $0.0006 on the December 31, 2013 origination date resulted in a debt discount
value of $35,028 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life
of the loan.
Loss on Convertible Debt Modification
to Related Party
On March 5, 2013, we amended a convertible
promissory note with Star Financial Corporation, which then carried a balance of $190,849, to revise the conversion terms from
a $0.005 floor and 75% discount to market to conversion terms consisting of, "equal to the greater of, (a) 50% of the Market
Price, or (b) the fixed conversion price of $0.00075 per share". The Company compared the fair value of the debt immediately
preceding the modification to the fair value after the modification to determine the loss on modification of $81,792. This value
was determined using the value of the shares assuming the note was converted pursuant to the respective conversion terms on the
date of modification. The total value of the shares after modification was $272,641, compared to the $190,849 value preceding the
modification, resulting in a loss on modification of $81,792.
Note 18 – Income Taxes
The Company accounts for income taxes under
FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities
are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences.
As of December 31, 2013, the Company incurred
a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes
has been recorded due to the uncertainty of the realization of any tax assets. The Company had approximately $1,554,000 and $955,000
of federal net operating loss carry forwards at December 31, 2013 and 2012, respectively. The net operating loss carry forwards,
if not utilized, will begin to expire in 2029.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the Company’s deferred
tax asset are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
1,554,000
|
|
|
$
|
955,000
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets before valuation allowance
|
|
$
|
543,900
|
|
|
$
|
334,250
|
|
Less: Valuation allowance
|
|
|
(543,900
|
)
|
|
|
(334,250
|
)
|
Net deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
Based on the available objective evidence,
including the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets
at December 31, 2013 and 2012. The Company had no uncertain tax positions as of December 31, 2013 and 2012.
A reconciliation between the amounts of
income tax benefit determined by applying the applicable U.S. and State statutory income tax rate to pre-tax loss is as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
|
|
|
|
Federal and state statutory rate
|
|
35%
|
|
35%
|
Change in valuation allowance on deferred tax assets
|
|
(35%)
|
|
(35%)
|
Note 19 - Subsequent Events
Telecorp Products, Inc., Stock Purchase
Agreement
On February 28, 2014, the Company entered
into a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario
Canada corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder
and the sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding
shares of Telecorp from Troy Holdings, for an aggregate purchase price of $320,000 (the “Purchase Price”). The Purchase
Price was payable as follows:
|
(a)
|
The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and
|
|
(b)
|
The Company provided Troy Holdings with a Promissory Note in the amount of $120,000 (the “Telecorp Note”), which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum.
|
Additionally, the Company agreed to assume
aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. As a result of the Closing, Telecorp
became a wholly-owned subsidiary of the Company.
In connection with the Stock Purchase Agreement,
the shareholders of Telecorp and the Company entered into a Non-Disclosure/Non-Compete Agreement, pursuant to which the shareholders
of Telecorp and the Company, each agreed to not for a period of one (1) year, communicate or divulge to, or use for the benefit
of itself or any other person, firm, association or corporation, any information in any way relating to the Proprietary Property,
in competition with the business of the Company, and pursuant to the agreement, the shareholders of Telecorp agreed not to compete
against the Company for one (1) year from the closing of the acquisition.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Zinergy (DBA) formerly Cynergy Software,
Asset Purchase
On March 13, 2014, the Company entered
into an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase
Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s
help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers,
software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing,
$25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the
closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation.
The acquisition was financed in part with a software financing agreement. 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.
Jadian Enterprises, Inc., Asset Purchase
Agreement
On May 16, 2014, the Company, through a
newly-formed wholly-owned Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset
Purchase Agreement (“APA”) with Jadian, Inc., a Michigan corporation (“Jadian”). Pursuant to the APA, we
purchased substantially all of the intangible assets and certain tangible assets used in connection with Jadian’s software
business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery
and accounts receivable in consideration for an aggregate of $425,000, of which $215,000 was paid at the closing and $210,000 was
financed by way of a Promissory Note (the “Jadian Note”). The terms of the Jadian Note include interest at 6% per annum,
a ten (10) year amortization, full right of offset, no payments of either principal or interest for thirty (30) days after Closing
and equal payments of principal and interest commencing thereafter, no prepayment penalty, and a balloon payment consisting of
full payment of all amounts due after three (3) years, subject to certain offsets, including an offset for $40,760 for prepaid
maintenance contracts received by the seller prior to Closing. The Jadian Note is secured by a lien on the assets of Jadian. We
did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian. We did not purchase and
Jadian agreed to retain and be responsible for any and all liabilities of Jadian.
The Company also agreed to provide the
seller with additional earn-out rights in connection with the purchase, which provide that the seller will receive up to a maximum
of $100,000 per year for the three twelve month periods following the Closing (any delinquent earn-out payment shall bear interest
at the rate of 10% per annum until the delinquent amount is paid), based on the gross revenues generated by Jadian during such
applicable year based on the following schedule (the “Earn-Out”):
Revenue for the Relevant Year
|
|
Earn-Out
|
|
$-0- to $500,000
|
|
$
|
–
|
|
$500,000 to $600,000
|
|
$
|
25,000
|
|
$600,000 to $700,000
|
|
$
|
50,000
|
|
$700,000 to $800,000
|
|
$
|
75,000
|
|
$800,000 or more
|
|
$
|
100,000
|
|
Provided that in no event shall the total
amount payable to Jadian Enterprises in connection with the Earn-Out exceed $100,000 per year, or $300,000 in aggregate.
The unaudited supplemental pro forma results
of operations of the combined entities had the dates of the acquisitions been January 1, 2013 or January 1, 2012 are
as follows:
|
|
Combined Pro Forma:
|
|
|
For the years ended
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Revenue:
|
$
|
1,846,625
|
|
$
|
2,459,767
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Operating expenses
|
|
4,413,118
|
|
|
3,889,148
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
(2,566,493)
|
|
|
(1,429,381)
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
(660,325)
|
|
|
(475,117)
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(3,226,818)
|
|
$
|
(1,904,498)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
Outstanding – basic and fully diluted
|
2,536,096,673
|
|
|
399,031,314
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and fully diluted
|
$
|
(0.00)
|
|
$
|
(0.00)
|
|
Debt Financing, Related Parties, GG
Mars Capital, Inc.
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 was issued as consideration for the
loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee
of $500 upon default.
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 was issued as consideration for
the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages
fee of $35,000 upon default.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $7,000 upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $1,500 upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $7,000 upon default.
Debt Financing, Related Parties, Star
Financial Corporation
Originated January 15, 2014, an unsecured
$43,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 20, 2014. In addition, a loan
origination fee consisting of 5,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan,
and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500
upon default.
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 was issued as consideration for the loan,
and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500
upon default.
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 was issued as consideration for the loan,
and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $25,000
upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $1,500 upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.
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 was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Debt Financing
Originated February 4, 2014, an unsecured
$35,491 convertible promissory note, carries a 12% interest rate, matures on February 4, 2015, (“Second Magna Group Note”)
owed to Magna Group, LLC, consisting of two notes acquired and assigned from Star Financial Corporation, a related party, consisting
of a total of $33,000 of principal and $2,491 of accrued interest. The acquired promissory notes did not carry conversion terms,
and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common
stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s
common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was
limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was
subsequently converted to a total of 236,606,400 shares of common stock over various dates from February 13, 2014 to February 27,
2014 in complete satisfaction of the debt.
Originated February 19, 2014, an unsecured
$37,700 convertible promissory note, carries a 12% interest rate, matures on February 17, 2015, (“Third Magna Group Note”)
owed to Magna Group, LLC, consisting of a promissory note acquired and assigned from Star Financial Corporation, a related party,
consisting of $32,000 of principal and $5,700 of accrued interest. The acquired promissory note did not carry conversion terms,
and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common
stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s
common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was
limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was
subsequently converted to a total of 377,000,000 shares of common stock over various dates from March 10, 2014 to March 19, 2014
in complete satisfaction of the debt.
Equity Based Debt Settlement Financing,
Conversions into Class A Common Stock – IBC Funds, LLC
On February 14, 2014, IBC Funds, LLC (“IBC”)
filed a Joint Motion for Approval of Settlement Agreement and Stipulation, and Request for Fairness Hearing in the Circuit Court
of the Twelfth Judicial Circuit in and for Sarasota County, Florida, Case No. 2014-CA-000899. IBC has contracted with various note
holders of the Company to acquire approximately $314,021 of Company debt and subsequently converted the debt to common stock of
the Company at 50% of the lowest trading price over the 15 days prior to, and including the conversion request date pursuant to
Section 3(a)(10) of the Securities Act of 1933, which allows the exchange of claims, securities, or property for stock when the
arrangement is approved for fairness by a court proceeding. In addition, the Company agreed to issue 75,000,000 settlement shares
to IBC. The Company has agreed to these terms as the acquisition of these debts and subsequent conversion would alleviate a significant
portion of the Company’s liabilities. A fairness hearing was held on February 14, 2014 and the arrangement was approved.
A total of 3,040,823,600 shares of Class A Common Stock was issued, in addition to the 75,000,000 settlement shares, in complete
satisfaction of the debt, as disclosed in detail below.
On February 14, 2014, the Company issued
75,000,000 settlement shares of Class A Common Stock pursuant to the February 12, 2014 settlement agreement entered into
with IBC Funds, LLC. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
The total fair value of the common stock was $37,500 based on the closing price of the Company’s common stock on the date
of grant.
On February 14, 2014, the Company issued
25,000,000 shares of Class A Common Stock pursuant to the conversion of $3,750 of convertible debt held by IBC Funds, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 24, 2014, the Company issued
100,000,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 25, 2014, the Company issued
100,000,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 25, 2014, the Company issued
150,000,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On February 28, 2014, the Company issued
142,900,000 shares of Class A Common Stock pursuant to the conversion of $21,435 of convertible debt held by IBC Funds, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On March 7, 2014, the Company issued 150,000,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 11, 2014, the Company issued 150,000,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 14, 2014, the Company issued 101,900,000
shares of Class A Common Stock pursuant to the conversion of $10,190 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 25, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 27, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 2, 2014, the Company issued 151,900,000
shares of Class A Common Stock pursuant to the conversion of $15,190 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 7, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $30,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 10, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 16, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 22, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On April 28, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 1, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 6, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On May 6, 2014, the Company issued 169,123,600
shares of Class A Common Stock pursuant to the conversion of $8,456 of convertible debt held by IBC Funds, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Shares of Convertible Series C Preferred
Stock Issued for Services to Related Parties
On January 17, 2014, the Company issued
600,000,000 shares of the recently designated Series C Convertible Preferred Stock to the Company’s CEO in exchange for 600,000,000
shares of his previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $367,713
based on an independent valuation on the date of grant.
On February 7, 2014, the Company issued
2,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley,
as a loan origination cost in consideration for a $26,000 short term promissory note. The total fair value of the common stock
was $1,226 based on an independent valuation on the date of grant.
On February 21, 2014, the Company issued
10,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member,
a related party, as a loan origination cost in consideration for a $75,000 short term promissory note. The total fair value of
the common stock was $6,129 based on an independent valuation on the date of grant.
On February 22, 2014, the Company issued
15,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley,
as a loan origination cost in consideration for a $100,000 short term promissory note. The total fair value of the common stock
was $9,193 based on an independent valuation on the date of grant.
On March 7, 2014, the Company issued 3,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
as a loan origination cost in consideration for a $30,000 short term promissory note. The total fair value of the common stock
was $1,839 based on an independent valuation on the date of grant.
On March 22, 2014, the Company issued 200,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, for providing
a personal guaranty on an acquisition loan. The total fair value of the common stock was $122,571 based on an independent valuation
on the date of grant.
On March 22, 2014, the Company issued 200,000,000
shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party,
for providing a personal guaranty on an acquisition loan. The total fair value of the common stock was $122,571 based on an independent
valuation on the date of grant.
On March 22, 2014, the Company issued 1,821,052,632
shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 1,821,052,632 shares, consisting
of 1,730,526,316 previously issued and unvested shares of Class A Common Stock and 90,526,316 shares of his previously issued and
vested Class A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series
C Convertible Preferred Stock was $1,116,041 based on an independent valuation on the date of grant.
On March 22, 2014, the Company issued 13,669,568
shares of the Series C Convertible Preferred Stock to L&F Lawn Services, a company owned by our CEO’s family member,
a related party, in exchange for 13,669,568 of their previously issued Class A Common Stock. The total fair value of the Series
C Convertible Preferred Stock was $8,377 based on an independent valuation on the date of grant.
On March 22, 2014, the Company issued 60,000,000
shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000,000 shares, consisting of
54,000,000 previously issued and unvested shares of Class A Common Stock and 6,000,000 shares of his previously issued and vested
Class A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible
Preferred Stock was $36,771 based on an independent valuation on the date of grant.
Subscriptions Payable Issued for Shares
of Convertible Series C Preferred Stock Granted for Services to Related Parties
On January 15, 2014, the Company granted
5,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a
related party, as a loan origination cost in consideration for a $43,000 short term promissory note. The total fair value of the
common stock was $3,064 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7,
2014.
On February 8, 2014, the Company granted
1,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a
related party, as a loan origination cost in consideration for a $13,000 short term promissory note. The total fair value of the
common stock was $613 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On March 7, 2014, the Company granted 2,000,000
shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan
origination cost in consideration for a $22,000 short term promissory note. The total fair value of the common stock was $1,226
based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
On March 26, 2014, the Company granted
3,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley,
as a loan origination cost in consideration for a $37,500 short term promissory note. The total fair value of the common stock
was $1,839 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
On March 26, 2014, the Company granted
3,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a
related party, as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the
common stock was $1,839 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7,
2014.
On March 28, 2014, the Company granted
2,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley,
as a loan origination cost in consideration for a $18,750 short term promissory note. The total fair value of the common stock
was $1,226 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.
On March 28, 2014, the Company granted
3,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a
related party, as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the
common stock was $1,839 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7,
2014.
Debt Conversions into Class A Common
Stock – Related Parties
On April 2, 2014, the Company issued 250,000,000
shares of Class A Common Stock pursuant to the conversion of $25,000 of convertible debt held by Vivienne Passley, a related party,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On April 7, 2014, the Company issued 125,000,000
shares of Class A Common Stock pursuant to the conversion of $18,750 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 3, 2014, the Company issued 200,000,000
shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On May 22, 2014, the Company issued 150,000,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Star Financial Corporation, a
related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore
no gain or loss has been recognized.
On June 17, 2014, the Company issued 334,333,745
shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party,
which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance
with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversions into Class A Common
Stock – Magna Group, LLC
On January 7, 2014, the Company issued
25,140,000 shares of Class A Common Stock pursuant to the conversion of $5,028 of convertible debt held by Magna Group, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On January 22, 2014, the Company issued
25,000,000 shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt held by Magna Group, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
On January 31, 2014, the Company issued
66,666,667 shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt held by Magna Group, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
EPAZZ, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On February 6, 2014, the Company issued
100,000,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Magna Group, LLC,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On February 13, 2014, the Company issued
103,273,067 shares of Class A Common Stock pursuant to the conversion of $15,491 of convertible debt held by Magna Group, LLC,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On February 27, 2014, the Company issued
133,333,333 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Magna Group, LLC,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.
On March 10, 2014, the Company issued 180,000,000
shares of Class A Common Stock pursuant to the conversion of $18,000 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 19, 2014, the Company issued 197,000,000
shares of Class A Common Stock pursuant to the conversion of $19,700 of convertible debt held by Magna Group, LLC, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversions into Class A Common
Stock – Asher Enterprises
On March 3, 2014, the Company issued 150,000,000
shares of Class A Common Stock pursuant to the conversion of $27,000 of convertible debt held by Asher Enterprises, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On March 5, 2014, the Company issued 200,857,143
shares of Class A Common Stock pursuant to the conversion of $28,120 of convertible debt held by Asher Enterprises, which consisted
of $26,000 of principal and $2,120 of interest. The note was converted in accordance with the conversion terms; therefore no gain
or loss has been recognized.
On March 25, 2014, the Company issued 341,666,667
shares of Class A Common Stock pursuant to the conversion of $41,000 of convertible debt held by Asher Enterprises, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Debt Conversions into Class A Common
Stock – St. George Investments, LLC
On March 7, 2014, the Company issued 125,000,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by St. George Investments, LLC, which
consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has
been recognized.
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 $23,750 based on the closing price of the Company’s common stock on the date of grant.