0001019687-14-002763.txt : 20140718 0001019687-14-002763.hdr.sgml : 20140718 20140718160202 ACCESSION NUMBER: 0001019687-14-002763 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20131231 FILED AS OF DATE: 20140718 DATE AS OF CHANGE: 20140718 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Epazz Inc CENTRAL INDEX KEY: 0001335239 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-139117 FILM NUMBER: 14982705 BUSINESS ADDRESS: STREET 1: 27 N WACKER DR N261 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3129558161 MAIL ADDRESS: STREET 1: 27 N WACKER DR N261 CITY: CHICAGO STATE: IL ZIP: 60606 10-K 1 epazz_10k-123113.htm ANNUAL REPORT

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission file number: 333-139117

 

EPAZZ, INC.

(Exact name of registrant as specified in its charter)

 

 

Illinois   36-4313571

(State or other jurisdiction of incorporation or organization)

  (IRS Employer Identification No.)

 

 

205 W. Wacker Dr., Suite 1320

Chicago, IL 60606

(Address of principal executive offices)

 

(312) 955-8161

(Registrant's telephone number)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(B)

OF THE EXCHANGE ACT:

 

None

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(G)

OF THE EXCHANGE ACT:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X].

 

The aggregate market value of the issuer's voting and non-voting common equity held by non-affiliates computed by reference to the average bid and ask price of such common equity on the Over-The-Counter Bulletin Board as of June 30, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was $789,803.

 

There were 6,796,730,730 shares of the registrant's class A common stock outstanding as of July 13, 2014.

 

 
 

 

TABLE OF CONTENTS

 

 

PART 1
ITEM 1   Business 1
ITEM 1A   Risk Factors 11
ITEM 1B   Unresolved Staff Comments 26
ITEM 2   Properties 26
ITEM 3   Legal Proceedings 26
ITEM 4   Mine Safety Disclosures 26
PART II
ITEM 5   Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 27
ITEM 6   Selected Financial Data 29
ITEM 7   Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
ITEM 7A   Quantitative and Qualitative Disclosures About Market Risk 40
ITEM 8   Financial Statements and Supplementary Data 41
ITEM 9   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
ITEM 9A   Controls and Procedures 42
ITEM 9B   Other Information 43
PART III
ITEM 10   Directors, Executive Officers, and Corporate Governance 45
ITEM 11   Executive Compensation 48
ITEM 12   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 51
ITEM 13   Certain Relationships and Related Transactions, and Director Independence 52
ITEM 14   Principal Accounting Fees and Services 55
ITEM 15   Exhibits, Financial Statement Schedules 56
SIGNATURES 58

 

i
 

 

PART I

 

ITEM 1. BUSINESS

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

All statements in this discussion that are not historical are forward-looking statements. Statements preceded by, followed by or that otherwise include the words "believes", "expects", "anticipates", "intends", "projects", "estimates", "plans", "may increase", "may fluctuate" and similar expressions or future or conditional verbs such as "should", "would", "may" and "could" are generally forward-looking in nature and not historical facts. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. These factors include, among others, the factors set forth below under the heading "risk factors." Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Most of these factors are difficult to predict accurately and are generally beyond our control. We are under no obligation to publicly update any of the forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as otherwise provided by law. Readers are cautioned not to place undue reliance on these forward-looking statements. References in this form 10-K, unless another date is stated, are to December 31, 2013. As used herein, the “Company,” “Epazz,” “we,” “us,” “our” and words of similar meaning refer to Epazz, Inc., and include Epazz’s wholly owned subsidiaries, Desk Flex, Inc., an Illinois corporation (“DFI”), Professional Resource Management, Inc., an Illinois corporation (“PRMI”), Intellisys, Inc., a Wisconsin corporation ("IntelliSys"), K9 Bytes, Inc., an Illinois corporation (“K9 Bytes”) and MS Health, Inc., an Illinois corporation (“MS Health”) unless otherwise stated, or the context suggests otherwise.

 

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements include the following:

·volatility or decline of our stock price;
·low trading volume and illiquidity of our common stock, and application of the SEC’s penny stock rules;
·potential fluctuation in quarterly results;
·our failure to earn revenues;
·material defaults on monetary obligations owed us, resulting in unexpected losses;
·dissipation of existing assets and failure to acquire or grow a new business;
·litigation, disputes and legal claims involving outside parties;
·risks related to our ability to be listed on a national securities exchange and meeting listing requirements;
·risks related to our recently announced acquisition, our ability to finance the acquisition;
·risks associated with our ability to raise necessary capital to continue as a going concern; and
·other risks set forth below under “risk factors” and included from time to time in our filings with the Commission.

 

We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. You should consider carefully the statements in “Item 1A. Risk Factors” and other sections of this report, which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements.

 

Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the United States Securities and Exchange Commission (the “SEC”) which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

 

Business Overview

 

The Company was incorporated in the State of Illinois on March 23, 2000, to create software to help college students organize their college information and resources. The idea behind the Company was that if the information and resources provided by colleges and universities was better organized and targeted toward each individual, the students would encounter a personal experience with the college or university that could lead to a lifetime relationship with the institution. This concept is already used by business software designed to retain relationships with clients, employees, vendors and partners.

 

1
 

 

The Company developed a web portal infrastructure operating system product called BoxesOS v3.0. BoxesOS provides a web portal infrastructure operating system designed to increase the satisfaction of key stakeholders (students, faculty, alumni, employees, and clients) by enhancing the organizational experience through the use of enterprise web-based applications to organize their relationships and improve the lines of communication. BoxesOS decreases an organization’s operating expenses by providing development tools to create advanced web applications. The applications can be created by non-technical staff members of each institution. BoxesOS creates sources of revenue for Alumni Associations and Non-Profit organizations through utilizing a web platform to conduct e-commerce and provides e-commerce tools for small businesses to easily create "my accounts" for their customers. It further reduces administrative costs, by combining technology applications into one package, providing an alternative solution to enterprise resource planner (“ERP”) modules and showing a return on investment for institutions by reducing the need for 3rd party applications license fees. BoxesOS can also link a college or university’s resources with the business community by allowing businesses to better train their employees by utilizing courseware development from higher education institutions.

 

On or about June 18, 2008, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Desk Flex, Inc., an Illinois corporation (“DFI”), Professional Resource Management, Inc., an Illinois corporation (“PRMI” and collectively with DFI, the “Target Companies”) and Arthur A. Goes, an individual and the sole stockholder of the Target Companies, whereby Epazz acquired 100% of the outstanding shares of the Target Companies.

 

Professional Resource Management, Inc. and Desk Flex, Inc., Wholly Owned Subsidiaries

 

Professional Resource Management, Inc. was incorporated under the laws of Illinois in June 1985. On or around December 31, 1997, Professional Resource Management, Inc. established a wholly-owned subsidiary, PRM Transfer Corp. On or around December 31, 1997, Professional Resource Management, Inc., PRM Transfer Corp. and Arthur Goes entered into a Reorganization Agreement, whereby Professional Resource Management, Inc. transferred all of its assets and liabilities to PRM Transfer Corp., with the exception of those assets pertaining to its proprietary source code or software product, Desk/Flex. Also pursuant to the Reorganization Agreement, Professional Resource Management, Inc. amended its corporate charter to change its name to Desk Flex, Inc. (“DFI”), and PRM Transfer Corp. amended its charter to change its name to Professional Resource Management, Inc. (“PRMI”).

 

PRMI and DFI are separate legal entities, but operate in conjunction. PRMI and DFI share office space and certain employees. DFI’s main source of revenue comes from the “Desk/Flex Software” product, which it owns, and PRMI’s main source of revenue comes from the “Agent Power” product line, which it owns. PRMI also acts as the general agent for DFI; however, there is no formal agency agreement between the two companies. DeskFlex is a hoteling and scheduling solution for conference rooms, workspaces, desks, car parking spaces, equipment, hoteling and “HotDesking” so office managers can accommodate the occasional needs of mobile workers while reducing the rent. PRMI Agent Power Software provides vital information and tools for call centers to help improve their workforce management. Historical, real-time, and forecast information is available at the touch of a button to plan, control, and monitor your call center.

 

AutoHire Software, Asset Purchase

 

Effective February 1, 2010, the Company entered into a Software Product Asset Purchase Agreement (the “Software Rights Agreement”) with Igenti, Inc., a Florida corporation (“Igenti”) to acquire the rights to Igenti’s AutoHire software, domain names, permits, customers, contracts, know-how, equipment, software programs, receivables totaling approximately $10,000 and the intellectual property of Igenti associated therewith (the “AutoHire Software”). AutoHire competes favorably with other hiring system providers by providing a wide range of applicant tracking functionality combined with ease of use. The system design is uncomplicated, making it easy for the user to navigate. Quick access to candidate records is provided directly from the job postings.

 

IntelliSys, Inc., Wholly-Owned Subsidiary

 

On or about September 2, 2010, the Company entered into a Stock Purchase Agreement (the “IntelliSys Purchase Agreement”) with IntelliSys, Inc., a Wisconsin corporation (“IntelliSys”) and Paul Prahl, an individual and the sole stockholder of IntelliSys. Pursuant to the IntelliSys Purchase Agreement, the Company purchased 100% of the outstanding shares of IntelliSys from Mr. Prahl. IntelliSys SystemVIEW is a scada software and HMI software for rapid application development of HMI and process.

 

K9 Bytes, Inc., Wholly-Owned Subsidiary

 

On October 26, 2011, the Company, through a newly-formed wholly-owned Illinois subsidiary, K9 Bytes, Inc. (“K9 Bytes”), entered into an Asset Purchase Contract and Receipt Agreement with K9 Bytes, Inc., a Florida corporation (“K9 Florida” and the “Purchase Contract”). Pursuant to the Purchase Contract, the Company purchased all of K9 Florida’s assets, including all of its intellectual property, its business trade name, website (k9bytessoftware.com), furniture, fixtures, equipment and inventory, and goodwill. K9 Bytes focuses on core application areas related to pet care: pet boarding, daycare, grooming, training, and other pet care services (including dog walking and pet sitting). K9 Bytes products also include retail inventory and point of sale capabilities; including credit and debit card processing, collar printers, digital signature tablets, and biometric/fingerprint identification hardware.

 

2
 

 

MS Health Software Corporation, Asset Purchase

 

On March 8, 2012, the Company, through a newly-formed wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), entered into an Asset Purchase Agreement with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the Purchase Agreement, we purchased all of MSHSC’s assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and software in consideration for an aggregate of $500,000, of which $39,200 was paid in cash at the closing, $360,800 was financed using a small business loan and $100,000 was paid by way of a Promissory Note (the “MSHSC Note”). The terms of the MSHSC Note include interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and full payment of all amounts due after five (5) years. Pursuant to a subsequent amendment to a consulting agreement with the seller on March 23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during the year ended December 31, 2012. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC. The acquisition was financed in part with a $360,800 Small Business Administration (“SBA”) loan, bearing interest at fixed and variable rates. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.

 

MSHSC developed and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services. With CMHCi, an organization will realize the benefits of increased efficiency, accountability, and productivity. CMHCi offers server-based, internet, and secure cloud computing enabling the user to access information as required. By maintaining a complete electronic client record, including data collection and reporting across multiple programs, locations, episodes of care, and service providers, CMHCi helps eliminate redundant record keeping. The scheduler component tracks client, staff, and group appointments. Easy to use, it interfaces seamlessly with service authorization tracking, service history, and billing. The integrated financial reporting component provides the basis for an efficient and comprehensive accounting system, including electronic claims and remittance, third party insurance, and client, municipality, and grantor billing.

 

In connection with the Asset Purchase, the shareholders of MSHSC and the Company (through MS Health) entered into a Covenant Not to Compete; Consulting Agreement, Non-Competition and Consulting Agreement, pursuant to which the shareholders of MSHSC agreed to provide consulting services to the Company for a period of six months following closing. Pursuant to the agreement, the shareholders of MSHSC agreed not to compete against the Company for two years from the closing of the acquisition.

 

FlexFridge, Inc., Formation of Subsidiary and Subsequent Spin-Off

 

On March 4, 2013, the Board of Directors of Epazz, Inc. (the “Company”), consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc., which was later renamed, Z Fridge, Inc., and ultimately again renamed as, FlexFridge, Inc. (“FlexFridge”) on May 29, 2014. The Company has filed a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge. On November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz, Inc. received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10. There has been no material activity within FlexFridge to date.

 

Terran Power, Inc., Recent Formation of Subsidiary

 

On September 19, 2013, the Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned subsidiary of the Company named Terran Power, Inc. The Company plans to file a non-provisional patent application to develop a mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing an outlet or a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.

 

Recent 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.

 

3
 

 

Additionally, the Company agreed to assume aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. As a result of the Closing, Telecorp became a wholly-owned subsidiary of the Company.

 

In connection with the Stock Purchase Agreement, the shareholders of Telecorp and the Company entered into a Non-Disclosure/Non-Compete Agreement, pursuant to which the shareholders of Telecorp and the Company, each agreed to not for a period of one (1) year, communicate or divulge to, or use for the benefit of itself or any other person, firm, association or corporation, any information in any way relating to the Proprietary Property, in competition with the business of the Company, and pursuant to the agreement, the shareholders of Telecorp agreed not to compete against the Company for one (1) year from the closing of the acquisition.

 

Zinergy (DBA) formerly Cynergy Software, Asset Purchase

 

On March 13, 2014, the Company entered into an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing, $25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation. The acquisition was financed in part with a software financing agreement. 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.

 

4
 

 

Recent Debt Financing

 

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.

 

5
 

 

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. 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.

 

Our Products

 

The Company currently offers seven primary product lines. The Epazz BoxesOS v3.0 product is offered through Epazz, Inc., the Desk/Flex Software product is offered through Desk Flex, Inc., the Agent Power product is offered through Professional Resource Management, Inc., the AutoHire software is offered through Epazz, Inc., IntelliSys offers the Integrated Plant Management Control (“IPMC”) software product, K9 Bytes offers a series of Point of Sale software products for pet care, boarding and retail pet stores and the Company developed and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services through MS Health, Inc.

 

Epazz BoxesOS v3.0

 

Epazz BoxesOS v3.0 (Web Infrastructure Operating System) is the Company's flagship product. It is the core package of Epazz, Inc.’s products and services. Epazz BoxesOS integrates with each organization's back-end systems and provides a customizable personal information system for each stakeholder.

 

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Services include:

·Single sign-on: Provides a powerful single-sign-on with security procedure to protect users' information and identity.
·Course Management System: Manage distance, traditional courses and Calendar.
·Enterprise Web Site Content Management: Manage public sites with multi contributors.
·Integration Management Services: Integrated into Enterprise Resource Planning (“ERP”) and Mainframes.
·Email Management: Email server and web client.
·Instant Messenger Services: Instant messaging and alerts.
·Customer Relationship Management: Prospective students and alumni.
·Calendar/Scheduler Management: Event directory, groupware, and personal calendar.
·Administrative Support Services: Online payment services.
·Business Services: Facility Management and Online Bookstore.

 

BoxesOS software provides:

 

Web Portal Component

 

BoxesOS Web Portal Component is a gateway to all of an organization’s online services and information resources. The Web Portal Component provides a Personal Information System, which refers to the user's entire online environment - the user’s resources, information, graphics, color, layout, and organization. All resources are customizable. The Web Portal Component simplifies organizations’ ability to create and deploy custom web applications with a common graphic user interface and connectivity to the back-end systems.

 

Administrative Content Management

 

BoxesOS Content Management Component provides an organization with enterprise level tools for creating, managing, organizing, archiving and sharing content. Content can be delivered in many forms such as web pages, emails, polls, documents, web forms, rich site summaries (“RSS”), and “hot news.” The Content Management Component enables staff members with little technical skills to create web pages and processes without having any programming skills.

 

Work Hub

 

Work Hub provides a host of applications that can empower an organization to increase productivity while decreasing costs. Work Hub helps to manage work flow throughout an organization. Senior management is able to view a document for approval before it is sent out to a client. A company can view all projects of the enterprise in one page. Some of the applications in Work Hub are products/services management, project management, invoice management, time management, content management and sales management. Work Hub has clear graphic charts with detail reports on many areas.

 

Central Repository

 

BoxesOS Central Knowledge Repository is a collection and indexing of shareable content. Central Knowledge Repository installs a server index application on the Windows 2003 platform to identify an organization’s current knowledge assets. All knowledge assets will be imported into a storage device. The server index application will import the knowledge assets into a temporary folder before moving into a main folder. The server index application will prompt the organization’s administrators to add detailed information about the knowledge assets into the database by using a web form. These forms will allow the administrators to add custom fields; therefore, allowing the organization to add custom information to the database in the present and at a future date. The organization would be able to group their knowledge objects by program, course, subject, topic, users, content, or date.

 

ViewPoint

 

ViewPoint is BoxesOS central communication hub, calendaring, contact management and scheduling system. ViewPoint works with or can be used as an alternative to MS Outlook/MS Exchange Server. The web applications provide the institution with an extensive range of options including communication system email web client and an email server. Email applications provide features you would find on popular web-based e-mail providers. ViewPoint provides robust threaded discussion boards and a “chatting” environment. ViewPoint provides each user with a personal calendar, which notifies users of scheduling conflicts and appointments priorities. ViewPoint makes it easy to create group calendars and public calendars. With the ViewPoint scheduling system users are able to schedule group meetings together. The scheduling system will view each user's calendar to see the next available time and date the group can meet.

 

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Learning Management System

 

BoxesOS My Courses is an extensive application for learning management, and e-learning. My Courses is an effective means for managing traditional courses, distance learning courses, and self-paced courses. My Courses is a powerful communication tool that can be effectively used by students, instructors, employees and corporate trainers to make information flow easily, clearly and faster. My Courses provides a robust grade book, powerful authoring content tools, easy to use drop box, sharable folders, wide-ranging course calendar and many more features all designed to provide customization to key stakeholders. Organizations will be able to train their employees on systems using My Courses self-paced settings, as well as test candidates on their skill sets before they are hired.

 

Single Sign-on

 

Single Sign-on provides organizations the ability to log into multiple systems with a single unique username and password. The username and password authenticates the user’s credentials to make sure the person who is accessing the data is authorized to. BoxesOS uses Microsoft Active Directory Identity Management to accomplish single sign on. Microsoft Active Directory allows institutions to centrally manage and share user information. Active Directory also acts as the single sign on point for bringing systems and applications together. BoxesOS user management integrates with Active Directory.

 

Pathways Real-time Integration

 

Epazz Pathways is an integration suite enabling real-time connectivity with ERP and Legacy systems. Pathways integration suite allows organizations to retrieve data from ERPs and write data back to ERPs in real-time.

 

AutoHire Software

 

The AutoHire system provides a tool to power career centers, post job ads to sites and job boards, and to collect resumes online. The online processes supported by the system provide the mechanism to comply with the record keeping requirements of Title VII of the Civil Rights Act of 1964, which apply to organizations employing 15 or more persons.

 

One of the most useful features 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. We believe that result can have a substantial impact on the cost of recruiting and the quality of candidates selected.

 

By attaching interactive questions to job opportunities, posted clients can collect information not typically presented in a resume. The additional information can often replace the initial interview process. Questions can be multiple choice or narrative.

 

Desk Flex Software

 

DFI developed the Desk/Flex Software (“Desk/Flex”) to enhance the value of businesses’ real estate investments and modernize their office space. Desk/Flex lets businesses make better use of office space restrictions by enabling employees to instantly access their workstation tools from multiple areas in and outside of the office. Desk/Flex lets employees reserve space in advance or claim space instantly. It adjusts the telephone switch (Private Branch Exchange or “PBX”) so that calls ring at the 'desk du jour', or go directly to voice mail when a worker is not checked in.

 

Key Features of Desk/Flex include:

 

Quick and Easy Check-In - Check-in and Check-out to a workstation takes less than 8 seconds, and advance reservations take only a few seconds more.

 

Point-and-Click Floor Maps - Desks that are available are identified by green dots. Those that are in use are identified by red. An employee needs only to click or touch (using an optional touch-screen) a green dot to select his or her desk.

 

PBX Interaction - Desk/Flex connects to an employee’s Nortel, Avaya or Cisco PBX to ensure that the employee has phone access at his or her desk; the message waiting light becomes operational; outside calls can be made only after checking in; and an employee is automatically checked out overnight if he or she leaves a workstation without checking out.

 

Web Browser and Local "Kiosk" Access - On site, the Desk/Flex kiosk(s) makes it easy to select a vacant desk near a co-worker or centrally located at the office. Even before leaving home a worker with access to the company intranet can reserve a desk or locate a co-worker at any desk in the company’s office via a web browser.

 

Advance Reservations - Workers can easily choose and reserve workspaces ahead of time for a particular date or range of dates.

 

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Occupancy Reports - Management reports allow accurate measures of occupancy in total or by type of desk so the total number or mix of desks can be adjusted to meet client demand and save more office space expense in future months.

 

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. Desk/Flex has full integration capabilities with both Nortel and Avaya, which combined represent the majority of the telecommunications and inbound automatic call distributor (“ACD”) market.

 

Agent Power Software

 

Agent Power Software (“Agent Power”) is PRMI’s proprietary software line. PRMI believes Agent Power provides vital information and tools for call centers to help improve their workforce management. Historical, real-time, and forecast information is available at the touch of a button to plan, control, and monitor a business’s call center. Coordinated stand-alone modules allow a company to develop employee schedules, track queue and agent performance, communicate this information with the company’s agents and improve workforce management.

 

Agent Power is a suite of six (6) applications. Each can operate on a stand-alone basis, or can work in conjunction with the other applications. The applications feature the following workforce management components:

·Planning and Scheduling;
·Agent Adherence;
·Agent Performance;
·ACD Group Performance;
·Real-Time Agent Status; and
·Info Screen.

 

All modules of Agent Power have full integration capabilities with Nortel, Avaya, and ROLM ACDs, and the Planning and Scheduling module works with any modern ACD system.

 

IntelliSys Software

 

IntelliSys developed the IPMC Software (“IPMC”)(Integrated Plant Management Control) which is a software system design for water and wastewater facility management. IPMC is the technology-based strategy for optimizing operations by automatically collecting, managing, organizing and disseminating information for the operations, management, laboratory, maintenance, and engineering functions.

 

SystemView

 

SystemView displays the system processes and lets users control the system in real time. It displays alarms, equipment status, summary accumulated and trend data.

 

Features

 

·The Alarm/Event Journal records all alarms and status changes and has the flexibility to query history based on tag names and time ranges.
·Smart Server provides communication with process control and automatic collections of data. It is designed to normalize data, accumulate and summarize statistics for the plant management and maintenance systems.
·Rapid application development tools dramatically reduce system development time. Development tools are included with all applications.

 

MaintenanceView

 

MaintenanceView provides the traditional functionality of a comprehensive maintenance management system including:

·Fixed asset and rotating equipment.
·Preventive scheduling and predictive reports and charts.
·Work order management.
·Inventory and purchasing.
·Manufacture and vendor records.
·Parts inventory.

 

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Features

 

·Ability to track maintenance costs by center, department, location, etc.
·Ability to customize user interface sorting by location, equipment type, department, cost center, manufacturer or vendor.
·Ability to customize reports using MS Excel compatible spreadsheets to accommodate users’ specific needs.

 

ReportView

 

ReportView provides users with a historic picture of the operation of their plant through centralized storage of data. Realistic graphics can be constructed to assist the user in managing, accessing and analyzing real-time and manually entered process or laboratory data.

 

Features

 

·Stores real-time and laboratory data in a secure open database.
·Time-based compression stores process information and manually collected data.
·Flexible rapid application development tools allow creation of input displays, reports and charts and navigation menus.
·Using MS Excel compatible spreadsheet, ReportView combines the user-friendly features of familiar spreadsheet functions with the security of an expandable database.
·Reporting tools provide easy access to retrieve summarized or raw data for process-efficiency and compliance reports.
·Creates 2D and 3D presentations-quality charts in minutes.
·An efficient decision support system and dashboard development tools for operations, maintenance, management and engineering.

 

EnergyView

 

EnergyView is an automated energy management dashboard tool. EnergyView provides smart energy metering and power measurement technology to accurately measure, store, track and analyze energy data. The energy metering and submetering systems can link to SCADA (Supervisory Control and Data Acquisition) or any PC to collect crucial energy data. In addition manual data on other energy sources can be managed as part of the same energy management application. The combination of hardware and software is designed to provide an end-to-end solution from measurement to billing audits. The objective of the EnergyView application is to improve the speed and quality of energy measurement information, so that facility managers will be able to make better management decisions, conserve energy and reduce operating costs.

 

Features

 

·Collect usage data manually and automatically.
·Normalize energy variables create benchmarking variables.
·Provide comparisons of hourly usage to previous days.
·Calculate operating cost and savings by day, month and year-to-date.
·Forecast and alarm peak demands.
·Send alarms via local annunciation, email or pagers.
·Benchmarking.
·Local Factor Analysis.
·Automate Energy Billing Audits.
·Determine Changes in Energy Usage Patterns.
·Setting Saving Targets and Tracking Progress.

 

K9 Bytes Software

 

K9 Bytes develops and sells point of sale (“POS”) software products that focus on core application areas related to pet care: pet boarding, daycare, grooming, training, and other pet care services (including dog walking and pet sitting). K9 Bytes products include scheduling, billing, retail inventory and general POS capabilities; including credit and debit card processing, collar printers, digital signature tablets, and biometric/fingerprint identification hardware.

 

MS Health Software

 

MSHSC developed and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services. With CMHCi, an organization will realize the benefits of increased efficiency, accountability, and productivity. CMHCi offers server-based, internet, and secure cloud computing enabling the user to access information as required. By maintaining a complete electronic client record, including data collection and reporting across multiple programs, locations, episodes of care, and service providers, CMHCi helps eliminate redundant record keeping. The scheduler component tracks client, staff, and group appointments. Easy to use, it interfaces seamlessly with service authorization tracking, service history, and billing. The integrated financial reporting component provides the basis for an efficient and comprehensive accounting system, including electronic claims and remittance, third party insurance, and client, municipality, and grantor billing.

 

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Sales & Marketing

 

Epazz uses telemarketing and email campaigns to meet with key decision makers in order to demonstrate the significant customer satisfaction, cost savings, and revenue enhancement benefits they can realize by using the Epazz systems.

 

Epazz plans to contract with independent sales representatives as independent contractors for IT sales. Independent representatives are independent contractors who work on a performance basis and are located throughout the United States. Epazz will pay commission on sales. Since the sales teams will be independent and not employees of Epazz we do not plan to pay such sales representatives salaries, travel expenses or office expenses. Furthermore, we believe that we will be able to enter into more markets at less cost allowing us to invest more in product development.

 

Research and Development

 

The Company has spent not spent resources on research and development activities for the fiscal years ended December 31, 2013 and December 31, 2012.

 

Employees

 

We currently employ six (6) full-time employees, all of which are provided to us by Insperity, Inc., with whom we have a client service agreement to provide labor and human resource services.

 

Competition

 

The environment for our products and services is intensely competitive. Our current and potential competitors include many large and well capitalized software companies and many smaller less-known software companies.

 

We believe that the principal competitive factors in our market segments include selection, price, availability, convenience, brand recognition, customer service, reliability, ease of use, and ability to adapt to changing conditions, as well as our future customers' overall trust in the entire experience in transactions with us.

 

Our overall market is intensely competitive, and there are a number of other competitors that are much larger than us and have significantly greater resources at their disposal. We believe that our product offerings are competitive with others in the marketplace; however, we do not have a dominant market share.

 

Intellectual Property

 

We received a trademark for “Epazz” on March 5, 2002 (Serial Number 75930172). We regard our trademark, copyrights, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as important to our success, and we plan to rely on trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights.

 

Policing unauthorized use of our proprietary rights is inherently difficult, and we may not be able to determine the existence or extent of any unauthorized use. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, we cannot be certain that the steps we take to protect our intellectual property will adequately protect our rights or that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.

 

ITEM 1A. RISK FACTORS

 

Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this report before deciding whether to make an equity investment in our Company. Our business, financial condition or results of operations, including those of our wholly owned subsidiaries DFI, PRMI, Intellisys, K9 Bytes, MS Health, Terran Power and FlexFridge, could be materially adversely affected by these risks if any of them actually occur. Some of these factors have affected our financial condition and operating results in the past or are currently affecting us.

 

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RISKS RELATED TO OUR BUSINESS

 

We owed a total of $2,607,576 in liabilities as of December 31, 2013. We will need to raise additional funds to repay our obligations and continue our operations, and these funds may not be available on acceptable terms or at all. Failure to raise additional funds could require us to substantially reduce or terminate our operations.

 

As of December 31, 2013, we had $2,607,576 in liabilities and owed approximately $1,942,244 in outstanding notes payable, which included $73,232 owed on line of credits, $17,421 owed on our capital leases; $397,368 owed to our Chief Executive and other related parties; a total of $157,294 owed on six convertible debentures, including a discount on beneficial conversion features of $109,583, or a total face value of $266,877 of convertible debts, and $1,211,929 owed to other unrelated third parties. We anticipate raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support our business operations; however we currently do not have commitments from third parties for additional capital. Our cash on hand is sufficient to fund operations for the next six months. We will need to raise additional funds to continue to operate as a going concern.

 

We cannot be certain that any such financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue and expand our business. We intend to overcome the circumstances that impact our ability to remain a going concern through a combination of the commencement of additional revenues, of which there can be no assurance, with interim cash flow deficiencies being addressed through additional equity and debt financing. Our ability to obtain additional funding for the remainder of the 2014 year and thereafter will determine our ability to continue as a going concern. There can be no assurances that these plans for additional financing will be successful. Failure to secure additional financing in a timely manner to repay our obligations and supply us sufficient funds to continue our business operations and on favorable terms if and when needed in the future could have a material adverse effect on our financial performance, results of operations and stock price and require us to implement cost reduction initiatives and curtail operations. Furthermore, additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, and may require that we relinquish valuable rights. In the event that we are unable to repay our current and long-term obligations as they come due, we could be forced to curtail or abandon our business operations, and/or file for bankruptcy protection; the result of which would likely be that our securities would decline in value and/or become worthless.

 

The Notes payable in connection with the acquisition of IntelliSys, due to a third party lender, due in connection with K9 Bytes acquisition and due in connection with the MS Health acquisition are secured by a security interest in substantially all of the assets of the Company.

 

The Company agreed to secure the payment of the $50,000 IntelliSys Note (described above) with a Uniform Commercial Code Security Interest filing, which the Company agreed to file, at the Company’s expense, to grant a security interest over all of IntelliSys’ tangible and intangible assets, and the outstanding stock of IntelliSys until the IntelliSys Note is repaid, which security interest is junior to the Third Party Note (described below). On September 30, 2010, the Company obtained a $185,000 U.S. Small Business Association Loan from Third Party Lender (the “Third Party Lender Note” and “Third Party Lender”). The Third Party Lender Note bears interest at the rate of the Prime Rate in effect from time to time plus 2.75% (which has an initial interest rate of 6% per annum). The Company agreed to repay the Third Party Lender Note at the rate of $2,054 per month, which commenced in November 2010. The Third Party Lender Note is due and payable on September 30, 2020. The repayment of the Third Party Lender Note is secured by a security interest over substantially all of the Company’s property, including, but not limited to the stock of IntelliSys which was purchased in connection with the IntelliSys Purchase Agreement. Additionally, the Third Party Lender Note is guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer and director, related parties, PRMI and DFI. The Third Party Note is also secured by a mortgage on the properties of related parties, and Shaun Passley, Ph.D.. Finally, Shaun Passley, Ph.D. agreed to further secure the Third Party Lender Note with the proceeds of a personal insurance policy, equal at least to the amount of the Third Party Lender Note. An aggregate of $125,000 received in connection with the Third Party Lender Note was used to pay Mr. Prahl the Cash Consideration due under the IntelliSys Purchase Agreement, $50,000 was used for working capital, and $10,000 was paid in closing costs associated with the note.

 

On October 26, 2011, the Company purchased all of K9 Florida’s assets in consideration for an aggregate of $205,000, of which $5,000 was paid in cash at the closing, $169,750 was financed using a small business loan and $30,750 was paid by way of a Balloon Installment Promissory Note (the “K9 Note”). The K9 Note accrues interest at 6% per annum and is payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the K9 Note ($23,017, assuming no additional payments other than those scheduled) is due. The repayment of the K9 Note is secured by all of the securities of K9 Bytes, which owns all of the assets purchased as a result of the Purchase Contract, provided that Third Party Lender, as a result of the SBA Loan described below, has a first priority security interest to such securities. The K9 Note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.

 

We raised the funds paid to K9 Florida in connection with the Purchase Contract through a $235,000 Small Business Association loan obtained by K9 Bytes from the Third Party Lender (the “SBA Loan”). The SBA Loan has a term of ten (10) years; bears interest at the prime rate plus 2.75% per annum (currently 6%), adjusted quarterly; is payable in monthly installments (beginning in December 2011) of $2,609 per month; is guaranteed by the Company and personally guaranteed by Shaun Passley, Ph.D., the Company’s Chief Executive Officer; and is secured by all of the assets of K9 Bytes and the Company, 100% of the outstanding capital of K9 Bytes which is held by the Company, and a life insurance policy on Dr. Passley’s life in the amount of $235,000. A total of approximately $10,000 of the amount borrowed under the SBA Loan was used to pay closing fees in connection with the loan, $175,000 was used to pay K9 Florida the cash amount due pursuant to the terms of the Purchase Contract and $50,000 of such loan amount was made available for working capital for the Company and K9 Bytes.

 

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On March 8, 2012, we, through a newly-formed wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), entered into an Asset Purchase Agreement with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the Purchase Agreement, we purchased all of MSHSC’s assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and software in consideration for an aggregate of $500,000, of which $39,200 was paid in cash at the closing, $360,800 was financed using a small business loan and $100,000 was paid by way of a Promissory Note (the “MSHSC Note”). The terms of the MSHSC Note include interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and full payment of all amounts due after five (5) years. Pursuant to an amendment to a consulting agreement with the seller on March 23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during the year ended December 31, 2012 before discontinuing payments. The MSHSC Note is secured by a security interest over the assets of MS Health. The acquisition was financed in part with a $360,800 Small Business Administration (“SBA Loan”) loan, bearing interest at fixed and variable rates. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.

 

If we default on the repayment of the notes described above the holders of such notes may enforce their security interest over the assets of the Company or its subsidiaries which secure the repayment of such notes, and we could be forced to curtail or abandon our current business plans and operations. If that were to happen, any investment in the Company could become worthless.

 

We have a history of losses which may continue and may negatively impact our ability to achieve our business objectives.

 

We incurred a net loss of $3,376,238 for the year ended December 31, 2013 and accumulated losses of $7,501,994 from March 2000 (inception) to December 31, 2013, in addition to having negative working capital of $1,283,338 at December 31, 2013. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the software development industry. We cannot assure you that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to increase our revenues. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on our business, financial condition and result of operations.

 

We have conditions that raise substantial doubt that we can continue as a going concern, which may negatively affect our ability to raise additional funds and otherwise operate our business. If we fail to raise sufficient capital, we will not be able to implement our business plan, we may have to liquidate our business, and you may lose your investment.

 

There is substantial doubt about our ability to continue as a going concern given our recurring losses from operations, deficiencies in working capital and equity and our failure to make payments related to our notes payable as described herein. This substantial doubt could materially limit our ability to raise additional funds by issuing new debt or equity securities or otherwise. If we fail to raise sufficient capital, we will not be able to implement our business plan, we may have to liquidate our business and you may lose your investment. You should consider our independent registered public accountants’ comments when determining if an investment in us is suitable.

 

Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.

 

Shares eligible for future sale may have an adverse effect on the market price of our common stock by creating an excessive supply. We currently plan to raise additional funding through the sale of debt or equity securities in the future, which would cause a significant increase in the number of outstanding shares which we currently have, and would cause immediate and substantial dilution to our existing shareholders. Additionally in the future, shareholders, including our President and Chief Executive Officer, and any shareholders who purchase shares in the future may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, if the Company remains a reporting company, a non “affiliate” stockholder (or stockholders whose shares are aggregated) who has satisfied a six month holding period may sell their securities free of any volume limitations. Rule 144 also permits, under certain circumstances, the sale of securities, with certain volume limitations, by an affiliate, if the Company is a reporting company, the “affiliate” has held such shares for six months, and the Company continues to file periodic reports with the commission. The rules are different however for non-reporting companies in that non-“affiliate” and “affiliate shareholders must hold their securities for at least a year, and no sales by “non-affiliates” are able to be made unless certain requirements are met, including, but not limited to that there is current public information available regarding the Company and the “affiliate” complies with the applicable volume limitations. The disclosures in this paragraph assume for all purposes that the Company is not a “shell company” or former “shell company” as described in Rule 144. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.

 

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Our success and the success of our products depend in part upon our ability to develop new products and enhance our existing products. Failure to successfully introduce new or enhanced products to the market may adversely affect our business.

 

We may not be successful in achieving market acceptance of our products. Any failure or delay in diversifying our existing product offerings could harm our business, results of operations and financial condition.

 

Our future success depends in part on our ability to develop enhancements to our existing products and to introduce new products that keep pace with rapid technological developments. We must continue to modify and enhance our products to keep pace with changes in technologies. We may not be successful in developing these modifications and enhancements or in bringing them to market in a timely manner. In addition, uncertainties about the timing and nature of new technologies and platforms or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of our products to operate effectively with future network platforms and technologies could reduce the demand for our products, result in customer dissatisfaction and harm our business. Additionally, accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results.

 

We may not be able to effectively manage our growth, which may harm our profitability.

 

Our strategy envisions the expansion of our business. If we fail to effectively manage our growth, our financial results could be adversely affected. Growth may place a strain on our management systems and resources. We must continue to refine and expand our business capabilities, our systems and processes and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot assure that we will be able to:

·meet our capital needs;
·expand our systems effectively or efficiently or in a timely manner;
·allocate our human resources optimally;
·identify and engage qualified employees and consultants, or retain valued employees and consultants; or
·incorporate effectively the components of any business that we may acquire in our effort to achieve growth.

 

If we are unable to manage our growth, our financial condition and results of operations may be materially adversely affected.

 

Our operating results are difficult to predict and fluctuate substantially from quarter to quarter and year to year, which may increase the difficulty of financial planning and forecasting and may result in declines in our stock price.

 

Our future operating results may vary from our past operating results, are difficult to predict and may vary from year to year due to a number of factors. Many of these factors are beyond our control. These factors include:

·the potential delay in recognizing revenue from transactions due to revenue recognition rules which we must follow;
·customer decisions to delay implementation of our products;
·any seasonality of technology purchases;
·demand for our products, which may fluctuate significantly;
·the timing of new product introductions and product enhancements by both us and our competitors;
·changes in our pricing policy; and
·the publication of opinions concerning us, our products or technology by industry analysts.

 

As a result of these and other factors, our operating results for any fiscal quarter or fiscal year will be subject to significant variation, and we believe that period-to-period comparisons of our results of operations are not necessarily meaningful in terms of their relation to future performance. You should not rely upon these comparisons as indications of future performance. It is likely that our future quarterly and annual operating results from time to time will not meet the expectations of public market analysts or investors, which could cause a drop in the price of our common stock.

 

Defects or errors in our software could adversely affect our reputation, result in significant costs to us and impair our ability to sell our software.

 

If our software is determined to contain defects or errors, our reputation could be materially adversely affected, which could result in significant costs to us and impair our ability to sell our software in the future. The costs we would incur to correct product defects or errors may be substantial and would materially adversely affect our operating results. After the release of our software, defects or errors may be identified from time to time by our internal team and by our clients. Such defects or errors may occur in the future.

 

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Any defects in our applications, or defects that cause other applications to malfunction or fail, could result in:

·lost or delayed market acceptance and sales of our software;
·loss of clients;
·product liability suits against us;
·diversion of development resources;
·injury to our reputation; and
·increased maintenance and warranty costs.

 

Our market is subject to rapid technological change and if we fail to continually enhance our products and services in a timely manner, our revenue and business would be harmed.

 

We must continue to enhance and improve the performance, functionality and reliability of our products in a timely manner. The software industry is characterized by rapid technological change, changes in user requirements and preferences, frequent new product and services introductions embodying new technologies, and the emergence of new industry standards and practices that could render our products and services obsolete. Our failure to continually enhance our products and services in a timely manner would adversely impact our business and prospects. Our success will depend, in part, on our ability to internally develop and license leading technologies to enhance our existing products and services, to develop new products and services that address the increasingly sophisticated and varied needs of our future customers, and to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. Our product development efforts are expected to continue to require substantial investments, and we may not have sufficient resources to make the necessary investments. If we are unable to adapt our products and services to changing market conditions, customer requirements or emerging industry standards, we may not be able to maintain or increase our revenue and expand our business.

 

Our management has no senior management experience in the software industry which may hinder our ability to manage our operations.

 

Our Company is a relatively new software company and our management has limited experience managing in our industry and our management and employees have limited experience developing and selling software. The lack of experience in software design and sales may make it difficult to compete against companies that have more senior management and design experience. We expect to add additional key personnel in the future. Our failure to attract and fully integrate our new employees into our operations or successfully manage such employees could have a material adverse effect on our business, financial condition and results of operations.

 

Significant unauthorized use of our products would result in material loss of potential revenues and our pursuit of protection for our intellectual property rights could result in substantial costs to us.

 

Our software is planned to be licensed to customers under license agreements, which license may include provisions prohibiting the unauthorized use, copying and transfer of the licensed program. Policing unauthorized use of our products will likely be difficult and, while we are unable to determine the extent to which piracy of our software products exists, any significant piracy of our products could materially and adversely affect our business, results of operations and financial condition. In addition, the laws of some foreign countries do not protect the proprietary rights to as great an extent as do the laws of the United States and our means of protecting our proprietary rights may not be adequate.

 

We may face product liability claims from our future customers which could lead to additional costs and losses to the Company.

 

Our license agreements with our future customers will contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the license agreements may not be effective under the laws of some jurisdictions. A successful product liability claim brought against us could result in payment by us of substantial damages, which would harm its business, operating results and financial condition and cause the price of its common stock to fall.

 

We may not be able to respond to technological changes with new software applications, which could materially adversely affect our sales and profitability.

 

The markets for our software applications are characterized by rapid technological changes, changing customer needs, frequent introduction of new software applications and evolving industry standards. The introduction of software applications that embody new technologies or the emergence of new industry standards could make our software applications obsolete or otherwise unmarketable. As a result, we may not be able to accurately predict the lifecycle of our software applications, which may become obsolete before we receive any revenue or the amount of revenue that we anticipate receiving from them. If any of the foregoing events were to occur, our ability to retain or increase market share could be materially adversely affected.

 

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To be successful, we need to anticipate, develop and introduce new software applications on a timely and cost-effective basis that keep pace with technological developments and emerging industry standards and that address the increasingly sophisticated needs of our future customers and their budgets. We may fail to develop or sell software applications that respond to technological changes or evolving industry standards, experience difficulties that could delay or prevent the successful development, introduction or sale of these applications or fail to develop applications that adequately meet the requirements of the marketplace or achieve market acceptance. Our failure to develop and market such applications and services on a timely basis, or at all, could materially adversely affect our sales and profitability.

 

Our failure to offer high quality customer support services could harm our reputation and could materially adversely affect our sales of software applications and results of operations.

 

Our future customers, if any, will depend on us to resolve implementation, technical or other issues relating to our software. A high level of service is critical for the successful marketing and sale of our software. If we do not succeed in helping our customers quickly resolve post-deployment issues, our reputation could be harmed and our ability to make new sales or increase sales to customers could be damaged.

 

We expect to rely on off-shore independent contract service providers and, as a result, will be exposed to potential service problems from those providers.

 

Certain Company functions, such as software development, will be provided through off-shore contract providers. Any material disruption or slowdown in service resulting from telephone or Internet failures, power or service outages, natural disasters, labor disputes, or other events could make it difficult or impossible to provide adequate off-shore services. Furthermore, we may be unable to attract and retain an adequate number of competent software developers, which is essential in creating a favorable customer experience. In addition, because our outsourced software development is located in India, we may experience difficulties in training or monitoring the level of support provided. If we are unable to continually provide adequate and trained staffing for our software development operations, our reputation could be seriously harmed and our sales could decline. Further, we cannot assure you that our needs will not exceed our capacities. If this occurs, we could experience delays in developing software and addressing customer concerns. Because our success depends in large part on keeping our future customers satisfied, any failure to provide satisfactory levels of software development would likely impair our reputation and we could lose customers.

 

Our business could be harmed if our independent third party contractors violate labor or other laws.

 

Once we are able to retain them, our independent contract third party contractors may not operate in compliance with applicable United States and foreign laws and regulations, including labor practices. If one of any of our possible future independent contractors violates labor or other laws or diverges from those labor practices generally accepted as ethical in the United States, it could result in adverse publicity for us, damage our reputation in the United States or render our conduct of business in a particular foreign country undesirable or impractical, any of which could harm our business.

 

Our future success depends on our ability to respond to changing customer demands, identify and interpret trends and successfully market new products.

 

The software industry is subject to rapidly changing customer demands, particularly in the “enterprise” market that we intend to market our product. Accordingly, we must identify and interpret trends and respond in a timely manner. Demand for and market acceptance of new products are uncertain and achieving market acceptance for new products generally requires substantial product development and marketing efforts and expenditures. If we do not meet changing customer demands or are unable to develop products that appeal to current customer demands, our results of operations will be negatively impacted. In addition, we will have to make decisions about product development and marketing expenditures in advance of the time when customer acceptance can be determined. If we fail to anticipate, identify or react appropriately to changes and trends or are not successful in marketing our products, we could experience excess inventories, higher than normal markdowns or an inability to sell our products once and if the products are available.

 

Our business and the success of our products could be harmed if we are unable to establish and maintain a brand image.

 

We believe that establishing a brand is critical to achieving acceptance of our software products and to establishing key strategic relationships. As a new company with a new brand, we believe that we have little to no brand recognition with the public. We may experience difficulty in establishing a brand name that is well-known and regarded, and any brand image that we may be able to create may be quickly impaired. The importance of brand recognition will increase when and if our competitors create products that are similar to our products. Even if we are able to establish a brand image and react appropriately to changes in customer preferences, customers may consider our brand image to be less prestigious or trustworthy than those of our larger competitors. Our results of operations may be affected in the future should our products even be successfully launched.

 

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We may fail in introducing and promoting our products to the software market, which will have an adverse effect on our ability to generate revenues.

 

Demand for and market acceptance of new products is inherently uncertain. Our revenue will come from the sale of our products, and our ability to sell our products will depend on various factors, including the eventual strength, if any, of our brand name, competitive conditions and our access to necessary capital. If we fail to introduce and promote our products, we may not be able to generate any significant revenues. In addition, as part of our growth strategy, we intend to expand our product offerings to introduce more products in other categories. This strategy may however prove unsuccessful and our association with failed products could impair our brand image. Introducing and achieving market acceptance for these products will require, among other things:

·the establishment of our brand;
·the development and performance to our planned product introductions;
·the establishment of key relationships with customers for our software products; and
·substantial marketing and product development efforts and expenditures to create and sustain customer demand.

 

We will face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our business could be harmed.

 

We will face intense competition in the software industry from other established companies. We have a very limited market for our product, product sales, brand recognition, manufacturing or brand equity. Almost all of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas will enable them to better withstand periodic downturns in the software industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, new companies may enter the markets in which we expect to compete, further increasing competition in the software industry.

 

We believe that our ability to compete successfully will depend on a number of factors, including the functionality of our products once marketed and the strength of our brand, once established, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products.

 

We depend on key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain existing personnel, our business could be harmed.

 

Our future success depends upon the continued services of key employees especially Shaun Passley, Ph.D., our President and Chief Executive Officer. The loss of the services of Dr. Passley or any other key employee could harm us. Our future success also depends on our ability to identify, attract and retain additional qualified personnel. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel.

 

The disruption, expense and potential liability associated with unanticipated future litigation against us could have a material adverse effect on our business, results of operations and financial condition.

 

We may be subject to various legal proceedings and threatened legal proceedings from time to time as part of our ordinary business. We are not currently a party to any legal proceedings. However, any unanticipated litigation in the future, regardless of merits, could significantly divert management’s attention from our operations and result in substantial legal fees to us. Further, there can be no assurance that any actions that have been or will be brought against us will be resolved in our favor or, if significant monetary judgments are rendered against us, that we will have the ability to pay such judgments. Such disruptions, legal fees and any losses resulting from these claims could have a material adverse effect on our business, results of operations and financial condition.

 

Protection of our intellectual property is limited, and any misuse of our intellectual property by others could materially adversely affect our sales and results of operations.

 

Proprietary technology in our software is important to our success. To protect our proprietary rights, we plan to rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions. We do not own any issued patents and we have not emphasized patents as a source of significant competitive advantage. We have sought to protect our proprietary technology under laws affording protection for trade secrets, copyright and trademark protection of our software, products and developments where available and appropriate. In the event we are issued patents, our issued patents may not provide us with any competitive advantages or may be challenged by third parties, and the patents of others may seriously impede our ability to conduct our business. Further, any patents issued to us may not be timely or broad enough to protect our proprietary rights.

 

We also have one registered trademark in the U.S. for our “Epazz” mark. Although we attempt to monitor use of and take steps to prevent third parties from using our trademark without permission, policing the unauthorized use of our trademark is difficult. If we fail to take steps to enforce our trademark rights, our competitive position and brand recognition may be diminished.

 

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Protection of trade secrets and other intellectual property rights in the markets in which we operate and compete is highly uncertain and may involve complex legal and scientific questions. The laws of countries in which we operate may afford little or no protection to our trade secrets and other intellectual property rights. Policing unauthorized use of our trade secret technologies and proving misappropriation of our technologies is particularly difficult, and we expect software piracy to continue to be a persistent problem. Piracy of our products represents a loss of revenue to us. Furthermore, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may adversely affect our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our confidential information and trade secret protection. If we are unable to protect our proprietary rights or if third-parties independently develop or gain access to our or similar technologies, our competitive position and revenue could suffer.

 

We may incur significant litigation expenses protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on our cash flow and results of operations.

 

If our efforts to protect our intellectual property rights are inadequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the intellectual property rights of others, we could incur substantial significant legal expenses in resolving such disputes.

 

Our competitors may develop similar, non-infringing products that adversely affect our ability to generate revenues.

 

Our competitors may be able to produce a software product that is similar to our product without infringing on our intellectual property rights. Since we have yet to establish any significant brand recognition for our product, we could lose a substantial amount of business due to competitors developing products similar to our software products. As a result, our future growth and ability to generate revenues from the sale of our product could suffer a material adverse effect.

 

Claims that we misuse the intellectual property of others could subject us to significant liability and disrupt our business, which could materially adversely affect our results of operations and financial condition.

 

Because of the nature of our business, we may become subject to material claims of infringement by competitors and other third-parties with respect to current or future software applications, trademarks or other proprietary rights. Our competitors, some of which may have substantially greater resources than us and have made significant investments in competing technologies or products, may have, or seek to apply for and obtain, patents that will prevent, limit or interfere with our ability to make, use and sell our current and future products, and we may not be successful in defending allegations of infringement of these patents. Further, we may not be aware of all of the patents and other intellectual property rights owned by third-parties that may be potentially adverse to our interests. We may need to resort to litigation to enforce our proprietary rights or to determine the scope and validity of a third party’s patents or other proprietary rights, including whether any of our products or processes infringe the patents or other proprietary rights of third-parties. The outcome of any such proceedings is uncertain and, if unfavorable, could significantly harm our business. If we do not prevail in this type of litigation, we may be required to:

·pay damages, including actual monetary damages, royalties, lost profits or other damages and third-party’s attorneys’ fees, which may be substantial;
·expend significant time and resources to modify or redesign the affected products or procedures so that they do not infringe a third-party’s patents or other intellectual property rights; further, there can be no assurance that we will be successful in modifying or redesigning the affected products or procedures;
·obtain a license in order to continue manufacturing or marketing the affected products or processes, and pay license fees and royalties; if we are able to obtain such a license, it may be non-exclusive, giving our competitors access to the same intellectual property, or the patent owner may require that we grant a cross-license to part of our proprietary technologies; or
·stop the development, manufacture, use, marketing or sale of the affected products through a court-ordered sanction called an injunction, if a license is not available on acceptable terms, or not available at all, or our attempts to redesign the affected products are unsuccessful.

 

Any of these events could adversely affect our business strategy and the value of our business. In addition, the defense and prosecution of intellectual property suits, interferences, oppositions and related legal and administrative proceedings in the United States and elsewhere, even if resolved in our favor, could be expensive, time consuming, generate negative publicity and could divert financial and managerial resources.

 

We expect that software developers will increasingly be subject to infringement claims as the number of software applications and competitors in our industry segment grows and the functionality of software applications in different industry segments overlaps. Thus, we could be subject to additional patent infringement claims in the future. There can be no assurance that the claims that may arise in the future can be amicably disposed of, and it is possible that litigation could ensue.

 

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Intellectual property litigation can be complex, costly and protracted. As a result, any intellectual property litigation to which we are subject could disrupt our business operations, require us to incur substantial costs and subject us to significant liabilities, each of which could severely harm our business.

 

Plaintiffs in intellectual property cases often seek injunctive relief. Any intellectual property litigation commenced against us could force us to take actions that could be harmful to our business, including the following:

·stop selling our products or using the technology that contains the allegedly infringing intellectual property;
·stop selling our products or using the technology that contains the allegedly infringing intellectual property;
·attempt to obtain a license to use the relevant intellectual property, which may not be available on reasonable terms or at all; and
·attempt to redesign the products that allegedly infringed upon the intellectual property.

 

If we are forced to take any of the foregoing actions, our business, financial position and operating results could be harmed. We may not be able to develop, license or acquire non-infringing technology under reasonable terms, if at all. These developments would result in an inability to compete for customers and would adversely affect our ability to increase our revenue. The measure of damages in intellectual property litigation can be complex, and is often subjective or uncertain. If we were to be found liable for the infringement of a third party’s proprietary rights, the amount of damages we might have to pay could be substantial and would be difficult to predict.

 

Our business may be negatively impacted as a result of changes in the economy and corporate and institutional spending.

 

Our business will depend on the general economic environment and levels of corporate and institutional spending. Purchases of software may decline in periods of recession or uncertainty regarding future economic prospects. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to customers, maintain sales levels, establish operations on a profitable basis or create earnings from operations as a percentage of net sales. As a result, our operating results may be adversely and materially affected by downward trends in the economy or the occurrence of events that adversely affect the economy in general. Our operating results and margins will be adversely impacted if we do not grow as anticipated.

 

We may engage in future acquisitions or investments that present many risks, and we may not realize the anticipated financial and strategic goals for any of these transactions.

 

We do not have significant experience acquiring companies. However, in the future we may acquire or make investments in companies, in addition to our acquisition of DFI, PRMI, IntelliSys, K9 Bytes, MS Health, Telecorp, Jadian and our purchase of the AutoHire and Zinergy Software described above. If we acquire or make investments in complementary companies, products, services and technologies, the acquisitions and investments will involve a number of risks, including:

·we have limited experience acquiring or making investments in complementary companies, products, services and technologies;
·we may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that industry or economic conditions change, all of which may generate a future impairment charge;
·we may have difficulty integrating the operations and personnel of the acquired business and may have difficulty retaining the key personnel of the acquired business;
·we may have difficulty incorporating the acquired technologies or products with our existing product lines;
·there may be customer confusion where our products overlap with those that we acquire;
·our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations;
·we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;
·the acquisition may result in litigation from terminated employees or third parties; and
·we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

 

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time.

 

From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

 

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The consideration paid for an investment or acquisition may also affect our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash, including a portion of the net proceeds of this offering. To the extent we issue shares of our capital stock or other rights to purchase shares of our capital stock, including options or other rights, our existing stockholders may be diluted, and our earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs, including write-offs of acquired in-process research and development costs, and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

 

We may be unable to scale our operations successfully and fail to attain our planned growth.

 

Our plan is to grow our business rapidly. Our growth, if it occurs as planned, will place significant demands on our management, as well as our financial, administrative and other resources. We will need to hire highly skilled personnel to effectuate our planned growth. There is no guarantee that we will be able to locate and retain qualified personnel for such positions, which would likely hinder our ability to manage operations. Furthermore, we cannot guarantee that any of the systems, procedures and controls we put in place will be adequate to support the commercialization of our products or other operations. Our operating results will depend substantially on the ability of our officers and key employees to manage changing business conditions and to implement and improve our financial, administrative and other resources. If we are unable to respond to and manage changing business conditions, or the scale of our products, services and operations, then the quality of our services, our ability to retain key personnel and our business could be harmed.

 

RISKS RELATED TO OUR CAPITAL STRUCTURE

 

We have the obligation to issue additional shares of our Class A Common Stock in the future. The issuance of such additional shares of common and preferred stock may depress the price of our common stock and cause dilution to existing shareholders.

 

We have both the ability as well as outstanding obligations to issue additional shares of common stock in the future. These include the following:

·As of July 9, 2014, there were 200,000,000 shares of common stock reserved for issuance upon conversion of a convertible note payable agreement with St. George Investments, Inc.
·As of July 9, 2014, there were 1,400,000,000 shares of common stock reserved for issuance upon conversion of a convertible note payable agreement with JMJ Financial, Inc.

 

We also have outstanding obligations to issue additional shares of common stock in the future related to conversions of Preferred Stock and Convertible Class B Common Stock, provided that we do not currently have a sufficient number of authorized but unissued shares to issue such securities, given our 9,000,000,000 total authorized shares. These shares are held entirely by our CEO and other related parties who have the ability to amend the Articles of Incorporation and increase the authorized shares as necessary without the approval or consent of our minority shareholders. These include the following:

·As of July 9, 2014, there were 4,078,038,438 shares of common stock reserved for issuance upon conversion of 1,000 shares of outstanding Convertible Series A Preferred Stock.
·As of July 9, 2014, there were 679,673,073 shares of common stock reserved for issuance upon conversion of 1,000 shares of outstanding Convertible Series B Preferred Stock.
·As of July 9, 2014, there were 8,831,166,600 shares of common stock reserved for issuance upon conversion of 2,943,722,200 shares of outstanding Convertible Series B Preferred Stock.
·As of July 9, 2014, there were 23,000,000 shares of common stock reserved for issuance upon conversion of a Convertible Class B Common Stock.

 

Any shares of common stock issued pursuant to these conversions would further dilute the percentage ownership of existing stockholders. We may issue additional shares in the future other than as listed above. There are no preemptive rights in connection with our common stock. Thus, the percentage ownership of existing stockholders may be diluted if we issue additional shares in the future. Our Board of Directors intends to use its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any such grant. Nonetheless, future issuances of additional shares pursuant to conversions granted could cause immediate and substantial dilution to the net tangible book value of shares of common stock issued and outstanding immediately before such transaction. Any future decrease in the net tangible book value of such issued and outstanding shares could materially and adversely affect the market value of the shares. Additionally, our Board of Directors is authorized to issue shares of preferred stock in one or more series and to fix the voting powers, preferences and other rights and limitations of the preferred stock. Shares of preferred stock may be issued by our Board of Directors without shareholder approval, with voting powers and such preferences and relative, participating, optional or other special rights and powers as determined by our Board of Directors, which may be greater than the shares of common stock currently outstanding. As a result, shares of preferred stock (similar to the above) may be issued by our Board of Directors which cause the holders to have majority voting power over our shares, provide the holders of the preferred stock the right to convert the shares of preferred stock they hold into shares of our common stock, which may cause substantial dilution to our then common stock shareholders and/or have other rights and preferences greater than those of our common stock shareholders including having a preference over our common stock with respect to dividends or distributions on liquidation or dissolution.

 

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Investors should keep in mind that the Board of Directors has the authority to issue additional shares of common stock and preferred stock, which could cause substantial dilution to our existing shareholders. Additionally, the dilutive effect of any preferred stock which we may issue may be exacerbated given the fact that such preferred stock may have voting rights and/or other rights or preferences which could provide the preferred shareholders with substantial voting control over us subsequent to the date of this filing and/or give those holders the power to prevent or cause a change in control, even if that change in control might benefit our shareholders. As a result, the issuance of shares of common stock and/or preferred stock may cause the value of our securities to decrease.

 

Finally, investors should keep in mind that our majority shareholders have the right in their sole discretion (because they exercise super majority voting control over our securities) to increase our authorized but unissued shares of common and preferred stock in their sole discretion without approval of the minority shareholders of the Company. Such increases in authorized shares make additional authorized but unissued shares available for issuance, which could further dilute existing shareholders and/or cause our majority shareholders to gain even greater ownership of our voting securities.

 

We may issue additional stock without shareholder consent.

 

Our board of directors has authority, without action or vote of the shareholders, to issue all or part of our authorized but unissued shares. Additional shares may be issued in connection with future financing, acquisitions, employee stock plans, or otherwise. Any such issuance will dilute the percentage ownership of existing shareholders. The board of directors can issue preferred stock in one or more series and fix the terms of such stock without shareholder approval. We currently have 39,998,000 shares of preferred stock undesignated. Preferred stock may include the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. The issuance of preferred stock could adversely affect the rights of the holders of common stock and reduce the value of the common stock. In addition, specific rights granted to holders of preferred stock could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our shareholders. Such issuance could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

We may exchange non-convertible debt for convertible debt without shareholder consent which may cause immediate and substantial dilution.

 

Our board of directors has authority, without action or vote of the shareholders, to exchange non-convertible debts for convertible debts with agreement by the lenders. As of December 31, 2013, we had a total of $1,784,950 of non-convertible debts on our balance sheet, and a total of $266,877 of outstanding convertible debts. Any conversion of the Convertible Notes and sale of shares of common stock issuable in connection with the conversion thereof will likely cause the value of our common stock, if any, to decline in value, as described in greater detail under the Risk Factors below.

 

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The Convertible Notes are convertible into shares of our common stock at a discount to market.

 

The conversion price of the $74,900 in Convertible Notes (principal only) currently outstanding as of July 9, 2014, is convertible at various prices discounted to market as depicted in the table below, in addition to the 6,210,861,173 shares of Class A Common Stock issued in conversion of a total of $989,084 of principal and interest over various dates from January 1, 2013 through July 9, 2014, including 584,333,745 shares pursuant to the conversion of $58,433 of previously non-convertible related party debt. In addition, a total of $60,500 of principal on convertible notes was repaid in cash during the year ended December 31, 2013. As a result, any conversion of the Convertible Notes and sale of shares of common stock issuable in connection with the conversion thereof will likely cause the value of our common stock, if any, to decline in value, as described in greater detail under the Risk Factors below.

 

              Potential issuable shares at various conversion prices
              below the most recent market price of $0.0002 per share
    Conversion   Principal   100%   75%   50%   25%
Lender / Origination   Terms   Borrowed   $0.0002   $0.00015   $0.0001   $0.00005
                           
JMJ Financial
 (Second JMJ Note)
 November 13, 2013
  Convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.00009 per share, whichever is greater.   $ 33,000   165,000,000   220,000,000   330,000,000   660,000,000
                           
St. George Investments, Inc.
 (First St. George Note)
 September 5, 2013
  Convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest closing bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater.   $ 41,900   209,500,000   279,333,333   419,000,000   838,000,000
                           
        $ 74,900   374,500,000   499,333,333   749,000,000   1,498,000,000

 

The issuance and sale of common stock upon conversion of the Convertible Notes may depress the market price of our common stock.

 

As sequential conversions of the Convertible Notes and sales of such converted shares take place, the price of our common stock may decline, and as a result, the holder of the Convertible Notes will be entitled to receive an increasing number of shares in connection with its conversions, which shares could then be sold in the market, triggering further price declines and conversions for even larger numbers of shares, to the detriment of our investors. The shares of common stock which the Convertible Notes are convertible into may be sold without restriction pursuant to Rule 144. As a result, the sale of these shares may adversely affect the market price, if any, of our common stock.

 

In addition, the common stock issuable upon conversion of the Convertible Notes may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company's stock in the market than there is demand for that stock. When this happens the price of the Company's stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. The various Convertible Notes will be convertible into shares of our common stock at various discounts to market, which provide the holders with the ability to sell their common stock at or below market and still make a profit. In the event of such overhang, the note holders will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock (which to date has been very limited) cannot absorb the discounted shares, then the value of our common stock will likely decrease.

 

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The issuance of common stock upon conversion of the Convertible Notes will cause immediate and substantial dilution.

 

The issuance of common stock upon conversion of the Convertible Notes will result in immediate and substantial dilution to the interests of other stockholders since the holder of the Convertible Notes may ultimately receive and sell the full amount of shares issuable in connection with the conversion of such Convertible Notes. Although the Convertible Notes may not be converted if such conversion would cause the holder thereof to own more than 4.99% of our outstanding common stock (subject to 61 days written notice of such holder’s intent to waive such restriction), this restriction does not prevent the holder of the Convertible Notes from converting some of its holdings, selling those shares, and then converting the rest of its holdings, while still staying below the 4.99% limit. In this way, the holder of the Convertible Notes could sell more than this limit while never actually holding more shares than this limit allows. If the holder of the Convertible Notes chooses to do this, it will cause substantial dilution to the then holders of our common stock.

 

The continuously adjustable conversion price feature of our Convertible Notes could require us to issue a substantially greater number of shares, which may adversely affect the market price of our common stock and cause dilution to our existing stockholders.

 

Our existing stockholders will experience substantial dilution of their investment upon conversion of the Convertible Notes. The Convertible Notes are convertible into shares of common stock at various discounted prices to market. As a result, the number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of our common stock, which decrease would cause substantial dilution to our existing stockholders. As sequential conversions and sales take place, the price of our common stock may decline, and if so, the holder of the Convertible Notes would be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders and would likely cause the value of our common stock to decline.

 

The continuously adjustable conversion price feature of our Convertible Notes may encourage the holder of the Convertible Notes to sell short our common stock, which could have a depressive effect on the price of our common stock.

 

The Convertible Notes are convertible into shares of our common stock at various discounted prices to market. The significant downward pressure on the price of our common stock as the holder of the Convertible Notes converts and sells material amounts of our common stock could encourage investors to short sell our common stock. This could place further downward pressure on the price of our common stock. In addition, not only the sale of shares issued upon conversion of the Convertible Notes, but also the mere perception that these sales could occur, may adversely affect the market price of our common stock.

 

The price of our common stock may be volatile.

 

In the past several years, technology stocks have experienced high levels of volatility and significant declines in value from their historic highs. The trading price of our common stock may fluctuate substantially. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

·price and volume fluctuations in the overall stock market from time to time;
·significant volatility in the market price and trading volume of software companies;
·actual or anticipated changes in our earnings or fluctuations in our operating results;
·actual or anticipated changes in the expectations of securities analysts;
·announcements of technological innovations, new solutions, strategic alliances or significant agreements by us or by our competitors;
·general economic conditions and trends;
·major catastrophic events;
·sales of large blocks of our stock; or
·recruitment or departures of key personnel.

 

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In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business.

 

We may experience a decline in revenue or volatility in our operating results, which may adversely affect the market price of our common stock.

 

We cannot predict our future revenue with certainty because of many factors outside of our control. A significant revenue or profit decline, lowered forecasts or volatility in our operating results could cause the market price of our common stock to decline substantially. Factors that could affect our revenue and operating results include the following:

·the possibility that our future customers may cancel, defer or limit purchases as a result of reduced information technology budgets;
·the possibility that our future customers may defer purchases of our software applications in anticipation of new software applications or updates from us or our competitors;
·the ability of the Company or its distributors to meet their sales objectives;
·market acceptance of our new applications and enhancements;
·our ability to control expenses;
·changes in our pricing and distribution terms or those of our competitors;
·the demands on our management, sales force and services infrastructure as a result of the introduction of new software applications or updates; and
·the possibility that our business will be adversely affected as a result of the threat of terrorism or military actions taken by the United States or its allies.

 

Our expense levels are relatively fixed and are based, in part, on our expectations of our future revenue. If revenue levels fall below our expectations, our net income would decrease because only a small portion of our expenses varies with our revenue. Therefore, any significant decline in revenue for any period could have an immediate adverse impact on our results of operations for the period. We believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, our results of operations could be below expectations of public market analysts and investors in future periods, which would likely cause the market price of our common stock to decline.

 

The President and Chief Executive officer of the Company has significant influence over our Company.

 

Shaun Passley, Ph.D. beneficially owns approximately 4% of our Class A Common Stock, and 100% of our Convertible Class B Common Stock, which is entitled to 10,000 votes per share, which represents approximately 97% of our aggregate outstanding voting stock. Dr. Passley, as majority shareholder, sole director, President and Chief Executive Officer of the Company possesses significant influence over our Company, giving him the ability, among other things, to elect a majority of the Board of Directors and to approve significant corporate transactions. Such stock ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company. While Dr. Passley has managed the Company since its inception, he has no other accounting or finance experience and has no experience relating to a public company.

 

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

 

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts covering us downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our Company, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

 

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Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.

 

We have no committed source of financing. Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock. Our Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock. In addition, if a trading market develops for our common stock, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.

 

There is currently a limited trading market for our common stock and we cannot ensure that one will ever develop or be sustained.

 

To date there has not been a significant liquid trading market for our common stock. We cannot predict how liquid the market for our common stock might become. We currently do not satisfy the initial listing standards for any major securities exchange, although we intend to apply for such an exchange listing when we are able. Currently our common stock is traded on the OTC Pink. Should we fail to remain traded on the OTC Pink or not be able to be traded on the OTC Pink, the trading price of our common stock could suffer, the trading market for our common stock may be less liquid and our common stock price may be subject to increased volatility. Furthermore, for companies whose securities are quoted on the OTC Pink, it may be more difficult (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies and (iii) to obtain needed capital.

 

State securities laws may limit secondary trading, which may restrict the States in which and conditions under which you can sell shares.

 

Secondary trading in our common stock will not be possible in any state until the common stock is qualified for sale under the applicable securities laws of the state or there is confirmation that an exemption, such as listing in certain recognized securities manuals, is available for secondary trading in the state. If we fail to register or qualify, or to obtain or verify an exemption for the secondary trading of, the common stock in any particular state, the common stock could not be offered or sold to, or purchased by, a resident of that state. In the event that a significant number of states refuse to permit secondary trading in our common stock, the liquidity for the common stock could be significantly impacted.

 

Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protections against interested director transactions, conflicts of interest and similar matters.

 

The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.

 

Because our sole director is not an independent director, we do not currently have independent audit or compensation committees. As a result, our sole director has the ability to, among other things; determine his own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and any potential investors may be reluctant to provide us with funds necessary to expand our operations.

 

We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of the Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.

 

25
 

 

Due to the fact that we are a public reporting company we will incur significant increased costs in connection with compliance with section 404 of the Sarbanes-Oxley Act, and our management will be required to devote substantial time to new compliance initiatives.

 

As a publicly reporting company we will incur significant legal, accounting and other expenses, including expenses in connection with various new requirements on public companies imposed by the Sarbanes Oxley Act of 2002 (the “Sarbanes Oxley Act”). Additionally, our management and other personnel need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses (similar to those weakness identified by our management as discussed in this report), the market price of our stock could decline, and we could be subject to penalties or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

Investors may face significant restrictions on the resale of our common stock due to federal regulations of penny stocks.

 

As our common stock is listed on the OTC Pink, it is subject to the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Our executive offices are located at 205 W. Wacker Dr., Suite 1320, Chicago, IL 60606. The executive offices represent approximately 2,522 square feet. We occupy this space under a lease agreement between Epazz, Inc. and 205 West Wacker Property Owner, LLC which has a sixty six month term that began on September 1, 2013 and ends on February 28, 2019. The monthly rent under the lease is as follows:

 

Lease   Monthly   Minimum   Minimum
Year   Installments   Annual Rent   Annual Rent PSF
1   $ 2,417   $ 29,004   $ 11.50
2   $ 2,522   $ 30,264   $ 12.00
3   $ 2,627   $ 31,524   $ 12.50
4   $ 2,732   $ 32,784   $ 13.00
5   $ 2,837   $ 34,044   $ 13.50
6   $ 2,942   $ 35,304   $ 14.00

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become a party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

 

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 converting the debt to common stock of the Company 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. 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.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Mine safety disclosures are not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

(a) Market Information

 

The Company's Series A Common Stock is quoted on the Over-the-Counter Pink Sheets under the symbol "EPAZ” as maintained by the OTC Markets Group Inc.

 

The following table sets forth the high and low bid prices for each quarter within the last two fiscal years. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

 

    COMMON STOCK MARKET PRICE  
    HIGH     LOW  
FISCAL YEAR ENDED DECEMBER 31, 2013:            
Fourth Quarter (Quarter ended December 31, 2013)   $ 0.0010     $ 0.0004  
Third Quarter (Quarter ended September 30, 2013)   $ 0.0022     $ 0.0006  
Second Quarter (Quarter ended June 30, 2013)   $ 0.0029     $ 0.0006  
First Quarter (Quarter ended March 31, 2013)   $ 0.0077     $ 0.0010  
FISCAL YEAR ENDED DECEMBER 31, 2012:                
Fourth Quarter (Quarter ended December 31, 2012)   $ 0.0100     $ 0.0025  
Third Quarter (Quarter ended September 30, 2012)   $ 0.0450     $ 0.0051  
Second Quarter (Quarter ended June 30, 2012)   $ 0.0200     $ 0.0100  
First Quarter (Quarter ended March 31, 2012)   $ 0.0400     $ 0.0100  

 

(b) Holders of Common Stock

 

As of July 13, 2014, the Company had 2,943,722,200 shares of Class A Common Stock outstanding held by approximately 53 shareholders of record. As of July 13, 2014, the closing price of the Company's shares of common stock was $0.0001 per share. Island Stock Transfer Company (telephone: (727) 289-0010; facsimile: (727) 289-0069) is the registrar and transfer agent for our common stock.

 

Class A Common Stock, Convertible Class B Common Stock, Convertible Series A Preferred Stock, Convertible Series B Preferred Stock and Convertible Series C Preferred Stock

 

Rights to Dividends and on Liquidation. Each share of Class A Common Stock and Convertible Class B Common Stock is entitled to share equally in dividends (other than dividends declared with respect to any outstanding Preferred Stock) when and as declared by our Board of Directors. Upon liquidation, each share of Class A Common Stock and Convertible Class B Common Stock is entitled to share equally in our assets available for distribution to the holders of those shares. Any outstanding Preferred Stock would rank senior to the Class A Common Stock and Convertible Class B Common Stock in respect of liquidation rights and could rank senior to that stock in respect of dividend rights.

 

Voting--General. All voting power is vested in the holders of Class A Common Stock, Convertible Class B Common Stock and Convertible Series C Preferred Stock voting together without regard to class but with votes determined as described below. However, we could in the future create a series of Preferred Stock with voting rights equal to or greater than our Class A Common Stock, Convertible Class B Common Stock or Convertible Series C Preferred Stock ("Full Voting Preferred Stock").

 

Each holder of Class A Common Stock is entitled to one vote per share, each holder of Convertible Class B Common Stock is entitled to 10,000 votes per share, and each holder of Convertible Series C Preferred Stock is entitled to 3 votes per share. Our Convertible Series A and B Preferred Stock carry no voting rights.

 

Non-Cumulative Voting Rights. Our Class A Common Stock, Convertible Class B Common Stock, and Convertible Series C Preferred Stock, as well as any Full Voting Preferred Stock we may issue, do not have cumulative voting rights.

 

Voting by Class. Holders of our Class A Common Stock, Convertible Class B Common Stock, and Convertible Series C Preferred Stock vote as one class.

 

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Miscellaneous Rights and Provisions. There are no preemptive rights, subscription rights, or redemption provisions relating to our Class A Common Stock, Convertible Class B Common Stock, Convertible Series A Preferred Stock, Convertible Series B Preferred Stock and Convertible Series C Preferred Stock and none of the shares carry any liability for further calls. Our Class B Common Stock is convertible into shares of Class A Common on a 1:1 basis. Our Convertible Series A Preferred Stock is convertible into 60% of the issued and outstanding shares of Class A Common Stock at the time of conversion, our Convertible Series B Preferred Stock is convertible into 10% of the issued and outstanding shares of Class A Common Stock at the time of conversion, and our Convertible Series C Preferred Stock is convertible into three (3) shares of Class A Common Stock at the time of conversion. We are not obligated to redeem or retire the Convertible Class B Common Stock, Convertible Series A Preferred Stock, Convertible Series B Preferred Stock or Convertible Series C Preferred Stock.

 

Ranking. The Convertible Series A Preferred Stock ranks senior to the Convertible Series B and C Preferred Stock, which in turn ranks senior to the Class A Common Stock, which also ranks senior to the Convertible Class B Common Stock with respect to dividends and upon liquidation.

 

As of July 13, 2014, the Company had 1,000 shares of Convertible Series A Preferred Stock outstanding, all of which are held by the Company’s Chief Executive Officer, Shaun Passley, Ph.D.. There is currently no market for the Company’s Convertible Series A Preferred Stock.

 

As of July 13, 2014, the Company had 1,000 shares of Convertible Series B Preferred Stock outstanding, which are held by the Company’s Secretary, Craig Passley (10 shares), Vivienne Passley (500 shares), the aunt of the Company’s CEO and Fay Passley (490 shares), the mother of the Company’s CEO. There is currently no market for the Company’s Convertible Series B Preferred Stock.

 

As of July 13, 2014, the Company had 2,943,722,200 shares of Convertible Series C Preferred Stock outstanding, which are held by the Company’s Chief Executive Officer, Shaun Passley, Ph.D. (2,421,052,632 shares), the Company’s Secretary, Craig Passley (60,000,000 shares), GG Mars Capital, Inc. (224,000,000 shares), a Company solely owned by Vivienne Passley, the aunt of the Company’s CEO and Star Financial Corporation (225,000,000 shares), a Company solely owned Fay Passley, the mother of the Company’s CEO. There is currently no market for the Company’s Convertible Series C Preferred Stock.

 

As of July 13, 2014, the Company had 23,000,000 shares of Convertible Class B Common Stock outstanding, all of which are held by the Company’s Chief Executive Officer, Shaun Passley, Ph.D. There is currently no market for the Company’s Convertible Class B Common Stock.

 

(c) Dividends

 

On January 1, 2013, the Company declared and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1 million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which can be paid in cash or in shares of Class A Common Stock in lieu of cash at the sole discretion of the Board of Directors. The declaration and payment of future dividends on the Common Stock will be at the sole discretion of the Board of Directors and will depend on Epazz's profitability and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant.

 

The Company has 1,000 authorized and 1,000 outstanding shares of $0.0001 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $2 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million (which has not occurred to date). The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with five business days' notice into 60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders.

 

The Company has 1,000 authorized and 1,000 outstanding shares of $0.0001 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $1 million (which dividends began accruing on January 1, 2013, due to the fact that the Company had revenue of over $1 million during fiscal 2012), and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million (which has not occurred to date). The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes a liquidation preference equal to $0.0001 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.

 

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The Company has 3,000,000,000 authorized and 2,943,722,200 outstanding shares of $0.0001 par value Series C Convertible Preferred Stock (“Series C Preferred Stock”). The Series C Preferred Stock shall accrue dividends, when, as and only if declared by the Board of Directors, out of any assets at the time legally available therefor, payable in preference and priority to any declaration or payment of any distribution on common stock of the Corporation in such calendar year. The Series C Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. Each share of Series C Preferred Stock is convertible, at the option of the holder into three (3) shares of the Company’s Class A Common Stock, with five business days' notice, provided that no conversion will take place until all holders of the Series C Preferred Stock consent to such conversion. The Series C Preferred Stock has preferential voting rights that carry three (3) voting rights for each share issued and outstanding, and shall vote together with the shares of the Common Stock of the Company, and not as a separate class.

 

(d) Securities Authorized for Issuance under Equity Compensation Plans

 

None.

 

(e) Recent Sales of Unregistered Securities

 

The following issuances of equity securities by the Company occurred during the three month period ended December 31, 2013:

 

Class A Common Stock

 

On November 13, 2013, the Company issued 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 on August 7, 2013.

 

On November 13, 2013, the Company issued 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 on August 20, 2013.

 

On November 13, 2013, the Company issued 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 on August 27, 2013.

 

On November 13, 2013, the Company issued 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 on September 7, 2013.

 

The foregoing securities issued for services were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not required.

 

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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.

 

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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.

 

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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.

 

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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”).

 

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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.

 

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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.

 

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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.

 

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

 

36
 

 

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.

 

37
 

 

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.

 

38
 

 

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.

 

39
 

 

In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on our financial position or results of operations.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40
 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41
 

 

 

 

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

 

F-1
 

 

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.

 

F-2
 

 

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.

 

F-3
 

 

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)

 

 

 

F-4
 

 

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.

 

F-5
 

 

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.

 

F-6
 

 

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.

 

F-7
 

 

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.

 

F-8
 

 

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.

 

F-9
 

 

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.

 

F-10
 

 

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:

-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.

 

F-11
 

 

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.

 

F-12
 

 

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.

 

F-13
 

 

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 

 

F-14
 

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.

 

F-15
 

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.

 

F-16
 

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.

 

F-17
 

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 

 

F-18
 

 

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 

 

F-19
 

 

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 

 

F-20
 

 

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  $ 

 

F-21
 

 

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     

 

F-22
 

 

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     

 

F-23
 

 

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     

 

 

F-24
 

 

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 

 

F-25
 

 

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 

 

F-26
 

 

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.

 

F-27
 

 

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.

 

F-28
 

 

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.

 

F-29
 

 

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.

 

F-30
 

 

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.

 

F-31
 

 

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.

 

F-32
 

 

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     

 

F-33
 

 

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%.
          

 

F-34
 

 

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 
           
F-35
 

 

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 1st of any calendar year in which the Company has generated revenue over $2 million, and an additional 24% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into 60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders. The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions.

 

F-36
 

 

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 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series B Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into 10% of the total number of then issued and outstanding shares of Class A Common Stock, provided that no conversion will take place until all holders of the Series B Preferred Stock consent to such conversion. The Series B Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series B Preferred Stock holders. The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions.

 

On July 2, 2012, the Company issued a total of 1,000 shares of convertible Series B preferred stock amongst three related parties pursuant to the exchange and extension of a promissory note owed to Star Financial Corporation, a related party. The total fair value of the preferred stock was $61,130 based on valuations performed using an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for lack of marketability.

 

Convertible Preferred Stock, Series C

Effective January 14, 2014, the Company has three billion (3,000,000,000) authorized shares of $0.0001 par value Series C Convertible Preferred Stock (“Series C Preferred Stock”). The Series C Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series C Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. Subject to certain conversion restrictions over the first three months from the original issuance date, each share of Series C Preferred Stock is convertible, at the option of the holder into three (3) shares of the Company’s Class A Common Stock, with five business days’ notice. The following conversion restrictions shall apply; (i) the holder shall be prohibited from converting any Series C Preferred shares for a period of one (1) month from the original issuance date, (ii) the holder shall be prohibited from converting not more than 30% of the Series C Preferred shares originally issued to holder during the second (2nd) month following the original issuance date, (iii) the holder shall be prohibited from converting not more than 30% (60% in total) of the Series C Preferred shares originally issued to holder during the third (3rd) month following the original issuance date, (iv) the holder shall be prohibited from converting not more than an additional 40% (100% in total) of the Series C Preferred shares originally issued to holder following the end of the third month following the original issuance date. The Series C Preferred Stock shall each vote three voting share and shall vote together with the Common Stock of the Company. The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions.

 

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.

 

F-37
 

 

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.

 

F-38
 

 

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.

 

F-39
 

 

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.

 

F-40
 

 

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.

 

F-41
 

 

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.

 

F-42
 

 

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.

 

F-43
 

 

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.

 

F-44
 

 

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.

 

F-45
 

 

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.

 

F-46
 

 

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.

 

F-47
 

 

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.

 

F-48
 

 

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.

 

F-49
 

 

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.

 

F-50
 

 

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.

 

F-51
 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our principal executive officer and principal financial officer, Shaun Passley, Ph.D., evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report. Based on that evaluation, Dr. Passley concluded that our disclosure controls and procedures are not effective, which are discussed below in more detail, in timely alerting him to material information relating to us being required to be included in our periodic SEC filings and in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses in internal control over financial reporting as identified below under the heading “Management’s Report on Internal Control over Financial Reporting.” Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.

 

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based upon this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2013 for the following reasons.

 

·The Company does not have an independent board of directors or audit committee or adequate segregation of duties due to the limited nature and resources of the Company;
·All of our financial reporting and review of critical accounting areas and disclosures and material non-standard transactions is carried out by our financial reporting consultant; and
·We have inadequate separation of duties.

 

We intend to rectify these weaknesses by implementing an independent board of directors and hiring of additional accounting personnel once we have sufficient resources available.

 

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting through the date of this report or during the quarter ended December 31, 2013, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

42
 

 

No Attestation Report by Independent Registered Accountant

 

The effectiveness of our internal control over financial reporting as of December 31, 2013 has not been audited by our independent registered public accounting firm by virtue of our exemption from such requirement as a smaller reporting company.

 

 

ITEM 9B. OTHER INFORMATION

 

Formation of Subsidiary – Terran Power, Inc., September 19, 2013

On September 19, 2013, the Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned subsidiary of the Company named Terran Power, Inc. The Company plans to file a non-provisional patent application to develop a mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing an outlet or a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.

 

Subsidiary Formation – FlexFridge, Inc., March 4, 2013

On March 4, 2013, the Board of Directors of Epazz, Inc. (the “Company”), consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc., which was later renamed, Z Fridge, Inc., and ultimately again renamed as, FlexFridge, Inc. (“FlexFridge”) on May 29, 2014. The Company has filed a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge. On November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz, Inc. received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10. There has been no material activity within FlexFridge to date.

 

Telecorp Products, Inc., Stock Purchase Agreement

On February 28, 2014, the Company entered into a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario Canada corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder and the sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding shares of Telecorp from Troy Holdings, for an aggregate purchase price of $320,000 (the “Purchase Price”). The Purchase Price was payable as follows:

 

  (a) The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and
  (b) The Company provided Troy Holdings with a Promissory Note in the amount of $120,000 (the “Telecorp Note”), which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum.

 

Additionally, the Company agreed to assume aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. As a result of the Closing, Telecorp became a wholly-owned subsidiary of the Company.

 

In connection with the Stock Purchase Agreement, the shareholders of Telecorp and the Company entered into a Non-Disclosure/Non-Compete Agreement, pursuant to which the shareholders of Telecorp and the Company, each agreed to not for a period of one (1) year, communicate or divulge to, or use for the benefit of itself or any other person, firm, association or corporation, any information in any way relating to the Proprietary Property, in competition with the business of the Company, and pursuant to the agreement, the shareholders of Telecorp agreed not to compete against the Company for one (1) year from the closing of the acquisition.

 

Zinergy (DBA) formerly Cynergy Software, Asset Purchase

On March 13, 2014, the Company entered into an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing, $25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation. The acquisition was financed in part with a software financing agreement. 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.

 

43
 

 

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.

 

Amendment to the $400,000 Convertible Promissory Note, JMJ Financial

On July 11, 2014, the Company and JMJ Financial amended the $400,000 convertible promissory note, originally dated November 13, 2013, of which $33,000, including a $3,000 OID, remains outstanding. The amendment specifies that due to the delinquent Form 10-K for the year ended December 31, 2013 and the Form 10-Q for the three months ended March 31, 2014, any future borrowings shall only be made by mutual agreement of both the borrow and lender.

 

 

 

44
 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

Our executive officers and director and their ages as of July 9, 2014 are as follows:

 

NAME AGE POSITION
     
Shaun Passley, Ph.D. 35 President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors
     
Craig Passley 42 Secretary

 

Set forth below is a brief description of the background and business experience of our executive officers and director.

 

Shaun Passley, Ph.D.

 

Shaun Passley, Ph.D. has been the President, Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors since our inception in March 2000. Dr. Passley obtained his Bachelor’s degree from De Paul University in Finance in 2000, his Master’s Degree from DePaul University in Information Technology in 2006, his MBA from Benedictine University in 2007, Master’s Degree from Northwestern University in Product Development in 2011 and Ph.D. from Benedictine University in 2014. Dr. Passley is a candidate for Masters of Law in Intellectual Property for Northwestern University expected to graduate in 2017.

 

Directors Qualifications:

 

Dr. Passley is a college graduate with one Ph.D. and three master’s degrees in software, information technology and an MBA. Dr. Passley has over 15 years of experience in the software industry.

 

Craig Passley

 

Craig Passley has served as our Secretary since May 2005. Since November 2000, Mr. Passley has worked for KB Builders. Mr. Passley obtained his Bachelor’s degree from Bradley University in 1997 and his Master’s Degree from the Keller Graduate School of Management in 2000 and MBA from Lake Forest School of Management in 2008.

 

Shaun Passley, Ph.D. and Craig Passley are brothers.

 

The Board of Directors and Committees

 

Our Board of Directors does not maintain a separate audit, nominating or compensation committee. Functions customarily performed by such committees are performed by our Board of Directors as a whole. Our director is elected annually and holds office until our next annual meeting of the shareholders and until his successors are elected and qualified. Officers will hold their positions at the pleasure of the Board of Directors, absent any employment agreement. Our officers and director may receive compensation as determined by us from time to time by vote of the Board of Directors. Such compensation might be in the form of stock options. Directors may be reimbursed by the Company for expenses incurred in attending meetings of the Board of Directors. Vacancies in the Board are filled by majority vote of the remaining director(s).

 

Independence of Directors

 

We are not required to have independent members of our Board of Directors, and do not anticipate having independent directors until such time as we are required to do so.

 

Involvement in Certain Legal Proceedings

 

No Executive Officer or director of the Company has been the subject of any order, judgment, or decree of any Court of competent jurisdiction, or any regulatory agency permanently or temporarily enjoining, barring suspending or otherwise limiting him from acting as an investment advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any securities.

 

No executive officer or director of the Company has been convicted in any criminal proceeding (excluding traffic violations) or is the subject of a criminal proceeding which is currently pending.

 

No current executive officer or director of the Company is the subject of any pending legal proceedings.

 

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Limitation of Liability and Indemnification of Officers and Directors

 

Under the Illinois Business Corporation Act of 1983, we have the authority to indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal action or proceeding, that the person had reasonable cause to believe that his or her conduct was unlawful. Provided further that no indemnification shall be made with respect to any claim, issue, or matter as to which such person has been adjudged to have been liable to the Company, unless, and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper.

 

Any indemnification by the Company shall be made upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth as described above. Such determination shall be made with respect to a person who is a director or officer at the time of the determination: (1) by the majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, (2) by a committee of the directors who are not parties to such action, suit, or proceeding, even though less than a quorum, designated by a majority vote of the directors, (3) if there are no such directors, or if the directors so direct, by independent legal counsel in a written opinion, or (4) by the shareholders.

 

Expenses (including attorney's fees) incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Company. Such expenses (including attorney's fees) incurred by former directors and officers or other employees and agents may be so paid on such terms and conditions, if any, as the Company deems appropriate.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), may be permitted to directors, officers or persons controlling Epazz pursuant to the foregoing provisions, Epazz has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Board Committees

 

Director Independence. The board of directors (consisting solely of Dr. Passley) has analyzed the independence of each director and has concluded that we currently don’t have any directors that are considered independent directors in accordance with the director independence standards of the NYSE Amex Equities.

 

Audit Committee. Currently, we do not have an audit committee. At this time, the board of directors (consisting solely of Dr. Passley) will perform the necessary functions of an audit committee, such as: recommending an independent registered public accounting firm to audit the annual financial statements; reviewing the independence of the independent registered public accounting firm; review of the financial statements and other required regulatory financial reporting; and reviewing management’s policies and procedures in connection with its internal control over financial reporting.

 

Additionally, we do not have a financial expert. We believe the cost related to retaining a financial expert at this time is prohibitive. However, at such time the Company has the financial resources; a financial expert will be hired.

 

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Compensation Committee. We currently do not have a compensation committee of the board of directors. Until a formal committee is established our board of directors will review all forms of compensation provided to our executive officers, directors, consultants and employees, including stock compensation. The board (consisting solely of Dr. Passley) makes all compensation decisions for the Executives and approves recommendations regarding equity awards to all elected officers of Epazz. Decisions regarding the non-equity compensation of other executive officers are made by the board.

 

Nominating Committee. We do not have a Nominating Committee or Nominating Committee Charter. Our board of directors (consisting solely of Dr. Passley) performs some of the functions associated with a Nominating Committee. We elected not to have a Nominating Committee during the year ended December 31, 2013, in that we had only two officers and one director.

 

Director Nomination Procedures. Generally, nominees for directors are identified and suggested by the members of the board or management using their business networks. The board has not retained any executive search firms or other third parties to identify or evaluate director candidates in the past and does not intend to in the near future. In selecting a nominee for director, the board or management considers the following criteria:

 

·whether the nominee has the personal attributes for successful service on the board, such as demonstrated character and integrity; experience at a strategy/policy setting level; managerial experience dealing with complex problems; an ability to work effectively with others; and sufficient time to devote to the affairs of the Company;
·whether the nominee has been the chief executive officer or senior executive of a public company or a leader of a similar organization, including industry groups, universities or governmental organizations;
·whether the nominee, by virtue of particular experience, technical expertise or specialized skills or contacts relevant to the Company’s current or future business, will add specific value as a board member; and
·whether there are any other factors related to the ability and willingness of a new nominee to serve, or an existing board member to continue his service.

 

The board or management has not established any specific minimum qualifications that a candidate for director must meet in order to be recommended for board membership. Rather, the board or management will evaluate the mix of skills and experience that the candidate offers, consider how a given candidate meets the board’s current expectations with respect to each such criterion and make a determination regarding whether a candidate should be recommended to the stockholders for election as a director. During 2013, the Company received no recommendation for directors from its stockholders.

 

Report of the Audit Committee

 

Our board of directors has reviewed and discussed our audited financial statements for the fiscal year ended December 31, 2013 with senior management. The board of directors has also discussed with M&K CPAS, PLLC, our independent auditors, the matters required to be discussed by the statement on Auditing Standards No. 61 (Communication with Audit Committees) and received the written disclosures and the letter from M&K required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees). The board of directors has discussed with M&K the independence of M&K as our auditors. Finally, in considering whether the independent auditors provision of non-audit services to us is compatible with the auditors’ independence for M&K, our board of directors has recommended that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for filing with the United States Securities and Exchange Commission. Our board of directors did not submit a formal report regarding its findings.

 

 

BOARD OF DIRECTORS

Shaun Passley, Ph.D.

 

 

Notwithstanding anything to the contrary set forth in any of our previous or future filings under the United States Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this report in future filings with the Securities and Exchange Commission, in whole or in part, the foregoing report shall not be deemed to be incorporated by reference into any such filing.

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Stock Option Grants

 

We have not granted any stock options to our executive officers since our incorporation.

 

Employment Agreements

 

On September 6, 2012, we entered into an employment agreement with Shaun Passley, Ph.D., our Chief Executive Officer, President, and Chairman of the Board of Directors which had a term of ten (10) years. Compensation pursuant to the agreement calls for a base salary of $180,000 per year; of which $30,000 shall be payable annually in cash and $150,000 shall be payable in shares of the Company’s Common Stock at the rate of $0.006 per share, or 25,000,000 shares per year. In addition, the Company issued 1 billion shares of Class A Common Stock to the Company’s CEO as a bonus in consideration for various services performed, and to be performed over a ten year period beginning on September 6, 2012, provided that all of the shares remain subject to forfeiture until such time, if ever, as we generate annual revenues of at least $10 million, subject to the below termination provisions. The total fair value of the common stock was $6,000,000 based on the closing price of the Company’s common stock on the date of grant, which has been presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares. In the event of the termination of Dr. Passley’s employment agreement for cause by the Company or without good reason by Dr. Passley, any non-vested shares are to be cancelled and he is to be paid any consideration he is owed through the date of termination. In the event of the termination of Dr. Passley’s employment agreement for good reason (as described in the agreement) by Dr. Passley or without cause by the Company, he is due eight additional weeks of compensation and all non-vested shares vest to him immediately. In the event of the termination of Dr. Passley’s employment agreement for any other reason, he is due eight weeks of additional salary and any non-vested shares are to be cancelled.

 

On August 16, 2013, the Company amended Dr. Passley’s employment agreement to increase the cash portion of his compensation from $30,000 per year to $100,000 in the initial year of the agreement only. All other terms remain in effect, and the shares of stock awarded as a bonus as previously disclosed were granted in addition to the stock based compensation outlined in the original agreement.

 

We do not have an employment or consultant agreement with Craig Passley, our Secretary, however on March 20, 2013, we granted 60 million shares to Craig Passley for services rendered between 2012 and 2021. The shares vest annually over the 10 year period with the first 6 million vesting upon the grant date. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Director Compensation

 

Our Board of Directors, currently consisting solely of Shaun Passley, does not currently receive any consideration for its service as a member of the Board of Directors. The Board of Directors reserves the right in the future to award the members of the Board of Directors cash or stock based consideration for their services to the Company, which awards, if granted shall be in the sole determination of the Board of Directors.

 

Executive Compensation Philosophy

 

Our Board of Directors, consisting solely of Dr. Passley, determines the compensation given to our executive officers in its sole determination. Dr. Passley in his capacity as our sole director has the power to set his own compensation, without the required approval of any other individual or shareholder. Additionally, our Board of Directors, currently consisting solely of Dr. Passley, reserves the right to issue our executives shares of Common Stock issued in consideration for services rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s performance in the future. This package may also include long-term stock based compensation to certain executives which is intended to align the performance of our executives with our long-term business strategies. Additionally, while our Board of Directors has not granted any performance based stock options to date, the Board of Directors reserves the right to grant such options in the future, if the Board in its sole determination believes such grants would be in the best interests of the Company.

 

Incentive Bonus

 

The Board of Directors may grant incentive bonuses to our executive officers in its sole discretion, if the Board of Directors believes such bonuses are in the Company’s best interest, after analyzing our current business objectives and growth, if any, and the amount of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of such executives.

 

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Long-term, Stock Based Compensation

 

In order to attract, retain and motivate executive talent necessary to support the Company’s long-term business strategy we may award certain executives with long-term, stock-based compensation in the future, in the sole discretion of our Board of Directors, which we do not currently have any immediate plans to award.

 

Summary Compensation Table

 

The following table sets forth the compensation of our executive officers for the years ended December 31, 2013, 2012 and 2011, respectively:

 

          Stock   All Other     
Name and Principal Position  Year  Salary   Awards   Compensation   Total 
                    
Shaun Passley, Ph.D.,(1)  2013  $108,016    $1,499,500(2-5)  $-0-   $1,607,516 
Chief Executive Officer, Chief Financial Officer,  2012  $82,816    $758,236(6-10)  $-0-   $841,052 
and Chairman of the Board of Directors  2011  $23,000   $-0-   $-0-   $23,000 

 

 

(1)Other than the named executive officer above, the Company had no other executive officers who made more than $100,000 in total compensation for the years ended December 31, 2013, 2012 or 2011.
(2)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 was expensed during 2013 and $357,368 is presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.
(3)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.
(4)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.
(5)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.
(6)On July 1, 2012, the Company issued 3,000,000 shares of Convertible Class B Common Stock to Shaun Passley, Ph.D., the Company’s sole director and Chief Executive Officer for services provided and personal guaranties associated with previous acquisition activities. The fair value of the class B common stock was $24,000 based on valuations performed using an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for lack of marketability.
(7)On July 2, 2012, the Company issued 1,000 shares of convertible Series A Preferred Stock to Shaun Passley, Ph.D., the Company’s sole director and Chief Executive Officer for services provided and personal guaranties associated with previous acquisition activities. The total fair value of the preferred stock was $229,236 based on valuations performed using an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for lack of marketability.
(8)On July 19, 2012, the Company issued 30,000,000 shares of Class A Common Stock to Shaun Passley, Ph.D., the Company’s sole director and Chief Executive Officer in consideration for providing a personal guaranty and collateral on twelve loans over the past 10 years. The total fair value of the common stock was $375,000 based on the closing price of the Company’s common stock on the date of grant.
(9)On August 27, 2012, the Company issued 20,000,000 shares of Class A Common Stock to Shaun Passley, Ph.D., the Company’s sole director and Chief Executive Officer in consideration for providing product development services. The total fair value of the common stock was $130,000 based on the closing price of the Company’s common stock on the date of grant.
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(10)On September 6, 2012, the Company issued 1 billion shares of Class A Common Stock to Shaun Passley, Ph.D., the Company’s sole director and Chief Executive Officer in consideration for various services performed, and to be performed over a ten year period beginning on September 6, 2012. The total fair value of the common stock was $6,000,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. No shares have yet vested; therefore the fair value of $6,000,000 was excluded from compensation. The services performed and vesting periods are as follows:
Vesting  Shares   Fair    
Terms  Granted    Value(e)   Services Performed
(a)    250,000,000   $ 1,500,000   Base salary of 25 million shares per year over a ten year term
(b)   225,000,004    1,350,000   Compensation bonus for services provided
(b)   25,000,000    150,000   Compensation for services provided related to the acquisition of IntelliSys
(b)   25,000,000    150,000   Compensation for services provided related to the acquisition of PRM
(b)   25,000,000    150,000   Compensation for services provided related to the acquisition of DFI
(b)   25,000,000    150,000   Compensation for services provided related to the acquisition of K9 Bytes
(b)   25,000,000    150,000   Compensation for services provided related to the acquisition of AutoHire Software
(b)   33,333,333    200,000   Compensation for services provided related to the acquisition of MS Health
(c)   33,333,333    200,000   Compensation for services provided related to the acquisition of a future acquisition
(b)   33,333,333    200,000   Compensation for use of the CEO's personal residence as collateral on various loans
(d)   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    

 

(a) Vests annually at a rate of 1/10th per year from the anniversary date of the employment agreement (September 6, 2012), subject to the recognition of at least $10 million in revenues for any calendar year.

(b) Vests subject to the recognition of at least $10 million in revenues for any calendar year.

(c) Vests upon the latter of both, a) the future closing of an acquisition, and b) the recognition of at least $10 million in revenues for any calendar year.

(d) Vests annually at a rate of 1/9th per year from the anniversary date of the employment agreement (September 6, 2012), subject to the recognition of at least $10 million in revenues for any calendar year.

(e) The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.

(11)On July 29, 2010, the Company issued 20,000,000 shares of Class A Common Stock to Shaun Passley, Ph.D., the Company’s sole director and Chief Executive Officer as compensation for management services rendered. On May 11, 2011, the compensation agreement was amended such that the 20,000,000 shares will be earned over five years, monthly, following the first year when revenues exceed $2 million. The fair value of the common stock exchanged was $800,000 based on the closing stock price at the date of agreement. None of these shares have vested as of the date of this report.

 

CORPORATE GOVERNANCE

 

The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission (the “SEC”) and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations. The Company has not formally adopted a written code of business conduct and ethics that governs the Company’s employees, officers and directors as the Company is not required to do so.

 

In lieu of an Audit Committee, the Company’s Board of Directors is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company’s independent public accountants. The Board of Directors reviews the Company's internal accounting controls, practices and policies.

 

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table presents information, to the best of our knowledge, about the beneficial ownership of our common stock on July 13, 2014, held by those persons known to beneficially own more than 5% of our capital stock and by our directors and executive officers. The percentage of beneficial ownership for the following table is based on 6,796,730,730 shares of Class A Common Stock issued and outstanding, 23,000,000 shares of our Convertible Class B Common Stock issued and outstanding (which each vote 10,000 voting shares), 1,000 shares of Series A Convertible Preferred Stock (which are convertible at any time into shares totaling 60% of our outstanding Class A Common Stock) and 1,000 shares of Series B Convertible Preferred Stock (which are convertible at any time into shares totaling 10% of our outstanding Class A Common Stock) issued and outstanding as of July 13, 2014.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes (unless footnoted) shares of common stock that the stockholder has a right to acquire within 60 days after July 13, 2014, through the exercise of any option, warrant or other right (including the conversion of the preferred stock). The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options, warrants or other convertible securities into shares of our common stock, unless otherwise stated. Inclusion of shares in the table does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, (i) each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity, and (ii) the address of each person or entity named in the table is c/o Epazz, Inc., 205W. Wacker Dr., Suite 1320, Chicago, Illinois 60606.

 

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    Class A    Convertible Class B     Convertible Series A 
    Common Stock    Common Stock     Preferred Stock 
    Number of  % of     Number of   % of   Total Voting     Number of   % of   Class A Common Stock 
Name of Beneficial Owner(1)   Shares(2)  Class     Shares  Class(3)  Shares     Shares   Class(4)   Convertible Into 
Officers and Directors:                       
Shaun Passley, CEO, CFO and Director    265,372,498 4%   23,000,000 100%  230,000,000,000   1,000 100%  4,078,038,438
Craig Passley, Secretary    10,050 *      –  –   –
Directors and Officers as a Group (2 persons)   265,382,548 4%   23,000,000 100% 230,000,000,000    1,000 100%   4,078,038,438
5% Holders:                       
Vivienne Passley(7)   81,590,643 9%    –  –    –   –  –

 

 

       Convertible Series B     Convertible Series C     
       Preferred Stock     Preferred Stock     Total 
       Number of   % of   Class A Common Stock     Number of   % of   Class A Common Stock     Voting 
Name of Beneficial Owner(1)      Shares   Class(5)   Convertible Into     Shares   Class(6)   Convertible Into     Power 
Officers and Directors:                       
Shaun Passley, CEO, CFO and Director          –    –   2,421,052,632 82% 7,263,157,896   97%
Craig Passley, Secretary           10 1%  6,796,731    60,000,000 2%   180,000,000   *
Directors and Officers as a Group (2 persons)            10 1%   6,796,731   2,481,052,632 84% 7,443,157,896   97%
5% Holders:                       
Vivienne Passley(7)             500 50% 339,836,537 224,000,000 8%  672,000,000   *

____________________

* less than 1%

 

(1) Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all securities owned by such person.

(2) Does not include shares of Class A Common Stock issuable upon conversion of outstanding shares of Convertible Class B Common Stock, Convertible Series A Preferred Stock or Convertible Series B Preferred Stock which are reported separately in the table or described in the footnotes below.

(3) Percentage of beneficial ownership is based upon 10,500,000 shares of Convertible Class B Common Stock outstanding as of July 13, 2014. Each share of Convertible Class B Common Stock votes 10,000 voting shares on all shareholder matters and converts at the option of the holder thereof into Class A Common Stock on a one-for-one basis.

(4) Percentage of beneficial ownership is based upon 1,000 shares of Convertible Series A Preferred Stock outstanding as of July 13, 2014. The Convertible Series A Preferred Stock does not have any voting rights (other than specifically to matters associated with the Convertible Series A Preferred Stock) and all Convertible Series A Preferred Stock shares are convertible at the option of the holders thereof into 60% of our then outstanding Class A Common Stock.

(5) Percentage of beneficial ownership is based upon 1,000 shares of Convertible Series B Preferred Stock outstanding as of July 13, 2014. The Convertible Series B Preferred Stock does not have any voting rights (other than specifically to matters associated with the Convertible Series B Preferred Stock) and all Convertible Series B Preferred Stock shares are convertible at the option of the holders thereof into 10% of our then outstanding Class A Common Stock.

(6) Percentage of beneficial ownership is based upon 2,943,722,200 shares of Convertible Series C Preferred Stock outstanding as of July 13, 2014. The Convertible Series C Preferred Stock carries 3 voting rights for each share issued and outstanding and all Convertible Series C Preferred Stock shares are convertible at the option of the holders thereof into 3 shares of Class A Common Stock.

(7) Related Party, Vivienne Passley is the aunt of the Company’s CEO, Shaun Passley, Ph.D.

(8) Includes 50 shares held in the name of IT Business Solutions Group, Inc., which is a defunct entity. Dr. Passley beneficially owns the shares.

(9) Includes 28,231,526 million shares held in the name of GG Mars Capital, Inc., which is 100% owned by Vivienne Passley.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE

 

Related Party Debt Financing Arrangements

 

On August 15, 2013, GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO, acquired a note from another independent lender and the Company subsequently exchanged the promissory note for an unsecured $14,838 convertible promissory note that carried an 11% interest rate (“First GG Mars Note”). The principal and interest was convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for the one hundred and twenty (120) days prior to the conversion date, or $0.00001 per share, whichever was greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of $14,838 was immediately converted at the election of the note holder into 46,856,526 shares.

 

On July 7, 2012, the Company issued an unsecured $440,849 convertible promissory note due to a related party, which carries a 10% interest rate (“Star Convertible Note”), and matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 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.

 

We borrow money from our Chief Executive Officer, Shaun Passley, Ph.D. and other related parties periodically under verbal agreements. We owed $-0- and $-0- as of December 31, 2013 and 2012, respectively. A total of $209,380 was advanced and repaid by the CEO during the year ended December 31, 2013.

 

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Related Party Equity Issuances

 

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.

 

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.

 

53
 

 

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.

 

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.

 

54
 

 

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.

 

Dividends Payable

 

On January 1, 2013, the Company declared and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1 million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which can be paid in cash or in shares of Class A Common Stock in lieu of cash. These Dividends are payable to related parties.

 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The following table shows the fees paid or accrued for the audit and other services provided by our independent auditors for 2013 and 2012.

 

   2013   2012 
Audit fees:          
M&K CPAS, PLLC  $27,500   $26,500 
Audit-related fees:          
M&K CPAS, PLLC        
Tax fees:          
M&K CPAS, PLLC        
All other fees:        
Total fees paid or accrued to our principal accountant  $27,500   $26,500 

 

We do not have an Audit Committee. Our board of directors acted as the Company's Audit Committee during fiscal 2013, recommending a firm of independent certified public accountants to audit the annual financial statements; reviewing the independent auditors’ independence, the financial statements and their audit report; and reviewing management's administration of the system of internal accounting controls.

 

Audit Fees: Consist of the aggregate fees, including expenses, billed by the Company's principal accountants for professional services rendered for the audit of the Company's consolidated financial statements and for the review of the Company's financial information included in its quarterly reports or services that are normally provided in connection with statutory and regulatory filings or engagements.

 

Audit Related Fees: Consist of the aggregate fees, including expenses, billed by principal accountants for assurance and related services reasonably related to the performance of the Company's audit or review of the Company's financial statements.

 

Tax Fees: Consist of the aggregate fees, including expenses, billed by principal accountants for tax compliance, tax advice and tax planning.

 

 

55
 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

      Incorporated by reference
Exhibit Exhibit Description Filed herewith Form Period ending Exhibit Filing date
3.1 Articles of Incorporation   SB-2 12/04/06 X 12/04/06
3.2 Articles of Amendment   SB-2 12/04/06 X 12/04/06
3.3 Articles of Amendment   SB-2 12/04/06 X 12/04/06
3.4 Articles of Amendment   SB-2 12/04/06 X 12/04/06
3.5 Statement of Change of Registered Agent   SB-2 12/04/06 X 12/04/06
3.6 Articles of Amendment   SB-2 12/04/06 X 12/04/06
3.7 Amended and Restated By-Laws   SB-2 12/04/06 X 12/04/06
3.8 Articles of Amendment   10-Q 09/30/12 X 12/18/12
3.9 Articles of Amendment   10-K 12/31/12 X 06/03/13
4.1 Form of Stock Certificate   SB-2 12/04/06 X 12/04/06
10.1 February 22, 2013 – Equipment Finance Agreement with Summit Funding Group, Inc.   10-Q 03/31/13 X 06/14/13
10.2 March 7, 2013 – Lease Agreement with Baytree National Bank & Trust Company   10-Q 03/31/13 X 06/14/13
10.3 Promissory Note with Star Financial Corporation, April 1, 2013   10-Q 06/30/13 X 08/19/13
10.4 Promissory Note with Star Financial Corporation, April 12, 2013   10-Q 06/30/13 X 08/19/13
10.5 Promissory Note with Star Financial Corporation, May 16, 2013   10-Q 06/30/13 X 08/19/13
10.6 Promissory Note with Star Financial Corporation, June 12, 2013   10-Q 06/30/13 X 08/19/13
10.7 First JMJ Financial Convertible Promissory Note, June 12, 2013   10-Q 06/30/13 X 08/19/13
10.8 Software Finance Agreement with CIT Finance, LLC, May 1, 2013   10-Q 06/30/13 X 08/19/13
10.9 Loan and Security Agreement with Small Business Financial Solutions, LLC, April 5, 2013   10-Q 06/30/13 X 08/19/13
10.10 Merchant Agreement with Horizon Business Funding, LLC, June 11, 2013   10-Q 06/30/13 X 08/19/13
10.11 Business Loan Agreement with WebBank, June 19, 2013   10-Q 06/30/13 X 08/19/13
10.12 First Amendment to Executive Employment Agreement, August 16, 2013   10-Q 06/30/13 X 08/19/13
10.13 Promissory Note with Vivienne Passley, July 19, 2013   10-Q 09/30/13 X 11/19/13
10.14 Promissory Note with Vivienne Passley, August 12, 2013   10-Q 09/30/13 X 11/19/13
10.15 Promissory Note with Star Financial Corporation, July 31, 2013   10-Q 09/30/13 X 11/19/13
10.16 Promissory Note with Star Financial Corporation, August 2, 2013   10-Q 09/30/13 X 11/19/13
10.17 Promissory Note with Star Financial Corporation, August 7, 2013   10-Q 09/30/13 X 11/19/13
10.18 Promissory Note with Star Financial Corporation, August 27, 2013   10-Q 09/30/13 X 11/19/13
10.19 Promissory Note with GG Mars Capital, Inc., August 20, 2013   10-Q 09/30/13 X 11/19/13
10.20 Promissory Note with GG Mars Capital, Inc., September 7, 2013   10-Q 09/30/13 X 11/19/13
10.21 Convertible Promissory Note with GG Mars Capital, Inc., August 20, 2013   10-Q 09/30/13 X 11/19/13

 

56
 

 

10.22 Assignment Agreement with GG Mars Capital, Inc. and Accion Chicago, August 15, 2013   10-Q 09/30/13 X 11/19/13
10.23 Convertible Promissory Note with St. George Investments, Inc., September 5, 2013   10-Q 09/30/13 X 11/19/13
10.24 Note Purchase Agreement with St. George Investments, Inc., September 5, 2013   10-Q 09/30/13 X 11/19/13
10.25 Convertible Promissory Note with Asher Enterprises (Seventh Asher Note), August 19, 2013   10-Q 09/30/13 X 11/19/13
10.26 Securities Purchase Agreement with Asher Enterprises (Seventh Note), August 19, 2013   10-Q 09/30/13 X 11/19/13
10.27 Amendment #1 to Promissory Note with Asher Enterprises (Seventh Asher Note), November 7, 2013   10-Q 09/30/13 X 11/19/13
10.28 Convertible Promissory Note with Asher Enterprises (Eighth Asher Note), September 18, 2013   10-Q 09/30/13 X 11/19/13
10.29 Securities Purchase Agreement with Asher Enterprises (Eighth Note), September 18, 2013   10-Q 09/30/13 X 11/19/13
10.30 Amendment #1 to Promissory Note with Asher Enterprises (Eighth Asher Note), November 7, 2013   10-Q 09/30/13 X 11/19/13
10.31 Amendment #1 to Promissory Note with JMJ Financial (First JMJ Note), August 13, 2013   10-Q 09/30/13 X 11/19/13
21.1 Subsidiaries X        
31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X        
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X        
101.INS XBRL Instance Document X        
101.SCH XBRL Schema Document X        
101.CAL XBRL Calculation Linkbase Document X        
101.DEF XBRL Definition Linkbase Document X        
101.LAB XBRL Labels Linkbase Document X        
101.PRE XBRL Presentation Linkbase Document X        

 

 

57
 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  EPAZZ, INC.
   
DATED: July 18, 2014 By: /s/ Shaun Passley
  Shaun Passley, Ph.D.
  Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director
   

 

 

 

 

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Exhibit 21.1

 

 

Subsidiaries

 

 

    State of       Abbreviated
Name of Entity(2)   Incorporation   Relationship(1)   Reference
Epazz, Inc.   Illinois   Parent   Epazz
IntelliSys, Inc.   Wisconsin   Subsidiary   IntelliSys
Professional Resource Management, Inc.   Illinois   Subsidiary   PRMI
Desk Flex, Inc.   Illinois   Subsidiary   DFI
K9 Bytes, Inc.   Illinois   Subsidiary   K9 Bytes
MS Health, Inc.   Illinois   Subsidiary   MS Health
FlexFridge, Inc.(3)   Illinois   Subsidiary(4)   FlexFridge
Terran Power, Inc.(5)   Illinois   Subsidiary   Terran

 

(1)All subsidiaries are wholly-owned subsidiaries of Epazz, Inc.
(2)All entities are in the form of Corporations.
(3)Formerly Z Fridge, Inc. and Cooling Technology Solutions, Inc.
(4)FlexFridge, Inc. was spun-off on November 21, 2013, and distributed on a 1:10 basis to shareholders of record on September 15, 2014. Epazz has a controlling financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10.
(5)Entity formed for prospective purposes, but has not incurred any income or expenses to date.

 

EX-31.1 5 epazz_10k-ex3101.htm CERTIFICATION

EXHIBIT 31.1

 

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL ACCOUNTING OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

 

I, Shaun Passley, Ph.D., certify that:

 

1.I have reviewed this Annual Report on Form 10-K of Epazz, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5.The registrant’s other certifying officer(s) and I have disclosed, based on Epazz’s most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (of persons performing the equivalent functions):

 

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

 

Dated: July 18, 2014

 

 

By:  /s/ Shaun Passley                       

Shaun Passley, Ph.D., Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer and Principal Accounting Officer)

EX-32.1 6 epazz_10k-ex3201.htm CERTIFICATION

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the Annual Report of Epazz, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2013 (the “Report”), I, Shaun Passley, Ph.D., Chief Executive Officer of the Company, certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

 

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Dated: July 18, 2014

 

 

 

 

By:  /s/ Shaun Passley                  

Shaun Passley, Ph.D., Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer and Principal Accounting Officer)

 

 

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

 

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(&#147;Epazz&#148; or the &#147;Company&#148;), 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.</font></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font-size: 8pt">&#160;</font></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font-size: 8pt">On or about June 18, 2008, the Company entered into a Stock Purchase Agreement (the &#147;Purchase Agreement&#148;) with Desk Flex, Inc., an Illinois corporation (&#147;DFI&#148;) and Professional Resource Management, Inc., an Illinois corporation (&#147;PRMI&#148; and collectively with DFI, the &#147;Target Companies&#148;) to acquire 100% of the outstanding shares of the Target Companies. 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DFI developed the Desk/Flex Software (Desk/Flex) to enhance the value of businesses&#146; 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&#146;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.</font></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font-size: 8pt">&#160;</font></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font-size: 8pt">On September 30, 2010, the Company acquired IntelliSys, Inc., doing business as, AutoHire Software, a Florida-based company owned by Igenti, Inc. (&#147;Intellisys&#148;). 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 &#147;<i>my accounts</i>&#148; for their customers. BoxesOS also links a college or university&#146;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&#146;s flagship product. Epazz BoxesOS integrates with each organization&#146;s back-end system and provides a customizable personal information system for each stakeholder. 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basic and fully diluted Net income (loss) per share - basic and fully diluted Total convertible debts, related parties Less: unamortized discount on beneficial conversion feature Convertible debts Less: current maturities of convertible debts, related parties included in convertible debts Long term convertible debts, related parties included in convertible debts Beneficial conversion feature on convertible promissory note Loss on modification of debt Fair Value Measurements, Recurring and Nonrecurring [Table] Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] Measurement Frequency [Axis] Assets Cash Intangible assets Goodwill Total assets Liabilities Lines of credit Capital leases Long term debts Notes payable, related parties Convertible debts, net of discounts Total Liabilities Total assets over liabilities Fair value adjustment - intangible assets Other Assets [Abstract] Deferred financing costs Prepaid expenses Other receivable Security deposits Total other current assets Property, Plant and Equipment [Table] Property, Plant and Equipment [Line Items] Property and equipment, gross Less accumulated depreciation and amortization Total property and equipment, net Depreciation Segments [Axis] Intangible assets, gross Less: accumulated amortization Total intangible assets, net Useful Life, years Amortization and impairment on intangible assets Goodwill rollforward Goodwill, beginning balance Accumulated impairment losses Goodwill acquired during the year Goodwill, ending balance Accrued interest Accrued interest, related parties Accrued payroll and payroll taxes Other accrued expenses Total Accrued Expenses Line of Credit Facility [Table] Line of Credit Facility [Line Items] Lender Name [Axis] Total line of credit Less: current portion Line of credit, less current portion 2014 2015 2016 Total minimum payments Less: amount representing interest Present value of net minimum lease payments Less: Current maturities of capital lease obligations Long-term capital lease obligations Schedule of Related Party Transactions, by Related Party [Table] Related Party Transaction [Line Items] Total notes payable, related parties Less: current portion Notes payable, related parties, less current portion Schedule of Long-term Debt Instruments [Table] Debt Instrument [Line Items] Total convertible debts Less: unamortized discount on beneficial conversion feature Less: unamortized OID Convertible debts Less: current maturities of convertible debts Long term convertible debts Interest expense on convertible debts Beneficial conversion feature Unamortized debt discount Debt amortization expense Stock issued pursuant to debt conversions, shares issued Stock issued pursuant to debt conversions, value Stock issued in modification of debt, shares issued Stock issued in modification of debt, value Loss on debt modification Total long term debt Less: current portion Long term debt, less current portion Long-term Debt, Unclassified [Abstract] Interest expense on long term debts, credit lines and capital leases Beneficial Conversion Feature Type of equity security Deferred tax assets: Net operating loss carry forwards Net deferred tax assets before valuation allowance Less: Valuation allowance Net deferred tax assets Federal and state statutory rate Change in valuation allowance on deferred tax assets Beneficial conversion features policy Net income (loss) per share - basic and fully diluted Pro forma expenses Pro forma other income (expense) Business acquisition pro forma operating expenses Convertible debt discussion Discounts on convertible debt - current Discounts on convertible debt - noncurrent Deferred financing costs Modification Of Repayment Terms By Maturity Date [Axis] Total liabilities over total assets (shown as negative) Other Related Party [Member] Promissory Note Two [Member] Schedule Of Related Party Transactions [Table Text Block] Line of credit discussion MS Health [Member] Notes payable, related parties text block Paul Prahl Promissory Note [Member] Preferred Stock Dividend Rate Percentage After Revenue Threshold Schedule of consolidated entities text block Subsidiary Formation Unamortized discount on beneficial conversion feature Unamortized original issue discount Member Member Small Business Administration Loan [Member] Value of shares issued for conversion of debt, related parties Member Working capital Shares issued for conversion of debt, related parties, shares issued Shares issued for conversion of debt, related parties, value Fair value of debt modification, related parties Website development costs policy text block Convertible debts, related parties table text block Schedule of shares granted for services performed Entity abbreviated name Amortization and impairment of intangible assets Stock issued in modification of debt, shares issued Stock issued in modification of debt, value Beneficial Conversion Feature UnsecuredNote3Member AsherEnterprises2Member Assets, Current Assets [Default Label] Liabilities, Current Liabilities [Default Label] Common Stock, Share Subscribed but Unissued, Subscriptions Receivable Stockholders' Equity Attributable to Parent Liabilities and Equity Operating Expenses Operating Income (Loss) Interest Expense Nonoperating Income (Expense) Shares, Outstanding Depreciation, Depletion and Amortization Payments of Debt Restructuring Costs Stock Issued During Period, Value, Share-based Compensation, Net of Forfeitures Increase (Decrease) in Accounts Receivable Increase (Decrease) in Other Current Assets Increase (Decrease) in Accounts Payable Increase (Decrease) in Accrued Liabilities Increase (Decrease) in Accounts Payable, Related Parties Net Cash Provided by (Used in) Operating Activities, Continuing Operations Payments to Acquire Property, Plant, and Equipment Payments to Acquire Businesses, Net of Cash Acquired Net Cash Provided by (Used in) Investing Activities, Continuing Operations Repayments of Debt and Capital Lease Obligations Repayments of Related Party Debt Repayments of Convertible Debt Repayments of Long-term Debt Net Cash Provided by (Used in) Financing Activities, Continuing Operations Related Party Transactions Disclosure [Text Block] NotesPayableRelatedParties Property, Plant and Equipment, Policy [Policy Text Block] Fair Value of Financial Instruments, Policy [Policy Text Block] Intangible Assets, Finite-Lived, Policy [Policy Text Block] Goodwill and Intangible Assets, Goodwill, Policy [Policy Text Block] Business Combination, Consideration Transferred Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Assets, Other Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Assets BusinessAcquisitionProFormaExpensesAbstract Assets, Fair Value Disclosure [Abstract] Cash and Cash Equivalents, Fair Value Disclosure Goodwill, Fair Value Disclosure Assets, Fair Value Disclosure Lines of Credit, Fair Value Disclosure Notes Payable, Fair Value Disclosure Deferred Costs, Noncurrent Accumulated Depreciation, Depletion and Amortization, Property, Plant, and Equipment Finite-Lived Intangible Assets, Accumulated Amortization Accrued Liabilities Capital Leases, Future Minimum Payments Due Capital Leases, Future Minimum Payments, Interest Included in Payments Capital Leases, Future Minimum Payments, Present Value of Net Minimum Payments Convertible Notes Payable Deferred Tax Assets, Valuation Allowance Deferred Tax Assets, Net of Valuation Allowance EX-101.PRE 12 epaz-20131231_pre.xml XBRL PRESENTATION FILE XML 13 R39.htm IDEA: XBRL DOCUMENT v2.4.0.8
15. Convertible Debt (Tables)
12 Months Ended
Dec. 31, 2013
Convertible Debt [Abstract]  
Schedule of Convertible Debt

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     

 

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 

 

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 

  

XML 14 R54.htm IDEA: XBRL DOCUMENT v2.4.0.8
8. Property and Equipment (Details) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Property, Plant and Equipment [Line Items]    
Property and equipment, gross $ 530,078 $ 523,248
Less accumulated depreciation and amortization (416,668) (326,951)
Total property and equipment, net 113,410 196,297
Depreciation 89,717 119,628
Furniture and Fixtures [Member]
   
Property, Plant and Equipment [Line Items]    
Property and equipment, gross 2,187 2,187
Computers and Equipment [Member]
   
Property, Plant and Equipment [Line Items]    
Property and equipment, gross 325,105 318,275
Software [Member]
   
Property, Plant and Equipment [Line Items]    
Property and equipment, gross 67,986 67,986
Assets Held under Capital Leases [Member]
   
Property, Plant and Equipment [Line Items]    
Property and equipment, gross $ 134,800 $ 134,800
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4. Asset Purchase Acquisitions (Details - Pro forma information) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Expenses:    
Weighted average number of common shares Outstanding - basic and fully diluted 2,536,096,673 399,031,314
MS Health
   
Asset Purchase Acquisition    
Revenue: $ 750,139 $ 1,256,054
Expenses:    
Operating expenses 3,469,090 2,710,529
Net operating income (loss) (2,718,951) (1,454,475)
Other income (expense) (657,287) (457,730)
Net income (loss) $ (3,376,238) $ (1,912,205)
Weighted average number of common shares Outstanding - basic and fully diluted 2,536,096,073 399,031,314
Net income (loss) per share - basic and fully diluted $ 0.00 $ (0.01)
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2. Going Concern (Details Narrative) (USD $)
Dec. 31, 2013
Risks and Uncertainties [Abstract]  
Working capital $ (1,283,338)
Total liabilities over total assets (shown as negative) $ (1,524,615)
XML 19 R33.htm IDEA: XBRL DOCUMENT v2.4.0.8
9. Intangible Assets (Tables)
12 Months Ended
Dec. 31, 2013
Goodwill and Intangible Assets Disclosure [Abstract]  
Schedule of Intangible Assets
   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 
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11. Accrued Expenses (Details) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Payables and Accruals [Abstract]    
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
Total Accrued Expenses $ 74,039 $ 44,129
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19. Subsequent Events
12 Months Ended
Dec. 31, 2013
Subsequent Events [Abstract]  
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.

 

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.

 

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. 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.

 

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.

 

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.

 

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.

 

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.

XML 23 R50.htm IDEA: XBRL DOCUMENT v2.4.0.8
5. Related Parties (Details Narrative) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dividends payable $ 11,000 $ 0
Loss on modification of debt (94,758) (137,199)
Related Parties
   
Dividends payable 11,000  
Beneficial conversion feature on convertible promissory note 14,838  
Loss on modification of debt $ 81,792  
XML 24 R42.htm IDEA: XBRL DOCUMENT v2.4.0.8
18. Income Taxes (Tables)
12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Deferred tax assets
   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  $   $ 
Reconcilation of income tax rates
   December 31,  December 31,
   2013  2012
       
Federal and state statutory rate  35%  35%
Change in valuation allowance on deferred tax assets  (35%)  (35%)
XML 25 R37.htm IDEA: XBRL DOCUMENT v2.4.0.8
13. Capital Lease Obligations Payable (Tables)
12 Months Ended
Dec. 31, 2013
Leases, Capital [Abstract]  
Schedule of Future Minimum Lease Payments
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  $ 
XML 26 R52.htm IDEA: XBRL DOCUMENT v2.4.0.8
6. Fair Value of Financial Instruments (Details Narrative) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Fair Value Disclosures [Abstract]    
Fair value adjustment - intangible assets $ 276,282 $ 0
XML 27 R67.htm IDEA: XBRL DOCUMENT v2.4.0.8
18. Income Taxes (Details - Reconciliation)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Income Tax Disclosure [Abstract]    
Federal and state statutory rate 35.00% 35.00%
Change in valuation allowance on deferred tax assets (35.00%) (35.00%)
XML 28 R61.htm IDEA: XBRL DOCUMENT v2.4.0.8
15. Convertible Debt (Details) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Debt Instrument [Line Items]    
Total convertible debts $ 266,877 $ 366,749
Less: unamortized discount on beneficial conversion feature (103,188) (139,068)
Less: unamortized OID (6,395) 0
Convertible debts 157,294 227,681
Less: current maturities of convertible debts (115,128) (74,708)
Long term convertible debts 42,166 152,973
Convertible Debt A
   
Debt Instrument [Line Items]    
Total convertible debts 0 0
Convertible Debt B
   
Debt Instrument [Line Items]    
Total convertible debts 35,028 0
Convertible Debt C
   
Debt Instrument [Line Items]    
Total convertible debts 0 56,900
Convertible Debt D
   
Debt Instrument [Line Items]    
Total convertible debts 0 16,500
Convertible Debt E
   
Debt Instrument [Line Items]    
Total convertible debts 0 27,500
Convertible Debt F
   
Debt Instrument [Line Items]    
Total convertible debts 0 32,500
Convertible Debt G
   
Debt Instrument [Line Items]    
Total convertible debts $ 0 $ 32,500
XML 29 R47.htm IDEA: XBRL DOCUMENT v2.4.0.8
4. Asset Purchase Acquisitions (Details - Acquisition) (MS Health, USD $)
1 Months Ended
Mar. 28, 2012
MS Health
 
Business combination consideration:  
Cash paid at closing $ 39,200
Small business loan 360,800
Seller financed note payable 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) $ 114,627
XML 30 R9.htm IDEA: XBRL DOCUMENT v2.4.0.8
3. Subsidiary Formation
12 Months Ended
Dec. 31, 2013
Notes to Financial Statements  
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.

XML 31 R62.htm IDEA: XBRL DOCUMENT v2.4.0.8
15. Convertible Debts (Details Narrative) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Debt amortization expense $ 237,065 $ 155,759
Stock issued pursuant to debt conversions, value 155,823 83,000
Loss on debt modification (94,758) (137,199)
First Asher Note
   
Debt amortization expense 0 7,769
Second Asher Note
   
Debt amortization expense 0 7,209
Third Asher Note
   
Beneficial conversion feature   36,082
Debt amortization expense 11,760 24,322
Fourth Asher Note
   
Beneficial conversion feature   27,959
Debt amortization expense 11,751 16,208
Fifth Asher Note
   
Beneficial conversion feature   27,500
Debt amortization expense 19,900 7,600
Sixth Asher Note
   
Beneficial conversion feature   16,500
Debt amortization expense 15,364 1,136
Seventh Asher Note
   
Beneficial conversion feature 39,021  
Debt amortization expense 19,014 0
Eighth Asher Note
   
Beneficial conversion feature 27,210  
Debt amortization expense 10,290 0
GG Mars
   
Beneficial conversion feature 14,838  
Star Financial
   
Loss on debt modification (81,792)  
JMJ Financial, Inc.
   
Beneficial conversion feature 33,000  
St. George Investments, Inc.
   
Beneficial conversion feature 46,555  
Magna Group, LLC
   
Beneficial conversion feature 35,028  
Convertible Debt [Member]
   
Interest expense on convertible debts 38,614 20,965
Unamortized debt discount 195,652 277,323
Debt amortization expense 237,065 155,759
Stock issued pursuant to debt conversions, shares issued 462,766,951 71,292,329
Stock issued pursuant to debt conversions, value 343,540 374,228
Stock issued in modification of debt, shares issued 14,239,500  
Stock issued in modification of debt, value 28,479  
Loss on debt modification (14,240)  
Convertible Debt [Member] | GG Mars
   
Beneficial conversion feature 14,838  
Debt amortization expense 14,838 0
Convertible Debt [Member] | Star Financial
   
Beneficial conversion feature   112,382
Debt amortization expense 39,445 67,284
Convertible Debt [Member] | Tonaquint, Inc.
   
Beneficial conversion feature   56,900
Debt amortization expense 32,669 24,231
Convertible Debt [Member] | JMJ Financial, Inc.
   
Beneficial conversion feature 33,000  
Debt amortization expense 33,000 0
Convertible Debt [Member] | St. George Investments, Inc.
   
Beneficial conversion feature 46,555  
Debt amortization expense 20,975 0
Convertible Debt [Member] | Magna Group, LLC
   
Beneficial conversion feature 35,028  
Debt amortization expense $ 0 $ 0
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1. Nature of Business and Summary of Significant Accounting Policies (Details - Entities)
12 Months Ended
Dec. 31, 2013
Epazz
 
Name of Entity Epazz, Inc.
State of Incorporation Illinois
Relationship Parent
Abbreviated Epazz
IntelliSys [Member]
 
Name of Entity IntelliSys, Inc.
State of Incorporation Wisconsin
Relationship Subsidiary
Abbreviated IntelliSys
PRMI [Member]
 
Name of Entity Professional Resource Management, Inc.
State of Incorporation Illinois
Relationship Subsidiary
Abbreviated PRMI
DFI
 
Name of Entity Desk Flex, Inc.
State of Incorporation Illinois
Relationship Subsidiary
Abbreviated DFI
K9 Bytes [Member]
 
Name of Entity K9 Bytes, Inc.
State of Incorporation Illinois
Relationship Subsidiary
Abbreviated K9 Bytes
MS Health
 
Name of Entity MS Health, Inc.
State of Incorporation Illinois
Relationship Subsidiary
Abbreviated MS Health
FlexFridge
 
Name of Entity FlexFridge, Inc.
State of Incorporation Illinois
Relationship Subsidiary
Abbreviated FlexFridge
Terran
 
Name of Entity Terran Power, Inc.
State of Incorporation Illinois
Relationship Subsidiary
Abbreviated Terran
XML 34 R29.htm IDEA: XBRL DOCUMENT v2.4.0.8
5. Related Parties (Tables)
12 Months Ended
Dec. 31, 2013
Related Party Transactions [Abstract]  
Related party debt
   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 
XML 35 R28.htm IDEA: XBRL DOCUMENT v2.4.0.8
4. Asset Purchase Acquisitions (Tables)
12 Months Ended
Dec. 31, 2013
Capital Lease Initiation Date  
Schedule of Assets Acquired and Liabilities Assumed

   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.

 

Unaudited Supplemental Pro Forma Results of Operations
   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)
XML 36 R56.htm IDEA: XBRL DOCUMENT v2.4.0.8
10. Goodwill (Details) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Goodwill, beginning balance $ 255,460 $ 140,832
Accumulated impairment losses 0 0
Goodwill acquired during the year 0 114,628
Goodwill, ending balance 255,460 255,460
IntelliSys [Member]
   
Goodwill, beginning balance 53,588 53,588
Accumulated impairment losses 0 0
Goodwill acquired during the year 0 0
Goodwill, ending balance 53,588 53,588
K9 Bytes [Member]
   
Goodwill, beginning balance 87,244 87,244
Accumulated impairment losses 0 0
Goodwill acquired during the year 0 0
Goodwill, ending balance 87,244 87,244
MS Health
   
Goodwill, beginning balance 114,628 0
Accumulated impairment losses 0 0
Goodwill acquired during the year 0 114,628
Goodwill, ending balance $ 114,628 $ 114,628
XML 37 R44.htm IDEA: XBRL DOCUMENT v2.4.0.8
1. Nature of Business and Summary of Significant Accounting Policies (Details - Property useful lives)
12 Months Ended
Dec. 31, 2013
Furniture and Fixtures [Member]
 
Property estimated useful lives 5 years
Computers and Equipment [Member]
 
Property estimated useful lives 3-5 years
Software [Member]
 
Property estimated useful lives 3 years
Assets Held under Capital Leases [Member]
 
Property estimated useful lives 3-4 years
XML 38 R30.htm IDEA: XBRL DOCUMENT v2.4.0.8
6. Fair Value of Financial Instruments (Tables)
12 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
Schedule of Assets and Liabilities Measured on a Non-recurring Basis

   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 

  

XML 39 R31.htm IDEA: XBRL DOCUMENT v2.4.0.8
7. Other Current Assets (Tables)
12 Months Ended
Dec. 31, 2013
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
Schedule of other current assets
   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 
XML 40 R8.htm IDEA: XBRL DOCUMENT v2.4.0.8
2. Going Concern
12 Months Ended
Dec. 31, 2013
Uncertainties [Abstract]  
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.

XML 41 R32.htm IDEA: XBRL DOCUMENT v2.4.0.8
8. Property and Equipment (Tables)
12 Months Ended
Dec. 31, 2013
Property, Plant and Equipment [Abstract]  
Schedule of Property and Equipment
   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 
XML 42 R40.htm IDEA: XBRL DOCUMENT v2.4.0.8
16. Long Term Debt (Tables)
12 Months Ended
Dec. 31, 2013
Long-term Debt, Current and Noncurrent [Abstract]  
Schedule of Long-Term Debt

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     

 

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%.
          

 

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 

 

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 

 

XML 43 R53.htm IDEA: XBRL DOCUMENT v2.4.0.8
7. Other Current Assets (Details) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Other Assets [Abstract]    
Deferred financing costs $ 44,986 $ 17,032
Prepaid expenses 0 1,743
Other receivable 51,250 0
Security deposits 9,878 3,252
Total other current assets $ 106,114 $ 22,027
XML 44 R2.htm IDEA: XBRL DOCUMENT v2.4.0.8
CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2013
Dec. 31, 2012
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
Current liabilities:    
Dividends payable 11,000 0
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 debt, 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 0 17,421
Notes payable, related parties 85,000 0
Convertible debts, net of discounts of $4,483 and $37,876, respectively 42,166 152,973
Long term debt, net of current maturities 857,143 892,463
Total liabilities 2,607,576 1,849,541
Stockholders' equity (deficit):    
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
Class A [Member]
   
Stockholders' equity (deficit):    
Common stock 346,836 117,779
Class B [Member]
   
Stockholders' equity (deficit):    
Common stock 1,050 550
Series A Preferred Stock [Member]
   
Stockholders' equity (deficit):    
Convertible Preferred stock 0 0
Series B Preferred Stock [Member]
   
Stockholders' equity (deficit):    
Convertible Preferred stock $ 0 $ 0
XML 45 R45.htm IDEA: XBRL DOCUMENT v2.4.0.8
1. Nature of Business and Summary of Significant Accounting Polies (Details Narrative) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Organization, Consolidation and Presentation of Financial Statements [Abstract]    
Amortization and impairment of intangible assets $ 446,988 $ 155,448
Impairment of intangible assets 276,282 0
Unamortized deferred finance costs 44,986 17,033
Amortization of deferred financing costs 79,123 25,849
Bad debts expense (recoveries) (27,129) 2,957
Allowance for doubtful accounts 7,017 68,521
Advertising and promotional expense 181,497 104,431
Common stock issued for services and compensation $ 1,713,150 $ 1,278,151
XML 46 R6.htm IDEA: XBRL DOCUMENT v2.4.0.8
CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 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 debt (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 0
Amortization of deferred financing costs 79,123 25,849
Amortization of discount on convertible notes payable 237,065 155,759
Finance costs on debt modifications, related party 0 98,528
Loss on debt modifications, related party 96,032 38,671
Stock based compensation issued for services, related party 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 0 14,175
Purchase of equipment (6,830) (166,652)
Acquisition of subsidiaries 0 (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) 0
Proceeds from long term debts 450,800 386,041
Repayment of long term debt (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 0 0
Non-cash investing and financing activities:    
Acquisition of subsidiary in exchange for debt 0 460,800
Acquisition of leased assets for debt 0 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 0
Discount on beneficial conversion feature of convertible debt 195,652 277,323
Deferred financing costs 107,076 0
Dividends payable declared $ 11,000  
XML 47 R59.htm IDEA: XBRL DOCUMENT v2.4.0.8
13. Capital Lease Obligations Payable (Details) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Leases, Capital [Abstract]    
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) (25,699)
Long-term capital lease obligations $ 0 $ 17,421
XML 48 R35.htm IDEA: XBRL DOCUMENT v2.4.0.8
11. Accrued Expenses (Tables)
12 Months Ended
Dec. 31, 2013
Payables and Accruals [Abstract]  
Schedule of accrued expenses
   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 
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17. Stockholders' Equity (Details Narrative) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Beneficial Conversion Feature    
Loss on debt modification $ (94,758) $ (137,199)
JMJ Financial, Inc.
   
Beneficial Conversion Feature    
Type of equity security Convertible promirrowy note  
Beneficial conversion feature 33,000  
Asher Enterprises
   
Beneficial Conversion Feature    
Type of equity security Convertible promirrowy note  
Beneficial conversion feature 39,021  
GG Mars
   
Beneficial Conversion Feature    
Type of equity security Convertible promirrowy note  
Beneficial conversion feature 14,838  
St. George Investments, Inc.
   
Beneficial Conversion Feature    
Type of equity security Convertible promirrowy note  
Beneficial conversion feature 46,555  
Asher Enterprises
   
Beneficial Conversion Feature    
Type of equity security Convertible promirrowy note  
Beneficial conversion feature 27,210  
Magna Group, LLC
   
Beneficial Conversion Feature    
Type of equity security Convertible promirrowy note  
Beneficial conversion feature 35,028  
Star Financial
   
Beneficial Conversion Feature    
Loss on debt modification $ (81,792)  
XML 50 R22.htm IDEA: XBRL DOCUMENT v2.4.0.8
16. Long Term Debts
12 Months Ended
Dec. 31, 2013
Long-term Debt, Current and Noncurrent [Abstract]  
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     

 

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%.
          

 

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 

 

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.

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12. Line of Credit (Tables)
12 Months Ended
Dec. 31, 2013
Line of Credit Facility [Abstract]  
Schedule of Lines 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  $   $ 

 

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18. Income Taxes
12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
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.

 

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%)

 

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1. Nature of Business and Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
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.

 

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.

 

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.

XML 55 R3.htm IDEA: XBRL DOCUMENT v2.4.0.8
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Discounts on convertible debt - current $ 105,300 $ 101,192
Discounts on convertible debt - noncurrent 4,283 37,876
Notes Payable, Related Parties
   
Debt in default 88,868  
Convertible Debt [Member]
   
Debt in default $ 56,900  
Class A [Member]
   
Common stock, par value per share $ 0.0001 $ 0.0001
Common stock, shares authorized 6,000,000,000 6,000,000,000
Common stock, shares issued 3,468,358,708 1,177,789,125
Common stock, shares outstanding 3,468,358,708 1,177,789,125
Class B [Member]
   
Common stock, par value per share $ 0.0001 $ 0.0001
Common stock, shares authorized 60,000,000 60,000,000
Common stock, shares issued 10,500,000 5,500,000
Common stock, shares outstanding 10,500,000 5,500,000
Series A Preferred Stock [Member]
   
Preferred stock, par value per shares $ 0.0001 $ 0.0001
Preferred stock, shares authorized 1,000 1,000
Preferred stock, shares issued 1,000 1,000
Preferred stock, shares outstanding 1,000 1,000
Series B Preferred Stock [Member]
   
Preferred stock, par value per shares $ 0.0001 $ 0.0001
Preferred stock, shares authorized 1,000 1,000
Preferred stock, shares issued 1,000 1,000
Preferred stock, shares outstanding 1,000 1,000
XML 56 R17.htm IDEA: XBRL DOCUMENT v2.4.0.8
11. Accrued Expenses
12 Months Ended
Dec. 31, 2013
Payables and Accruals [Abstract]  
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 

 

XML 57 R1.htm IDEA: XBRL DOCUMENT v2.4.0.8
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Jul. 13, 2014
Jun. 30, 2013
Document And Entity Information      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2013    
Entity Registrant Name Epazz Inc    
Entity Central Index Key 0001335239    
Current Fiscal Year End Date --12-31    
Document Fiscal Year Focus 2013    
Document Fiscal Period Focus FY    
Entity Filer Category Smaller Reporting Company    
Entity Common Stock, Shares Outstanding   6,796,730,730  
Entity Public Float     $ 789,803
Entity current reporting status Yes    
Well Known Seasoned Issuer? No    
Voluntary Filer? No    
XML 58 R18.htm IDEA: XBRL DOCUMENT v2.4.0.8
12. Lines of Credit
12 Months Ended
Dec. 31, 2013
Line of Credit Facility [Abstract]  
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  $   $ 

 

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XML 61 R12.htm IDEA: XBRL DOCUMENT v2.4.0.8
6. Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
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 

  

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.

XML 62 R11.htm IDEA: XBRL DOCUMENT v2.4.0.8
5. Related Parties
12 Months Ended
Dec. 31, 2013
Related Party Transactions [Abstract]  
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 

  

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.

 

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.

 

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.

 

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.

XML 63 R23.htm IDEA: XBRL DOCUMENT v2.4.0.8
17. Stockholder's Equity
12 Months Ended
Dec. 31, 2013
Stockholders' Equity Note [Abstract]  
Stockholder's 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 1st of any calendar year in which the Company has generated revenue over $2 million, and an additional 24% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into 60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders. The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions.

 

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 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series B Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into 10% of the total number of then issued and outstanding shares of Class A Common Stock, provided that no conversion will take place until all holders of the Series B Preferred Stock consent to such conversion. The Series B Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series B Preferred Stock holders. The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions.

 

On July 2, 2012, the Company issued a total of 1,000 shares of convertible Series B preferred stock amongst three related parties pursuant to the exchange and extension of a promissory note owed to Star Financial Corporation, a related party. The total fair value of the preferred stock was $61,130 based on valuations performed using an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for lack of marketability.

 

Convertible Preferred Stock, Series C

Effective January 14, 2014, the Company has three billion (3,000,000,000) authorized shares of $0.0001 par value Series C Convertible Preferred Stock (“Series C Preferred Stock”). The Series C Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series C Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. Subject to certain conversion restrictions over the first three months from the original issuance date, each share of Series C Preferred Stock is convertible, at the option of the holder into three (3) shares of the Company’s Class A Common Stock, with five business days’ notice. The following conversion restrictions shall apply; (i) the holder shall be prohibited from converting any Series C Preferred shares for a period of one (1) month from the original issuance date, (ii) the holder shall be prohibited from converting not more than 30% of the Series C Preferred shares originally issued to holder during the second (2nd) month following the original issuance date, (iii) the holder shall be prohibited from converting not more than 30% (60% in total) of the Series C Preferred shares originally issued to holder during the third (3rd) month following the original issuance date, (iv) the holder shall be prohibited from converting not more than an additional 40% (100% in total) of the Series C Preferred shares originally issued to holder following the end of the third month following the original issuance date. The Series C Preferred Stock shall each vote three voting share and shall vote together with the Common Stock of the Company. The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

XML 64 R19.htm IDEA: XBRL DOCUMENT v2.4.0.8
13. Capital Lease Obligations Payable
12 Months Ended
Dec. 31, 2013
Leases, Capital [Abstract]  
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  $ 

 

XML 65 R15.htm IDEA: XBRL DOCUMENT v2.4.0.8
9. Intangible Assets
12 Months Ended
Dec. 31, 2013
Goodwill and Intangible Assets Disclosure [Abstract]  
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 

  

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.

XML 66 R60.htm IDEA: XBRL DOCUMENT v2.4.0.8
14. Notes Payable, Related Parties (Details) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Related Party Transaction [Line Items]    
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 0
Unsecured Note 1
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 0 0
Unsecured Note 2
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 125,000 0
Unsecured Note 3
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 18,000 0
Unsecured Note 4
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 65,000 0
Unsecured Note 5
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 25,000 0
Unsecured Note 6
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 51,000 0
Unsecured Note 7
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 23,000 0
Unsecured Note 8
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 12,500 0
Unsecured Note 9
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 24,000 0
Unsecured Note 10
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 10,000 0
Unsecured Note 11
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 32,000 0
Unsecured Note 12
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 10,000 0
Unsecured Note 13
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 0 0
Unsecured Note 14
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 57,000 0
Unsecured Note 15
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 12,500 0
Unsecured Note 16
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 24,000 0
Unsecured Note 17
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 32,000 0
Unsecured Note 18
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 32,000 0
Unsecured Note 19
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 10,000 0
Unsecured Note 20
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 0 0
Unsecured Note 21
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 57,000 0
Unsecured Note 22
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 0 0
Unsecured Note 23
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 0 13,000
Unsecured Note 24
   
Related Party Transaction [Line Items]    
Total notes payable, related parties 2,000 2,000
Unsecured Note 25
   
Related Party Transaction [Line Items]    
Total notes payable, related parties $ 5,868 $ 7,085
XML 67 R13.htm IDEA: XBRL DOCUMENT v2.4.0.8
7. Other Current Assets
12 Months Ended
Dec. 31, 2013
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
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.

XML 68 R14.htm IDEA: XBRL DOCUMENT v2.4.0.8
8. Property and Equipment
12 Months Ended
Dec. 31, 2013
Property, Plant and Equipment [Abstract]  
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.

XML 69 R16.htm IDEA: XBRL DOCUMENT v2.4.0.8
10. Goodwill
12 Months Ended
Dec. 31, 2013
Goodwill and Intangible Assets Disclosure [Abstract]  
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.

XML 70 R64.htm IDEA: XBRL DOCUMENT v2.4.0.8
16. Long Term Debt (Details Narrative) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Long-term Debt, Unclassified [Abstract]    
Interest expense on long term debts, credit lines and capital leases $ 261,634 $ 102,261
XML 71 R66.htm IDEA: XBRL DOCUMENT v2.4.0.8
18. Income Taxes (Details - Deferred tax assets) (USD $)
Dec. 31, 2013
Dec. 31, 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 $ 0 $ 0
XML 72 R63.htm IDEA: XBRL DOCUMENT v2.4.0.8
16. Long Term Debt (Details) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Debt Instrument [Line Items]    
Total long term debt $ 211,929 $ 1,111,162
Less: current portion (354,786) (218,699)
Long term debt, less current portion 857,143 892,463
Long Term Debt A
   
Debt Instrument [Line Items]    
Total long term debt 98,984 0
Long Term Debt B
   
Debt Instrument [Line Items]    
Total long term debt 9,417 0
Long Term Debt C
   
Debt Instrument [Line Items]    
Total long term debt 47,321 0
Long Term Debt D
   
Debt Instrument [Line Items]    
Total long term debt 32,025 0
Long Term Debt E
   
Debt Instrument [Line Items]    
Total long term debt 4,202 0
Long Term Debt F
   
Debt Instrument [Line Items]    
Total long term debt 0 0
Long Term Debt G
   
Debt Instrument [Line Items]    
Total long term debt 0 0
Long Term Debt H
   
Debt Instrument [Line Items]    
Total long term debt 41,167 0
Long Term Debt I
   
Debt Instrument [Line Items]    
Total long term debt 38,361 0
Long Term Debt J
   
Debt Instrument [Line Items]    
Total long term debt 40,108 0
Long Term Debt K
   
Debt Instrument [Line Items]    
Total long term debt 10,228 13,448
Long Term Debt L
   
Debt Instrument [Line Items]    
Total long term debt 78,603 104,129
Long Term Debt M
   
Debt Instrument [Line Items]    
Total long term debt 312,095 343,060
Long Term Debt N
   
Debt Instrument [Line Items]    
Total long term debt 94,000 94,000
Long Term Debt O
   
Debt Instrument [Line Items]    
Total long term debt 0 28,173
Long Term Debt P
   
Debt Instrument [Line Items]    
Total long term debt 0 54,088
Long Term Debt Q
   
Debt Instrument [Line Items]    
Total long term debt 0 19,483
Long Term Debt R
   
Debt Instrument [Line Items]    
Total long term debt 2,510 6,234
Long Term Debt S
   
Debt Instrument [Line Items]    
Total long term debt 8,186 10,520
Long Term Debt T
   
Debt Instrument [Line Items]    
Total long term debt 60,573 68,436
Long Term Debt U
   
Debt Instrument [Line Items]    
Total long term debt 137,087 153,377
Long Term Debt V
   
Debt Instrument [Line Items]    
Total long term debt $ 197,062 $ 216,214
XML 73 R34.htm IDEA: XBRL DOCUMENT v2.4.0.8
10. Goodwill (Tables)
12 Months Ended
Dec. 31, 2013
Goodwill and Intangible Assets Disclosure [Abstract]  
Changes in goodwill and accumulated impairment
   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 
XML 74 R51.htm IDEA: XBRL DOCUMENT v2.4.0.8
6. Fair Value of Financial Instruments (Details) (Fair Value, Measurements, Nonrecurring [Member], USD $)
Dec. 31, 2013
Dec. 31, 2012
Fair Value, Inputs, Level 1 [Member]
   
Assets    
Intangible assets $ 0 $ 0
Goodwill 0 0
Total assets 0 0
Liabilities    
Lines of credit 0 0
Capital leases 0 0
Long term debts 0 0
Notes payable, related parties 0 0
Convertible debts, net of discounts 0 0
Total Liabilities 0 0
Total assets over liabilities 0 0
Fair Value, Inputs, Level 2 [Member]
   
Assets    
Intangible assets 0 0
Goodwill 0 0
Total assets 0 0
Liabilities    
Lines of credit 73,232 77,047
Capital leases 17,421 43,120
Long term debts 1,211,929 1,111,162
Notes payable, related parties 482,368 22,085
Convertible debts, net of discounts 157,294 227,681
Total Liabilities 1,942,244 1,481,095
Total assets over liabilities (1,942,244) (1,481,095)
Fair Value, Inputs, Level 3 [Member]
   
Assets    
Intangible assets 374,162 821,150
Goodwill 255,460 255,460
Total assets 629,622 1,076,610
Liabilities    
Lines of credit 0 0
Capital leases 0 0
Long term debts 0 0
Notes payable, related parties 0 0
Convertible debts, net of discounts 0 0
Total Liabilities 0 0
Total assets over liabilities $ 629,622 $ 1,076,610
XML 75 R21.htm IDEA: XBRL DOCUMENT v2.4.0.8
15. Convertible Debts
12 Months Ended
Dec. 31, 2013
Convertible Debt [Abstract]  
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     

 

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 

 

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 

  

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.

 

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.

 

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.

 

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.

 

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.

 

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.

XML 76 R26.htm IDEA: XBRL DOCUMENT v2.4.0.8
1. Nature of Business and Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Nature of Business and Organization

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.

 

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

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

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.

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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5. Related Parties (Details) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Total convertible debts, related parties $ 266,877 $ 366,749
Long term convertible debts, related parties included in convertible debts 42,166 152,973
Related Parties
   
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 0 0
Long term convertible debts, related parties included in convertible debts 40,796 145,751
First GG Mars Note
   
Total convertible debts, related parties 0 0
Star Convertible Note
   
Total convertible debts, related parties $ 46,449 $ 190,849
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17. Stockholders' Equity (Tables)
12 Months Ended
Dec. 31, 2013
Equity [Abstract]  
Schedule of shares granted for services performed
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    
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (USD $)
Convertible Preferred Stock Series A
Convertible Preferred Stock Series B
Class A Common Stock
Convertible Class B Common Stock
Additional Paid-In Capital
Stockholders' Receivable
Accumulated Deficit
Total
Beginning balance, value at Dec. 31, 2011 $ 0 $ 0 $ 3,090 $ 250 $ 2,668,032 $ (1,000,000) $ (2,208,067) $ (536,695)
Beginning balance, shares at Dec. 31, 2011 0 0 30,900,281 2,500,000        
Shares issued for services, related parties, shares issued 1,000 1,000 1,075,596,515 3,000,000       1,180,834
Shares issued for services, related parties, value 0 0 107,560 300 1,008,962 200,000   1,316,822
Shares issued for conversion of debt, related parties, shares issued     59,370,640          
Shares issued for conversion of debt, related parties, value     5,937   28,791     294,728
Shares issued for conversion of debt, shares issued     11,921,689          
Shares issued for conversion of debt, value     1,192   81,808     83,000
Beneficial conversion feature of convertible debt         277,323     277,323
Net loss             (1,906,689) (1,906,689)
Ending balance, value at Dec. 31, 2012 0 0 117,779 550 4,324,916 (800,000) (4,114,756) (471,511)
Ending balance, shares at Dec. 31, 2012 1,000 1,000 1,177,789,125 5,500,000        
Shares issued for services, related parties, shares issued     1,802,052,632 5,000,000       1,713,150
Shares issued for services, related parties, value     180,206 500 1,496,294     1,677,000
Shares issued for debt origination fees, related parties, shares issued     25,750,000          
Shares issued for debt origination fees, related parties, value     2,575   33,575     36,150
Shares issued for conversion of debt, related parties, shares issued     281,096,026          
Shares issued for conversion of debt, related parties, value     28,110   159,607     187,717
Shares issued for conversion of debt, shares issued     181,670,925          
Shares issued for conversion of debt, value     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             (11,000) (11,000)
Net loss             (3,376,238) (3,376,238)
Ending balance, value at Dec. 31, 2013 $ 0 $ 0 $ 346,836 $ 1,050 $ 6,429,493 $ (800,000) $ (7,501,994) $ (1,524,615)
Ending balance, shares at Dec. 31, 2013 1,000 1,000 3,468,358,708 10,500,000        
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4. Asset Purchase Acquisitions
12 Months Ended
Dec. 31, 2013
Business Combinations [Abstract]  
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.

 

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.

 

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)

 

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12. Line of Credit (Details) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Line of Credit Facility [Line Items]    
Total line of credit $ 73,232 $ 77,047
Less: current portion (73,232) (77,047)
Line of credit, less current portion 0 0
PNC Bank [Member]
   
Line of Credit Facility [Line Items]    
Total line of credit 49,508 49,606
US Bank [Member]
   
Line of Credit Facility [Line Items]    
Total line of credit 18,087 19,641
Dell Business Credit [Member]
   
Line of Credit Facility [Line Items]    
Total line of credit $ 5,637 $ 7,800
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1. Nature of Business and Summary of Significant Accounting Policies (Tables)
12 Months Ended
Dec. 31, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Schedule of Consolidated Entities
    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
Schedule of property and equipment useful lives
Furniture and fixtures   5 years
Computers and equipment   3-5 years
Software   3 years
Assets held under capital leases   3-4 years
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14. Notes Payable, Related Parties (Tables)
12 Months Ended
Dec. 31, 2013
Related Party Transactions [Abstract]  
Schedule of 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     

 

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     

 

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   $ 

  

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14. Notes Payable, Related Parties
12 Months Ended
Dec. 31, 2013
Related Party Transactions [Abstract]  
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     

 

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     

 

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.

 

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XML 60 R4.htm IDEA: XBRL DOCUMENT v2.4.0.8
CONSOLIDATED STATEMENT OF OPERATIONS (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]    
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 0
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

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9. Intangible Assets (Details) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Intangible assets, gross $ 1,170,720 $ 1,170,720
Less: accumulated amortization (315,838) (349,570)
Total intangible assets, net 374,162 821,150
Amortization and impairment on intangible assets 446,988 155,448
Impairment on intangible assets 276,282 0
Technology-Based Intangible Assets [Member] | PRMI [Member]
   
Intangible assets, gross 0 258,000
Useful Life, years 15 years  
Technology-Based Intangible Assets [Member] | IntelliSys [Member]
   
Intangible assets, gross 200,000 124,000
Useful Life, years 5 years  
Technology-Based Intangible Assets [Member] | K9 Bytes [Member]
   
Intangible assets, gross 42,000 18,000
Useful Life, years 5 years  
Technology-Based Intangible Assets [Member] | MS Health
   
Intangible assets, gross 124,000 22,000
Useful Life, years 5 years  
Contracts [Member] | MS Health
   
Intangible assets, gross 258,000 42,000
Useful Life, years 6 years  
Trade Name [Member] | K9 Bytes [Member]
   
Intangible assets, gross 22,000 26,000
Useful Life, years 5 years  
Other Intangible Assets [Member] | K9 Bytes [Member]
   
Intangible assets, gross 26,000 200,000
Useful Life, years 2 years  
Other Intangible Assets [Member] | MS Health
   
Intangible assets, gross $ 18,000 $ 480,720
Useful Life, years 2 years