Epazz 10Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

T	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

£	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

For the transition period from ____________ to ______________

Commission file number: 333-139117

EPAZZ, Inc.

(Exact name of registrant as specified in its charter)

Illinois

36-4313571

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification No.)

205 W. Wacker Dr., Suite 1320

Chicago, IL 60606

(Address of principal executive offices)

(312) 955-8161

(Registrant's telephone number)

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

Yes T No £

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

Yes T No £

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

Large accelerated filer £	Accelerated filer £
Non-accelerated filer £	Smaller reporting company T

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

Yes £ No T

The number of shares of the issuer’s Class A common stock outstanding as of November 18, 2013, was 3,468,358,708 shares, par value $0.01 per share.

EPAZZ, INC.

FORM 10-Q

Quarterly Period Ended September 30, 2013

		Page

INDEX

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	3
	Statements of Operations for the Three and Nine Months ended September 30, 2013 and 2012 (Unaudited)	4
	Statements of Cash Flows for the Nine Months ended September 30, 2013 and 2012 (Unaudited)	5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50

SIGNATURES		51

EPAZZ, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2013			2012
Assets	(Unaudited)
Current assets:
Cash	$	43,085		$	46,101
Accounts receivable, net		13,981			36,995
Other current assets		69,952			22,027
Total current assets		127,018			105,123

Property and equipment, net		124,125			196,297
Intangible assets, net		690,856			821,150
Goodwill		255,460			255,460

Total assets	$	1,197,459		$	1,378,030

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Dividends payable	$	18,000		$	–
Accounts payable and accrued expenses		154,403			129,651
Accrued expenses, related parties		38,169			19,205
Deferred revenue		150,650			219,590
Lines of credit		72,975			77,047
Current maturities of capital lease obligations payable		19,839			25,699
Current maturities of notes payable, related parties		272,368			22,085
Convertible debts, net of discounts of $107,792 and $101,192, respectively		44,608			74,708
Current maturities of long term debts		253,801			218,699
Total current liabilities		1,024,813			786,684

Capital lease obligations payable, net of current maturities		6,973			17,421
Notes payable, related parties		100,000			–
Convertible debts, net of discounts of $4,644 and $37,876, respectively		41,805			152,973
Long term debts, net of current maturities		865,887			892,463
Total liabilities		2,039,478			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, 3,456,108,708 and 1,177,789,125 shares issued and outstanding, respectively		345,611			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		6,737,458			4,324,916
Stockholders' receivable, consisting of 532,526,316 shares		(1,157,368	)		(800,000	)
Stockholders' payable, consisting of 12,250,000 shares		15,600			–
Accumulated deficit		(6,784,370	)		(4,114,756	)
Total stockholders' equity (deficit)		(842,019	)		(471,511	)

Total liabilities and stockholders' equity (deficit)	$	1,197,459		$	1,378,030

See accompanying notes to financial statements.

EPAZZ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2013			2012			2013			2012

Revenue	$	156,750		$	308,881		$	643,879		$	856,248

Expenses:
General and administrative		231,705			201,766			519,339			524,647
Salaries and wages		303,716			1,233,782			2,074,950			1,394,994
Depreciation and amortization		60,682			77,315			204,842			199,956
Bad debts (recoveries)		5,407			137,077			(3,333	)		102,005
Total operating expenses		601,510			1,649,940			2,795,798			2,221,602

Net operating loss		(444,760	)		(1,341,059	)		(2,151,919	)		(1,365,354	)

Other income (expense):
Loss on convertible debt modification, related party		–			–			(96,032	)		–
Interest income		–			14			–			52
Interest expense		(140,705	)		(167,003	)		(403,663	)		(250,932	)
Other expense		–			(161,447	)		–			(161,447	)
Total other income (expense)		(140,705	)		(328,436	)		(499,695	)		(412,327	)

Net loss	$	(585,465	)	$	(1,669,495	)	$	(2,651,614	)	$	(1,777,681	)

Weighted average number of common shares outstanding - basic and fully diluted		3,319,614,527			347,295,659			2,223,857,269			137,591,052

Net loss per share - basic and fully diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)

See accompanying notes to financial statements.

EPAZZ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months
	Ended September 30,
	2013			2012
Cash flows from operating activities
Net loss	$	(2,651,614	)	$	(1,777,681	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debts (recoveries)		(3,333	)		102,005
Depreciation and amortization		74,548			86,051
Amortization of intangible assets		130,294			111,786
Amortization of deferred financing costs		35,035			13,530
Amortization of discounts on convertible notes payable		197,156			100,454
Loss on convertible debt modification, related party		96,032			161,447
Stock based compensation issued for services, related parties		1,713,150			1,180,834
Decrease (increase) in assets:
Accounts receivable		26,347			(17,271	)
Other current assets		(4,884	)		8,775
Increase (decrease) in liabilities:
Accounts payable and accrued expenses		32,176			46,208
Accrued expenses, related parties		20,224			(889	)
Deferred revenues		(68,940	)		(49,698	)
Net cash used in operating activities		(403,809	)		(34,449	)

Cash flows from investing activities
Proceeds from the sale of equipment		–			14,175
Purchase of equipment		(2,376	)		(147,597	)
Acquisition of subsidiaries		–			(39,200	)
Net cash used in investing activities		(2,376	)		(172,622	)

Cash flows from financing activities
Payments on capital lease obligations payable		(16,308	)		(25,242	)
Proceeds from notes payable, related parties		427,950			87,680
Repayment of notes payable, related parties		(119,167	)		(142,163	)
Proceeds from convertible debts		170,000			70,000
Repayment of convertible debts		(60,500	)		–
Proceeds from long term debts		273,935			346,837
Repayment of long term debts		(272,741	)		(127,664	)
Net cash provided by financing activities		403,169			209,448

Net increase (decrease) in cash		(3,016	)		2,377
Cash - beginning		46,101			12,668
Cash - ending	$	43,085		$	15,045

Supplemental disclosures:
Interest paid	$	156,847		$	104,352
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		$	–
Discount on beneficial conversion feature of convertible debt	$	160,624		$	176,423
Deferred financing costs	$	78,076		$	–
Dividends payable declared	$	18,000		$	–

See accompanying notes to financial statements.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation and Consolidation

The interim condensed consolidated financial statements of Epazz, Inc. (“Epazz” or the “Company”), an Illinois corporation, included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to not make the information presented misleading.

These statements reflect all adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. It is suggested that these interim condensed financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2012 and notes thereto included in the Company's 10-K annual report. The Company follows the same accounting policies in the preparation of interim reports.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the following entities, all of which are under common control and ownership:

	State of		Abbreviated
Name of Entity⁽²⁾	Incorporation	Relationship⁽¹⁾	Reference
Epazz, Inc.	Illinois	Parent	Epazz
IntelliSys, Inc.	Wisconsin	Subsidiary	IntelliSys
Professional Resource Management, Inc.	Illinois	Subsidiary	PRMI
Desk Flex, Inc.	Illinois	Subsidiary	DFI
K9 Bytes, Inc.	Illinois	Subsidiary	K9 Bytes
MS Health, Inc.	Illinois	Subsidiary	MS Health
Cooling Technology Solutions, Inc.	Illinois	Subsidiary	CTS

____________

⁽¹⁾ All subsidiaries are wholly-owned subsidiaries of Epazz, Inc.

⁽²⁾All entities are in the form of Corporations.

The condensed consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated in the preparation of these financial statements. The parent company, Epazz and subsidiaries, IntelliSys, PRMI, DFI, K9 Bytes, MS Health and CTS 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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Reclassifications

Certain amounts in the financial statements of the prior year have been reclassified to conform to the presentation of the current year for comparative purposes.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had debt instruments that required fair value measurement on a recurring basis.

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No material impairments of intangible assets have been identified during any of the periods presented. Amortization expense on intangible assets totaled $130,294 and $111,786 for the nine months ended September 30, 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.

Beneficial Conversion Features

From time to time, the Company may issue convertible notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basic and Diluted Net Earnings per Share

Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. There were no outstanding potential common stock equivalents for the periods presented. As such, basic and diluted earnings per share resulted in the same figure for the three and nine months ending September 30, 2013 and 2012.

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 $1,180,834 for the nine months ended September 30, 2013 and 2012, respectively.

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. We do not expect the adoption of the new provisions to have a material impact on our financial condition 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.

Note 2 – Going Concern

As shown in the accompanying condensed consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $(6,784,370), and as of September 30, 2013, the Company’s current liabilities exceeded its current assets by $897,795 and its total liabilities exceeded its total assets by $842,019. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Subsidiary Formation

Subsidiary Formation – Cooling Technology Solutions, Inc., March 4, 2013

On March 4, 2013, the Board of Directors of Epazz, Inc. (the “Company”), consisting solely of Shaun Passley, the Company’s majority shareholder, approved the formation of a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc. The Company plans to file a non-provisional patent application for its Project Flex product in the name of Cooling Technology Solutions, Inc., however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.

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.

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s assets and ongoing operations were acquired. The purchase resulted in $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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2013 or January 1, 2012 are as follows:

	Combined Pro Forma:
	For the nine months ended September 30,
	2013			2012
Revenue:	$	643,879		$	919,085

Expenses:
Operating expenses		2,795,798			2,352,693

Net operating income (loss)		(2,151,919	)		(1,433,608	)

Other income (expense)		(499,695	)		(349,589	)

Net income (loss)	$	(2,651,614	)	$	(1,783,197	)

Weighted average number of common shares
Outstanding – basic and fully diluted		2,223,857,269			137,591,052

Net income (loss) per share – basic and fully diluted	$	(0.00	)	$	(0.01	)

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 – Related Parties

Debt Financings

From time to time we have received and repaid loans from our CEO and his immediate family members to fund operations. These related party debts are fully disclosed in Note 11 below.

In addition to the debts disclosed in Note 11, we had two convertible notes with related parties that are disclosed in Note 12 as follows:

	September 30,			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		(5,967	)		(45,098	)
Convertible debts		40,482			145,751
Less: current maturities of convertible debts, related parties included in convertible debts		–			–
Long term convertible debts, related parties included in convertible debts	$	40,482		$	145,751

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Changes in Stockholders’ Equity, Related Parties

The majority of our stock issuances have been to related parties, as more fully disclosed in Note 14 below.

Declaration of Dividends

On January 1, 2013, the Company declared and accrued estimated dividends of $18,000 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 based on 1.5% of the estimated 2013 annual revenues. Dividends equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, 2013 will accrue quarterly and can be paid in cash or in shares of Class A Common Stock, the exact amounts of which are yet undetermined. All holders of our Preferred Stock are related parties.

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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.

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.

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. As such, they were presented as a subscription payable as of September 30, 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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. As such, they were presented as a subscription payable as of September 30, 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. As such, they were presented as a subscription payable as of September 30, 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. As such, they were presented as a subscription payable as of September 30, 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 2,000 votes to each Class A Common Stock vote (2,000:1). 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 Mary 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, 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. No shares have been vested to date. In the event of the termination of Mr. Passley’s employment agreement for cause by the Company or without good reason by Mr. 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 Mr. Passley’s employment agreement for good reason (as described in the agreement) by Mr. 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 Mr. 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.

Amendment to Employment Agreement

On August 16, 2013, the Company amended Shaun 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.

Note 6 – Fair Value of Financial Instruments

Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company does not have any financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

The following schedule summarizes the valuation of financial instruments at fair value on a non-recurring basis in the balance sheets as of September 30, 2013 and December 31, 2012:

Fair Value Measurements at September 30, 2013

Level 1

Level 2

Level 3

Assets

Cash

43,085

–

Intangible assets

–

690,856

Goodwill

–

255,460

Total assets

43,085

–

946,316

Liabilities

Lines of credit

–

72,975

–

Capital leases

–

26,812

–

Notes payable, related parties

–

372,368

–

Convertible debts, net of discount of $112,436

–

86,413

–

Long term debts, including current maturities

–

1,119,688

–

Total Liabilities

–

1,678,256

–

43,085

(1,678,256

)

946,316

Fair Value Measurements at December 31, 2012

Level 1

Level 2

Level 3

Assets

Cash

46,101

–

Intangible assets

–

821,150

Goodwill

–

255,460

Total assets

46,101

–

1,076,610

Liabilities

Lines of credit

–

77,047

–

Capital leases

–

43,120

–

Notes payable, related parties

–

22,805

–

Convertible debts, net of discount of $139,068

–

227,681

–

Long term debts, including current maturities

–

1,111,162

–

Total Liabilities

–

1,481,095

–

46,101

(1,481,095

)

1,076,610

There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the nine months ended September 30, 2013 and the year ended December 31, 2012.

Level 2 liabilities consist of various debt arrangements, and Level 3 assets consist of intangible assets and goodwill. No fair value adjustment was necessary during the nine months ended September 30, 2013 and the year ended December 31, 2012.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 – Property and Equipment

Property and Equipment consists of the following at September 30, 2013 and December 31, 2012, respectively:

	September 30,			December 31,
	2013			2012
Furniture and fixtures	$	2,187		$	2,187
Computers and equipment		320,651			318,275
Software		67,986			67,986
Assets held under capital leases		134,800			134,800
		525,624			523,248
Less accumulated depreciation and amortization		(401,499	)		(326,951	)
	$	124,125		$	196,297

Depreciation expense totaled $74,548 and $86,051 for the nine months ended September 30, 2013 and 2012, respectively.

Note 8 – Intangible Assets

Intangible assets consisted of the following at September 30, 2013 and December 31, 2012, respectively:

	Useful	September 30,			December 31,
Description	Life	2013			2012
Technology-based intangible assets - PRMI	15 Years	$	480,720		$	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			1,170,720			1,170,720
Less: accumulated amortization			(479,864	)		(349,570	)
Intangible assets, net		$	690,856		$	821,150

Amortization expense on intangible assets totaled $130,294 and $111,786 for the nine months ended September 30, 2013 and 2012, respectively.

Note 9 – Lines of Credit

Lines of credit consisted of the following at September 30, 2013 and December 31, 2012, respectively:

	September 30,			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.	$	50,322		$	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.		19,023			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.		3,630			7,800

Total line of credit		72,975			77,047
Less: current portion		(72,975	)		(77,047	)
Line of credit, less current portion	$	–		$	–

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – 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 September 30, 2013 and December 31, 2012, respectively. Accumulated amortization of the leased equipment at September 30, 2013 and December 31, 2012 was $123,194 and $108,090, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense.

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of September 30, 2013, are as follows:

Twelve Months
Ending
September 30,	Amount
2014	$	20,708
2015		5,757
2016		1,872
Total minimum payments	$	28,337
Less: amount representing interest		(1,525	)
Present value of net minimum lease payments		26,812
Less: Current maturities of capital lease obligations		(19,839	)
Long-term capital lease obligations	$	6,973

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 – Notes Payable, Related Parties

Notes payable, related parties consist of the following at September 30, 2013 and December 31, 2012, respectively:

	September 30,		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 $132,776 was advanced and repaid by the CEO during the nine months ended September 30, 2013, and total proceeds and repayments were $349,560 and $411,073, respectively during the year ended December 31, 2012.	$	–	$	–

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.		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.		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.		24,000		–

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.		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.		14,000			–

Originated April 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 12, 2015. In addition, a loan origination fee of $7,000 was issued as consideration for the loan on April 12, 2013, and is being amortized on a straight line basis over the life of the loan.		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.		19,000			–

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		372,368			22,085
Less: current portion		(272,368	)		(22,085	)
Notes payable, related parties, less current portion	$	100,000		$	–

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company recorded interest expense on notes payable to related parties in the amounts of $11,418 and $40,625 during the nine months ended September 30, 2013 and 2012, respectively.

Note 12 – Convertible Debts

Convertible debts consist of the following at September 30, 2013 and December 31, 2012, respectively:

	September 30,		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 $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 $6,116 at September 30, 2013.		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, 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 $0.0018 per share, whichever is less, but not less than $0.00009 per share. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of $33,000 and $333 of accrued interest on the note was subsequently repaid in full on August 12, 2013 & thus the 12% interest was not assessed per the terms of the note.		–		–

Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into another 40,000,000 shares pursuant to debt conversion on August 7, 2013.		46,449		190,849

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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		198,849			366,749
Less: unamortized discount on beneficial conversion feature		(106,320	)		(139,068	)
Less: unamortized OID		(6,116	)		–
Convertible debts		86,413			227,681
Less: current maturities of convertible debts		(44,608	)		(74,708	)
Long term convertible debts	$	41,805		$	152,973

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company recognized interest expense in the amount of $34,358 and $6,416 for the nine months ended September 30, 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 $160,624 and $277,323 during the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively. The discount is amortized on a straight line basis from the dates of issuance until the earlier of the stated redemption date of the debts, as noted above or the actual settlement date.

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, 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 nine months ended September 30, 2013 and 2012, the Company recorded debt amortization expense in the amount of $197,156 and $100,454, respectively, attributed to the aforementioned debt discount, including $4,195 of amortization on the $14,300 OID during the nine months ended September 30, 2013.

During the nine months ended September 30, 2013, the Company issued a total of 448,527,451 shares pursuant to debt conversions in settlement of $315,061, consisting of $307,616 of outstanding principal and $7,446 of unpaid interest, including 220,000,000 shares pursuant to debt conversion in settlement of $144,400 of outstanding principal owed to a related party (“Star Convertible Note”) and 46,856,526 shares pursuant to debt conversion in settlement of $14,838 of outstanding principal owed to a related party (“GG Mars Capital Convertible Note”). The principal and interest was converted in accordance with the conversion terms, therefore no gain or loss has been recognized. In addition, on May 27, 2013, the Company modified a related party debt and issued 14,239,500 shares of Class A Common Stock in settlement of $14,239 of related party debt owed to Vivienne Passley, which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest. The total fair value of the common stock was $28,479 based on the closing price of the Company’s common stock on the date of grant, resulting in the recognition of a $14,240 loss on debt settlement.

During the year ended December 31, 2012, the Company issued a total of 71,292,329 shares pursuant to debt conversions in settlement of $374,228 of outstanding principal and $3,500 of unpaid interest, including 50,000,000 shares pursuant to debt conversion in settlement of $250,000 of outstanding principal owed to a related party (“Star Convertible Note”). The principal and interest was converted in accordance with the conversion terms, therefore no gain or loss has been recognized.

Asher Enterprises, Inc. Convertible Notes

On May 27, 2011, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $50,000. The First Asher Note had a maturity date of February 28, 2012, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market Price” means the average of the lowest five (5) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009 per share. The shares of common stock issuable upon conversion of the First Asher Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 nine months ended September 30, 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 nine months ended September 30, 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 $12,027 was amortized during the nine months ended September 30, 2013 and 2012, respectively.

On July 24, 2012, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $32,500. The Fourth Asher Note had a maturity date of April 26, 2013, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market Price” means the average of the lowest five (5) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009 per share. The shares of common stock issuable upon conversion of the Fourth Asher Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Fourth Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $6,889 was amortized during the nine months ended September 30, 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 $-0- was amortized during the nine months ended September 30, 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 $-0- was amortized during the nine months ended September 30, 2013 and 2012, respectively.

On August 19, 2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $53,000. The Seventh Asher Note had a maturity date of May 21, 2014, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the Seventh Asher Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Seventh Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $5,960 and $-0- was amortized during the nine months ended September 30, 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 $1,187 and $-0- was amortized during the nine months ended September 30, 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 nine months ended September 30, 2013 and 2012, respectively.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $39,131 and $66,560 was amortized during the nine months ended September 30, 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 $-0- was amortized during the nine months ended September 30, 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 lesser 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 $0.0018 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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 nine months ended September 30, 2013 and 2012, respectively.

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 $0.015 provided a value of $46,555 of which $5,286 and $-0- was amortized during the nine months ended September 30, 2013 and 2012, respectively.

Note 13 – Long Term Debts

Long term debts consist of the following at September 30, 2013 and December 31, 2012, respectively:

	September 30,		December 31,
	2013		2012
On June 24, 2013, the Company received a loan of $15,000 from WebBank, c/o NewLogic Business Loans, Inc., (“NewLogic”) bearing an effective interest rate of 5.71%, consisting of 176 daily week day 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, our Chief Executive Officer.	$	7,722	$	–

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, our Chief Executive Officer.		883		–

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, our Chief Executive Officer.		40,415		–

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.	44,985	–

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.	42,207	–

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.	45,168	–

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.	11,129	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.	88,696	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.	320,285	343,060

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Consideration for the MS Health acquisition included an unsecured $100,000 seller financed note payable (“MSHSC Note”), bearing interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and full payment of all amounts due after five (5) years, maturing March 27, 2022. Pursuant to an amendment to a consulting agreement with the seller on March 23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during the year ended December 31, 2012. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC.	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

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, our Chief Executive Officer.		3,462			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.		9,991			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.		66,785			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.		141,522			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, 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 Mr. 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.		202,438			216,214

Total long term debt		1,119,688			1,111,162
Less: current portion		(253,801	)		(218,699	)
Long term debt, less current portion	$	865,887		$	892,463

The Company recorded interest expense on long term debts, credit lines and capital leases in the amount of $162,845 and $103,437 for the nine months ended September 30, 2013 and 2012, respectively.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14 – Changes in Stockholder’s Equity (Deficit)

On May 17, 2013, the Board of Directors, consisting solely of Shaun Passley, 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, 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 1,000 authorized shares of $0.0001 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1^st of any calendar year in which the Company has generated revenue over $2 million, and an additional 24% of the Company’s net income beginning on January 1^st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into 60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders. The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions.

Convertible Preferred Stock, Series B

The Company has 1,000 authorized shares of $0.0001 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1^st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1^st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series B Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into 10% of the total number of then issued and outstanding shares of Class A Common Stock, provided that no conversion will take place until all holders of the Series B Preferred Stock consent to such conversion. The Series B Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series B Preferred Stock holders. The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions.

Declaration of Dividends

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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.

Common Stock, Class A

The Company has 6 billion authorized shares of $0.0001 par value Class A Common Stock.

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Loss on Convertible Debt Modification to Related Party

Shares of Class A Common Stock Issued for Services to Related Parties

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Shares of Class A Common Stock Issued for Loan Origination Fees to Related Parties

Convertible Common Stock, Class B

Note 15 - Subsequent Events

Shares of Class A Common Stock Issued as Loan Origination Fees to Related Parties

On November 13, 2013, the Company issued a total of 12,250,000 shares of Class A Common Stock to related parties as loan origination fees that were granted and presented as subscriptions payable during the period ended September 30, 2013. The total fair value of the common stock was $14,375.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS", "ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES. THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS, EXCEPT AS PROVIDED BY LAW. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO SEPTEMBER 30, 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, INTELLISYS, INC., A WISCONSIN CORPORATION ("INTELLISYS"), K9 BYTES, INC., AN ILLINOIS CORPORATION (“K9 BYTES”), MS HEALTH, INC., AN ILLINOIS CORPORATION (“MS HEALTH”) ANDCOOLING TECHNOLOGY SOLUTIONS, INC., AN ILLINOIS CORPORATION (“CST”), UNLESS OTHERWISE STATED, OR THE CONTEXT SUGGESTS OTHERWISE.

BUSINESS OVERVIEW

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

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

On, or about June 18, 2008, the Company acquired Desk Flex, Inc., an Illinois corporation (“DFI”), and Professional Resource Management, Inc., an Illinois corporation (“PRMI”).

Professional Resource Management, Inc. and Desk Flex, Inc.

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

PRMI and DFI are separate legal entities, but operate in conjunction. PRMI and DFI share office space and certain employees. DFI’s main source of revenue comes from the “Desk/Flex Software” product, which it owns, and PRMI’s main source of revenue comes from the “Agent Power” product line, which it owns. PRMI also acts as the general agent for DFI; however, there is no formal agency agreement between the two companies.

Autohire Software

Effective February 1, 2010, the Company entered into a Software Product Asset Purchase Agreement (the “Software Rights Agreement”) with Igenti, Inc., a Florida corporation (“Igenti”) to acquire the rights to Igenti’s AutoHire software, domain names, permits, customers, contracts, know-how, equipment, software programs, receivables and the intellectual property of Igenti associated therewith (the “AutoHire Software”). The AutoHire system provides a tool to power career centers, post job ads to sites and job boards, and to collect resumes online. The online processes supported by the system provide the mechanism to comply with the record keeping requirements of Title VII of the Civil Rights Act of 1964, which apply to organizations employing fifteen (15) or more persons.

IntelliSys, Inc.

On or about September 2, 2010, the Company entered into a Stock Purchase Agreement (the “IntelliSys Purchase Agreement”) with IntelliSys, Inc., a Wisconsin corporation (“IntelliSys”) and Paul Prahl, an individual and the sole stockholder of IntelliSys. Pursuant to the IntelliSys Purchase Agreement, the Company purchased 100% of the outstanding shares of IntelliSys. The IntelliSys Purchase Agreement closed on March 31, 2011 (“Closing”). As a result of the Closing, IntelliSys became a wholly-owned subsidiary of the Company. IntelliSys developed the IPMC Software (“IPMC”)(Integrated Plant Management Control) which is a software system design for water and wastewater facility management. IPMC is the technology-based strategy for optimizing operations by automatically collecting, managing, organizing and disseminating information for the operations, management, laboratory, maintenance, and engineering functions.

K9 Bytes, Inc.

On October 26, 2011, we, through a newly-formed wholly-owned Illinois subsidiary, K9 Bytes, Inc. (“K9 Sub”), entered into an Asset Purchase Contract and Receipt Agreement with K9 Bytes, Inc., a Florida corporation (“K9 Bytes” and the “Purchase Contract”). Pursuant to the Purchase Contract, we purchased all of K9 Bytes assets, including all of its intellectual property, its business trade name, website (k9bytessoftware.com), furniture, fixtures, equipment and inventory, accounts receivable and goodwill.

MS Health, Inc.

On March 8, 2012, we, through a newly-formed wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), entered into an Asset Purchase Agreement with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the Purchase Agreement, we purchased all of MSHSC’s assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and software.

Cooling Technology Solutions, Inc.

On March 4, 2013, we formed a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc. The Company plans to file a non-provisional patent application for its Project Flex product in the name of Cooling Technology Solutions, Inc. to develop a dorm room sized refrigerator that has yet to be developed, however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.

PLAN OF OPERATION

During the next twelve months, we plan to further develop our BoxesOS software, and hope to expand our customer base for our Desk/Flex, Agent Power, AutoHire, IntelliSys, K9 Bytes and MS Health software packages, and look for additional acquisitions that are in line with our business plan. In addition, we intend to develop a newly formed wholly-owned subsidiary, named Cooling Technology Solutions, Inc. to develop our Project Flex product, a dorm room sized refrigerator that has yet to be developed, and continue to pursue growth through acquisitions. We believe we can satisfy our cash requirements for the next three months with our current cash on hand and revenues generated from our operations. As such, continuing operations and completion of our plan of operation are contingent on finding additional sources of capital. We cannot assure investors that adequate revenues will be generated. In the absence of our projected revenues, we may be unable to proceed with our plan of operations. Even without significant revenues or additional funding within the next several months, we still anticipate being able to continue with our present activities, but we may require financing to potentially achieve our goals of growing our operations and increasing our revenues.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013, AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2012:

	For the Three Months Ended
	September 30,						Increase /
	2013			2012			(Decrease)
Revenues	$	156,750		$	308,881		$	(152,131	)

General and Administrative		231,705			201,766			29,939
Salaries and Wages		303,716			1,233,782			(930,066	)
Depreciation and Amortization		60,682			77,315			(16,633	)
Bad Debts (Recoveries)		5,407			137,077			(131,670	)

Total Operating Expenses		601,510			1,649,940			(1,048,430	)

Net Operating Loss		(444,760	)		(1,341,059	)		(896,299	)

Total Other Income (Expense)		(140,705	)		(328,436	)		(187,731	)

Net Loss	$	(585,465	)	$	(1,669,495	)	$	(1,084,030	)

Revenues:

For the three months ended September 30, 2013 we had revenue of $156,750 compared to revenue of $308,881 for the three months ended September 30, 2012, a decrease of $152,131, or 49% from the comparative period. The decrease in revenues was evenly derived amongst our subsidiaries.

General and Administrative:

General and administrative expenses increased by $29,939, or 15% to $231,705 for the three months ended September 30, 2013 compared to general and administrative expense of $201,766 for the three months ended September 30, 2012. The increase in general and administrative expense is due primarily to increased advertising and public relations fees incurred during the three months ending September 30, 2013 that weren’t incurred during the three months ending September 30, 2012.

Salaries and Wages:

Salaries and wages decreased by $930,066, or 75% to $303,716 for the three months ended September 30, 2013 compared to salaries and wages of $1,233,782 for the three months ended September 30, 2012. The decrease in salaries and wages is due primarily to the decreased stock based compensation of $989,684, which was comprised of $191,150 of share based compensation related to the issuance of 749,026,316 shares of Class A Common stock granted amongst Shaun Passley, CEO, Vivienne Passley and Fay Passley during the three months ended September 30, 2013, compared to $1,180,834 incurred during the three months ended September 30, 2012 pursuant to the issuance of a total of 2,000 shares of Preferred Stock, 1,061,000,000 shares of Class A Common Stock and 3,000,000 shares of Convertible Class B Common Stock granted amongst Shaun Passley, CEO and Fay Passley.

Depreciation and Amortization:

We had depreciation and amortization expense of $60,682 for the three months ended September 30, 2013 as compared to $77,315 for the three months ended September 30, 2012, a decrease of $16,633, or 22% from the comparative period. This decrease is principally due to certain assets reaching the end of their depreciable life cycle. We anticipate the replacement of these assets as resources become available.

Bad Debts (Recoveries):

We had bad debts expense of $5,407 for the three months ended September 30, 2013 as compared to bad debts expense of $137,077 for the three months ended September 30, 2012, a decrease in bad debts expense of $131,670, or 96% from the comparative period. This decrease is due to changes in our allowance for doubtful accounts. We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days old, and are more actively managing our receivables than we had previously.

Net Operating Loss:

Total operating expenses for the three months ended September 30, 2013 were $601,510, compared to $1,649,940 for the three months ended September 30, 2012, a decrease of $1,048,430, or 64% from the comparative period. We had net operating losses of $444,760 for the three months ended September 30, 2013 compared to net operating loss of $1,341,059 for the three months ended September 30, 2012, a decrease in operating loss of $896,299, or 67% from the comparative period. The decrease in operating loss was primarily due the decrease in stock based compensation to related parties, decreased revenues and decreased bad debts expense.

Other Income (Expense):

Interest expense was $140,705 for the three months ended September 30, 2013 compared to $167,003 for the three months ended September 30, 2012, a decrease of $26,298, or 16% from the comparative period. Interest expense decreased primarily due to increased borrowings from related parties that generally carried lower interest rates than outstanding debts during the three months ended September 30, 2012.

Loss on debt conversions related to a modification and settlement of related party debts was $161,447 for the three months ended September 30, 2012 compared to $-0- for the three months ended September 30, 2013. The comparative period loss on debt modification was due to the modification of a promissory note with Star Financial that resulted in a loss of $98,528 and the settlement of outstanding liabilities owed to L&F Lawn Services with shares of common stock that resulted in a loss of $62,919.

Net Loss:

We had a net loss of $585,465 for the three months ended September 30, 2013 compared to a net loss of $1,669,495 for the three months ended September 30, 2012, resulting in a decreased net loss of $1,084,030, or 65% from the comparative period. The decreased net loss was due the decrease in stock based compensation to related parties, decreased revenues and decreased bad debts expense, in addition tolosses on debt modifications and settlements with related parties incurred during the three months ended September 30, 2012 that were not incurred during the comparative three months ended September 30, 2013.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013, AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2012:

	For the Nine Months Ended
	September 30,						Increase /
	2013			2012			(Decrease)
Revenues	$	643,879		$	856,248		$	(212,369	)

General and Administrative		519,339			524,647			(5,308	)
Salaries and Wages		2,074,950			1,394,994			679,956
Depreciation and Amortization		204,842			199,956			4,886
Bad Debts (Recoveries)		(3,333	)		102,005			(105,338	)

Total Operating Expenses		2,795,798			2,221,602			574,196

Net Operating Loss		(2,151,919	)		(1,365,354	)		786,565

Total Other Income (Expense)		(499,695	)		(412,327	)		87,368

Net Loss	$	(2,651,614	)	$	(1,777,681	)	$	873,933

Revenues:

For the nine months ended September 30, 2013 we had revenue of $643,879 compared to revenue of $856,248 for the nine months ended September 30, 2012, a decrease of $212,369, or 25% from the comparative period. The decrease in revenues was evenly derived amongst our subsidiaries.

General and Administrative:

General and administrative expenses decreased by $5,308, or 1% to $519,339 for the nine months ended September 30, 2013 compared to general and administrative expense of 524,647 for the nine months ended September 30, 2012. The decrease in general and administrative expense is due primarily to decreased professional fees as a result of not having to pay for the preparation of restatements for the year ended December 31, 2011 and acquisition costs during the nine months ending September 30, 2013 that were necessary during the nine months ending September 30, 2012.

Salaries and Wages:

Salaries and wages increased by $679,956, or 49% to $2,074,950 for the nine months ended September 30, 2013 compared to salaries and wages of $1,394,994 for the nine months ended September 30, 2012. The increase in salaries and wages is due primarily to the increase in stock based compensation of $532,316, consisting of $1,713,150 of stock based compensation granted during the none months ended September 30, 2013 pursuant to the issuance of a total of 1,561,552,632 shares of Class A Common Stock granted amongst Shaun Passley, CEO, Craig Passley, Corporate Secretary and Vivienne Passley valued at $1,703,650, and 5,000,000 shares of Convertible Class B Common Stock valued at $9,500 granted to Shaun Passley, CEO, in addition to increased cash compensation related to additional personnel on hand pursuant to our K9 Bytes subsidiary that was acquired on March 28, 2012. Another 254,000,000 shares valued at a total of $454,000 were issued that have not vested, and are 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 $1,180,834, consisting of a total of 2,000 shares of Preferred Stock, 1,061,000,000 shares of Class A Common Stock and 3,000,000 shares of Convertible Class B Common Stock granted amongst Shaun Passley, CEO and Fay Passley was issued for services during the nine months ending September 30, 2012.

Depreciation and Amortization:

We had depreciation and amortization expense of $204,842 for the nine months ended September 30, 2013 as compared to $199,956 for the nine months ended September 30, 2012, an increase of $4,886, or 2% from the comparative period. This increase is due to having a greater depreciable asset base as a result of our acquisition of K9 Bytes on March 28, 2012.

Bad Debts (Recoveries):

We had bad debts (recoveries) of $(3,333) for the nine months ended September 30, 2013 as compared to bad debts expenses of $102,005 for the nine months ended September 30, 2012, a decrease in bad debts expense of $105,338, or 103% from the comparative period. This decrease is due to changes in our allowance for doubtful accounts. We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days old, and are more actively managing our receivables than we had previously.

Net Operating Loss:

Total operating expenses for the nine months ended September 30, 2013 were $2,795,798, compared to $2,221,602 for the nine months ended September 30, 2012, an increase of $574,196, or 26% from the comparative period. We had net operating losses of $2,151,919 for the nine months ended September 30, 2013 compared to $1,365,354 for the nine months ended September 30, 2012, an increase in operating loss of $786,565, or 58%, from the comparative period. The increase in operating loss was primarily due the increase in stock based compensation to related parties, decreased revenues and decreased bad debts expense as we more actively managed our accounts receivable.

Other Income (Expense):

Loss on convertible debt modification, related party was $96,032 for the nine months ended September 30, 2013 compared to $-0- for the nine months ended September 30, 2012, an increase of $96,032 from the comparative period. The current period loss on debt modification was due to an amended convertible promissory note with Star Financial Corporation, which at the time of modification carried a balance of $190,849, and the settlement of a promissory note with Vivienne Passley, which at the time of modification carried a balance of $14,239, including accrued interest of $1,239. We amended the Star Financial convertible promissory note to revise the conversion terms from a $0.005 floor and 75% discount to market to conversion terms consisting of, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The Company compared the fair value of the debt immediately preceding the modification to the fair value after the modification to determine the loss on modification of $81,792. We also amended the Vivienne Passley promissory note to satisfy repayment with 14,239,500 shares of common stock valued at $28,479 based on the closing price of the common stock on the grant date. 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 $14,240.

Interest expense was $403,663 for the nine months ended September 30, 2013 compared to $250,932 for the nine months ended September 30, 2012, an increase of $152,932, or 61% from the comparative period. Interest expense increased due to increased borrowings to finance our acquisitions, as well as an increase of $90,392 of finance costs related to the amortized discount on beneficial conversion features of $190,846 during the nine months ended September 30, 2013 over the $100,454 of amortized discounts recognized during the nine months ended September 30, 2012, in addition to another $20,645 in excess of the carrying value of Asher Note 5 paid to satisfy the convertible note with Asher Enterprises during the nine months ended September 30, 2013 that was not present in the comparative nine months ended September 30, 2012.

Other expense consisted of loss on debt conversions related to a modification and settlement of related party debts was $161,447 for the three months ended September 30, 2012 compared to $-0- for the three months ended September 30, 2013. The comparative period loss on debt modification was due to the modification of a promissory note with Star Financial that resulted in a loss of $98,528 and the settlement of outstanding liabilities owed to L&F Lawn Services with shares of common stock that resulted in a loss of $62,919.

Net Loss:

We had a net loss of $2,651,614 for the nine months ended September 30, 2013 compared to $1,777,681 for the nine months ended September 30, 2012, an increased net loss of $873,933, or 49%, from the comparative period. The increased net loss was primarily due to increased stock based compensation, losses on convertible debt modification issued to related parties and increased debt servicing costs in the combined amount of $690,888, and the recognition of an additional $90,392 of associated amortization costs on debt discounts related to beneficial conversion features and decreased revenues of $212,369 during the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes total assets, accumulated deficit, stockholders’ equity (deficit) and working capital at September 30, 2013 compared to December 31, 2012.

	September 30,			December 31,
	2013			2012
Total Assets	$	1,197,459		$	1,378,030

Total Liabilities	$	2,039,478		$	1,849,541

Accumulated (Deficit)	$	(6,784,370	)	$	(4,114,756	)

Stockholders’ Equity (Deficit)	$	(842,019	)	$	(471,511	)

Working Capital (Deficit)	$	(897,795	)	$	(681,561	)

We had total current assets of $127,018 as of September 30, 2013, consisting of cash of $43,085, net accounts receivable of $13,981, and other current assets of $69,952.

We had non-current assets of $1,070,441 as of September 30, 2013, consisting of $124,125 of property and equipment, net, including accumulated depreciation and amortization of $401,499, intangible assets of $690,856, net, including $479,864 of accumulated amortization and goodwill of $255,460 related to the purchase of our subsidiaries.

We had total current liabilities of $1,024,813 as of September 30, 2013, consisting of $18,000 of dividends payable in stock or cash at the election of management, $192,572 of accounts payable and accrued expenses, $150,650 of deferred revenues, current portion of outstanding balances on lines of credit of $72,975, current portion of capitalized leases in the amount of $19,839, current maturities of notes payable, related parties of $272,368, current maturities on convertible debentures of $44,608, net of discounts of $107,792, and current maturities on long term debts in the amount of $253,801.

We had negative working capital of $897,795 and a total accumulated deficit of $6,784,370 as of September 30, 2013.

We had total liabilities of $2,039,478 as of September 30, 2013, which included total current liabilities of $1,024,813, long-term portion of capitalized leases of $6,973, long term portion of notes payable, related parties of $100,000, long-term convertible debentures of $41,805, net of discounts of $4,644 and long-term debts of $865,887, net of current portion.

We had net cash used in operating activities of $403,809 for the nine months ended September 30, 2013, which was primarily due to our net loss of $408,732 after adjustments for non-cash operating expenses, a decrease of $26,347 in accounts receivable, an increase of $4,884 of other current assets, and an increase of $52,400 in accounts payable and accrued expenses, and a decrease of $68,940 in deferred revenues.

We had $2,376 of net cash used in investing activities for the nine months ended September 30, 2013, which consisted of $2,376 of cash paid for the purchase of equipment.

We had $403,169 of net cash provided in financing activities during the nine months ended September 30, 2013, which represented proceeds from notes payable and convertible debts of $871,885, repayments on long term and convertible debts of $452,408 and principal payments on capital leases of $16,308.

Declaration of Dividends

Recent Financing Activities

Third quarter of 2013:

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 $39,556 was advanced and repaid by the CEO during the three months ended September 30, 2013.

On various dates between July 19, 2013 and September 7, 2013, related parties advanced net proceeds of $264,500 in exchange for unsecured promissory notes bearing interest at 15% and additional loan origination costs of $40,500. In addition, a total of 25,750,000 shares of Class A Common Stock with a cumulative fair value of $36,150 were granted as loan origination costs to related parties, of which 12,250,000 shares with a fair value of $15,600 weren’t issued until November 13, 2013. As a result, the $15,600 was presented as a subscriptions payable at September 30, 2013.

On September 18, 2013, we issued an unsecured $42,500 convertible promissory note, which 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.

On August 19, 2013, we issued an unsecured $53,000 convertible promissory note, which 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.

On September 5, 2013, we issued an unsecured $56,900 convertible promissory note, including an Original Issue Discount (“OID”) of $6,900, which 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.

We have no current commitment from our officers and directors or any of our shareholders to supplement our operations or provide us with financing in the future. If we are unable to raise additional capital from conventional sources and/or additional sales of stock in the future, we may be forced to curtail or cease our operations. Even if we are able to continue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results.

In the future, we may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all.

Recent Debt Conversions

Third quarter of 2013:

On various dates between July 9, 2013 and August 20, 2013, we issued a total of 224,106,205 shares of common stock pursuant to debt conversions of a total of $105,138 of principal and $3,763 of accrued interest, of which, 120,000,000 shares of common stock were issued in conversion of $58,400 of outstanding principal on a related party note owed to Star Financial Corporation and 46,856,526 shares of common stock were issued in conversion of $14,838 of outstanding principal on a related party note owed to GG Mars Capital, Inc.

A total of $198,849 of convertible debentures remain outstanding as of the date of this filing, and are convertible at various hypothetical prices discounted to market as depicted in the table below:

				Potential issuable shares at various conversion prices
				below the most recent market price of $0.0006 per share
Lender /	Conversion		Principal		100%		75%		50%		25%
Origination	Terms		Borrowed	$	0.0006	$	0.0005	$	0.0003	$	0.0002

Star Financial (Related Party) July 2, 2012	As amended on March 5, 2013, convertible into the greater of (a) 50% of the average of the closing market price over the 5 days prior to the conversion request, and (b) the fixed conversion price of $0.00075 per share. Interest rate of 10%.	$	46,449		77,415,000		103,220,000		154,830,000		309,660,000

Asher Enterprises, Inc. (Seventh Asher Note) August 19, 2013	Convertible into 59% of the average of the three lowest trading prices over the 10 days prior to the conversion request, or $0.00005, whichever is greater. Interest rate of 8% with a 22% default rate.	$	53,000		88,333,333		117,777,778		176,666,667		353,333,333

Asher Enterprises, Inc. (Eighth Asher Note) September 18, 2013	Convertible into 59% of the average of the three lowest trading prices over the 10 days prior to the conversion request, or $0.00005, whichever is greater. Interest rate of 8% with a 22% default rate.	$	42,500		70,833,333		94,444,444		141,666,667		283,333,333

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.	$	56,900		94,833,334		126,444,445		189,666,666		379,333,334

		$	198,849		331,415,000		441,886,667		662,830,000		1,325,660,000

Recent Shares of Common Stock Issued for Services

Third quarter of 2013:

To conserve on the Company's capital requirements, the Company has issued shares in lieu of cash payments to related parties, and the Company expects to continue this practice. In the three months ended September 30, 2013, the Company granted a total of 735,526,316 shares of Class A Common Stock valued at $512,368 in lieu of cash payments to our officer and a related party as disclosed below:

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. 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, consisting of 200,000,000 shares valued at $140,000 that vest immediately and 510,526,316 shares valued at $357,368 issued tothe Company’s CEO in consideration for providing product development services that will vest once the Company reports revenue of $10 million in a calendar year. The unvested shares are 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 Company is not now in a position to determine an approximate number of shares that the Company may issue for the preceding purpose in the remainder of 2013.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(c) and 15d – 15(e)). Based upon that evaluation, our principal executive officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer, as appropriate to allow timely decisions regarding required disclosure.

Inherent Limitations of Internal Controls

Our Principal Executive Officer does not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, other than those stated above, during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following sales of equity securities by the Company occurred during the three month period ended September 30, 2013:

Debt Conversion Issuances

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.

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.

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.

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, consisting of $10,900 of principal and $3,763 of accrued and unpaid interest.

On August 20, 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 Company claims an exemption from registration afforded by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”), for the above conversions, as the securities were exchanged by the Company with its existing security holders exclusively in transactions where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange and Section 4(2) of the Act for the issuances as the issuances did not involve a public offering, the recipients took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipients are (a) “accredited investors”; or (b) have access to similar documentation and information as would be required in a Registration Statement under.

Shares Issued for Services

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.

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. A totalof 200,000,000 of these shares vested immediately and 510,526,316 shares issued tothe Company’s CEO in consideration for providing product development services will vest once the Company reports revenue of $10 million in a calendar year. The unvested shares are 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.

Shares Issued to Related Parties for Loan Origination Services

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.

On July 31, 2013, the Company issued 3,000,000 shares of Class A Common Stock to Star Financial Corporation, a related party, as a loan origination cost.

On August 2, 2013, the Company issued 3,000,000 shares of Class A Common Stock to Star Financial Corporation, a related party, as a loan origination cost.

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.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION

Debt Assignment Agreement and Exchange to Convertible Debt

On August 20, 2013, the Company exchanged a promissory note held by GG Mars Capital, Inc., a company owned by an immediate family member of the Company’s CEO for a convertible note. 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 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 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.

Item 6. Exhibits

			Incorporated by reference
Exhibit	Exhibit Description	Filed herewith	Form	Period ending	Exhibit	Filing date
3.1	Articles of Incorporation		SB-2	12/04/06	X	12/04/06
3.2	Articles of Amendment		SB-2	12/04/06	X	12/04/06
3.3	Articles of Amendment		SB-2	12/04/06	X	12/04/06
3.4	Articles of Amendment		SB-2	12/04/06	X	12/04/06
3.5	Statement of Change of Registered Agent		SB-2	12/04/06	X	12/04/06
3.6	Articles of Amendment		SB-2	12/04/06	X	12/04/06
3.7	Amended and Restated By-Laws		SB-2	12/04/06	X	12/04/06
3.8	Articles of Amendment		10-Q	09/30/12	X	12/18/12
3.9	Articles of Amendment		10-K	12/31/12	X	06/03/13
4.1	Form of Stock Certificate		SB-2	12/04/06	X	12/04/06
10.1	Form of Promissory Note with Vivienne Passley, July 19, 2013	X
10.2	Form of Promissory Note with Vivienne Passley, August 12, 2013	X
10.3	Form of Promissory Note with Star Financial Corporation, July 31, 2013	X
10.4	Form of Promissory Note with Star Financial Corporation, August 2, 2013	X
10.5	Form of Promissory Note with Star Financial Corporation, August 7, 2013	X
10.6	Form of Promissory Note with Star Financial Corporation, August 27, 2013	X
10.7	Form of Promissory Note with GG Mars Capital, Inc., August 20, 2013	X
10.8	Form of Promissory Note with GG Mars Capital, Inc., September 7, 2013	X
10.9	Form of Convertible Promissory Note with GG Mars Capital, Inc., August 20, 2013	X
10.10	Form of Assignment Agreement with GG Mars Capital, Inc. and Accion Chicago, August 15, 2013	X
10.11	Form of Convertible Promissory Note with St. George Investments, Inc., September 5, 2013	X
10.12	Form of Note Purchase Agreement with St. George Investments, Inc., September 5, 2013
10.13	Form of Convertible Promissory Note with Asher Enterprises (Seventh Asher Note), August 19, 2013	X
10.14	Form of Securities Purchase Agreement with Asher Enterprises (Seventh Note), August 19, 2013	X
10.15	Form of Amendment #1 to Promissory Note with Asher Enterprises (Seventh Asher Note), November 7, 2013	X
10.16	Form of Convertible Promissory Note with Asher Enterprises (Eighth Asher Note), September 18, 2013	X
10.17	Form of Securities Purchase Agreement with Asher Enterprises (Eighth Note), September 18, 2013	X
10.18	Form of Amendment #1 to Promissory Note with Asher Enterprises (Eighth Asher Note), November 7, 2013	X
10.19	Form of Amendment #1 to Promissory Note with JMJ Financial (First JMJ Note), August 13, 2013	X
21.1	Subsidiaries	X
31.1	Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
101.INS	XBRL Instance Document	X
101.SCH	XBRL Schema Document	X
101.CAL	XBRL Calculation Linkbase Document	X
101.DEF	XBRL Definition Linkbase Document	X
101.LAB	XBRL Labels Linkbase Document	X
101.PRE	XBRL Presentation Linkbase Document	X

SIGNATURES

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


	EPAZZ, INC.

DATED: November 19, 2013	By: /s/ Shaun Passley
	Shaun Passley
	Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Epazz (EPAZ) 10-Q2013 Q3 Quarterly report

Content analysis