UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2012 |
| [ ] | 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.) |
309 W. Washington St. Suite 1225
Chicago, IL 60606
(Address of principal executive offices)
(312) 955-8161
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
The number of shares of the issuer’s Class A common stock outstanding as of August 17, 2012, was 76,788,072 shares, par value $0.001 per share.
EPAZZ, INC.
FORM 10-Q
Quarterly Period Ended June 30, 2012
| Page | ||
| SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | ||
| PART I. FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | |
| Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 | F-1 | |
| Statements of Operations for the Three and Six Months ended June 30, 2012 and 2011 (Unaudited) | F-2 | |
| Statements of Cash Flows for the Six Months ended June 30, 2012 and 2011 (Unaudited) | F-3 | |
| Notes to the Condensed Financial Statements (Unaudited) | F-4 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 |
| Item 4. | Controls and Procedures | 14 |
| PART II. OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 15 |
| Item 1A. | Risk Factors | 15 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
| Item 3. | Defaults Upon Senior Securities | 16 |
| Item 4. | Mine Safety Disclosure | 16 |
| Item 5. | Other Information | 16 |
| Item 6. | Exhibits | 17 |
| SIGNATURES | 18 | |
ITEM 1. FINANCIAL STATEMENTS
| EPAZZ, INC. | ||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Assets | (Unaudited) | |||||||
| Current assets: | ||||||||
| Cash | $ | 81,667 | $ | 12,668 | ||||
| Accounts receivable, net | 103,300 | 148,418 | ||||||
| Other current assets | 12,766 | 11,113 | ||||||
| Total current assets | 197,733 | 172,199 | ||||||
| Property and equipment, net | 240,703 | 145,593 | ||||||
| Intangible assets, net | 908,474 | 576,598 | ||||||
| Goodwill | 255,460 | 140,832 | ||||||
| Total assets | $ | 1,602,370 | $ | 1,035,222 | ||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 105,397 | $ | 41,430 | ||||
| Accounts payable, related party | 53,969 | - | ||||||
| Accrued expenses | 126,381 | 102,572 | ||||||
| Deferred revenue | 258,006 | 323,028 | ||||||
| Lines of credit | 75,524 | - | ||||||
| Current maturities of capital lease obligations payable | 32,767 | 47,515 | ||||||
| Current maturities of long term debt | 153,569 | 75,565 | ||||||
| Notes payable, related parties | 348,310 | 404,401 | ||||||
| Convertible debt, net of discounts of $-0- and $14,978, respectively | 59,500 | 64,522 | ||||||
| Total current liabilities | 1,213,423 | 1,059,033 | ||||||
| Capital lease obligations payable, net of current maturities | 29,412 | 13,816 | ||||||
| Long term debt, net of current maturities | 984,416 | 499,068 | ||||||
| Total liabilities | 2,227,251 | 1,571,917 | ||||||
| Stockholders' equity (deficit): | ||||||||
| Common stock, Class A, $0.01 par value, 300,000,000 shares authorized , | ||||||||
| 33,514,012 and 30,900,281 shares issued and outstanding, respectively | 335,141 | 309,003 | ||||||
| Common stock, Class B, $0.01 par value, 60,000,000 shares | ||||||||
| authorized, 2,500,000 shares issued and outstanding | 25,000 | 25,000 | ||||||
| Additional paid in capital | 2,331,231 | 2,337,369 | ||||||
| Stockholders' receivable, consisting of 25,000,000 shares | (1,000,000 | ) | (1,000,000 | ) | ||||
| Accumulated deficit | (2,316,253 | ) | (2,208,067 | ) | ||||
| Total stockholders' equity (deficit) | (624,881 | ) | (536,695 | ) | ||||
| Total liabilities and stockholders' equity (deficit) | $ | 1,602,370 | $ | 1,035,222 | ||||
| See accompanying notes to financial statements. | ||||||||
F-1
| EPAZZ, INC. | ||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (Restated) | (Restated) | |||||||||||||||
| Revenue | $ | 432,890 | $ | 235,707 | $ | 547,367 | $ | 450,290 | ||||||||
| Expenses: | ||||||||||||||||
| General and administrative | 259,828 | 177,438 | 484,093 | 330,933 | ||||||||||||
| Depreciation and amortization | 75,167 | 32,604 | 122,641 | 59,644 | ||||||||||||
| Bad debts (recoveries) | (42,847 | ) | - | (35,072 | ) | - | ||||||||||
| Total operating expenses | 292,148 | 210,042 | 571,662 | 390,577 | ||||||||||||
| Net operating income (loss) | 140,742 | 25,665 | (24,295 | ) | 59,713 | |||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 33 | 12 | 38 | 27 | ||||||||||||
| Interest expense | (42,854 | ) | (13,882 | ) | (83,929 | ) | (18,594 | ) | ||||||||
| Total other income (expense) | (42,821 | ) | (13,870 | ) | (83,891 | ) | (18,567 | ) | ||||||||
| Net income (loss) | $ | 97,921 | $ | 11,795 | $ | (108,186 | ) | $ | 41,146 | |||||||
| Weighted average number of common shares | ||||||||||||||||
| outstanding - basic and fully diluted | 32,060,081 | 30,448,294 | 31,586,526 | 30,448,294 | ||||||||||||
| Net income (loss) per share - basic and fully diluted | $ | 0.00 | $ | 0.00 | $ | (0.00 | ) | $ | 0.00 | |||||||
| See accompanying notes to financial statements. | ||||||||||||||||
F-2
| EPAZZ, INC. | ||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| (Unaudited) | ||||||||
| For the Six Months | ||||||||
| Ended June 30, | ||||||||
| 2012 | 2011 | |||||||
| (Restated) | ||||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | (108,186 | ) | $ | 41,146 | |||
| Adjustments to reconcile net income (loss) to | ||||||||
| net cash provided by (used in) operating activities: | ||||||||
| Bad debt (recoveries) | (35,072 | ) | - | |||||
| Depreciation and amortization | 54,517 | 58,352 | ||||||
| Amortization of intangible assets | 68,124 | - | ||||||
| Amortization of deferred financing costs | 5,041 | - | ||||||
| Amortization of discount on convertible notes payable | 14,978 | - | ||||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable | 80,190 | 92,587 | ||||||
| Other current assets | 8,776 | - | ||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | 63,967 | (37,787 | ) | |||||
| Accounts payable, related parties | 53,969 | - | ||||||
| Accrued expenses | (889 | ) | 1,291 | |||||
| Deferred revenues | (65,022 | ) | (61,963 | ) | ||||
| Net cash provided by (used in) operating activities | 140,393 | 93,626 | ||||||
| Cash flows from investing activities | ||||||||
| Proceeds from the sale of equipment | 14,175 | - | ||||||
| Purchase of equipment | (145,947 | ) | - | |||||
| Acquisition of subsidiaries | (39,200 | ) | - | |||||
| Net cash used in investing activities | (170,972 | ) | - | |||||
| Cash flows from financing activities | ||||||||
| Proceeds on capital lease obligations payable | - | 36,831 | ||||||
| Payments on capital lease obligations payable | (17,007 | ) | (72,541 | ) | ||||
| Proceeds from notes payable, related parties | 19,539 | 66,530 | ||||||
| Repayment of notes payable, related parties | (75,630 | ) | (74,601 | ) | ||||
| Proceeds from long term debt | 293,487 | - | ||||||
| Repayment of long term debt | (120,811 | ) | - | |||||
| Net cash provided by (used in) financing activities | 99,578 | (43,781 | ) | |||||
| Net increase (decrease) in cash | 68,999 | 49,845 | ||||||
| Cash - beginning | 12,668 | 40,613 | ||||||
| Cash - ending | $ | 81,667 | $ | 90,458 | ||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | 29,279 | $ | 13,615 | ||||
| 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 | $ | 20,000 | $ | - | ||||
| See accompanying notes to financial statements. | ||||||||
F-3
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, 2011 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 |
(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 and MS Health 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.
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 no other items that required fair value measurement on a recurring basis.
F-4
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 $68,124 and $21,466 for the six months ended June 30, 2012 and 2011, 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.
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 six months ending June 30, 2012 and 2011.
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.
F-5
In estimating its selling price for the software, the Company considers the cost to produce the software, profit margin for similar arrangements, customer demand, effect of competitors on the Company’s software, and other market constraints. When applying the relative selling price method, the Company uses its best estimate of selling price for the software, and third-party evidence of selling price for the installation. Accordingly, without considering whether any portion of the amount allocable to the software is contingent upon delivery of the other items, the Company allocates the selling price to the software, support, and installation.
The Company doesn’t currently provide product warranties, but if it does in the future it will provide for specific product lines and accrue for estimated future warranty costs in the period in which the revenue is recognized.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented. The adoption of ASU 2011-12 is not expected to have a material impact on our financial position or results of operations.
In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the impact, if any, that the adoption of this pronouncement may have on its results of operations or financial position.
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 $(2,316,253), and as of June 30, 2012, the Company’s current liabilities exceeded its current assets by $1,015,690 and its total liabilities exceeded its total assets by $624,881. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Correction of Errors
On April 13, 2012, Epazz, Inc. restated its Form 10-Q/A (the “First Amendment”) to its Interim Report for the Interim period ended June 30, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on August 17, 2011 (the “Original Report”) in response to certain issues set forth in our Quarterly Report on Form 10-Q filed with the SEC on November 22, 2010 (the “Form 10-Q”). The consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2010 and the Quarterly Reports on Form 10-Q for the three months ended March 31, 2011, the six months ended June 30, 2011 and nine months ended September 30, 2011 required restatement in order to correct errors related to the following (which reports have previously been restated):
The Company determined that it had not properly recorded the September 30, 2010 acquisition of its subsidiary, IntelliSys. Subsequently, the balance sheet has been adjusted to properly reflect the Goodwill that should have been recognized when the acquisition was initially recorded. Intangible assets, retained earnings and the Consolidated Statement of Operations have also been adjusted to correct related recording errors originally recorded at the time of the acquisition. The Company also determined that it had omitted accrued expenses that should have been recorded on the balance sheet dated June 30, 2011. Accounts payable and accrued expenses have been adjusted to correct this omission.
F-6
The Company also determined that it did not properly record stock issued in exchange for services rendered. Accordingly, the stock transaction, which was originally recorded to prepaid expense, has been reclassified to the Company’s equity account.
The effect on the Company’s previously issued June 30, 2011 financial statements are summarized as follows:
Balance Sheet as of June 30, 2011:
| As Originally | ||||||||||||
| Reported | As Restated | |||||||||||
| June 30, | June 30, | |||||||||||
| 2011 | Adjustments | 2011 | ||||||||||
| Assets | (Restated) | |||||||||||
| Current assets: | ||||||||||||
| Cash | $ | 89,858 | $ | 600 | $ | 90,458 | ||||||
| Accounts receivable, net | 201,950 | - | 201,950 | |||||||||
| Deferred financing cost, current | 2,342 | - | 2,342 | |||||||||
| Other current assets | 8,852 | (600 | ) | 8,252 | ||||||||
| Total current assets | 303,002 | - | 303,002 | |||||||||
| Property and equipment, net | 201,124 | 3,164 | 204,288 | |||||||||
| Intangible assets, net | 355,178 | 190,001 | 545,179 | |||||||||
| Goodwill | 253,588 | (200,000 | ) | 53,588 | ||||||||
| Prepaid expense | 1,000,000 | (1,000,000 | ) | - | ||||||||
| Total assets | $ | 2,112,892 | $ | (996,836 | ) | $ | 1,106,057 | |||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable and accrued liabilities | $ | 116,151 | $ | 443 | $ | 116,594 | ||||||
| Deferred revenue | 204,928 | - | 204,928 | |||||||||
| Current maturities of capital lease obligations payable | 50,641 | - | 50,641 | |||||||||
| Current maturities of long term debt | 61,731 | - | 61,731 | |||||||||
| Total current liabilities | 433,451 | 443 | 433,894 | |||||||||
| Capital lease obligations payable, net of current maturities | 52,295 | - | 52,295 | |||||||||
| Notes payable, related parties, net of current maturities | 558,017 | - | 558,017 | |||||||||
| Long term debt, net of current maturities | 257,675 | 36,392 | 294,067 | |||||||||
| Total liabilities | 1,301,438 | 36,835 | 1,338,273 | |||||||||
| Stockholders' equity (deficit): | ||||||||||||
| Common stock, Class A, $0.01 par value, 60,000,000 shares | �� | |||||||||||
| authorized, 30,448,294 shares issued and outstanding | 304,483 | - | 304,483 | |||||||||
| Common stock, Class B, $0.01 par value, 60,000,000 shares | ||||||||||||
| authorized, 2,500,000 shares issued and outstanding | 25,000 | - | 25,000 | |||||||||
| Additional paid in capital | 2,268,360 | - | 2,268,360 | |||||||||
| Stockholders’ receivable | - | (1,000,000 | ) | (1,000,000 | ) | |||||||
| Accumulated deficit | (1,786,389 | ) | (43,670 | ) | (1,848,658 | ) | ||||||
| Total stockholders' equity (deficit) | (811,454 | ) | (1,043,670 | ) | (232,216 | ) | ||||||
| Total liabilities and stockholders' equity (deficit) | $ | 2,112,892 | $ | (1,006,835 | ) | $ | 1,106,057 | |||||
When the acquisition of IntelliSys was originally recorded, it erroneously included pre-acquisition activity. An adjustment was made to correct this error in the most recently restated reports. On the June 30, 2011 Amended Report the following adjustments were made:
F-7
Statement of Operations for the three months ended June 30, 2011:
| As Originally | ||||||||||||
| Reported | As Restated | |||||||||||
| June 30, | June 30, | |||||||||||
| 2011 | Adjustments | 2011 | ||||||||||
| (Restated) | ||||||||||||
| Revenue | $ | 282,707 | $ | (47,000 | ) | $ | 235,707 | |||||
| Expenses: | ||||||||||||
| General and administrative | 180,798 | (3,360 | ) | 177,438 | ||||||||
| Depreciation and amortization | 29,271 | 3,333 | 32,604 | |||||||||
| Total operating expenses | 210,069 | (27 | ) | 210,042 | ||||||||
| Net operating income | 72,638 | (46,973 | ) | 25,665 | ||||||||
| Other income (expense): | ||||||||||||
| Interest income | 12 | - | 12 | |||||||||
| Interest expense | (13,882 | ) | - | (13,882 | ) | |||||||
| Total other income (expense) | (13,870 | ) | - | (13,870 | ) | |||||||
| Net income | $ | 58,768 | $ | (46,973 | ) | $ | 11,795 | |||||
Statement of Operations for the six months ended June 30, 2011:
| As Originally | ||||||||||||
| Reported | As Restated | |||||||||||
| June 30, | June 30, | |||||||||||
| 2011 | Adjustments | 2011 | ||||||||||
| (Restated) | ||||||||||||
| Revenue | $ | 487,129 | $ | (36,839 | ) | $ | 450,290 | |||||
| Expenses: | ||||||||||||
| General and administrative | 324,709 | 6,224 | 330,933 | |||||||||
| Depreciation and amortization | 52,978 | 6,666 | 59,644 | |||||||||
| Total operating expenses | 377,687 | 12,890 | 390,577 | |||||||||
| Net operating income | 109,442 | (49,729 | ) | 59,713 | ||||||||
| Other income (expense): | ||||||||||||
| Interest income | 27 | - | 27 | |||||||||
| Interest expense | (24,820 | ) | 6,226 | (18,594 | ) | |||||||
| Total other income (expense) | (24,793 | ) | 6,226 | (18,567 | ) | |||||||
| Net income | $ | 84,649 | $ | (43,503 | ) | $ | 41,146 | |||||
F-8
The following adjustments were made on the June 30, 2011 Restated Statement of Cash Flows:
| As Originally | ||||||||||||
| Reported | As Restated | |||||||||||
| June 30, | June 30, | |||||||||||
| 2011 | Adjustments | 2011 | ||||||||||
| (Restated) | ||||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income (loss) | $ | 84,647 | $ | (43,501 | ) | $ | 41,146 | |||||
| Adjustments to reconcile net income (loss) to | ||||||||||||
| net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 52,978 | 5,374 | 58,352 | |||||||||
| Decrease (increase) in assets: | ||||||||||||
| Accounts receivable | 92,582 | 5 | 92,587 | |||||||||
| Increase (decrease) in liabilities: | ||||||||||||
| Accounts payable | (37,787 | ) | - | (37,787 | ) | |||||||
| Accrued expenses | - | 1,291 | 1,291 | |||||||||
| Deferred revenues | (61,963 | ) | - | (61,963 | ) | |||||||
| Net cash provided by operating activities | 130,457 | (36,831 | ) | 93,626 | ||||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds on capital lease obligations payable | - | 36,381 | 36,381 | |||||||||
| Payments on capital lease obligations payable | (72,541 | ) | - | (72,541 | ) | |||||||
| Proceeds from notes payable, related parties | 66,530 | - | 66,530 | |||||||||
| Repayment of notes payable, related parties | (74,601 | ) | - | (74,601 | ) | |||||||
| Net cash used in financing activities | (80,612 | ) | 36,381 | (43,781 | ) | |||||||
| Net increase (decrease) in cash | 49,845 | - | 49,845 | |||||||||
| Cash - beginning | 40,013 | 600 | 40,613 | |||||||||
| Cash - ending | $ | 89,858 | $ | 600 | $ | 90,458 | ||||||
| Supplemental disclosures: | ||||||||||||
| Interest paid | $ | 13,882 | $ | - | $ | 13,882 | ||||||
| Income taxes paid | $ | - | $ | - | $ | - | ||||||
Note 4 – Asset Purchase Acquisitions
Asset Purchase Acquisition – K9 Bytes, Inc., October 26, 2011
On October 26, 2011, we, through a newly-formed wholly-owned Illinois subsidiary, K9 Bytes, Inc. (“K9 Bytes”), entered into an Asset Purchase Contract and Receipt Agreement with K9 Bytes, Inc., a Florida corporation (“K9 Florida” and the “Purchase Contract”). Pursuant to the Purchase Contract, we purchased all of K9 Florida’s assets, including all of its intellectual property, its business trade name, website (k9bytessoftware.com), furniture, fixtures, equipment and inventory, and goodwill in consideration for an aggregate of $205,000, of which $5,000 was paid in cash at the closing, $169,250 was financed using a small business loan and $30,750 was paid by way of a Balloon Installment Promissory Note (the “K9 Note”). We did not purchase and K9 Florida agreed to retain and be responsible for any and all liabilities of K9 Florida. We agreed to indemnify and hold K9 Florida harmless against, among other things, any claims and liability associated with the future operations of the assets purchased pursuant to the Purchase Contract and K9 Florida agreed to indemnify and hold us harmless against any misrepresentations made by K9 Florida in the Purchase Contract; any failure of K9 Florida to perform any required term or condition of the Purchase Contract and any debts or other obligations of K9 Florida not specifically assumed pursuant to the Purchase Contract in excess of $2,000.
F-9
K9 Bytes focuses on core application areas related to pet care: pet boarding, daycare, grooming, training, and other pet care services (including dog walking and pet sitting). K9 Bytes products also include retail inventory and point of sale capabilities; including credit and debit card processing, collar printers, digital signature tablets, and biometric/fingerprint identification hardware.
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 $87,244 of goodwill. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
| October 26, | ||||
| 2011 | ||||
| Consideration: | ||||
| Cash paid at closing | $ | 5,000 | ||
Small business loan(1) | 169,250 | |||
Seller financed note payable(2) | 30,750 | |||
| Fair value of total consideration exchanged | $ | 205,000 | ||
| Fair value of identifiable assets acquired assumed: | ||||
| Accounts receivable | $ | 25,483 | ||
| Inventories supplies | 1,000 | |||
| Equipment | 1,273 | |||
| Technology-based intangible assets | 42,000 | |||
| Customer base | 11,000 | |||
| Trade name | 22,000 | |||
| Non-compete agreement | 15,000 | |||
| Total fair value of assets assumed | 117,756 | |||
Consideration paid in excess of fair value (Goodwill)(3) | $ | 87,244 | ||
(1)Consideration included partial proceeds obtained from a $235,000 Small Business Association (“SBA”) loan, carrying a term of ten (10) years; maturing on October 26, 2021, bearing interest at the prime rate plus 2.75% per annum, adjusted quarterly; and payable in monthly installments (beginning in December 2011) of $2,609 per month. The loan 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. | ||||
(2)Consideration included an unsecured $30,750 seller financed note payable, bearing 6% per annum and is payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the K9 Note is due ($23,017, assuming no additional payments other than those scheduled). | ||||
(3)The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill. | ||||
The K9 Note accrues interest at 6% per annum and is payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the K9 Note ($23,017, assuming no additional payments other than those scheduled) is due. The repayment of the K9 Note is secured by all of the securities of K9 Bytes, which owns all of the assets purchased as a result of the Purchase Contract, provided that Third Party Lender, as a result of the SBA Loan described below, has a first priority security interest to such securities. The K9 Note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.
We raised the funds paid to K9 Florida in connection with the Purchase Contract through a $235,000 Small Business Association loan obtained by K9 Sub from a loan from a third party lender (the “Third Party Lender” and the “SBA Loan”). The SBA Loan has a term of ten (10) years; bears interest at the prime rate plus 2.75% per annum (currently 6%), adjusted quarterly; is payable in monthly installments (beginning in December 2011) of $2,609 per month; is guaranteed by the Company and personally guaranteed by Shaun Passley, the Company’s Chief Executive Officer; and is secured by all of the assets of K9 Sub and the Company, 100% of the outstanding capital of K9 Sub which is held by the Company, 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 Florida 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 K9 Bytes.
F-10
K9 Florida agreed to subordinate the K9 Note to Third Party Lender’s rights under the SBA Loan. Additionally, Mr. Passley agreed to subordinate the amount he is owed by the Company to the repayment of the SBA Loan.
In connection with the Purchase Contract, the owner of K9 Florida and the Company (through K9 Sub) entered into a Consulting Agreement, pursuant to which the owner of K9 Florida agreed to provide part-time consulting services to the Company for a period of four weeks following closing and provide additional consulting services as requested by the Company for up to an additional 30 days at the rate of $75 per hour. The owner of K9 Florida and the Company also entered into an Agreement Not to Compete, pursuant to which such owner agreed not to compete against the Company for three years and four weeks from the closing of the Purchase Contract.
Management believes the product line of K9 Bytes, customer base and other assets acquired will enable the Company to enhance their business model and enable the Company to take advantage of opportunities in the competitive software development industry.
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.
F-11
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 $87,244 of goodwill. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
| March 28, | ||||
| 2012 | ||||
| Consideration: | ||||
| Cash paid at closing | $ | 39,200 | ||
Small business loan(1) | 360,800 | |||
Seller financed note payable(2)(3) | 124,697 | |||
| Fair value of total consideration exchanged | $ | 524,697 | ||
| Fair value of identifiable assets acquired assumed: | ||||
| Other current assets | $ | 7,367 | ||
| Equipment | 2,703 | |||
| Contracts | 258,000 | |||
| Technology-based intangible assets | 124,000 | |||
| Non-compete agreement | 18,000 | |||
| Total fair value of assets assumed | 410,070 | |||
Consideration paid in excess of fair value (Goodwill)(4) | $ | 114,627 | ||
(1)Consideration included partial proceeds obtained from a $360,800 Small Business Association (“SBA”) loan, bearing interest at fixed and variable rates. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company. | ||||
(2)Consideration included an unsecured $100,000 seller financed note payable (“MSHSC Note”), bearing interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and equal payments of principal and interest commencing in year 3, no prepayment penalty, and full payment of all amounts due after five (5) years. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC. | ||||
(3)The fair value of the seller financed note in excess of the $100,000 principal balance attributable to the deferred payment terms will be amortized to interest expense over the deferred financing period. | ||||
(4)The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill. | ||||
Management believes the product line of MS Health, customer base and other assets acquired will enable the Company to enhance their business model and strengthen its future cash flows to fund operations and take advantage of additional growth opportunities.
F-12
The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been January 1, 2012 or January 1, 2011 are as follows:
| Combined Pro Forma: | ||||||||
| For the six months ended | ||||||||
| June 30, | ||||||||
| 2012 | 2011 | |||||||
| Revenue: | $ | 720,390 | $ | 591,229 | ||||
| Expenses: | ||||||||
| Operating expenses | 1,130,649 | 1,064,403 | ||||||
| Net operating income (loss) | (410,259 | ) | (473,174 | ) | ||||
| Other income (expense) | (87,396 | ) | 6,842 | |||||
| Net income (loss) | $ | (497,655 | ) | $ | (466,332 | ) | ||
| Weighted average number of common shares | ||||||||
| Outstanding – basic and fully diluted | 31,586,526 | 30,448,294 | ||||||
| Net income (loss) per share – basic and fully diluted | $ | (0.02 | ) | $ | (0.02 | ) | ||
Note 5 – Fair Value of Financial Instruments
Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company does not have any financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
F-13
The following schedule summarizes the valuation of financial instruments at fair value on a non-recurring basis in the balance sheets as of June 30, 2012 and December 31, 2011:
| Fair Value Measurements at June 30, 2012 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Intangible assets | $ | - | $ | - | $ | 908,474 | ||||||
| Goodwill | - | - | 255,460 | |||||||||
| Total assets | 1,163,934 | |||||||||||
| Liabilities | ||||||||||||
| Seller financed promissory note, MSHSC Note | - | - | 124,697 | |||||||||
| Convertible debt, net of discount of $-0- | - | 59,500 | - | |||||||||
| Total Liabilities | - | 59,500 | 124,697 | |||||||||
| $ | - | $ | (59,500 | ) | $ | 1,039,237 | ||||||
| Fair Value Measurements at December 31, 2011 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Intangible assets | $ | - | $ | - | $ | 576,598 | ||||||
| Goodwill | - | - | 140,833 | |||||||||
| Total assets | 717,431 | |||||||||||
| Liabilities | ||||||||||||
| Convertible debt, net of discount of $14,978 | - | 64,522 | - | |||||||||
| Total Liabilities | - | 64,522 | - | |||||||||
| $ | - | $ | (64,522 | ) | $ | 717,431 | ||||||
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the three months ended June 30, 2012 or the year ended December 31, 2011.
Level 3 assets consist of intangible assets and goodwill. No fair value adjustment was necessary during the three months ended June 30, 2012 or the year ended December 31, 2011.
F-14
Note 6 – Property and Equipment
Property and Equipment consists of the following:
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Furniture and fixtures | $ | 2,187 | $ | 2,187 | ||||
| Computers and equipment | 310,526 | 181,459 | ||||||
| Software | 55,029 | 52,326 | ||||||
| Assets held under capital leases | 134,800 | 116,945 | ||||||
| 502,542 | 352,917 | |||||||
| Less accumulated depreciation and amortization | (261,839 | ) | (207,324 | ) | ||||
| $ | 240,703 | $ | 145,593 | |||||
Depreciation and amortization expense totaled $54,517 and $36,886 for the six months ended June 30, 2012 and 2011, respectively.
Note 7 – Intangible Assets
Intangible assets consisted of the following at June 30, 2012 and December 31, 2011, respectively:
| Useful | June 30, | December 31, | ||||||
| Description | Life | 2012 | 2011 | |||||
| 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 | - | |||||
| Contracts – MS Health | 6 Years | 258,000 | - | |||||
| Trade name - K9 Bytes | 5 Years | 22,000 | 22,000 | |||||
| Other intangible assets – MS Health | 2 Years | 18,000 | - | |||||
| Other intangible assets - K9 Bytes | 2 Years | 26,000 | 26,000 | |||||
| Total intangible assets | 1,170,720 | 770,720 | ||||||
| Less: accumulated amortization | (262,246) | (194,122) | ||||||
| Intangible assets, net | $ | 908,474 | $ | 576,598 | ||||
Amortization expense on intangible assets totaled $24,462 and $21,466 for the six months ended June 30, 2012 and 2011, respectively.
Note 8 – Line of Credit
Lines of credit consisted of the following at June 30, 2012 and December 31, 2011, respectively:
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| 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. | $ | 48,071 | $ | - | ||||
| 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. | 20,000 | - | ||||||
| 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. | 7,453 | - | ||||||
| Total line of credit | 75,524 | - | ||||||
| Less: current portion | 75,524 | - | ||||||
| Line of credit, less current portion | $ | - | $ | - | ||||
F-15
Note 9 – 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 $2,238 and two months paid in advance, and the remaining payments paid over the next 43 months.
Lease #2 – Commenced on March 16, 2010 with monthly lease payments of $2,221 over 36 months.
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 $116,945 at June 30, 2012 and December 31, 2011, respectively. Accumulated amortization of the leased equipment at June 30, 2012 and December 31, 2011 was $91,687 and $75,284, 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 June 30, 2012, are as follows:
| Twelve Months | ||||
| Ending | ||||
| June 30, | Amount | |||
| 2013 | 46,564 | |||
| 2013 | 62,172 | |||
| 2014 | 42,500 | |||
| 2015 | 5,500 | |||
| 2016 | 5,500 | |||
| Total minimum payments | $ | 162,236 | ||
| Less: amount representing interest | (100,057 | ) | ||
| Present value of net minimum lease payments | 62,179 | |||
| Less: Current maturities of capital lease obligations | (32,767 | ) | ||
| Long-term capital lease obligations | $ | 29,412 | ||
Note 10 – Notes Payable, Related Parties
Notes payable, related parties consist of the following at June 30, 2012 and December 31, 2011, respectively:
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Various unsecured promissory notes carrying a 15% interest rate, due on demand from the Company’s CEO. | $ | 9,422 | $ | 61,513 | ||||
| Unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matured on July 31, 2007. Currently in default. | 34,700 | 34,700 | ||||||
| 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. | 8,085 | 12,085 | ||||||
| Secured promissory note originated on June 4, 2008 due to Star Financial Corporation, which is owned by Fay Passley, the mother of the Company’s CEO, Shaun Passley, which has since been amended. The loan bears interest at 10%. In April 2010, Star Financial, agreed to modify the repayment terms of the June 2008 Note (as defined above), to provide for $100,000 to be due on August 1, 2011, $100,000 to be due on August 1, 2012, and the remaining balance of the June 2008 Note to be due on August 1, 2013 in return for junior lien on the Company’s assets. On July 2, 2012 this note and accrued interest was exchanged for a convertible promissory note in the amount of $440,849. The note is convertible at 75% of the average closing price of the Company’s common stock immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. | 296,103 | 296,103 | ||||||
| Total notes payable, related parties | 420,981 | 404,401 | ||||||
| Less: current portion | 420,981 | 404,401 | ||||||
| Notes payable, related parties, less current portion | $ | - | $ | - | ||||
The Company recorded interest expense on notes payable to related parties in the amounts of $26,144 and $18,750 during the six months ended June 30, 2012 and 2011, respectively.
F-16
Note 11 – Convertible Debt
Convertible debt consists of the following at June 30, 2012 and December 31, 2011, respectively:
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Unsecured $50,000 convertible promissory note carries an 8% interest rate (“First Asher Note”), matured on February 28, 2012. 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 converted a total of $20,000 and $8,000 of principal into 2,613,731 and 451,977 shares of common stock during the six months ended June 30, 2012 and the year ended December 31, 2011, respectively. Currently in default. | $ | 22,000 | $ | 42,000 | ||||
| Unsecured $37,500 convertible promissory note carries an 8% interest rate (“Second Asher Note”), matured on March 30, 2012. 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 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 was limited to owning 4.99% of the Company’s issued and outstanding shares. Currently in default. | 37,500 | 37,500 | ||||||
| Total convertible debt | 59,500 | 79,500 | ||||||
| Less: unamortized discount on beneficial conversion feature | - | (14,978 | ) | |||||
| Convertible debt | $ | 59,500 | $ | 64,522 | ||||
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 $65,529. The discount is amortized from the dates of issuance until the stated redemption date of the debts, as noted above.
The convertible notes, totaling $87,500 that created the beneficial conversion feature carry default provisions that place a ��maximum share amount” on the note holders. The maximum share amount that can be owned as a result of the conversions to common stock by the note holders is 4.99% of the issued and outstanding shares of Epazz.
During the six months ended June 30, 2012 and 2011, the Company recorded debt amortization expense in the amount of $14,978 and $5,490, respectively, attributed to the aforementioned debt discount.
During the six months ended June 30, 2012, the Company issued a total of 2,613,731 shares pursuant to debt conversion in settlement of $20,000 of outstanding principal. The principal was converted in accordance with the conversion terms, therefore no gain or loss has been recognized.
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 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 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. The shares of common stock issuable upon conversion of the First Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
F-17
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 $7,769 was amortized during the six months ended June 30, 2012.
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 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 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. The shares of common stock issuable upon conversion of the Second Asher Note will be 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 $7,209 was amortized during the six months ended June 30, 2012.
The Company recorded interest expense in the amount of $2,916 and $333 for the six months ended June 30, 2012 and 2011, respectively related to convertible debts.
Note 12 – Long Term Debt
Long term debt consists of the following at June 30, 2012 and December 31, 2011, respectively:
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| 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. | $ | 119,998 | $ | - | ||||
| 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. 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. | 353,915 | - | ||||||
| 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 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. | 100,000 | - | ||||||
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| On November 7, 2011, DeskFlex entered into a four month $20,000 note payable agreement with On Deck Capital. Payments of $183 are due daily on the loan. The Company paid total initial fees of $500 in connection with the 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 January 3, 2012, we amended our loan agreement to increase the loan balance by approximately $35,500. The proceeds were received with substantially the same terms as the original debt. | 9,330 | 14,627 | ||||||
| On March 20, 2012, DeskFlex entered into a $25,000 three year promissory note bearing interest at 11%. The promissory note is payable in monthly installments of $843 per month, maturing on March 20, 2015 (the “Maturity Date”). | 22,565 | - | ||||||
| On May 15, 2011 DeskFlex entered into an unsecured $33,478 promissory note with Art Goes which is payable in monthly installments of $2,322, carries a 6% interest rate, maturing on August 15, 2012. | 4,610 | 15,935 | ||||||
| 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. | 29,291 | 29,634 | ||||||
| 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. | 34,127 | 20,210 | ||||||
| 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. | 77,960 | 90,193 | ||||||
| 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. | 161,177 | 168,106 | ||||||
| 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. | 225,012 | 235,928 | ||||||
| Total long term debt | 1,137,985 | 574,633 | ||||||
| Less: current portion | 153,569 | 75,565 | ||||||
| Long term debt, less current portion | $ | 984,416 | $ | 499,068 |
The Company recorded interest expense in the amount of $65,040 and $24,168 for the six months ended June 30, 2012 and 2011, respectively related to long term debt.
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Note 13 – Changes in Stockholder’s Equity (Deficit)
On June 15, 2012, the Company’s CEO, holding more than two-thirds voting power of the Company’s voting stock, voted to amend the Company’s Articles of Incorporation and increase the number of authorized shares of the Company’s Class A Common Stock from 60 million shares to 300 million shares, along with the establishment of 40 million shares of “blank check” preferred stock, which was designated into 1,000 shares of Series A and 1,000 Series B Preferred Stock. The amendment did not have any effect on the 60 million authorized shares of Class B Common stock. Accordingly, the Articles of Incorporation were subsequently amended on June 25, 2012, and 1,000 shares of series A convertible stock were designated, along with 1,000 shares of series B convertible stock.
Convertible Preferred Stock, Series A
The Company has 1,000 authorized shares of $0.01 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes a liquidation preference equal to $0.01 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.
Convertible Preferred Stock, Series B
The Company has 1,000 authorized shares of $0.01 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes a liquidation preference equal to $0.01 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.
Common Stock, Class A
The Company has 300,000,000 authorized shares of $0.01 par value class A common stock.
Common Stock, Class B
The Company has 60,000,000 authorized shares of $0.01 par value class B common stock. The class B common stock carries preferential voting rights of 100 votes to each series A vote (100:1).
Series A Common Stock Issuances
On March 13, 2012, the Company issued 1,075,269 shares of its $0.01 par value class A common stock pursuant to the partial conversion in the amount of $10,000 of a $50,000 convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On June 26, 2012, the Company issued 1,538,462 shares of its $0.01 par value class A common stock pursuant to the partial conversion in the amount of $10,000 of a $50,000 convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
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Note 14 - Subsequent Events
Convertible Preferred Stock Issuances
On July 2, 2012, the Company issued 1,000 shares of convertible series A preferred stock to the Company’s CEO for services provided and personal guaranties associated with previous acquisition activities.
On July 2, 2012, the Company issued a total of 1,000 shares of convertible series B preferred stock amongst three related parties pursuant to the exchange and extension of a promissory note. The new promissory note, dated July 2, 2012, consisting of $440,849 of previous loans and accrued interest is convertible at the greater of 75% of the average closing price of the Company’s common stock immediately preceding the date of conversion, or the fixed conversion price of $0.005 per share. The new convertible promissory note matures on July 2, 2017.
Class B Common Stock Issuances
On July 1, 2012, the Company issued 3,000,000 shares of class B common stock to the Company’s CEO for services provided and personal guaranties associated with previous acquisition activities.
Class A Common Stock Issuances
On July 9, 2012, the Company issued 1,578,947 shares of its $0.01 par value class A common stock pursuant to the conversion of $9,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 16, 2012, the Company issued 1,525,424 shares of its $0.01 par value class A common stock pursuant to the conversion of $9,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 19, 2012, the Company issued 30,000,000 shares of its $0.01 par value class A common stock to the Company’s CEO in consideration for providing a personal guaranty and collateral on twelve loans over the past 10 years.
On July 19, 2012, the Company issued 3,000,000 shares of its $0.01 par value series A common stock to a related party in consideration for providing a personal guaranty and collateral on two acquisition loans during 2010 and 2011.
On July 19, 2012, the Company issued 3,000,000 shares of its $0.01 par value class A common stock to another related party in consideration for providing a personal guaranty and collateral on two acquisition loans during 2010 and 2011.
On July 24, 2012, the Company issued 789,474 shares of its $0.01 par value class A common stock pursuant to the conversion of $6,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 31, 2012, the Company issued 1,898,734 shares of its $0.01 par value class A common stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On August 7, 2012, the Company issued 1,481,481 shares of its $0.01 par value 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.
Debt Financing
On July 2, 2012, a related party debt holder agreed to exchange an existing promissory note bearing interest at 10% in exchange for a new promissory note, consisting of $440,849 of previous loans and accrued interest. The new debt is convertible at the greater of 75% of the average closing price of the Company’s common stock immediately preceding the date of conversion, or the fixed conversion price of $0.005 per share. The new convertible promissory note matures on July 2, 2017. In addition, the Company issued a total of 1,000 shares of series B preferred stock amongst three related parties pursuant to the exchange and extension of a promissory note, as disclosed above. In further consideration for waiving the default provisions of the original promissory note, and entering into the replacement note, the Company agreed to vest a total of 5,000,000 shares of previously issued and unvested shares of class A common stock. Accordingly, the Company will recognize the $200,000 prepaid expense in accordance with the vesting on July 2, 2012.
On July 2, 2012, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which Asher agreed to purchase an 8% convertible promissory note in the amount of $42,500 from the Company, which provides Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such convertible note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the three (3) lowest bid prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued. The Convertible Note, which accrues interest at the rate of 8% per annum, is payable, along with interest thereon on March 29, 2013. In the event any principal or interest is not timely paid, such amount accrues interest at 22% per annum until paid in full. Asher is prohibited from converting the Convertible Note into shares of the Company’s common stock to the extent that such conversion would result in Asher beneficially owning more than 4.99% of the Company’s common stock, subject to 61 days prior written notice to the Company from Asher of Asher’s intention to waive or modify such provision. The Company can repay the Convertible Note prior to maturity (or conversion), provided that it pays 135% of such note (and accrued and unpaid interest thereon) if the note is repaid within the first 90 days after the issuance date; 140% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 91 and 120 days after the issuance date; 145% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 121 and 150 days after the issuance date; and 150% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 151 days and prior to 180 days after the issuance date. After 180 days have elapsed from the issuance date the Company has no right to repay the convertible note.
On July 24, 2012, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which Asher agreed to purchase an 8% convertible promissory note in the amount of $32,500 from the Company, which provides Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such convertible note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the three (3) lowest bid prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued. The Convertible Note, which accrues interest at the rate of 8% per annum, is payable, along with interest thereon on April 26, 2013. In the event any principal or interest is not timely paid, such amount accrues interest at 22% per annum until paid in full. Asher is prohibited from converting the convertible note into shares of the Company’s common stock to the extent that such conversion would result in Asher beneficially owning more than 4.99% of the Company’s common stock, subject to 61 days prior written notice to the Company from Asher of Asher’s intention to waive or modify such provision. The Company can repay the convertible note prior to maturity (or conversion), provided that it pays 135% of such note (and accrued and unpaid interest thereon) if the note is repaid within the first 90 days after the issuance date; 140% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 91 and 120 days after the issuance date; 145% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 121 and 150 days after the issuance date; and 150% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 151 days and prior to 180 days after the issuance date. After 180 days have elapsed from the issuance date the Company has no right to repay the convertible note.
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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 JUNE 30, 2012. 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”) AND MS HEALTH, INC., AN ILLINOIC CORPORATION (“MS HEALTH”), 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..
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 effected in an effort by Mr. Goes to better promote the Desk/Flex product.
-3-
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 15 or more persons.
IntelliSys, Inc.
On or about September 2, 2010, the Company entered into a Stock Purchase Agreement (the “IntelliSys Purchase Agreement”) with IntelliSys, Inc., a Wisconsin corporation (“IntelliSys”) and Paul Prahl, an individual and the sole stockholder of IntelliSys. Pursuant to the IntelliSys Purchase Agreement, the Company purchased 100% of the outstanding shares of IntelliSys. The IntelliSys Purchase Agreement closed on March 31, 2011 (“Closing”). As a result of the Closing, IntelliSys became a wholly-owned subsidiary of the Company. IntelliSys developed the IPMC Software (“IPMC”)(Integrated Plant Management Control) which is a software system design for water and wastewater facility management. IPMC is the technology-based strategy for optimizing operations by automatically collecting, managing, organizing and disseminating information for the operations, management, laboratory, maintenance, and engineering functions.
K9 Bytes, Inc.
On October 26, 2011, we, through a newly-formed wholly-owned Illinois subsidiary, K9 Bytes, Inc. (“K9 Sub”), entered into an Asset Purchase Contract and Receipt Agreement with K9 Bytes, Inc., a Florida corporation (“K9 Bytes” and the “Purchase Contract”). Pursuant to the Purchase Contract, we purchased all of K9 Bytes assets, including all of its intellectual property, its business trade name, website (k9bytessoftware.com), furniture, fixtures, equipment and inventory, accounts receivable and goodwill.
MS Health, Inc.
On March 8, 2012, we, through a newly-formed wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), entered into an Asset Purchase Agreement with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the Purchase Agreement, we purchased all of MSHSC’s assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and software.
MSHSC developed and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services. With CMHCi, an organization will realize the benefits of increased efficiency, accountability, and productivity. CMHCi offers server-based, internet, and secure cloud computing enabling the user to access information as required. By maintaining a complete electronic client record, including data collection and reporting across multiple programs, locations, episodes of care, and service providers, CMHCi helps eliminate redundant record keeping. The scheduler component tracks client, staff, and group appointments. Easy to use, it interfaces seamlessly with service authorization tracking, service history, and billing. The integrated financial reporting component provides the basis for an efficient and comprehensive accounting system, including electronic claims and remittance, third party insurance, and client, municipality, and grantor billing.
In connection with the Asset Purchase, the shareholders of MSHSC and the Company (through MS Health) entered into a Covenant Not to Compete; Consulting Agreement, Non-Competition and Consulting Agreement, pursuant to which the shareholders of MSHSC agreed to provide consulting services to the Company for a period of six months following closing. Pursuant to the agreement, the shareholders of MSHSC agreed not to compete against the Company for two years from the closing of the acquisition.
Convertible Note Funding
On May 27, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which Asher agreed to purchase an 8% convertible promissory note in the amount of $50,000 (the “Convertible Note”) from the Company, which provides Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such Convertible Note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the five lowest bid prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued. The Convertible Note, which accrues interest at the rate of 8% per annum, is payable, along with interest thereon on February 28, 2012. In the event any principal or interest is not timely paid, such amount accrues interest at 22% per annum until paid in full. Asher is prohibited from converting the Convertible Note into shares of the Company’s common stock to the extent that such conversion would result in Asher beneficially owning more than 4.99% of the Company’s common stock, subject to 61 days prior written notice to the Company from Asher of Asher’s intention to waive or modify such provision. The Company can repay the Convertible Note prior to maturity (or conversion), provided that it pays 135% of such note (and accrued and unpaid interest thereon) if the note is repaid within the first 90 days after the issuance date; 140% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 91 and 120 days after the issuance date; 145% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 121 and 150 days after the issuance date; and 150% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 151 days and prior to 180 days after the issuance date. After 180 days have elapsed from the issuance date the Company has no right to repay the Convertible Note.
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On June 28, 2011, the Company sold Asher an additional 8% Convertible Note in the amount of $37,500 on substantially similar terms as the Convertible Note described in the paragraph above (collectively the “Convertible Notes”), except that the maturity date of such note was March 30, 2012.
On July 2, 2012 and July 24, 2012, the Company sold Asher additional 8% Convertible Notes in the amounts of $42,500 and $32,500, respectively, and maturity dates of March 29, 2013 and April 26, 2013, respectively. These notes carry substantially similar terms as the Convertible Note described in the first paragraph above (collectively the “Convertible Notes”), with the exception of the conversion terms. These notes (“Asher Note #3” and “Asher Note #4”) provide Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such Convertible Note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the ten (3) lowest bid prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued.
As of August 17, 2012, the Company has issued a total of 10,339,768 shares in conversion of a total of $79,000 of outstanding principal on these Convertible Notes. A total of $83,500 of principal remains outstanding on these notes as of August 17, 2012.
Our Products
The Company currently offers five primary product lines. The EPAZZ BoxesOS v3.0 product is offered through EPAZZ, Inc., the Desk/Flex Software product is offered through Desk Flex, Inc., the Agent Power product is offered through Professional Resource Management, Inc. and the Company also offers the AutoHire software described below. Additionally, the Company offers products through IntelliSys, described below. The Company also offers the K9 Koordinator Software, the rights to which the Company acquired as a result of the Purchase Contract.
Epazz BoxesOS v3.0
Epazz BoxesOS v3.0 (Web Infrastructure Operating System) is the Company's flagship product. It is the core package of Epazz, Inc.’s products and services. Epazz BoxesOS integrates with each organization's back-end systems and provides a customizable personal information system for each stakeholder.
Services include:
| · | Single sign-on: Provides a powerful single-sign-on with security procedure to protect users' information and identity. |
| · | Course Management System: Manage distance, traditional courses and Calendar. |
| · | Enterprise Web Site Content Management: Manage public sites with multi contributors. |
| · | Integration Management Services: Integrated into Enterprise Resource Planning (“ERP”) and Mainframes. |
| · | Email Management: Email server and web client. |
| · | Instant Messenger Services: Instant messaging and alerts. |
| · | Customer Relationship Management: Prospective students and alumni. |
| · | Calendar/Scheduler Management: Event directory, groupware, and personal calendar. |
| · | Administrative Support Services: Online payment services. |
| · | Business Services: Facility Management and Online Bookstore. |
BoxesOS software provides:
Web Portal Component
BoxesOS Web Portal Component is a gateway to all of an organization’s online services and information resources. The Web Portal Component provides a Personal Information System, which refers to the user's entire online environment - the user’s resources, information, graphics, color, layout, and organization. All resources are customizable. The Web Portal Component simplifies organizations’ ability to create and deploy custom web applications with a common graphic user interface and connectivity to the back-end systems.
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Administrative Content Management
BoxesOS Content Management Component provides an organization with enterprise level tools for creating, managing, organizing, archiving and sharing content. Content can be delivered in many forms such as web pages, emails, polls, documents, web forms, rich site summaries (“RSS”), and “hot news.” The Content Management Component enables staff members with little technical skills to create web pages and processes without having any programming skills.
Work Hub
Work Hub provides a host of applications that can empower an organization to increase productivity while decreasing costs. Work Hub helps to manage work flow throughout an organization. Senior management is able to view a document for approval before it is sent out to a client. A company can view all projects of the enterprise in one page. Some of the applications in Work Hub are products/services management, project management, invoice management, time management, content management and sales management. Work Hub has clear graphic charts with detail reports on many areas.
Central Repository
BoxesOS Central Knowledge Repository is a collection and indexing of shareable content. Central Knowledge Repository installs a server index application on the Windows 2003 platform to identify an organization’s current knowledge assets. All knowledge assets will be imported into a storage device. The server index application will import the knowledge assets into a temporary folder before moving into a main folder. The server index application will prompt the organization’s administrators to add detailed information about the knowledge assets into the database by using a web form. These forms will allow the administrators to add custom fields; therefore, allowing the organization to add custom information to the database in the present and at a future date. The organization would be able to group their knowledge objects by program, course, subject, topic, users, content, or date.
ViewPoint
ViewPoint is BoxesOS central communication hub, calendaring, contact management and scheduling system. ViewPoint works with or can be used as an alternative to MS Outlook/MS Exchange Server. The web applications provide the institution with an extensive range of options including communication system email web client and an email server. Email applications provide features you would find on popular web-based e-mail providers. ViewPoint provides robust threaded discussion boards and a “chatting” environment. ViewPoint provides each user with a personal calendar, which notifies users of scheduling conflicts and appointments priorities. ViewPoint makes it easy to create group calendars and public calendars. With the ViewPoint scheduling system users are able to schedule group meetings together. The scheduling system will view each user's calendar to see the next available time and date the group can meet.
Learning Management System
BoxesOS My Courses is an extensive application for learning management, and e-learning. My Courses is an effective means for managing traditional courses, distance learning courses, and self-paced courses. My Courses is a powerful communication tool that can be effectively used by students, instructors, employees and corporate trainers to make information flow easily, clearly and faster. My Courses provides a robust grade book, powerful authoring content tools, easy to use drop box, sharable folders, wide-ranging course calendar and many more features all designed to provide customization to key stakeholders. Organizations will be able to train their employees on systems using My Courses self-paced settings, as well as test candidates on their skill sets before they are hired.
Single Sign-on
Single Sign-on provides organizations the ability to log into multiple systems with a single unique username and password. The username and password authenticates the user’s credentials to make sure the person who is accessing the data is authorized to. BoxesOS uses Microsoft Active Directory Identity Management to accomplish single sign on. Microsoft Active Directory allows institutions to centrally manage and share user information. Active Directory also acts as the single sign on point for bringing systems and applications together. BoxesOS user management integrates with Active Directory.
Pathways Real-time Integration
EPAZZ Pathways is an integration suite enabling real-time connectivity with ERP and Legacy systems. Pathways integration suite allows organizations to retrieve data from ERPs and write data back to ERPs in real-time.
AutoHire Software
The AutoHire system provides a tool to power career centers, post job ads to sites and job boards, and to collect resumes online. The online processes supported by the system provide the mechanism to comply with the record keeping requirements of Title VII of the Civil Rights Act of 1964, which apply to organizations employing 15 or more persons.
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One of the most useful features of the AutoHire system is the interactive question and online screening and ranking system. The interactive question system provides a means for the client to maintain their own library of questions and to attach selected questions to job opportunities posted. Responses obtained can be used to screen and rank candidates to permit hiring managers to focus their attention on only the most suitable candidates. We believe that result can have a substantial impact on the cost of recruiting and the quality of candidates selected.
By attaching interactive questions to job opportunities posted clients can collect information not typically presented in a resume. The additional information can often replace the initial interview process. Questions can be multiple choice or narrative.
Desk Flex Software
DFI developed the Desk/Flex Software (“Desk/Flex”) to enhance the value of businesses’ real estate investments and modernize their office space. Desk/Flex lets businesses make better use of office space restrictions by enabling employees to instantly access their workstation tools from multiple areas in and outside of the office. Desk/Flex lets employees reserve space in advance or claim space instantly. It adjusts the telephone switch (Private Branch Exchange or “PBX”) so that calls ring at the 'desk du jour', or go directly to voice mail when a worker is not checked in.
Key Features of Desk/Flex include:
Quick and Easy Check-In - Check-in and Check-out to a workstation takes less than 8 seconds, and advance reservations take only a few seconds more.
Point-and-Click Floor Maps - Desks that are available are identified by green dots. Those that are in use are identified by red. An employee needs only to click or touch (using an optional touch-screen) a green dot to select his or her desk.
PBX Interaction - Desk/Flex connects to an employee’s Nortel, Avaya or Cisco PBX to ensure that the employee has phone access at his or her desk; the message waiting light becomes operational; outside calls can be made only after checking in; and an employee is automatically checked out overnight if he or she leaves a workstation without checking out.
Web Browser and Local "Kiosk" Access - On site, the Desk/Flex kiosk(s) makes it easy to select a vacant desk near a co-worker or centrally located at the office. Even before leaving home a worker with access to the company intranet can reserve a desk or locate a co-worker at any desk in the company’s office via a web browser.
Advance Reservations - Workers can easily choose and reserve workspaces ahead of time for a particular date or range of dates.
Occupancy Reports - Management reports allow accurate measures of occupancy in total or by type of desk so the total number or mix of desks can be adjusted to meet client demand and save more office space expense in future months.
Desk/Flex is responsive to office size and needs, servicing small to large businesses. Desk/Flex can be configured to administer a single site or multiple sites locally or remotely. Desk/Flex has full integration capabilities with both Nortel and Avaya, which combined represent the majority of the telecommunications and inbound automatic call distributor (“ACD”) market.
Agent Power Software
Agent Power Software (“Agent Power”) is PRMI’s proprietary software line. PRMI believes Agent Power provides vital information and tools for call centers to help improve their workforce management. Historical, real-time, and forecast information is available at the touch of a button to plan, control, and monitor a business’s call center. Coordinated stand-alone modules allow a company to develop employee schedules, track queue and agent performance, communicate this information with the company’s agents and improve workforce management.
Agent Power is a suite of six (6) applications. Each can operate on a stand-alone basis, or can work in conjunction with the other applications. The applications feature the following workforce management components:
| · | Planning and Scheduling; |
| · | Agent Adherence; |
| · | Agent Performance; |
| · | ACD Group Performance; |
| · | Real-Time Agent Status; and |
| · | Info Screen. |
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All modules of Agent Power have full integration capabilities with Nortel, Avaya, and ROLM ACDs, and the Planning and Scheduling module works with any modern ACD system.
IntelliSys Software
IntelliSys developed the IPMC Software (“IPMC”)(Integrated Plant Management Control) which is a software system design for water and wastewater facility management. IPMC is the technology-based strategy for optimizing operations by automatically collecting, managing, organizing and disseminating information for the operations, management, laboratory, maintenance, and engineering functions.
SystemView
SystemView systems.
Features
| · | The Alarm/Event Journal records all alarms and status changes and has the flexibility to query history based on tag names and time ranges. |
| · | Smart Server provides communication with process control and automatic collections of data. It is designed to normalize data, accumulate and summarize statistics for the plant management and maintenance systems. |
| · | Rapid application development tools dramatically reduce system development time. Development tools are included with all applications. |
MaintenanceView
MaintenanceView provides the traditional functional functionality of a comprehensive maintenance management system including:
| · | Fixed asset and rotating equipment. |
| · | Preventive scheduling and predictive reports and charts. |
| · | Work order management. |
| · | Inventory and purchasing. |
| · | Manufacture and vendor records. |
| · | Parts inventory. |
Features
| · | Ability to track maintenance costs by center, department, and location. |
| · | Ability to customize user interface sorting by location, equipment type, department, cost center, manufacturer or vendor. |
| · | Ability to customize reports using MS Excel compatible spreadsheets to accommodate users’ specific needs. |
Report View
Report View provides users with a historic picture of the operation of their plant through centralized storage of data. Realistic graphics can be constructed to assist the user in managing, accessing and analyzing real-time and manually entered process or laboratory data.
Features
• Stores real-time and laboratory data in a secure open database.
• Time-based compression stores process information and manually collected data.
• Flexible rapid application development tools allow creation of input displays, reports and charts and navigation menus.
• Using MS Excel compatible spreadsheet, ReportView combines the user-friendly features of familiar spreadsheet functions with the security of an expandable database.
• Reporting tools provide easy access to retrieve summarized or raw data for process-efficiency and compliance reports.
• Creates 2D and 3D presentations-quality charts in minutes.
• An efficient decision support system and dashboard development tools for operations, maintenance, management and engineering.
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Energy View
Energy View is an automated energy management dashboard tool. EnergyView provides smart energy metering and power measurement technology to accurately measure, store, track and analyze energy data. The energy metering and submetering systems can link to SCADA (Supervisory Control and Data Acquisition) or any PC to collect crucial energy data. In addition manual data on other energy sources can be managed as part of the same energy management application. The combination of hardware and software is designed to provide an end-to-end solution from measurement to billing audits. The objective of the EnergyView application is to improve the speed and quality of energy measurement information, so that facility managers will be able to make better management decisions, conserve energy and reduce operating costs.
Features
• Collect usage data manually and automatically.
• Normalize energy variables creating benchmarking variables.
• Provide comparisons of hourly usage to previous days.
• Calculate operating cost and savings by day, month and year-to-date.
• Forecast and alarm peak demands.
• Send alarms via local annunciation, email or pagers.
• Benchmarking.
• Local Factor Analysis.
• Automate Energy Billing Audits.
• Determine Changes in Energy Usage Patterns.
• Setting Saving Targets and Tracking Progress.
K9 Koordinator Software
Included in the assets acquired through the Purchase Contract was the K9 Koordinator software. The software was designed to focus on applications related to pet care: pet boarding, daycare, grooming, training, and other pet care services (including dog walking and pet sitting). Products can be used for most animal types such as dogs, cats, horses, birds, rodents, snakes and pigs.
The K9 Koordinator is a complete management system for pet resorts (boarding kennels), pet daycare centers, pet sitters, dog walkers, grooming shops, and mobile groomers. The K9 Koordinator was designed to efficiently and easily manage scheduling, clients, pet information, services, and retail information.
Key components of the K9 Koordinator software include webcam integration, giftcard processing and management, and virtual kennel layout for run assignments.
The K9 Koordinator has over 20 years of development and usage in the pet care industry. K9 Koordinator users include pet resorts, boarding kennels, grooming shops, mobile groomers, trainers, dog walkers, pet sitters, animal hospitals, shelters, rescue organizations, and pet retailers.
MS Health Software
MSHSC developed and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services. With CMHCi, an organization will realize the benefits of increased efficiency, accountability, and productivity. CMHCi offers server-based, internet, and secure cloud computing enabling the user to access information as required. By maintaining a complete electronic client record, including data collection and reporting across multiple programs, locations, episodes of care, and service providers, CMHCi helps eliminate redundant record keeping. The scheduler component tracks client, staff, and group appointments. Easy to use, it interfaces seamlessly with service authorization tracking, service history, and billing. The integrated financial reporting component provides the basis for an efficient and comprehensive accounting system, including electronic claims and remittance, third party insurance, and client, municipality, and grantor billing.
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 and Agent Power software packages, funding permitting. 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, including making required payments on our outstanding promissory notes as described above, are subject to generating adequate revenue. 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 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 goal of profit, revenue and growth.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2012, AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2011:
| For the Three Months Ended | ||||||||||||
| June 30, | Increase / | |||||||||||
| 2012 | 2011 | (Decrease) | ||||||||||
| (Restated) | ||||||||||||
| Revenues | $ | 432,890 | $ | 235,707 | $ | 197,183 | ||||||
| General and administrative | 259,828 | 177,438 | 82,390 | |||||||||
| Depreciation and amortization | 75,167 | 32,604 | 42,563 | |||||||||
| Bad debts (recoveries) | (42,847 | ) | - | (42,847 | ) | |||||||
| Total Operating Expenses | 292,148 | 210,042 | 82,106 | |||||||||
| Net Operating Income (Loss) | 140,742 | 25,665 | (198,506 | ) | ||||||||
| Interest income | 33 | 12 | 21 | |||||||||
| Interest expense | (42,854 | ) | (13,882 | ) | (28,972 | ) | ||||||
| Total other income (expense) | (42,821 | ) | (13,870 | ) | (28,951 | ) | ||||||
| Net Income (Loss) | $ | 97,921 | $ | 11,795 | $ | 86,126 | ||||||
Revenues:
For the three months ended June 30, 2012 we had revenue of $432,890 compared to revenue of $235,707 for the three months ended June 30, 2011, an increase of $191,183 or 84% from the prior period. The increase in revenues is mainly attributable to increases in our existing customer base. We expect our recent acquisitions will replenish our customer base and further restore our revenues.
General and Administrative:
General and administrative expenses increased by $82,390 or 46% to $259,828 for the three months ended June 30, 2012 compared to general and administrative expense of $177,438 for the three months ended June 30, 2011. The increase in general and administrative expense is due mainly to the increase in cost associated with the Company’s acquisitions as described above.
Depreciation and Amortization:
We had depreciation and amortization expense of $75,167 for the three months ended June 30, 2012 compared to $32,604 for the three months ended June 30, 2011, an increase of $42,563 or 131% from the prior period. This increase is due to the Company having a greater depreciable asset base as a result of the recent acquisitions.
Bad Debts (Recoveries):
Recoveries for the three months ended June 30, 2012 were $42,847, as compared to $-0- for the three months ended June 30, 2011, an increase of $42,847 or 100%. This increase was due to our ability to collect on accounts previously written off as uncollectible.
Net Operating Income:
Total operating expenses for the three months ended June 30, 2012 were $292,148, compared to $210,042 for the three months ended June 30, 2011, an increase of $82,106 or 39% from the prior period.
We had operating income of $140,742 for the three months ended June 30, 2012 compared to operating income of $25,665 for the three months ended June 30, 2011, an increase in operating income of $115,077 or 448% from the prior period. The increase in operating income is due to our increasing revenues outpacing the increased operating expenses incurred in relation to our recent acquisitions.
Other Income (Expense):
Other income (expense) was ($42,821) for the three months ended June 30, 2012 compared to ($13,870) for the three months ended June 30, 2011, an increase of $28,951 or 209% from the comparative three months ended June 30, 2011. Interest expense increased for the three months ended June 30, 2012 due to the increase in loans payable at June 30, 2012 as compared to June 30, 2011, as described below under “Liquidity and Capital Resources”.
Net Income:
We had net income of $97,921 for the three months ended June 30, 2012 compared to $11,795 for the three months ended June 30, 2011, an increase of $86,126, or 730%, from the prior period. The increase in net income is due to the increase in revenues outpacing the increased operating expenses incurred in relation to our recent acquisitions.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2012, AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2011:
| For the Six Months Ended | ||||||||||||
| June 30, | Increase / | |||||||||||
| 2012 | 2011 | (Decrease) | ||||||||||
| (Restated) | ||||||||||||
| Revenues | $ | 547,367 | $ | 450,290 | $ | 97,077 | ||||||
| General and administrative | 484,093 | 330,933 | 153,160 | |||||||||
| Depreciation and amortization | 122,641 | 59,644 | 52,997 | |||||||||
| Bad debts (recoveries) | (35,072 | ) | - | (35,072 | ) | |||||||
| Total Operating Expenses | 571,662 | 390,577 | 181,085 | |||||||||
| Net Operating Income (Loss) | (24,295 | ) | 59,713 | (84,008 | ) | |||||||
| Interest income | 38 | 27 | 11 | |||||||||
| Interest expense | (83,929 | ) | (18,594 | ) | (65,335 | ) | ||||||
| Total other income (expense) | (83,891 | ) | (18,567 | ) | (65,324 | ) | ||||||
| Net Income (Loss) | $ | (108,186 | ) | $ | 41,146 | $ | (149,332 | ) | ||||
Revenues:
For the six months ended June 30, 2012 we had revenue of $547,367 compared to revenue of $450,290 for the six months ended June 30, 2011, an increase of $97,077 or 22% from the prior period. The increase in revenues is mainly attributable to increases in our existing customer base. We expect our recent acquisitions will replenish our customer base and further restore our revenues.
General and Administrative:
General and administrative expenses increased by $484,093 or 46% to $390,933 for the six months ended June 30, 2012 compared to general and administrative expense of $330,933 for the six months ended June 30, 2011. The increase in general and administrative expense is due mainly to the increase in cost associated with the Company’s acquisitions as described above.
Depreciation and Amortization:
We had depreciation and amortization expense of $122,641 for the six months ended June 30, 2012 compared to $59,644 for the six months ended June 30, 2011, an increase of $62,997 or 106% from the prior period. This increase is due to the Company having a greater depreciable asset base as a result of the recent acquisitions.
Bad Debts (Recoveries):
Recoveries for the six months ended June 30, 2012 were $35,072, as compared to $-0- for the six months ended June 30, 2011, an increase of $35,072 or 100%. This increase was due to our ability to collect on accounts previously written off as uncollectible.
Net Operating Income (Loss):
Total operating expenses for the six months ended June 30, 2012 were $571,662, compared to $390,577 for the six months ended June 30, 2011, an increase of $181,085 or 46% from the prior period.
We had an operating (loss) of ($24,295) for the six months ended June 30, 2012 compared to operating income of $59,713 for the six months ended June 30, 2011, a decrease in operating income of $84,008 or 141% from the prior period. The decrease in operating income is due to our increased operating expenses incurred in relation to our recent acquisitions.
Other Income (Expense):
Other income (expense) was ($83,891) for the six months ended June 30, 2012 compared to ($18,567) for the six months ended June 30, 2011, an increase of $65,324 or 352% from the comparative six months ended June 30, 2011. Interest expense increased for the three months ended June 30, 2012 due to the increase in loans payable at June 30, 2012 as compared to June 30, 2011, as described below under “Liquidity and Capital Resources”.
Net Income (Loss):
We had a net loss of $108,186 for the six months ended June 30, 2012 compared to net income of $41,146 for the six months ended June 30, 2011, a decrease of $149,332, or 363%, from the prior period. The increase in net loss is due to the increased operating expenses incurred in relation to our recent acquisitions.
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LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes total assets, accumulated deficit, stockholders’ equity and working capital at June 30, 2012 compared to December 31, 2011.
| June 30, 2012 | December 31, 2012 | |||||||
| Total Assets | $ | 1,602,370 | $ | 1,035,222 | ||||
| Total Liabilities | $ | 2,227,251 | $ | 1,571,917 | ||||
| Accumulated (Deficit) | $ | (2,316,253 | ) | $ | (2,208,067 | ) | ||
| Stockholders’ Equity (Deficit) | $ | (624,881 | ) | $ | (536,695 | ) | ||
| Working Capital (Deficit) | $ | (1,015,690 | ) | $ | (886,834 | ) | ||
We had total current assets of $197,733 as of June 30, 2012, consisting of cash of $81,667, accounts receivable, net of bad debts allowance, of $103,300, and other current assets of $12,766.
We had non-current assets of $1,404,637 as of June 30, 2012, consisting of property and equipment, net of accumulated depreciation of $240,703; intangible assets, net of accumulated amortization of $908,474, and goodwill of $255,460.
We had total current liabilities of $1,213,423 as of June 30, 2012, consisting of $285,747 of accounts payable and accrued expenses, $258,006 of deferred revenues, lines of credit of $75,524, $32,767 of the current portion of capitalized leases, and $561,379 of the current portion of notes payable. The notes payable are described in greater detail in Notes 10, 11 and 12 to the financials, included herewith.
We had negative working capital of $1,015,690 and a total accumulated deficit of $2,316,253 as of June 30, 2012.
We had total liabilities of $2,227,251 as of June 30, 2012, which included total current liabilities of $1,213,423 and long-term note payable, net of current portion of $984,416, which represented payments due on the notes.
We had net cash used in operating activities of $170,972 for the six months ended June 30, 2012, which primarily consisted of our net loss.
We had $170,972 of net cash used in investing activities during the six months ended June 30, 2012, which consisted of the $39,200 to acquire subsidiaries, proceeds of $14,175 received from the sale of computer equipment and the purchase of equipment $145,947.
We had $99,578 of net cash provided by financing activities during the six months ended June 30, 2012, which consisted of $75,630 in repayments of short term loans from our CEO, proceeds of $313,026 from new debt financing, and a total of $137,818 of repayments on long term debt and capital leases.
The Company received additional funds drawn on previously outstanding lines of credit in the amount of $33,495, along with repayments on the lines of credit totaling $7,921 during the three months ending June 30, 2012.
On April 1, 2012 Epazz received additional financing of $129,747 from Western Finance Equipment and carries an 8.268% interest rate, payable in 36 monthly installments of $4,077.78. The June 30, 2012 balance of this loan is $119,997.
On May 29, 2012, Deskflex received additional financing of $25,043 as part of a refinancing with OnDeck Financial, in which we increased the remaining outstanding debt of $32,959 as of March 31, 2012, less principal payments of $274 paid prior to the amendment in 2012, by an additional $25,043 resulting in total indebtedness of $21,367 at June 30, 2012. The revised loan terms include daily repayments of $274 over a 9 month term. The total payments due on the loan equate to an annual interest rate of 18%.
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.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivable, investment values, income taxes, the recapitalization and contingencies. We base our estimates on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented. The adoption of ASU 2011-12 is not expected to have a material impact on our financial position or results of operations.
The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flows.
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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.
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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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 26, 2012, the Company issued 1,538,462 shares of its $0.01 par value class A common stock pursuant to the partial conversion in the amount of $10,000 of a $50,000 convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 2, 2012, the Company issued 1,000 shares of Convertible Series A Preferred Stock to the Company’s CEO for services provided and personal guaranties associated with previous acquisition activities.
On July 2, 2012, the Company issued a total of 1,000 shares of Convertible Series B Preferred Stock amongst three related parties pursuant to the exchange and extension of a promissory note. The new promissory note, dated July 2, 2012, consisting of $440,849 of previous loans and accrued interest is convertible at the greater of 75% of the average closing price of the Company’s common stock immediately preceding the date of conversion, or the fixed conversion price of $0.005 per share. The new convertible promissory note matures on July 2, 2017. In addition, the Company issued a total of 1,000 shares of Series B Preferred Stock amongst three related parties pursuant to the exchange and extension of the promissory note. In further consideration for waiving the default provisions of the original promissory note, and entering into the replacement note, the Company agreed to vest a total of 5,000,000 shares of previously issued and unvested shares of Class A Common Stock.
Class B Common Stock Issuances
On July 1, 2012, the Company issued 3,000,000 shares of Class B Common Stock to the Company’s CEO for services provided and personal guaranties associated with previous acquisition activities.
Class A Common Stock Issuances
On July 9, 2012, the Company issued 1,578,947 shares of its $0.01 par value Class A Common Stock pursuant to the conversion of $9,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 16, 2012, the Company issued 1,525,424 shares of its $0.01 par value Class A Common Stock pursuant to the conversion of $9,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 19, 2012, the Company issued 30,000,000 shares of its $0.01 par value Class A Common Stock to the Company’s CEO in consideration for providing a personal guaranty and collateral on twelve loans over the past 10 years.
On July 19, 2012, the Company issued 3,000,000 shares of its $0.01 par value Class A Common Stock to a related party in consideration for providing a personal guaranty and collateral on two acquisition loans during 2010 and 2011.
On July 19, 2012, the Company issued 3,000,000 shares of its $0.01 par value Class A Common Stock to another related party in consideration for providing a personal guaranty and collateral on two acquisition loans during 2010 and 2011.
On July 24, 2012, the Company issued 789,474 shares of its $0.01 par value Class A Common Stock pursuant to the conversion of $6,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On July 31, 2012, the Company issued 1,898,734 shares of its $0.01 par value Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On August 7, 2012, the Company issued 1,481,481 shares of its $0.01 par value 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.
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On July 2, 2012, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which Asher agreed to purchase an 8% convertible promissory note in the amount of $42,500 from the Company, which provides Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such convertible note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the three (3) lowest bid prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued. The Convertible Note, which accrues interest at the rate of 8% per annum, is payable, along with interest thereon on March 29, 2013. In the event any principal or interest is not timely paid, such amount accrues interest at 22% per annum until paid in full. Asher is prohibited from converting the Convertible Note into shares of the Company’s common stock to the extent that such conversion would result in Asher beneficially owning more than 4.99% of the Company’s common stock, subject to 61 days prior written notice to the Company from Asher of Asher’s intention to waive or modify such provision. The Company can repay the Convertible Note prior to maturity (or conversion), provided that it pays 135% of such note (and accrued and unpaid interest thereon) if the note is repaid within the first 90 days after the issuance date; 140% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 91 and 120 days after the issuance date; 145% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 121 and 150 days after the issuance date; and 150% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 151 days and prior to 180 days after the issuance date. After 180 days have elapsed from the issuance date the Company has no right to repay the convertible note.
On July 24, 2012, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which Asher agreed to purchase an 8% convertible promissory note in the amount of $32,500 from the Company, which provides Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such convertible note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the three (3) lowest bid prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued. The Convertible Note, which accrues interest at the rate of 8% per annum, is payable, along with interest thereon on April 26, 2013. In the event any principal or interest is not timely paid, such amount accrues interest at 22% per annum until paid in full. Asher is prohibited from converting the convertible note into shares of the Company’s common stock to the extent that such conversion would result in Asher beneficially owning more than 4.99% of the Company’s common stock, subject to 61 days prior written notice to the Company from Asher of Asher’s intention to waive or modify such provision. The Company can repay the convertible note prior to maturity (or conversion), provided that it pays 135% of such note (and accrued and unpaid interest thereon) if the note is repaid within the first 90 days after the issuance date; 140% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 91 and 120 days after the issuance date; 145% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 121 and 150 days after the issuance date; and 150% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 151 days and prior to 180 days after the issuance date. After 180 days have elapsed from the issuance date the Company has no right to repay the convertible note.
We claim 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 the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION
On June 15, 2012, the Company’s CEO, holding more than two-thirds voting power of the Company’s voting stock, voted to amend the Company’s Articles of Incorporation and increase the number of authorized shares of the Company’s Class A Common Stock from 60 million shares to 300 million shares, along with the establishment of 40 million shares of “blank check” preferred stock, which was designated into 1,000 shares of Series A and 1,000 Series B Preferred Stock. The amendment did not have any effect on the 60 million authorized shares of Class B Common stock. Accordingly, the Articles of Incorporation were subsequently amended on June 25, 2012, and 1,000 shares of series A convertible stock were designated, along with 1,000 shares of series B convertible stock.
Convertible Preferred Stock, Series A
The Company has 1,000 authorized shares of $0.01 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes a liquidation preference equal to $0.01 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 have limited voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders.
Convertible Preferred Stock, Series B
The Company has 1,000 authorized shares of $0.01 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes a liquidation preference equal to $0.01 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 have limited voting rights, relating solely to matters which adversely affect the rights of the Series B Preferred Stock holders.
| 3.1 | Articles of Amendment (June 25, 2012)(1) |
| 10.1 | July 2, 2012 – Securities Purchase Agreement With Asher (1) |
| 10.2 | July 2, 2012 – Promissory Note With Asher (1) |
| 10.3 | July 24, 2012 – Securities Purchase Agreement With Asher (1) |
| 10.4 | July 24, 2012 – Promissory Note With Asher (1) |
| 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.* |
| 32.1 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 101.INS | XBRL Instance Document.** |
| 101.SCH | XBRL Schema Document.** |
| 101.CAL | XBRL Calculation Linkbase Document.** |
| 101.DEF | XBRL Definition Linkbase Document.** |
| 101.LAB | XBRL Labels Linkbase Document.** |
| 101.PRE | XBRL Presentation Linkbase Document.** |
* Filed herewith.
** Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-Q.
(1) To be filed by amendment.
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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: August 20, 2012 | By: /s/ Shaun Passley |
| Shaun Passley | |
| Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director |
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