UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, ~~2013~~2014

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

For the transition period from ______ to ______

Commission file number: 333-139117

EPAZZ, INC.

(Exact name of registrant as specified in its charter)

Illinois	36-4313571
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

205 W. Wacker Dr., Suite 1320

Chicago, IL 60606

(Address of principal executive offices)

(312) 955-8161

(Registrant's telephone number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B)

OF THE EXCHANGE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G)

OF THE EXCHANGE ACT:

None

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

Yes [ ] No [X]

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

Yes [ ] No [X]

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

Yes [X] No [ ]

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

Yes [X] No [ ]

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

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

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

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

Yes [ ] No [X].

The aggregate market value of the issuer's voting and non-voting common equity held by non-affiliates computed by reference to the average bid and ask price of such common equity on the Over-The-Counter Bulletin Board as of June 30, ~~2013~~2014 (the last business day of the registrant’s most recently completed second fiscal quarter) was $~~789~~1,~~803~~306,212.

There were 62,~~796~~273,~~730~~292,~~730~~485 shares of the registrant's ~~class~~Class A common stock outstanding as of ~~July~~May 134, ~~2014~~2015.

TABLE OF CONTENTS

PART 1
ITEM 1	Business	1
ITEM 1A	Risk Factors	119
ITEM 1B	Unresolved Staff Comments	2625
ITEM 2	Properties	2625
ITEM 3	Legal Proceedings	2625
ITEM 4	Mine Safety Disclosures	2625
PART II
ITEM 5	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	2726
ITEM 6	Selected Financial Data	2928
ITEM 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3029
ITEM 7A	Quantitative and Qualitative Disclosures About Market Risk	4038
ITEM 8	Financial Statements and Supplementary Data	4139
ITEM 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	4240
ITEM 9A	Controls and Procedures	4240
ITEM 9B	Other Information	4341
PART III
ITEM 10	Directors, Executive Officers, and Corporate Governance	4543
ITEM 11	Executive Compensation	4846
ITEM 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	5149
ITEM 13	Certain Relationships and Related Transactions, and Director Independence	5251
ITEM 14	Principal Accounting Fees and Services	5554
ITEM 15	Exhibits, Financial Statement Schedules	5655
SIGNATURES		5856

PART I

ITEM 1. BUSINESS

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

All statements in this discussion that are not historical are forward-looking statements. Statements preceded by, followed by or that otherwise include the words "believes", "expects", "anticipates", "intends", "projects", "estimates", "plans", "may increase", "may fluctuate" and similar expressions or future or conditional verbs such as "should", "would", "may" and "could" are generally forward-looking in nature and not historical facts. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. These factors include, among others, the factors set forth below under the heading "risk factors." Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Most of these factors are difficult to predict accurately and are generally beyond our control. We are under no obligation to publicly update any of the forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as otherwise provided by law. Readers are cautioned not to place undue reliance on these forward-looking statements. References in this form 10-K, unless another date is stated, are to December 31, ~~2013~~2014. As used herein, the “Company,” “Epazz,” “we,” “us,” “our” and words of similar meaning refer to Epazz, Inc., and include Epazz’s wholly owned subsidiaries, Desk Flex, Inc., an Illinois corporation (“DFI”), Professional Resource Management, Inc., an Illinois corporation (“PRMI”), Intellisys, Inc., a Wisconsin corporation ("IntelliSys"), K9 Bytes, Inc., an Illinois corporation (“K9 Bytes”), ~~and~~ MS Health, Inc., an Illinois corporation (“MS Health”), Telecorp Products, Inc., a Michigan corporation (“Telecorp”), Jadian, Inc., an Illinois corporation (“Jadian”), Strantin, an Illinois corporation (“Strantin”) and Interaction Technology, Inc., an Illinois corporation, (“Interact”) unless otherwise stated, or the context suggests otherwise.

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

volatility or decline of our stock price;

low trading volume and illiquidity of our common stock, and application of the SEC’s penny stock rules;

potential fluctuation in quarterly results;

our failure to earn revenues;

material defaults on monetary obligations owed us, resulting in unexpected losses;

dissipation of existing assets and failure to acquire or grow a new business;

litigation, disputes and legal claims involving outside parties;

risks related to our ability to be listed on a national securities exchange and meeting listing requirements;

risks related to our recently announced acquisition, our ability to finance the acquisition;

risks associated with our ability to raise necessary capital to continue as a going concern; and

other risks set forth below under “risk factors” and included from time to time in our filings with the Commission.

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

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

Business Overview

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

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

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

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

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

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

AutoHire Software, Asset Purchase

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

IntelliSys, Inc., Wholly-Owned Subsidiary

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

K9 Bytes, Inc., Wholly-Owned Subsidiary

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

MS Health Software Corporation, Asset Purchase

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

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

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

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

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

Terran Power, Inc., Recent Formation of Subsidiary

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

Recent Events

Telecorp Products, Inc., Stock Purchase Agreement

On February 28, 2014, the Company entered ~~into~~ into a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario ~~Canada~~ Canada corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder and the sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding ~~shares~~ shares of Telecorp from Troy Holdings, for an aggregate purchase price of $~~320~~302,000 (the “Purchase Price”). The Purchase ~~Price~~ Price was payable as follows:

	(a)	The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and
	(b)	The Company provided Troy Holdings with a Promissory Note in the amount of $~~120~~102,000 (the “Telecorp Note”), which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing less $18,000 overpayment adjustment. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum.

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

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

Zinergy (DBA) formerly Cynergy Software, Asset Purchase

On ~~March~~April 134, 2014, the Company entered into an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing, $25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation. The acquisition was financed in part with a software financing agreement. ~~The~~ Financing agreement has a lien against the software ~~assets~~ ~~of Zinergy~~assets.

Zinergy Service Desk Software is very customizable for your business processes. Integrate Zinergy ~~integrates~~ with just about every other business tool ~~available~~you can think of. Help Desk Support Software, ~~Help~~ Help Desk Ticketing Software, Customer Support Software, HRIS Ticketing Solution and much more.

Jadian Enterprises, Inc., Asset Purchase Agreement

On May 169, 2014, the Company, through a newly-formed wholly-owned Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset Purchase Agreement (“APA”) with Jadian, Inc., a Michigan corporation (“Jadian”). Pursuant to the APA, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Jadian’s software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $~~425~~417,~~000~~945, of which $~~215~~207,~~000~~945 was paid at the closing and $210,000 was financed by way of a Promissory Note (the “Jadian Note”). The terms of the Jadian Note include interest at 6% per annum, a ten (10) year amortization, full right of offset, no payments of either principal or interest for thirty (30) days after Closing and equal payments of principal and interest commencing thereafter, no prepayment penalty, and a balloon payment consisting of full payment of all amounts due after three (3) years, subject to certain offsets, including an offset for $40,760 for prepaid maintenance contracts received by the seller prior to Closing. The Jadian Note is secured by a lien on the assets of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian.

The Company also agreed to provide the seller with additional earn-out rights in connection with the purchase, which provide that the seller will receive up to a maximum of $100,000 per year for the three twelve month periods following the Closing (any delinquent earn-out payment shall bear interest at the rate of 10% per annum until the delinquent amount is paid), based on the gross revenues generated by Jadian during such applicable year based on the following schedule (the “Earn-Out”):

Revenue for the Relevant Year	Earn-Out
$-0- to $500,000	$	-–
$500,000 to $600,000	$	25,000
$600,000 to $700,000	$	50,000
$700,000 to $800,000	$	75,000
$800,000 or more	$	100,000

Provided that in no event shall the total amount payable to Jadian Enterprises in connection with the Earn-Out exceed $100,000 per year, or $300,000 in aggregate.

~~Recent~~Strand, ~~Debt~~Inc., ~~Financing~~Asset Purchase Agreement

~~Debt~~On ~~Financing~~July 31, ~~Related~~2014, ~~Parties~~one of the Company’s subsidiaries, GGTelecorp ~~Mars~~Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Strantin, Inc. (“Strantin”), ~~Capital~~closed on an Asset Purchase Agreement (“APA”) with Strand, Inc., an Illinois corporation (“Strand”). Pursuant to the APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used in connection with Strand’s software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $185,000, of which $100,000 was paid at the closing, and $85,000 was financed by way of a Convertible Promissory Note (the “Strand Note”). The terms of the Strand Note include interest at 6% per annum, no payments of either principal or interest for thirty (30) days after Closing and monthly principal and interest payments of $2,586 commencing thereafter, no prepayment penalty, and a balloon payment consisting of full payment of all amounts due after one (1) year. In the event we default on the July 31, 2015 balloon payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever is greater. The Strand Note is secured by a lien on the assets of Strand. We did not purchase and Strand agreed to retain and be responsible for any and all liabilities of Strand. We did not purchase and Strand agreed to retain and be responsible for any and all liabilities of Strand.

~~Originated~~This ~~February~~acquisition 7,was ~~2014,~~accounted afor ~~$26,000~~as ~~unsecured promissory note payable, including~~ a ~~$6,000~~business combination ~~loan~~under ~~origination~~the ~~fee,~~purchase ~~owed~~method toof ~~GG Mars Capital~~accounting, ~~Inc.,~~given athat ~~corporation~~substantially ~~owned~~all ~~by an immediate family member~~ of the Company’s ~~CEO.~~assets ~~The~~and ~~note~~ongoing ~~carries~~operations were ~~a 15% interest rate, matured on March 30, 2014~~acquired. InThe ~~addition,~~purchase aresulted ~~loan origination~~in ~~fee consisting of 2~~$206,~~000,000~~321 ~~shares~~ of ~~Convertible~~goodwill. ~~Series~~According Cto ~~Preferred~~the ~~Stock~~purchase ~~was~~method ~~issued~~of ~~as consideration for the loan~~accounting, ~~and~~ ~~is being amortized on a straight line basis over~~ the ~~life~~Company of recognized the ~~loan.~~identifiable ~~The~~assets ~~note~~acquired ~~also~~and ~~carries~~liabilities aassumed ~~liquidated~~as ~~damages fee of $500 upon default.~~follows:

Originated February 22, 2014, a $100,000 unsecured promissory note payable, including a $25,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on April 30, 2014. In addition, a loan origination fee consisting of 15,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $35,000 upon default.

	July
	2014
Consideration:
Cash paid at, and prior to, closing	$	100,000
Seller financed note payable(1)(2)		85,000
		185,000
Fair value of identifiable liabilities acquired:
Deferred revenue		36,638
Fair value of total consideration exchanged		221,638

Fair value of identifiable assets acquired assumed:
Software		9,447
Trade name		5,870
Total fair value of assets assumed		221,638
Consideration paid in excess of fair value (Goodwill)(3)	$	206,321

Originated March 7, 2014, a $22,000 unsecured promissory note payable, including a $7,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 7, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $7,000 upon default._______________

Originated March 26, 2014, a $37,500 unsecured promissory note payable, including a $7,500 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 26, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $1,500 upon default.

(1)	Consideration included an unsecured $85,000 seller financed note payable (“Strand Note”), which bears interest at 6% per annum until the maturity date of July 31, 2015, and provides for equal monthly principal and interest payments of $2,585.86 commencing on August 31, 2014. The Strand Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity at July 31, 2015.
(2)	The fair value of the seller financed note in excess of the $85,000 principal balance attributable to the deferred payment terms will be amortized to interest expense over the deferred financing period.
(3)	The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.

Originated March 28, 2014, an $18,750 unsecured promissory note payable, including a $3,750 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 28, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $7,000 upon default.

Debt Financing, Related Parties, Star Financial Corporation

Originated January 15, 2014, an unsecured $43,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 20, 2014. In addition, a loan origination fee consisting of 5,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500 upon default.

Originated February 8, 2014, an unsecured $13,000 promissory note payable, including a $3,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 30, 2014. In addition, a loan origination fee consisting of 1,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500 upon default.

Originated February 21, 2014, an unsecured $75,000 promissory note payable, including a $15,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on April 30, 2014. In addition, a loan origination fee consisting of 10,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $25,000 upon default.

Originated March 7, 2014, an unsecured $30,000 promissory note payable, including a $6,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 7, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $1,500 upon default.

~~Originated~~Interaction ~~March 26~~Technology, ~~2014, an unsecured $25,000 promissory note payable, including a $5,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO~~Inc. ~~The note carries a 15% interest rate~~, ~~matured~~Asset ~~on May 26, 2014. In addition, a loan origination~~Purchase fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.Agreement

~~Originated~~On ~~March~~December 2829, 2014, anThe ~~unsecured~~Company ~~$25,000~~through a ~~promissory~~newly-formed ~~note~~wholly-owned ~~payable~~Illinois subsidiary, ~~including~~Interaction aTechnology, $5Inc. (“Interact”),~~000~~ ~~loan~~closed ~~origination~~on ~~fee,~~an ~~owed~~Asset toPurchase Agreement ~~Star~~(“APA”) ~~Financial~~with Interaction Technology, aInc., ~~corporation~~an ~~owned~~Arizona bycorporation an(“Inter”). ~~immediate~~Pursuant ~~family~~to the ~~member~~APA, we purchased substantially all of the ~~Company~~seller’s ~~CEO.~~assets, ~~The~~including ~~note~~intangible ~~carries~~assets aand ~~15%~~certain ~~interest~~tangible ~~rate,~~assets ~~matured~~used in onconnection ~~May~~with 28Interaction’s software business, ~~2014.~~including Inall ~~addition~~of its intellectual property, aits ~~loan~~business ~~origination~~trademarks and ~~fee~~copyrights, ~~consisting~~equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of 3$600,000, of which $250,000 ~~shares~~was ofpaid ~~Convertible~~at ~~Series~~the Cclosing, ~~Preferred~~and ~~Stock~~$150,000 was ~~issued~~financed asby ~~consideration~~way ~~for~~of a Promissory Note (the ~~loan,~~“Inter Note1”) and $200,000 iswas ~~being amortized~~financed onby away ~~straight~~of ~~line~~a ~~basis~~Promissory ~~over~~Note (the ~~life~~"Inter Note2"). The terms of the ~~loan~~Inter Note1 include interest at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal payments of $37,500 commencing thereafter, no prepayment penalty. The ~~note~~terms ~~also~~of ~~carries~~the aInter ~~liquidated~~Note2 ~~damages~~include ~~fee~~interest at 6% per annum, no payments of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $211,~~500~~881.03 commencing ~~upon~~thereafter, ~~default~~no prepayment penalty. The Inter Note 1 and Inter Note2 is unsecured. We did not purchase and Inter agreed to retain and be responsible for any and all liabilities of Inter.

Recent Debt Financing

Originated March 18, 2015, a $6,250 unsecured promissory note payable, including a $1,250 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 18, 2015. The note also carries a liquidated damages fee of $1,000 upon default.

Originated January 22, 2015, an unsecured $47,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries a liquidated damages fee of $1,500 upon default.

Originated February 24, 2015, an unsecured $48,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 22, 2015. The note also carries a liquidated damages fee of $1,500 upon default.

Originated March 3, 2015, an unsecured $21,875 promissory note payable, including a $4,375 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on October 3, 2015. The note also carries a liquidated damages fee of $1,500 upon default.

Convertible Debt Financing

Originated ~~February~~January 47, ~~2014~~2015, an unsecured $3542,~~491~~323.64 convertible promissory note, carries a 12% interest rate, matures on ~~February~~January 47, ~~2015~~2016, (“~~Second~~One Magna Group Note”) ~~owed~~ owed to Magna Group, LLC, consisting of ~~two~~one ~~notes~~partial note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $3375,000 of principal and $29,~~491~~647.28 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the 3 lowest trading price of the Company’s common stock for the ~~five~~ten (510) days prior to the conversion date, or $0.~~00004~~000075 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal ~~and interest~~ of $3542,~~491 was~~323.64 was subsequently converted to a total of ~~236~~309,~~606~~445,~~400~~417 shares of common stock over various dates from ~~February~~January 137, ~~2014~~2015 to ~~February~~March 2718, ~~2014~~2015 in complete satisfaction of the debt.

Originated ~~February~~January 197, ~~2014~~2015, an unsecured $3717,~~700~~ 500 convertible promissory note, carries a 12% interest rate, matures on ~~February~~January 177, ~~2015~~2016, (“~~Third~~Two Magna Group Note”) ~~owed~~ owed to Magna Group, LLC~~, consisting of a promissory note acquired and assigned from Star Financial Corporation, a related party, consisting of $32,000 of principal and $5,700 of accrued interest~~. The acquired promissory ~~note~~notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the 3 lowest trading price of the Company’s common stock for the ~~five~~ten (510) days prior to the conversion date, or $0.~~00004~~000075 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was subsequently converted to a total of 377,000,000 shares of common stock over various dates from March 10, 2014 to March 19, 2014 in complete satisfaction of the debt.

~~Equity~~On ~~Based~~January ~~Debt~~29, ~~Settlement~~2015, we ~~Financing~~entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible Promissory ~~Conversions~~Note in the original principal amount of $43,000. The One KBM Note had a maturity date of November 2, 2015, and was convertible into ~~Class~~our Acommon stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock –during ~~IBC~~the ~~Funds~~thirty (30) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the One KBM Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the One KBM Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar ~~LLC~~with our operations, and there was no solicitation.

On February 14, 2014, IBC Funds, LLC (“IBC”) filed a Joint Motion for Approval of Settlement Agreement and Stipulation, and Request for Fairness Hearing in the Circuit Court of the Twelfth Judicial Circuit in and for Sarasota County, Florida, Case No. 2014-CA-000899. IBC has contracted with various note holders of the Company to acquire approximately $314,021 of Company debt and subsequently converted the debt to common stock of the Company at 50% of the lowest trading price over the 15 days prior to, and including the conversion request date pursuant to Section 3(a)(10) of the Securities Act of 1933, which allows the exchange of claims, securities, or property for stock when the arrangement is approved for fairness by a court proceeding. In addition, the Company agreed to issue 75,000,000 settlement shares to IBC. The Company has agreed to these terms as the acquisition of these debts and subsequent conversion would alleviate a significant portion of the Company’s liabilities. A fairness hearing was held on February 14, 2014 and the arrangement was approved. A total of 3,040,823,600 shares of Class A Common Stock was issued, in addition to the 75,000,000 settlement shares, in complete satisfaction of the debt, as disclosed in detail below.6

Originated February 13, 2015, an unsecured $127,812.50 convertible promissory note, carries a 15% interest rate, matures on January 7, 2016, (“IBC Note”) owed to IBC Funds, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $106,000 of principal and $21,812.5 of accrued interest and fees. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest trading price of the Company’s common stock for the fifteen (15) days prior to the conversion date. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. IBC Funds did not complete the require payments under the debt purchase agreement and the note is currently in dispute.

Originated February 17, 2015, an unsecured $22,542.47 convertible promissory note, carries a 5% interest rate, matures on February 17, 2016, (“Blackbridge Note”) owed to Blackbridge Capital, LLC, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $20,000 of principal and $2,542.47 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-five percent (55%) of the average of the lowest trading price of the Company’s common stock or $0.0001 which is greater for the fifteen (15) days prior to the conversion date. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares. The assigned principal of $22,542.47 was subsequently converted to a total of 187,300,733 shares of common stock over various dates from February 17, 2015 to March 5, 2015 in complete satisfaction of the debt.

Originated March 2, 2015, an unsecured $5,000 convertible promissory note, carries a 15% interest rate, matures on May 20, 2015, (“Star Note”) owed to Star Financial Corporation, a related party, consisting of a total of $5,000 of principal and $447.95 of accrued interest. The October 20, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.000075. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares.

Originated March 2, 2015, an unsecured $18,750 convertible promissory note, carries a 15% interest rate, matures on May 28, 2014, (“GG Note”) owed to GG Mars, Inc., a related party, consisting of a total of $18,750 of principal and $2,196.06 of accrued interest. The March 28, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares.

Originated March 31, 2015, an unsecured $30,000 convertible promissory note, carries a 15% interest rate, matures on May 7, 2014, (“Star Note”) owed to Star Financial Corporation, a related party, consisting of a total of $30,000 of principal and $3,772.60 of accrued interest. The March 7, 2014 promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to $0.00005. The debt holder was limited to owning 9.99% of the Company’s issued and outstanding shares.

Our Products

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

Epazz BoxesOS v3.0

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

Services include:

· Single sign-on: Provides a powerful single-sign-on with security procedure to protect users' information and identity.

· Course Management System: Manage distance, traditional courses and Calendar.

· Enterprise Web Site Content Management: Manage public sites with multi contributors.

· Integration Management Services: Integrated into Enterprise Resource Planning (“ERP”) and Mainframes.

· Email Management: Email server and web client.

· Instant Messenger Services: Instant messaging and alerts.

· Customer Relationship Management: Prospective students and alumni.

· Calendar/Scheduler Management: Event directory, groupware, and personal calendar.

· Administrative Support Services: Online payment services.

· Business Services: Facility Management and Online Bookstore.

BoxesOS software provides:

Web Portal Component

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

Administrative Content Management

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

Work Hub

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

Central Repository

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

ViewPoint

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

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

AutoHire system is the interactive question and online screening and ranking system. The ~~AutoHire~~interactive question system provides a ~~tool~~means tofor ~~power career~~the ~~centers,~~client ~~post~~to ~~job~~maintain ~~ads~~their toown library ~~sites~~of questions and ~~job~~to ~~boards,~~attach ~~and~~selected questions to ~~collect~~job ~~resumes~~opportunities ~~online~~posted. ~~The~~Responses ~~online~~obtained ~~processes~~can ~~supported~~be byused ~~the~~to ~~system~~screen and ~~provide~~rank ~~the~~candidates ~~mechanism~~to permit hiring managers to ~~comply~~focus ~~with~~their attention on only the ~~record~~most ~~keeping~~suitable ~~requirements~~candidates. ofWe ~~Title~~believe ~~VII~~that ofresult can ~~the~~have ~~Civil~~a ~~Rights~~substantial ~~Act~~impact ofon ~~1964,~~the ~~which~~cost ~~apply to~~of ~~organizations~~recruiting ~~employing~~and 15the orquality ~~more~~of ~~persons~~candidates selected.

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.7

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.

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

IntelliSys Software

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

SystemView

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

Features

· The Alarm/Event Journal records all alarms and status changes and has the flexibility to query history based on tag names and time ranges.

· Smart Server provides communication with process control and automatic collections of data. It is designed to normalize data, accumulate and summarize statistics for the plant management and maintenance systems.

· Rapid application development tools dramatically reduce system development time. Development tools are included with all applications.

MaintenanceView

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

· Fixed asset and rotating equipment.

· Preventive scheduling and predictive reports and charts.

· Work order management.

· Inventory and purchasing.

· Manufacture and vendor records.

· Parts inventory.

Features

· Ability to track maintenance costs by center, department, location, etc.

· Ability to customize user interface sorting by location, equipment type, department, cost center, manufacturer or vendor.

· Ability to customize reports using MS Excel compatible spreadsheets to accommodate users’ specific needs.

ReportView

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

Features

· Stores real-time and laboratory data in a secure open database.

· Time-based compression stores process information and manually collected data.

· Flexible rapid application development tools allow creation of input displays, reports and charts and navigation menus.

· Using MS Excel compatible spreadsheet, ReportView combines the user-friendly features of familiar spreadsheet functions with the security of an expandable database.

· Reporting tools provide easy access to retrieve summarized or raw data for process-efficiency and compliance reports.

· Creates 2D and 3D presentations-quality charts in minutes.

· An efficient decision support system and dashboard development tools for operations, maintenance, management and engineering.

EnergyView

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

Features

· Collect usage data manually and automatically.

· Normalize energy variables create benchmarking variables.

· Provide comparisons of hourly usage to previous days.

· Calculate operating cost and savings by day, month and year-to-date.

· Forecast and alarm peak demands.

· Send alarms via local annunciation, email or pagers.

· Benchmarking.

· Local Factor Analysis.

· Automate Energy Billing Audits.

· Determine Changes in Energy Usage Patterns.

· Setting Saving Targets and Tracking Progress.

K9 Bytes Software

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

MS Health Software

10Telecorp Software

MCCS has brought Avaya, Cisco and Nortel real-time and historical information to the web, allowing access from anywhere. This feature makes MCCS ideal for increased accessibility, including connecting with multiple sites or at home agents. Customizable, Easy-to-Use Data includes ad-hoc reporting, scheduled reports through email.

Cynergy Software

Cynergy Service Desk Software is very customizable for your business processes. Integrate Cynergy with just about every other business tool you can think of. Help Desk Support Software, Help Desk Ticketing Software, Customer Support Software, HRIS Ticketing Solution

Jadian Software

Jadian is a globally-operating software and services company that provides complete solutions for managing compliance, audits, inspections, work orders, licenses/certificates/permits, and enforcement activities. Jadian's compliance solutions are being used by wide variety of private industry companies and government agencies, including public health agencies, audit and inspection companies, food manufacturers, organic certifiers, road transportation authorities, national accreditation bodies, and federal agencies.

Strand Software

Strand offers enterprise-grade overarching surveillance management software from the very first camera installed. Strand allows for unlimited cameras to be added and unlimited users to be defined to the system at no extra cost. Strand’s Enterprise Solution was built for practicality and functionality, allowing clients to leave scalable and modular pricing concerns behind while searching for the perfect surveillance solution.

Interaction Software

Interaction is a software management intranet/portal solution designed specifically for your business needs. This robust solution encompasses key integrated components to manage and organize content for your company or organization, using a standard web browser. Company employees from executives to part-time staff have the ability to access pertinent information, resources and content relating to their duties and needs.

Sales & Marketing

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

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

Research and Development

The Company has ~~spent~~ not spent resources on research and development activities for the fiscal years ended December 31, ~~2013~~2014 and December 31, ~~2012~~2013.

Employees

We currently employ ~~six~~eight (68) full-time employees, all of which are provided to us by Insperity, Inc., with whom we have a client service agreement to provide labor and human resource services.

Competition

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

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

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

Intellectual Property

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

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

ITEM 1A. RISK FACTORS

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

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RISKS RELATED TO OUR BUSINESS

We owed a total of $25,~~607~~005,~~576~~501 in liabilities as of December 31, ~~2013~~2014. We will need to raise additional funds to repay our obligations and continue our operations, and these funds may not be available on acceptable terms or at all. Failure to raise additional funds could require us to substantially reduce or terminate our operations.

As of December 31, ~~2013~~2014, we had $25,~~607~~005,~~576~~501 in liabilities and owed approximately $13,~~942~~900,~~244~~562 in outstanding notes payable, which included $7380,~~232~~239 owed on line of credits, $175,~~421~~890 owed on our capital leases; $~~397~~1,~~368~~221,323 owed to our Chief Executive and other related parties; a total of $~~157~~88,~~294~~739 owed on six convertible debentures, including a discount on beneficial conversion features of $~~109~~131,~~583~~774, or a total face value of $~~266~~88,~~877~~739 of convertible debts, and $12,~~211~~504,~~929~~371 owed to other unrelated third parties. We anticipate raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support our business operations; however we currently do not have commitments from third parties for additional capital. Our cash on hand is sufficient to fund operations for the next six months. We will need to raise additional funds to continue to operate as a going concern.

We cannot be certain that any such financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue and expand our business. We intend to overcome the circumstances that impact our ability to remain a going concern through a combination of the commencement of additional revenues, of which there can be no assurance, with interim cash flow deficiencies being addressed through additional equity and debt financing. Our ability to obtain additional funding for the remainder of the ~~2014~~2015 year and thereafter will determine our ability to continue as a going concern. There can be no assurances that these plans for additional financing will be successful. Failure to secure additional financing in a timely manner to repay our obligations and supply us sufficient funds to continue our business operations and on favorable terms if and when needed in the future could have a material adverse effect on our financial performance, results of operations and stock price and require us to implement cost reduction initiatives and curtail operations. Furthermore, additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, and may require that we relinquish valuable rights. In the event that we are unable to repay our current and long-term obligations as they come due, we could be forced to curtail or abandon our business operations, and/or file for bankruptcy protection; the result of which would likely be that our securities would decline in value and/or become worthless.

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

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

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

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

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

On February 28, 2014, the Company entered into a Stock Purchase Agreement (the “Telecorp Purchase Agreement”) with Troy Holdings International, Inc., an Ontario Canada corporation (“Troy Holdings”), Telecorp Products, Inc. a Michigan corporation and Troy, Inc., a shareholder and the sole stockholder of Telecorp. Pursuant to the Telecorp Purchase Agreement, the Company purchased 100% of the outstanding shares of Telecorp from Troy Holdings, for an aggregate purchase price of $302,000 (the “Purchase Price”). The Purchase Price was payable as follows:

	(a)	The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and
	(b)	The Company provided Troy Holdings with a Promissory Note in the amount of $102,000 (the “Telecorp Note”), which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing less $18,000 overpayment adjustment. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum.

On April 4, 2014, the Company entered into an Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing, $25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation. The acquisition was financed in part with a software financing agreement. Financing agreement has a lien against the software assets.

On May 9, 2014, the Company, through a newly-formed wholly-owned Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset Purchase Agreement (“APA”) with Jadian, Inc., a Michigan corporation (“Jadian”). Pursuant to the APA, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Jadian’s software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $417,945, of which $207,945 was paid at the closing and $210,000 was financed by way of a Promissory Note (the “Jadian Note”). The terms of the Jadian Note include interest at 6% per annum, a ten (10) year amortization, full right of offset, no payments of either principal or interest for thirty (30) days after Closing and equal payments of principal and interest commencing thereafter, no prepayment penalty, and a balloon payment consisting of full payment of all amounts due after three (3) years, subject to certain offsets, including an offset for $40,760 for prepaid maintenance contracts received by the seller prior to Closing. The Jadian Note is secured by a lien on the assets of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian.

On July 31, 2014, one of the Company’s subsidiaries, Telecorp Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Strantin, Inc. (“Strantin”), closed on an Asset Purchase Agreement (“APA”) with Strand, Inc., an Illinois corporation (“Strand”). Pursuant to the APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used in connection with Strand’s software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $185,000, of which $100,000 was paid at the closing, and $85,000 was financed by way of a Convertible Promissory Note (the “Strand Note”). The terms of the Strand Note include interest at 6% per annum, no payments of either principal or interest for thirty (30) days after Closing and monthly principal and interest payments of $2,586 commencing thereafter, no prepayment penalty, and a balloon payment consisting of full payment of all amounts due after one (1) year. In the event we default on the July 31, 2015 balloon payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever is greater. The Strand Note is secured by a lien on the assets of Strand. We did not purchase and Strand agreed to retain and be responsible for any and all liabilities of Strand. We did not purchase and Strand agreed to retain and be responsible for any and all liabilities of Strand.

On December 29, 2014, The Company through a newly-formed wholly-owned Illinois subsidiary, Interaction Technology, Inc. (“Interact”), closed on an Asset Purchase Agreement (“APA”) with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the APA, we purchased substantially all of the seller’s assets, including intangible assets and certain tangible assets used in connection with Interaction’s software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $600,000, of which $250,000 was paid at the closing, and $150,000 was financed by way of a Promissory Note (the “Inter Note1”) and $200,000 was financed by way of a Promissory Note (the "Inter Note2"). The terms of the Inter Note1 include interest at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal payments of $37,500 commencing thereafter, no prepayment penalty. The terms of the Inter Note2 include interest at 6% per annum, no payments of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $11,881.03 commencing thereafter, no prepayment penalty. The Inter Note 1 and Inter Note2 is unsecured. We did not purchase and Inter agreed to retain and be responsible for any and all liabilities of Inter.

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

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

We incurred a net loss of $37,~~376~~667,~~238~~407 for the year ended December 31, ~~2013~~2014 and accumulated losses of $715,~~501~~169,~~994~~401 from March 2000 (inception) to December 31, ~~2013~~2014, in addition to having negative working capital of $13,~~283~~453,~~338~~062 at December 31, ~~2013~~2014. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the software development industry. We cannot assure you that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to increase our revenues. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on our business, financial condition and result of operations.

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

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

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

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

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

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

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

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

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

meet our capital needs;

expand our systems effectively or efficiently or in a timely manner;

allocate our human resources optimally;

identify and engage qualified employees and consultants, or retain valued employees and consultants; or

incorporate effectively the components of any business that we may acquire in our effort to achieve growth.

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

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

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

the potential delay in recognizing revenue from transactions due to revenue recognition rules which we must follow;

customer decisions to delay implementation of our products;

any seasonality of technology purchases;

demand for our products, which may fluctuate significantly;

the timing of new product introductions and product enhancements by both us and our competitors;

changes in our pricing policy; and

the publication of opinions concerning us, our products or technology by industry analysts.

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

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

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

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

lost or delayed market acceptance and sales of our software;

loss of clients;

product liability suits against us;

diversion of development resources;

injury to our reputation; and

increased maintenance and warranty costs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

the establishment of our brand;

the development and performance to our planned product introductions;

the establishment of key relationships with customers for our software products; and

substantial marketing and product development efforts and expenditures to create and sustain customer demand.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

pay damages, including actual monetary damages, royalties, lost profits or other damages and third-party’s attorneys’ fees, which may be substantial;

expend significant time and resources to modify or redesign the affected products or procedures so that they do not infringe a third-party’s patents or other intellectual property rights; further, there can be no assurance that we will be successful in modifying or redesigning the affected products or procedures;

obtain a license in order to continue manufacturing or marketing the affected products or processes, and pay license fees and royalties; if we are able to obtain such a license, it may be non-exclusive, giving our competitors access to the same intellectual property, or the patent owner may require that we grant a cross-license to part of our proprietary technologies; or

stop the development, manufacture, use, marketing or sale of the affected products through a court-ordered sanction called an injunction, if a license is not available on acceptable terms, or not available at all, or our attempts to redesign the affected products are unsuccessful.

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

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

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

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

stop selling our products or using the technology that contains the allegedly infringing intellectual property;

attempt to obtain a license to use the relevant intellectual property, which may not be available on reasonable terms or at all; and

attempt to redesign the products that allegedly infringed upon the intellectual property.

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

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

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

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

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

we have limited experience acquiring or making investments in complementary companies, products, services and technologies;

we may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that industry or economic conditions change, all of which may generate a future impairment charge;

we may have difficulty integrating the operations and personnel of the acquired business and may have difficulty retaining the key personnel of the acquired business;

we may have difficulty incorporating the acquired technologies or products with our existing product lines;

there may be customer confusion where our products overlap with those that we acquire;

our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations;

we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;

the acquisition may result in litigation from terminated employees or third parties; and

we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

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

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

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

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

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

RISKS RELATED TO OUR CAPITAL STRUCTURE

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

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

· As of ~~July~~May 911, ~~2014~~2015, there were ~~200~~1,800,000,000 shares of common stock reserved for issuance upon conversion of a convertible note payable agreement with ~~St.~~KBM ~~George Investments~~Worldwide, Inc.

· As of ~~July~~May 911, ~~2014~~2015, there were 160,~~400,~~000,000 shares of common stock reserved for issuance upon conversion of a convertible note payable agreement with ~~JMJ~~GG ~~Financial~~Mars, Inc.

We· ~~also~~May ~~have~~11, ~~outstanding~~2015, ~~obligations~~there towere ~~issue additional~~158,630,176 shares of common stock inreserved ~~the~~for ~~future~~issuance ~~related~~upon toconversion ~~conversions~~ of ~~Preferred Stock and Convertible Class B Common Stock, provided that we do not currently have~~ a ~~sufficient~~convertible ~~number~~note ofpayable ~~authorized~~agreement ~~but~~with ~~unissued~~LG ~~shares to issue such securities~~Capital, ~~given our 9,000,000,000 total authorized shares~~Inc. These shares are held entirely by our CEO and other related parties who have the ability to amend the Articles of Incorporation and increase the authorized shares as necessary without the approval or consent of our minority shareholders. These include the following:

· As of ~~July~~May 911, ~~2014~~2015, there were 4443,~~078~~000,~~038,438~~000 shares of common stock reserved for issuance upon conversion of ~~1,000~~a ~~shares~~convertible ofnote ~~outstanding~~payable ~~Convertible~~agreement ~~Series~~with ALG ~~Preferred~~Capital, ~~Stock~~Inc.

· As of ~~July~~May 911, ~~2014~~2015, there were ~~679~~800,~~673~~000,~~073~~000 shares of common stock reserved for issuance upon conversion of ~~1,000~~a ~~shares~~convertible ofnote ~~outstanding~~payable ~~Convertible~~agreement ~~Series~~with BVis ~~Preferred Stock~~Vires.

·We Asalso ofhave ~~July~~outstanding 9,obligations ~~2014,~~to ~~there~~issue additional ~~were 8,831,166,600~~ shares of common stock ~~reserved~~in ~~for~~the ~~issuance~~future ~~upon~~related ~~conversion~~to conversions of 2Preferred Stock and Convertible Class B Common Stock,~~943~~ provided that we do not currently have a sufficient number of authorized but unissued shares to issue such securities,~~722~~ given our 6,~~200~~000,000,000 total authorized shares. These shares are held entirely by our CEO and other related parties who have the ability to amend the Articles of ~~outstanding~~Incorporation ~~Convertible~~and ~~Series~~increase Bthe ~~Preferred~~authorized ~~Stock~~shares as necessary without the approval or consent of our minority shareholders. These include the following:

· As of ~~July~~April 910, ~~2014~~2015, there were 234,~~000~~078,~~000~~038,438 shares of common stock reserved for issuance upon conversion of a1,000 shares of outstanding Convertible ~~Class~~Series BA ~~Common~~Preferred Stock.

As of April 10, 2015, there were 679,673,073 shares of common stock reserved for issuance upon conversion of 1,000 shares of outstanding Convertible Series B Preferred Stock.

As of April 10, 2015, there were 8,831,166,600 shares of common stock reserved for issuance upon conversion of 2,943,722,200 shares of outstanding Convertible Series B Preferred Stock.

As of April 10, 2015, there were 23,000,000 shares of common stock reserved for issuance upon conversion of a Convertible Class B Common Stock.

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

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

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

We may issue additional stock without shareholder consent.

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

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

Our board of directors has authority, without action or vote of the shareholders, to exchange non-convertible debts for convertible debts with agreement by the lenders. As of December 31, ~~2013~~2014, we had a total of $13,~~784~~811,~~950~~823 of non-convertible debts on our balance sheet, and a total of $~~266~~88,~~877~~739 of outstanding convertible debts. Any conversion of the Convertible Notes and sale of shares of common stock issuable in connection with the conversion thereof will likely cause the value of our common stock, if any, to decline in value, as described in greater detail under the Risk Factors below.

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

The conversion price of the $7460,~~900~~674 in Convertible Notes (principal only) currently outstanding as of ~~July~~May 91, ~~2014~~2015, is convertible at various prices discounted to market as depicted in the table below, in addition to the 64,~~210~~557,~~861,173~~590 shares of Class A Common Stock issued in ~~conversion~~ conversion of a total of $~~989~~2,~~084~~250,914 of principal and interest over various dates from January 1, 2013 through ~~July~~December 931, 2014, including 584,333~~,745~~ shares pursuant to the conversion of $58,433 of previously non-convertible related party debt. In addition, a total of of $601,500 of principal on convertible notes was repaid in cash during the year ended December 31, ~~2013~~2014. As a result, any conversion of the Convertible Notes and sale of shares of common stock issuable in connection with the conversion thereof will likely cause the value of our common stock, if any, to decline in value, as described in greater detail under the Risk Factors below.

Potential issuable shares at various conversion prices

below the most recent market price of $0.0002 per share

Conversion

Principal

100%

75%

50%

25%

Lender / Origination

Terms

Borrowed

$0.0002

$0.00015

$0.0001

$0.00005

JMJ Financial (Second JMJ Note) November 13, 2013

Convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.00009 per share, whichever is greater.

3316,~~000~~125

~~165~~80,~~000~~625,000

~~220~~107,~~000~~500,000

~~330~~161,~~000~~260,000

~~660~~322,~~000~~520,000

St. George Investments, Inc. (First St. George Note) September 5, 2013

Convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest closing bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater.

4144,~~900~~549

~~209~~222,~~500~~745,000

~~279~~296,~~333~~933,333

~~419~~445,~~000~~490,000

~~838~~890,~~000~~980,000

7460,~~900~~674

~~374~~303,~~500~~370,000

~~499~~404,~~333~~493,333

~~749~~606,~~000~~750,000

1,~~498~~213,~~000~~500,000

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

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

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

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

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

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

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

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

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

The price of our common stock may be volatile.

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

price and volume fluctuations in the overall stock market from time to time;

significant volatility in the market price and trading volume of software companies;

actual or anticipated changes in our earnings or fluctuations in our operating results;

actual or anticipated changes in the expectations of securities analysts;

announcements of technological innovations, new solutions, strategic alliances or significant agreements by us or by our competitors;

general economic conditions and trends;

major catastrophic events;

sales of large blocks of our stock; or

recruitment or departures of key personnel.

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

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

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

the possibility that our future customers may cancel, defer or limit purchases as a result of reduced information technology budgets;

the possibility that our future customers may defer purchases of our software applications in anticipation of new software applications or updates from us or our competitors;

the ability of the Company or its distributors to meet their sales objectives;

market acceptance of our new applications and enhancements;

our ability to control expenses;

changes in our pricing and distribution terms or those of our competitors;

the demands on our management, sales force and services infrastructure as a result of the introduction of new software applications or updates; and

the possibility that our business will be adversely affected as a result of the threat of terrorism or military actions taken by the United States or its allies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

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

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

ITEM 3. LEGAL PROCEEDINGS

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

On February 14, 2014, IBC Funds, LLC (“IBC”) filed a Joint Motion for Approval of Settlement Agreement and Stipulation, and Request for Fairness Hearing in the Circuit Court of the Twelfth Judicial Circuit in and for Sarasota County, Florida, Case No. 2014-CA-000899. IBC has contracted with various note holders of the Company to acquire approximately $314,021 of Company debt and subsequently converting the debt to common stock of the Company pursuant to Section 3(a)(10) of the Securities Act of 1933, which allows the exchange of claims, securities, or property for stock when the arrangement is approved for fairness by a court proceeding. The Company has agreed to these terms as the acquisition of these debts and subsequent conversion would alleviate a significant portion of the Company’s liabilities. A fairness hearing was held on February 14, 2014 and the arrangement was approved.

ITEM 4. MINE SAFETY DISCLOSURES

Mine safety disclosures are not applicable.

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PART II

(a) Market Information

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

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

	COMMON STOCK MARKET PRICE
	HIGH		LOW
FISCAL YEAR ENDED DECEMBER 31, 2014:
Fourth Quarter (Quarter ended December 31, 2014)	$	0.0070	$	0.0032
Third Quarter (Quarter ended September 30, 2014)	$	0.0001	$	0.0001
Second Quarter (Quarter ended June 30, 2014)	$	0.0002	$	0.0001
First Quarter (Quarter ended March 31, 2014)	$	0.0004	$	0.0003
FISCAL YEAR ENDED DECEMBER 31, 2013:
Fourth Quarter (Quarter ended December 31, 2013)	$	0.0010	$	0.0004
Third Quarter (Quarter ended September 30, 2013)	$	0.0022	$	0.0006
Second Quarter (Quarter ended June 30, 2013)	$	0.0029	$	0.0006
First Quarter (Quarter ended March 31, 2013)	$	0.0077	$	0.0010
FISCAL YEAR ENDED DECEMBER 31, 2012:
Fourth Quarter (Quarter ended December 31, 2012)	$	0.0100	$	0.0025
Third Quarter (Quarter ended September 30, 2012)	$	0.0450	$	0.0051
Second Quarter (Quarter ended June 30, 2012)	$	0.0200	$	0.0100
First Quarter (Quarter ended March 31, 2012)	$	0.0400	$	0.0100

(b) Holders of Common Stock

As of ~~July~~May 134, ~~2014~~2015, the Company had 2,~~943~~273,~~722~~292,~~200~~485 shares of Class A Common Stock outstanding held by approximately 5358 shareholders of record. As of ~~July~~May 134, ~~2014~~2015, the closing price of the Company's shares of common stock was $0.~~0001~~0002 per share. Island Stock Transfer Company (telephone: (727) 289-0010; facsimile: (727) 289-0069) is the registrar and transfer agent for our common stock.

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

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

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

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

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

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

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

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

As of ~~July~~December 1331, 2014, the Company had 1,000 shares of Convertible Series A Preferred Stock outstanding, all of which are held by the Company’s Chief Executive Officer, Shaun Passley, Ph.D.. There is currently no market for the Company’s Convertible Series A Preferred Stock.

As of ~~July~~December 1331, 2014, the Company had 1,000 shares of Convertible Series B Preferred Stock outstanding, which are held by the Company’s Secretary, Craig Passley (10 shares), Vivienne Passley (500 shares), the aunt of the Company’s CEO and Fay Passley (490 shares), the mother of the Company’s CEO. There is currently no market for the Company’s Convertible Series B Preferred Stock.

As of ~~July~~December 1331, 2014, the Company had 2,~~943~~932,~~722~~755,~~200~~533 shares of Convertible Series C Preferred Stock outstanding, which are held by the Company’s Chief Executive Officer, Shaun Passley, Ph.D. (2,421,052,632 shares), the Company’s Secretary, Craig Passley (60,000,000 shares), GG Mars Capital, Inc. (224,000,000 shares), a Company solely owned by Vivienne Passley, the aunt of the Company’s CEO and Star Financial Corporation (225,000,000 shares), a Company solely owned Fay Passley, the mother of the Company’s CEO. There is currently no market for the Company’s Convertible Series C Preferred Stock.

As of ~~July~~December 1331, 2014, the Company had 23,000,000 shares of Convertible Class B Common Stock outstanding, all of which are held by the Company’s Chief Executive Officer, Shaun Passley, Ph.D. There is currently no market for the Company’s Convertible Class B Common Stock.

As of December 31, 2014, the Company had not issued any Convertible Series D Preferred Stock.

(c) Dividends

On January 1, ~~2013~~2014, the Company declared and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1 million during the year ended December 31, ~~2012~~2013. Dividends equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, ~~2013~~2014 accrue quarterly, resulting in a dividend payable of $11,000, which can be paid in cash or in shares of Class A Common Stock in lieu of cash at the sole discretion of the Board of Directors. The declaration and payment of future dividends on the Common Stock will be at the sole discretion of the Board of Directors and will depend on Epazz's profitability and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant. During 2014, 11,000 shares of Class A Common Stock in consideration for the dividend payable.

The Company has 1,000 authorized and 1,000 outstanding shares of $0.~~0001~~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 $2 million, and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million (which has not occurred to date). The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible, at the option of the holder into shares of the Company’s Class A Common Stock, with five business days' notice into 60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders.

The Company has 1,000 authorized and 1,000 outstanding shares of $0.~~0001~~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 (which dividends began accruing on January 1, 2013, due to the fact that the Company had revenue of over $1 million during fiscal 2012), and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million (which has not occurred to date). The dividends are payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes a liquidation preference equal to $0.~~0001~~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.

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The Company has 3,000,000,000 authorized and 2,~~943~~932,~~722~~755,~~200~~533 outstanding shares of $0.0001 par value Series C Convertible Preferred Stock (“Series C Preferred Stock”). The Series C Preferred Stock shall accrue dividends, when, as and only if declared by the Board of Directors, out of any assets at the time legally available therefor, payable in preference and priority to any declaration or payment of any distribution on common stock of the Corporation in such calendar year. The Series C Preferred Stock includes a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. Each share of Series C Preferred Stock is convertible, at the option of the holder into three (3) shares of the Company’s Class A Common Stock, with five business days' notice, provided that no conversion will take place until all holders of the Series C Preferred Stock consent to such conversion. The Series C Preferred Stock has preferential voting rights that carry three (3) voting rights for each share issued and outstanding, and shall vote together with the shares of the Common Stock of the Company, and not as a separate class.

The Company has 1,000,000 authorized and zero outstanding shares of $0.01 par value Series D Convertible Preferred Stock (“Series D Preferred Stock”). The Series D Preferred Stock shall carry an 8.0% dividend, payable semiannually at Issuer’s election in either (i) cash or (ii) shares of common stock. Each share of Series D Preferred Stock is convertible, at the option of the holder into three (3) shares of the Company’s Class A Common Stock, with five business days' notice, provided that no conversion will take place until all holders of the Series C Preferred Stock consent to such conversion. The Series D Preferred Stock has preferential voting rights that carry three (3) voting rights for each share issued and outstanding, and shall vote together with the shares of the Common Stock of the Company, and not as a separate class.

(d) Securities Authorized for Issuance under Equity Compensation Plans

None.

(e) Recent Sales of Unregistered Securities

The following issuances of equity securities by the Company occurred during the three month period ended December 31, ~~2013~~2014:

On October 10, 2014 the Company issued 30,000,000 shares of Class A Common ~~Stock~~to our CEO from a conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was recognized as a result of this conversion.

On ~~November~~October 1310, ~~2013,~~2014 the Company issued 21,500,000 shares of Class A Common ~~Stock~~ to Star Financial, a company owned by our CEO’s family member, a related party, asfrom a ~~loan~~conversion ~~origination~~notice ~~cost~~from inPreferred ~~consideration~~C. ~~for~~As this was a ~~$24,000~~conversion ~~short~~within ~~term~~the ~~promissory~~terms ~~note~~of onthe ~~August 7, 2013~~Preferred C equity instrument no additional value was recognized as a result of this conversion.

On ~~November~~October 1310, ~~2013,~~2014 the Company issued 21,~~500~~400,000 shares of Class A Common ~~Stock~~ to GG Mars Capital~~, Inc~~., a company owned by our CEO’s family member, a related party, as from a ~~loan~~conversion notice ~~origination~~from ~~cost~~Preferred inC. ~~consideration~~As ~~for~~this was a ~~$25,000~~conversion ~~short~~within ~~term~~the ~~promissory~~terms ~~note~~of onthe ~~August 20, 2013~~Preferred C equity instrument no additional value was recognized as a result of this conversion.

On ~~November~~October 1328, ~~2013,~~2014 the Company issued 135,~~250,~~000 shares of Class A Common Stock pursuant to ~~Star~~the ~~Financial~~November 13, a2013 ~~company~~promissory ~~owned~~note byentered ~~our~~into ~~CEO’s~~with ~~family~~JMJ ~~member,~~Financial. aThe ~~related party, as a loan~~conversion ~~origination~~amount ~~cost~~was ~~in consideration for a~~ $121,~~500 short term promissory note on August 27, 2013~~399.

On November 133, ~~2013,~~2014 the Company issued 6150,000~~,000~~ shares of Class A Common Stock pursuant to GGthe ~~Mars~~November ~~Capital~~13, ~~Inc.,~~2013 apromissory ~~company~~note ~~owned~~entered byinto ~~our~~with ~~CEO’s~~JMJ ~~family~~Financial. ~~member,~~The ~~a related party, as~~conversion aamount ~~loan~~was ~~origination cost in consideration for a~~ $655,~~000 short term promissory note on September 7, 2013~~994.

On November 7, 2014 the Company issued 60,584 shares of Class A Common Stock as additional consideration pursuant to the November 13, 2013 promissory note entered into with LG Capital Funding LLC. The conversion amount was $12,117.

On November 11, 2014 the Company issued 227,273 shares of Class A Common Stock pursuant to the September 5, 2013 promissory note entered into with St. George Investment. The conversion amount was $15,000.

On December 4, 2014 the Company issued 700,000 shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion amount was $8,442.

On December 10, 2014 the Company issued 1,108,647 shares of Class A Common Stock pursuant to the September 5, 2013 promissory note entered into with St. George Investment. The conversion amount was $15,000.

On December 16, 2014 the Company issued 1,690,000 shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion amount was $5,374.

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

ITEM 6. SELECTED FINANCIAL DATA

Not required.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS:

The following discussion of our financial condition and plan of operations should be read in conjunction with our financial statements and the related notes, and the other financial information included in this report. This Management’s Discussion and Analysis or Plan of Operations describes the matters Epazz considers to be important to understanding Epazz’s history, technology, current position, financial condition and future plans. Our fiscal year begins on January 1 and ends on December 31.

The following discussion includes forward looking statements and uncertainties, including plans, objectives, goals, strategies, financial projections as well as known and unknown uncertainties. The actual results of our future performance may differ materially from the results anticipated in these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievement.

PLAN OF OPERATION

During the next twelve months, we plan to integrate our recent acquisitions, including Zinergy, Telecorp, Jadian and ~~Jadian~~Strantin, and hope to expand our customer base for our Desk/Flex, ~~Agent~~ Agent Power, AutoHire, IntelliSys, K9 Bytes and MS Health software packages. In addition, we plan to develop our Project Flex product, which consists of a patent pending foldable mini-fridge that has yet to be developed, and continue to pursue growth through additional acquisitions. We believe we can satisfy our cash requirements for the next three months with our current cash on hand and revenues generated from our operations. As such, continuing operations and completion of our plan of operation are contingent on finding additional sources of capital. We cannot assure investors that adequate revenues will be generated. In the absence of our projected revenues, we may be unable to proceed with our plan of operations. Even without significant revenues or additional funding within the next several months, we still anticipate being able to continue with our present activities, but we may require financing to potentially achieve our goals of growing our operations and increasing our revenues.

Results of Operations for the Years Ended December 31, ~~2013~~2014 and December 31, ~~2012~~2013:

	For the Years Ended
	December 31,						Increase /
	2013			2012			(Decrease)
	2014			2013			(Decrease)
Revenues	$	~~750~~1,~~139~~560,252		$	1750,~~193,217~~139		$	~~(443~~810,~~078~~113	)
General and administrative		~~758~~1,~~353~~524,779			~~698~~758,~~895~~353			59766,~~458~~426
Salaries and wages		23,~~201~~505,~~161~~511			12,~~665~~201,~~429~~161			~~535~~1,~~732~~304,350
Depreciation and amortization, including impairment		536,705			275,076			261,629
Depreciation and amortization		206,437			260,423			(53,986	)
Bad debts (recoveries)		(27,129	)		2,957			(30,086	)
Impairment on intangible assets and goodwill		1,659,335			276,282			1,383,053
Total Operating Expenses		3,469,090			2,642,357			826,733
Bad debts (recoveries)		62,601			(27,129	)		89,730
Net Operating Income (Loss)		(2,718,951	)		(1,449,140	)		1,269,811
Total Operating Expenses		6,958,663			3,469,090			3,489,573
Total other income (expense)		(657,287	)		(457,549	)		199,738
Net Operating Loss		(5,398,411	)		(2,718,951	)		(3,440,158	)
Net Income (Loss)	$	(3,376,238	)	$	(1,906,689	)	$	1,469,549
Total other income (expense)		(2,268,996	)		(657,287	)		(1,611,709	)
Net Loss	$	(7,667,407	)	$	(3,376,238	)	$	(4,097,445	)

Revenue:

For the year ended December 31, ~~2013~~2014 we had revenue of $~~750~~1,~~139~~560,252, compared to revenue of $1750,~~193,217~~139 for the year ended December 31, ~~2012~~2013, aan ~~decrease~~increase of $~~443~~810,~~078~~113, or 37108%, ~~from~~ from the comparative year. The ~~decrease~~increase in revenues is ~~partially~~ due to anew ~~$102,540~~products ~~increase~~developed in ~~deferred~~2013 ~~revenues over the prior year,~~ and ~~approximately~~released ~~a $195,000, or approximately 50%, decrease~~ in ~~sales within our MS Health subsidiary, which was primarily attributable to transitional deficiencies with the 2012 acquisition~~2014. ~~MSHealth software was out dated and the Company is in the process of replacing the software. Our Autohire and K9 Bytes operations accounted for the remaining decline of approximately $145,000.~~ We entered into a few strategic acquisitions in 2014 to rejuvenate our operations and expand our scope of products.

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General and Administrative:

General and administrative expenses increased by $59766,~~458~~426, or 9101%, to $~~758~~1,~~353~~524,779 for the year ended December 31, ~~2013~~2014, compared to general and administrative expense of $~~698~~758,~~895~~353 for the year ended December 31, ~~2012~~2013. The increase in general and administrative expense is due mainly to increased marketing and public relations expenses over the prior year.

Salaries and Wages:

Salaries and wages increased by $~~535~~1,~~732~~304, or350, 32or 59%, to $23,~~201~~505,~~161~~511 for the year ended December 31, ~~2013~~2014, compared to salaries and wages of $12,~~665~~201,~~429~~161 for the year ended December 31, ~~2012~~2013. The increase in salaries and wages is due primarily to the increase in stock based compensation of approximately $~~435~~1,~~000~~251,458 pursuant to stock issuances to our CEO, Shaun Passley, Ph.D., Craig Passley, our Corporate Secretary and two other immediate family members related to Shaun Passley, Ph.D., in addition to increased cash compensation paid to our CEO over the prior year.

Depreciation and Amortization:

We had depreciation and amortization expense of $~~260~~206,~~423~~437 for the year ended December 31, ~~2013~~2014, compared to $~~275~~260,~~076~~423 for the year ended December 31, ~~2012~~ 2013, a decrease of $1453,~~653~~986, or 521%, from the comparative year. ~~This decrease is due primarily to certain intangible assets reaching the end of their useful lives without needing to being replaced by the end of the current year.~~

Impairment on intangible assets:

We had impairment on intangible assets of $276,282 for the year ended December 31, 2013, compared to $-0- for the year ended December 31, 2012. This increase is due to $276,282 of impairments on intangible assets that are no longer generating an economic benefit within our PRMI subsidiary.

Bad Debts (recoveries):

We had bad debts (recoveries) of $~~(27~~62,~~129) for~~601 for the year ended December 31, ~~2013~~2014 as compared to $2(27,~~957~~129) of bad debts expense for the year ended December 31, ~~2012~~2013, aan ~~decrease~~increase of $3089,~~086~~730, or ~~1,017~~331%, from the comparative year. This ~~decrease~~increase is due primarily to ~~improved~~unpaid ~~monitoring~~customer ~~and~~invoices ~~collection~~from ~~efforts over~~the ~~our~~acquired ~~accounts receivable~~companies. We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days old.

Net Operating Income (Loss):

Total operating expenses for the year ended December 31, ~~2013~~2014 were $36,~~469~~958,~~090~~663, compared to $23,~~642~~469,~~357~~090 for the year ended December 31, ~~2012~~2013, an increase of $12,~~269~~768,~~811~~366, or 88 80%, from the comparative year. We had net operating losses of $25,~~718~~38,~~951~~411 for the year ended December 31, ~~2013~~2014 compared to $12,~~449~~718,~~140~~951 for the year ended December 31, ~~2012~~2013, an increase in operating loss of $12,~~269~~679,~~811~~460, or 8899%, from the comparative year. The increase in operating loss was primarily due to ~~revenue reductions of approximately $443,000,~~ the increase in stock based compensation of approximately $~~435~~1,~~000~~251,458 pursuant to the issuance of shares of common stock to our CEO, Shaun Passley, Ph.D., ~~and~~increased ~~other~~development ~~related~~expense ~~parties~~of $583, an887 ~~increase in marketing~~ and ~~public~~an ~~relations~~increase of ~~approximately~~ $771,~~000~~383,053 for ~~and $276,282 of~~ impairments on intangible assets ~~no longer in service~~.

Other Income (Expense):

Interest ~~income~~expense was $571,318,468 for the year ~~ended~~ ended December 31, ~~2013~~2014, compared to $52562,529 for the year ended December 31, ~~2012~~2013, an increase of $5755,939, or 10134%, from the comparative year. Interest ~~income~~expense increased ~~slightly~~ due to ~~having~~increased ~~more~~borrowings ~~cash~~to onfinance ~~hand~~our inoperations ~~interest~~and ~~bearing accounts during 2013~~acquisitions.

~~Interest~~Change ~~expense~~in ~~was~~derivative ~~$526,586~~liabilities ~~for~~was ~~the~~a ~~year ended~~loss ~~December~~of 31$777,664 ~~2013,~~in 2014 compared to $~~320,402~~-0- for the year ended December 31, ~~2012~~2013, an increase of $~~242~~777,~~184,~~664 ~~or 76%,~~ from the comparative ~~year~~ period. ~~Interest~~The ~~expense~~current ~~increased~~period loss ~~due~~on toderivative ~~increased~~liabilities ~~borrowings~~consisted toof ~~finance~~a ~~our~~loss ~~operations~~of $837,010 asdue ~~well~~to asthe anvalue ~~increase~~in ofexcess ~~approximately $80,000~~ of ~~finance~~the ~~costs~~face ~~related~~value toof the ~~amortized~~convertible notes, ~~discounts~~as onoffset ~~beneficial~~by ~~conversion~~a ~~features~~net ~~over~~gain ~~the~~in ~~$155,759~~market value of ~~amortized~~$59,346 ~~discounts recognized~~on ~~during~~ the ~~year~~convertible ~~ended December 31, 2012~~debts.

Loss on debt modifications, ~~related parties~~ was $94172,~~758~~864 for the year ended December 31, ~~2013~~2014, compared to $~~137~~94,~~199~~758 for the year ended December 31, ~~2012~~2013, aan ~~decrease~~increase of $4278,~~441~~106, or 3182%, from the comparative year. Loss on debt modifications for the year ended December 31, ~~2013~~2014 consisted of the modification of a promissory note with ~~Star Financial that resulted in~~ a ~~loss~~related ofparty. ~~$81,792,~~The ~~a loss of $14,240 on a~~ debt ~~conversion~~modification ~~with~~resulted ~~Vivienne Passley~~in ~~and~~ a ~~gain of $1,274 on debt settlements, and for the year ended December 31, 2012, consisted of a~~ loss on debt ~~settlement~~ ofmodifications ~~$38,671 related to the excess fair value~~ of ~~common stock exchanged in settlement of outstanding debt owed to a related party, and~~ $98172,~~528 of finance costs incurred pursuant to the modification of a convertible note with Star Financial, a related party~~864.

Net Income (Loss):

We had a net loss of $37,~~376~~667,~~238~~407 for the year ended December 31, ~~2013~~2014 compared to $13,~~906~~376,~~689~~238 for the year ended December 31, ~~2012~~2013, an increased net loss of $14,~~469~~291,~~549~~169, or 77127%, from the comparative year. The increased net loss was primarily due to ~~revenue~~impairment ~~reductions~~ of ~~approximately~~intangible assets and goodwill of $~~443~~1,~~000~~659,335, the ~~increase~~ in stock based compensation of approximately $~~435~~1,~~000~~251,458 pursuant to the issuance of shares of common stock to our CEO, Shaun Passley, Ph.D., ~~and other related parties,~~ an increase in ~~marketing~~interest ~~and~~expense ~~public relations~~ of ~~approximately~~ $77755,~~000~~939, and $~~276~~1,~~282~~ 659,335 of impairments on intangible assets no longer in service, and increased borrowing costs used to finance our recent acquisitions and sustain operations.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes total assets, accumulated deficit, stockholders’ equity and working capital at December 31, ~~2013~~2014, compared to December 31, ~~2012~~2013.

	December 31,
	2013			2012
	2014			2013
Total Assets	$	1,~~082~~087,~~961~~191		$	1,~~378~~082,~~030~~961
Total Liabilities	$	25,~~607~~005,~~576~~501		$	12,~~849~~607,~~541~~576
Accumulated (Deficit)	$	(715,~~501~~169,~~994~~401	)	$	(47,~~114~~501,~~756~~994	)
Stockholders’ Equity (Deficit)	$	(13,~~524~~918,~~615~~310	)	$	(~~471~~1,~~511~~524,615	)
Working Capital (Deficit)	$	(13,~~283~~453,~~338~~062	)	$	(~~681~~1,~~561~~283,338	)

We had total current assets of $~~339~~267,~~929~~737 as of December 31, ~~2013~~2014, consisting of cash of $~~208~~106,~~567~~708, net accounts receivable of $2596,~~248~~422, and other current assets of $~~106~~64,~~114~~607.

We had non-current assets of $~~743~~819,~~032~~454 as of December 31, ~~2013~~2014, consisting of $~~113~~106,~~410~~698 of property and equipment, net of accumulated depreciation and amortization of $~~416~~137,~~668~~436, intangible assets of $~~374~~337,~~162~~938, net of accumulated amortization of $~~796~~466,~~558~~784, and goodwill of $~~255~~374,~~460~~818 related to the ~~purchase of the Company’s subsidiaries~~goodwill.

We had total current liabilities of $13,~~623~~720,~~267~~799 as of December 31, ~~2013~~2014, consisting of $~~258~~419,~~163~~206 of accounts payable, $7488,~~039~~026 of accrued expenses, $~~322~~469,~~130~~937 of deferred revenues, current portion of outstanding balances on lines of credit of $7380,~~232~~239, current portion of capitalized leases in the amount of $175,~~421~~890, notes payable, related parties of $~~397~~1,~~368~~221,323, current maturities on convertible debentures of $~~115~~88,~~128~~739, net of discounts of $~~105~~131,~~300~~774, and current maturities on long term debts in the amount of $~~354~~1,~~786~~219,669.

We had negative working capital of $13,~~283~~453,~~338~~062 and a total accumulated deficit of $715,~~501~~169,~~994~~401 as of December 31, ~~2013~~2014.

We had total liabilities of $25,~~607~~005,~~576~~501 as of December 31, ~~2013~~2014, which included total current liabilities of $13,~~623~~720,~~267~~799, ~~long-term notes payable, related parties of $85,000, long term convertible debentures of $42,166, net of discounts of $4,283~~ and the long-term portion of debts of $~~857~~1,~~143~~284,702.

We had net cash used in operating activities of $~~463~~678,~~980~~907 for the year ended December 31, ~~2013~~2014, which was primarily due to our net loss of $37,~~376~~667,~~238~~407 after adjustments for non-cash expenses, a decrease of $381,~~876~~130 in accounts receivable and an increase of $56,~~134~~247 of other current assets, an increase of $~~153~~161,~~436~~ 043 in accounts payable, and increase of $38141,~~594~~757 in accrued expenses and $~~102~~43,~~540~~661 in deferred revenues.

We had ($6758,~~830~~533) of net cash used in investing activities for the year ended December 31, ~~2013~~2014, which consisted ~~entirely~~ of cash paid for the ~~purchase~~acquisition of subsidiaries and the purchase of equipment.

We had $~~633~~1,~~276~~335,581 of net cash provided in financing activities during the year ended December 31, ~~2013~~2014, which represented proceeds from long term debts, notes payable and convertible debts of $12,~~287~~111,~~179~~043, repayments on long term debts of $~~567~~679,~~704~~551 and principal payments on capital leases of $2511,~~699~~532.

Recent Financing Activities

Fourth quarter of ~~2013~~2014:

Debt Financing, Related Parties

OnOriginated ~~various~~October ~~dates~~20, ~~during~~2014, ~~the~~unsecured ~~fourth quarter~~promissory ofnote ~~2013~~payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. ~~advanced~~The ~~and~~note ~~repaid~~carries ~~funds~~a to15% ~~the~~interest ~~Company~~rate, matures on May 20, 2014. AIn ~~total~~addition, a loan origination fee of $501,~~900~~500 was ~~advanced~~issued as consideration for the loan, and ~~repaid~~is bybeing ~~the~~amortized ~~CEO during~~on ~~the~~a ~~fourth~~straight ~~quarter~~line basis over the life of ~~2013~~the loan.

OnOriginated ~~October~~November 159, ~~2013~~2014, ~~the~~an ~~Company~~unsecured ~~received~~ $1560,000 inpromissory ~~exchange~~note ~~for~~payable, anincluding ~~unsecured~~a $1812,000 ~~promissory~~loan ~~note~~origination ~~payable~~fee, owed to Star Financial ~~Corporation~~, ~~Inc.,~~ a corporation owned by an ~~immediate~~ immediate family member of the Company’s CEO. The note carries a 15% interest rate, ~~matures~~matured on June 129, 2015. In addition, a loan origination fee of $3,000 was issued as consideration for the loan and added to the principal loan of $18,000, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $1,500 upon default.

OnOriginated ~~November~~December 117, ~~2013~~2014, ~~the~~an ~~Company received~~ unsecured $~~100~~9,000 in ~~exchange~~promissory ~~for~~note anpayable, ~~unsecured~~including a $~~125~~2,~~000~~500 ~~promissory~~loan ~~note~~origination ~~payable~~fee, owed to GGL ~~Mars~~& ~~Capital~~F Lawn Service, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on ~~March~~December 717, ~~2014~~2015. In addition, a loan origination fee of $25,000 was issued as consideration for the loan and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.

Convertible Debt Financing

On ~~November~~October 1320, ~~2013~~ 2014, ~~the~~we ~~Company~~entered ~~received $30,000~~into ina ~~exchange~~Securities ~~for~~Purchase anAgreement ~~unsecured~~with ~~$33~~KBM Worldwide,~~000~~ ~~convertible~~Inc., ~~promissory~~pursuant ~~note~~to ~~originated~~which onwe ~~November~~sold ~~13,~~to ~~2013,~~KBM ~~including~~ an ~~Original~~8% Convertible ~~Issue~~Promissory ~~Discount~~Note ~~(“OID”)~~in the original principal amount of $343,000, ~~carries a 12% interest rate~~ (“~~Second~~One ~~JMJ~~KBM Note”),. ~~matures~~The onOne ~~November~~KBM Note had a maturity date ~~12,~~of ~~2014.~~July ~~The~~22, ~~principal~~2015, isand was convertible into ~~shares~~our of common stock at the ~~discretion~~greater of (i) the ~~note~~Variable ~~holder~~Conversion atPrice aand ~~price~~(ii) ~~equal~~the ~~to sixty~~Fixed ~~percent~~Conversion ~~(60~~Price. The “Variable Conversion Price” shall mean 50%) ofmultiplied by the ~~lowest~~Market ~~trading~~Price ~~price~~(representing a discount rate of ~~the~~50%). ~~Company’s~~“Market ~~common~~Price” ~~stock~~means ~~for~~the average of the ~~twenty~~lowest ~~five~~three (253) ~~trading~~Trading ~~days~~Prices ~~prior~~for to the Common Stock during ~~conversion~~the ~~date,~~thirty or(30) ~~$0.00009~~Trading ~~per~~Day ~~share,~~period ~~whichever~~ending ison ~~greater.~~the ~~The~~latest ~~debt~~complete ~~holder~~Trading ~~was~~Day ~~limited~~prior to ~~owning~~the 4Conversion Date.~~99%~~ of“Fixed ~~the Company’s~~Conversion ~~issued~~Price” ~~and~~shall ~~outstanding~~mean ~~shares~~$0.00005 Onper ~~July~~share. ~~11,~~The ~~2014,~~shares ~~the~~of ~~Company~~common ~~and~~stock ~~JMJ~~issuable ~~Financial~~upon ~~amended~~conversion of the ~~$400,000~~One ~~convertible~~KBM ~~promissory~~Note ~~note,~~were restricted ~~originally~~securities ~~dated~~as ~~November 13, 2013,~~defined ofin ~~which~~Rule ~~$33,000,~~144 ~~including~~promulgated aunder ~~$3,000~~the ~~OID,~~Securities ~~remains~~Act ~~outstanding~~of 1933. The ~~amendment~~issuance ~~specifies that~~of ~~due to~~ the ~~delinquent~~One ~~Form~~KBM ~~10-K~~Note ~~for~~was exempt from the ~~year~~registration ~~ended~~requirements ~~December~~of ~~31,~~the ~~2013~~Securities ~~and~~Act ~~the~~of ~~Form~~1933 ~~10-Q~~pursuant ~~for~~to ~~the~~Rule ~~three~~506 ~~months~~of ~~ended~~Regulation ~~March 31, 2014, any~~D ~~future~~promulgated ~~borrowings~~thereunder. ~~shall~~The ~~only~~purchaser was bean ~~made~~accredited byand ~~mutual~~sophisticated ~~agreement~~investor, offamiliar ~~both~~with ~~the~~our ~~borrow~~operations, and ~~lender~~there was no solicitation.

On December 313, ~~2013~~ 2014, ~~the~~we ~~Company~~entered ~~issued~~into ~~an unsecured~~a ~~$35,028~~Securities ~~convertible~~Purchase ~~promissory~~Agreement ~~note~~with ~~which~~KBM Worldwide, ~~carries~~Inc., anpursuant ~~12%~~to ~~interest~~which ~~rate~~we ~~(“First~~sold ~~Magna~~to ~~Group~~KBM ~~Note”)~~an ~~owed~~8% toConvertible ~~Magna~~Promissory ~~Group,~~Note ~~LLC.~~in ~~Two~~the ~~notes~~original ~~totaling~~principal ~~$33,000~~amount of ~~principal and~~ $133,~~028~~000 of(“Two ~~accrued~~KBM ~~interest~~Note”). ~~were~~The ~~acquired~~Two ~~from~~KBM ~~and~~Note ~~assigned~~had bya ~~Star~~maturity date ~~Financial~~of onSeptember ~~December~~2, 312015, ~~2013~~and ~~prior~~was toconvertible ~~being~~into ~~exchanged~~our ~~for~~common ~~the~~stock ~~convertible~~at ~~note,~~the ~~including~~greater ~~$1,000~~ of ~~loan~~(i) ~~origination~~the ~~costs.~~Variable ~~The principal~~Conversion Price and ~~accrued~~(ii) ~~interest~~the Fixed isConversion ~~convertible~~Price. ~~into~~The ~~shares~~“Variable ofConversion ~~common~~Price” ~~stock~~shall atmean ~~the~~50% ~~discretion~~multiplied ofby the ~~note~~Market ~~holder~~Price at (representing a ~~price~~discount ~~equal to~~rate ~~fifty~~of ~~percent (~~50%). of“Market ~~the~~Price” ~~lowest~~means ~~trading~~the ~~price~~average of the ~~Company’s~~lowest ~~common~~three ~~stock~~(3) Trading Prices for the ~~five~~Common Stock during the thirty (530) ~~days~~Trading Day period ending on the latest complete Trading Day prior to the ~~conversion~~Conversion Date. “Fixed ~~date,~~Conversion orPrice” shall mean $0.~~00004~~00005 per share,. ~~whichever~~The isshares ~~greater~~of common stock issuable upon conversion of the Two KBM Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The ~~debt~~issuance ~~holder~~of the Two KBM Note was ~~limited~~exempt tofrom ~~owning~~the ~~4.99%~~registration requirements of the ~~Company’s~~Securities ~~issued~~Act ~~and~~of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. ~~outstanding~~The ~~shares~~purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

Originated November 6, 2014, an unsecured $50,239 convertible promissory note, carries a 8% interest rate, matures on November 6, 2015, (“LG Note”) owed to LG Capital, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $43,000 of principal and $7,239 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s issued and outstanding shares.

Originated November 6, 2014, an unsecured $33,600 convertible promissory note, carries a 8% interest rate, matures on November 5, 2015, (“LG Note 2”) owed to LG Capital. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s issued and outstanding shares.

Debt Financing

On October 102, ~~2013~~2014, the Company ~~purchased~~received a ~~licenses~~loan ~~to develop content management software in the total amount~~ of $3425,~~800~~250 from ~~Igenti~~Knight Capital, Inc., of(“Knight ~~which~~Loan”). ~~$34,800~~The ~~was~~loan ~~financed pursuant~~bears tointerest anat ~~equipment financing agreement with Financial Pacific Leasing bearing~~ an effective ~~interest~~ rate of ~~31.625~~187%, consisting of 36100 ~~monthly~~daily weekday payments of $1250,~~438;~~ maturing on ~~October~~November 93, ~~2016~~2014. The loan is collateralized with the ~~content~~accounts ~~management~~receivable ~~software. Igenti retained a total~~ of $1 Epazz,~~300~~ ofInc. ~~financing~~The ~~fees~~promissory ~~and~~note ~~paid~~is ~~the~~also ~~remaining~~personally ~~proceeds~~guaranteed ofby ~~$33~~Shaun Passley,~~500~~ ~~to the Company for future payment for the development of the data management software~~Ph. ~~Given the nature and status of the software development~~D., noour ~~equipment~~Chief ~~costs have~~Executive ~~been capitalized~~Officer.

On October 2428, ~~2013~~2014, the Company ~~purchased licenses~~entered ~~to develop content management software in the total amount of $51,250 from Igenti, Inc., of which $51,250 was financed~~into ~~pursuant to~~ an equipment financing agreement with ~~Baytree~~Direct ~~National~~Capital ~~Bank~~for &a ~~Trust~~total ~~Company~~of $200,000 bearing an effective interest rate of ~~13.235~~6%, consisting of 3660 monthly payments of $13,~~719~~846.02; maturing on October 2328, ~~2016~~2019. The loan is collateralized with ~~the data management~~ software. ~~Igenti subsequently paid a total of $53,500, including $2,250 of penalties, to the Company for future payment for the development of the content management software.~~ Given the nature and status of the software development, no equipment costs have been capitalized.

On November 43, ~~2013~~2014, the Company ~~received~~entered ~~net~~into ~~proceeds~~an ofequipment ~~$75,381,~~financing ~~and~~agreement awith ~~direct~~Western ~~payoff~~Finance offor ~~$36,619 on the Rapid Advance Loan listed below, on~~ a ~~loan~~total of $~~112~~50,000 ~~from CAN Capital Assets Servicing, Inc., (“CAN Capital #2”)~~ bearing an effective interest rate of ~~53.1~~8%, consisting of ~~370~~36 ~~daily~~monthly ~~weekday~~ payments of $~~552~~1,702.60; maturing on November 133, ~~2014~~2017. The loan is collateralized with MSsoftware. ~~Health’s~~Given ~~receivables.~~the ~~The~~nature ~~promissory~~and ~~note~~status isof ~~also~~the ~~personally~~software ~~guaranteed by Shaun Passley~~development, ~~Ph.D.,~~no ~~our~~equipment ~~Chief~~costs ~~Executive~~have ~~Officer~~been capitalized.

On ~~November~~December 201, ~~2013~~2014, ~~DeskFlex~~the ~~received~~Company ~~proceeds~~entered into ofan ~~$10,550~~equipment infinancing ~~exchange~~agreement with Direct Credit for a ~~demand~~total ~~promissory~~of ~~note~~$35,000 bearing ~~interest~~an ateffective ~~10.25%.~~interest ~~The~~rate ~~promissory~~of ~~note~~15%, isconsisting of ~~payable~~36 in monthly ~~installments~~ payments of $1,~~223~~187.11; ~~per month,~~ maturing on ~~August~~December 201, ~~2014~~2017. (The loan is collateralized with software. Given the ~~“Maturity~~nature ~~Date”)~~and status of the software development, no equipment costs have been capitalized.

33On December 1, 2014, the Company renew a loan for $119,000 from EBF Partners, LLC. (“EBF Loan”). The loan bears interest at an effective rate of 15%, consisting of 100 daily weekday payments of $999, maturing on June 19, 2014. The loan is collateralized with future accounts receivable of Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.

~~First quarter of 2014:~~32

~~Debt~~On ~~Financing~~December 10, ~~Related~~2014, ~~Parties~~the Company entered into an equipment financing agreement with Direct Credit for a total of $35,000 GGbearing ~~Mars~~an effective interest rate of 16%, consisting ~~Capital~~of 36 monthly payments of $1,210.63; ~~Inc~~maturing on December 10, 2017. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized.

~~Originated~~On ~~February~~December 715, 2014, athe ~~$26,000~~Company ~~unsecured~~received ~~promissory~~a ~~note~~loan ~~payable,~~of ~~including a~~ $625,000 ~~loan~~from ~~origination fee~~Lendini, ~~owed to GG Mars Capital,~~ Inc., a(“Lendini ~~corporation owned by an immediate family member of the Company’s CEO~~Loan”). The ~~note~~loan ~~carries~~bears ~~a 15%~~ interest ~~rate,~~at ~~matured~~an oneffective ~~March~~rate ~~30,~~of ~~2014. In addition~~187%, ~~a loan~~consisting ~~origination~~of ~~fee~~100 ~~consisting~~daily ofweekday ~~2,000,000~~payments ~~shares~~ of ~~Convertible~~$293, ~~Series~~maturing Con ~~Preferred~~June ~~Stock~~15, ~~was~~2015. ~~issued~~The ~~as consideration for the~~ loan~~, and~~ is ~~being~~collateralized ~~amortized~~with ~~on a straight line basis over~~ the ~~life~~accounts receivable of ~~the loan~~Epazz, Inc. The promissory note is also ~~carries~~personally aguaranteed ~~liquidated~~by ~~damages~~Shaun ~~fee~~Passley, ofPh.D., ~~$500 upon~~our ~~default~~Chief Executive Officer.

~~Originated~~On ~~February~~December 2215, 2014, athe ~~$100,000~~Company ~~unsecured~~received ~~promissory~~a ~~note~~loan ~~payable,~~of ~~including a~~ $25,~~000~~250 ~~loan~~from ~~origination~~Knight ~~fee, owed to GG Mars~~ Capital, Inc., a(“Knight ~~corporation owned by an immediate family member of the Company’s CEO~~Loan”). The ~~note~~loan ~~carries~~bears ~~a 15%~~ interest ~~rate,~~at ~~matured~~an oneffective ~~April~~rate ~~30,~~of ~~2014. In addition~~187%, ~~a loan~~ ~~origination fee~~ consisting of ~~15,000,000~~100 ~~shares~~daily ofweekday ~~Convertible~~payments ~~Series~~of C$250, ~~Preferred~~maturing ~~Stock~~on ~~was~~November ~~issued~~3, as2014. ~~consideration~~The ~~for the~~ loan~~, and~~ is ~~being~~collateralized ~~amortized~~with ~~on a straight line basis over~~ the ~~life~~accounts receivable of ~~the~~Epazz, ~~loan~~Inc. The promissory note is also ~~carries~~personally aguaranteed ~~liquidated~~by ~~damages~~Shaun ~~fee~~Passley, ~~of $35~~Ph.D.,~~000 upon~~ ~~default~~our Chief Executive Officer.

~~Originated~~On ~~March~~December 717, 2014, athe ~~$22,000~~Company ~~unsecured~~received ~~promissory~~a ~~note~~loan ~~payable,~~of ~~including a~~ $727,~~000~~800 ~~loan~~from ~~origination fee~~WebBank, ~~owed~~c/o toNewLogic GGBusiness ~~Mars Capital~~Loans, Inc., a(“NewLogic”), ~~corporation~~which ~~owned~~has bybeen anrenamed ~~immediate family~~to ~~member~~CAN ofCapital Assets ~~the~~Servicing, ~~Company’s~~Inc ~~CEO.~~(“CAN ~~The~~Capital”) ~~note~~bearing ~~carries~~an aeffective ~~15%~~ interest rate, ~~matured~~of ~~on May 7~~63.9%, ~~2014.~~consisting Inof ~~addition,~~176 adaily ~~loan origination~~weekday ~~fee~~payments ~~consisting~~ of 2$131,~~000,000~~ ~~shares~~maturing ofon ~~Convertible~~December ~~Series~~19, C2015. ~~Preferred~~The ~~Stock was issued as consideration for the~~ loan, ~~and~~ is ~~being amortized~~collateralized onwith ~~a straight line basis over the life of the loan~~receivables. The promissory note is also ~~carries~~personally guaranteed aby ~~liquidated~~Shaun ~~damages~~Passley, ~~fee~~Ph.D., ofour ~~$7,000~~Chief ~~upon~~Executive ~~default~~Officer.

~~Originated~~On ~~March~~December 2619, 2014, athe ~~$37,500~~Company ~~unsecured~~entered into ~~promissory~~an ~~note~~equipment ~~payable,~~financing ~~including~~agreement awith ~~$7,500~~MEF ~~loan~~for ~~origination~~a ~~fee,~~total ~~owed~~of ~~to GG Mars Capital~~$50,000 ~~Inc.,~~bearing ~~a corporation owned by~~ an ~~immediate family~~effective ~~member of the Company’s CEO. The note carries a 15%~~ interest rate, ~~matured~~of ~~on May 26~~16%, ~~2014.~~consisting Inof ~~addition,~~36 ~~a loan origination~~monthly ~~fee~~payments ~~consisting~~ of 3$1,~~000,000~~702.60; ~~shares~~maturing ofon ~~Convertible~~December ~~Series~~10, C2017. ~~Preferred~~The ~~Stock~~loan ~~was~~is ~~issued~~collateralized aswith ~~consideration~~software. ~~for~~Given the ~~loan,~~nature and isstatus ~~being~~of ~~amortized on a straight line basis over~~ the ~~life~~software ofdevelopment, ~~the~~no ~~loan.~~equipment ~~The~~costs ~~note~~have ~~also~~been ~~carries a liquidated damages fee of $1,500 upon default~~capitalized.

~~Originated~~On ~~March~~January 2830, ~~2014~~2015, anthe ~~$18,750~~Company ~~unsecured~~entered into ~~promissory~~an ~~note~~equipment ~~payable,~~financing ~~including~~agreement awith ~~$3,750~~CIT ~~loan~~Finance ~~origination~~for ~~fee,~~a ~~owed~~total toof ~~GG Mars Capital~~$100,000 ~~Inc.,~~bearing aan ~~corporation~~effective ~~owned~~interest byrate anof ~~immediate family~~11%, ~~member~~ consisting of ~~the~~36 ~~Company’s~~monthly ~~CEO.~~payments ~~The~~of ~~note carries a 15% interest rate~~$3,210; ~~matured~~maturing on ~~May~~January 2830, ~~2014~~2018. InThe ~~addition, a~~ loan ~~origination fee~~is ~~consisting~~collateralized ofwith ~~2,000,000~~software. ~~shares~~Given ~~of Convertible Series C Preferred Stock was issued as consideration for~~ the ~~loan,~~nature and ~~is being~~ ~~amortized~~status ~~on a straight line basis over the life~~ of the ~~loan.~~software ~~The~~development, ~~note~~no ~~also~~equipment ~~carries~~costs ahave ~~liquidated~~been ~~damages fee of $7,000 upon default~~capitalized.

~~Debt~~On ~~Financing~~January 27, ~~Related~~2015, ~~Parties~~the Company entered into an equipment financing agreement with Direct Credit for a total of $50,000 ~~Star~~bearing ~~Financial~~an effective interest rate of 17%, consisting ~~Corporation~~of 36 monthly payments of $1,793; maturing on January 27, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized.

~~Originated~~On ~~January~~February 1520, ~~2014~~2015, anthe ~~unsecured~~Company ~~$43,000~~entered into ~~promissory~~an ~~note~~equipment ~~payable,~~financing ~~including~~agreement awith ~~$10,000~~Safe ~~loan~~Leasing ~~origination~~for ~~fee,~~a ~~owed~~total toof ~~Star Financial~~$37,500 abearing ~~corporation~~an ~~owned~~effective byinterest anrate ~~immediate family~~of ~~member~~21%, consisting of ~~the~~36 ~~Company’s~~monthly ~~CEO.~~payments ~~The~~of ~~note carries a 15% interest rate~~$1,549; ~~matured~~maturing on ~~March~~February 20, ~~2014~~2018. InThe ~~addition, a~~ loan ~~origination~~ ~~fee consisting of 5,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and~~ is ~~being~~collateralized ~~amortized~~with onsoftware. aGiven ~~straight line basis over~~ the ~~life~~nature and status of the ~~loan.~~software ~~The~~development, ~~note~~no ~~also~~equipment ~~carries~~costs ahave ~~liquidated~~been ~~damages fee of $500 upon default~~capitalized.

Originated March 26, 2014, an unsecured $25,000 promissory note payable, including a $5,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 26, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.

Originated March 28, 2014, an unsecured $25,000 promissory note payable, including a $5,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 28, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.

Convertible Debt Financing

Originated February 4, 2014, an unsecured $35,491 convertible promissory note, carries a 12% interest rate, matures on February 4, 2015, (“Second Magna Group Note”) owed to Magna Group, LLC, consisting of two notes acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $33,000 of principal and $2,491 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was subsequently converted to a total of 236,606,400 shares of common stock over various dates from February 13, 2014 to February 27, 2014 in complete satisfaction of the debt.

Originated February 19, 2014, an unsecured $37,700 convertible promissory note, carries a 12% interest rate, matures on February 17, 2015, (“Third Magna Group Note”) owed to Magna Group, LLC, consisting of a promissory note acquired and assigned from Star Financial Corporation, a related party, consisting of $32,000 of principal and $5,700 of accrued interest. The acquired promissory note did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was subsequently converted to a total of 377,000,000 shares of common stock over various dates from March 10, 2014 to March 19, 2014 in complete satisfaction of the debt.

Equity Based Debt Settlement Financing, Conversions into Class A Common Stock – IBC Funds, LLC

Critical Accounting Policies:

The establishment and consistent application of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with generally accepted accounting principles in the United States (GAAP), as well as ensuring compliance with applicable laws and regulations governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances and a complex series of decisions.

3533

Principles of Consolidation

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

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

~~____________~~_______________

⁽¹⁾ All subsidiaries, with the exception of FlexFridge, are wholly-owned subsidiaries.

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

⁽³⁾ Formerly Z Fridge, Inc. and Cooling Technology Solutions, Inc.

(4) FlexFridge, Inc. was spun-off on November 21, 2013, and distributed on a 1:10 basis to shareholders of record on September 15, ~~2013~~2014. Epazz has a controlling financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10. ~~There has been no material activity within FlexFridge to date.~~

⁽⁵⁾ Entity formed for prospective purposes, but has not incurred any income or expenses to date.

The consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated in the preparation of these financial statements. The parent company, Epazz and subsidiaries, IntelliSys, PRMI, DFI, K9 Bytes, MS Health and FlexFridge will be collectively referred to herein as the “Company”, or “Epazz”. The Company's headquarters are located in Chicago, Illinois and substantially all of its customers are within the United States.

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.

Segment Reporting

FASB ASC 280-10-50 requires annual and interim reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources. All of the Company’s software products are considered operating segments, and will be aggregated into one reportable segment given the similarities in economic characteristics among the operations represented by the common nature of the products, customers and methods of distribution.

Reclassifications

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

Use of Estimates

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

Restatement Accounting Policy

Prior Period Errors must be corrected retrospectively in the financial statements. Retrospective application means that the correction affects only prior period comparative figures. Current period amounts are unaffected. Therefore, comparative amounts of each prior period presented which contain errors are restated. If however, an error relates to a reporting period that is before the earliest prior period presented, then the opening balances of assets, liabilities and equity of the earliest prior period presented must be restated.

Cash and Cash Equivalents

Epazz maintains cash balances in non-interest-bearing transaction accounts, which do not currently exceed federally insured limits. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents on hand at December 31, ~~2013~~2014 and ~~2012~~2013.

Property and Equipment

Equipment is recorded at its acquisition cost, which includes the costs to bring the equipment to the condition and location for its intended use, and equipment is depreciated using the straight-line method over the estimated useful life of the related asset as follows:

Furniture and fixtures		5 years
Computers and equipment		3-5 years
Software		3 years
Assets held under capital leases		3-4 years

Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the useful lives of the assets due to transfer of ownership after the lease term has expired.

Maintenance and repairs will be charged to expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected in operations.

Property and equipment are evaluated for impairment whenever impairment indicators are prevalent. The Company will assess the recoverability of equipment by determining whether the depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the period in which such impairment is determined by management.

Fair Value of Financial Instruments

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

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. Amortization expense on intangible assets totaled $~~446~~150,~~988~~947 and $~~155~~446,~~448~~988 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively. Additionally, ~~including~~ impairments of $~~276~~170,~~282~~257 and $~~-0-~~276,282 for the years ended ~~December~~ December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Goodwill

The Company evaluates the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company's evaluation of goodwill completed during the year resulted in no impairment losses.

Website Development Costs

The Company accounts for website development costs in accordance with ASC 350-50, “Accounting for Website Development Costs” (“ASC 350-50”), wherein website development costs are segregated into three activities:

1) Initial stage (planning), whereby the related costs are expensed. 2) Development (web application, infrastructure, and graphics), whereby the related costs are capitalized and amortized once the website is ready for use. Costs for development content of the website may be expensed or capitalized depending on the circumstances of the expenditures. 3) Post-implementation (after site is up and running: security, training, and administration), whereby the related costs are expensed as incurred. Upgrades are usually expensed, unless they add additional functionality.

The Company didn’t have any capitalized website development costs during the years ended December 31, 2013 and 2012.

Deferred Financing Costs

Costs relating to obtaining certain debts are capitalized and amortized over the term of the related debt using the straight-line method. The unamortized capitalized balance of deferred financing costs at December 31, ~~2013~~2014, and ~~2012~~2013, was $4454,~~986~~729 and $1744,~~033~~986, respectively. Amortization of deferred financing costs charged to operations was $79422,~~123~~451 and $2579,~~849~~123 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively. When a ~~loan~~ loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.

Allowance for Doubtful Accounts

We generate the majority of our revenues and corresponding accounts receivable from the sales of software products. We evaluate the collectability of our accounts receivable considering a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on past write-off experience and the length of time the receivables are past due. Bad debts expense (recoveries) was $~~(27~~62,~~129)~~601 and ($227,~~957~~129) for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively. The allowance for doubtful accounts was $7132,~~017~~985 and $687,~~521~~ 017 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Beneficial Conversion Features

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

Revenue Recognition

The Company designs and sells various software programs to business enterprises, hospitals and Government and post-secondary institutions. Prior to shipment, each software product is tested extensively to meet Company specifications. The software is shipped fully functional via electronic delivery, but some installation and setup is required. No other entities sell the same or largely interchangeable software.

Installation is a standard process, outlined in the owner's manual, consisting principally of setup, ~~calibrating~~calibration, and testing the software. A purchaser of the software could complete the process using the information in the owner's manual, although it would probably take significantly longer than it would take the Company’s technicians to perform the tasks. Although other vendors do not install the Company’s software, they do provide largely interchangeable installation services for a fee. Historically, the Company has never sold the software without installation. Most installations are performed by the Company within 7 to 24 days of shipment and are included in the overall sales price of the software. In addition, the customer must pay for support contracts and training packages, depending on their desired level of service. The Company is the only manufacturer of the software and it only sells software on a standalone basis directly to the end user.

The sales price of the arrangement consists of the software, installation, and training and support services, which the customer is obligated to pay in full upon delivery of the software. In addition, there are no general rights of return involved in these arrangements. Therefore, the software is accounted for as a separate unit of accounting.

The Company does not have vendor-specific objective evidence of selling price for the software because it does not sell the software separately (without installation services and support contracts). In addition, third-party evidence of selling price does not exist as no vendor separately sells the same or largely interchangeable software. Therefore, the Company uses its best estimate of selling price when allocating such arrangement consideration.

In estimating its selling price for the software, the Company considers the cost to produce the software, profit margin for similar arrangements, customer demand, effect of competitors on the Company’s software, and other market constraints. When applying the relative selling price method, the Company uses its best estimate of selling price for the software, and third-party evidence of selling price for the installation. Accordingly, without considering whether any portion of the amount allocable to the software is contingent upon delivery of the other items, the Company allocates the selling price to the software, support, and installation.

The Company doesn’t currently provide product warranties, but if it does in the future it will provide for specific product lines and accrue for estimated future warranty costs in the period in which the revenue is recognized.

Advertising and Promotion

All costs associated with advertising and promoting products are expensed as incurred. These expenses approximated $~~181~~22,~~497~~443 and $~~104~~181,~~431~~497 for the years ended December 31, ~~2013~~2014 and ~~2012,~~ 2013, respectively.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

Basic and Diluted Loss per Share

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and therefore basic and diluted earnings per share result in the same figure.

Stock-Based Compensation

The Company adopted FASB guidance on ~~stock~~ stock based compensation on January 1, 2006. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Common stock issued for services and compensation was $3,069,781 and $1,713,150 for the years ended December 31, 2014 and 2013, respectively. Common stock issued for services and compensation to related parties was $2,964,608 and $1,~~278~~713,~~151~~150 for the years ended December 31, 2014 and 2013, respectively. Common stock issued for services and ~~2012~~compensation to third parties was $105,173 and $-0- for the years ended December 31, 2014 and 2013, respectively.

Uncertain Tax Positions

Effective January 1, 2009, the Company adopted new standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions. As of December 31, ~~2013~~2014, the Company had no uncertain tax positions.

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance requires that share-based compensation that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards and that could be achieved after an employee completes the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on our financial position or results of operations.

In June 2014, the FASB issued ASU No. 2014-10: Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements of development stage entities. The amendments in this update remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, thereby improving financial reporting by eliminating the cost and complexity associated with providing that information. The amendments in this Update also eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The amendments to eliminate that exception simplify U.S. GAAP by reducing avoidable complexity in existing accounting literature and improve the relevance of information provided to financial statement users by requiring the application of the same consolidation guidance by all reporting entities. The elimination of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage. The amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to Topic 275, which shall be applied prospectively. For public companies, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The adoption of ASU 2014-10 is not expected to have a material impact on our financial position or results of operations.

In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our financial position or results of operations.

In February 2013, FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:

Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and

Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial position or results of operations.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

4038

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EPAZZ, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Annual Financial Statements
	Report of Independent Registered Public Accounting Firm	F-1
	Consolidated Balance Sheets as of December 31, 2013 and 2012	F-2
	Consolidated Balance Sheets as of December 31, 2014 and 2013	F-2
	Consolidated Statements of Operations for the years ended December 31, 2013 and 2012	F-3
	Consolidated Statements of Operations for the years ended December 31, 2014 and 2013	F-3
	Consolidated Statement of Stockholders' Equity (Deficit) for the years ended December 31, 2013 and 2012	F-4
	Consolidated Statement of Stockholders' Equity (Deficit) for the years ended December 31, 2014 and 2013	F-4
	Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012	F-5
	Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013	F-5
	Notes to Consolidated Financial Statements	F-6

4139

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

EPAZZ, INC.

We have audited the accompanying consolidated balance sheets of Epazz, Inc. (the “Company”) as of December 31, ~~2013~~2014 and ~~2012~~2013, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Epazz, Inc. as of December 31, ~~2013~~2014 and ~~2012~~2013, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has an accumulated deficit of $(715,~~501~~169,~~994~~401) and a working capital deficit of $(13,~~283~~453,~~338~~062), which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ M&K CPAS, PLLC

http://www.mkacpas.com

Houston, Texas

~~July~~May 1812, ~~2014~~2015

F-1

EPAZZ, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
	2013			2012
	2014			2013
Assets
Current assets:
Cash	$	~~208~~106,~~567~~708		$	46208,~~101~~567
Accounts receivable, net		2596,~~248~~422			3625,~~995~~248
Other current assets		~~106~~64,~~114~~607			22106,~~027~~114
Total current assets		~~339~~267,~~929~~737			~~105~~339,~~123~~929
Property and equipment, net		~~113~~106,~~410~~698			~~196~~113,~~297~~410
Intangible assets, net		~~374~~337,~~162~~938			~~821~~374,~~150~~162
Goodwill		~~255~~374,~~460~~818			255,460
Total assets	$	1,~~082~~087,~~961~~191		$	1,~~378~~082,~~030~~961
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Dividends payable	$	~~11,000~~–		$	–11,000
Accounts payable		~~258~~419,~~163~~206			~~104~~258,~~727~~163
Accrued expenses		4588,~~298~~026			2445,~~924~~298
Accrued expenses, related parties		28127,~~741~~770			1928,~~205~~741
Deferred revenue		~~322~~469,~~130~~937			~~219~~322,~~590~~130
Lines of credit		7380,~~232~~239			7773,~~047~~232
Current maturities of capital lease obligations payable		175,~~421~~890			2517,~~699~~421
Current maturities of notes payable, related parties ($88,868 currently in default)		397,368			22,085
Current maturities of notes payable, related parties ($1,066,073 currently in default)		1,221,323			397,368
Convertible debts, net of discounts of $105,300 and $101,192, respectively ($56,900 currently in default		115,128			74,708
Convertible debts, net of discounts of $131,774 and $105,300, respectively ($60,674 currently in default)		88,739			115,128
Current maturities of long term debts		~~354~~1,~~786~~219,669			~~218~~354,~~699~~786
Total current liabilities		1,623,267			786,684
Derivative Liabilities		–			–
Capital lease obligations payable, net of current maturities		–			17,421
Total current liabilities		3,720,799			1,623,267
Notes payable, related parties		~~85,000~~–			–85,000
Convertible debts, net of discounts of $4,283 and $37,876, respectively		42,166			152,973
Convertible debts, net of discounts of $0 and $4,283, respectively		–			42,166
Long term debts, net of current maturities		~~857~~1,~~143~~284,702			~~892~~857,~~463~~143
Total liabilities		25,~~607~~005,~~576~~501			12,~~849~~607,~~541~~576
Stockholders' equity (deficit):
Convertible preferred stock, Series A, $0.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding		–			–
Convertible preferred stock, Series B, $0.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding		–			–
Common stock, Class A, $0.0001 par value, 6,000,000,000 shares authorized, 3,468,358,708 and 1,177,789,125 shares issued and outstanding, respectively		346,836			117,779
Convertible preferred stock, Series C, $0.0001 par value, 3,000,000,000 shares authorized, 2,932,755,533 shares issued and outstanding		293,275			–
Convertible common stock, Class B, $0.0001 par value, 60,000,000 shares authorized, 10,500,000 and 5,500,000 shares issued and outstanding, respectively		1,050			550
Common stock, Class A, $0.0001 par value, 9,000,000,000 shares authorized, 37,557,842 and 346,836 shares issued and outstanding, respectively		375,578			3,468
Additional paid in capital		6,429,493			4,324,916
Convertible common stock, Class B, $0.0001 par value, 60,000,000 shares authorized, 23,000,000 and 10,500,000 shares issued and outstanding, respectively		2,300			1,050
Stockholders' receivable, consisting of 20,000,000 shares		(800,000	)		(800,000	)
Additional paid in capital		10,579,938			6,772,861
Accumulated deficit		(7,501,994	)		(4,114,756	)
Stockholders' receivable, consisting of -0- and 20,000,000 shares of Class A Common Stock, respectively		–			(800,000	)
Total stockholders' equity (deficit)		(1,524,615	)		(471,511	)
Accumulated deficit		(15,169,401	)		(7,501,994	)
Total liabilities and stockholders' equity (deficit)	$	1,082,961		$	1,378,030
Total stockholders' equity (deficit)		(3,918,310	)		(1,524,615	)
Total liabilities and stockholders' equity (deficit)	$	1,087,191		$	1,082,961

~~The~~ See accompanying notes ~~are~~to ~~an integral part of these consolidated~~ financial statements.

F-2

EPAZZ, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Years Ended
	For the Year Ended			For the Year Ended
	December 31,
	December 31, 2014			December 31, 2013
	2013			2012
Revenue	$	1,560,252		$	750,139
Revenue	$	750,139		$	1,193,217
Expenses:
General and administrative		~~758~~1,~~353~~524,779			~~698~~758,~~895~~353
Salaries and wages		23,~~201~~505,~~161~~511			12,~~665~~201,~~429~~161
Depreciation and amortization		~~260~~206,~~423~~437			~~275~~260,~~076~~423
Impairment on intangible assets		~~276~~1,~~282~~659,335			–276,282
Bad debts (recoveries)		~~(27~~62,~~129~~601	)		2(27,~~957~~129	)
Total operating expenses		36,~~469~~958,~~090~~663			23,~~642~~469,~~357~~090
Net operating loss		(25,~~718~~398,~~951~~411	)		(12,~~449~~718,~~140~~951	)
Other income (expense):
Interest income		57			52
Interest expense, net		(1,318,468	)		(562,529	)
Interest expense		(562,586	)		(320,402	)
Loss on debt modifications, related parties		(172,864	)		(94,758	)
Loss on debt modifications, related parties		(94,758	)		(137,199	)
Change in derivative liabilities		(777,664	)		–
Total other income (expense)		(~~657~~2,~~287~~268,996	)		(~~457~~657,~~549~~287	)
Net loss	$	(37,~~376~~667,~~238~~407	)	$	(13,~~906~~376,~~689~~238	)
Weighted average number of common shares outstanding - basic and fully diluted		28,~~536~~504,~~096,673~~489			~~399~~253,~~031,314~~610
Net loss per share - basic and fully diluted	$	(0.0090	)	$	(013.0031	)

~~The~~ See accompanying notes ~~are~~to ~~an integral part of these consolidated~~ financial statements.

F-3

EPAZZ, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

Convertible Series A

~~Convertible Series A~~

Convertible Series B

~~Convertible Series B~~

Convertible Series C

~~Class A~~

Class A

Convertible Class B

~~Convertible Class B~~

Additional

Total

~~Total~~

Preferred Stock

~~Preferred Stock~~

Preferred Stock

~~Preferred Stock~~

Preferred Stock

~~Common Stock~~

Common Stock

~~Common Stock~~

Paid-in

~~Additional~~Stockholders’

Accumulated

~~Stockholders'~~

Stockholders’

~~Accumulated~~

~~Stockholders'~~

~~Shares~~

Amount

~~Amount~~

~~Shares~~Amount

~~Amount~~

Amount

~~Shares~~

Amount

~~Shares~~

Amount

~~Amount~~

Capital

~~Paid-in~~Receivable

(Deficit)

~~Receivable~~

(Deficit)

~~(Deficit)~~

Balance, December 31, 2011

–

$–

–

~~30,900,281~~

30,900,281

3,090

2,500,000

~~2,500,000~~

250

~~250~~$

2,668,032

2(1,~~668~~000,~~032~~000

)

$(2,208,067

~~(1,000,000~~)

(536,695

~~(2,208,067~~

)

~~(536,695~~

)

Shares issued for services, related parties

1,000

~~1,000~~

–

1,000

~~1,000~~–

–

~~1,075,596,515~~

1,075,596,515

107,560

3,000,000

~~3,000,000~~

300

~~300~~$

1,008,962

1200,~~008,962~~000

–

~~200,000~~

1,316,822

–

~~1,316,822~~

Shares issued for conversion of debt, related parties

–

~~59,370,640~~

59,370,640

5,937

–

–$

288,791

~~288,791~~–

–

294,728

–

~~294,728~~

Shares issued for conversion of debt

–

~~11,921,689~~

11,921,689

1,192

–

–$

81,808

~~81,808~~–

–

83,000

–

~~83,000~~

Beneficial conversion feature of convertible debt

–

–$

277,323

~~277,323~~–

–

277,323

–

~~277,323~~

Net (loss) for the year ended December 31, 2012

–

(1,906,689

–)

(1,906,689

)

~~(1,906,689~~

)

~~(1,906,689~~

)

Balance, December 31, 2012

1,000

~~1,000~~

–

1,000

~~1,000~~–

$–

–

~~1,177,789,125~~

1,177,789,125

117,779

5,500,000

~~5,500,000~~

550

~~550~~$

4,324,916

4(800,~~324,916~~000

)

$(4,114,756

~~(800,000~~)

(471,511

~~(4,114,756~~

)

~~(471,511~~

)

Shares issued for services, related parties

–

~~1,802,052,632~~

1,802,052,632

180,~~206~~205

5,000,000

~~5,000,000~~

500

~~500~~

1,496,294

~~1,496,294~~–

–

1,676,999

–

~~1,677,000~~

Shares issued for debt origination fees, related parties

–

~~25,750,000~~

25,750,000

2,575

–

33,575

~~33,575~~–

–

36,150

–

~~36,150~~

Shares issued for conversion of debt, related parties

–

~~281,096,026~~

281,096,026

28,110

–

159,607

~~159,607~~–

–

187,717

–

~~187,717~~

Shares issued for conversion of debt

–

~~181,670,925~~

181,670,925

18,~~166~~167

–

137,657

~~137,657~~–

–

155,824

–

~~155,823~~

Beneficial conversion feature of convertible debt

–

195,652

~~195,652~~–

–

195,652

–

~~195,652~~

Fair value of debt modification, related parties

–

81,792

~~81,792~~–

–

81,792

–

~~81,792~~

Dividends declared, 1.5% of revenues

–

(11,000

–)

(11,000

)

~~(11,000~~

)

~~(11,000~~

)

Net (loss) for the year ended December 31, 2013

–

(3,376,238

–)

(3,376,238

)

~~(3,376,238~~

)

~~(3,376,238~~

)

Balance, December 31, 2013

1,000

~~1,000~~

–

1,000

~~1,000~~–

$–

–

~~3,468,358,708~~

3,468,358,708

346,836

10,500,000

~~10,500,000~~

1,050

~~1,050~~

6,429,493

6(800,~~429,493~~000

)

$(7,501,994

~~(800,000~~)

)

(1,524,615

~~(7,501,994~~

)

~~(1,524,615~~

)

Shares issued for services, related parties

–

400,000,000

40,000

–

12,500,000

1,250

980,186

–

1,021,436

Shares issued for debt origination fees, related parties

–

49,000,000

4,900

28,880,000

2,888

–

47,690

–

55,478

Shares issued for conversion of debt, related parties

–

484,330,000

48,433

–

48,433

Share exchange, related party

–

2,494,722,200

249,472

(2,494,722,200

)

(249,472

)

–

1,081,054

800,000

–

1,881,054

Shares issued for dividend, related party

–

110,000,000

11,000

–

11,000

Beneficial conversion feature of convertible debt

–

124,811

–

124,811

Fair value of debt modification

–

172,864

–

172,864

Increase Class B voting rights from 2,000:1 to 10,000:1

–

6,640

–

6,640

Shares issued for services

–

277,780,000

27,778

–

27,778

–

55,556

Shares issued for debt

–

75,000,000

7,500

–

30,000

–

37,500

Shares issued for conversion of debt

–

5,263,760,477

526,376

–

1,270,638

–

1,797,014

Reverse stock split Class A Common Stock 1:10,000

–

(7,212,665,646

)

(714,125

)

–

714,125

–

Preferred C Shares conversion to Common A Shares, related party

–

(10,966,667

)

(1,097

)

32,900,000

329,000

–

(327,903

)

–

Shares issued for debt

–

3,936,504

39,365

–

22,562

–

61,927

Net (loss) for the year ended December 31, 2014

–

(7,667,407

)

(7,667,407

)

Balance, December 31, 2014

1,000

–

1,000

–

2,932,755,533

293,275

37,557,842

375,578

23,000,000

2,300

10,579,937

–

(15,169,401

)

(3,918,310

)

See accompanying notes to financial statements.

F-4

EPAZZ, INC.

~~CONSOLIDATED~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended
	For the Year Ended
	December 31,
	2013			2012
	2014			2013
Cash flows from operating activities
Net loss	$	(37,~~376~~667,~~238~~407	)	$	(13,~~906~~376,~~689~~238	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debts (recoveries)		~~(27~~62,~~129~~601	)		2(27,~~957~~129	)
Depreciation and amortization		89206,~~717~~437			~~119~~260,~~628~~423
Amortization of intangible assets		170,706			155,448
Impairment of intangible assets		1,659,335			276,282
Impairment of intangible assets		276,282			–
Amortization of deferred financing costs		422,451			79,123
Amortization of deferred financing costs		79,123			25,849
Amortization of discounts on convertible debts		518,465			237,065
Amortization of discounts on convertible notes payable		237,065			155,759
Loss on debt modifications, related parties		172,864			96,032
Finance costs on debt modifications, related party		–			98,528
Loss on default provisions of convertible debt		12,842
Loss on debt modifications, related parties		96,032			38,671
Change in fair market value of derivative liabilities		777,664			–
Stock based compensation issued for services, related parties		1,713,150			1,278,151
Stock based compensation issued for services		105,173			–
Stock based compensation issued for services, related parties		2,964,608			1,713,150
Decrease (increase) in assets:
Accounts receivable		381,~~876~~130			~~108~~38,~~466~~876
Other current assets		(56,~~134~~247	)		7(56,~~032~~134	)
Increase (decrease) in liabilities:
Accounts payable		~~153~~(158,~~436~~735	)		63153,~~297~~436
Accrued expenses		2744,~~798~~728			(427,~~039~~798	)
Accrued expenses, related parties		1099,~~796~~029			~~(19~~10,~~356~~796	)
Deferred revenues		~~102~~43,~~540~~661			~~(103~~102,~~438~~540	)
Net cash provided by (used in) operating activities		(~~463~~678,~~980~~907	)		20(463,~~264~~980	)
Cash flows from investing activities
Proceeds from the sale of equipment		–			14,175
Cash acquired in merger		736			–
Purchase of equipment		(648,~~830~~778	)		(~~166~~6,~~652~~830	)
Acquisition of subsidiaries		–(710,491	)		~~(39,200~~–	)
Net cash used in investing activities		(6758,~~830~~533	)		(~~191~~6,~~677~~830	)
Cash flows from financing activities
Payments on capital lease obligations payable		(2511,~~699~~532	)		(3625,~~066~~699	)
Proceeds from notes payable, related parties		~~634~~811,~~379~~137			~~203~~634,~~650~~379
Repayment of notes payable, related parties		(~~210~~82,~~596~~879	)		(~~255~~210,~~163~~596	)
Proceeds from convertible debts		202,000			158,374
Proceeds from convertible notes		109,600			202,000
Repayment of convertible debts		(60,500	)		–
Repayment of convertible notes		(1,500	)		(60,500	)
Proceeds from long term debts		~~450~~1,~~800~~190,306			~~386~~450,~~041~~800
Repayment of long term debts		(~~357~~679,~~108~~551	)		(~~251~~357,~~990~~108	)
Net cash provided by financing activities		~~633~~1,~~276~~335,581			~~204~~633,~~846~~276
Net increase (decrease) in cash		~~162~~(101,~~466~~859	)		33162,~~433~~466
Cash - beginning		46208,~~101~~567			1246,~~668~~101
Cash - ending	$	~~208~~106,~~567~~708		$	46208,~~101~~567
Supplemental disclosures:
Interest paid	$	~~205~~32,~~508~~991		$	80205,~~023~~508
Income taxes paid	$	–		$	–
Non-cash investing and financing activities:
Acquisition of subsidiary in exchange for debt	$	–961,988		$	~~460,800~~–
Acquisition of leased assets for debt	$	–		$	17,855
Value of shares issued for conversion of debt	$	695,353		$	329,300
Value of shares issued for conversion of debt	$	155,823		$	333,000
Value of shares issued for conversion of debt, related parties	$	173,477		$	–
Value of shares issued for conversion of debt, related parties	$	173,477		$	44,728
Beneficial conversion features	$	124,810		$	195,652
Discount on beneficial conversion feature of convertible debt	$	195,652		$	277,323
Discount on derivatives	$	422,240
Deferred financing costs	$	~~107~~432,~~076~~194		$	–107,076
Dividends payable declared	$	11,000		$	–
Conversion of Preferred C to Common A	$	329,000			–
Derivative adjustment due to debt conversions	$	1,199,904
Dividends payable declared		–		$	11,000

~~The~~ See accompanying notes ~~are~~to ~~an integral part of these consolidated~~ financial statements.

F-5

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Business and Summary of Significant Accounting Policies

Nature of Business and Organization

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

On or about June 18, 2008, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Desk Flex, Inc., an Illinois corporation (“DFI”) and Professional Resource Management, Inc., an Illinois corporation (“PRMI” and collectively with DFI, the “Target Companies”) to acquire 100% of the outstanding shares of the Target Companies. Pursuant to the Purchase Agreement, the Company purchased 100% of the outstanding shares of the Target Companies and DFI and PRMI became wholly-owned subsidiaries of the Company.

~~PRMI and~~ DFI ~~are separate legal entities, but operate in conjunction. PRMI and DFI share office space and certain employees. DFI~~’s main source of revenue comes from ~~the~~ 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~~ between the two companies. DFI developed the Desk/Flex Software (Desk/Flex) to enhance the value of businesses’ real estate ~~investments~~ investments and modernize their office space. Desk/Flex lets businesses make better use of office space restrictions by enabling ~~employees~~ employees to instantly access their workstation tools from multiple areas in and outside of the office. Desk/Flex lets employees reserve space in advance or claim space instantly. It adjusts the telephone switch (Private Branch Exchange (PBX)) so that calls ring at the desk du jour, or go directly to voice mail when a worker is not checked in. Desk/Flex is responsive to office size and needs, servicing small to large businesses. Desk/Flex can be configured to administer a single site or multiple sites locally or remotely. Agent Power Software (Agent Power) is PRMI’s software line. Agent Power is a suite of six applications. Each can operate on a stand-alone basis, or can work in conjunction with the other applications. The applications feature workforce management components, which include planning and scheduling; agent adherence; agent performance; automatic call distributor (ACD) group performance; real-time agent status, and info screen. All modules of Agent Power have integration capabilities with Nortel, Avaya, and ROLM ACDs, and the planning and scheduling module works with any modern ACD system.

On September 30, 2010, the Company acquired IntelliSys, Inc., doing business as, AutoHire Software, a Florida-based company owned by Igenti, Inc. (“Intellisys”). Intellisys had developed a Web portal infrastructure operating system product called BoxesOSv3.0. BoxesOS creates sources of revenue for Alumni Associations and Non-Profit organizations by utilizing a Web platform to conduct e-commerce and provides e-commerce tools for small businesses to create “my accounts” for their customers. BoxesOS also links a college or university’s resources with the business community by allowing businesses to train their employees by utilizing courseware development from higher education institutions. Epazz BoxesOS v3.0 (Web Infrastructure Operating System) is the Company’s flagship product. Epazz BoxesOS integrates with each organization’s back-end system and provides a customizable personal information system for each stakeholder. Its services include single sign-on, which provides a single-sign-on with security procedure to product users’ information and identity; course management system, which manages distance, traditional courses and calendar; enterprise Website content management, which manages public sites with multi contributors; integration management services, which is integrated into enterprise resource planning (ERP) and mainframes; e-mail management, which is an e-mail server and Web client; instant messenger services, which includes instant messaging and alerts; customer relationship management, which includes prospective students and alumni; calendar/scheduler management, which includes event directory, groupware, and personal calendar; administrative support services, which includes online payment services, and business services, which includes facility management and online bookstore. The AutoHire system provides a tool to power career centers, post job ads to sites and job boards, and to collect resumes online. One feature of the AutoHire system is the interactive question, and online screening and ranking system. The interactive question system provides a means for the client to maintain their own library of questions and to attach selected questions to job opportunities posted. Responses obtained can be used to screen and rank candidates to permit hiring managers to focus their attention on only the most suitable candidates.

On October 26, 2011, the Company, through a newly-formed wholly-owned Illinois subsidiary, K9 Bytes, Inc., entered into an Asset Purchase Contract and Receipt Agreement with K9 Bytes, Inc., a Florida corporation (“K9 Bytes” and the “Purchase Contract”). Pursuant to the Purchase Contract, the Company purchased all of K9 Bytes assets, including all of its intellectual property, its business trade name, website (k9bytessoftware.com), furniture, fixtures, equipment and inventory, and goodwill. The Company did not purchase, and K9 Bytes agreed to retain and be responsible for, any and all liabilities of K9 Bytes. K9 Bytes sells Point of Sale software to retail pet stores throughout the United States.

On March 28, 2012, we, through a newly-formed wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), closed on an Asset Purchase Agreement (“APA”) with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the APA, we purchased all of MSHSC’s assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and software. MS Health develops and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services.

FlexFridge, Inc. (“FlexFridge”), an Illinois corporation, was formed as a wholly-owned subsidiary of Epazz on March 4, 2013 as Cooling Technology Solutions, Inc. (“CTS”), and was renamed Z Fridge, Inc. (“Z Fridge”) on September 19, 2013 prior to being renamed again to FlexFidge on May 27, 2014. The Company filed a non-provisional patent application and currently has limited activity. The Company has filed a non-provisional patent application for its Project Flex product, which consists of a patent pending foldable mini-fridge. On November 21, 2013, the Company was spun off to shareholders of record on September 15, 2013, whereby shareholders of Epazz, Inc. received one (1) share of FlexFridge in exchange for each ten (10) shares held of Epazz, Inc. Epazz has a controlling financial interest in FlexFridge. As such, FlexFridge is consolidated within these financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10.

Terran Power, Inc (“Terran”), an Illinois corporation formed as a wholly-owned subsidiary of Epazz on September 19, 2013 to file a non-provisional patent application to develop a mobile power device that allows iPhone and other smartphone users to power up their phone on the go without needing an outlet or a second battery, however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses.

F-6

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On ~~March~~April 284, ~~2012~~2014, ~~we,~~the ~~through~~Company aentered ~~newly-formed~~into ~~wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), closed on~~ an Asset Purchase Agreement ~~(“APA”)~~ with MSCynergy ~~Health Software~~ Corporation, aan ~~New Jersey~~ Oklahoma corporation (“~~MSHSC~~Cynergy”). Pursuant to the ~~APA~~Purchase Agreement, we purchased ~~all~~substantially ~~of MSHSC’s assets, including~~ all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and software. MS Health develops and sells CHMCi, an enterprise wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services. With CMHCi, an organization will realize the ~~benefits~~intangible ~~of increased efficiency,~~assets ~~accountability,~~ and ~~productivity.~~certain ~~CMHCi~~tangible ~~offers~~assets ~~server-based,~~used ~~internet,~~in ~~and~~connection ~~secure~~with ~~cloud~~Cynergy’s ~~computing~~help ~~enabling~~desk ~~the~~software ~~user to access information as required. By maintaining a complete electronic client record~~business, including ~~data~~all ~~collection and reporting across multiple programs, locations, episodes~~ of ~~care,~~its ~~and service providers, CMHCi helps eliminate redundant record keeping. The scheduler component tracks~~intellectual ~~client~~property, ~~staff,~~its ~~and~~business ~~group~~trademarks ~~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~~copyrights, ~~including~~ ~~electronic claims and remittance~~equipment, ~~third party insurance~~computers, ~~and client~~software, ~~municipality,~~machinery and ~~grantor~~accounts ~~billing~~receivable.

~~FlexFridge,~~On ~~Inc.~~May ~~(“FlexFridge”)~~9, an ~~Illinois corporation~~2014, ~~was~~the ~~formed~~Company, asthrough a newly-formed wholly-owned Illinois subsidiary ~~of Epazz on March 4~~, ~~2013~~Jadian ~~as Cooling Technology Solutions~~Enterprises, Inc. (“~~CTS~~Jadian Enterprises”), ~~and~~closed ~~was~~on ~~renamed~~an ZAsset ~~Fridge,~~Purchase ~~Inc.~~Agreement (“~~Z Fridge~~APA”) ~~on September 19, 2013 prior to being renamed again~~ towith ~~FlexFidge on May 27~~Jadian, ~~2014~~Inc. ~~The Company filed a non-provisional patent application and currently has limited activity. The Company has filed a non-provisional patent application for its Project Flex product~~, ~~which consists of~~ a ~~patent~~Michigan ~~pending~~corporation ~~foldable mini-fridge~~(“Jadian”). On ~~November~~Pursuant ~~21,~~to ~~2013,~~ the ~~Company~~APA, ~~was~~we ~~spun~~purchased ~~off~~substantially toall ~~shareholders~~ of ~~record~~the ~~on September 15, 2013, whereby shareholders of Epazz,~~intangible ~~Inc.~~assets ~~received~~and ~~one~~certain ~~(1)~~tangible ~~share~~assets ofused ~~FlexFridge~~ in ~~exchange~~connection ~~for~~with ~~each~~Jadian’s ~~ten~~software ~~(10)~~business, ~~shares~~including ~~held~~all of ~~Epazz,~~its ~~Inc. Epazz has a controlling financial~~intellectual ~~interest in FlexFridge. As such~~property, ~~FlexFridge~~its isbusiness ~~consolidated~~trademarks ~~within~~and ~~these~~copyrights, ~~financial~~equipment, ~~statements~~computers, ~~pursuant~~software, tomachinery ~~Accounting~~and ~~Standards Codification~~accounts ~~(“ASC”) 810-10~~receivable. ~~There has been no material activity within FlexFridge to date.~~

~~Terran~~On ~~Power~~July 31, ~~Inc~~2014, ~~(“Terran”)~~one of the Company’s subsidiaries, anTelecorp ~~Illinois~~Products, ~~corporation~~Inc., ~~formed~~through as a newly-formed wholly-owned Illinois subsidiary, ofStrantin, ~~Epazz~~Inc. on(“Strantin”), ~~September~~closed ~~19,~~on ~~2013~~an Asset toPurchase ~~file~~Agreement a(“APA”) ~~non-provisional~~with ~~patent~~Strand, ~~application to~~Inc., ~~develop~~an aIllinois ~~mobile~~corporation ~~power~~(“Strand”). ~~device~~Pursuant ~~that~~to ~~allows~~the APA, ~~iPhone~~we ~~and~~purchased ~~other~~substantially ~~smartphone~~all ~~users~~of tothe ~~power~~seller’s upassets, ~~their~~including ~~phone~~intangible onassets ~~the~~and gocertain ~~without~~tangible ~~needing~~assets used anin ~~outlet~~connection orwith aStrand’s ~~second~~software ~~battery~~business, ~~however,~~including asall of ~~the~~its ~~date~~intellectual ofproperty, ~~this~~its ~~filing~~business ~~there~~trademarks ~~has~~and ~~been~~copyrights, equipment, ~~no activity and~~computers, ~~as such~~software, ~~there~~machinery ~~are~~and noaccounts ~~revenues or expenses~~receivable.

Basis of Accounting

Our consolidated financial statements are prepared using the accrual method of accounting as generally accepted in the United States of America (U.S. GAAP) and the rules of the Securities and Exchange Commission (SEC).

Principles of Consolidation

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

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

~~____________~~_______________

⁽¹⁾All subsidiaries, with the exception of FlexFridge, are wholly-owned subsidiaries.

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

⁽³⁾Formerly Z Fridge, Inc. and Cooling Technology Solutions, Inc.

⁽⁵⁾ Entity formed for prospective purposes, but has not incurred any income or expenses to date.

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.

F-7

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.

Segment Reporting

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

Cash and Cash Equivalents

Property and Equipment

Furniture and fixtures		5 years
Computers and equipment		3-5 years
Software		3 years
Assets held under capital leases		3-4 years

Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Fair Value of Financial Instruments

F-8

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. Amortization expense on intangible assets totaled $~~446~~150,~~988~~947 and $~~155~~446,~~448~~ 988 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively,. ~~including~~Impairments ~~impairments~~charges of $~~276~~170,~~282~~257 and $~~-0-~~276,282 were recorded for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, 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~~ 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~~ fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. ~~The~~ The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the ~~market~~ 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 of $1,489,078 and $-0- for the years ended December 31, 2014 and 2013, respectively.

Website Development Costs

The Company didn’t have any capitalized website development costs during the years ended December 31, 2013 and 2012.

Deferred Financing Costs

Costs relating to obtaining certain debts are capitalized and amortized over the term of the related debt using the straight-line method. The unamortized capitalized balance of deferred financing costs at December 31, ~~2013~~2014, and ~~2012~~2013, was $4454,~~986~~729 and $1744,~~033~~986, respectively. Amortization of deferred financing costs charged to operations was $79422,~~123~~451 and $2579,~~849~~123 for the years ended December 31, 2014 ~~2013~~ and ~~2012~~2013, respectively. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.

Allowance for Doubtful Accounts

We generate the majority of our revenues and corresponding accounts receivable from the sales of software products. We evaluate the collectability of our accounts receivable considering a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on past write-off experience and the length of time the receivables are past due. Bad debts expense (recoveries) was $~~(27~~62,~~129)~~601 and $2(27,~~957~~129) for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively. The allowance for doubtful accounts was $7132,~~017~~985 and $687,~~521~~ 017 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Beneficial Conversion Features

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

Revenue Recognition

F-9

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

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.

Advertising and Promotion

Income Taxes

Basic and Diluted Loss per Share

Stock-Based Compensation

The Company adopted FASB guidance on stock based compensation on January 1, 2006. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Common stock issued for services and compensation was $12,~~713~~964,~~150~~608 and $1,~~278~~713,~~151~~150 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Uncertain Tax Positions

F-10

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Uncertain Tax Positions

Restatement Accounting Policy

Recent Accounting Pronouncements

InOn ~~July~~August ~~2013~~2014, ~~the~~The Financial Accounting Standards Board (FASB) issued Accounting ~~Standards~~Standard Update ~~(ASU)~~ No. ~~2013~~2014-~~11:~~15, Presentation of Financial Statements – Going Concerns (Subtopic 205-40): Disclosures of Uncertainties about an ~~Unrecognized~~Entity’s ~~Tax~~Ability ~~Benefit~~to ~~When~~Continue as a ~~Net~~Going ~~Operating~~Concern. The amendments require management ~~Loss~~to ~~Carryforward,~~assess an entity’s ability to continue as a ~~Similar~~going ~~Tax~~concern ~~Loss~~by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, orthe amendments (1) provide a ~~Tax~~definition ~~Credit~~of ~~Carryforward~~the ~~Exists.~~term ~~The~~substantial ~~new~~doubt, (2) ~~guidance~~require ~~requires~~an ~~that~~evaluation ~~unrecognized~~every ~~tax~~reporting period including interim periods, (3) provide principles for considering the mitigating ~~benefits~~effect beof ~~presented~~management’s onplans, (4) require certain disclosures when substantial doubt is alleviated as a ~~net~~result ~~basis~~of ~~with~~consideration of ~~the~~management’s ~~deferred~~plans, ~~tax~~(5) ~~assets~~require ~~for~~an ~~such~~express ~~carryforwards.~~statement ~~This~~and ~~new~~other ~~guidance~~disclosures when substantial doubt is ~~effective~~not alleviated, and (6) require an assessment for ~~fiscal~~a period of one year after the date that the financial statements are issued (or available to be ~~years~~issued). ~~and~~The ~~interim~~amendments ~~periods~~in ~~within~~this ~~those~~Update ~~years~~are ~~beginning~~effective for the annual period ending after December 15, ~~2013~~2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of ASU ~~2013~~2014-1115 is not expected to have a material impact on our financial position or results of operations.

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance requires that share-based compensation that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards and that could be achieved after an employee completes the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on our financial position or results of operations.

In July 2013, the FASB issued ASU No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our financial position or results of operations.

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

F-11

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Going Concern

As shown in the accompanying financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $(715,~~501~~169,~~994~~401), and as of December 31, ~~2013~~2014, the Company’s current liabilities exceeded its current assets by $13,~~283~~453,~~338~~062 and its total liabilities exceeded its total assets by $13,~~524~~918,~~615~~310. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

Epazz will require substantial additional funding for continuing research and development, obtaining regulatory approval and for the commercialization of its products. Management expects to be able to raise enough funds to meet its working capital requirements through debt and/or equity financing. There is no assurance that Epazz will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to Epazz. The accompanying financial statements do not include any adjustments that might be necessary should Epazz be unable to continue as a going concern.

Note 3 – Subsidiary Formation

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

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

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

~~Note~~Formation 4of Subsidiary – ~~Asset~~Jadian, Inc., ~~Purchase~~May ~~Acquisitions~~6, 2014

~~Asset~~On ~~Purchase~~May ~~Acquisition~~6, –2014, MSthe ~~Health~~Board of Directors, ~~Inc~~consisting solely of Shaun Passley, Ph.D., ~~March~~the 28Company’s majority shareholder, ~~2012~~approved the formation of a new wholly-owned subsidiary of the Company named Jadian, Inc. for the asset purchase agreement with Jadian Enterprises, Inc.

OnFormation 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,~~Subsidiary ~~including~~– ~~all of its intellectual property~~Strantin, ~~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., MSJuly ~~Health and the Company~~31, ~~and secured by the assets of MS Health and the Company.~~2014

On July 31, 2014, the Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned subsidiary of the Company named Strantin, Inc. for the asset purchase agreement with Strand, Inc.

Formation of Subsidiary – Interaction Technology, Inc. December 17, 2014

On December 17, 2014, the Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, approved the formation of a new wholly-owned subsidiary of the Company named Interaction Technology, Inc. for the asset purchase agreement with Interaction Technology, Inc.

F-12

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~MSHSC~~Note ~~developed~~4 ~~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.Acquisitions

InInteraction ~~connection with the Asset Purchase~~Technology, ~~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 closingInc. ~~Pursuant to the agreement~~, ~~the~~Asset ~~shareholders of MSHSC agreed not to compete against the~~Purchase ~~Company for two years from the closing of the acquisition.~~Agreement

~~This~~On ~~acquisition was~~December ~~accounted~~29, ~~for~~2014, asThe Company through a ~~business~~newly-formed ~~combination~~wholly-owned ~~under~~Illinois ~~the~~subsidiary, ~~purchase~~Interaction ~~method~~Technology, ofInc. ~~accounting~~(“Interact”), ~~given~~closed ~~that~~on an Asset Purchase Agreement (“APA”) with Interaction Technology, Inc., an Arizona corporation (“Inter”). Pursuant to the APA, we purchased substantially all of the ~~Company~~seller’s assets, including intangible assets and ~~ongoing~~certain ~~operations~~tangible ~~were~~assets ~~acquired.~~used in ~~The~~connection ~~purchase~~with ~~resulted~~Interaction’s software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $~~114~~600,~~627~~000, of which $250,000 was paid at the closing, and $150,000 was financed by way of ~~goodwill~~a Promissory Note (the “Inter Note 1”) and $200,000 was financed by way of a Promissory Note (the “Inter Note 2”). ~~According~~The toterms of the ~~purchase~~Inter ~~method~~Note 1 include interest at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal ~~accounting~~payments of $37,500 ~~the~~commencing ~~Company~~thereafter, ~~recognized~~no prepayment penalty. The terms of the ~~identifiable~~Inter ~~assets~~Note ~~acquired~~2 include interest at 6% per annum, no payments of either principal or interest for thirty (160) days after Closing and ~~liabilities~~18 ~~assumed~~monthly asprincipal ~~follows:~~and interest payments of $11,881.03 commencing thereafter, no prepayment penalty. The Inter Note 1 and Inter Note 2 are unsecured. We did not purchase and Inter agreed to retain and be responsible for any and all liabilities of Inter.

	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

This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s assets and ongoing operations were acquired. The purchase resulted in $508,535 of goodwill. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:

(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.

	December 29,
	2014
Consideration:
Cash paid at closing	$	250,000
Subordinated promissory note⁽¹⁾		150,000
Seller financed note payable⁽²⁾		200,000
Fair value of total consideration exchanged	$	600,000

Fair value of identifiable assets/(liabilities) acquired assumed:
Current assets	$	4,175
Software		52,200
Contracts		24,800
Trademark		18,000
Deferred revenue liability		(8,510	)
Total fair value of assets assumed		91,465
Consideration paid in excess of fair value (Goodwill)⁽³⁾	$	508,535

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._______________

⁽¹⁾ $150,000 was financed by way of a Promissory Note (the “Inter Note 1”). The terms of the Inter Note1 include interest at 0% per annum, no payments of either principal or interest for thirty (30) days after Closing and four monthly principal payments of $37,500 commencing thereafter, no prepayment penalty. The Inter Note 1 is unsecured.

⁽²⁾ $200,000 was financed by way of a Promissory Note. The terms of the Inter Note 2 include interest at 6% per annum, no payments of either principal or interest for thirty (160) days after Closing and 18 monthly principal and interest payments of $11,881.03 commencing thereafter, no prepayment penalty. The Inter Note 2 is unsecured.

⁽³⁾ The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.

F-13

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been January 1, 2014 or January 1, ~~2012~~2013 are as follows:

	Combined Pro Forma:
	For the years ended December 31, 2012
	For the 12 months ended
Revenue:	$	1,256,054
	December 31,
Expenses:
	2014			2013
Operating expenses		2,710,529
Revenue:	$	2,098,269		$	1,457,134
Net operating loss		(1,454,475	)
Expenses:
Other income (expense)		(457,730	)
Operating expenses		7,041,089			3,600,915
Net loss	$	(1,912,205	)
Net operating loss		(4,942,820	)		(2,143,781	)
Weighted average number of common shares
Other income (expense)		(2,268,996	)		(657,287	)
Outstanding – basic and fully diluted		399,031,314
Net loss	$	(7,211,816	)	$	(2,801,068	)
Net loss per share – basic and fully diluted	$	(0.00	)
Weighted average number of common shares
Outstanding – basic and fully diluted		8,504,489			253,610
Net loss per share – basic and fully diluted	$	(0.85	)	$	(11.04	)

Strand, Inc., Asset Purchase Agreement

This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s assets and ongoing operations were acquired. The purchase resulted in $399,865 of goodwill. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:

	July,
	2014
Consideration:
Cash paid at, and prior to, closing	$	100,000
Seller financed note payable⁽¹⁾⁽²⁾		85,000
		185,000
Fair value of identifiable liabilities acquired:
Deferred revenue		36,638
Fair value of total consideration exchanged	$	221,638

Fair value of identifiable assets acquired assumed:
Software	$	9,447
Trade name		5,870
Total fair value of assets assumed		15,317
Consideration paid in excess of fair value (Goodwill)⁽³⁾	$	206,321

_______________

⁽¹⁾Consideration included an unsecured $85,000 seller financed note payable (“Strand Note”), which bears interest at 6% per annum until the maturity date of July 31, 2015, and provides for equal monthly principal and interest payments of $2,585.86 commencing on August 31, 2014. The Strand Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity at July 31, 2015.

⁽²⁾The fair value of the seller financed note in excess of the $85,000 principal balance attributable to the deferred payment terms will be amortized to interest expense over the deferred financing period.

⁽³⁾The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.

F-14

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management believes the product line of Strand, software and other assets acquired will enable the Company to enhance their business model and strengthen its future cash flows to fund operations and take advantage of additional growth opportunities.

The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been January 1, 2014 or January 1, 2013 are as follows:

	Combined Pro Forma:
	For the 12 months ended December 31,
	2014			2013
Revenue:	$	1,724,945		$	900,742

Expenses:
Operating expenses		7,044,595			3,609,116

Net operating income (loss)		(5,319,650	)		(2,708,374	)

Other income (expense)		(2,269,968	)		(659,059	)

Net income (loss)	$	(7,589,345	)	$	(3,367,733	)

Weighted average number of common shares outstanding – basic and fully diluted		8,504,489			253,610

Net income (loss) per share – basic and fully diluted	$	(0.89	)	$	(13.30	)

Zinergy (DBA) formerly Cynergy Software, Asset Purchase

On April 4, 2014, we closed on a March 13, 2014 Asset Purchase Agreement with Cynergy Corporation, an Oklahoma corporation (“Cynergy”). Pursuant to the Purchase Agreement, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Cynergy’s help desk software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $75,000, of which $25,000 was paid at the closing, $25,000 was paid within fifteen (15) days after the closing and the remaining $25,000 was paid within forty (40) days after the closing. We did not purchase and Cynergy agreed to retain and be responsible for any and all liabilities of Cynergy Corporation. The acquisition was financed in part with a software financing agreement. The financing agreement has a lien against the software assets of Zinergy.

Zinergy Service Desk Software is very customizable for business processes. Zinergy integrates with just about every other business tool available. Help Desk Support Software, Help Desk Ticketing Software, Customer Support Software, HRIS Ticketing Solution and much more.

F-15

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s assets and ongoing operations were acquired. The purchase resulted in $65,139 of goodwill. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:

	April 4,
	2014
Consideration:
Cash paid at, and prior to, closing	$	75,000

Fair value of identifiable assets acquired assumed:
Software	$	8,035
Trade name		1,826
Total fair value of assets assumed		9,861
Consideration paid in excess of fair value (Goodwill)⁽¹⁾	$	65,139

_______________

⁽¹⁾The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.

Management believes the product line of Cynergy, software and other assets acquired will enable the Company to enhance their business model and strengthen its future cash flows to fund operations and take advantage of additional growth opportunities.

Jadian Enterprises, Inc., Asset Purchase Agreement

On May 9, 2014, the Company, through a newly-formed wholly-owned Illinois subsidiary, Jadian Enterprises, Inc. (“Jadian Enterprises”), closed on an Asset Purchase Agreement (“APA”) with Jadian, Inc., a Michigan corporation (“Jadian”). Pursuant to the APA, we purchased substantially all of the intangible assets and certain tangible assets used in connection with Jadian’s software business, including all of its intellectual property, its business trademarks and copyrights, equipment, computers, software, machinery and accounts receivable in consideration for an aggregate of $425,000, of which $207,945 was paid at the closing, $7,055 was settled as a result of certain offsets, including an offset for $40,760 for prepaid maintenance contracts received by the seller prior to Closing, as diminished by a credit for Accounts Receivable of $33,705, and $210,000 was financed by way of a Promissory Note (the “Jadian Note”). The terms of the Jadian Note include interest at 6% per annum, a ten (10) year amortization, full right of offset, no payments of either principal or interest for thirty (30) days after Closing and equal payments of principal and interest commencing thereafter, no prepayment penalty, and a balloon payment consisting of full payment of all amounts due after three (3) years. The Jadian Note is secured by a lien on the assets of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian. We did not purchase and Jadian agreed to retain and be responsible for any and all liabilities of Jadian.

Revenue for the Relevant Year	Earn-Out
$-0- to $500,000	$	–
$500,000 to $600,000	$	25,000
$600,000 to $700,000	$	50,000
$700,000 to $800,000	$	75,000
$800,000 or more	$	100,000

Provided that in no event shall the total amount payable to Jadian Enterprises in connection with the Earn-Out exceed $100,000 per year, or $300,000 in aggregate. Management has determined the probability of having to pay out any of these Earn-Out provisions as Medium and accordingly, has not recorded a contingent liability.

F-16

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s assets and ongoing operations were acquired. The purchase resulted in $399,865 of goodwill. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:

	May 9,
	2014
Consideration:
Cash paid at, and prior to, closing	$	215,000
Seller financed note payable⁽¹⁾⁽²⁾		210,000
Adjustments to cash paid at closing⁽³⁾		(7,055	)
		417,945
Fair value of identifiable liabilities acquired:
Deferred revenue		86,423
Fair value of total consideration exchanged	$	504,368

Fair value of identifiable assets acquired assumed:
Accounts receivable	$	42,382
Software		37,180
Trade name		24,941
Total fair value of assets assumed		104,503
Consideration paid in excess of fair value (Goodwill)⁽⁴⁾	$	399,865

____________________

⁽¹⁾ Consideration included an unsecured $210,000 seller financed note payable (“Jadian Note”), which bears interest at 6% per annum until the maturity date of May 9, 2017, and provides for equal monthly principal and interest payments of $6,389 commencing on June 1, 2014. The Jadian Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity at May 9, 2017. The interest rate shall be 8% per annum with an additional 5% late payment fee upon default.

⁽²⁾ The fair value of the seller financed note in excess of the $210,000 principal balance attributable to the deferred payment terms will be amortized to interest expense over the deferred financing period.

⁽³⁾ The Company agreed to adjust the purchase price in connection with the Closing by paying an additional $33,705 for the accounts receivable acquired, less $40,760 attributable to deferred revenues recognized on previously collected sales for which services are still pending. The net total of $7,055 was credited as payment at the Closing.

⁽⁴⁾ The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.

Management believes the product line of Jadian, software and other assets acquired will enable the Company to enhance their business model and strengthen its future cash flows to fund operations and take advantage of additional growth opportunities.

The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been January 1, 2014 or January 1, 2013 are as follows:

	Combined Pro Forma:
	For the 12 months ended December 31,
	2014			2013
Revenue:	$	1,729,127		$	1,008,084

Expenses:
Operating expenses		7,100,879			3,715,426

Net operating income (loss)		(5,371,752	)		(2,707,342	)

Other income (expense)		(2,272,930	)		(665,243	)

Net income (loss)	$	(7,644,682	)	$	(3,372,585	)

Weighted average number of common shares outstanding – basic and fully diluted		8,504,489			253,610

Net income (loss) per share – basic and fully diluted	$	(0.90	)	$	(13.30	)

F-17

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Purchase Acquisition – Telecorp Products, Inc., February 28, 2014

	(a)	The Company paid Troy Holdings $200,000 at the Closing (the “Cash Consideration”) of the Telecorp Purchase Agreement; and
	(b)	The Company provided Troy Holdings with a Promissory Note in the amount of $102,000 (the “Telecorp Note”), as adjusted from an original $120,000 by $18,000 of liabilities acquired in excess of the agreed upon limit of $50,000 of liabilities, which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum.

Additionally, the Company agreed to assume aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. A total of $68,000 of liabilities was actually acquired, and the resulting $18,000 of excess liabilities was credited as payment against the Telecorp Note. As a result of the Closing, Telecorp became a wholly-owned subsidiary of the Company.

Telecorp developed and sells software to effectively operate contact centers. Telecorp’s solutions work with equipment from the giants of the computer telephony industry, such as Avaya, Cisco and Nortel Networks. In connection with the Stock Purchase Agreement, the shareholders of Telecorp and the Company entered into a Non-Disclosure/Non-Compete Agreement, pursuant to which the shareholders of Telecorp and the Company, each agreed to not for a period of one (1) year, communicate or divulge to, or use for the benefit of itself or any other person, firm, association or corporation, any information in any way relating to the Proprietary Property, in competition with the business of the Company, and pursuant to the agreement, the shareholders of Telecorp agreed not to compete against the Company for one (1) year from the closing of the acquisition.

This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s assets and ongoing operations were acquired. The purchase resulted in $428,577 of goodwill. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:

	February 28,
	2014
Consideration:
Cash paid at, and prior to, closing	$	200,000
Seller financed note payable⁽¹⁾⁽²⁾		120,000
Excess liability adjustment to seller financed note payable⁽³⁾		(18,000	)
		302,000
Fair value of identifiable liabilities acquired:
Accounts payable and accrued expenses		43,500
Deferred revenue		162,016
Line of credit		24,500
Fair value of total consideration exchanged	$	532,016

Fair value of identifiable assets acquired assumed:
Cash	$	736
Other current assets		823
Technology-based intangible assets		72,490
Trade name		29,390
Total fair value of assets assumed		103,439
Consideration paid in excess of fair value (Goodwill)⁽⁴⁾	$	428,577

______________

⁽¹⁾ Consideration included an unsecured $120,000 seller financed note payable (“Telecorp Note”), which provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum.

⁽²⁾ The fair value of the seller financed note in excess of the $102,000 principal balance attributable to the deferred payment terms will be amortized to interest expense over the deferred financing period.

⁽³⁾ The Company agreed to assume aggregate outstanding Telecorp liabilities of up to $50,000 in connection with the Closing. A total of $68,000 of liabilities was actually acquired, and the resulting $18,000 of excess liabilities was credited as payment against the Telecorp Note.

⁽⁴⁾ The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.

F-18

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management believes the product line of Telecorp, customer base and other assets acquired will enable the Company to enhance their business model and strengthen its future cash flows to fund operations and take advantage of additional growth opportunities.

The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been January 1, 2014 or January 1, 2013 are as follows:

	Combined pro Forma:
	For the 12 months ended December 31,
	2014			2013
Revenue:	$	1,648,955		$	1,038,678

Expenses:
Operating expenses		7,042,077			3,824,831

Net operating income (loss)		(5,393,122	)		(2,786,153	)

Other income (expense)		(2,268,872	)		(657,984	)

Net income (loss)	$	(7,661,994	)	$	(3,444,137	)

Weighted average number of common shares outstanding – basic and fully diluted		8,504,489			253,610

Net income (loss) per share – basic and fully diluted	$	(0.90	)	$	(13.58	)

Note 5 – Related Parties

Debt ~~Financings~~Financing

From time to time we have received and repaid loans from our CEO and his immediate family members to fund operations. These related party debts are fully disclosed in Note 14 below.

In addition to the debts disclosed in Note 14, we had two convertible notes with related parties that are disclosed in Note 15 as follows:

	December 31,			December 31,
	2013			2012
	2014			2013
Unsecured $14,838 convertible promissory note carries an 11% interest rate (“First GG Mars Note”) owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note was acquired from and assigned by another independent lender on August 15, 2013 prior to being exchanged for the convertible note. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for the one hundred and twenty (120) days prior to the conversion date, or $0.00001 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of $14,838 was immediately converted at the election of the note holder into 46,856,526 shares.	$	–		$	–
Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into another 40,000,000 shares pursuant to debt conversion on August 7, 2013.		46,449			190,849
Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013, $32,000 into another 40,000,000 shares pursuant to debt conversion on August 7, 2013, $18,750 into 125,000,000 shares pursuant to debt conversion on April 7, 2014, $20,000 into 200,000,000 shares pursuant to debt conversion on May 3, 2014, and $15,000, consisting of $7,699 of principal and $7,301 of interest into 150,000,000 shares pursuant to debt conversion on May 22, 2014		–			46,449
Total convertible debts, related parties		~~46,449~~–			~~190~~46,~~849~~449
Less: unamortized discount on beneficial conversion feature		~~(5,653~~–	)		(455,~~098~~653	)
Convertible debts		~~40,796~~–			~~145,751~~40796
Less: current maturities of convertible debts, related parties included in convertible debts		–			–
Long term convertible debts, related parties included in convertible debts	$	~~40,796~~–		$	~~145~~40,~~751~~796

F-1419

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in Stockholders’ Equity, Related Parties

Dividends Payable

On January 1, 2013, the Company declared ~~and~~ and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1 million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during ~~the~~ the year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which ~~can~~was besubsequently paid inon ~~cash~~September 11, or2014, in with the issuance of 11,000 shares of Class A Common Stock in lieu of cash.

~~Beneficial~~On September 10, 2014, an amendment to the corporation’s Articles of Incorporation was approved with respect to the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. With regard to each series of preferred stock, the Corporation shall not without first obtaining the approval, by written consent, as provided by law, of the holders of 2/3rds of the then outstanding shares of each respective series of Preferred Stock, to increase or decrease, other than by redemption or conversion, the total number of authorized shares of each respective series of Preferred Stock, to effect an exchange, reclassification, or cancellation of all or a part of each respective series of Preferred Stock, but excluding a stock split, forward split or reverse stock split of the Corporation’s Common Stock or series B Preferred Stock, to effect an exchange, or create a right of exchange, of all or part of the shares of another class of shares into shares of any series of Preferred Stock, or to alter or change the rights, preferences or privileges of the shares of any series of Preferred Stock so as to affect adversely the shares of such series. With respect to the Class B Common Stock, the amendment as approved stipulates that The Corporation will take all such action as may be necessary or appropriate in order to protect the Conversion ~~Feature~~rights of the holders of Class B Common Stock against impairment as a result of any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action.

OnA ~~August~~valuation ~~20,~~of ~~2013,~~ the ~~Company~~various ~~entered into~~classes aof ~~convertible~~stock was ~~promissory~~performed ~~note~~by ~~with~~an GGindependent ~~Mars~~third ~~Capital,~~party ~~Inc.,~~to aprovide ~~company~~an ~~owned~~estimated bychange ~~our~~in ~~CEO’s~~the ~~family~~fair ~~member.~~value ~~The~~of ~~beneficial conversion~~each ~~feature~~class ~~discount~~affected ~~resulting~~by ~~from~~ the ~~conversion~~amendment. The ~~price~~estimated ~~that~~change ~~was~~to ~~$0.001 below~~ the ~~market~~fair ~~price~~value of ~~$0.0013 on~~ the ~~August 20,~~various ~~2013~~classes ~~origination~~of ~~date~~stock ~~resulted~~is in$721,207. aThe ~~debt~~market ~~discount~~ value of ~~$14,838~~equity ~~that~~ was ~~recognized~~estimated aswith the ~~additional~~market ~~paid~~price inof ~~capital~~the ~~and~~Company's ~~is being~~Class ~~amortized~~A oncommon astock ~~straight~~as ~~line~~of ~~basis~~September ~~over~~10, ~~the~~2014 ~~life~~according ofto ~~the~~Capital ~~loan~~IQ.

~~Debt~~Shares ~~Conversions~~of ~~into~~Convertible ~~Class~~Series AC ~~Common~~Preferred Stock Issued for Services to Related Parties

On ~~March~~January 1417, ~~2013~~2014, the Company issued 50600,000,000 shares of ~~Class~~the Arecently ~~Common~~designated ~~Stock~~Series ~~pursuant~~C Convertible Preferred Stock to the ~~conversion~~Company’s ofCEO ~~$46~~in exchange for 60,000 shares of ~~convertible~~his ~~debt~~previously ~~owed~~issued toClass ~~Star~~A ~~Financial~~Common ~~Corporation,~~Stock. ~~which consisted~~The ~~entirely~~total fair value of ~~principal.~~the ~~The~~Series ~~note~~C Convertible Preferred Stock was ~~converted~~$568,283 inbased on ~~accordance~~an ~~with~~independent valuation on the ~~conversion~~date ~~terms~~of grant; therefore nothe ~~gain~~Company orrecognized ~~loss~~additional ~~has~~compensation expense of $345,427 ~~been~~due ~~recognized~~to the difference in the fair value of the Class A Common Stock exchanged.

On ~~April~~February 107, ~~2013~~2014, the Company issued 502,000,000 shares of ~~Class~~Convertible ASeries ~~Common~~C Preferred Stock ~~pursuant~~ to ~~the~~GG ~~conversion~~Mars ~~of $40~~Capital,~~000~~ ofa ~~convertible~~related ~~debt~~party ~~owed~~entity toowned ~~Star~~by ~~Financial~~Vivienne ~~Corporation~~Passley, ~~which~~as a loan ~~consisted~~origination ~~entirely~~cost ofin ~~principal.~~consideration ~~The~~for a $26,000 short term promissory note. ~~was~~The ~~converted~~total infair ~~accordance~~value ~~with~~of the ~~conversion~~common ~~terms;~~stock ~~therefore~~was no$2,385 based ~~gain~~on oran ~~loss~~independent ~~has been~~valuation ~~recognized~~on the date of grant.

On ~~May~~February 2721, ~~2013~~2014, the Company ~~modified a related party debt and~~ issued 1415,~~239~~000,~~500~~ 000 shares of ~~Class~~Convertible ASeries ~~Common~~C Preferred Stock into ~~settlement~~Star ~~of $14~~Financial,~~239~~ ofa ~~related~~company ~~party~~owned ~~debt~~by ~~owed~~our ~~to Vivienne~~CEO’s ~~Passley~~family member, ~~which~~a ~~consisted~~related party, ofas ~~$13,000~~a ofloan ~~principal~~origination ~~and~~cost in consideration for a $175,~~239~~000 ofshort ~~accrued~~term ~~and~~promissory ~~unpaid interest~~note. The total fair value of the ~~common~~ common stock was $289,~~479~~562 based on ~~the~~an ~~closing~~independent ~~price~~valuation ~~of the Company’s common stock~~ on the date of grant~~, resulting in the recognition of a $14,240 loss on debt settlement~~.

On ~~July~~February 922, ~~2013~~2014, the Company issued 8015,000,000 shares of ~~Class~~Convertible ASeries ~~Common~~C Preferred Stock ~~pursuant~~ to ~~the~~GG ~~conversion~~Mars ~~of $26~~Capital,~~400~~ ofa ~~convertible~~related ~~debt~~party ~~owed~~entity toowned ~~Star~~by ~~Financial~~Vivienne ~~Corporation~~Passley, ~~which~~as a loan ~~consisted~~origination ~~entirely~~cost ofin ~~principal.~~consideration ~~The~~for a $100,000 short term promissory note. ~~was~~The ~~converted~~total infair ~~accordance~~value ~~with~~of the ~~conversion~~common ~~terms;~~stock ~~therefore~~was no$14,266 based ~~gain~~on oran ~~loss~~independent ~~has been~~valuation ~~recognized~~on the date of grant.

On ~~August~~March 7, ~~2013~~2014, the Company issued 403,000,000 shares of ~~Class~~Convertible ASeries ~~Common~~C Preferred Stock ~~pursuant~~ to ~~the~~Star ~~conversion~~Financial, ofa ~~$32~~company owned by our CEO’s family member,~~000~~ ofa ~~convertible~~related ~~debt~~party, as ~~owed~~a toloan ~~Star~~origination ~~Financial~~cost ~~Corporation~~in consideration for a $30,000 ~~which consisted~~short ~~entirely~~term ofpromissory ~~principal~~note. The ~~note~~total ~~was~~fair ~~converted~~value inof ~~accordance~~the ~~with~~common ~~the~~stock was ~~conversion~~$2,912 ~~terms;~~based ~~therefore~~on noan ~~gain~~independent orvaluation ~~loss~~on ~~has been~~the ~~recognized~~date of grant.

On ~~August~~March 2722, ~~2013~~2014, the Company issued 46 200,~~856~~000,~~526~~ 000 shares of ~~Class~~Convertible ASeries ~~Common~~C Preferred Stock ~~pursuant~~ to ~~the~~GG ~~conversion~~Mars ~~of $14~~Capital,~~838~~ ofa ~~convertible~~related ~~debt~~party ~~owed~~entity toowned GGby ~~Mars~~Vivienne ~~Capital~~Passley, ~~Inc.,~~for providing ~~which~~a ~~consisted~~personal ~~entirely~~guaranty ofon ~~principal~~an acquisition loan. The ~~note~~total ~~was~~fair ~~converted~~value inof ~~accordance~~the ~~with~~common ~~the~~stock ~~conversion~~was ~~terms;~~$127,746 ~~therefore~~based noon ~~gain~~an orindependent ~~loss~~valuation ~~has~~on ~~been~~the ~~recognized~~date of grant.

~~Loss~~On onMarch ~~Convertible~~22, ~~Debt~~2014, ~~Modification~~the Company issued 200,000,000 shares of Convertible Series C Preferred Stock to ~~Related~~Star ~~Party~~Financial, a company owned by our CEO’s family member, a related party, for providing a personal guaranty on an acquisition loan. The total fair value of the common stock was $127,746 based on an independent valuation on the date of grant.

On March 522, ~~2013~~2014, wethe ~~amended~~Company ~~a convertible~~issued ~~promissory note with Star Financial Corporation~~1, ~~which then carried a balance of $190~~821,~~849~~052,632 toshares ~~revise~~of the ~~conversion~~Series ~~terms~~C ~~from a~~Convertible ~~$0.005~~Preferred ~~floor~~Stock ~~and 75% discount~~ to ~~market~~the toCompany’s ~~conversion~~CEO ~~terms~~in ~~consisting~~exchange offor 182,105 ~~"equal~~Class toA Common ~~the greater of~~shares, ~~(a)~~consisting ~~50%~~ of ~~the Market Price~~173,053 orpreviously ~~(b)~~issued ~~the~~and ~~fixed~~unvested ~~conversion~~shares ~~price~~ of ~~$0.00075~~Class ~~per~~A ~~share".~~Common ~~The~~Stock ~~Company~~and ~~compared~~9,052 ~~the~~shares ~~fair value~~ of ~~the debt immediately~~his ~~preceding~~previously ~~the~~issued ~~modification~~and tovested ~~the~~Class ~~fair~~A ~~value~~Common ~~after~~Stock. ~~the~~The ~~modification~~vesting toterms ~~determine~~were ~~the~~accelerated ~~loss~~commensurate onwith ~~modification~~the ~~of $81,792~~exchange. ~~This value~~ ~~was~~The ~~determined~~total ~~using~~fair ~~the~~ value of the ~~shares~~Series ~~assuming~~C ~~the~~Convertible ~~note~~Preferred Stock was ~~converted~~$1,163,162 ~~pursuant~~based toon ~~the~~an ~~respective~~independent ~~conversion~~valuation ~~terms~~ on the ~~date~~ date of ~~modification.~~grant; ~~The~~therefore ~~total~~the ~~value~~Company ofrecognized ~~the~~additional ~~shares~~compensation ~~after~~expense ~~modification~~of ~~was~~ $~~272~~707,~~641,~~025 ~~compared~~due to the ~~$190,849~~difference ~~value~~in ~~preceding~~ the fair ~~modification,~~value ~~resulting~~of inthe aClass ~~loss~~A onCommon ~~modification~~Stock ~~of $81,792~~exchanged.

On March 22, 2014, the Company issued 13,669,568 shares of the Series C Convertible Preferred Stock to L&F~~-15~~ Lawn Services, a company owned by our CEO’s family member, a related party, in exchange for 1,367 of their previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $8,731 based on an independent valuation on the date of grant; therefore the Company recognized additional compensation expense of $5,370 due to the difference in the fair value of the Class A Common Stock exchanged.

On March 22, 2014, the Company issued 60,000,000 shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000,000 shares, consisting of 5,400 previously issued and unvested shares of Class A Common Stock and 600 shares of his previously issued and vested Class A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible Preferred Stock was $38,324 based on an independent valuation on the date of grant; therefore the Company recognized additional compensation expense of $23,295 due to the difference in the fair value of the Class A Common Stock exchanged.

On July 7, 2014 the Company issued 5,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost that was previously granted on January 15, 2014 in consideration for a $43,000 short term promissory note. The total fair value of the common stock was $6,465 based on an independent valuation on the date of grant.

On July 7, 2014 the Company issued 1,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost that was previously granted on February 8, 2014 in consideration for a $13,000 short term promissory note. The total fair value of the common stock was $1,193 based on an independent valuation on the date of grant.

F-20

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On July 7, 2014 the Company issued 2,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost that was previously granted on March 7, 2014 in consideration for a $22,000 short term promissory note. The total fair value of the common stock was $1,942 based on an independent valuation on the date of grant.

On July 7, 2014 the Company issued 3,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost that was previously granted on March 26, 2014 in consideration for a $37,500 short term promissory note. The total fair value of the common stock was $2,928 based on an independent valuation on the date of grant.

On July 7, 2014 the Company issued 3,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost that was previously granted on March 26, 2014 in consideration for a $25,000 short term promissory note. The total fair value of the common stock was $2,928 based on an independent valuation on the date of grant.

On July 7, 2014 the Company issued 2,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost that was previously granted on March 28, 2014 in consideration for an $18,750 short term promissory note. The total fair value of the common stock was $1,594 based on an independent valuation on the date of grant.

On July 7, 2014 the Company issued 3,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost that was previously granted on March 28, 2014 in consideration for a $25,000 short term promissory note. The total fair value of the common stock was $2,928 based on an independent valuation on the date of grant.

On October 10, 2014 the Company issued 30,000,000 shares of Class A Common to our CEO from a conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was recognized as a result of this conversion.

On October 10, 2014 the Company issued 1,500,000 shares of Class A Common to Star Financial, a company owned by our CEO’s family member, a related party, from a conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was recognized as a result of this conversion.

On October 10, 2014 the Company issued 1,400,000 shares of Class A Common to GG Mars Capital., a company owned by our CEO’s family member, a related party, from a conversion notice from Preferred C. As this was a conversion within the terms of the Preferred C equity instrument no additional value was recognized as a result of this conversion.

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

On March 5, 2013, the Company issued 121,~~500,000~~250 shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on an acquisition loan that originated on September 30, 2010. The total fair value of the common stock was $25,000 based on the closing price of the Company’s common stock on the date of grant.

On March 5, 2013, the Company issued 121,~~500,000~~250 shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on two acquisition loans that originated on October 26, 2011. The total fair value of the common stock was $25,000 based on the closing price of the Company’s common stock on the date of grant.

On March 5, 2013, the Company issued ~~200~~2,000~~,000~~ shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The shares will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock was $400,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.

On March 20, 2013, the Company issued 353,~~500,000~~550 shares of Class A Common Stock to Vivienne Passley, a related party, for providing collateral on acquisition loans that originated on September 30, 2010 and October 26, 2011. The total fair value of the common stock was $35,500 based on the closing price of the Company’s common stock on the date of grant.

On March 20, 2013, the Company issued 606,000~~,000~~ shares of Class A Common Stock to Craig Passley, a related party, for providing corporate secretary services from 2012 to 2021. The total fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. A total of $6,000 was expensed related to the vested services for the year ended December 31, 2012. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.

On May 16, 2013, the Company issued 710,526,316 shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The total fair value of the common stock was $1,350,000 based on the closing price of the Company’s common stock on the date of grant.F-21

~~On May 24~~EPAZZ, 2013, the Company issued 35,500,000 shares of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on September 30, 2010 and October 26, 2011INC. ~~The total fair value of the common stock was $71,000 based on the closing price of the Company’s common stock on the date of grant.~~

~~On July 5, 2013, the Company issued 25,000,000~~NOTES ~~shares~~TO ofCONSOLIDATED ~~Class~~FINANCIAL A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.STATEMENTS

On ~~July~~May 816, 2013, the Company issued ~~710~~71,~~526,316~~053 shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services~~, of which 200,000,000 shares vested immediately and the remaining 510,526,316 shares will be vested once the Company reports revenue of $10 million in a calendar year~~. The total fair value of the common stock was $~~497~~1,~~368~~350,000 based on the closing price of the Company’s common stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. ~~The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.~~

On May 24, 2013, the Company issued 3,550 shares of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on September 30, 2010 and October 26, 2011. The total fair value of the common stock was $71,000 based on the closing price of the Company’s common stock on the date of grant.

On July 5, 2013, the Company issued 2,500 shares of Class A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.

On July 8, 2013, the Company issued 71,053 shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services, of which 20,000 shares vested immediately and the remaining 510,526,316 shares will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock was $497,368 based on the closing price of the Company’s common stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares.

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

On July 19, 2013, the Company issued ~~2,500,000 shares~~250 shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $23,000 short term promissory note. The total fair value of the common stock was $4,250 based on the closing price of the Company’s common stock on the date of grant.

On July 31, 2013, the Company issued ~~3,000,000 shares~~300 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan ~~origination~~ origination cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $4,200 based on the closing price of the Company’s common stock on the date of grant.

On August 2, 2013, the Company issued ~~3,000,000 shares~~300 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan ~~origination~~ origination cost in consideration for a $32,000 short term promissory note. The total fair value of the common stock was $5,100 based on the closing price of the Company’s common stock on the date of grant.

~~F-16~~On August 7, 2013, the Company granted 250 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $24,000 short term promissory note. The total fair value of the common stock was $4,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November 13, 2013.

On August 12, 2013, the Company issued 500 shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination cost in consideration for a $51,000 short term promissory note. The total fair value of the common stock was $7,000 based on the closing price of the Company’s common stock on the date of grant.

On August 20, 2013, the Company granted 250 shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock was $3,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November 13, 2013.

On August 27, 2013, the Company granted 125 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $12,500 short term promissory note. The total fair value of the common stock was $1,500 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November 13, 2013.

On September 7, 2013, the Company granted 600 shares of Class A Common Stock to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $65,000 short term promissory note. The total fair value of the common stock was $6,600 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November 13, 2013.

On April 23, 2014, the Company granted 350 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $35,000 short term promissory note. The total fair value of the common stock was $1,050 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.

On April 24, 2014, the Company granted 1,000 shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for a $150,000 short term promissory note. The total fair value of the common stock was $3,000 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.

On May 7, 2014, the Company granted 1,000 shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for a $125,000 short term promissory note. The total fair value of the common stock was $2,000 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.

F-22

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On ~~August~~May 728, ~~2013~~2014, the Company granted ~~2,500,000~~ 325 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $2432,~~000~~500 short term promissory note. The total fair value of the common stock was $~~4,250~~ 650 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on ~~November 13~~August 29, ~~2013~~2014.

On ~~August~~June 12, ~~2013~~2014, the Company ~~issued~~granted ~~5,000,000~~213 shares of Class A Common Stock to ~~Vivienne~~Star ~~Passley~~Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $515,000 short term promissory note. The total fair value of the common stock was $~~7,000~~ 213 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.

OnConvertible ~~August 20, 2013, the Company granted~~Class ~~2,500,000~~B ~~shares of Class A~~ Common Stock toIssuance ~~GG Mars Capital, Inc., a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration~~ for a $25,000 short term promissory note. The total fair value of the common stock was $3,250 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November 13, 2013.Services

On ~~August~~March 2722, ~~2013~~2014, the Company ~~granted 1~~issued 12,~~250~~500,000 shares of Convertible Class AB Common Stock to ~~Star~~the ~~Financial, a company owned by our CEO~~Company’s ~~family~~CEO ~~member, a related party, as a loan origination cost~~ in consideration for aproviding ~~$12,500 short term promissory note~~services. The total fair value of the common stock was $144,~~500~~737 based on the closing price of the Company’s common stock on the date of grant. ~~The shares were subsequently issued on November 13, 2013.~~

OnDebt ~~September~~Conversions 7,into ~~2013, the Company granted 6,000,000 shares of~~ Class A Common Stock ~~to GG Mars Capital, Inc., a company owned by our CEO’s family member, a related~~ ~~party,~~– asRelated a loan origination cost in consideration for a $65,000 short term promissory note. The total fair value of the common stock was $6,600 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on November 13, 2013.Parties

~~Convertible~~On April 2, 2014, the Company issued 25,000 shares of Class A Common Stock pursuant to the conversion of $25,000 ~~Class~~of Bconvertible debt held by Vivienne Passley, ~~Related~~a ~~Parties~~related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

~~The~~On ~~Company~~April ~~has 60~~7,~~000,000~~ ~~authorized shares of $0.0001 par value Convertible Class B Common Stock~~2014, ~~convertible at~~ the ~~option~~Company ofissued ~~the holder into~~ 12,500 shares of ~~the Company’s~~ Class A Common Stock onpursuant ato ~~1:1~~the ~~basis.~~conversion ~~The~~of ~~Convertible~~$18,750 ~~Class~~of Bconvertible ~~Common~~debt ~~Stock~~held ~~carries~~by ~~preferential~~Star ~~voting~~Financial ~~rights of 10~~Corporation,~~000~~ ~~votes to~~a ~~each~~related ~~Class~~party, Awhich ~~Common~~consisted ~~Stock~~entirely ~~vote~~of ~~(10,000:1)~~principal. The ~~Company~~note ~~shall~~was ~~reserve~~converted ~~and~~in ~~keep~~accordance ~~available~~with ~~out~~the ofconversion ~~its~~terms; ~~authorized but unissued shares~~therefore ofno ~~Class~~gain Aor ~~Common~~loss ~~Stock~~has ~~such~~been ~~number of shares sufficient to effect the conversions~~recognized.

On ~~March~~May 163, ~~2013~~2014, the Company issued 520,000~~,000 shares~~ shares of ~~Convertible~~ Class BA Common Stock pursuant to the ~~Company’s~~conversion ~~CEO~~of in$20,000 ~~consideration~~of ~~for~~convertible ~~providing~~debt ~~product~~held ~~development~~by ~~services.~~Star Financial Corporation, a related ~~The~~party, ~~total~~which ~~fair~~consisted ~~value~~entirely of ~~the~~principal. ~~common~~The ~~stock~~note was ~~$9,500~~converted ~~based~~in onaccordance with the ~~closing~~conversion ~~price~~terms; oftherefore ~~the~~no ~~Company’s~~gain or ~~common~~loss ~~stock~~has onbeen ~~the date of grant~~recognized.

On May 22, 2014, the Company issued 15,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Star Financial Corporation, a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On June 17, 2014, the Company issued 33,433 shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party, which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Employment Agreement

On September 6, 2012, we entered into an ~~employment~~ employment agreement with Shaun Passley, Ph.D., our Chief Executive Officer, President, and Chairman of the Board of Directors which had a term of ten (10) years. Compensation pursuant to the agreement calls for a base salary of $180,000 per year; of which $30,000 shall be payable annually in cash and $150,000 shall be payable in shares of the Company’s Common Stock at the rate of $0.006 per share, or 252,~~000,000~~500 shares per year. In addition, the Company issued 1 billion shares of Class A Common Stock to the Company’s CEO as a bonus in consideration for various services performed, and to be performed over a ten year period beginning on September 6, 2012, provided that all of the shares remain subject to forfeiture until such time, if ever, as we generate annual revenues of at least $10 million, subject to the below termination provisions. The total fair value of the common stock was $6,000,000 based on the closing price of the Company’s common stock on the date of grant, which has been presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The vesting restrictions were subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares. In the event of the termination of Dr. Passley’s employment agreement for cause by the Company or without good reason by Dr. Passley, any non-vested shares are to be ~~cancelled~~canceled and he is to be paid any consideration he is owed through the date of termination. In the event of the termination of Dr. Passley’s employment agreement for good reason (as described in the agreement) by Dr. Passley or without cause by the Company, he is due eight additional weeks of compensation and all non-vested shares vest to him immediately. In the event of the termination of Dr. Passley’s employment agreement for any other reason, he is due eight weeks of additional salary and any non-vested shares are to be ~~cancelled~~canceled.

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

F-1723

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amendments to Employment Agreement

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

Note 6 – Fair Value of Financial Instruments

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

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

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

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

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

The following schedule summarizes the valuation of financial instruments at fair value on a non-recurring basis in the balance sheets as of December 31, ~~2013~~2014 and ~~2012~~2013:

Fair Value Measurements at December 31, 2013

Fair Value Measurements at December 31, 2014

Level 1

Level 2

Level 31

Assets

Intangible assets

–

~~374~~337,~~162~~938

Goodwill

–

~~255~~374,~~460~~818

Total assets

–

~~629~~712,~~622~~756

Liabilities

Lines of credit

–

7380,~~232~~239

–

Capital leases

–

175,~~421~~889

–

Long term debts

–

1,211,929

–

Promissory notes

–

2,504,371

–

Notes payable, related parties

–

~~482~~1,~~368~~221,323

–

Convertible debts, net of discount of $109,583

–

157,294

–

Convertible debts, net of discount of $131,774

–

88,739

–

Total Liabilities

–

13,~~942~~900,~~244~~561

–

(13,~~942~~900,~~244~~561

)

~~629~~712,~~622~~756

Fair Value Measurements at December 31, 2012

Fair Value Measurements at December 31, 2013

Level 1

Level 2

Level 31

Assets

Intangible assets

–

~~821~~374,~~150~~162

Goodwill

–

255,460

Total assets

–

1629,~~076,610~~622

Liabilities

Lines of credit

–

7773,~~047~~232

–

Capital leases

–

4317,~~120~~421

–

Long term debts

–

1,~~111~~211,~~162~~929

–

Notes payable, related parties

–

22482,~~085~~368

–

Convertible debts, net of discount of $139,068

–

227,681

–

Convertible debts, net of discount of $105,300

–

157,294

Total Liabilities

–

1,~~481~~942,~~095~~244

–

(1,~~481~~942,~~095~~244

)

1629,~~076,610~~622

~~F-18~~There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the years ended December 31, 2014 and 2013.

Level 3 assets consist of intangible assets and goodwill. Impairment adjustments related to the measurement of intangible assets of $1,659,335 and $276,282 were necessary during the years ended December 31, 2014 and 2013.

F-24

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Level 3 assets consist of intangible assets and goodwill. Fair value adjustments related to the measurement of intangible assets of $276,282 and $-0- were necessary during the years ended December 31, 2013 and 2012.

Note 7 – Other Current Assets

As of December 31, ~~2013~~2014 and ~~2012~~2013 other ~~current~~ current assets included the following:

	December 31,		December 31,
	2013		2012
	2014		2013
Deferred financing costs	$	4454,~~986~~729	$	1744,~~032~~986
Prepaid expenses		–		1,743
Other receivable		–		51,250
Other receivable		51,250		–
Security deposits		9,878		9,878
Security deposits		9,878		3,252
	$	64,607	$	106,114
	$	106,114	$	22,027

The Company recognized $79422,~~123~~451 and $2579,~~849~~123 of amortization expense related to the deferred financing costs during the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Note 8 – Property and Equipment

Property and Equipment consists of the ~~following~~ following at December 31, ~~2013~~2014 and ~~2012~~2013, respectively:

	December 31,			December 31,
	2013			2012
	2014			2013
Furniture and fixtures	$	222,~~187~~006		$	2,187
Computers and equipment		~~325~~188,~~105~~613			~~318~~325,~~275~~105
Software		6715,~~986~~660			67,986
Assets held under capital leases		~~134~~17,~~800~~855			134,800
		530,078			523,248
		244,134			530,078
Less accumulated depreciation and amortization		(~~416~~137,~~668~~436	)		(~~326~~416,~~951~~668	)
	$	~~113~~106,~~410~~698		$	~~196~~113,~~297~~410

Depreciation ~~and amortization~~ expense totaled ~~$89,717~~ ~~and~~ $~~119~~55,~~628~~490 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

F-25

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 – Intangible Assets

Intangible assets consisted of the following at December 31, ~~2013~~ 2014 and ~~2012~~2013, respectively:

	Useful		~~December 31,~~		December 31,		~~December 31,~~		December 31,
Description	Life		~~2013~~		2014		~~2012~~		2013
Technology-based intangible assets - PRMI	15 Years		$	–			$	480,720
Technology-based intangible assets
Technology-based intangible assets - IntelliSys	5 Years			200,000				200,000
K9 Bytes		5 Years				42,000				42,000
Technology-based intangible assets - K9 Bytes	5 Years			42,000				42,000
MS Health		5 Years				124,000				124,000
Technology-based intangible assets – MS Health	5 Years			124,000				124,000
Intellisys		5 Years				163,333				200,000
Contracts – MS Health	6 Years			258,000				258,000
Cynergy		5 Years				1,205				–
Trade name - K9 Bytes	5 Years			22,000				22,000
Interaction		5 Years				11,892				–
Other intangible assets – MS Health	2 Years			18,000				18,000
Jadian		5 Years				37,180				–
Other intangible assets - K9 Bytes	2 Years			26,000				26,000
Strand		5 Years				9,447				–
Total intangible assets				690,000				1,170,720
Telecorp		5 Years				12,082				–
Less: accumulated amortization				(315,838	)			(349,570	)
						401,139				366,000
Intangible assets, net			$	374,162			$	821,150
Contracts
MS Health		6 Years				258,000				258,000
Interaction		6 Years				24,800				–
						282,800				258,000
Trade Name
K9 Bytes		5 Years				22,000				22,000
Cynergy		5 Years				274				–
Jadian		5 Years				24,941				–
Strand		5 Years				5,870				–
Telecorp		5 Years				4,898				–
						57,983				22,000
Other Intangible Assets
MS Health		2 Years				18,000				18,000
K9 Bytes		2 Years				26,000				26,000
Interaction		2 Years				18,800				–
						62,800				44,000
Total intangible assets						804,722				690,000
Less: accumulated amortization						(466,784	)			(315,838	)
Intangible assets, net					$	337,938			$	374,162

~~F-19~~Amortization expense on intangible assets totaled $150,946 and $446,998 for the years ended December 31, 2014 and 2013, respectively. The company also recorded intangible asset impairments of $170,257 and $276,282 for the years ended December 31, 2014 and 2013, respectively.

F-26

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amortization expense on intangible assets totaled $446,988 and $155,448 for the years ended December 31, 2013 and 2012, respectively, including impairments of $276,282 and $-0- for the years ended December 31, 2013 and 2012, respectively.

A total of $480,720 of fully amortized intangible assets were removed during the year ended December 31, 2013, of which $276,282 was due to impairments and the remaining $204,438 was the removal of the fully amortized remaining balance from the PRMI assets with the offset to accumulated amortization. As these were due to the non-performance of the assets, there was no resulting gain or loss on the removal of intangible assets.

Note 10 – Goodwill

The changes in the carrying amount of goodwill and accumulated impairment losses for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively, are as follows:

		IntelliSys, Inc.				K9 Bytes, Inc.			MS Health			Total
	IntelliSys			K9 Bytes			MS Health		Jadian		Cynergy			Telecorp		Strand		Interaction		Total
Balance, December 31, 2011:
Goodwill acquired during the year
Goodwill		$	53,588			$	87,244		$	–		$	140,832
Impairment losses		–			–			–													–
Accumulated impairment losses			–				–			–			–
Balance, December 31, 2013:		53,588			87,244			114,628													255,460
			53,588				87,244			–			140,832
Goodwill acquired during the year					–			–	399,865		65,139			428,576		206,321		508,535			1,608,436
Goodwill acquired during the year			–				–			114,628			114,628
Impairment loses		(53,588)			–			(114,628)	(318,612)		(65,139)			(428,576)		–		(508,535)			(1,489,078)
Impairment losses			–				–			–			–
Balance, December 31, 2014:	$	–		$	87,244		$	–	$	81,253	$	–		$	–	$	206,321	$	–	$	374,818
Balance, December 31, 2012:
Goodwill			53,588				87,244			114,628			255,460
Accumulated impairment losses			–				–			–			–
			53,588				87,244			114,628			255,460
Goodwill acquired during the year			–				–			–			–
Impairment losses			–				–			–			–
Balance, December 31, 2013:
Goodwill			53,588				87,244			114,628			255,460
Accumulated impairment losses			–				–			–			–
		$	53,588			$	87,244		$	114,628		$	255,460

Our subsidiaries operate as a single operating segment. The fair value of the goodwill is tested for impairment in the fourth quarter, after the annual forecasting process. Our annual forecasting ~~did~~resulted ~~not result~~ in impairment losses of $1,489,078 and $-0- during the years ended December 31, ~~2013~~2014 and ~~2012.~~2013 respectively. We will perform our next earnings forecast during the fourth quarter of ~~2013~~2015, unless events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The fair value of our goodwill was estimated using the expected present value of future cash flows.

Note 11 – Accrued Expenses

As of December 31, ~~2013~~2014 and ~~2012~~2013 accrued ~~expenses~~ expenses included the following:

	December 31,		December 31,
	2013		2012
	2014		2013
Accrued interest	$	2863,~~628~~697	$	1928,~~509~~628
Accrued interest, related parties		28127,~~741~~770		428,~~592~~741
Accrued payroll and payroll taxes		1623,~~610~~769		1916,~~980~~610
Other accrued expenses		60560		4860
	$	74215,~~039~~796	$	4474,~~129~~039

F-2027

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 – Line of Credit

Lines of credit consisted of the following at December 31, ~~2013~~2014 and ~~2012~~2013, respectively:

	December 31,			December 31,
	2013			2012
	2014			2013
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.	$	4947,~~508~~898		$	49,~~606~~507
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.		1814,~~087~~786			1918,~~641~~087
Line of credit of $40,000 from Dell Business Credit available for the purchase of Dell products, such as computer and software equipment. The outstanding balance on the line of credit bears interest at a rate of 26.99%. Variable payments are due monthly.		5,~~637~~305			75,~~800~~637
Total line of credit		73,232			77,047
Line of credit of $25,000 from Bank of America. The outstanding balance on the line of credit bears interest at a rate of 4.25%. Variable payments are due monthly. A total of $24,500 was acquired with the acquisition of Telecorp.		12,250			–
Less: current portion		(73,232	)		(77,047	)
Total line of credit		80,239			73,232
Less: current portion		(80,239	)		(73,232	)
Line of credit, less current portion	$	–		$	–

Note 13 – Capital Lease Obligations Payable

The Company leases certain equipment under agreements that are classified as capital leases as follows:

Lease #1 - Commenced on March 12, 2010 ~~with~~ with monthly lease payments of $2,455 and two months paid in advance, and the remaining payments paid over the following 43 months. The term of this lease ended on March 12, 2014

Lease #2 – Commenced on ~~March~~January 1612, ~~2010~~ 2012 with monthly lease payments of $~~2,258~~480 over the ~~following~~next 3648 months~~. The lease was terminated on April 16~~, ~~2013~~ and ~~the~~a ~~equipment was~~bargain ~~purchased~~purchase ~~pursuant~~price toof ~~the~~$1 ~~mutual~~at ~~release~~the ~~and~~end ~~final payment~~ of ~~$5,500~~the lease.

~~Lease~~The #3cost –of ~~Commenced~~equipment onunder ~~January~~capital ~~12,~~leases ~~2012~~is ~~with~~included ~~monthly~~in ~~lease~~the ~~payments~~Balance ofSheets ~~$480~~as ~~over~~property ~~the~~and ~~next~~equipment 48and ~~months~~was $17,855 and a$134,800 ~~bargain~~at ~~purchase~~December ~~price~~31, 2014 and 2013, respectively. Accumulated amortization of the leased equipment was $110,713 and $124,087 at ~~the~~December ~~end~~31, 2014 and 2013, respectively. Amortization of ~~the~~assets ~~lease~~under capital leases is included in depreciation and amortization expense.

The ~~cost~~future ofminimum ~~equipment~~lease ~~under~~payments ~~capital leases~~required isunder ~~included in~~ the ~~Balance~~capital ~~Sheets~~leases ~~as property~~ and ~~equipment~~the ~~and~~present ~~was~~value ~~$134,800 and $134,800 at December 31, 2013 and 2012, respectively. Accumulated amortization~~ of the ~~leased~~net ~~equipment~~minimum ~~was~~lease ~~$124,087~~payments ~~and~~as ~~$108,090~~of at December 31, ~~2013 and 2012~~2014, ~~respectively.~~are ~~Amortization of~~as ~~assets under capital leases is included in depreciation and amortization expense.~~follows:

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2013, are as follows:

Twelve Months
Ending
December 31,	Amount
2015		5,890
Total minimum payments	$	5,890
Less: amount representing interest		(766	)
Present value of net minimum lease payments		5,124
Less: Current maturities of capital lease obligations		(5,124	)
Long-term capital lease obligations	$	0

Twelve Months
Ending
December 31,	Amount
2014	$	13,232
2015		5,757
2016		433
Total minimum payments	$	19,422
Less: amount representing interest		(2,001	)
Present value of net minimum lease payments		17,421
Less: Current maturities of capital lease obligations		(17,421	)
Long-term capital lease obligations	$	–

F-28

F-21

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 – Notes Payable, Related Parties

Notes payable, related parties consist of the following at December 31, ~~2013~~2014 and ~~2012~~2013, respectively:

	December 31,		December 31,
	2014		2013
	2013		2012
On various dates, the Company’s CEO advanced and repaid short term loans to the Company. A total of $77,879 and $209,380 was advanced and repaid during the years ending December 31, 2014 and 2013, respectively.	$	–	$	–
On various dates the Company’s CEO advanced and repaid funds to the Company at a 15% interest rate, due on demand. A total of $209,380 was advanced and repaid by the CEO during the year ended December 31, 2013, and total proceeds and repayments were $349,560 and $411,073, respectively during the year ended December 31, 2012.	$	–	$	–
Originated July 28, 2014, an unsecured $37,500 promissory note payable, including a $7,500 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 15, 2014. The note also carried a liquidated damages fee of $1,000 upon default, which was amended and removed on September 19, 2014.		37,500		–
Originated November 1, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on March 7, 2014. In addition, a loan origination fee of $25,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default.		125,000		–
Originated August 1, 2014, an unsecured $36,000 promissory note payable, including an $8,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 3, 2014. The note also carried a liquidated damages fee of $1,000 upon default, which was amended and removed on September 19, 2014.		36,000		–
Originated October 15, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $500 upon default.		18,000		–
Originated August 21, 2014, an unsecured $12,500 promissory note payable, including a $2,500 loan origination fee, owed to L & F Lawn Service, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 21, 2014. The note also carried a liquidated damages fee of $1,000 upon default.		12,500		–
Originated September 7, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on February 7, 2014. In addition, a loan origination fee of $10,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 6,000,000 shares of Series A Common Stock with a fair market value of $6,600 was granted as consideration for the loan on September 7, 2013 and the shares were subsequently issued on November 13, 2013.		65,000		–
Originated August 26, 2014, an unsecured $57,000 promissory note payable, including a $12,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default.		57,000		–
Originated August 20, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 20, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $3,250 was granted as consideration for the loan on August 20, 2013 and the shares were subsequently issued on November 13, 2013. Currently in default.		25,000		–
Originated September 2, 2014, an unsecured $69,000 promissory note payable, including a $14,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default.		69,000		–
Originated August 12, 2013, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on February 15, 2014. In addition, a loan origination fee of $6,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 5,000,000 shares of Series A Common Stock with a fair market value of $7,000 was issued as consideration for the loan on August 12, 2013. The note was subsequently exchanged for a convertible note on April 2, 2014 and $58,433, consisting of $51,000 of principal, $4,933.33 of accrued interest and $2,500 of liquidated damages, was converted in exchange for 584,333,745 shares of common stock in complete satisfaction of the debt.		51,000		–
Originated September 22, 2014, an unsecured $43,750 promissory note payable, including an $8,750 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default.		43,750		–
Originated July 19, 2013, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was issued as consideration for the loan on July 19, 2013.		23,000		–
Originated June 30, 2014, an unsecured $20,000 promissory note payable, including a $3,500 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 30, 2014. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014.		20,000		–
Originated June 12, 2014, an unsecured $21,250 promissory note payable, including a $4,250 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on October 12, 2014. In addition, a loan origination fee consisting of 2,125,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014.		21,250		–

F-2229

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Originated August 27, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 27, 2014. In addition, a loan origination fee of $2,500 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 1,250,000 shares of Series A Common Stock with a fair market value of $1,500 was granted as consideration for the loan on August 27, 2013 and the shares were subsequently issued on November 13, 2013.	12,500	–
Originated June 3, 2014, an unsecured $5,000 promissory note payable, including a $1,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carried a 15% interest rate, matures on December 3, 2014. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014.	5,000	–
Originated August 7, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 20, 2014. In addition, a loan origination fee of $4,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was granted as consideration for the loan on August 7, 2013 and the shares were subsequently issued on November 13, 2013. Currently in default.	24,000	–
Originated June 3, 2014, a $25,000 unsecured promissory note payable, including a $4,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carried a 15% interest rate, matures on December 3, 2014. The note also carries a liquidated damages fee of $1,000 upon default, which was amended and removed on September 19, 2014.	25,000	–
Originated August 2, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 17, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 3,000,000 shares of Series A Common Stock with a fair market value of $5,100 was issued as consideration for the loan on August 2, 2013. Currently in default.	32,000	–
Originated May 28, 2014, an unsecured $32,500 promissory note payable, including a $7,500 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on September 28, 2014. In addition, a loan origination fee consisting of 3,250,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014.	32,500	–
Originated July 31, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 3,000,000 shares of Series A Common Stock with a fair market value of $4,200 was issued as consideration for the loan on July 31, 2013.	32,000	–
Originated May 7, 2014, a $125,000 unsecured promissory note payable, including a $25,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 7, 2014. In addition, a loan origination fee consisting of 10,000,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $12,500 upon default, which was amended and removed on September 19, 2014.	125,000	–
Originated June 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $2,000 was issued as consideration for the loan on June 12, 2013, and is being amortized on a straight line basis over the life of the loan.	10,000	–
Originated April 24, 2014, a $150,000 unsecured promissory note payable, including a $30,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on June 26, 2014. In addition, a loan origination fee consisting of 10,000,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $10,000 upon default, which was amended and removed on September 19, 2014.	150,000	–
Originated May 16, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 1, 2015. In addition, a loan origination fee of $2,000 was issued as consideration for the loan on May 16, 2013, and is being amortized on a straight line basis over the life of the loan. On December 31, 2013, the note holder sold and assigned the debt to Magna Group, LLC. The Company subsequently agreed to exchange the $14,000 of principal and $875 of accrued interest for a convertible note. The assigned note was combined with the assigned note, carrying an origination date of April 1, 2013 for a combined convertible note of $35,028. The assigned principal and interest of $35,028 was subsequently converted to a total of 216,806,667 shares of common stock over various dates from January 7, 2014 to February 6, 2014 in complete satisfaction of the debt.	–	–
Originated April 23, 2014, an unsecured $35,000 promissory note payable, including a $7,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on August 23, 2014. In addition, a loan origination fee consisting of 3,500,000 shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014.	35,000	–
Originated April 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 12, 2015. In addition, a loan origination fee of $7,000 was issued as consideration for the loan on April 12, 2013, and is being amortized on a straight line basis over the life of the loan.	57,000	–
Originated March 28, 2014, an unsecured $25,000 promissory note payable, including a $5,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 28, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock valued at $2,390 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014.	25,000	–

F-2330

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Originated April 1, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 1, 2015. In addition, a loan origination fee of $3,000 was issued as consideration for the loan on April 1, 2013, and is being amortized on a straight line basis over the life of the loan. On December 31, 2013, the note holder sold and assigned the debt to Magna Group, LLC. The Company subsequently agreed to exchange the $19,000 of principal and $153 of accrued interest, and a $1,000 loan origination cost for a convertible note. The assigned note was combined with the assigned note, carrying an origination date of May 16, 2013 for a combined convertible note of $35,028. The assigned principal and interest of $35,028 was subsequently converted to a total of 216,806,667 shares of common stock over various dates from January 7, 2014 to February 6, 2014 in complete satisfaction of the debt.		–			–
Originated March 28, 2014, an $18,750 unsecured promissory note payable, including a $3,750 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 28, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock valued at $1,594 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $7,000 upon default, which was amended and removed on September 19, 2014.		18,750			–
Originated October 9, 2012, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on July 15, 2013. In addition, a loan origination fee, consisting of 1,088,957 shares of Series A Common Stock with a fair market value of $6,630 was issued as consideration for the loan on October 9, 2012.		–			13,000
Originated March 26, 2014, a $37,500 unsecured promissory note payable, including a $7,500 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 26, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock valued at $2,928 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $1,500 upon default, which was amended and removed on September 19, 2014.		37,500			–
Originated October 9, 2012, unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matures on July 15, 2013. In addition, a loan origination fee, consisting of 144,928 shares of Series A Common Stock with a fair market value of $884 was issued as consideration for the loan on October 9, 2012. Currently in default.		2,000			2,000
Originated March 26, 2014, an unsecured $25,000 promissory note payable, including a $5,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 26, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock valued at $2,928 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $2,500 upon default, which was amended and removed on September 19, 2014.		25,000			–
Unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matured on July 31, 2007. Currently in default.		5,868			7,085
Originated March 7, 2014, an unsecured $30,000 promissory note payable, including a $6,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 7, 2014. In addition, a loan origination fee consisting of 3,000,000 shares of Convertible Series C Preferred Stock valued at $2,912 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $1,500 upon default, which was amended and removed on September 19, 2014.		30,000			–
Total notes payable, related parties		482,368			22,085
Originated March 7, 2014, a $22,000 unsecured promissory note payable, including a $7,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 7, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock valued at $1,942 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $7,000 upon default, which was amended and removed on September 19, 2014.		22,000			–
Less: current portion		(397,368	)		(22,085	)
Originated February 22, 2014, a $100,000 unsecured promissory note payable, including a $25,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on April 30, 2014. In addition, a loan origination fee consisting of 15,000,000 shares of Convertible Series C Preferred Stock valued at $14,266 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $35,000 upon default, which was amended and removed on September 19, 2014.		100,000			–
Notes payable, related parties, less current portion	$	85,000		$	–
Originated February 21, 2014, an unsecured $75,000 promissory note payable, including a $15,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on April 30, 2014. In addition, a loan origination fee consisting of 10,000,000 shares of Convertible Series C Preferred Stock valued at $9,562 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $25,000 upon default, which was amended and removed on September 19, 2014.		75,000			–

~~The Company recorded interest expense on notes payable to related parties in the amounts of $26,416 and $41,417 during the years ended December~~ F-31~~, 2013 and 2012, respectively.~~

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Originated February 8, 2014, an unsecured $13,000 promissory note payable, including a $3,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 30, 2014. In addition, a loan origination fee consisting of 1,000,000 shares of Convertible Series C Preferred Stock valued at $1,193 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014.	13,000	–

Originated February 7, 2014, a $26,000 unsecured promissory note payable, including a $6,000 loan origination fee, owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 30, 2014. In addition, a loan origination fee consisting of 2,000,000 shares of Convertible Series C Preferred Stock valued at $2,385 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014.	26,000	–

Originated January 15, 2014, an unsecured $43,000 promissory note payable, including a $10,000 loan origination fee, owed to Star Financial, a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on March 20, 2014. In addition, a loan origination fee consisting of 5,000,000 shares of Convertible Series C Preferred Stock valued at $6,465 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014.	43,000	–

Originated November 1, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on March 7, 2014. In addition, a loan origination fee of $25,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carries a liquidated damages fee of $2,500 upon default. As disclosed in Note 10, pursuant to a settlement agreement, dated February 12, 2014, the $125,000 note, along with $8,264 of accrued interest, was sold and assigned to IBC Funds, LLC and was subsequently converted to stock as part of a court order on February 14, 2014 under Section 3(a)(10) of the Securities Act of 1933.	–	125,000

Originated October 15, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan. The note also carried a liquidated damages fee of $500 upon default, which was amended and removed on September 19, 2014.	18,000	18,000

Originated September 7, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on February 7, 2014. In addition, a loan origination fee of $10,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 6,000,000 shares of Series A Common Stock with a fair market value of $6,600 was granted as consideration for the loan on September 7, 2013 and the shares were subsequently issued on November 13, 2013. As disclosed in Note 10, pursuant to a settlement agreement, dated February 12, 2014, the $65,000 balance of this note, along with $7,528 of accrued interest, was sold and assigned to IBC Funds, LLC and was subsequently converted to stock as part of a court order on February 14, 2014 under Section 3(a)(10) of the Securities Act of 1933.	–	65,000

F-32

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Originated August 20, 2013, unsecured promissory note payable owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 20, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $3,250 was granted as consideration for the loan on August 20, 2013 and the shares were subsequently issued on November 13, 2013. Currently in default.	25,000	25,000

Originated August 12, 2013, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on February 15, 2014. In addition, a loan origination fee of $6,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 5,000,000 shares of Series A Common Stock with a fair market value of $7,000 was issued as consideration for the loan on August 12, 2013. The note, consisting of $51,000 of principal, $4,933 of accrued interest and $2,500 of liquidated damages, was subsequently sold and assigned to a third party and exchanged for a convertible note on April 2, 2014 and the $58,433 was converted in exchange for 584,333,745 shares of common stock in complete satisfaction of the debt.	–	51,000

Originated July 19, 2013, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was issued as consideration for the loan on July 19, 2013. The note, consisting of $23,000 of principal and $1,153 of accrued interest, was subsequently sold and assigned to a third party and exchanged for a convertible note on February 4, 2014.	–	23,000

Originated August 27, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 27, 2014. In addition, a loan origination fee of $2,500 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 1,250,000 shares of Series A Common Stock with a fair market value of $1,500 was granted as consideration for the loan on August 27, 2013 and the shares were subsequently issued on November 13, 2013. As disclosed in Note 10, pursuant to a settlement agreement, dated February 12, 2014, the $12,500 note, along with $3,519 of accrued interest, was sold and assigned to IBC Funds, LLC and was subsequently converted to stock as part of a court order on February 14, 2014 under Section 3(a)(10) of the Securities Act of 1933.	–	12,500

Originated August 7, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 20, 2014. In addition, a loan origination fee of $4,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was granted as consideration for the loan on August 7, 2013 and the shares were subsequently issued on November 13, 2013. Currently in default.	24,000	24,000

F-33

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Originated August 2, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 17, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 3,000,000 shares of Series A Common Stock with a fair market value of $5,100 was issued as consideration for the loan on August 2, 2013. Currently in default.	32,000	32,000

Originated July 31, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $5,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 3,000,000 shares of Series A Common Stock with a fair market value of $4,200 was issued as consideration for the loan on July 31, 2013. The note, consisting of $32,000 of principal and $5,000 of accrued interest, was subsequently sold and assigned to a third party and exchanged for a convertible note on February 19, 2014.	–	32,000

Originated June 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $2,000 was issued as consideration for the loan on June 12, 2013, and is being amortized on a straight line basis over the life of the loan. The note, consisting of $10,000 of principal and $338 of accrued interest, was subsequently sold and assigned to a third party and exchanged for a convertible note on February 4, 2014.	–	10,000

Originated April 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 12, 2015. In addition, a loan origination fee of $7,000 was issued as consideration for the loan on April 12, 2013, and is being amortized on a straight line basis over the life of the loan. As disclosed in Note 10, pursuant to a settlement agreement, dated February 12, 2014, the $57,000 note, along with $9,261 of accrued interest, was sold and assigned to IBC Funds, LLC and was subsequently converted to stock as part of a court order on February 14, 2014 under Section 3(a)(10) of the Securities Act of 1933.	–	57,000

Originated October 9, 2012, unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matures on July 15, 2013. In addition, a loan origination fee, consisting of 144,928 shares of Series A Common Stock with a fair market value of $884 was issued as consideration for the loan on October 9, 2012. Currently in default.	2,868	2,000

Unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matured on July 31, 2007. Principal of $5,000 was repaid during the first quarter of 2014. Currently in default.	–	5,868

Originated August 11, 2014, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a zero percent (0%) interest rate, matures on December 1, 2014. In addition, a loan origination fee of $3,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan, as well as, a loan origination fee, consisting of 2,500,000 shares of Series A Common Stock with a fair market value of $4,250 was issued as consideration for the loan on July 19, 2013.	3,705	–

F-34

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Originated October 20, 2014, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on May 20, 2014. In addition, a loan origination fee of $1,500 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan.		5,000

Originated December 17, 2014, an unsecured $9,000 promissory note payable, including a $2,500 loan origination fee, owed to L & F Lawn Service, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on December 17, 2015.		9,000

Originated November 9, 2014, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matures on June 9, 2015. In addition, a loan origination fee of $12,000 was issued as consideration for the loan, and is being amortized on a straight line basis over the life of the loan.		60,000
Total notes payable, related parties		1,221,323			482,368
Less: current portion		(1,221,323	)		(397,368	)
Notes payable, related parties, less current portion	$	–		$	85,000

The Company recorded interest expense on notes payable to related parties in the amounts of $138,636 and $127,770 during the years ended December 31, 2014 and 2013, respectively. The Company recorded accrued interest of $127,770 and $28,741 during the years ended December 31, 2014 and 2013, respectively.

Note 15 – Convertible Debts

Convertible debts consist of the following at December 31, ~~2013~~2014 and ~~2012~~2013, respectively:

	December 31,		December 31,
	2013		2012
	2014		2013
Unsecured $33,000 convertible promissory note originated on November 13, 2013, including an Original Issue Discount (“OID”) of $3,000, carries a 12% interest rate (“Second JMJ Note”), matures on November 12, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The unamortized OID is $2,604 at December 31, 2013. On July 11, 2014, the Company and JMJ Financial amended this note. The amendment specifies that due to the delinquent Form 10-K for the year ended December 31, 2013 and the Form 10-Q for the three months ended March 31, 2014, any future borrowings shall only be made by mutual agreement of both the borrow and lender.	$	33,000	$	–
Originated April 2, 2014, an unsecured $51,000 convertible promissory note, carried a 15% interest rate, matured on August 1, 2014, (“First Vivienne Passley Note”) owed to Vivienne Passley, a related party. The convertible promissory note was issued in exchange for a promissory note originally issued on August 12, 2013 to the same debt holder, which did not carry conversion terms. The principal and accrued interest was convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.0001 per share. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The debt modification resulted in a loss on debt modifications, related party of $172,864. The assigned principal of $51,000, interest of $4,933 and liquidated damages incurred prior to assignment of $2,500 was subsequently converted to a total of 584,333,745 shares of common stock over various dates from April 2, 2014 to June 17, 2014 in complete satisfaction of the debt.	$	–	$	–
Unsecured $35,028 convertible promissory note originated on December 31, 2013, carries an 12% interest rate (“First Magna Group Note”) owed to Magna Group, LLC. Two notes totaling $33,000 of principal and $1,028 of accrued interest were acquired from and assigned by Star Financial on December 31, 2013 prior to being exchanged for the convertible note, including $1,000 of loan origination costs. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,028 was subsequently converted to a total of 216,806,667 shares of common stock over various dates from January 7, 2014 to February 6, 2014 in complete satisfaction of the debt.		35,028		–
Originated February 19, 2014, an unsecured $37,700 convertible promissory note, carries a 12% interest rate, matures on February 17, 2015, (“Third Magna Group Note”) owed to Magna Group, LLC, consisting of a promissory note acquired and assigned from Star Financial Corporation, a related party, consisting of $32,000 of principal and $5,700 of accrued interest. The acquired promissory note did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was subsequently converted to a total of 377,000,000 shares of common stock over various dates from March 10, 2014 to March 19, 2014 in complete satisfaction of the debt.		–		–

F-2435

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unsecured $14,838 convertible promissory note carries an 11% interest rate (“First GG Mars Note”) owed to GG Mars Capital, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note was acquired from and assigned by another independent lender on August 15, 2013 prior to being exchanged for the convertible note. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for the one hundred and twenty (120) days prior to the conversion date, or $0.00001 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of $14,838 was immediately converted at the election of the note holder into 46,856,526 shares.	$	–	$	–
Originated February 4, 2014, an unsecured $35,491 convertible promissory note, carries a 12% interest rate, matures on February 4, 2015, (“Second Magna Group Note”) owed to Magna Group, LLC, consisting of two notes acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $33,000 of principal and $2,491 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,491 was subsequently converted to a total of 236,606,400 shares of common stock over various dates from February 13, 2014 to February 27, 2014 in complete satisfaction of the debt.		–		–
Unsecured $56,900 convertible promissory note, including an Original Issue Discount (“OID”) of $6,900, carries an 8% interest rate (“First St. George Note”), matures on May 30, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The unamortized OID is $3,791 at December 31, 2013. Currently in default.		56,900		–
Unsecured $33,000 convertible promissory note originated on November 13, 2013, including an Original Issue Discount (“OID”) of $3,000, carries a 12% interest rate (“Second JMJ Note”), matures on November 12, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The unamortized OID is $2,604 at December 31, 2013. On July 11, 2014, the Company and JMJ Financial amended this note. The amendment specifies that due to the previously delinquent SEC filings, any future borrowings shall only be made by mutual agreement of both the borrower and lender.		16,125		33,000
Unsecured $42,500 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on June 20, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares.		42,500		–
Unsecured $35,028 convertible promissory note originated on December 31, 2013, carries a 12% interest rate (“First Magna Group Note”) owed to Magna Group, LLC. Two notes totaling $33,000 of principal and $1,028 of accrued interest were acquired from and assigned by Star Financial on December 31, 2013 prior to being exchanged for the convertible note, including $1,000 of loan origination costs. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the lowest trading price of the Company’s common stock for the five (5) days prior to the conversion date, or $0.00004 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal and interest of $35,028 was subsequently converted to a total of 216,806,667 shares of common stock over various dates from January 7, 2014 to February 6, 2014 in complete satisfaction of the debt.		–		35,028
Unsecured $53,000 convertible promissory note carries an 8% interest rate (“Seventh Asher Note”), matures on May 21, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares.		53,000		–
Unsecured $56,900 convertible promissory note, including an Original Issue Discount (“OID”) of $6,900, carries an 8% interest rate (“First St. George Note”), matures on May 30, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted $15,000 of outstanding principal into 125,000,000 shares pursuant to debt conversion on March 7, 2014.The unamortized OID is $3,791 at December 31, 2013. During the 2nd quarter of 2014, a total of $77,375 of principal and another $7,512 of accrued interest was added to the debt due to default provisions, including $25,000 of principal due to a Late Clearing Adjustment penalty. Currently in default.		44,549		56,900
Unsecured $33,000 convertible promissory note originated on June 12, 2013, including an Original Issue Discount (“OID”) of $3,000, carries a 12% interest rate (“First JMJ Note”), matures on June 11, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The principal of $33,000 and $333 of accrued interest on the note was subsequently repaid in full on August 12, 2013 & thus the 12% interest was not assessed per the terms of the note.		–		–
Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into another 40,000,000 shares pursuant to debt conversion on August 7, 2013.		46,449		190,849

F-2536

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unsecured $56,900 convertible promissory note, including an Original Issue Discount (“OID”) of $4,400 and legal fees of $2,500, carries an 8% interest rate (“First Tonaquint Note”), matures on May 31, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted $5,000 of outstanding principal into 4,504,505 shares pursuant to debt conversion on March 12, 2013, $10,000 of principal into 15,151,515 shares on April 2, 2013, $10,000 of principal into 15,873,016 shares on April 24, 2013, $8,000 of principal into 22,222,222 shares on July 10, 2013, $13,000 of principal into 15,476,190 shares on July 30, 2013 and another $10,900 of principal and $3,764 of accrued interest into 19,551,267 shares on August 19, 2013.		–			56,900
Unsecured $42,500 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on June 20, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted $41,000 of outstanding principal into 341,666,667 shares pursuant to debt conversion on March 25, 2014, and $2,750, consisting of $1,500 of principal and $1,250 of interest was repaid in cash during the second quarter of 2014.		–			42,500
Unsecured $16,500 convertible promissory note carries an 8% interest rate (“Sixth Asher Note”), matures on September 14, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to forty-one percent (41%) of the average of the three lowest trading bid prices of the Company’s common stock for the ninety (90) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted a total of $16,500 of principal and $660 of interest into a total of 40,857,143 shares in full settlement of the outstanding debt on June 24, 2013.		–			16,500
Unsecured $53,000 convertible promissory note carries an 8% interest rate (“Seventh Asher Note”), matures on May 21, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted $27,000 of outstanding principal into 150,000,000 shares pursuant to debt conversion on March 3, 2014, and $28,120, consisting of $26,000 of principal and $2,120 of accrued interest into 200,857,143 shares pursuant to debt conversion on March 5, 2014 in complete satisfaction of the debt.		–			53,000
Unsecured $27,500 convertible promissory note carries an 8% interest rate (“Fifth Asher Note”), matures on July 18, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to forty-one percent (41%) of the average of the three lowest trading bid prices of the Company’s common stock for the ninety (90) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The promissory note, consisting of $27,500 of principal and $21,716 of accrued interest and financing costs, was repaid in full with cash on April 15, 2013.		–			27,500
Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 50,000,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 80,000,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into 40,000,000 shares pursuant to debt conversion on August 7, 2013, $18,750 into 125,000,000 shares pursuant to debt conversion on April 7, 2014, $20,000 into 200,000,000 shares pursuant to debt conversion on May 3, 2014, and $15,000, consisting of $7,699 of principal and $7,301 of interest into 150,000,000 shares pursuant to the final debt conversion on May 22, 2014.		–			46,449
Unsecured $32,500 convertible promissory note carries an 8% interest rate (“Fourth Asher Note”), matured on April 26, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the five lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder subsequently converted a total of $32,500 of principal and $1,300 of interest into a total of 24,461,538 shares in settlement of the outstanding debt on March 4, 2013 and March 6, 2013.		–			32,500
Unsecured $43,000 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on September 5, 2015. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest trading bid prices of the Company’s common stock for the thirty (30) trading days prior to the conversion date. The note carries a twenty two percent (22%) interest rate in the event of default.		43,000			–
Unsecured $42,500 convertible promissory note carries an 8% interest rate (“Third Asher Note”), matured on March 29, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder subsequently converted a total of $42,500 of principal and $1,700 of interest into a total of 23,573,529 shares of common stock in settlement of the outstanding debt between January 3, 2013 and February 26, 2013.		–			42,500
Total convertible debts		266,877			366,749
Less: unamortized discount on beneficial conversion feature		(103,188	)		(139,068	)
Less: unamortized OID		(6,395	)		–
Convertible debts		157,294			227,681
Less: current maturities of convertible debts		(115,128	)		(74,708	)
Long term convertible debts	$	42,166		$	152,973

F-2637

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recognized interest expense in the amount of $38,614 and $20,965 for the years ended December 31, 2013 and 2012, respectively related to convertible debts.


Unsecured $33,000 convertible promissory note carries an 8% interest rate (“Eighth Asher Note”), matures on July 22, 2015. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest trading bid prices of the Company’s common stock for the thirty (30) trading days prior to the conversion date. The note carries a twenty two percent (22%) interest rate in the event of default.		33,000			–

Originated November 6, 2014, an unsecured $33,600 convertible promissory note, carries a 8% interest rate and matures on November 5, 2015 owed to LG Capital. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s issued and outstanding shares.		33,600			–

Originated November 6, 2014, an unsecured $50,238.63 convertible promissory note, carries a 8% interest rate, matures on November 6, 2015, (“LG Note”) owed to LG Capital, consisting of one note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $43,000 of principal and $7,238.63 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the convertible note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty-five percent (65%) of the average of the 2 lowest trading price of the Company’s common stock for the twelve (12) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 9.9% of the Company’s issued and outstanding shares.		50,239			–
Total convertible debts		220,513			266,877
Less: unamortized discount on beneficial conversion feature		(131,774	)		(103,188	)
Less: unamortized OID		–			(6,395	)
Convertible debts		88,739			157,294
Less: current maturities of convertible debts		(88,739	)		(115,128	)
Long term convertible debts	$	–		$	42,166

The Company recognized interest expense in the amount of $33,393 and $28,628 for the years ended December 31, 2014 and 2013, respectively related to convertible debts. The Company recorded accrued interest of $3,573 and $28,628 during the years ended December 31, 2014 and 2013, respectively.

In addition, the Company recognized and measured the embedded beneficial conversion feature present in the convertible debts by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment date using the effective conversion price of the convertible debt. This intrinsic value is limited to the portion of the proceeds allocated to the convertible debt.

The aforementioned accounting treatment ~~resulted~~ resulted in a total debt discount equal to $~~195~~131,~~652~~774 and $~~277~~195,~~323~~652 during the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively. The discount is amortized on a straight line basis from the dates of issuance until the stated redemption date of the debts, as noted above.

The convertible notes, consisting of total original face values of $440,849 from Star Financial, $302,000 from Asher Enterprises, $56,900 from Tonaquint Inc. and $33,000 from JMJ Financial, Inc., $56,900 from St. George Investments, $35,028 from Magna Group, LLC and $14,838 from the related party, GG Mars Capital, Inc., that created the beneficial conversion feature carry default provisions that place a “maximum share amount” on the note holders that can be owned as a result of the conversions to common stock by the note holders is 9.99% and 4.99%, respectively, of the issued and outstanding shares of Epazz.

During the years ended December 31, ~~2013 and~~2014 ~~2012~~and 2013, the Company recorded debt amortization expense in the amount of $~~237~~518,~~065~~465 and $~~155~~237,~~759~~065, respectively, attributed to the ~~aforementioned~~ aforementioned debt discount, including $6,916 of amortization on the $17,300 OID during the year ended December 31, 2013.

During year ended December 31, ~~2013~~2014, the ~~Company~~ Company issued a total of ~~462~~43,~~766,951~~448 shares pursuant to debt conversions in settlement of $343,540, consisting of $336,094 of outstanding principal and $7,446 of unpaid interest, including ~~220~~22,000~~,000~~ shares pursuant to debt conversion in settlement of $144,400 of outstanding principal owed to a related party (“Star Convertible Note”) and 464,~~856,526~~686 shares pursuant to debt conversion in settlement of $14,838 of outstanding principal owed to a related party (“GG Mars Capital Convertible Note”). The principal and interest was converted in accordance with the conversion terms, therefore no gain or loss has been recognized. In addition, on May 27, 2013, the Company modified a related party debt and issued 141,~~239,500~~424 shares of Class A Common Stock in settlement of $14,239 of related party debt owed to Vivienne Passley, which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest. The total fair value of the common stock was $28,479 based on the closing price of the Company’s common stock on the date of grant, resulting in the recognition of a $14,240 loss on debt settlement.

During the year ended December 31, 2012, the Company issued a total of 71,292,329 shares pursuant to debt conversions in settlement of $374,228 of outstanding principal and $3,500 of unpaid interest, including 50,000,000 shares pursuant to debt conversion in settlement of $250,000 of outstanding principal owed to a related party (“Star Convertible Note”). The principal and interest was converted in accordance with the conversion terms, therefore no gain or loss has been recognized.F-38

Asher Enterprises, Inc. Convertible Notes

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

F-27

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The Company evaluated the First~~ Asher ~~Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and~~Enterprises, ~~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~~Inc. ~~The~~Convertible beneficial conversion feature discount resulting from the conversion price of $0.02603 below the market price on May 27, 2011 of $0.056 provided a value of $43,421, of which $-0- and $7,769 was amortized during the years ended December 31, 2013 and 2012, respectively.Note

On ~~June~~August 2819, ~~2011~~2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $3753,~~500~~000. The ~~Second~~Seventh Asher Note had a maturity date of ~~March~~May 3021, ~~2012~~2014, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market Price” means the average of the lowest ~~five~~three (53) 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~~00005 per share. The shares of common stock issuable upon conversion of the ~~Second~~Seventh Asher Note were restricted securities as defined in in Rule 144 promulgated under the Securities Act of 1933. The issuance of the ~~Second~~Seventh Asher Note was exempt from the registration ~~requirements~~ requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited ~~and~~ and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the ~~Second~~Seventh Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.~~01298~~0006 below the market price on ~~June~~August 2819, ~~2011~~2013 of $0.~~035~~0014 provided a value of $2239,~~108~~021, of which $-0- and $719,~~209~~014 was amortized during ~~the~~ the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

On ~~July~~September 218, ~~2012~~2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $42,500. The ~~Third~~Eighth Asher Note had a maturity date of ~~March~~June 2920, ~~2013~~2014, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.~~00009~~00005 per share. The shares of common stock issuable upon conversion of the ~~Third~~Eighth Asher Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the ~~Third~~Eighth Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the ~~Third~~Eighth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.~~00551~~0004 below the market price on ~~July~~September 218, ~~2012~~2013 of $0.~~012~~0010 provided a value of $3627,~~082~~210, of which $~~11,760~~-0- and $2410,~~322~~290 was amortized during the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

On ~~July~~October 2420, ~~2012~~2014, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $3243,~~500~~000. The ~~Fourth~~Seventh Asher Note had a maturity date of ~~April~~July 2622, ~~2013~~2015, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market Price” means the average of the lowest ~~five~~three (53) 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~~00005 per share. The shares of common stock issuable upon conversion of the ~~Fourth~~Ninth Asher Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the ~~Fourth~~Ninth Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

FThe Company evaluated the Nine Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.03330 below the market price on October 20, 2014 of $0.20 provided a value of $43,000, of which $11,258 and $-280- was amortized during the years ended December 31, 2014 and 2013, respectively.

F-39

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The~~On ~~Company~~December ~~evaluated~~3, 2014, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the ~~Fourth~~original principal amount of $33,000. The Tenth Asher Note ~~and~~had ~~determined~~a ~~that~~maturity ~~the~~date ~~shares~~of ~~issuable~~September ~~pursuant~~5, to2015, and was convertible into our common stock at the ~~conversion~~greater ~~option~~of ~~were~~(i) ~~determinate~~the ~~due~~Variable toConversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” ~~and,~~shall asmean ~~such,~~59% ~~does~~multiplied ~~not~~by ~~constitute~~the Market Price (representing a ~~derivative~~discount ~~liability~~rate asof 41%). “Market Price” means the ~~Company~~average ~~has~~of ~~obtained~~the ~~authorization~~lowest ~~from~~three a(3) ~~majority~~Trading Prices for the Common Stock during the ten (10) Trading ofDay ~~shareholders~~period ~~such~~ending ~~that~~on ~~should~~the ~~conversion~~latest ~~occur~~complete atTrading Day prior to the Conversion Date. “Fixed Conversion Price” ~~the~~shall ~~appropriate~~mean $0.00005 ~~number~~per ofshare. The shares ~~will~~of becommon ~~available or~~stock issuable ~~for~~upon ~~settlement~~conversion toof ~~occur.~~the ~~The~~Tenth ~~beneficial~~Asher ~~conversion~~Note ~~feature~~were ~~discount~~restricted ~~resulting~~securities ~~from~~as defined in Rule 144 promulgated under the ~~conversion~~Securities ~~price~~Act of $01933.~~00583 below~~ The issuance of the ~~market~~Tenth ~~price~~Asher onNote ~~July~~was ~~24,~~exempt ~~2012~~from ofthe ~~$0.0126~~registration requirements ~~provided~~of athe ~~value~~Securities Act of ~~$27,959,~~1933 pursuant to Rule 506 of ~~which~~Regulation ~~$11,751~~D ~~and~~promulgated ~~$16,208~~thereunder. The purchaser was ~~amortized~~an ~~during~~accredited ~~the~~and ~~years~~sophisticated ~~ended~~investor, ~~December~~familiar ~~31,~~with ~~2013~~our operations, and ~~2012,~~there ~~respectively~~was no solicitation.

OnThe ~~October~~Company ~~16,~~evaluated ~~2012, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in~~ the ~~original~~Tenth ~~principal amount of $27,500. The Fifth~~ Asher Note ~~had a maturity date of July 18, 2013,~~ and ~~was convertible~~determined ~~into~~that ~~our common stock at~~ the ~~greater~~shares ofissuable ~~(i)~~pursuant to the ~~Variable~~conversion ~~Conversion~~option ~~Price~~were ~~and~~determinate ~~(ii)~~due to the Fixed ~~Conversion Price. The~~ ~~“Variable~~ Conversion Price” ~~shall~~and, ~~mean~~as ~~41%~~such, ~~multiplied~~does bynot ~~the~~constitute ~~Market Price (representing~~ a ~~discount~~derivative ~~rate~~liability ofas ~~59%). “Market Price” means~~ the ~~average~~Company ofhas ~~the~~obtained ~~lowest~~authorization ~~three~~from ~~(3)~~a ~~Trading Prices for the Common Stock during the ninety (90) Trading Day period~~majority ~~ending~~of onshareholders ~~the~~such ~~latest~~that ~~complete~~should ~~Trading~~conversion ~~Day~~occur ~~prior~~at to the ~~Conversion Date. “~~Fixed Conversion Price” ~~shall~~the ~~mean~~appropriate ~~$0.00005 per~~number ~~share.~~of ~~The~~ shares ofwill ~~common~~be ~~stock~~available or issuable ~~upon~~for ~~conversion~~settlement ofto ~~the~~occur. ~~Fifth~~The ~~Asher~~beneficial ~~Note~~conversion ~~were~~feature ~~restricted~~discount ~~securities~~resulting asfrom ~~defined in Rule 144 promulgated under~~ the ~~Securities~~conversion ~~Act~~price of ~~1933~~$0.005 ~~The issuance of~~ below the ~~Fifth~~market ~~Asher~~price ~~Note~~on ~~was~~December ~~exempt~~3, ~~from~~2014 ~~the registration requirements~~ of ~~the~~$0.03 ~~Securities~~provided ~~Act~~a value of ~~1933~~$33,000, ~~pursuant to Rule 506~~ of ~~Regulation~~which D$3,348 ~~promulgated~~and ~~thereunder.~~$-0- ~~The purchaser~~ was anamortized ~~accredited~~during ~~and~~the years ~~sophisticated~~ended ~~investor~~December 31, ~~familiar~~2014 ~~with~~and ~~our operations~~2013, ~~and there was no solicitation~~respectively.

~~The~~LG ~~Company evaluated the Fifth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and~~Capital, 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 occurInc. ~~The beneficial conversion feature discount resulting from the conversion price of $0.00603~~ ~~below~~Convertible ~~the market price on October 16, 2012 of $0.008 provided a value of $27,500, of which $19,900 and $7,600 was amortized during the years ended December 31, 2013 and 2012, respectively.~~Notes

On ~~December~~November 126, ~~2012,~~ 2014, we entered into a Securities Purchase Agreement with ~~Asher~~LG ~~Enterprises~~Capital, Inc., pursuant to which we sold to ~~Asher~~LG Capital an 8% Convertible Promissory Note in the original principal amount of $1633,~~500~~600. The ~~Sixth~~First ~~Asher~~LG Capital Note had a maturity date of ~~September~~November 146, ~~2013~~2015, ~~and~~ and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 4165% multiplied by the Market Price (representing a discount rate of 5935%). “Market Price” means the average of the lowest ~~three~~two (32) Trading Prices for the Common Stock during the ~~ninety~~twelve (9012) ~~Trading~~ Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the ~~Sixth~~First ~~Asher~~LG ~~Note~~Capital were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the ~~Sixth~~First ~~Asher~~LG ~~Note~~Capital was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the ~~Sixth~~First ~~Asher~~LG ~~Note~~Capital and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.~~00518 below~~125 below the market price on ~~December~~November 126, ~~2012~~2014 of $0.~~0064~~0817 provided a value of $1633,~~500~~600, of which $155,~~364~~063 and $~~1,136~~-0- was amortized during ~~the~~ the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

On ~~August~~October 1931, ~~2013,~~ 2014, we entered into a Securities Purchase Agreement with ~~Asher~~LG ~~Enterprises~~Capital, Inc., pursuant to which we sold to ~~Asher~~LG Capital an 8% Convertible Promissory Note in the original principal amount of $5350,~~000~~239. The ~~Seventh~~Second ~~Asher~~LG Capital Note had a maturity date of ~~May~~October 2131, ~~2014~~2015, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. ~~The~~ The “Variable Conversion Price” shall mean 5965% multiplied by the Market Price (representing a discount rate of 4135%). “Market Price” means the average of the lowest ~~three~~two (32) Trading Prices for the Common Stock during the ~~ten~~twelve (1012) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the ~~Seventh~~Second ~~Asher~~LG ~~Note~~Capital were restricted securities as ~~defined~~ defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the ~~Seventh~~Second ~~Asher~~LG ~~Note~~Capital was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

FThe Company evaluated the Second LG Capital and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.21 below the market price on October 31, 2014 of $0.1667 provided a value of $50,239, of which $8,396 and $-290- was amortized during the years ended December 31, 2014 and 2013, respectively.

F-40

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluated the Seventh Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0006 below the market price on August 19, 2013 of $0.0014 provided a value of $39,021, of which $19,014 and $-0- was amortized during the years ended December 31, 2013 and 2012, respectively.

On September 18, 2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $42,500. The Eighth Asher Note had a maturity date of June 20, 2014, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the Eighth Asher Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Eighth Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the Eighth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0004 below the market price on September 18, 2013 of $0.0010 provided a value of $27,210, of which $10,290 and $-0- was amortized during the years ended December 31, 2013 and 2012, respectively.

GG Mars Capital, Inc. Convertible Note, Related Party

On August 20, 2013, we entered into a Convertible Promissory Note Agreement with GG Mars Capital, Inc. (“GG Mars”), a company owned by our CEO’s family member, pursuant to which we sold to GG Mars an 11% Convertible Promissory Note in the original principal amount of $14,838. The note was acquired from and assigned by another independent lender on August 15, 2013 prior to being exchanged for the convertible note. The First GG Mars Note was convertible into shares of common stock at the discretion of the note holder at a price equal to fifty percent (50%) of the average of the three lowest closing prices of the Company’s common stock for the one hundred and twenty (120) days prior to the conversion date, or $0.0001 per share, whichever is greater. The shares of common stock issuable upon conversion of the First GG Mars Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First GG Mars Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the First GG Mars Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.001 below the market price on August 20, 2013 of $0.0013 provided a value of $14,838, of which $~~14,838~~-0- and $~~-0-~~14,838 was amortized during the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

F-30

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Star Financial, Inc. Convertible Note, Related Party

On July 2, 2012, we modified a previously outstanding non-convertible debt of $342,321, consisting of $296,103 of principal and $46,218 of accrued interest in exchange for a Convertible Promissory Note with Star Financial Corporation (“Star”), a company owned by our CEO’s family member, pursuant to which we issued to Star a 10% Convertible Promissory Note in the original principal amount of $440,849. The modification resulted in a loss on debt modification of $98,528. The note was again modified on March 5, 2013, resulting in a loss on debt modification of $81,792. The Star Convertible Note has a maturity date of July 2, 2017, and is convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the five (5) Closing Prices for the Common Stock during the five (5) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00075 per share. The shares of common stock issuable upon conversion of the Star Convertible Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Star Convertible Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the Star Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00141 below the market price on July 2, 2012 of $0.012 provided a value of $112,382, of which $395,~~445~~653 and $6739,~~284~~445 was amortized during the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Tonaquint, Inc. Convertible Note

On September 10, 2012, we entered into a Securities Purchase Agreement with Tonaquint, Inc., pursuant to which we sold to Tonaquint an 8% Convertible Promissory Note in the original principal amount of $56,900. The First Tonaquint Note has a maturity date of May 31, 2013, and is convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the average of the lowest two (2) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009 per share. The shares of common stock issuable upon conversion of the First Tonaquint Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Tonaquint Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the First Tonaquint Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0047 below the market price on September 10, 2012 of $0.0033 provided a value of $56,900, of which $32,669 and $24,231 was amortized during the years ended December 31, 2013 and 2012, respectively.

JMJ Financial, Inc. Convertible Note

On ~~June~~November 1213, 2013, we ~~entered~~drew ~~into~~additional afunds on the June 12, 2013 Securities Purchase Agreement with JMJ Financial, Inc., (“JMJ”) pursuant to which we sold to JMJ a another 12% Convertible Promissory Note in the original principal amount of $33,000. The ~~First~~Second JMJ Note has ~~had~~ a maturity date of ~~June~~November 1112, 2014, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price, not less than $0.00009 per share. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the lowest Trading Price for the Common Stock during the twenty five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009 per share. The shares of common stock issuable upon conversion of the ~~First~~Second JMJ Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the ~~First~~Second JMJ Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the First JMJ Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00518 below the market price on June 12, 2013 of $0.0017 provided a value of $33,000, of which $33,000 and $F-~~0- was amortized during the years ended December 31, 2013 and 2012, respectively.~~41

F-31

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On November 13, 2013, we drew additional funds on the June 12, 2013 Securities Purchase Agreement with JMJ Financial, Inc., (“JMJ”) pursuant to which we sold to JMJ another 12% Convertible Promissory Note in the original principal amount of $33,000. The Second JMJ Note has a maturity date of November 12, 2014, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price, not less than $0.00009 per share. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the lowest Trading Price for the Common Stock during the twenty five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009 per share. The shares of common stock issuable upon conversion of the Second JMJ Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second JMJ Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the Second JMJ Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00024 was above the market price on November 13, 2013 and did not result in a beneficial conversion feature.

St. George Investments, Inc. Convertible Note

On September 5, 2013, we entered into a Securities Purchase Agreement with St. George Investments, Inc., (“First St. George Note”) pursuant to which we sold to St. George an 8% Convertible Promissory Note in the original principal amount of $56,900. The First St. George Note has a maturity date of May 30, 2014, and is convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the average of the two lowest Closing Bid Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the First St. George Note are restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First St. George Note is exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser is an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the First St. George Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0005 below the market price on September 5, 2013 of $0.0012 provided a value of $46,555, of which $2025,~~975~~580 and $~~-0-~~20,975 was ~~amortized~~ amortized during the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Magna Group, LLC Convertible Note

On December 31, 2013, we issued to Magna Group, LLC (“First Magna Group Note”) a 12% Convertible Promissory Note in the original principal amount of $35,028. The note was issued in exchange for two notes totaling $33,000 of principal and $1,028 of accrued interest, along with a $1,000 origination fee, that were acquired from, and assigned by, Star Financial on December 31, 2013. The First Magna Group Note has a maturity date of December 31, 2014, and is convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the lowest Trading Price for the Common Stock during the five (5) day period prior to delivery of the conversion notice. “Fixed Conversion Price” shall mean $0.00004 per share. The shares of common stock issuable upon conversion of the First Magna Group Note are restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Magna Group Note is exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser is an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the First Magna Group Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0003 below the market price on December 31, 2013 of $0.0006 provided a value of $35,028, of which $~~-0-~~35,028 and $-0- was amortized during the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

F-3242

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 – ~~Long~~Promissory ~~Term Debts~~Notes

~~Long~~Promissory ~~term~~notes ~~debts~~ consist of the following at at December 31, ~~2013~~2014 and ~~2012~~2013, respectively:

	December 31,		December 31,
	2013		2012
	2014		2013
On November 4, 2013, the Company received net proceeds of $75,381, and a direct payoff of $36,619 on the Rapid Advance Loan listed below, on a loan of $112,000 from CAN Capital Assets Servicing, Inc., (“CAN Capital #2”) bearing an effective interest rate of 53.1%, consisting of 370 daily weekday payments of $552, maturing on November 13, 2014. The loan is collateralized with MS Health’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.	$	98,984	$	–
Can Capital Loan – K9 Bytes: On February 20, 2014, the Company received a loan of $22,283 from WebBank, c/o CAN Capital Assets Servicing, Inc (“CAN Capital”) bearing an effective interest rate of 58.7%, consisting of 308 daily weekday payments of $130, maturing on December 25, 2014. The loan is collateralized with K9 Bytes’ receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. On July 10, 2014, we amended this loan agreement to increase the loan balance to $46,368, consisting of additional proceeds of $18,055, a rolled over balance of $15,545 to be paid over the restarted one year term of the loan via daily payments of $141.		29,085		–
On November 20, 2013, DeskFlex entered into a $10,550 demand promissory note bearing interest at 10.25%. The promissory note is payable in monthly installments of $1,223 per month, maturing on August 20, 2014 (the “Maturity Date”).		9,417		–
Can Capital Loan – MS Health: On June 24, 2013, the Company received a loan of $15,000 from WebBank, c/o NewLogic Business Loans, Inc., (“NewLogic”), which has been renamed to CAN Capital Assets Servicing, Inc (“CAN Capital”) bearing an effective interest rate of 63.9%, consisting of 176 daily weekday payments of $106, maturing on February 19, 2014. The loan is collateralized with MS Health’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.
On October 24, 2013, the Company purchased licenses to develop content management software in the total amount of $51,250 from Igenti, Inc., of which $51,250 was financed pursuant to an equipment financing agreement with Baytree National Bank & Trust Company bearing an effective interest rate of 13.235%, consisting of 36 monthly payments of $1,719; maturing on October 23, 2016. The loan is collateralized with the data management software. Igenti subsequently paid a total of $53,500, including $2,250 of penalties, to the Company for future payment for the development of the content management software. Given the nature and status of the software development, no equipment costs have been capitalized.		47,321		–
On January 7, 2014, we amended this loan agreement to increase the loan balance to $22,025, consisting of additional proceeds of $18,323, a rolled over loan balance of $3,702 to be paid over the restarted one year term of the loan via daily payments of $113. On June 30 , 2014, we amend this loan agreement to increase the loan balance to $34,706, consisting of additional proceeds of $10,132, a rolled over balance of 15,767.63 to be paid over the restarted one year term of the loan via daily payments of $131.		34,721		4,202
On October 10, 2013, the Company purchased licenses to develop content management software in the total amount of $34,800 from Igenti, Inc., of which $34,800 was financed pursuant to an equipment financing agreement with Financial Pacific Leasing bearing an effective interest rate of 31.625%, consisting of 36 monthly payments of $1,438; maturing on October 9, 2016. The loan is collateralized with the content management software. Igenti retained a total of $1,300 of financing fees and paid the remaining proceeds of $33,500 to the Company for future payment for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.		32,025		–
On July 30, the Company received a loan of $100,000 from CIT Finance LLC. (“CIT Loan”) as a partial financing to purchase certain assets of Strand, Inc. for a total of $185,000. The loan bears interest at an effective rate of 5.13%, consisting of monthly payments of $3,346, maturing on February 25, 2017. The loan is collateralized with Strand’s assets.		79,926		–
On June 24, 2013, the Company received a loan of $15,000 from WebBank, c/o NewLogic Business Loans, Inc., (“NewLogic”), which has been renamed to CAN Capital Assets Servicing, Inc (“CAN Capital”) bearing an effective interest rate of 5.71%, consisting of 176 daily weekday payments of $106, maturing on February 19, 2014. The loan is collateralized with MS Health’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.	$	4,202	$	–
On July 31, 2014, the Company issued an unsecured $85,000 seller financed note payable as partial payment on an asset purchase (“Strand Note”), which bears interest at 6% per annum until the maturity date of July 31, 2015, and provides for equal monthly principal and interest payments of $2,586 commencing on August 31, 2014. The Strand Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity at July 15, 2015. In the event we default on the July 31, 2015 balloon payment, the seller, may at his option, convert the then outstanding principal and interest into the Class A Common stock of the parent company of Telecorp Products, Inc. (Epazz, Inc.) based on a twenty-five percent (25%) discount to the average closing bid price of Epazz’ common stock over the five (5) trading days prior to the date of default, or $0.00075 per share, whichever is greater.		69,484		–
On June 11, 2013, the Company received a loan of $24,000, including $499 of loan origination costs, from Horizon Business Funding, LLC (“Horizon”) bearing an effective interest rate of 368.05%, consisting of 78 daily week day payments of $448, maturing on October 2, 2013. The loan is collateralized with the Epazz receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.		–		–
On August 25, 2014, the Company received a loan of $75,000 from EBF Partners, LLC. (“EBF Loan”). The loan bears interest at an effective rate of 15%, consisting of 100 daily weekday payments of $937, maturing on February 26, 2015. The loan is collateralized with the accounts receivable of Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.		-		–
On April 11, 2013, the Company received a loan of $70,000, including $1,650 of loan origination costs, from Small Business Financial Solutions, LLC (“SBFS”) bearing an effective interest rate of 95.6%, consisting of 240 daily week day payments of $394, maturing on March 13, 2014. The loan is collateralized with the Epazz receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.		–		–
On June 6, 2014, the Company received a loan of $42,000 from Global Merchant Cash, Inc. (“GMC Loan”). The loan bears interest at an effective rate of 187%, consisting of 100 daily weekday payments of $599, maturing on November 3, 2014. The loan is collateralized with the accounts receivable of Epazz, Inc. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. The loan was refinanced in October 16, 2014.		–		–
On May 1, 2013, the Company purchased licenses to develop data management software in the total amount of $51,250 from Igenti, Inc., bearing an effective interest rate of 11%, consisting of 36 monthly payments of $1,674, maturing on April 30, 2016. The loan is collateralized with the data management software. Igenti retained a total of $4,615 of financing fees and paid the remaining proceeds of $46,615 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.		41,167		–
On May 9, 2014, the Company issued an unsecured $210,000 seller financed note payable as partial payment on an asset purchase (“Jadian Note”), which bears interest at 6% per annum until the maturity date of May 9, 2017, and provides for equal monthly principal and interest payments of $6,389 commencing on June 1, 2014. The Jadian Note includes a balloon payment, consisting of the remaining outstanding balance of principal and interest upon maturity at May 9, 2017. The interest rate shall be 8% per annum with an additional 5% late payment fee upon default.		201,035		–

F-3343

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed pursuant to an equipment financing agreement with Baytree National Bank & Trust Company on March 7, 2013 bearing an effective interest rate of 11.48%, consisting of 36 monthly payments of $1,674; maturing on March 6, 2016. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.	38,361	–
On April 30, 2014, the Company purchased furniture and fixtures and computer equipment in the total amount of $41,300 from IKEA, which was partially financed with proceeds of $37,788 pursuant to an equipment financing agreement with Financial Pacific Leasing bearing an effective interest rate of 26.78%, consisting of 36 monthly payments of $1,488; maturing on March 15, 2017. The loan is collateralized with the furniture and fixtures and computer equipment, along with a personal guarantee by Shaun Passley, Ph.D., our Chief Executive Officer.	43,226	–
On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed with an equipment finance loan from Summit Funding Group, Inc. equipment with a three year loan term consisting of monthly loan payments of $1,828, with $2,078 paid at signing, maturing on February 21, 2016. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.	40,108	–
On Deck Capital Loan – Telecorp: On April 4, 2013, the Company received a loan of $65,000 from On Deck Capital, Inc., (“On Deck”), bearing an effective interest rate of 42.74%, consisting of 377 daily weekday payments of $234, maturing on September 11, 2015. The loan is collateralized with Telecorp’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.	38,226	–
On August 10, 2012, the Company purchased $13,870 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 31.55%, along with monthly principal and interest payments of $585. The loan is collateralized with the purchased equipment. Matures on August 9, 2015.	10,228	13,448
On April 2, 2014, the Company received a loan of $25,000 from BSB Leasing, Inc. (“BSB Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 25%, consisting of monthly payments of $944, maturing on February 25, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.	27,376	–
On April 1, 2012, the Company purchased $129,747 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 8.3%, along with monthly principal and interest payments of $4,078. The loan is collateralized with the purchased equipment. Matures on April 1, 2015.	78,603	104,129
On March 20, 2014, the Company received a loan of $25,000 from BMT Leasing, Inc. (“BMT Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 21%, consisting of monthly payments of $910, maturing on March 20, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.	22,749	–
Consideration for the MS Health acquisition included partial proceeds obtained from a $360,800 Small Business Association (“SBA”) loan, bearing interest at fixed and variable rates, maturing on March 27, 2022. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.	312,095	343,060
On March 25, 2014, the Company received a loan of $25,000 from Navitas Leasing, Inc. (“Navitas Loan”) as a partial financing to purchase certain assets of Cynergy, Inc. for a total of $75,000. The loan bears interest at an effective rate of 21%, consisting of monthly payments of $907, maturing on April 1, 2017. The loan is collateralized with Cynergy’s assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.	24,475	–
Consideration for the MS Health acquisition included an unsecured $100,000 seller financed note payable (“MSHSC Note”), bearing interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and full payment of all amounts due after five (5) years, maturing March 27, 2022. Pursuant to an amendment to a consulting agreement with the seller on March 23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during the year ended December 31, 2012. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC.	94,000	94,000
On February 28, 2014, the Company provided Troy Holdings with a Promissory Note in the amount of $120,000 (the “Telecorp Note”), which was adjusted down to $102,000 for excess liabilities acquired during the acquisition of Telecorp Products, Inc. The Note provides for six (6) equal monthly payments of $20,000 commencing thirty (30) days after the Closing. The Telecorp Note is non-interest bearing except upon default, in which case the interest rate shall be 10% per annum. The loan was paid off August 28, 2014	–	–
On Deck Capital Loan – DeskFlex, Inc.: On November 7, 2011, DeskFlex entered into a four month $20,000 note payable agreement with On Deck Capital. Payments of $183 were originally due daily on the loan. Origination fees of $500 were added to the initial loan, agreed to pay additional fees of $387 per month in servicing fees during the term of the loan and to repay the loan via daily payments of $183. The total payments due on the loan equate to an annual interest rate of 18%.
On June 11, 2014, DeskFlex refinanced the Accion #2 promissory note and entered into a $15,207 promissory note, bearing interest at 10.25% (“Accion #3”). The promissory note is payable in monthly principal and interest installments of $1,339 per month, maturing on June 20, 2015 (the “Maturity Date”).	6,508	–
Can Capital Loan – Epazz: On November 4, 2013, the Company received net proceeds of $75,381, and a direct payoff of $36,619 on the Rapid Advance Loan listed below, on a loan of $112,000 from CAN Capital Assets Servicing, Inc., (“CAN Capital #4”) bearing an effective interest rate of 53.1%, consisting of 370 daily weekday payments of $552, maturing on November 13, 2014. The loan is collateralized with Epazz’s receivables. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. On April 23, 2014, we amended this loan agreement to increase the loan balance to $150,000, consisting of additional proceeds of $71,685, and a rolled over loan balance of $78,315, to be paid over the restarted term of the loan via 432 daily weekday payments of $648, maturing on July 7, 2015.	84,852	98,984

F-3444

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 15, 2012, we amended this loan agreement to increase the loan balance to $35,400, consisting of additional proceeds of $19,200, a rolled over loan balance of $10,050, an origination fee of $750 and interest amount of $5,400 to be paid over the restarted four month term of the loan via daily payments of $274. On July 23, 2012, we amended this loan agreement again to increase the remaining unpaid loan balance to $35,400 again, consisting of additional proceeds of $23,883, a rolled over loan balance of $5,367, an origination fee of $750 and interest amount of $5,400 to be paid over the restarted four month term of the loan via daily payments of $274. On October 30, 2012, we amended this loan agreement again to increase the remaining unpaid loan balance to $41,300, consisting of additional proceeds of $18,085, a rolled over loan balance of $16,040, an origination fee of $875 and interest amount of $6,300 to be paid over the restarted four month term of the loan via daily payments of $320. On February 8, 2013, we again amended this loan agreement again to increase the remaining unpaid loan balance to $41,300, consisting of additional proceeds of $17,541, a rolled over loan balance of $16,584, an origination fee of $875 and interest amount of $6,300 to be paid over the restarted four month term of the loan via daily payments of $320. The proceeds of all refinancing loans were received with substantially the same terms as the original debt.	–	28,173
On November 20, 2013, DeskFlex entered into a $10,550 demand promissory note bearing interest at 10.25% (“Accion #2”). The promissory note is payable in monthly installments of $1,223 per month, maturing on August 20, 2014 (the “Maturity Date”).	–	9,417
On Deck Capital Loan – Epazz, Inc.: On January 3, 2012, Epazz entered into a nine month $55,800 note payable agreement with On Deck Capital. Payments of $289 were originally due daily on the loan. Proceeds of $43,875 were received on the loan, origination fees of $1,125 were added to the initial loan, along with interest of $10,800. The total payments due on the loan equate to an annual interest rate of 18%. On May 25, 2012, we amended this loan agreement to increase the loan balance to $63,000, consisting of additional proceeds of $25,043, a rolled over loan balance of $24,957 and interest of $13,000 to be paid over the restarted nine month term of the loan via daily payments of $326. On September 10, 2012, we again amended this loan agreement to increase the loan balance to $76,800, consisting of additional proceeds of $22,613, a rolled over loan balance of $35,887, an origination fee of $1,500 and interest of $16,800 to be paid over the revised twelve month term of the loan via daily payments of $299. The proceeds of all refinancing loans were received with substantially the same terms as the original debt.	–	54,088
On October 24, 2013, the Company purchased licenses to develop content management software in the total amount of $51,250 from Igenti, Inc., of which $51,250 was financed pursuant to an equipment financing agreement with Baytree National Bank & Trust Company bearing an effective interest rate of 13.235%, consisting of 36 monthly payments of $1,719; maturing on October 23, 2016. The loan is collateralized with the data management software. Igenti subsequently paid a total of $53,500, including $2,250 of penalties, to the Company for future payment for the development of the content management software. Given the nature and status of the software development, no equipment costs have been capitalized.	37,808	47,321
On March 20, 2012, DeskFlex entered into a $25,000 three year promissory note bearing interest at 11%. The promissory note was payable in monthly installments of $843 per month, maturing on March 20, 2015 (the “Maturity Date”). The note was acquired and assigned by GG Mars Capital, Inc., a company owned by our CEO’s family member, on August 15, 2013 prior to being exchanged for a convertible note on August 20, 2013 and subsequently converted into 46,856,526 shares of Class A Common Stock.	–	19,483
On October 10, 2013, the Company purchased licenses to develop content management software in the total amount of $34,800 from Igenti, Inc., of which $34,800 was financed pursuant to an equipment financing agreement with Financial Pacific Leasing bearing an effective interest rate of 31.625%, consisting of 36 monthly payments of $1,438; maturing on October 9, 2016. The loan is collateralized with the content management software. Igenti retained a total of $1,300 of financing fees and paid the remaining proceeds of $33,500 to the Company for future payment for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.	31,925	32,025
Pursuant to an asset purchase agreement entered into on October 26, 2011, the Company granted K9 Bytes, Inc., a Florida corporation, a subordinated secured $30,750 promissory note carrying a 6% interest rate, payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the promissory note ($23,017, assuming no additional payments other than those scheduled) is due. The promissory note is secured by a secondary lien on all of the assets of Epazz’s subsidiary, K9 Bytes, Inc., an Illinois corporation formed to house the purchased assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer.	2,510	6,234
On May 1, 2013, the Company purchased licenses to develop data management software in the total amount of $51,250 from Igenti, Inc., bearing an effective interest rate of 11%, consisting of 36 monthly payments of $1,674, maturing on April 30, 2016. The loan is collateralized with the data management software. Igenti retained a total of $4,615 of financing fees and paid the remaining proceeds of $46,615 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.	21,677	41,167
On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed pursuant to an equipment financing agreement with Baytree National Bank & Trust Company on March 7, 2013 bearing an effective interest rate of 11.48%, consisting of 36 monthly payments of $1,674; maturing on March 6, 2016. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.	24,888	38,361
On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed with an equipment finance loan from Summit Funding Group, Inc. equipment with a three year loan term consisting of monthly loan payments of $1,828, with $2,078 paid at signing, maturing on February 21, 2016. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.	31,074	40,108

F-3545

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unsecured $50,000 promissory note originated on September 15, 2010 between Intellisys and Paul Prahl, payable in monthly installments of $970 carries a 6% interest rate, maturing on September 18, 2015. The Company also agreed to provide Mr. Prahl earn-out rights, which provide that he will receive up to a maximum of $13,350 per year for the three calendar years following the Closing (with the first such calendar year beginning on January 1, 2011), based on the revenues generated by IntelliSys during such applicable year, whereas $6,675 is earned if revenues are between $350,000 and $380,000, $10,012 is earned if revenues are between $380,000 and $395,000, or $13,350 is earned if revenues are greater than $395,000 during each relevant year.		8,186			10,520
On August 10, 2012, the Company purchased $13,870 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 31.55%, along with monthly principal and interest payments of $585. The loan is collateralized with the purchased equipment. Matures on August 9, 2015.		5,267			10,228
Unsecured term loan between Epazz and Bank of America, originating on June 15, 2011 bearing interest at 9.5% matures on June 17, 2016. Payments of $1,559 are due monthly.		60,573			68,436
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.		44,165			78,603
Unsecured promissory note between Epazz and Newtek Finance for $185,000 originating on September 30, 2010 bearing interest at 6% matures on September 30, 2020. Payments of $2,054 are due monthly.		137,087			153,377
Consideration for the MS Health acquisition included partial proceeds obtained from a $360,800 Small Business Association (“SBA”) loan, bearing interest at fixed and variable rates, maturing on March 27, 2022. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.		283,868			312,095
The Company raised funds paid pursuant to an asset purchase agreement with K9 Bytes, Inc., a Florida corporation, on October 26, 2011, through a $235,000 Small Business Association (“SBA”) loan from a third party lender (the “Third Party Lender” and the “SBA Loan”). The SBA Loan has a term of ten (10) years; maturing on October 26, 2021, bearing interest at the prime rate plus 2.75% per annum, adjusted quarterly; is payable in monthly installments (beginning in December 2011) of $2,609 per month; is guaranteed by the Company and personally guaranteed by Shaun Passley, Ph.D., the Company’s Chief Executive Officer; and is secured by all of the assets of K9 Bytes, Inc., the Illinois corporation and wholly-owned subsidiary formed to house the acquired assets and the Company, 100% of the outstanding capital of the K9 subsidiary, and a life insurance policy on Dr. Passley’s life in the amount of $235,000. A total of approximately $10,000 of the amount borrowed under the SBA Loan was used to pay closing fees in connection with the loan, $169,250 was used to pay K9 Bytes the cash amount due pursuant to the terms of the Purchase Contract and the remainder of such loan amount was made available for working capital for the Company and the wholly-owned subsidiary, K9 Bytes, Inc.		197,062			216,214
Consideration for the MS Health acquisition included an unsecured $100,000 seller financed note payable (“MSHSC Note”), bearing interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and full payment of all amounts due after five (5) years, maturing March 27, 2022. Pursuant to an amendment to a consulting agreement with the seller on March 23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during the year ended December 31, 2012. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC.		99,441			94,000
Total long term debt		1,211,929			1,111,162
Pursuant to an asset purchase agreement entered into on October 26, 2011, the Company granted K9 Bytes, Inc., a Florida corporation, a subordinated secured $30,750 promissory note carrying a 6% interest rate, payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the promissory note ($23,017, assuming no additional payments other than those scheduled) is due. The promissory note is secured by a secondary lien on all of the assets of Epazz’s subsidiary, K9 Bytes, Inc., an Illinois corporation formed to house the purchased assets. The promissory note is also personally guaranteed by Shaun Passley, Ph.D., our Chief Executive Officer. On August 27, 2014, The Company agreed to a payoff release with Candamo, LLC for $941.		–			2,510
Less: current portion		(354,786	)		(218,699	)
Unsecured $50,000 promissory note originated on September 15, 2010 between IntelliSys and Paul Prahl, payable in monthly installments of $970 carries a 6% interest rate, maturing on September 18, 2015. The Company also agreed to provide Mr. Prahl earn-out rights, which provide that he will receive up to a maximum of $13,350 per year for the three calendar years following the Closing (with the first such calendar year beginning on January 1, 2011), based on the revenues generated by IntelliSys during such applicable year, whereas $6,675 is earned if revenues are between $350,000 and $380,000, $10,012 is earned if revenues are between $380,000 and $395,000, or $13,350 is earned if revenues are greater than $395,000 during each relevant year.		8,454			8,186
Long term debt, less current portion	$	857,143		$	892,463
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.		39,471			60,573

~~The Company recorded interest expense on long term debts, credit lines and capital leases in the amount of $261,634 and $102,261 for the years ended December 31, 2013 and 2012, respectively.~~F-46

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.	120,062	137,087

The Company raised funds paid pursuant to an asset purchase agreement with K9 Bytes, Inc., a Florida corporation, on October 26, 2011, through a $235,000 Small Business Association (“SBA”) loan from a third party lender (the “Third Party Lender” and the “SBA Loan”). The SBA Loan has a term of ten (10) years; maturing on October 26, 2021, bearing interest at the prime rate plus 2.75% per annum, adjusted quarterly; is payable in monthly installments (beginning in December 2011) of $2,609 per month; is guaranteed by the Company and personally guaranteed by Shaun Passley, Ph.D., the Company’s Chief Executive Officer; and is secured by all of the assets of K9 Bytes, Inc., the Illinois corporation and wholly-owned subsidiary formed to house the acquired assets and the Company, 100% of the outstanding capital of the K9 subsidiary, and a life insurance policy on Dr. Passley’s life in the amount of $235,000. A total of approximately $10,000 of the amount borrowed under the SBA Loan was used to pay closing fees in connection with the loan, $169,250 was used to pay K9 Bytes the cash amount due pursuant to the terms of the Purchase Contract and the remainder of such loan amount was made available for working capital for the Company and the wholly-owned subsidiary, K9 Bytes, Inc.	176,702	197,062

WLCC (Lendini) - Jadian: On December 15, 2014, the Company received a loan of $34,500 from Wakpamni Lake Community Corp, (“Lendini”), bearing an effective interest rate of 15.97%, consisting of 118 daily weekday payments of $293, maturing on September 11, 2015. The loan is collateralized with Jadian’s accounts receivable.	31,273	–

Everest Business Funding (EBF Partners) - Epazz: On December 18, 2014, the Company received a loan of $34,500 from EBF Parters LLC, , bearing an effective interest rate of 15%, consisting of 120 daily weekday payments of $999, maturing on June 3, 2015. The loan is collateralized with Epazz accounts receivable.	112,925	–

Knight Capital Funding II, LLC - Deskflex: On December 18, 2014, the Company received a loan of $35,830 from EBF Parters LLC, , bearing an effective interest rate of 12.5%, consisting of 143 daily weekday payments of $251, maturing on June 3, 2015. The loan is collateralized with Epazz accounts receivable.	22,049	–

Direct Credit Funding Inc - Telecorp On December 26, 2014, the Company purchased $35,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 15%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment.	32,579	–

Direct Credit Funding Inc - Telecorp On December 18, 2014, the Company purchased $45,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 17%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment.	43,101	–

Maquerie Equipment Finance – Interaction Information Technology Inc On December 19, 2014, the Company purchased $50,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 16%, along with monthly principal and interest payments of $1,703. The loan is collateralized with the purchased equipment.	48,297	–

Western Equipment Finance – Interaction Information Technology Inc On November 3, 2014, the Company purchased $50,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 8%, along with monthly principal and interest payments of $1,560. The loan is collateralized with the purchased equipment.	54,611	–

Direct Credit Funding Inc - Epazz On December 18, 2014, the Company purchased $230,000 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 6%, along with monthly principal and interest payments of $1,210. The loan is collateralized with the purchased equipment.	223,069	–

F-47

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Seller Note – Hopkins Unsecured $150,000 promissory note originated on December 29, 2014 between Epazz and J Hopkins, payable in equal monthly installments of $37,500 carries a 0% interest rate if paid in full by the maturity date of April 29, 2015. This Note may be prepaid at any time, in whole or in part, without penalty.		150,000			–

Seller Note – Hopkins Unsecured $200,000 promissory note originated on December 29, 2014 between Epazz and J Hopkins. Beginning June 8, 2015, and continuing on the 8^th day of each and every month until the Maturity Date, Epazz, Inc shall pay equal installments of principal and interest in the amount of $11,881.03. The interest rate on the note is 6% which matures on November 8, 2016. This Note may be prepaid at any time, in whole or in part, without penalty.		200,000
Total promissory notes		2,504,371			1,211,929
Less: current portion		(1,219,669	)		(354,786	)
Promissory notes, less current portion	$	1,284,702		$	857,143

The Company recorded interest expense on promissory notes of $251,794 and $100,160 for the twelve months ended December 31, 2014 and 2013, respectively. The Company recorded accrued interest of $60,123 and $-0- during the years ended December 31, 2014 and 2013, respectively.

Note 17 – Stockholders’ Equity

On ~~January~~September 1410, 2014, ~~and~~an ~~May~~amendment ~~17,~~to the ~~2013,~~corporation’s Articles of Incorporation was approved with respect to the Series B Convertible Preferred Stock and the ~~Board~~Series ofC ~~Directors,~~Convertible ~~consisting~~Preferred ~~solely~~Stock. ofThe ~~Shaun~~Corporation ~~Passley~~shall not without first obtaining the approval, ~~Ph.D.~~by written consent, as provided by law, of the ~~Company’s~~holders ~~majority~~of ~~shareholder,~~2/3rds ~~amended~~of the ~~Article~~then outstanding shares of ~~Incorporation~~ Series B Preferred Stock, to ~~change~~increase ~~the~~or ~~par~~decrease, ~~value~~other ~~and~~than by redemption or conversion, the total number of authorized shares of ~~each~~Series ~~class~~B Preferred Stock, to effect an exchange, reclassification, or cancellation of ~~common~~all ~~and~~or ~~series~~a part of ~~preferred~~the Series B Preferred Stock, but excluding a stock ~~and~~split, forward split or reverse stock ~~authorize~~split of the Corporation’s Common Stock or Series B Preferred Stock, to effect an exchange, or create a ~~third~~right of exchange, of all or part of the shares of another class of ~~preferred~~shares ~~stock,~~into ~~Series~~shares Cof ~~Convertible~~Series B Preferred Stock, inor ~~addition~~ to alter or change the ~~modification~~rights, preferences or privileges of the ~~attributes and~~shares ~~dividends~~of Series B Preferred Stock so as to affect adversely the shares of such series. ~~The~~A ~~disclosures~~valuation of ~~herein~~the ~~reflect~~various ~~these~~classes ~~modifications~~of ~~and~~stock was performed by an independent third party to provide an estimated change in the ~~changes~~fair value of each class affected by the amendment. The estimated change to the ~~par~~fair value ~~have~~of ~~been~~the ~~retroactively~~various ~~reflected throughout~~classes of stock is $721,207.

On April 10, 2015 and December 1, 2014, the Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, amended the Article of Incorporation to change the par value and number of authorized shares of each class of common and series of preferred stock and authorize a fourth class of preferred stock, Series D Convertible Preferred Stock, in addition to the modification of the attributes and dividends. The disclosures herein reflect these modifications and the changes to the par value have been retroactively reflected throughout.

Reverse Stock Split

In September 2014, Epazz, Inc.’s (the “Company’s”) majority stockholder and sole director (Shaun Passley) approved a 1:10,000 reverse stock split of the Company’s Class A common stock Effective October 6, 2014, the Company affected the 1:10,000 reverse stock split of its Class A common stock. The Company’s Class B common stock and preferred stock were not affected by the reverse stock split. The Company’s new symbol following the reverse split will be EPAZD. The D will be removed in 20 business days. The Company’s new CUSIP number is 29413V 309. In order for the Company to be in compliance with the minimum bid price requirement of $0.01 per share for listing on OTCQB OTC markets. The Company may need to be do reverse split, if the share price falls below $0.01 or if the Company needs to qualify for a national stock exchange.

Convertible Preferred Stock, Series A

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

F-3648

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On July 2, 2012, the Company issued 1,000 ~~shares~~ shares of convertible Series A Preferred Stock to the Company’s CEO for services provided and personal ~~guaranties~~guarantees associated ~~with~~ with previous acquisition activities. The total fair value of the preferred stock was $229,236 based on valuations performed using an option-pricing method based on the Company’s publicly traded common stock on the date of grant, and a 5% discount for lack of marketability.

Convertible Preferred Stock, Series B

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

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

Convertible Preferred Stock, Series C

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

~~A total of 2,943,722,200 shares of Series C~~ Convertible Preferred Stock ~~have been subsequently issued~~, asSeries ~~disclosed in the Subsequent Events footnote below.~~D

Effective December 18, 2014, the Company has 1,000,000 authorized and zero outstanding shares of $0.01 par value Series D Convertible Preferred Stock (“Series D Preferred Stock”). The Series D Preferred Stock shall carry an 8.0% dividend, payable semiannually at Issuer’s election in either (i) cash or (ii) shares of common stock. Each share of Series D Preferred Stock is convertible, at the option of the holder into three (3) shares of the Company’s Class A Common Stock, with five business days' notice, provided that no conversion will take place until all holders of the Series C Preferred Stock consent to such conversion. The Series D Preferred Stock has preferential voting rights that carry three (3) voting rights for each share issued and outstanding, and shall vote together with the shares of the Common Stock of the Company, and not as a separate class.

Common Stock, Class A

The Company has 9 billion authorized shares of $0.~~0001~~01 par value Class A Common Stock.

~~Class A Common Stock Issuances, 2013:~~F-49

Debt Conversions into Class A Common Stock

On January 3, 2013, the Company issued 4,000,000 shares of Class A Common Stock pursuant to the conversion of $12,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

F-37

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~On February 19, 2013, the Company issued 8,823,529 shares of~~ Class A Common Stock ~~pursuant to the conversion of $15~~Issuances,~~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.~~2014:

On ~~February~~January 267, ~~2013~~2014, the Company issued ~~10,750,000~~ 2,514 shares of Class A Common Stock pursuant to the conversion of $175,~~200~~028 of convertible debt, ~~consisting~~held ofby ~~$15~~Magna Group,~~500~~ ofLLC, ~~principal~~which consisted ~~and~~entirely ~~$1,700~~ of ~~accrued and unpaid interest~~principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~March~~January 422, ~~2013~~2014, the Company issued 102,~~000,000~~500 shares of Class A Common Stock pursuant to the conversion of $155,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~March~~January 631, ~~2013~~2014, the Company issued 146,~~461,538~~667 shares of Class A Common Stock pursuant to the conversion of $1810,~~800~~000 of convertible debt, ~~consisting~~held ofby ~~$17~~Magna Group,~~500~~ ofLLC, ~~principal~~which ~~and~~consisted ~~$1,300~~entirely of ~~accrued and unpaid interest~~principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~March~~February 126, ~~2013~~2014, the Company issued 410,~~504,505~~000 shares of Class A Common Stock pursuant to the conversion of $515,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~March~~February 1413, ~~2013~~2014, the Company issued 5010,~~000,000~~327 shares of Class A Common Stock pursuant to the conversion of $4615,~~000~~491 of convertible debt ~~owed~~held toby aMagna ~~related~~Group, ~~party~~LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~April~~February 227, ~~2013~~2014, the Company issued 1513,~~151,515~~333 shares of Class A Common Stock pursuant to the conversion of $1020,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~April~~March 10, ~~2013~~2014, the Company issued 5018,000~~,000~~ shares of Class A Common Stock pursuant to the conversion of $4018,000 of convertible debt ~~owed~~held toby aMagna ~~related~~Group, ~~party~~LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~May~~March 2719, ~~2013~~2014, the Company ~~modified a related party debt and~~ issued 1419,~~239,500~~ 700 shares of Class A Common Stock inpursuant ~~settlement~~to the conversion of $1419,~~239~~700 of ~~related~~convertible ~~party~~ debt ~~owed~~held ~~to Vivienne~~by ~~Passley~~Magna Group, LLC, which consisted entirely of ~~$13,000 of~~ principal ~~and $1,239 of accrued and unpaid interest~~. The ~~total~~note ~~fair value of the common stock~~ was ~~$28,479~~converted ~~based~~in onaccordance ~~the~~with ~~closing price of~~ the ~~Company’s~~conversion ~~common~~terms; ~~stock~~therefore onno ~~the~~gain ~~date~~or ~~of grant, resulting in the recognition of a $14,240~~ loss onhas ~~debt~~been ~~settlement~~recognized.

On ~~April~~March 243, ~~2013~~2014, the Company issued 15,~~873,016~~000 shares of Class A Common Stock pursuant to the conversion of $1027,000 of convertible debt held by Asher Enterprises, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~June~~March 245, ~~2013~~2014, the Company issued 4020,~~857,143~~086 shares of Class A Common Stock pursuant to the conversion of $1728,~~160~~120 of convertible debt held by Asher Enterprises, ~~consisting~~which consisted of $1626,~~500~~000 of principal and $~~660~~2,120 of ~~accrued and unpaid~~ interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~July~~March 97, ~~2013~~2014, the Company issued 8012,~~000,000~~500 shares of Class A Common Stock pursuant to the conversion of $2615,~~400~~000 of convertible debt ~~owed~~held toby aSt. ~~related~~George ~~party~~Investments, ~~which~~LLC, ~~consisted~~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~~March 1025, ~~2013~~2014, the Company issued 2234,~~222,222~~167 shares of Class A Common Stock pursuant to the conversion of $841,000 of convertible debt held by Asher Enterprises, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~July~~April 302, ~~2013~~2014, the Company issued 15,~~476,~~190 shares of Class A Common Stock pursuant to the conversion of $1315,~~000~~190 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~August~~April 7, ~~2013~~2014, the Company issued 4020,000~~,000~~ shares of Class A Common Stock pursuant to the conversion of $3230,000 of convertible debt ~~owed~~held toby aIBC ~~related~~Funds, ~~party~~LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

~~F-38~~On April 10, 2014, the Company issued 20,000 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

F-50

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On ~~August~~April 1916, ~~2013~~2014, the Company issued ~~19,551,267~~ 20,000 shares of Class A Common Stock pursuant to the conversion of $1420,~~663~~000 of convertible debt, ~~which~~held ~~consisted~~by ofIBC ~~$10~~Funds,~~900 of~~ ~~principal~~LLC, ~~and~~which ~~$3,763~~consisted entirely of ~~accrued interest~~principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~August~~April 2722, ~~2013~~2014, the Company issued ~~46,856,526~~ 20,000 shares of Class A Common Stock pursuant to the conversion of $1420,~~838~~000 of convertible debt ~~owed~~held toby aIBC ~~related~~Funds, ~~party~~LLC, which ~~consisted~~ consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

~~Shares~~On April 24, 2014, the Company granted 1,000 shares of Class A Common Stock ~~Issued~~to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for ~~Services~~a to$150,000 ~~Related~~short ~~Parties~~term promissory note. The total fair value of the common stock was $3,000 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.

On ~~March~~April 528, ~~2013~~2014, the Company issued 1220,~~500,~~000 shares of Class A Common Stock pursuant to ~~Vivienne~~the ~~Passley,~~conversion aof ~~related party~~$20,000 ~~for~~of ~~providing~~convertible adebt ~~personal~~held ~~guaranty~~by onIBC anFunds, ~~acquisition~~LLC, ~~loan~~which ~~that~~consisted ~~originated~~entirely onof ~~September 30, 2010~~principal. The ~~total~~note ~~fair value of the common stock~~ was ~~$25,000~~converted ~~based~~in onaccordance with the ~~closing~~conversion ~~price~~terms; oftherefore ~~the~~no ~~Company’s common~~gain ~~stock~~or onloss ~~the~~has ~~date~~been ~~of grant~~recognized.

On ~~March~~May 51, ~~2013~~2014, the Company issued 1220,~~500,~~000 ~~shares~~ shares of Class A Common Stock pursuant to ~~Vivienne~~the ~~Passley,~~conversion aof ~~related party~~$20,000 ~~for~~of ~~providing~~convertible adebt ~~personal~~held ~~guaranty~~by onIBC ~~two~~Funds, ~~acquisition~~LLC, ~~loans that~~which ~~originated~~consisted onentirely of ~~October 26, 2011~~principal. The ~~total~~note ~~fair value of the common stock~~ was ~~$25,000~~converted ~~based~~in onaccordance with the ~~closing~~conversion ~~price~~terms; oftherefore ~~the~~no ~~Company’s common~~gain ~~stock~~or onloss ~~the~~has ~~date~~been ~~of grant~~recognized.

On ~~March~~May 53, ~~2013~~2014, the Company issued ~~200~~20,000~~,000 shares~~ shares of Class A Common Stock pursuant to the ~~Company’s~~conversion ~~CEO in consideration for providing product development services. The shares will be vested once the Company reports revenue~~ of $~~10 million in a calendar year. The total fair value of the common stock was $400~~20,000 ~~based on the closing price~~ of ~~the~~convertible ~~Company’s~~debt ~~common~~held ~~stock~~by onStar ~~the~~Financial ~~date~~Corporation, ofa ~~grant~~related party, which isconsisted ~~presented~~entirely asof aprincipal. ~~deduction against~~The ~~additional~~note ~~paid~~was inconverted ~~capital~~ in ~~the~~accordance ~~equity~~with ~~section of~~ the ~~balance~~conversion ~~sheet until the~~ terms; oftherefore ~~the~~no ~~vesting periods are satisfied.~~gain ~~The~~or ~~vesting~~loss ~~restrictions~~has ~~were~~been ~~subsequently lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares~~recognized.

On ~~March~~May 206, ~~2013~~2014, the Company issued 3520,~~500,~~000 ~~shares~~ shares of Class A Common Stock pursuant to ~~Vivienne~~the ~~Passley,~~conversion aof ~~related party~~$10,000 ~~for~~of ~~providing~~convertible ~~collateral~~debt onheld ~~acquisition~~by ~~loans~~IBC ~~that~~Funds, ~~originated on September 30~~LLC, ~~2010~~which ~~and~~consisted ~~October~~entirely of ~~26, 2011~~principal. The ~~total~~note ~~fair value of the common stock~~ was ~~$35,500~~converted ~~based~~in onaccordance with the ~~closing~~conversion ~~price~~terms; ~~of the~~therefore ~~Company’s~~no ~~common~~gain ~~stock~~or onloss ~~the~~has ~~date~~been ~~of grant~~recognized.

On ~~March~~May 206, ~~2013~~2014, the Company issued 6016,~~000,000 shares~~912 shares of Class A Common Stock topursuant ~~Craig Passley, a related party, for providing corporate secretary services from 2012~~ to ~~2021. The~~the ~~total~~conversion ~~fair value~~ of ~~the common stock was~~ $608,~~000~~456 ~~based on the closing price~~ of ~~the~~convertible ~~Company’s~~debt ~~common~~held ~~stock~~by onIBC ~~the~~Funds, ~~date of grant~~LLC, which isconsisted ~~presented as a deduction against additional paid in capital in the equity section of the balance sheet until~~entirely ~~the terms~~ of ~~the vesting periods are satisfied~~principal. AThe ~~total~~note ~~of $6,000~~ was ~~expensed~~converted ~~related~~in toaccordance ~~the~~with ~~vested services for~~ the ~~year~~conversion ~~ended December~~terms; ~~31,~~therefore ~~2012.~~no ~~The~~gain ~~vesting~~or ~~restrictions~~loss ~~were~~has ~~subsequently~~been ~~lifted on March 22, 2014 pursuant to the exchange of these shares for Convertible Series C Preferred shares~~recognized.

On May 167, ~~2013~~2014, the Company ~~issued~~granted ~~710~~1,~~526,316 shares~~000 shares of Class A Common Stock to ~~the~~GG ~~Company’s~~Mars ~~CEO~~Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for ~~providing~~a ~~product~~$125,000 ~~development~~short ~~services~~term promissory note. The total fair value of the common stock was $12,~~350,~~000 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.

On May 2422, ~~2013~~2014, the Company issued 3515,~~500,~~000 shares of Class A Common Stock pursuant to ~~Fay~~the ~~Passley,~~conversion aof ~~related party~~$15,000 ~~for~~of ~~providing~~convertible ~~collateral~~debt onheld ~~acquisition~~by ~~loans~~Star ~~that~~Financial ~~originated~~Corporation, ona ~~September~~related 30party, ~~2010~~which ~~and~~consisted ~~October~~entirely ~~26,~~of ~~2011~~principal. The ~~total~~note ~~fair value of the common stock~~ was ~~$71,000~~converted ~~based~~in onaccordance with the ~~closing~~conversion ~~price~~terms; ~~of the~~therefore ~~Company’s~~no ~~common~~gain ~~stock~~or onloss ~~the~~has ~~date~~been ~~of grant~~recognized.

On ~~July~~May 528, ~~2013~~2014, the Company ~~issued~~granted ~~25,000,000 shares~~325 shares of Class A Common Stock to ~~Vivienne~~Star ~~Passley~~Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for ~~providing~~a ~~human~~$32,500 ~~resource~~short ~~services~~term promissory note. The total fair value of the common stock was $~~15,000~~650 based on the closing price of the Company’s common stock on the date of grant. The shares were subsequently issued on August 29, 2014.

On ~~July~~June 812, ~~2013~~2014, the Company ~~issued~~granted ~~710,526,316 shares~~213 shares of Class A Common Stock to ~~the~~Star ~~Company’s~~Financial, ~~CEO~~a incompany ~~consideration~~owned ~~for~~by ~~providing~~our ~~product~~CEO’s ~~development~~family ~~services~~member, ofa ~~which 200,000,000~~related ~~shares vested immediately and the remaining 510~~party,~~526,316~~ ~~shares~~as ~~will~~a beloan ~~vested~~origination cost ~~once~~in ~~the~~consideration ~~Company~~for ~~reports~~a ~~revenue of~~ $~~10 million~~5,000 inshort aterm ~~calendar~~promissory ~~year~~note. The total fair value of the common stock was $~~497,368~~213 based on the closing price of the Company’s common stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied. The ~~vesting~~shares ~~restrictions~~ were subsequently ~~lifted~~issued on ~~March~~August 2229, 2014 ~~pursuant to the exchange of these shares for Convertible Series C Preferred shares~~.

~~F-39~~On June 17, 2014, the Company issued 33,433 shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party, which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

F-51

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Shares~~On ofJuly 30, 2014 the Company issued 27,778 shares of Class A Common Stock ~~Issued~~ to Wellington Shields Holdings, LLC, as a fee for ~~Loan~~closing ~~Origination~~on ~~Fees~~an toacquisition. ~~Related~~The ~~Parties~~total fair value of the common stock was $55,556 based on the closing price of the Company’s common stock on the date of grant.

On ~~July~~August 1929, ~~2013,~~2014 the Company issued ~~2,500,000~~350 shares of Class A Common Stock to ~~Vivienne~~Star ~~Passley~~Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost that was previously granted on April 23, 2014 in consideration for a $2335,000 short term promissory note. The total fair value of the common stock was $41,~~250~~050 based on the closing price of the Company’s common stock on the date of grant.

On ~~July~~October 3110, ~~2013,~~2014 the Company issued 330,000,000 shares of Class A Common ~~Stock~~ to ~~Star Financial, a company owned by~~ our CEO’s ~~family~~from ~~member,~~ a ~~related~~conversion ~~party,~~notice asfrom a10,000,000 ~~loan origination~~shares ~~cost~~of inPreferred ~~consideration~~C ~~for~~which aconvert ~~$32,000~~at ~~short~~the ~~term~~ratio ~~promissory~~of 1 ~~note~~to 3. ~~The~~As ~~total~~this ~~fair~~was ~~value~~a ofconversion within the ~~common~~terms ~~stock~~of ~~was $4,200 based on~~ the ~~closing~~Preferred ~~price~~C ofequity ~~the~~instrument ~~Company’s~~no ~~common~~additional ~~stock~~value onwas ~~the~~recognized ~~date~~as a result of ~~grant.~~this conversion

On ~~August~~October 210, ~~2013,~~2014 the Company issued 31,~~000~~500,000 shares of Class A Common ~~Stock~~ to Star Financial, a company owned by our CEO’s family member, a related party, asfrom a ~~loan~~conversion ~~origination~~notice ~~cost~~from ~~in consideration for a $32~~500,000 ~~short~~shares ~~term~~of ~~promissory~~Preferred ~~note.~~C ~~The~~which ~~total~~convert ~~fair~~at ~~value~~the ratio of ~~the~~1 ~~common~~to ~~stock~~3. As this was ~~$5,100 based~~a onconversion within the ~~closing~~terms ~~price~~ of the Preferred ~~Company’s~~C ~~common~~equity ~~stock~~instrument onno ~~the~~additional ~~date~~value was recognized as a result of ~~grant.~~this conversion

On ~~August~~October 710, ~~2013,~~2014 the Company ~~granted 2~~issued 1,~~500~~400,000 shares of Class A Common ~~Stock~~ to ~~Star~~GG ~~Financial~~Mars Capital., a company owned by our CEO’s family member, a related party, as from a ~~loan~~conversion notice ~~origination~~from ~~cost~~466,667 inshares ~~consideration~~of ~~for~~Preferred aC ~~$24,000~~which ~~short~~convert ~~term~~at ~~promissory~~the ~~note.~~ratio ~~The~~of ~~total~~1 ~~fair~~to ~~value~~3. ofAs ~~the~~this ~~common stock~~ was ~~$4,250~~a ~~based~~conversion onwithin the ~~closing~~terms ~~price~~ of the Preferred ~~Company’s~~C ~~common~~equity ~~stock~~instrument onno ~~the~~additional ~~date~~value ofwas ~~grant.~~recognized ~~The~~as ~~shares~~a ~~were~~result ~~subsequently~~of ~~issued on~~this ~~November 13, 2013.~~conversion

On ~~August~~November 123, ~~2013,~~2014 the Company issued 5 150,000~~,000~~ shares of Class A Common Stock pursuant to ~~Vivienne~~the ~~Passley~~November 13, a2013 ~~related~~promissory ~~party,~~note asentered ainto ~~loan~~with ~~origination~~JMJ ~~cost~~Financial. inThe ~~consideration for~~conversion aamount was $515,~~000 short term promissory note~~994. ~~The~~As ~~total fair value of~~ the ~~common~~conversion ~~stock~~occurred ~~was~~within ~~$7,000 based on~~ the ~~closing~~terms ~~price~~ of the ~~Company’s common~~conversion ~~stock~~agreement; onno ~~the~~gain ~~date~~or ofloss ~~grant~~was recognized.

On ~~August~~November 2011, ~~2013,~~2014 the Company ~~granted 2,500,000~~issued 227,273 shares of Class A Common Stock pursuant to GGthe ~~Mars~~September ~~Capital~~5, ~~Inc.,~~2013 apromissory ~~company~~note ~~owned~~entered byinto ~~our~~with ~~CEO’s~~St. ~~family~~George ~~member,~~Investment. aThe ~~related~~conversion ~~party,~~amount aswas ~~a loan origination cost in consideration for a~~ $2515,000 ~~short term promissory note~~. ~~The~~As ~~total fair value of~~ the ~~common stock~~conversion ~~was~~occurred ~~$3,250~~within ~~based on~~ the ~~closing~~terms ~~price~~ of the ~~Company’s~~conversion ~~common~~agreement; ~~stock~~no ongain ~~the~~or ~~date~~loss ofwas ~~grant~~recognized. ~~The shares were subsequently issued on November 13, 2013.~~

On ~~August~~December 274, ~~2013,~~2014 the Company ~~granted 1~~issued 700,~~250,~~000 shares of Class A Common Stock pursuant to ~~Star~~the ~~Financial,~~November ~~a company owned by our CEO’s family member~~13, a2013 ~~related~~promissory ~~party, as~~note aentered ~~loan~~into ~~origination~~with ~~cost~~JMJ ~~in consideration for a $12,500 short term promissory note~~Financial. The ~~total fair value of the common stock~~conversion amount was $18,~~500~~442. ~~based~~As on the ~~closing~~conversion ~~price~~occurred ofwithin the ~~Company’s~~terms ~~common~~of ~~stock on~~ the ~~date~~conversion ofagreement; ~~grant.~~no ~~The~~gain ~~shares~~or ~~were~~loss ~~subsequently~~was ~~issued on November 13, 2013~~recognized.

On ~~September~~December 710, ~~2013,~~ 2014 the Company ~~granted 6~~issued 1,~~000~~108,~~000~~647 shares of Class A Common Stock pursuant to GGthe ~~Mars~~September ~~Capital~~5, ~~Inc.,~~2013 apromissory ~~company~~note ~~owned~~entered byinto ~~our CEO’s family member, a related~~with ~~party,~~St. asGeorge aInvestment. ~~loan~~The ~~origination~~conversion ~~cost~~amount inwas ~~consideration for a~~ $6515,000 ~~short term promissory note~~. ~~The~~As ~~total fair value of~~ the ~~common stock~~conversion ~~was~~occurred ~~$6,600~~within ~~based on~~ the ~~closing~~terms ~~price~~ of the ~~Company’s~~conversion ~~common~~agreement; no ~~stock~~gain onor ~~the~~loss ~~date~~was ~~of grant~~recognized. ~~The shares were subsequently issued on November 13, 2013.~~

On January 2, 2015 the Company issued 1,695,000 shares of Class A Common Stock ~~Issuances~~pursuant to the November 13, ~~2012:~~2013 promissory note entered into with JMJ Financial. The conversion amount was $2,543. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.

Equity Based Debt Settlement Financing, Conversions into Class A Common Stock – IBC Funds, LLC

On February 14, 2014, IBC Funds, LLC (“IBC”) filed a Joint Motion for Approval of Settlement Agreement and Stipulation, and Request for Fairness Hearing in the Circuit Court of the Twelfth Judicial Circuit in and for Sarasota County, Florida, Case No. 2014-CA-000899. IBC has contracted with various note holders of the Company to acquire approximately $314,021 of Company debt and subsequently converted the debt to common stock of the Company at 50% of the lowest trading price over the 15 days prior to, and including the conversion request date pursuant to Section 3(a)(10) of the Securities Act of 1933, which allows the exchange of claims, securities, or property for stock when the arrangement is approved for fairness by a court proceeding. In addition, the Company agreed to issue 7,500 settlement shares to IBC. The Company has agreed to these terms as the acquisition of these debts and subsequent conversion would alleviate a significant portion of the Company’s liabilities. A fairness hearing was held on February 14, 2014 and the arrangement was approved. A total of 304,082 shares of Class A Common Stock was issued, in addition to the 7,500 settlement shares, in complete satisfaction of the debt, as disclosed in detail below.

On February 14, 2014, the Company issued 7,500 settlement shares of Class A Common Stock pursuant to the February 12, 2014 settlement agreement entered into with IBC Funds, LLC. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized. The total fair value of the common stock was $37,500 based on the closing price of the Company’s common stock on the date of grant.

F-52

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 14, 2014, the Company issued 2,500 shares of Class A Common Stock pursuant to the conversion of $3,750 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 24, 2014, the Company issued 10,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 25, 2014, the Company issued 10,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 25, 2014, the Company issued 15,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 28, 2014, the Company issued 14,290 shares of Class A Common Stock pursuant to the conversion of $21,435 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 7, 2014, the Company issued 15,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 11, 2014, the Company issued 15,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 14, 2014, the Company issued 10,190 shares of Class A Common Stock pursuant to the conversion of $10,190 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 25, 2014, the Company issued 20,000 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 27, 2014, the Company issued 20,000 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Convertible Common Stock, Class B

The Company has 60,000,000, authorized shares of $0.01 par value Convertible Class B Common Stock, convertible at the option of the holder into shares of the Company’s Class A Common Stock on a 1:10,000 basis. Effective January 14, 2014, the preferential voting rights of the Convertible Class B Common Stock were changed from preferential voting rights of 2,000 votes to each Class A Common Stock vote (2,000:1) to 10,000 votes to each Class A Common Stock vote (10,000:1). The Company shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect the conversions. Common B was not part of the October 6, 2014 reversed stock split.

Convertible Class B Common Stock Issuance for Services

On March 22, 2014, the Company issued 12,500,000 shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing services. The total fair value of the common stock was $44,737 based on the closing price of the Company’s common stock on the date of grant.

On March 16, 2013, the Company issued 5,000,000 shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing product development services. The total fair value of the common stock was $9,500 based on the closing price of the Company’s common stock on the date of grant.

F-53

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dividends Payable

On January 1, 2013, the Company declared and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1 million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which was subsequently paid on September 11, 2014, with the issuance of 11,000 shares of Class A Common Stock in lieu of cash.

Shares of Convertible Series C Preferred Stock Issued for Services to Related Parties

On January 17, 2014, the Company issued 600,000,000 shares of the recently designated Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000 shares of his previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $367,713 based on an independent valuation on the date of grant.

On February 7, 2014, the Company issued 2,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for a $26,000 short term promissory note. The total fair value of the common stock was $1,226 based on an independent valuation on the date of grant.

On February 21, 2014, the Company issued 10,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $75,000 short term promissory note. The total fair value of the common stock was $6,129 based on an independent valuation on the date of grant.

On February 22, 2014, the Company issued 15,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for a $100,000 short term promissory note. The total fair value of the common stock was $9,193 based on an independent valuation on the date of grant.

On March 7, 2014, the Company issued 3,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $30,000 short term promissory note. The total fair value of the common stock was $1,839 based on an independent valuation on the date of grant.

On March 22, 2014, the Company issued 200,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, for providing a personal guaranty on an acquisition loan. The total fair value of the common stock was $122,571 based on an independent valuation on the date of grant.

On March 22, 2014, the Company issued 200,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, for providing a personal guaranty on an acquisition loan. The total fair value of the common stock was $122,571 based on an independent valuation on the date of grant.

On March 22, 2014, the Company issued 1,821,052,632 shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 182,105 shares, consisting of 173,053 previously issued and unvested shares of Class A Common Stock and 9,052 shares of his previously issued and vested Class A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible Preferred Stock was $1,116,041 based on an independent valuation on the date of grant.

On March 22, 2014, the Company issued 13,669,568 shares of the Series C Convertible Preferred Stock to L&F Lawn Services, a company owned by our CEO’s family member, a related party, in exchange for 1,367 of their previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $8,377 based on an independent valuation on the date of grant.

On March 22, 2014, the Company issued 1,821,052,632 shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 182,105 common shares, consisting of 173,053 previously issued and unvested shares of Class A Common Stock and 9,052 shares of his previously issued and vested Class A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible Preferred Stock was $1,116,041 based on an independent valuation on the date of grant.

Shares of Convertible Series C Preferred Stock Issued for Loan Origination Fees to Related Parties

On January 15, 2014, the Company granted 5,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $43,000 short term promissory note. The total fair value of the common stock was $3,064 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

F-54

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 8, 2014, the Company granted 1,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $13,000 short term promissory note. The total fair value of the common stock was $613 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

On March 7, 2014, the Company granted 2,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for a $22,000 short term promissory note. The total fair value of the common stock was $1,226 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

On March 26, 2014, the Company granted 3,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for a $37,500 short term promissory note. The total fair value of the common stock was $1,839 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

On March 26, 2014, the Company granted 3,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock was $1,839 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

On March 28, 2014, the Company granted 2,000,000 shares of Convertible Series C Preferred Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost in consideration for a $18,750 short term promissory note. The total fair value of the common stock was $1,226 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

On March 28, 2014, the Company granted 3,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock was $1,839 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

Debt Conversions into Class A Common Stock – Related Parties

On April 2, 2014, the Company issued 25,000 shares of Class A Common Stock pursuant to the conversion of $25,000 of convertible debt held by Vivienne Passley, a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 7, 2014, the Company issued 12,500 shares of Class A Common Stock pursuant to the conversion of $18,750 of convertible debt held by Star Financial Corporation, a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On May 3, 2014, the Company issued 20,000 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Class A Common Stock Issuances, 2013:

Debt Conversions into Class A Common Stock

On ~~March~~January 133, ~~2012~~2013, the Company issued ~~1,075,269~~400 shares of Class A Common Stock pursuant to the ~~partial~~ conversion ~~in the amount~~ of $1012,000 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~~February 2619, ~~2012~~2013, the Company issued ~~1,538,462~~882 shares of Class A Common Stock pursuant to the ~~partial~~ conversion ~~in the amount~~ of $1015,000 of ~~a $50,000~~ convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On July 9, 2012, the Company issued 1,578,947 shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.F-55

On July 16, 2012, the Company issued 1,525,424 shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

F-40

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On ~~July~~February 2426, ~~2012~~2013, the Company issued ~~789~~1,~~474~~075 shares of Class A Common Stock pursuant to the conversion of $617,~~000~~200 of convertible debt, ~~which~~consisting ~~consisted~~of ~~entirely~~$15,500 of principal. and $1,700 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~July~~March 314, ~~2012~~2013, the Company issued 1,~~898,734~~000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~August~~March 76, ~~2012~~2013, the Company issued 1,~~481,481~~446 shares of Class A Common Stock pursuant to the conversion of $1218,~~000~~800 of convertible debt, ~~which~~consisting ~~consisted~~of ~~entirely~~$17,500 of principal. and $1,300 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~August~~March 2112, ~~2012~~2013, the Company issued ~~2,033,898~~ ~~shares~~450 shares of Class A Common Stock pursuant to the conversion of $125,000 of convertible debt, ~~consisting~~which ofconsisted ~~$10,500~~entirely of principal ~~and $1,500 of accrued and unpaid interest~~. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~September~~March 1514, ~~2012~~2013, the Company issued 50 5,000~~,000~~ shares of Class A Common Stock pursuant to the conversion of $~~250~~46,000 of convertible debt owed to ~~Star Financial Corporation,~~ a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~September~~April 242, ~~2012~~2013, the Company issued ~~10,343,963~~ 1,515 shares of Class A Common Stock inpursuant ~~settlement~~to the conversion of $5310,~~968~~000 of ~~accounts~~convertible ~~payable~~debt, ~~owed~~which ~~for~~consisted ~~the~~entirely ~~purchase~~ of ~~computer equipment on June 16, 2012 from L&F Lawn Services, a related party~~principal. The ~~total~~note ~~fair value of the common stock~~ was ~~$116,887~~converted ~~based~~in onaccordance ~~the closing~~with ~~price of~~ the ~~Company’s~~conversion ~~common~~terms; ~~stock~~therefore onno ~~the~~gain ~~date~~or ofloss ~~grant,~~has ~~resulting~~been ~~in additional compensation of $62,919~~recognized.

On ~~October~~April 110, ~~2012~~2013, the Company issued ~~9,370,640~~ 5,000 shares of Class A Common Stock inpursuant ~~settlement~~to the conversion of $4440,~~728~~000 of ~~related~~convertible ~~party~~ debt owed to ~~Fay~~a ~~Passley~~related party, which consisted of ~~$34,700~~entirely of principal ~~and $10,028 of accrued and unpaid interest~~. The ~~total~~note ~~fair value of the common stock~~ was ~~$83,399~~converted ~~based~~in ~~on the~~accordance ~~closing~~with ~~price of~~ the ~~Company’s~~conversion ~~common~~terms; ~~stock~~therefore onno ~~the~~gain ~~date~~or ~~of grant, resulting in the recognition of a $38,671~~ loss onhas ~~debt settlement~~been recognized.

~~Shares~~On May 27, 2013, the Company modified a related party debt and issued 1,424 shares of Class A Common Stock ~~Issued for~~in ~~Services~~settlement of $14,239 of related party debt owed to ~~Related~~Vivienne ~~Parties~~Passley, which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest. The total fair value of the common stock was $28,479 based on the closing price of the Company’s common stock on the date of grant, resulting in the recognition of a $14,240 loss on debt settlement.

On ~~July~~April 1924, ~~2012~~2013, the Company issued 301,~~000,000~~587 shares of Class A Common Stock pursuant to the ~~Company’s~~conversion ~~CEO~~of in$10,000 ~~consideration~~of ~~for~~convertible ~~providing~~debt, awhich ~~personal~~consisted ~~guaranty~~entirely ~~and~~of ~~collateral on twelve loans over the past 10 years~~principal. The ~~total~~note ~~fair value of the common stock~~ was ~~$375,000~~converted ~~based~~in onaccordance with the ~~closing~~conversion ~~price~~terms; oftherefore ~~the~~no ~~Company’s common~~gain ~~stock~~or onloss ~~the~~has ~~date~~been ~~of grant~~recognized.

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