UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~March 3031, ~~2014~~2015

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

For the transition period from ____________ to ______________

Commission file number: 333-139117

EPAZZ, Inc.

(Exact name of registrant as specified in its charter)

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

205 W. Wacker Drive. Suite 1320

Chicago, IL 60606

(Address of principal executive offices)

(312) 955-8161

(Registrant's telephone number)

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

Yes [X] No [_]

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

Yes [X] No [_]

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

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

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

Yes [_] No [X]

The number of shares of the issuer’s Class A common stock outstanding as of ~~November~~June 1911, ~~2014~~2015, was 342,~~059~~726,~~195~~392,485 shares, par value $0.01 per share.

EPAZZ, INC.

FORM 10-Q

Quarterly Period Ended ~~September~~March 3031, ~~2014~~2015

INDEX

		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
	Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013	2
	Condensed Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014	2
	Statements of Operations for the Three and Nine Months ended September 30, 2014 and 2013 (Unaudited)	3
	Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2015 and 2014 (Unaudited)	3
	Statements of Cash Flows for the Three and Nine Months ended September 30, 2014 and 2013 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2015 and 2014 (Unaudited)	4
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5361
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6372
Item 4.	Controls and Procedures	6372
PART II. OTHER INFORMATION		6473
Item 1.	Legal Proceedings	6473
Item 1A.	Risk Factors	6473
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6473
Item 3.	Defaults Upon Senior Securities	6577
Item 4.	Mine Safety Disclosures	6677
Item 5.	Other Information	6677
Item 6.	Exhibits	6678
SIGNATURES		6880

PART II. – OTHER INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EPAZZ, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	March 31,			December 31,
	2014			2013
	2015			2014
Assets	~~(Unaudited)~~	(Unaudited)
Current assets:
Cash	$	7132,~~963~~765		$	~~208~~106,~~567~~708
Accounts receivable, net		~~256~~97,~~617~~902			2596,~~248~~422
Other current assets		~~131~~53,~~392~~566			~~106~~64,~~114~~607
Total current assets		~~459~~184,~~972~~233			~~339~~267,~~929~~737
Property and equipment, net		~~115~~104,~~470~~532			~~113~~106,~~410~~698
Intangible assets, net		~~451~~309,~~391~~055			~~374~~337,~~162~~938
Goodwill		1374,~~355,361~~818			~~255~~374,~~460~~818
Total assets	$	2972,~~382,194~~638		$	1,~~082~~087,~~961~~191
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Dividends payable	$	–		$	11,000
Accounts payable	$	446,241		$	419,206
Accounts payable		339,540			258,163
Accrued expenses		87,777			88,026
Accrued expenses		213,022			45,298
Accrued expenses, related parties		170,592			127,770
Accrued expenses, related parties		–			28,741
Deferred revenue		401,254			469,937
Deferred revenue		592,408			322,130
Lines of credit		72,138			80,239
Lines of credit		83,260			73,232
Current maturities of capital lease obligations payable		4,748			5,890
Current maturities of capital lease obligations payable		7,031			17,421
Current maturities of notes payable, related parties ($972,823 and $1,066,073 currently in default, respectively)		1,271,198			1,221,323
Current maturities of notes payable, related parties ($841,618 currently in default)		1,186,618			397,368
Convertible debts, net of discounts of $240,917 and $131,774, respectively ($32,749 and $60,674 currently in default, respectively)		147,885			88,739
Convertible debts, net of discounts of $0 and $105,300, respectively ($119,275 currently in default)		152,275			115,128
Current maturities of long term debts		1,155,689			1,219,669
Current maturities of long term debts		809,177			354,786
Derivative Liabilities		24,482			–
Total current liabilities		3,~~383~~782,~~331~~004			13,~~623~~720,~~267~~799
Notes payable, related parties		–			85,000
Long term debts, net of current maturities		1,121,885			1,284,702
Convertible debts, net of discounts of $-0- and $4,283, respectively		–			42,166
Total liabilities		4,903,889			5,005,501
Long term debts, net of current maturities		911,467			857,143
Total liabilities		4,294,798			2,607,576
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		–			–
Convertible preferred stock, Series C, $0.0001 par value, 3,000,000,000 shares authorized, 2,943,722,200 shares issued and outstanding		294,372			–
Convertible preferred stock, Series C, $0.0001 par value, 3,000,000,000 shares authorized, 2,875,320,333 shares issued and outstanding		287,531			293,275
Common stock, Class A, $0.0001 par value, 9,000,000,000 shares authorized, 7,213,383,508 and 3,468,358,708 shares issued and outstanding, respectively		721,338			346,836
Common stock, Class A, $0.01 par value, 9,000,000,000 shares authorized, 1,171,092,485 and 37,557,842 shares issued and outstanding, respectively		11,710,924			375,578
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
Convertible common stock, Class B, $0.01 par value, 60,000,000 shares authorized, 23,000,000 shares issued and outstanding, respectively		230,000			230,000
Additional paid in capital		9(481,~~290,110~~340	)		610,~~429~~352,~~493~~238
Stockholders' payable, consisting of 19,000,000 shares of Series C Convertible Preferred Stock and 28,875,000 shares of Class A Common Stock		–			–
Accumulated deficit		(15,678,366	)		(15,169,401	)
Stockholders' receivable, consisting of -0- and 20,000,000 shares of Class A Common Stock, respectively		–			(800,000	)
Total stockholders' equity (deficit)		(3,931,251	)		(3,918,310	)
Accumulated deficit		(12,220,724	)		(7,501,994	)
Total liabilities and stockholders' equity (deficit)	$	972,638		$	1,087,191
Total stockholders' equity (deficit)		(1,912,604	)		(1,524,615	)
Total liabilities and stockholders' equity (deficit)	$	2,382,194		$	1,082,961

See accompanying notes to financial statements.

EPAZZ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended						~~For the Nine Months Ended~~
	September 30,						September 30,
	March 31,
Revenue	$	361,150		$	156,750		$	941,227		$	643,879
	2015			2014
Expenses:
Revenue	$	461,661		$	252,552
General and administrative		113,308			231,705			683,447			519,339
Expenses:
Salaries and wages		209,667			303,716			2,654,666			2,074,950
General and administrative		255,732			291,693
Depreciation and amortization		55,156			60,682			152,711			204,842
Salaries and wages		150,146			2,336,497
Bad debts (recoveries)		30,813			5,407			25,551			(3,333	)
Depreciation and amortization		43,965			46,157
Total operating expenses		408,944			601,510			3,516,375			2,795,798
Bad debts (recoveries)		152,455			(12	)
Net operating loss		(47,794	)		(444,760	)		(2,575,148	)		(2,151,919	)
Total operating expenses		602,298			2,674,335
Other income (expense):
Net operating loss		(140,637	)		(2,421,783	)
Interest income		–			–			55			–
Other income (expense):
Interest expense		(194,583	)		(140,705	)		(1,212,360	)		(403,663	)
Interest income		217			54
Loss on debt modifications, related parties		–			–			(172,864	)		(96,032	)
Interest expense		(291,435	)		(516,065	)
Other Income / (Expense)		19,251			–			19,251			–
Change in derivative liabilities		(77,110	)		(793,579	)
Change in derivative liabilities		–			–			(777,664	)		–
Total other expense		(368,328	)		(1,309,590	)
Total other income (expense)		(175,332	)		(140,705	)		(2,143,582	)		(499,695	)
Net loss	$	(508,965	)	$	(3,731,373	)
Net loss	$	(223,126	)	$	(585,465	)	$	(4,718,730	)	$	(2,651,614	)
Weighted average number of common shares outstanding - basic and fully diluted		362,189,918			361,573
Weighted average number of common shares outstanding - basic and fully diluted		7,052,068,854			3,319,614,527			5,563,139,967			2,223,857,269
Net loss per share - basic and fully diluted	$	(0.00	)	$	(10.32	)
Net loss per share - basic and fully diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)

See accompanying notes to financial statements.

EPAZZ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months
	For the Three Months Ended March 31,
	Ended September 30,
	2015			2014
	2014			2013
Cash flows from operating activities
Net loss	$	(4508,~~718,730~~965	)	$	(23,~~651~~731,~~614~~373	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debts (recoveries)		25152,~~551~~455			(~~3,333~~12	)
Depreciation and amortization		4143,~~452~~965			7446,~~548~~156
Amortization of intangible assets		111,259			130,294
Amortization of deferred financing costs		39,791			106,341
Amortization of deferred financing costs		317,789			35,035
Amortization of discounts on convertible debts		197,786			316,907
Amortization of discounts on convertible debts		495,683			197,156
Change in fair market value of derivative liabilities		77,110			793,579
Loss on debt modifications, related parties		172,864			96,032
Stock based compensation issued for services		–			37,500
Loss on default provisions of convertible debt		77,375			–
Stock based compensation issued for services, related parties		–			2,236,489
Change in fair market value of derivative liabilities		777,664			–
Stock based compensation issued for services		93,056			–
Stock based compensation issued for services, related parties		2,243,402			1,713,150
Decrease (increase) in assets:
Accounts receivable		1(153,~~130~~935	)		26(9,~~347~~052	)
Other current assets		~~48,035~~–			~~(4,884~~246	)
Increase (decrease) in liabilities:
Accounts payable		~~(395~~6,~~307~~363	)		3240,~~176~~324
Accrued expenses		~~81,049~~(85	)		–(8,460	)
Accrued expenses, related parties		5742,~~450~~822			2029,~~224~~072
Deferred revenues		~~270~~(68,~~277~~683	)		(6825,~~940~~903	)
Net cash provided by (used in) operating activities		(~~300~~171,~~001~~417	)		(~~403~~168,~~809~~186	)
Cash flows from investing activities
Cash acquired in merger		~~736~~–			–736
Purchase of equipment		(437,~~512~~236	)		(2,~~376~~211	)
Acquisition of subsidiaries		~~(582,945~~–	)		–(200,000	)
Net cash used in investing activities		(~~625~~7,~~721~~236	)		(2201,~~376~~475	)
Cash flows from financing activities
Payments on capital lease obligations payable		(101,~~392~~141	)		(165,~~308~~701	)
Proceeds from notes payable, related parties		~~774~~113,~~524~~375			~~427~~323,~~950~~314
Repayment of notes payable, related parties		(8238,~~879~~500	)		(~~119~~54,~~167~~879	)
Proceeds from convertible notes		–253,179			~~170,000~~–
Repayment of convertible notes		(1,500	)		(60,500	)
Proceeds from long term debts		196,052			93,268
Proceeds from long term debts		582,206			273,935
Repayment of long term debts		(418,255	)		(90,371	)
Repayment of long term debts		(472,841	)		(272,741	)
Net cash provided by financing activities		104,710			265,631
Net cash provided by financing activities		789,118			403,169
Net increase (decrease) in cash		(73,943	)		(104,030	)
Net increase (decrease) in cash		(136,604	)		(3,016	)
Cash - beginning		106,708			208,567
Cash - beginning		208,567			46,101
Cash - ending	$	32,765		$	104,537
Cash - ending	$	71,963		$	43,085
Supplemental disclosures:
Interest paid	$	~~187~~291,~~563~~435		$	~~156~~94,~~847~~163
Income taxes paid		–			–
Non-cash investing and financing activities:
Acquisition of subsidiary in exchange for debt	$	~~611,988~~–		$	–102,000
Value of shares issued for conversion of debt	$	~~533~~138,~~360~~803		$	~~155~~369,~~823~~714
Value of shares issued for conversion of debt, related parties	$	112,183		$	173,477
Beneficial conversion features	$	222,228		$	35,028
Shares issued for dividend payable	$	11,000		$	–
Discount on derivatives	$	82,366		$	–
Discount on derivatives	$	422,240		$	150,624
Deferred financing costs	$	28,750		$	141,815
Beneficial conversion feature	$	35,028		$	–
Conversion of Preferred C to Common A	$	1,974,352		$	–
Deferred financing costs	$	391,102		$	78,076
Derivative adjustment due to debt conversions	$	134,994		$	642,481
Value of derivative adjustment due to debt conversions	$	1,199,904		$	–
Dividends payable declared	$	–		$	11,000
Dividends payable declared	$	–		$	18,000

See accompanying notes to financial statements.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

Note 1 – Basis of Presentation and Consolidation

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

These statements reflect all adjustments, ~~which~~ which in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. It is suggested that these interim condensed financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, ~~2013~~2014 and notes thereto included in in the Company's 10-K annual report. The Company follows the same accounting policies in the preparation of interim reports.

Principles of Consolidation

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

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

______________

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

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

(3) ~~Formerly~~Entity Zformed ~~Fridge,~~for prospective ~~Inc.~~purposes, ~~and~~but ~~Cooling~~has ~~Technology~~not ~~Solutions,~~incurred ~~Inc~~any income or expenses to date.

~~(4)~~The ~~FlexFridge,~~condensed ~~Inc.~~consolidated ~~was~~financial statements ~~spun~~herein contain the operations of the wholly-~~off~~owned onsubsidiaries ~~November~~listed ~~21,~~above. ~~2013,~~All ~~and~~significant ~~distributed~~inter-company ontransactions ahave ~~1:10~~been eliminated ~~basis~~in tothe ~~shareholders~~preparation of ~~record~~these onfinancial ~~September~~statements. 15The parent company, ~~2013.~~ Epazz ~~has~~and asubsidiaries, ~~controlling~~IntelliSys, ~~financial~~PRMI, ~~interest~~DFI, K9 inBytes, ~~FlexFridge.~~MS AsHealth, ~~such~~Terran, ~~FlexFridge~~Telecorp, isJadian, ~~consolidated~~Strantin ~~within~~and ~~these~~Inter ~~financial statements~~will ~~pursuant~~be collectively referred to ~~Accounting~~herein ~~Standards~~as ~~Codification~~the (“~~ASC~~Company”), or ~~810-10~~“Epazz”. ~~There~~The ~~has~~Company's ~~been~~headquarters noare ~~material~~located ~~activity~~in Chicago, Illinois and substantially all of its customers are within ~~FlexFridge~~the toUnited ~~date~~States.

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

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

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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.

Fair Value of Financial Instruments

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

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No material impairments of intangible assets have been identified during any of the periods presented. Amortization expense on intangible assets totaled $~~111~~27,~~259~~591 and $~~130~~34,~~294~~ 098 for the ~~nine~~three months ended ~~September~~ 30March 31, ~~2014~~2015 and ~~2013~~2014, respectively.

Goodwill

The Company evaluates the carrying value of of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that ~~would~~ 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 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 ~~ended~~resulted ~~December~~in 31impairment losses of $1,489,078 ~~2013~~for ~~resulted~~the inyear noended ~~impairment~~December ~~losses~~31, 2014.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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.

Derivative Liability

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date. We analyzed the derivative financial instruments (the Convertible Note and tainted Warrant), in accordance with ASC 815. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument's contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument's settlement provisions. The Company utilized multinomial lattice models that value the derivative liability within the notes based on a probability weighted discounted cash flow model. The Company utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

Basic and Diluted Net Earnings per Share

Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. There were no outstanding potential common stock equivalents for the periods presented. As such, basic and diluted earnings per share resulted in the same figure for the ~~nine~~three months ending ~~September~~March 3031, ~~2014~~2015 and ~~2013~~2014.

Stock-Based Compensation

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 ~~stock~~ issued for services and compensation was $~~2,243,402~~ -0- and $12,~~713~~273,~~150~~ 989 for the ~~nine~~three months ~~ended~~ending ~~September~~March 3031, ~~2014~~2015 and ~~2013~~2014, respectively.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

Revenue Recognition

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

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

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

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

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

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

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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.

Note 2 – Going Concern

As shown in the accompanying condensed consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $1215,~~220~~552,~~724~~260, and as of ~~September~~March 3031, ~~2014~~2015, the Company’s current liabilities exceeded its current assets by $3,~~383~~471,~~331~~665 and its total liabilities exceeded its total assets by $13,~~912~~805,~~604~~145. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

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

Note 3 – Subsidiary Formation

Formation of Subsidiary – ~~Terran Power~~Jadian, Inc., ~~September~~May 196, ~~2013~~2014

On ~~September~~May 196, ~~2013~~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 ~~Terran Power~~Jadian, Inc. ~~The~~for ~~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 goasset ~~without~~purchase ~~needing~~agreement anwith ~~outlet~~Jadian ~~or a second battery~~Enterprises, ~~however, as of the date of this filing there has been no activity and, as such, there are no revenues or expenses~~Inc.

~~Subsidiary~~ Formation of Subsidiary – ~~FlexFridge~~Strantin, Inc., ~~March~~July 431, ~~2013~~2014

On ~~March~~July 431, ~~2013~~2014, 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~~Strantin, 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~~asset ~~was~~purchase ~~spun~~agreement ~~off~~with ~~to shareholders of record on September 15~~Strand, ~~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.

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.

Formation of Subsidiary – ZCollars, Inc., March 11, 2015

On March 11, 2015, 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 ZCollars, Inc. The Company plans to file a non-provisional patent application to develop a dog collars that allows for better tracking dogs.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

Note 4 – ~~Mergers and~~ Acquisitions

Interaction Technology, Inc., Asset Purchase Agreement

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 Note 1”) and $200,000 was financed by way of a Promissory Note (the “Inter Note 2”). The terms of the Inter 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 payments of $37,500 commencing thereafter, no prepayment penalty. 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 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.

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:

	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

⁽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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

	Combined Pro Forma:
		For the Three months ended March 31,
			2014
Revenue:			$	379,952

Expenses:
Operating expenses				2,815,598

Net operating loss				(2,435,646	)

Other income (expense)				(1,309,578	)

Net loss			$	(3,745,224	)

Weighted average number of common shares Outstanding – basic and fully diluted				361,573

Net loss per share – basic and fully diluted			$	(10.36	)

Strand, Inc., Asset Purchase Agreement

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.

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,
	July 31,
	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
Goodwill		206,321
Total fair value of assets assumed		15,317
Total fair value of assets assumed		221,638
Consideration paid in excess of fair value (Goodwill)	$	206,321
Consideration paid in excess of fair value (Goodwill)(3)	$	–

______________

⁽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.

1011

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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~~2014 are as follows:

	Combined Pro Forma:
	For the nine months ended September 30,
	For the Three months ended March 31,
	~~2014~~			~~2013~~2014
Revenue:	$	~~1,039,287~~		$	~~990~~275,~~049~~311
Expenses:
Operating expenses		~~3,620,536~~			(2,~~687~~711,~~554~~378	)
Net operating income (loss)		~~(2,581,249~~	)		(12,~~697~~436,~~505~~067	)
Other income (expense)		~~(2,141,440~~	)		(~~366~~1,~~946~~308,015	)
Net income (loss)	$	~~(4,472,880~~	)	$	(23,~~064~~744,~~451~~082	)
Weighted average number of common shares outstanding – basic and fully diluted		~~5,563,139,967~~			1361,~~666,897,778~~573
Net income (loss) per share – basic and fully diluted	$	~~(0.00~~	)	$	(010.0035	)

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.

1112

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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

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. 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.

1213

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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

13The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been January 1, 2014 are as follows:

	Combined Pro Forma:
	For the Three months ended March 31,
		2014
Revenue:	$	$	367,599

Expenses:
Operating expenses			2,798,474

Net operating income (loss)			(2,430,875	)

Other income (expense)			(1,308,299	)

Net income (loss)		$	(3,739,174	)

Weighted average number of common shares outstanding – basic and fully diluted			361,753

Net income (loss) per share – basic and fully diluted		$	(10.34	)

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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 nine months ended September 30,
	2014			2013
Revenue:	$	1,112,167		$	1,274,813
Expenses:
Operating expenses		3,658,633			2,941,345
Net operating income (loss)		(2,546,466	)		(1,666,532	)
Other income (expense)		(2,153,780	)		(368,430	)
Net income (loss)	$	(4,700,246	)	$	(2,034,962	)
Weighted average number of common shares outstanding – basic and fully diluted		4,783,826,881			1,666,897,778
Net income (loss) per share – basic and fully diluted	$	(0.00	)	$	(0.00	)

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

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”), 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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

⁽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.

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.

15The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been January 1, 2014 are as follows:

EPAZZ, INC.

	Combined Pro Forma:
	For the Three months ended March 31,
		2014
Revenue:$		$	341,573

Expenses:
Operating expenses			2,752,907

Net operating loss			(2,411,334	)

Other income (expense)			(1,309,590	)

Net loss		$	(3,720,924	)

Weighted average number of common shares Outstanding – basic and fully diluted			361,573

Net loss per share – basic and fully diluted		$	(10.29	)

~~NOTES~~Note TO5 ~~CONDENSED~~– ~~CONSOLIDATED~~Related ~~FINANCIAL STATEMENTS~~Parties

~~(Unaudited)~~Debt Financing

~~The~~From ~~unaudited~~time ~~supplemental~~to ~~pro~~time ~~forma~~we ~~results of~~have ~~operations~~received ofand repaid ~~the~~loans ~~combined~~from ~~entities~~our ~~had~~CEO ~~the~~and ~~dates~~his ofimmediate ~~the~~family ~~acquisitions~~members ~~been~~to ~~January 1, 2014~~fund oroperations. ~~January~~These 1,related ~~2013~~party debts are fully disclosed in asNote ~~follows:~~ 14 below.

	Combined pro Forma:
	For the nine months ended September 30,
	2014			2013
Revenue:	$	1,029,930		$	1,311,150
Expenses:
Operating expenses		3,615,415			2,883,930
Net operating income (loss)		(2,585,485	)		(1,572,780	)
Other income (expense)		(2,228,419	)		(367,836	)
Net income (loss)	$	(4,813,904	)	$	(1,940,616	)
Weighted average number of common shares outstanding – basic and fully diluted		5,563,139,967			1,666,897,778
Net income (loss) per share – basic and fully diluted	$	(0.00	)	$	(0.00	)

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

In addition to the debts disclosed in Note 514, –we ~~Related~~had ~~Parties~~three convertible notes with related parties that are disclosed in Note 15 as follows:

Debt Financings

	March 31,			December 31,
	2015			2014
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.	$	5,000		$	–

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.		13,550

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.		25,050			–

Total convertible debts, related parties		43,600			–
Less: unamortized discount on beneficial conversion feature		(41,105	)		–
Convertible debts		2,495			–
Less: current maturities of convertible debts, related parties included in convertible debts		(2,495	)		–
Long term convertible debts, related parties included in convertible debts	$	–		$	–

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 13 below.

In addition to the debts disclosed in Note 13, we had a convertible note with a related party that is disclosed in Note 14 as follows:

	September 30, 2014		December 31, 2013
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 $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
Total convertible debts, related parties		–		46,449
Less: unamortized discount on beneficial conversion feature		–		(5,653	)
Convertible debts		–		40,796
Less: current maturities of convertible debts, related parties included in convertible debts		–		–
Long term convertible debts, related parties included in convertible debts	$	–	$	40,796

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Changes in Stockholders’ Equity, Related Parties

Dividends Payable

On January 1, 2013, the Company declared and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1 million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which was subsequently paid on September 11, 2014, with the issuance of 110,000,000 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 ~~600~~60,000~~,000 shares~~ shares of his previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $568,283 ~~based~~ based on an independent valuation on the date of grant; therefore the Company recognized additional compensation expense of $345,427 due to the difference in the fair value of the Class A Common Stock exchanged.

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 $2,385 based on an independent valuation on the date of grant.

On February 21, 2014, the Company issued 10 15,000,000 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 $9,562 based on an independent valuation on the date of grant.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 $14,266 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 $2,912 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 $127,746 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 $127,746 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 1182,~~821,052,632~~105 Class A Common shares, consisting of 1173,~~730,526,316~~053 previously issued and unvested shares of Class A Common Stock and 909,~~526,316~~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 $1,163,162 based on an independent valuation on the date of grant; therefore the Company recognized ~~additional~~ additional compensation expense of $707,025 due to the difference in the fair value of the Class A Common Stock exchanged.

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 131,~~669,568~~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~~ additional compensation expense of $5,370 due to the difference in the fair value of the Class A Common Stock exchanged.

18On 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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On March 22, 2014, the Company issued 60,000,000 shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 60,000,000 shares, consisting of 54,000,000 previously issued and unvested shares of Class A Common Stock and 6,000,000 shares of his previously issued and vested Class A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible Preferred Stock was $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.

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

~~Debt~~On ~~Conversions~~October ~~into~~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 ~~Related~~the ~~Parties~~Preferred C equity instrument no additional value was recognized as a result of this conversion.

On ~~April~~October 210, 2014, the Company issued ~~250~~ 1,~~000~~500,000 shares of Class A Common ~~Stock pursuant~~ to ~~the~~Star ~~conversion of $25~~Financial,~~000~~ ofa ~~convertible~~company ~~debt~~owned ~~held~~ by ~~Vivienne~~our ~~Passley~~CEO’s family member, a related party, from a ~~which~~conversion ~~consisted~~notice ~~entirely~~from ofPreferred ~~principal~~C. ~~The~~As ~~note~~this was ~~converted~~a inconversion ~~accordance~~within ~~with~~ the ~~conversion~~ terms; ~~therefore~~of nothe ~~gain~~Preferred orC ~~loss~~equity instrument no additional ~~has~~value ~~been~~was recognized as a result of this conversion.

On ~~April~~October 710, 2014, the Company issued ~~125~~ 1,~~000~~400,000 shares of Class A Common ~~Stock pursuant~~ to ~~the~~GG ~~conversion~~Mars ~~of $18~~Capital.,~~750~~ ofa ~~convertible~~company ~~debt~~owned ~~held~~ by ~~Star~~our ~~Financial~~CEO’s ~~Corporation~~family member, a related party, ~~which~~from a ~~consisted~~conversion ~~entirely~~notice offrom ~~principal~~Preferred C. ~~The~~As ~~note~~this was ~~converted~~a inconversion ~~accordance~~within ~~with~~the terms of the ~~conversion~~Preferred ~~terms;~~C ~~therefore~~ equity instrument no ~~gain~~additional value orwas ~~loss~~recognized ~~has~~as ~~been~~a ~~recognized~~result of this conversion.

On ~~May~~April 323, 2014, the Company ~~issued 200,000,000~~granted 350 shares of Class A Common Stock ~~pursuant~~ to ~~the~~Star ~~conversion of $20~~Financial,~~000~~ ofa ~~convertible~~company ~~debt~~owned ~~held~~ by ~~Star~~our ~~Financial~~CEO’s ~~Corporation~~family member, a related party, ~~which~~as ~~consisted~~a ~~entirely~~loan origination ofcost ~~principal~~in consideration for a $35,000 short term promissory note. The ~~note~~total fair value of the common stock was ~~converted~~$1,050 based inon ~~accordance~~the ~~with~~closing price of the ~~conversion~~Company’s ~~terms;~~common ~~therefore no~~stock ~~gain~~on orthe ~~loss~~date ~~has~~of ~~been~~grant. ~~recognized~~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.

On May 28, 2014, the Company granted 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 $32,500 short term promissory note. The total fair value of the common stock was $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 June 12, 2014, the Company granted 213 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 $5,000 short term promissory note. The total fair value of the common stock was $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.

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

OnDebt ~~May~~Conversions ~~22,~~into ~~2014, the Company issued 150,000,000 shares of~~ Class A Common Stock ~~pursuant~~– toRelated 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.Parties

On ~~June~~April 172, 2014, the Company issued ~~334~~25,~~333,745~~000 shares of Class A Common Stock pursuant to the conversion of $3325,~~433~~000 of convertible debt held by Vivienne Passley, a related party, which consisted ofentirely ~~$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.

~~Convertible~~On ~~Class~~April 7, 2014, the Company issued 12,500 Bshares of Class A Common Stock ~~Issuance~~pursuant ~~for~~to ~~Services~~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 ~~March~~May 223, 2014, the Company issued 1220,~~500,~~000 shares of ~~Convertible~~ Class BA Common Stock pursuant to the ~~Company’s~~conversion ~~CEO~~of in$20,000 ~~consideration~~of ~~for~~convertible ~~providing~~debt ~~services.~~held ~~The~~by ~~total~~Star ~~fair~~Financial ~~value~~Corporation, a ofrelated ~~the~~party, ~~common~~which ~~stock~~consisted ~~was~~entirely ~~$44,737~~of ~~based~~principal. onThe ~~the~~note ~~closing~~was ~~price~~converted ofin accordance with the ~~Company’s~~conversion ~~common~~terms; ~~stock~~therefore no ongain ~~the~~or ~~date~~loss ofhas ~~grant~~been recognized.

~~Subscriptions~~On ~~Payable~~May ~~Issued~~22, ~~for~~2014, ~~Shares~~the Company issued 15,000 shares of Class A Common Stock ~~Granted~~pursuant ~~for~~to ~~Services~~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 ~~April~~June 2317, 2014, the Company ~~granted~~issued 333,~~500,000~~433 shares of Class A Common Stock pursuant to ~~Star~~the ~~Financial,~~conversion aof ~~company~~$33,433 ~~owned~~of byconvertible ~~our~~debt ~~CEO’s~~held ~~family~~by ~~member~~Vivienne Passley, a related party, ~~as a loan~~ ~~origination~~which ~~cost~~consisted inof ~~consideration for a~~ $3526,000 ~~short~~of ~~term~~principal, ~~promissory~~$4,933 ~~note. The total fair value~~ of ~~the~~interest ~~common~~and ~~stock was~~ $12,~~050 based~~500 onof ~~the~~liquidated ~~closing~~damages. ~~price~~The ofnote ~~the~~was ~~Company’s~~converted ~~common~~in ~~stock~~accordance with on the ~~date~~conversion ofterms; ~~grant.~~therefore ~~The~~no ~~shares~~gain ~~were~~or ~~subsequently~~loss ~~issued~~has onbeen ~~August 29, 2014~~recognized.

On ~~April~~October 2410, 2014, the Company ~~granted 10~~issued 30,000,000 shares of Class A Common ~~Stock~~ to GGour ~~Mars~~CEO ~~Capital,~~from a ~~related~~conversion ~~party~~notice ~~entity~~from ~~owned~~Preferred ~~by Vivienne Passley, as a loan origination cost in consideration for a $150,000 short term promissory note~~C. ~~The~~As ~~total~~this ~~fair value of the common stock~~ was ~~$3,000~~a ~~based~~conversion onwithin the ~~closing~~terms ~~price~~ of the ~~Company’s~~Preferred ~~common~~C ~~stock~~equity oninstrument ~~the~~no ~~date~~additional ofvalue ~~grant.~~was ~~The~~recognized ~~shares~~as ~~were~~a ~~subsequently~~result ~~issued~~of onthis ~~August 29, 2014~~conversion.

On ~~May~~October 710, 2014, the Company ~~granted 10~~issued 1,~~000~~500,000 shares of Class A Common ~~Stock~~ to GGStar ~~Mars Capital~~Financial, a ~~related~~company ~~party entity~~ owned by ~~Vivienne~~our ~~Passley,~~CEO’s asfamily member, a ~~loan~~related ~~origination~~party, ~~cost in~~from ~~consideration for~~ a conversion ~~$125,000~~notice ~~short~~from ~~term~~Preferred ~~promissory note~~C. ~~The~~As ~~total~~this ~~fair value of the common stock~~ was ~~$2,000~~a ~~based~~conversion onwithin the ~~closing price~~terms of the ~~Company’s~~Preferred ~~common~~C ~~stock~~equity oninstrument ~~the~~no ~~date~~additional value ofwas ~~grant.~~recognized ~~The~~as ~~shares~~a ~~were~~result ~~subsequently~~of ~~issued~~this ~~on August 29, 2014~~conversion.

On ~~May~~October 2810, 2014, the Company ~~granted 3~~issued 1,~~250~~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 a loan~~from ~~origination cost in consideration for~~ a ~~$32,500~~conversion ~~short~~notice ~~term~~from ~~promissory~~Preferred ~~note~~C. ~~The~~As ~~total~~this ~~fair value of the common stock~~ was ~~$650~~a ~~based on~~conversion within the ~~closing~~terms ~~price~~ of the ~~Company’s~~Preferred ~~common~~C ~~stock~~equity oninstrument ~~the~~no ~~date~~additional value ofwas ~~grant.~~recognized ~~The~~as ~~shares~~a ~~were~~result ~~subsequently~~of ~~issued~~this ~~on August 29, 2014~~conversion.

OnDebt ~~June~~Conversion ~~12, 2014, the Company granted 2,125,000 shares of Class A Common Stock to Star Financial, a company owned~~ by ~~our~~Related CEO’s family member, a related party, as a loan origination cost in consideration for a $5,000 short term promissory note. The total fair value of the common stock was $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.Party

On ~~July~~March 302, ~~2014~~2015, the Company issued ~~277~~64,~~777~~000,~~778~~000 shares of Class A Common Stock pursuant to ~~Wellington~~the ~~Shields~~conversion ~~Holdings,~~of ~~LLC~~$3,200 asof aconvertible ~~fee~~debt ~~for~~held ~~closing~~by onGG anMars, ~~acquisition.~~a ~~The~~company ~~total~~owned ~~fair~~by ~~value~~our ofCEO’s ~~the~~family ~~common~~member, ~~stock~~a ~~was~~related party, which consisted of $553,~~556~~200 ~~based~~of onprincipal.. ~~the~~The ~~closing~~note ~~price~~was ofconverted in accordance with the ~~Company’s~~conversion ~~common~~terms; ~~stock~~therefore onno ~~the~~gain ~~date~~or ofloss ~~grant~~has been recognized.

On ~~August~~March 293, ~~2014~~2015, the Company issued 344,~~500~~000,000 shares of Class A Common Stock pursuant to the conversion of $3,300 of convertible debt held by Star Financial, a company owned by our CEO’s family member, a related party, aswhich aconsisted ~~loan origination~~of ~~cost that was previously granted on April 23, 2014 in consideration for a~~ $353,~~000~~300 ~~short~~of ~~term promissory note~~principal. The ~~total fair~~note ~~value of the common stock~~ was ~~$1,050~~converted ~~based~~in onaccordance with the ~~closing~~conversion ~~price~~terms; oftherefore ~~the~~no ~~Company’s~~gain ~~common~~or ~~stock~~loss onhas ~~the~~been ~~date of grant~~recognized.

On ~~August~~March 2911, ~~2014~~2015, the Company issued 1022,000,000 shares of Class A Common Stock pursuant to GGthe ~~Mars~~conversion ~~Capital~~of $1,650 aof ~~related~~convertible ~~party~~debt ~~entity~~held ~~owned~~ by ~~Vivienne~~Star ~~Passley~~Financial, as a ~~loan~~company ~~origination cost~~owned ~~that~~by ~~was~~our ~~previously~~CEO’s ~~granted~~family ~~on April 24~~member, ~~2014~~a inrelated ~~consideration~~party, ~~for~~which aconsisted of $~~150~~1,~~000~~650 ~~short~~of ~~term promissory note~~principal. The ~~total~~note ~~fair value of the common stock~~ was ~~$3,000~~converted ~~based~~in onaccordance with the ~~closing~~conversion ~~price~~terms; oftherefore ~~the~~no ~~Company’s~~gain ~~common~~or ~~stock~~loss onhas ~~the~~been ~~date of grant~~recognized.

On March 24, 2015, the Company issued 40,000,000 shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by GG Mars, a company owned by our CEO’s family member, a related party, which consisted of $2,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

On August 29, 2014 the Company issued 10,000,000 shares of Class A Common Stock to GG Mars Capital, a related party entity owned by Vivienne Passley, as a loan origination cost that was previously granted on May 7, 2014 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.

On August 29, 2014 the Company issued 3,250,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost that was previously granted on May 28, 2014 in consideration for a $32,500 short term promissory note. The total fair value of the common stock was $650 based on the closing price of the Company’s common stock on the date of grant.

On August 29, 2014 the Company issued 2,125,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost that was previously granted on June 12, 2014 in consideration for a $5,000 short term promissory note. The total fair value of the common stock was $213 based on the closing price of the Company’s common stock on the date of grant.

Issuance of Dividends Paid via Class A Common Stock in Lieu of Cash

On September 11, 2014 the Company issued a total of 110,000,000 shares of Class A Common Stock amongst three related party Convertible Series B Preferred Stockholders pursuant to a dividend payable of $11,000 that was earned at a rate of 1.5% of the Company’s revenues for the 2013 calendar year. The total fair value of the common stock was $11,000 based on the closing price of the Company’s common stock on the date of grant.

Subscriptions Payable Issued for Shares of Convertible Series C Preferred Stock Granted for Services

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 $6,465 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

On February 8, 2014, the Company granted 1,000,000 shares of Convertible Series C Preferred Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $13,000 short term promissory note. The total fair value of the common stock was $1,193 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 $1,942 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 $2,928 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 $2,928 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 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. 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 $2,390 based on an independent valuation on the date of grant. The shares were subsequently issued on July 7, 2014.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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~~ 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~~ 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.

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.

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

~~The following schedule summarizes the valuation of financial instruments at fair value on a non-recurring basis in the balance sheets as of September 30, 2014 and December 31, 2013:~~21

Fair Value Measurements at September 30, 2014

Level 1

Level 2

Level 3

Assets

Cash

71,963

–

Intangible assets

–

451,391

Goodwill

–

1,355,361

Total assets

71,963

–

1,806,752

Liabilities

Lines of credit

–

83,260

–

Capital leases

–

7,031

–

Notes payable, related parties

–

1,186,618

–

Convertible debts, net of discount of $0.00

–

152,275

–

Long term debts, including current maturities

–

911,467

–

Total Liabilities

–

2,340,651

–

71,963

(2,340,651

)

1,806,752

Fair Value Measurements at December 31, 2013

Level 1

Level 2

Level 3

Assets

Cash

208,567

–

Intangible assets

–

374,162

Goodwill

–

255,460

Total assets

208,567

–

629,622

Liabilities

Lines of credit

–

73,232

–

Capital leases

–

17,421

–

Long term debts

–

1,211,929

–

Notes payable, related parties

–

482,368

–

Convertible debts, net of discount of $109,583

–

157,294

–

Total Liabilities

–

1,942,244

–

208,567

(1,942,244

)

629,622

EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

~~There~~The ~~were~~following noschedule ~~transfers~~summarizes the valuation of financial ~~assets or~~instruments ~~liabilities~~at ~~between~~fair ~~Level~~value 1on ~~and~~a ~~Level~~non-recurring 2basis ~~inputs~~in ~~for~~ the ~~nine~~balance ~~months~~sheets ~~ended~~as ~~September~~of 30March 31, ~~2014~~ 2015 and ~~the year ended~~ December 31, ~~2013.~~2014:

Level 2 liabilities consist of various debt arrangements, and Level 3 assets consist of intangible assets and goodwill. Fair value adjustments related to the measurement of intangible assets of $-0- and $276,282 were necessary during the nine months ended September 30, 2014 and December 31, 2013, respectively.

Fair Value Measurements at March 31, 2015

Level 1

Level 2

Level 3

Assets

Intangible assets

–

309,055

Goodwill

–

374,818

Total assets

–

683,873

Liabilities

Lines of credit

–

66,137

–

Capital leases

–

4,748

–

Promissory notes

–

2,157,469

–

Notes payable, related parties

–

1,271,198

–

Convertible debts, net of discount of $222,228

–

147,885

–

Derivative Liabilities

–

24,482

–

Total Liabilities

–

3,671,919

–

(3,671,919

)

683,873

Fair Value Measurements at December 31, 2014

Level 1

Level 2

Level 3

Assets

Intangible assets

–

337,938

Goodwill

–

374,818

Total assets

–

712,756

Liabilities

Lines of credit

–

80,239

–

Capital leases

–

5,889

–

Long term debts

–

2,504,371

–

Notes payable, related parties

–

1,221,323

–

Convertible debts, net of discount of $131,774

–

88,739

–

Total Liabilities

–

3,900,561

–

(3,900,561

)

712,756

There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the periods ended March 31, 2015 and 2014.

Level 3 assets consist of intangible assets and goodwill.

Note 7 – Other Current Assets

As of ~~September~~March 3031, ~~2014~~2015 and December 31, ~~2013,~~ 2014 other current assets included the following:

	September 30,		December 31,
	March 31,		December 31,
	2014		2013
	2015		2014
Deferred financing costs	$	~~118~~43,~~299~~688	$	4454,~~986~~729
Other receivable		3,215		51,250
Security deposits		9,878		9,878
	$	~~131~~53,~~392~~566	$	~~106~~64,~~114~~607

The Company recognized $~~317~~39,~~789~~791 and $35106,~~035~~341 of amortization expense related to the deferred financing costs during the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015 and ~~2013~~2014, respectively.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 8 – Property and Equipment

Property and Equipment consists of the ~~following~~ following at ~~September~~March 3031, ~~2014~~2015 and December 31, ~~2013~~2014, respectively:

		September 30,				December 31,
	March 31,			December 31,
		2014				2013
	2015			2014
Furniture and fixtures	$	$22,006	~~23,279~~	$	22,006	$	~~2,187~~
Computers and equipment		197,683	~~182,074~~		188,613		~~325,105~~
Software		19,506	~~15,660~~		15,660		~~67,986~~
Assets held under capital leases		17,855	~~17,855~~		17,855		~~134,800~~
			238,868				530,078
		257,050			244,134
Less accumulated depreciation and amortization		(152,518)	~~(123,398~~	)	(137,436)		~~(416,668~~	)
	$	$104,532	~~115,470~~	$	106,698	$	~~113,410~~

Depreciation and amortization expense totaled $4115,~~452~~082 and $7412,~~548~~ 058 for the ~~nine~~periods ~~months~~ ended ~~September~~March 3031, ~~2014~~2015 and ~~2013~~2014, respectively.

A total of $334,722 of fully depreciated assets no longer in service was disposed of on March 31, 2014. No proceeds were received on disposal, resulting in no gain or loss on disposal during the nine months ending September 30, 2014.23

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

Note 9 – Intangible Assets

Intangible assets consisted of the following at ~~September~~March 3031, ~~2014~~2015 and December 31, ~~2013~~2014, respectively:

	Useful		March 31,		~~September 30,~~		December 31,		~~December 31,~~
Description	Life		2015		~~2014~~		2014		~~2013~~
Technology-based intangible assets - IntelliSys		5 Years			$	200,000			$	200,000
Technology-based intangible assets
Technology-based intangible assets - K9 Bytes		5 Years				42,000				42,000
K9 Bytes	5 Years		$	31,569			$	31,569
Technology-based intangible assets – MS Health		5 Years				124,000				124,000
MS Health	5 Years			74,400				74,400
Technology-based intangible assets – Telecorp		5 Years				72,490				–
Intellisys	5 Years			163,333				163,333
Technology-based intangible assets – Cynergy		5 Years				8,035				–
Cynergy	5 Years			1,205				1,205
Technology-based intangible assets – Jadian		5 Years				37,180				–
Interaction	5 Years			466				466
Technology-based intangible assets – Strantin		5 Years				9,447				–
Jadian	5 Years			6,816				6,816
Contracts – MS Health		6 Years				258,000				258,000
Strand	5 Years			1,259				1,259
Trade name - K9 Bytes		5 Years				22,000				22,000
Telecorp	5 Years			12,082				12,082
Trade name - Telecorp		5 Years				29,390				–
				291,130				291,130
Trade name - Cynergy		5 Years				1,826				–
Contracts
Trade name - Jadian		5 Years				24,941				–
MS Health	6 Years			129,000				129,000
Trade name - Strand		5 Years				5,870
Interaction	6 Years			1,056				1,056
Other intangible assets – MS Health		2 Years				18,000				18,000
				130,056				130,056
Other intangible assets - K9 Bytes		2 Years				26,000				26,000
Trade Name
Other intangible assets – Telecorp		2 Years				13,750				–
K9 Bytes	5 Years			16,536				16,536
Other intangible assets - Jadian		2 Years				15,417				–
Cynergy	5 Years			274				274
Total intangible assets						879,179				690,000
Jadian	5 Years			4,572				4,572
Less: accumulated amortization						(427,788	)			(315,838	)
Strand	5 Years			783				783
Intangible assets, net					$	451,391			$	374,162
Telecorp	5 Years			4,898				4,898
				27,063				27,063
Other Intangible Assets
MS Health	2 Years			20,250				20,250
K9 Bytes	2 Years			26,000				26,000
Interaction	2 Years			686				686
				46,936				49,936
Total intangible assets				495,186				495,186
Less: accumulated amortization				(186,131	)			(157,248	)
Intangible assets, net			$	309,055			$	337,938

Amortization expense on intangible assets totaled $~~111~~28,~~259~~883 and $~~130~~34,~~294~~098 for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015 and ~~2013~~March 31, 2014, respectively.

~~Note 10 – Convertible Settlement~~24

~~On February 14~~EPAZZ, 2014, the Circuit Court of the Twelfth Judicial Circuit in and for Sarasota County, Florida approved the February 12, 2014, Settlement Agreement, entered into between the Company and IBC Funds, LLC (“IBC”) whereby a total of $314,021 of outstanding debts that were acquired by IBC from various creditors, including $288,071 of outstanding debts previously owed to related parties was sold and assigned to IBCINC. In satisfaction of the outstanding debts acquired by IBC, we agreed to issue IBC shares of our common stock at a 50% discount to the lowest trading price during the fifteen (15) trading days preceding the share request (“Settlement Shares”) in various tranches in an aggregate amount equal to the claim amount of $314,021 until such time as the debts were satisfied. A total of 3,040,823,600 Settlement Shares were subsequently issued pursuant to the Settlement Agreement, in addition to 75,000,000 shares that were issued in consideration pursuant to the settlement agreement. IBC is precluded from owning more than 9.99% of the Company’s common stock in aggregate at any given time. The net proceeds, less the 50% discount retained by IBC, received from the sale of the Settlement Shares in the market were used to satisfy the Company’s outstanding obligations that were acquired by IBC. The convertible settlements liability was fully converted as of June 30, 2014.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 10 – Goodwill

The changes in the carrying amount of goodwill and accumulated impairment losses for the period ended March 31, 2015 and December 31, 2014, respectively, are as follows:

	K9 Bytes		Jadian		Strand		Total
Balance, December 31, 2014:	$	87,244	$	81,253	$	206,321	$	374,818
Goodwill acquired during the period		–		–		–		–
Impairment loses		–		–		–		–
Balance, March 31, 2015:	$	87,244	$	81,253	$	206,321	$	374,818

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 resulted in impairment losses of $1,489,078 during the year ended December 31, 2014. We will perform our next earnings forecast during the fourth quarter of 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 March 31, 2015 and December 31, 2014 accrued expenses included the following:

	March 31,		December 31,
	2015		2014
Accrued interest	$	63,524	$	63,697
Accrued interest, related parties		170,592		127,770
Accrued payroll and payroll taxes		23,769		23,769
Other accrued expenses		484		560
	$	258,369	$	215,796

Note 12 – Line of Credit

Lines of credit consisted of the following at March 31, 2015 and December 31, 2014, respectively:

	March 31,			December 31,
	2015			2014
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.	$	46,467		$	47,898

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.		13,421			14,786

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.		–			5,305

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			12,250

Total line of credit		72,138			80,239
Less: current portion		(72,138	)		(80,239	)
Line of credit, less current portion	$	–		$	–

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

Note 1113 – ~~Lines~~Capital ofLease ~~Credit~~Obligations Payable

Lines of credit consisted of the following at September 30, 2014 and December 31, 2013, respectively:

	September 30,			December 31,
	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.	$	47,685		$	49,508
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.		15,290			18,087
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
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.		20,285			–
Total line of credit		83,260			73,232
Less: current portion		(83,260	)		(73,232	)
Line of credit, less current portion	$	–		$	–

Note 12 – Capital Lease Obligations Payable

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

~~Lease~~The #1cost -of ~~Commenced~~equipment onunder capital leases is included in the Balance Sheets as property and equipment and was $16,962 and $17,855 at March 1231, ~~2010~~2015 ~~with~~and December 31, 2014, ~~monthly~~respectively. ~~lease~~Accumulated ~~payments~~amortization of the leased equipment was $211,~~455~~606 and ~~two~~$10,713 ~~months~~at ~~paid~~March ~~in advance~~31, 2015 and ~~the~~2014, ~~remaining~~respectively. Amortization ~~payments~~of ~~paid~~assets ~~over~~under ~~the~~capital ~~following~~leases 46is ~~months~~included in depreciation and amortization expense.

~~Lease~~The #2future –minimum ~~Commenced~~lease onpayments ~~January~~required under ~~12,~~the ~~2012 with~~capital ~~monthly~~leases ~~lease~~and ~~payments~~the ofpresent ~~$480~~value ~~over~~of the ~~next~~net 48minimum ~~months,~~lease ~~and~~payments aas ~~bargain~~of ~~purchase~~March ~~price~~31, of2015 $1and atDecember ~~the~~31, ~~end~~2014, ofare as ~~the lease.~~follows:

The cost of equipment under capital leases is included in the Balance Sheets as property and equipment and was $17,855 and $134,800 at September 30, 2014 and December 31, 2013, respectively. Accumulated amortization of the leased equipment was $2,678 and $124,087 at September 30, 2014 and December 31, 2013, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense.

	March 31,			December 31,
	2015			2014
Lease #1 – Capital Lease from Marlin Bank Lease Commenced on January 12, 2012 with monthly lease payments of $480 over the next 48 months, and a bargain purchase price of $1 at the end of the lease. The outstanding balance on the Capital Lease bears interest at a rate of 13%.		5,047			5,890
Total minimum payments	$	5,047		$	5,890
Less: amount representing interest		(299	)		(766	)
Present value of net minimum lease payments		4,748			5,124
Less: Current maturities of capital lease obligations		(4,748	)		(5,124	)
Long-term capital lease obligations	$	0		$	0

~~The~~Note ~~future~~14 ~~minimum~~– ~~lease~~Notes ~~payments required under the capital leases and the present value of the net minimum lease payments as of September 30~~Payable, ~~2014,~~Related ~~are as follows:~~Parties

Nine Months Ending September 30,	Amount
2015	$	7,196
2016		428
Total minimum payments	$	7,624
Less: amount representing interest		(593	)
Present value of net minimum lease payments		7,031
Less: Current maturities of capital lease obligations		(7,031	)
Long-term capital lease obligations		–

Notes payable, related parties consist of the following at March 31, 2015 and December 31, 2014, respectively:

	2015		2014
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.	$	6,250	$	–

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.		47,000		–

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.		48,000		–

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.		21,875		–

On various dates, the Company’s CEO advanced and repaid short term loans to the Company. A total of $-52,564- and $77,879 was advanced and repaid during the periods ending March 31, 2015 and 2014, respectively.		–		–

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

Note 13 – Notes Payable, Related Parties

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	37,500

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	36,000

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	12,500

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	57,000

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	69,000

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	43,750

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	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	21,250

Notes payable, related parties consist of the following at September 30, 2014 and December 31, 2013, respectively:

	September 30,		December 31,
	2014		2013
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 nine months ending September 30, 2014 and the year ending December 31, 2013, respectively.	$	–	$	–
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 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 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 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 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 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 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		–

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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	–
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	5,000
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 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	25,000
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 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	32,500
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 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	125,000
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 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	150,000
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 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	35,000
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	25,000

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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 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. On March 2, 2015, the promissory note was 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.	–	18,750
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	–
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	37,500
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 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	25,000
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 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	22,000
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	–
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	100,000
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	–
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	75,000

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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	–
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	13,000
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	–
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	26,000
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	–
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 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 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.	12,000	24,000
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 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.	15,500	32,000
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 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	2,868

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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 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.		5,705			3,705
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 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. On March 2, 2015, the promissory note was 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.		–			5,000
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
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. L & F Service loaned an additional $16,000 to the Company at the same interest rate.		25,000			9,000
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			25,000
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			60,000
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 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.		9,000			18,000
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 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. On March 31, 2015, the promissory note was 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.		–			30,000
Total notes payable, related parties		1,271,198			1,221,323
Less: current portion		(1,271,198	)		(1,221,323	)
Notes payable, related parties, less current portion	$	–		$	–

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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
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

The Company recorded interest expense on notes payable to related parties in the amounts of $47,797 and $29,072 during the three months ended March 31, 2015 and March 31, 2014, respectively. The Company recorded accrued interest of $170,592and $127,619 as of March 31, 2015 and December 31, 2014, respectively.

Note 15 – Convertible Debts

Convertible debts consist of the following at March 31, 2015 and December 31, 2014, respectively:

	March 31,		December 31,
	2015		2014
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.	$	5,000		–

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. The principal of $5,200 was subsequently converted to a total of 104,000,000 shares of common stock over various dates from March 2, 2015 to March 24, 2015.		13,550		–

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. The principal of $4,950 was subsequently converted to a total of 66,000,000 shares of common stock over various dates from March 3, 2015 to March 11, 2015..		25,050		–

Originated January 7, 2015, an unsecured $42,323.64 convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“One Magna Group Note”) owed to Magna Group, LLC, consisting of one partial note acquired and assigned from Star Financial Corporation, a related party, consisting of a total of $75,000 of principal and $9,647.28 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 ten (10) days prior to the conversion date, or $0.000075 per share, whichever is greater. At no time shall the conversion price be lower than $0.000075. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares. The assigned principal of $42,323.64 was subsequently converted to a total of 220,646,886 shares of common stock over various dates from January 7, 2015 to March 20, 2015 in complete satisfaction of the debt.		–		–

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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
Originated January 7, 2015, an unsecured $17,500 convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“Two Magna Group Note”) owed to Magna Group, LLC. 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 ten (10) days prior to the conversion date, or $0.000075 per share, whichever is greater. At no time shall the conversion price be lower than $0.000075. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares.		17,500			–
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
On January 29, 2015, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible Promissory 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 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 lowest three (3) Trading Prices for the Common Stock during the 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 with our operations, and there was no solicitation.		43,000			–
Total notes payable, related parties		1,186,618			482,368
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, therefore the ownership of the note was returned to Star Financial Corporation. The assigned principal of $28,160 was subsequently converted to a total of 268,000,000 shares of common stock over various dates from February 7, 2015 to March 31, 2015.		99,653			–
Less: current portion		(1,186,618	)		(397,368	)
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 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 113,300,733 shares of common stock over various dates from February 17, 2015 to March 5, 2015.		–			–
Notes payable, related parties, less current portion	$	–		$	85,000

The Company recorded interest expense on notes payable to related parties in the amounts of $39,766 and $11,418 during the nine months ended September 30, 2014 and 2013, respectively.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

Note 14 – Convertible Debts

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. The assigned principal of $8,521 was subsequently converted to a total of 7,560,000 shares of common stock over various dates from January 2, 2015 to February 23, 2015 in complete satisfaction of the debt.	7,604	16,125

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 12,500,000 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. Principal of $19,404 was subsequently converted to a total of 80,700,000 shares of common stock over various dates from January 9, 2015 to March 26, 2015.	25,145	44,549

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-three 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 34,166 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.	–	–

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-three 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 15,000shares 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.	–	–

Convertible debts consist of the following at September 30, 2014 and December 31, 2013, respectively:

	September 30,		December 31,
	2014		2013
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.	$	–	$	–
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.		–		–
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 $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.		33,000		33,000

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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 $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 5,000shares pursuant to debt conversion on September 15, 2012, $46,000 into 5,000 shares pursuant to debt conversion on March 14, 2013, $40,000 into 5,000 shares pursuant to debt conversion on April 10, 2013, $26,400 into 8,000 shares pursuant to debt conversion on July 9, 2013 and $32,000 into 4,000 shares pursuant to debt conversion on August 7, 2013, $18,750 into 12,500 shares pursuant to debt conversion on April 7, 2014, $20,000 into 20,000 shares pursuant to debt conversion on May 3, 2014, and $15,000, consisting of $7,699 of principal and $7,301 of interest into 15,000 shares pursuant to the final debt conversion on May 22, 2014.		–			–
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.		119,275			56,900
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			43,000
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. 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 $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			33,000
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
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. The assigned principal of $7,702 was subsequently converted to a total of 38,891,824 shares of common stock over various dates from January 7, 2015 to March 19, 2015.		26,062			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			50,239
Total convertible debts		388,802			220,513
Less: unamortized discount on beneficial conversion feature		(240,917	)		(131,774	)
Less: unamortized OID		–			–
Convertible debts		147,885			88,739
Less: current maturities of convertible debts		(147,885	)		(88,739	)
Long term convertible debts	$	–		$	–

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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
Total convertible debts		152,275			266,877
Less: unamortized discount on beneficial conversion feature		–			(103,188	)
Less: unamortized OID		–			(6,395	)
Convertible debts		152,275			157,294
Less: current maturities of convertible debts		(152,275	)		(115,128	)
Long term convertible debts	$	–		$	42,166

The Company recognized interest expense in the amount of $9,379 and $6,764 for the periods ended March 31, 2015 and 2014, respectively related to convertible debts. The Company recorded accrued interest of $12,045 and $3,573 as of March 31, 2015 and December 31, 2014, respectively.

The Company recognized interest expense in the amount of $43,648 and $30,867 for the nine months ended September 30, 2014 and 2013, respectively related to convertible debts.

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

The aforementioned accounting treatment resulted in a total debt discount equal to $~~-0-~~240,917 and $~~195~~131,~~652~~774 ~~during~~as ~~the~~of ~~nine~~March ~~months ended September 30~~31, ~~2014~~2015 and ~~the year ended~~ December 31, ~~2013~~2014, 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, $95,500 from Asher Enterprises, $33,000 from JMJ Financial, Inc., and $56,900 from St. George Investments~~ 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 of is 9.99% and 4.99%, respectively, of the issued and outstanding shares of Epazz.

During the ~~nine~~three months ended ~~September 30~~March 31, 2015 ~~2014~~ and ~~2013~~March 31, 2014, the Company recorded debt amortization expense in the amount of $66197,~~725~~786 and $~~128~~58,~~612~~313, respectively~~, attributed to the aforementioned debt discount, including $355,037 and $197,156 of amortization on Original Issue Discounts during the nine months ended September 30, 2014 and 2013, respectively~~.

~~During~~Asher ~~the nine months ended September 30~~Enterprises, ~~2014, the Company issued a total of 4,688,760,477 shares pursuant to debt conversions in settlement of $533,360, consisting~~ ~~of $531,240 of outstanding principal and $2,120 of unpaid interest~~Inc. InConvertible addition, the Company issued a total of 1,059,333,745 shares pursuant to related party debt conversions in settlement of $112,183, consisting of $97,449 of outstanding principal, $12,234 of unpaid interest and $2,500 of liquidated damages during the nine months ended September 30, 2014. The principal and interest was converted in accordance with the conversion terms, therefore no gain or loss has been recognized.Note

~~During~~On ~~year~~August ~~ended December 31~~19, 2013, ~~the Company~~we ~~issued~~entered into a ~~total~~Securities ofPurchase ~~462~~Agreement with Asher Enterprises,~~766~~ Inc.,~~951~~ ~~shares~~ pursuant to ~~debt~~which ~~conversions~~we insold ~~settlement~~to ofAsher ~~$343,540,~~an ~~consisting~~8% ofConvertible Promissory ~~$336,094~~Note ~~of outstanding~~in the original principal ~~and~~amount of $753,~~446~~000. ofThe ~~unpaid~~Seventh ~~interest,~~Asher ~~including~~Note ~~220,000,000~~had ~~shares~~a ~~pursuant~~maturity todate ~~debt~~of ~~conversion~~May in21, ~~settlement~~2014, ofand was ~~$144,400~~convertible ofinto ~~outstanding~~our ~~principal~~common ~~owed~~stock toat athe ~~related~~greater ~~party~~of (~~“Star~~i) ~~Convertible~~the ~~Note”)~~Variable Conversion Price and ~~46,856,526~~(ii) ~~shares~~the ~~pursuant~~Fixed Conversion Price. The to“Variable ~~debt~~Conversion ~~conversion~~Price” inshall ~~settlement~~mean of59% ~~$14,838~~multiplied ofby ~~outstanding~~the ~~principal~~Market ~~owed~~Price to(representing a ~~related~~discount ~~party~~rate ~~(“GG~~of ~~Mars~~41%). ~~Capital Convertible~~“Market ~~Note~~Price”). ~~The~~means ~~principal~~the ~~and~~average ~~interest~~of ~~was~~the ~~converted~~lowest inthree ~~accordance~~(3) ~~with~~Trading Prices for the ~~conversion~~Common ~~terms,~~Stock ~~therefore~~during nothe ~~gain~~ten or(10) ~~loss~~Trading ~~has~~Day ~~been~~period ~~recognized.~~ending Inon ~~addition,~~the onlatest ~~May~~complete ~~27,~~Trading ~~2013,~~Day prior to the ~~Company~~Conversion ~~modified~~Date. a“Fixed ~~related~~Conversion ~~party~~Price” ~~debt~~shall ~~and~~mean ~~issued~~$0.00005 per ~~14,239,500~~share. The shares of ~~Class~~common Astock ~~Common Stock~~issuable inupon ~~settlement~~conversion of ~~$14,239~~the ofSeventh ~~related~~Asher ~~party~~Note ~~debt~~were ~~owed~~restricted tosecurities ~~Vivienne~~as ~~Passley,~~defined in ~~which~~Rule ~~consisted~~144 ofpromulgated ~~$13,000~~under the Securities Act of ~~principal~~1933. ~~and~~The ~~$1,239~~ issuance of ~~accrued~~the ~~and~~Seventh ~~unpaid~~Asher ~~interest.~~Note ~~The~~was ~~total~~exempt ~~fair~~from ~~value~~the registration requirements of the ~~common~~Securities ~~stock~~Act ~~was~~of ~~$28,479~~1933 ~~based~~pursuant onto ~~the~~Rule ~~closing~~506 ~~price~~ of ~~the~~Regulation ~~Company’s common~~D ~~stock~~promulgated onthereunder. ~~the~~The ~~date~~purchaser ofwas ~~grant,~~an ~~resulting~~accredited and insophisticated ~~the~~investor, ~~recognition~~familiar ofwith aour ~~$14~~operations,~~240~~ ~~loss~~and onthere ~~debt~~was ~~settlement~~no solicitation.

The Company evaluated the Seventh Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0006 below the market price on August 19, 2013 of $0.0014 provided a value of $39,021, of which $-0- and $20,007 was amortized during the three months ended March 31, 2015 and 2014, 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.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

OnThe ~~September~~Company ~~18,~~evaluated ~~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~~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 ~~59%~~such, ~~multiplied~~does bynot ~~the~~constitute ~~Market Price (representing~~ a ~~discount~~derivative ~~rate~~liability ofas ~~41%). “Market Price” means~~ the ~~average~~Company ofhas ~~the~~obtained ~~lowest~~authorization ~~three~~from ~~(3)~~a ~~Trading Prices for the Common Stock during the ten (10) 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. ~~Eighth~~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~~$0.0004 below ~~The issuance of~~ the ~~Eighth~~market ~~Asher~~price ~~Note~~on ~~was~~September ~~exempt~~18, ~~from~~2013 ~~the registration requirements~~ of ~~the~~$0.0010 ~~Securities~~provided ~~Act~~a value of ~~1933~~$27,210, ~~pursuant to Rule 506~~ of ~~Regulation~~which D$-0- ~~promulgated~~and ~~thereunder.~~$16,920 ~~The purchaser~~ was anamortized ~~accredited and~~during ~~sophisticated~~the ~~investor,~~periods ~~familiar~~ended ~~with~~March ~~our operations~~31, 2015 and ~~there~~2014, ~~was no solicitation~~respectively.

~~The~~On ~~Company~~October ~~evaluated~~20, 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 ~~Eighth~~original principal amount of $43,000. The Seventh Asher Note ~~and~~had ~~determined~~a ~~that~~maturity ~~the~~date ~~shares~~of ~~issuable~~July ~~pursuant~~22, 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 Day period ofending ~~shareholders~~on ~~such~~the ~~that~~latest ~~should~~complete ~~conversion~~Trading ~~occur~~Day atprior to the Conversion Date. “Fixed Conversion Price” ~~the~~shall ~~appropriate~~mean ~~number~~$0.00005 per ofshare. The shares ~~will~~of becommon ~~available or~~stock issuable ~~for~~upon ~~settlement~~conversion toof ~~occur.~~the ~~The~~Ninth ~~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.~~0004 below~~ The issuance of the ~~market~~Ninth ~~price~~Asher onNote ~~September~~was ~~18,~~exempt ~~2013~~from ofthe ~~$0.0010~~registration ~~provided~~requirements of athe ~~value~~Securities Act of ~~$27,210,~~1933 pursuant to Rule 506 of ~~which~~Regulation ~~$16,920~~D ~~and~~promulgated ~~$-0-~~thereunder. The purchaser was ~~amortized~~an ~~during~~accredited and ~~the~~sophisticated ~~six~~investor, ~~months~~familiar ~~ended~~with ~~June~~our 30operations, ~~2014~~ and ~~2013,~~there ~~respectively~~was no solicitation.

GGThe ~~Mars~~Company ~~Capital~~evaluated the Three Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, ~~Inc~~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. ~~Convertible~~The beneficial ~~Note~~conversion feature discount resulting from the conversion price of $0.03330 below the market price on October 20, 2014 ~~Related~~of ~~Party~~$0.20 provided a value of $43,000, of which $14,333 and $-0- was amortized during the periods ended March 31, 2015 and 2014, respectively.

On ~~August~~December 203, ~~2013~~2014, we entered into a ~~Convertible~~Securities ~~Promissory~~Purchase ~~Note~~ Agreement with GGAsher ~~Mars Capital~~Enterprises, Inc. ~~(“GG Mars”)~~, ~~a company owned by our CEO’s family member,~~ pursuant to which we sold to GGAsher ~~Mars~~ an 118% Convertible Promissory Note in the original principal amount of $1433,~~838~~000. The ~~note~~Tenth ~~was~~Asher ~~acquired~~Note ~~from~~had ~~and~~a ~~assigned~~maturity bydate ~~another~~of ~~independent~~September ~~lender~~5, on2015, ~~August~~and was ~~15,~~convertible ~~2013~~into ~~prior~~our tocommon ~~being~~stock ~~exchanged for~~at the ~~convertible~~greater ~~note.~~of ~~The~~(i) ~~First~~the GGVariable ~~Mars~~Conversion ~~Note~~Price ~~was~~and ~~convertible~~(ii) ~~into~~the ~~shares~~Fixed ofConversion ~~common~~Price. The ~~stock~~“Variable atConversion ~~the~~Price” ~~discretion~~shall ofmean ~~the~~59% ~~note~~multiplied ~~holder at~~by athe ~~price~~Market ~~equal~~Price to(representing ~~fifty~~a ~~percent~~discount ~~(50~~rate of 41%). “Market ofPrice” means the average of the lowest three ~~lowest~~(3) ~~closing~~Trading ~~prices~~Prices offor the ~~Company’s~~Common ~~common~~Stock ~~stock~~during ~~for~~ the ~~one~~ten ~~hundred~~(10) ~~and~~Trading Day ~~twenty~~period ~~(120)~~ending ~~days~~on the latest complete Trading Day prior to the ~~conversion~~Conversion ~~date,~~Date. or“Fixed Conversion Price” shall mean $0.~~0001~~00005 per share~~, whichever is greater~~. The shares of common stock issuable upon conversion of the ~~First~~Tenth GGAsher ~~Mars~~ Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the ~~First~~Tenth GGAsher ~~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~~Tenth GGAsher ~~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~~005 below the market price on ~~August~~December 203, ~~2013~~2014 of $0.~~0013~~03 provided a value of $1433,~~838~~000, of which $~~-0-~~11,000 and $-0- was amortized during the ~~nine~~periods ~~months~~ ended ~~September~~March 3031, ~~2014~~2015 and ~~2013~~2014, respectively.

~~Star~~LG ~~Financial~~Capital, Inc. Convertible ~~Note, Related Party~~Notes

On ~~July~~November 26, ~~2012,~~ ~~we modified a previously outstanding non-convertible debt of $342~~2014,~~321,~~ ~~consisting~~we ofentered ~~$296,103~~into ~~of principal and $46,218 of accrued interest in exchange for~~ a ~~Convertible~~Securities ~~Promissory~~Purchase ~~Note~~Agreement with ~~Star~~LG ~~Financial Corporation (“Star”)~~Capital, ~~a company owned by our CEO’s family member~~Inc., pursuant to which we ~~issued~~sold to ~~Star~~LG aCapital 10an 8% Convertible Promissory Note in the original principal amount of $~~440~~33,~~849~~600. The ~~modification~~First ~~resulted~~LG inCapital ~~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~~had a maturity date of ~~July~~November 26, ~~2017~~2015, and iswas 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 5065% multiplied by the Market Price (representing a discount rate of 5035%). “Market Price” means the average of the ~~five~~lowest two (52) ~~Closing~~Trading Prices for the Common Stock during the ~~five~~twelve (512) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.~~00075~~00005 per share. The shares of common stock issuable upon conversion of the ~~Star~~First ~~Convertible~~LG ~~Note~~Capital ~~will~~were be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the ~~Star~~First ~~Convertible~~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.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

The Company evaluated the ~~Star~~First ~~Convertible~~LG ~~Note~~Capital and determined that the shares issuable pursuant to the conversion option were determinate due to the ~~Fixed~~ 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~~125 below the market price on ~~July~~November 26, ~~2012~~2014 of $0.~~012~~0817 provided a value of $~~112~~33,~~382~~600, of which $58,~~653~~400 and $~~24,176~~-0- was amortized during the periods ~~nine months~~ ended ~~September~~March 3031, ~~2014~~2015 and ~~2013~~2014, respectively.

On October 31, 2014, we entered into a Securities Purchase Agreement with LG Capital, Inc., pursuant to which we sold to LG Capital an 8% Convertible Promissory Note in the original principal amount of $50,239. The Second LG Capital Note had a maturity date of October 31, 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 65% multiplied by the Market Price (representing a discount rate of 35%). “Market Price” means the average of the lowest two (2) Trading Prices for the Common Stock during the twelve (12) 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 Second LG Capital were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second LG 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 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 $12,560 and $-0- was amortized during the periods ended March 31, 2015 and 2014, respectively.

JMJ Financial, Inc. Convertible Note

On June 12, 2013, we entered into a Securities Purchase Agreement with JMJ Financial, Inc., (“JMJ”) pursuant to which we sold to JMJ a 12% Convertible Promissory Note in the original principal amount of $33,000. The First JMJ Note had a maturity date of June 11, 2014, and was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price, not less than $0.00009 per share. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the lowest Trading Price for the Common Stock during the twenty five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009 per share. The shares of common stock issuable upon conversion of the First JMJ Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First JMJ Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the First JMJ Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00518 below the market price on June 12, 2013 of $0.0017 provided a value of $33,000, of which $-0- and $9,581 was amortized during the nine months ended September 30, 2014 and 2013, respectively.

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

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

St. George Investments, Inc. Convertible Note

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

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

OnThe ~~September~~Company ~~24,~~evaluated the ~~2014,~~First St. George ~~Investments, LLC~~Note ~~(“note~~and ~~holder”)~~determined ~~presented~~that the ~~Company~~shares ~~with~~issuable apursuant ~~notice~~to ofthe ~~default.~~conversion Inoption ~~accordance~~were ~~with~~determinate ~~the~~due ~~default~~to ~~provisions,~~ the ~~note~~Fixed ~~began~~Conversion toPrice ~~accrue interest at twenty two percent (22%) per annum effective March 31~~and, ~~2014.~~as ~~The unsecured convertible promissory note with $41~~such,~~900~~ ofdoes ~~principal~~not ~~outstanding~~constitute ~~(“First~~a ~~St.~~derivative ~~George~~liability ~~Note”)~~as ~~matured~~the onCompany ~~June~~has 5,obtained ~~2014~~authorization ~~and was in default effective~~from ~~April~~a 1,majority ~~2014 pursuant to Section 3.2~~ of ~~the~~shareholders ~~Note.~~such Inthat ~~accordance~~should ~~with~~conversion ~~the~~occur ~~default~~at ~~provisions,~~ the ~~outstanding~~Fixed ~~balance~~Conversion ~~prior~~Price to the ~~occurrence~~appropriate ofnumber ~~default shall increase to 150%~~ of ~~the~~shares ~~outstanding~~will be ~~balance~~available ofor ~~principal~~issuable ~~and~~for ~~interest~~settlement ato ~~maximum of two times~~occur. ~~In addition,~~The ~~the~~beneficial ~~note~~conversion ~~holder~~feature ~~was~~discount ~~precluded~~resulting from ~~clearing~~ the conversion ~~of 125,000,000 shares of common stock received pursuant to~~price ~~a March 7, 2014 conversion~~ of $~~15,000~~0.0005 ofbelow ~~outstanding~~the ~~principal~~market ~~until~~price on September 105, ~~2014~~2013 ~~(“Late~~of ~~Clearing Adjustment Amount”)~~$0. ~~Pursuant~~0012 toprovided ~~Section~~a ~~1.6(g)~~value of ~~the Note~~$46,555, ~~the note holder was entitled to increase the outstanding balance~~ of ~~the~~which ~~Note~~$-0- byand ~~the Late Clearing Adjustment Amount of~~ $2518,~~000.~~045 Aswas aamortized during ~~result of~~ the ~~Late~~years ~~Clearing~~ended ~~Adjustment~~March ~~Amount~~31, ~~and~~2015 ~~Note defaults on April 1, 2014~~ and ~~June 5,~~ 2014, ~~the principal and interest on the First St~~respectively. ~~George Note has increased to $136,738 as of September 24, 2014.~~

~~The~~Magna ~~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~~Group, asLLC ~~such,~~Convertible 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 $25,580 and $-0- was amortized during the nine months ended September 30, 2014 and 2013, respectively.Note

~~Derivative~~On ~~Liabilities~~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.

InThe ~~accordance~~Company ~~with~~evaluated the ~~ASC~~First ~~815-15,~~Magna ~~the~~Group ~~Company~~ Note and determined that the ~~variable~~shares ~~conversion~~issuable ~~feature~~pursuant ~~and~~to ~~shares~~the toconversion beoption ~~issued~~were ~~with~~determinate ~~respect~~due to the Fixed ~~Magna~~Conversion ~~Group~~Price and, ~~LLC~~as ~~convertible~~such, ~~notes and~~does not constitute a derivative liability as the ~~convertible~~Company ~~debt~~has ~~with~~obtained ~~IBC~~authorization ~~Funds,~~from a ~~LLC~~majority ~~represented~~of ~~embedded~~shareholders ~~derivative~~such ~~features,~~that ~~and~~should ~~these~~conversion ~~are~~occur ~~shown~~at asthe ~~derivative~~Fixed ~~liabilities on~~Conversion Price the ~~balance~~appropriate ~~sheet~~number of shares will be available or issuable for settlement to occur. The ~~Company~~beneficial ~~calculated~~conversion feature discount resulting from the ~~fair~~conversion price of $0.0003 below the market price on December 31, 2013 of $0.0006 provided a value of ~~the~~$35,028, ~~compound~~of ~~embedded~~which ~~derivatives~~$-0- ~~associated~~and ~~with~~$35,028- ~~the~~was ~~convertible~~amortized ~~debentures~~during ~~utilizing~~the ayears ~~lattice~~ended ~~model~~March 31, 2015 and 2014, respectively.

~~The~~KBM ~~aforementioned accounting treatment resulted in a total debt discount equal to $422~~Worldwide,~~240 and $-0- during the nine months ended September 30, 2014 and the year ended~~ ~~December 31, 2013, respectively~~Inc. ~~The~~Convertible discount was amortized using the effective interest method from the dates of issuance until the stated redemption date of the debts, or the accelerated dates of conversion. A total of $422,240 and $-0- was amortized during the nine months ended September 30, 2014 and 2013, respectively.Note

On January 29, 2015, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible Promissory Note 15in –the ~~Long~~original ~~Term~~principal ~~Debts~~amount of $43,000. The KBM Note had a maturity date of October 31, 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 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 KBM Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Seventh Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

~~Long~~The ~~term~~Company ~~debts~~evaluated the ~~consist~~KBM ofand determined that the ~~following~~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 ~~September~~the 30Fixed 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 $0.00126 below the market price on January 29, ~~2014~~2015 of $0.0021 provided a value of $40,665, of which $9,020 and ~~December~~$-0- was amortized during the three months ended March 31, ~~2013~~2015 and 2014, respectively:.

	September 30,	December 31,
	2014	2013
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 amend 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.	28,099	–
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 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.	31,380	4,202

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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.	89,963	–
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.	77,242	–
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, 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.	90,015	–
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.	–	–
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.	199,836	–

IBC Funds Convertible Note

On February 13, 2015, we entered into a Securities Purchase Agreement with IBC Funds., pursuant to which we sold to IBC an 8% Convertible Promissory Note in the original principal amount of $127,813. The IBC Note had a maturity date of August 14, 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 55% multiplied by the Market Price (representing a discount rate of 45%). “Market Price” means the average of the lowest one (1) 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 IBC Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Seventh Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the IBC 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 $0.00072 below the market price on February 13, 2015 of $0.0016 provided a value of $127,813, of which $60,464 and $-0- was amortized during the three months ended March 31, 2015 and 2014, respectively.

Star Financial Corporation, Inc. Convertible Note, Related Party

On March 2, 2015, we entered into a Convertible Promissory Note Agreement with Star Financial Corporation (“Star”), a company owned by our CEO’s family member, pursuant to which we sold to Star an 15% Convertible Promissory Note in the original principal amount of $5,000. The Star was convertible into shares of common stock at the discretion of the note holder at a fix price $0.000075 per share, whichever is greater. The shares of common stock issuable upon conversion of the Star Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Star 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 9.99% of the Company’s issued and outstanding shares.

The Company evaluated the Star 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 $0.00023 below the market price on March 2, 2015 of $0.0003 provided a value of $5,000, of which $525 and $-0- was amortized during the periods ended March 31, 2015 and 2014, respectively.

GG Mars, Inc. Convertible Note, Related Party

On March 2, 2015, we entered into a Convertible Promissory Note Agreement with Star Financial Corporation (“GG Mars”), a company owned by our CEO’s family member, pursuant to which we sold to GG Mars an 15% Convertible Promissory Note in the original principal amount of $18,750. The GG Mars was convertible into shares of common stock at the discretion of the note holder at a fix price $0.00005 per share, whichever is greater. The shares of common stock issuable upon conversion of the GG Mars Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the 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 9.99% of the Company’s issued and outstanding shares.

The Company evaluated the 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 $0.00025 below the market price on March 2, 2015 of $0.0003 provided a value of $18,750, of which $7,170 and $-0- was amortized during the periods ended March 31, 2015 and 2014, respectively.

Star Financial Corporation Convertible Note, Related Party

On March 31, 2015, we entered into a Convertible Promissory Note Agreement with Star Financial Corporation (“Star”), a company owned by our CEO’s family member, pursuant to which we sold to Star an 15% Convertible Promissory Note in the original principal amount of $30,000. The Star was convertible into shares of common stock at the discretion of the note holder at a fix price $0.000075 per share, whichever is greater. The shares of common stock issuable upon conversion of the Star Note were restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Star 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 9.99% 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.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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.	31,720	–
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.	48,297	–
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.	20,253	–
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.	21,611	–
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.	21,688	–
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.	–	–
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”).	10,212	–
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.	104,525	98,984

The Company evaluated the Star 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 $0.00008 below the market price on March 2, 2015 of $0.0002 provided a value of $30,000, of which $4,950 and $-0- was amortized during the years ended March 31, 2015 and 2014, respectively.

Magna Group, LLC Convertible Note

On January 7, 2015, we issued to Magna Group, LLC (“First Magna Group Note”) a 12% Convertible Promissory Note in the original principal amount of $42,324. The note was issued in exchange for partial note $42,324 was acquired from, and assigned by, Star Financial on January 7, 2015. The First Magna Group Note has a maturity date of January 7, 2016 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 $0.004 below the market price on January 7, 2015 of $0.008 provided a value of $42,324, of which $42,324 and $-0- was amortized during the years ended March 31, 2015 and 2014, respectively.

The First Magna Note has conversion terms of the convertible debts are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. As such, the number of shares of common stock issuable upon conversion of the debts is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion debts and shares to be issued were recorded as derivative liabilities on the issuance date. See note 17 which derivatives liabilities.

Magna Group, LLC Convertible Note

On January 7, 2015, we issued to Magna Group, LLC (“Second Magna Group Note”) a 12% Convertible Promissory Note in the original principal amount of $17,500. The Second Magna Group Note has a maturity date of January 7, 2016, 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 Second Magna Group Note are restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second 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 Second 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 $0.004 below the market price on January 7, 2015 of $0.008 provided a value of $17,500, of which $3,979 and $-0- was amortized during the years ended March 31, 2015 and 2014, respectively.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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 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.	34,869	47,321
On October 10, 2013, the Company purchased licenses to develop content management software in the total amount of $34,800 from Igenti, Inc., of which $34,800 was financed pursuant to an equipment financing agreement with Financial Pacific Leasing bearing an effective interest rate of 31.625%, consisting of 36 monthly payments of $1,438; maturing on October 9, 2016. The loan is collateralized with the content management software. Igenti retained a total of $1,300 of financing fees and paid the remaining proceeds of $33,500 to the Company for future payment for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.	26,776	32,025
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.	27,483	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.	23,552	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.	27,742	40,108

The Second Magna Note has conversion terms of the convertible debts are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. As such, the number of shares of common stock issuable upon conversion of the debts is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion debts and shares to be issued were recorded as derivative liabilities on the issuance date. See note 17 which derivatives liabilities.

Blackbridge, LLC Convertible Note

On February 17, 2015, we issued to Blackbridge Capital (“Blackbrdige”) a 5% Convertible Promissory Note in the original principal amount of $22,542. The note was issued in exchange for partial note $22,252 was acquired from, and assigned by, Star Financial on February 17, 2015. The Blackbridge Note has a maturity date of February 17, 2016, 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 $0.00005 per share. The shares of common stock issuable upon conversion of the Blackbridge Note are restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Blackbridge 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 Blackbridge 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 $0.00055 below the market price on February 17, 2015 of $0.0011 provided a value of $22,542, of which $22,542 and $-0- was amortized during the years ended March 31, 2015 and 2014, respectively.

The Blackbridge Note has conversion terms of the convertible debts are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. As such, the number of shares of common stock issuable upon conversion of the debts is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion debts and shares to be issued were recorded as derivative liabilities on the issuance date. See note 17 which derivatives liabilities.

Note 16 – Promissory Notes

Promissory notes consist of the following at March 31, 2015 and December 31, 2014, respectively:

	March 31,		December 31,
	2015		2014
On January 30, 2015, the Company entered into an equipment financing agreement with CIT Finance for a total of $100,000 bearing an effective interest rate of 10.9%, consisting of 36 monthly payments of $3,210; maturing on January 30, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized.	$	100,000	$	–

On January 27, 2015, the Company entered into an equipment financing agreement with Direct Credit for a total of $50,000 bearing an effective interest rate of 19.7%, consisting 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.	$	50,000		–

On February 20, 2015, the Company entered into an equipment financing agreement with Safe Leasing for a total of $37,500 bearing an effective interest rate of 31.625%, consisting of 36 monthly payments of $1,549; maturing on February 20, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized.	$	37,500		–

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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.	6,686	10,228
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. 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.	27,071	29,085
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.	45,473	78,603
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.	64,181	79,926
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.	292,308	312,095
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	69,484
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.	101,348	94,000
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.	194,041	201,035
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.	0	2,510
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.	38,735	43,226
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

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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.		45,283			60,573
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.		22,791			38,226
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.		124,128			137,087
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.		24,544			27,376
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.		181,700			197,062
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.		19,109			22,749
Total long term debt		1,720,644			1,211,929
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.		21.754			24,475
Less: current portion		(809,177	)		(354,786	)
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”).		2,492			6,508
Long term debt, less current portion	$	911,467		$	857,143
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.		42,102			84,852
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.		29,848			37,808

The Company recorded interest expense on long term debts, credit lines and capital leases in the amount of $196,813 and $100,160 for the nine months ended September 30, 2014 and 2013, respectively.

Note 16 – Derivative Liabilities

As discussed in Note 14 under Convertible Debts, the Company issued convertible debts with variable conversion provisions. The conversion terms of the convertible debts are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. As such, the number of shares of common stock issuable upon conversion of the debts is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion debts and shares to be issued were recorded as derivative liabilities on the issuance date.

The fair values of the Company’s derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date, using a lattice model. The Company recorded current derivative liabilities of $-0- and $-0- at September 30, 2014 and December 31, 2013, respectively. The change in fair value of the derivative liabilities resulted in a net loss of $777,664 and $-0- for the nine months ended September 30, 2014 and 2013, respectively, which has been reported as other income (expense) in the statements of operations. The net loss of $777,664 for the nine months ended September 30, 2014 consisted of a loss of $837,010 due to the value in excess of the face value of the convertible notes, as offset by a net gain in market value of $59,346 on the convertible debts.

The aforementioned accounting treatment resulted in a total debt discount equal to $422,240 and $-0- during the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively. The discount was amortized using the effective interest method from the dates of issuance until the stated redemption date of the debts, or the accelerated dates of conversion. A total of $422,240 and $-0- was amortized during the nine months ended September 30, 2014 and 2013, respectively.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

The following presents the derivative liability value by instrument type at September 30, 2014 and December 31, 2013, respectively:

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.	27,461	31,925

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.	16,025	21,677

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.	16,928	24,888

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.	25,590	31,074

		September 30, 2014		December 31, 2013
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.		3,512		5,267
Convertible notes, Magna Group	$	–	$	–
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.		34,384		44,165
Convertible debt, IBC Funds, LLC		–		–
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.		272,118		283,868
	$	–	$	–

The following is a summary of changes in the fair market value of the derivative liability during the nine months ended September 30, 2014 and the years ended December 31, 2013, respectively:

	Derivative Liability Total
Balance, December 31, 2012	$	–
Increase in derivative value due to issuances of convertible promissory notes, Magna Group		–
Increase in derivative value due to issuances of debt, IBC Funds, LLC		–
Change in fair market value of derivative liabilities due to the mark to market adjustment		–
Debt conversions		–
Balance, December 31, 2013	$	–
Increase in derivative value due to issuances of convertible promissory notes, Magna Group		124,323
Increase in derivative value due to issuances of debt, IBC Funds, LLC		1,134,927
Change in fair market value of derivative liabilities due to the mark to market adjustment		(59,346	)
Debt conversions		(1,199,904	)
Balance, September 30, 2014	$	–

Key inputs and assumptions used to value the convertible debentures and warrants issued during the nine months ended September 30, 2014:

· Stock prices on all measurement dates were based on the fair market value and would fluctuate with projected volatility.

· The holders of the securities would convert monthly to the ownership limit starting at 4.99% increasing by 10% per month.

· The holders would automatically convert the note at the maximum of 3 times the conversion price if the Company was not in default.

· The monthly trading volume would reflect historical averages and would increase at 1% per month.

· The Company would redeem the notes based on availability of alternative financing, increasing 2% monthly to a maximum of 10%.

· The holder would automatically convert the note at maturity if the registration was effective and the Company was not in default.

· The computed volatility was projected based on historical volatility.

· The expected risk-free interest rate is based on the yield of the 1-year U.S. Treasury note.

· The estimated value represents the average or expected value from the Monte Carlo simulation. The simulation was specified to run until the expected value was within 1.0 percent of the true value using a 95% confidence interval. A total of 8,020,000 trials were necessary to reach the specified level of precision.

Note 17 – Changes in Stockholder’s Equity (Deficit)

On January 14, 2014 and May 17, 2013, the Board of Directors, consisting solely of Shaun Passley, Ph.D., the Company’s majority shareholder, amended the Article of Incorporation to change the par value and number of authorized shares of each class of common and series of preferred stock and authorize a third class of preferred stock, Series C Convertible Preferred Stock, in addition to the modification of the attributes and dividends. The disclosures herein reflect these modifications and the changes to the par value have been retroactively reflected throughout.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

Convertible Preferred Stock, Series A

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.	96,110	99,441

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	8,454

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.	33,936	39,471

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.	113,538	120,062

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.	168,374	176,702

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.	24,820	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.	39,883	112,925

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

Convertible Preferred Stock, Series B

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

Convertible Preferred Stock, Series C

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

Shares of Convertible Series C Preferred Stock Issued for Services to Related Parties

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 in consideration for a $43,000 short term promissory note. The shares were granted on January 15, 2014. 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 in consideration for a $13,000 short term promissory note. The shares were granted on February 8, 2014. The total fair value of the common stock was $1,193 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 in consideration for a $22,000 short term promissory note. The shares were granted on March 26, 2014. 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 in consideration for a $37,500 short term promissory note. The shares were granted on March 26, 2014. 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 in consideration for a $25,000 short term promissory note. The shares were granted on March 26, 2014. 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 in consideration for a $18,750 short term promissory note. The shares were granted on March 28, 2014. 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 in consideration for a $25,000 short term promissory note. The shares were granted on March 28, 2014. The total fair value of the common stock was $2,390 based on an independent valuation on the date of grant.

On January 17, 2014, the Company issued 600,000,000 shares of the recently designated Series C Convertible Preferred Stock to the Company’s CEO in exchange for 600,000,000 shares of his previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $568,283 based on an independent valuation on the date of grant; therefore the Company recognized additional compensation expense of $345,427 due to the difference in the fair value of the Class A Common Stock exchanged.

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 $9,562 based on an independent valuation on the date of grant.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

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.		16,411			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.		31,392			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.		37,404			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.		43,189			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.		49,930			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.		211,531			223,069

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.		37,500			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			200,000

Total promissory notes		2,277,574			2,504,371
Less: current portion		(1,155,689	)		(1,219,669	)
Promissory notes, less current portion	$	1,121,885		$	1,284,702

On March 22, 2014, the Company issued 1,821,052,632 shares of the Series C Convertible Preferred Stock to the Company’s CEO in exchange for 1,821,052,632 shares, consisting of 1,730,526,316 previously issued and unvested shares of Class A Common Stock and 90,526,316 shares of his previously issued and vested Class A Common Stock. The vesting terms were accelerated commensurate with the exchange. The total fair value of the Series C Convertible Preferred Stock was $1,163,162 based on an independent valuation on the date of grant; therefore the Company recognized additional compensation expense of $707,025 due to the difference in the fair value of the Class A Common Stock exchanged.

On March 22, 2014, the Company issued 13,669,568 shares of the Series C Convertible Preferred Stock to L&F Lawn Services, a company owned by our CEO’s family member, a related party, in exchange for 13,669,568 of their previously issued Class A Common Stock. The total fair value of the Series C Convertible Preferred Stock was $8,731 based on an independent valuation on the date of grant; therefore the Company recognized additional compensation expense of $5,307 due to the difference in the fair value of the Class A Common Stock exchanged.

Subscriptions Payable Issued for Shares of Convertible Series C Preferred Stock Granted for Services to Related Parties

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

OnThe ~~March~~Company ~~26,~~recorded ~~2014,~~interest ~~the~~expense ~~Company granted~~on ~~3,000,000~~promissory ~~shares~~notes of ~~Convertible~~$291,435 ~~Series~~and ~~C Preferred Stock to Star Financial~~$251,794 afor ~~company~~the ~~owned~~three bymonths ~~our~~ended ~~CEO’s~~March ~~family member~~31, ~~a related~~2015 ~~party,~~and asDecember a31, ~~loan origination cost in consideration for a $25~~2014,~~000~~ ~~short term promissory note~~respectively. The ~~total~~Company recorded ~~fair~~accrued ~~value~~interest of ~~the common~~$25,973 ~~stock~~and ~~was~~ $260,~~928~~123 ~~based~~during ~~on an independent valuation on~~ the ~~date~~years ofended ~~grant.~~March ~~The~~31, ~~shares~~2015 ~~were~~and ~~subsequently~~December ~~issued on July 7~~31, 2014, respectively.

OnNote ~~March~~17 ~~28,~~– ~~2014,~~Derivative 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 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. The shares were subsequently issued on July 7, 2014.Liabilities

OnAs ~~March~~discussed ~~28,~~in ~~2014~~Note 15 under Convertible Debts, the Company ~~granted 3,000,000~~issued ~~shares~~convertible debts with variable conversion provisions. The conversion terms of ~~Convertible~~the ~~Series~~convertible Cdebts are ~~Preferred~~variable ~~Stock~~based toon ~~Star~~certain ~~Financial~~factors, asuch ~~company~~as ~~owned~~the byfuture ~~our~~price ~~CEO~~of the Company’s ~~family~~common ~~member,~~stock. ~~a related~~The ~~party,~~number asof ashares ~~loan~~of ~~origination~~common stock ~~cost~~to inbe ~~consideration~~issued ~~for~~is abased ~~$25,000~~on ~~short~~the ~~term~~future ~~promissory~~price ~~note~~of the Company’s common stock. ~~The~~As ~~total~~such, ~~fair~~the ~~value~~number of ~~the~~ shares of common stock issuable ~~was~~upon ~~$2,390~~conversion ~~based~~of onthe andebts ~~independent~~is ~~valuation~~indeterminate. onPursuant to ASC 815-15 Embedded Derivatives, the ~~date~~fair values of ~~grant.~~the ~~The~~variable conversion debts and shares ~~were~~to ~~subsequently~~be issued were recorded as derivative liabilities on ~~July~~the ~~7, 2014~~issuance date.

~~Common~~The ~~Stock~~fair values of the Company’s derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date, ~~Class~~using Aa lattice model. The Company’s current derivative liabilities were $24,482 and $-0- at March 31, 2015 and December 31, 2014, respectively.

The change ~~Company~~in fair value of the derivative liabilities resulted in losses of $77,110 and $793,579 for the three months ended March 31, 2015 and 2014, respectively, which has 9been ~~billion~~reported ~~authorized~~as ~~shares~~other income (expense) in the statements of operations. The loss of $077,110 for the three months ended March 31, 2015 consisted of a loss of $91,791 due to the value in excess of the face value of the convertible notes, as offset by a net gain in market value of $14,681 on the convertible debts.~~0001~~ ~~par~~The loss of $793,579 for the three months ended March 31, 2014 consisted of a loss of $837,010 due to the value ~~Class~~in Aexcess ~~Common~~of ~~Stock~~the face value of the convertible notes, as offset by a net gain in market value of $43,431 on the convertible debts.

~~Class~~The Afollowing ~~Common~~presents the derivative liability ~~Stock~~value ~~Issuances~~by loan at March 31, 2015 and December 31, 2014, respectively:

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

	March 31,		December 31,
	2015		2014
Convertible notes, Magna Group I	$	–	$	–
Convertible notes, Magna Group II		24,482
Convertible debt, Blackbridge Capital		–		–
	$	24,482	$	–

OnThe ~~August~~following ~~29,~~is ~~2014,~~a ~~the~~summary ~~Company issued 2,125,000 shares~~ of ~~Class~~changes ~~A Common Stock to Star Financial Corporation, a related party, as a loan origination cost~~ in ~~consideration for~~ athe ~~$21,250 short term promissory note. The total~~ fair market value of the ~~common~~derivative ~~stock~~liability ~~was~~during ~~$425 based on~~ the ~~closing~~three ~~price~~months ofended ~~the~~March 31, 2015 ~~Company’s common~~and ~~stock on~~ the ~~date~~year ofended ~~grant.~~December 31, 2014:

On August 29, 2014, the Company issued 3,250,000 shares of Class A Common Stock to Star Financial Corporation, a related party, as a loan origination cost in consideration for a $32,500 short term promissory note. The total fair value of the common stock was $650 based on the closing price of the Company’s common stock on the date of grant.

	Derivative
	Liability
	Total
Balance, December 31, 2013	$	–
Increase in derivative value due to issuances of convertible promissory notes, Magna Group I		124,323
Increase in derivative value due to issuances of debt, IBC Funds, LLC		1,134,927

Change in fair market value of derivative liabilities due to the mark to market adjustment		(59,346	)
Debt conversions		(1,199,904	)–
Balance, December 31, 2014	$	–
Increase in derivative value due to issuances of convertible promissory notes, Magna Group I		78,508
Increase in derivative value due to issuances of convertible promissory notes, Magna Group II		32,371
Increase in derivative value due to issuances of convertible promissory notes, Blackbridge Capital		63,278
Change in fair market value of derivative liabilities due to the mark to market adjustment		(14,681	)
Debt conversions		(134,994	)
Balance, March 31, 2015	$	24,482

On August 29, 2014, the Company issued 10,000,000 shares of Class A Common Stock to GG Mars, Inc., a related party, as a loan origination cost in consideration for a $150,000 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.

On August 29, 2014, the Company issued 10,000,000 shares of Class A Common Stock to GG Mars, Inc., a related party, as a loan origination cost in consideration for a $125,000 short term promissory note. The total fair value of the common stock was $2000 based on the closing price of the Company’s common stock on the date of grant.

On August 29, 2014, the Company issued 3,500,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $25,000 short term promissory note. The total fair value of the common stock was $700 based on the closing price of the Company’s common stock on the date of grant.

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

On July 30, 2014 the Company issued 277,777,778 shares of Class A Common Stock to Wellington Shields Holdings, LLC, as a fee for closing on an acquisition. The 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.

Debt Conversions into Class A Common Stock – Related Parties

On April 2, 2014, the Company issued 250,000,000 shares of Class A Common Stock pursuant to the conversion of $25,000 of convertible debt held by Vivienne Passley, a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 7, 2014, the Company issued 125,000,000 shares of Class A Common Stock pursuant to the conversion of $18,750 of convertible debt held by Star Financial Corporation, a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On May 3, 2014, the Company issued 200,000,000 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Star Financial Corporation, a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On May 22, 2014, the Company issued 150,000,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Star Financial Corporation, a related party, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On June 17, 2014, the Company issued 334,333,745 shares of Class A Common Stock pursuant to the conversion of $33,433 of convertible debt held by Vivienne Passley, a related party, which consisted of $26,000 of principal, $4,933 of interest and $2,500 of liquidated damages. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

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

On February 14, 2014, the Company issued 75,000,000 settlement shares of Class A Common Stock pursuant to the February 12, 2014 settlement agreement entered into with IBC Funds, LLC. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized. The total fair value of the common stock was $37,500 based on the closing price of the Company’s common stock on the date of grant.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

OnKey ~~February~~inputs ~~14,~~and ~~2014, the Company issued~~assumptions ~~25,000,000~~used ~~shares of Class A Common Stock pursuant~~ to value the ~~conversion of $3,750 of~~ convertible ~~debt~~debentures ~~held~~and bywarrants ~~IBC~~issued ~~Funds,~~during ~~LLC, which consisted entirely of principal. The note was converted in accordance with~~ the ~~conversion~~three ~~terms;~~months ~~therefore~~ended ~~no gain or loss has been recognized.~~March 31, 2015:

On· ~~February~~Stock ~~24,~~prices ~~2014,~~on all measurement dates were based on the ~~Company~~fair ~~issued 100,000,000~~market ~~shares~~value and would fluctuate with projected volatility. · The holders of ~~Class~~the Asecurities ~~Common~~would ~~Stock~~convert ~~pursuant~~monthly to the ~~conversion~~ownership oflimit ~~$15,000~~starting at 4.99% increasing by 10% per month. · The holders would automatically convert the note at the maximum of ~~convertible~~3 ~~debt~~times ~~held~~the byconversion ~~IBC~~price ~~Funds,~~if ~~LLC~~the Company was not in default. · The monthly trading volume would reflect historical averages and would increase at 1% per month. · The Company would redeem the notes based on availability of alternative financing, ~~which consisted~~increasing ~~entirely~~2% monthly to a maximum of ~~principal~~10%. · The holder would automatically convert the note at maturity if the registration was ~~converted~~effective and the Company was not in ~~accordance~~default. ~~with~~· The computed volatility was projected based on historical volatility. · The expected risk-free interest rate is based on the ~~conversion~~yield ~~terms;~~of ~~therefore~~the no2-year ~~gain~~U.S. Treasury note. · The estimated value represents the average or ~~loss~~expected ~~has been~~value ~~recognized~~from the Monte Carlo simulation. The simulation was specified to run until the expected value was within 1.0 percent of the true value using a 95% confidence interval. A total of 1,000 to 60,000 trials were necessary to reach the specified level of precision.

OnKey ~~February~~inputs ~~25,~~and ~~2014, the Company issued~~assumptions ~~100,000,000~~used ~~shares of Class A Common Stock pursuant~~ to value the ~~conversion of $15,000 of~~ convertible ~~debt~~debentures ~~held~~and bywarrants ~~IBC~~issued ~~Funds,~~during ~~LLC, which consisted entirely of principal. The note was converted in accordance with~~ the ~~conversion~~year ~~terms;~~ended ~~therefore no gain or loss has been recognized.~~December 31, 2014:

On· ~~February~~Stock ~~25,~~prices ~~2014,~~on all measurement dates were based on the ~~Company~~fair ~~issued 150,000,000~~market ~~shares~~value and would fluctuate with projected volatility. · The holders of ~~Class~~the Asecurities ~~Common~~would ~~Stock~~convert ~~pursuant~~monthly to the ~~conversion~~ownership oflimit ~~$15,000~~starting at 4.99% increasing by 10% per month. · The holders would automatically convert the note at the maximum of ~~convertible~~3 ~~debt~~times ~~held~~the byconversion ~~IBC~~price ~~Funds,~~if ~~LLC~~the Company was not in default. · The monthly trading volume would reflect historical averages and would increase at 1% per month. · The Company would redeem the notes based on availability of alternative financing, ~~which consisted~~increasing ~~entirely~~2% monthly to a maximum of ~~principal~~10%. · The holder would automatically convert the note at maturity if the registration was ~~converted~~effective and the Company was not in ~~accordance~~default. ~~with~~· The computed volatility was projected based on historical volatility. · The expected risk-free interest rate is based on the ~~conversion~~yield ~~terms;~~of ~~therefore~~the no1-year ~~gain~~U.S. Treasury note. · The estimated value represents the average or ~~loss~~expected ~~has been~~value ~~recognized~~from the Monte Carlo simulation. The simulation was specified to run until the expected value was within 1.0 percent of the true value using a 95% confidence interval. A total of 8,020,000 trials were necessary to reach the specified level of precision.

OnNote ~~February~~18 ~~28,~~– ~~2014, the Company issued~~Stockholders’ 142,900,000 shares of Class A Common Stock pursuant to the conversion of $21,435 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.Equity

On ~~March~~April 710, ~~2014~~2015 and December 1, 2014, the ~~Company~~Board ~~issued~~of ~~150~~Directors,~~000,000 shares~~ consisting solely of ~~Class~~Shaun APassley, ~~Common~~Ph.D., ~~Stock~~the ~~pursuant~~Company’s majority shareholder, amended the Article of Incorporation to change the ~~conversion~~par value and number of ~~$15,000~~authorized shares of ~~convertible~~each ~~debt~~class ~~held~~of bycommon ~~IBC~~and ~~Funds,~~series ~~LLC,~~of ~~which~~preferred ~~consisted~~stock ~~entirely~~and authorize a fourth class of ~~principal.~~preferred ~~The~~stock, ~~note~~Series ~~was~~D ~~converted~~Convertible Preferred Stock, in ~~accordance~~addition ~~with~~to the ~~conversion~~modification ~~terms;~~of ~~therefore~~the noattributes and ~~gain~~dividends. orThe ~~loss~~disclosures ~~has~~herein reflect these modifications and the changes to the par value have been ~~recognized~~retroactively reflected throughout.

OnReverse ~~March 11, 2014, the Company issued 150,000,000 shares of Class A Common~~ Stock pursuant to the conversion of $15,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.Split

OnIn ~~March~~September 142014, ~~2014~~Epazz, Inc.’s (the “Company’s”) ~~issued~~majority ~~101~~stockholder and sole director (Shaun Passley) approved a 1:10,~~900,~~000 ~~shares~~ reverse stock split of the Company’s Class A ~~Common~~common ~~Stock~~stock ~~pursuant~~Effective toOctober 6, 2014, the ~~conversion~~Company ofaffected $the 1:10,~~190~~000 reverse stock split of its ~~convertible~~Class ~~debt~~A ~~held~~common bystock. ~~IBC~~The ~~Funds,~~Company’s ~~LLC,~~Class ~~which~~B ~~consisted~~common stock and preferred stock were not affected by the reverse stock split. ~~entirely~~The ofCompany’s ~~principal~~new symbol following the reverse split will be EPAZD. The ~~note~~D ~~was~~will ~~converted~~be removed in ~~accordance~~20 business days. The Company’s new CUSIP number is 29413V 309. In order for the Company to be in compliance with the ~~conversion~~minimum ~~terms;~~bid ~~therefore~~price norequirement ~~gain~~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 ~~loss~~if the ~~has~~Company ~~been~~needs ~~recognized~~to qualify for a national stock exchange.

~~On March 25, 2014, the Company issued 200,000,000~~Convertible ~~shares~~Preferred ~~of Class A Common~~ Stock ~~pursuant to the conversion of $20~~,~~000~~ ofSeries ~~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.~~A

OnThe ~~March~~Company 27has one thousand (1,000) ~~2014~~authorized shares of $0.0001 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company ~~issued~~has ~~200~~generated revenue over $2 million,~~000~~ and an additional 24% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company,~~000~~ 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, ~~pursuant~~with tofive business days’ notice into 60% of the ~~conversion~~total number of ~~$20,000~~then issued and outstanding shares of ~~convertible~~Class ~~debt~~A ~~held~~Common byStock. ~~IBC~~The ~~Funds,~~Series ~~LLC~~A Preferred Stock has limited voting rights, relating solely to matters which ~~consisted entirely~~adversely affect the rights of ~~principal~~the Series A Preferred Stock holders. The ~~note~~Company shall ~~was~~reserve ~~converted~~and inkeep ~~accordance~~available ~~with~~out ~~the~~of ~~conversion~~its ~~terms;~~authorized ~~therefore~~but nounissued ~~gain~~shares orof ~~loss~~Class ~~has~~A ~~been~~Common ~~recognized~~Stock such number of shares sufficient to effect the conversions.

On April 2, 2014, the Company issued 151,900,000 shares of Class A Common Stock pursuant to the conversion of $15,190 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 7, 2014, the Company issued 200,000,000 shares of Class A Common Stock pursuant to the conversion of $30,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 10, 2014, the Company issued 200,000,000 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 16, 2014, the Company issued 200,000,000 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 22, 2014, the Company issued 200,000,000 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

On ~~April~~July 282, ~~2014~~2012, the Company issued ~~200~~1,000~~,000~~ shares of ~~Class~~convertible Series A ~~Common~~Preferred Stock ~~pursuant~~ to the ~~conversion~~Company’s ofCEO ~~$20,000~~for ofservices ~~convertible~~provided ~~debt~~and ~~held~~personal byguarantees ~~IBC~~associated with ~~Funds,~~previous ~~LLC,~~acquisition ~~which~~activities. ~~consisted entirely~~The total fair value of ~~principal.~~the ~~The~~preferred ~~note~~stock was ~~converted~~$229,236 inbased ~~accordance~~on ~~with~~valuations performed using an option-pricing method based on the ~~conversion~~Company’s ~~terms;~~publicly ~~therefore~~traded nocommon ~~gain~~stock oron ~~loss~~the ~~has~~date ~~been~~of ~~recognized~~grant, and a 5% discount for lack of marketability.

~~On May 1, 2014, the Company issued 200,000,000~~Convertible ~~shares~~Preferred ~~of Class A Common~~ Stock ~~pursuant to the conversion of $20~~,~~000~~ ofSeries ~~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.~~B

OnThe ~~May~~Company 6has one thousand (1,000) ~~2014~~authorized shares of $0.0001 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred Stock accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company ~~issued~~has ~~200~~generated revenue over $1 million,~~000~~ and an additional 6% of the Company’s net income beginning on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company,~~000~~ 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, ~~pursuant~~with tofive business days’ notice into 10% of the ~~conversion~~total number of ~~$10~~then issued and outstanding shares of Class A Common Stock,~~000~~ provided that no conversion will take place until all holders of ~~convertible~~the ~~debt~~Series ~~held~~B byPreferred ~~IBC~~Stock ~~Funds,~~consent ~~LLC~~to such conversion. The Series B Preferred Stock has limited voting rights, relating solely to matters which ~~consisted entirely~~adversely affect the rights of ~~principal~~the Series B Preferred Stock holders. The ~~note~~Company ~~was~~shall ~~converted~~reserve and inkeep ~~accordance~~available ~~with~~out ~~the~~of ~~conversion~~its ~~terms;~~authorized ~~therefore~~but nounissued ~~gain~~shares orof ~~loss~~Class ~~has~~A ~~been~~Common ~~recognized~~Stock such number of shares sufficient to effect the conversions.

On ~~May~~July 62, ~~2014~~2012, the Company issued ~~169,123,600~~a total of 1,000 shares of ~~Class~~convertible ASeries ~~Common~~B ~~Stock~~preferred stock amongst three related parties pursuant to the ~~conversion~~exchange ofand ~~$8,456~~extension of a ~~convertible~~promissory ~~debt~~note ~~held~~owed byto ~~IBC~~Star ~~Funds,~~Financial ~~LLC~~Corporation, ~~which~~a ~~consisted entirely~~related ~~of principal~~party. The ~~note~~total fair value of the preferred stock was ~~converted~~$61,130 based inon ~~accordance~~valuations ~~with~~performed using an option-pricing method based on the ~~conversion~~Company’s ~~terms;~~publicly ~~therefore~~traded nocommon ~~gain~~stock oron ~~loss~~the ~~has~~date of ~~been~~grant, ~~recognized~~and a 5% discount for lack of marketability.

~~Debt Conversions into Class A Common~~Convertible ~~Stock~~Preferred ~~– Magna Group~~Stock, ~~LLC~~Series C

OnEffective January 714, 2014, the Company ~~issued~~ 25has three billion (3,~~140~~000,000,000) authorized shares of ~~Class~~$0.0001 Apar ~~Common~~value Series C Convertible Preferred Stock ~~pursuant~~(“Series C Preferred Stock”). The Series C Preferred Stock accrues dividends equal to 1.5% of the ~~conversion~~Company’s revenues per quarter, beginning on January 1st of any calendar year in which the Company has generated revenue over $51 million,~~028~~ and an additional 6% of ~~convertible~~the ~~debt~~Company’s ~~held~~net byincome ~~Magna~~beginning ~~Group~~on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are payable at the discretion of the Company, ~~LLC~~provided that any unpaid dividends accrue until paid. The Series C Preferred Stock includes a liquidation preference equal to $0.0001 per share, ~~which~~plus any accrued and unpaid ~~consisted~~dividends. ~~entirely~~Subject to certain conversion restrictions over the first three months from the original issuance date, each share of Series ~~principal~~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 ~~note~~following ~~was~~conversion ~~converted~~restrictions shall apply; (i) the holder shall be prohibited from converting any Series C Preferred shares for a period of one (1) month from the original issuance date, (ii) the holder shall be prohibited from converting not more than 30% of the Series C Preferred shares originally issued to holder during the second (2nd) month following the original issuance date, (iii) the holder shall be prohibited from converting not more than 30% (60% in ~~accordance~~total) of the Series C Preferred shares originally issued to holder during the third (3rd) month following the original issuance date, (iv) the holder shall be prohibited from converting not more than an additional 40% (100% in total) of the Series C Preferred shares originally issued to holder following the end of the third month following the original issuance date. The Series C Preferred Stock shall each vote three voting share and shall vote together with the ~~conversion~~Common ~~terms;~~Stock ~~therefore~~of nothe ~~gain~~Company. The orCompany ~~loss~~shall ~~has~~reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares ~~been~~sufficient ~~recognized~~to effect the conversions.

OnConvertible ~~January~~Preferred ~~22, 2014, the Company issued 25,000,000 shares of Class A Common~~ Stock ~~pursuant to the conversion of $5~~,~~000~~ ~~of convertible debt held by Magna Group, LLC, which~~Series ~~consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.~~D

OnEffective ~~January~~December 3118, 2014, the Company ~~issued~~ 66has 1,~~666~~000,~~667~~000 authorized and zero outstanding shares of ~~Class~~$0.01 Apar ~~Common~~value Series D Convertible Preferred Stock ~~pursuant~~(“Series toD ~~the~~Preferred Stock”). ~~conversion~~The ofSeries ~~$10~~D Preferred Stock shall carry an 8.0% dividend,~~000~~ 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, ~~debt~~at ~~held~~the byoption ~~Magna~~of ~~Group~~the holder into three (3) shares of the Company’s Class A Common Stock, ~~LLC~~with five business days' notice, ~~which~~provided that no conversion will ~~consisted~~take ~~entirely~~place until all holders of ~~principal~~the Series C Preferred Stock consent to such conversion. The ~~note~~Series ~~was~~D ~~converted~~Preferred inStock ~~accordance~~has preferential voting rights that carry three (3) voting rights for each share issued and outstanding, and shall vote together with the ~~conversion~~shares of ~~terms;~~the ~~therefore~~Common noStock ~~gain~~of orthe ~~loss~~Company, ~~has been~~and ~~recognized~~not as a separate class.

On February 6, 2014, the Company issued 100,000,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 13, 2014, the Company issued 103,273,067 shares of Class A Common Stock pursuant to the conversion of $15,491 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 27, 2014, the Company issued 133,333,333 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 10, 2014, the Company issued 180,000,000 shares of Class A Common Stock pursuant to the conversion of $18,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 19, 2014, the Company issued 197,000,000 shares of Class A Common Stock pursuant to the conversion of $19,700 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversions into Class A Common Stock – Asher Enterprises

On March 3, 2014, the Company issued 150,000,000 shares of Class A Common Stock pursuant to the conversion of $27,000 of convertible debt held by Asher Enterprises, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 5, 2014, the Company issued 200,857,143 shares of Class A Common Stock pursuant to the conversion of $28,120 of convertible debt held by Asher Enterprises, which consisted of $26,000 of principal and $2,120 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

~~On March 25, 2014, the Company issued 341,666,667 shares of Class A~~ Common Stock ~~pursuant to the conversion of $41~~,~~000 of convertible debt held by Asher Enterprises, which consisted~~ ~~entirely~~Class ~~of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.~~A

~~Debt~~The ~~Conversions~~Company ~~into~~has ~~Class~~9 Abillion ~~Common~~authorized shares ~~Stock~~of ~~– St~~$0.01 ~~George~~par ~~Investments,~~value ~~LLC~~Class A Common Stock.

On March 7, 2014, the Company issued 125,000,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by St. George Investments, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Subscriptions Payable Issued for Shares of Class A Common Stock Granted for Services

On April 23, 2014, the Company granted 3,500,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $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 10,000,000 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 10,000,000 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.

On May 28, 2014, the Company granted 3,250,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $32,500 short term promissory note. The total fair value of the common stock was $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 June 12, 2014, the Company granted 2,125,000 shares of Class A Common Stock to Star Financial, a company owned by our CEO’s family member, a related party, as a loan origination cost in consideration for a $5,000 short term promissory note. The total fair value of the common stock was $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.

Convertible Common Stock, Class B

The Company has 60,000,000, authorized ~~shares~~ shares of $0.~~0001~~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 1:110,000 basis. Effective January 14, 2014, the preferential voting rights of the Convertible Class B ~~Common~~ 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~~ 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

~~Dividends~~Class ~~Payable~~A Common Stock Issuances, 2014:

On January 17, ~~2013~~2014, the Company ~~declared~~issued ~~and~~2,514 ~~accrued~~shares ~~dividends~~of ~~quarterly~~Class onA ~~its~~Common ~~Convertible Series B Preferred~~ Stock pursuant to the ~~recognition~~conversion of ~~revenues in excess of~~ $~~1 million during the year ended December 31~~5,028 ~~2012. Dividends equal to 1.5%~~ of ~~the~~convertible ~~Company’s~~debt ~~revenues~~held ~~per~~by ~~quarter~~Magna ~~during the year ending December 31~~Group, ~~2013 accrue quarterly~~LLC, ~~resulting~~which inconsisted entirely ~~a dividend payable~~ of ~~$11,000,~~principal. ~~which~~The note was ~~subsequently~~converted ~~paid~~in ~~on September~~accordance ~~11, 2014,~~ with the ~~issuance~~conversion ofterms; ~~110,000,000~~therefore ~~shares~~no ofgain ~~Class~~or Aloss ~~Common~~has ~~Stock~~been ~~in lieu of cash~~recognized.

On January 22, 2014, the Company issued 2,500 shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On January 31, 2014, the Company issued 6,667 shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 6, 2014, the Company issued 10,000 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 13, 2014, the Company issued 10,327 shares of Class A Common Stock pursuant to the conversion of $15,491 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 27, 2014, the Company issued 13,333 shares of Class A Common Stock pursuant to the conversion of $20,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 10, 2014, the Company issued 18,000 shares of Class A Common Stock pursuant to the conversion of $18,000 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 19, 2014, the Company issued 19,700 shares of Class A Common Stock pursuant to the conversion of $19,700 of convertible debt held by Magna Group, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 3, 2014, the Company issued 15,000 shares of Class A Common Stock pursuant to the conversion of $27,000 of convertible debt held by Asher Enterprises, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

EPAZZ, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(~~Unaudited~~UNAUDITED)

~~Note~~On 18March –5, ~~Subsequent~~2014, ~~Events~~the Company issued 20,086 shares of Class A Common Stock pursuant to the conversion of $28,120 of convertible debt held by Asher Enterprises, which consisted of $26,000 of principal and $2,120 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

~~Reverse~~On March 7, 2014, the Company issued 12,500 shares of Class A Common Stock ~~Split~~pursuant to the conversion of $15,000 of convertible debt held by St. George Investments, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

InOn ~~September~~March ~~2014~~25, ~~Epazz~~2014, ~~Inc.’s (~~the “Company~~’s”)~~ ~~majority~~issued ~~stockholder and sole director (Shaun Passley) approved a 1:10~~34,~~000 reverse stock split~~167 shares of ~~the Company’s~~ Class A ~~common~~Common ~~stock~~Stock ~~Effective~~pursuant ~~October~~to ~~6, 2014,~~ the ~~Company~~conversion ~~affected~~of ~~the 1:10~~$41,000 ~~reverse stock split~~ of ~~its~~ ~~Class~~convertible Adebt ~~common~~held ~~stock. The Company’s Class B common stock and preferred stock were not affected~~ by ~~the~~Asher ~~reverse~~Enterprises, ~~stock~~which ~~split.~~consisted ~~The~~entirely ~~Company’s~~of ~~new symbol following the reverse split will be EPAZD~~principal. The Dnote ~~will~~was beconverted ~~removed~~ in 20accordance ~~business~~with ~~days. Following~~ the ~~reverse~~conversion ~~stock~~terms; ~~split,~~therefore ~~the~~no ~~Company~~gain ~~has~~or ~~33,621,390~~loss ~~shares~~has ofbeen ~~common stock issued and outstanding and 100,000,000 shares of Class A common stock authorized~~recognized. ~~The Company’s new CUSIP number is 29413V 309.~~

~~Forbearance~~On ~~Agreement~~April 2, 2014, the Company issued 15,190 shares of Class A Common Stock pursuant to the conversion of $15,190 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

InOn ~~November~~April ~~2014~~7, ~~Epazz~~2014, ~~Inc’s (~~the “ Company~~’s”)~~ ~~signed~~issued a20,000 shares ~~forbearance~~of ~~agreement~~Class ~~with~~A ~~St.~~Common ~~George~~Stock ~~Investments,~~pursuant ~~LLC,~~to ~~which changed~~ the ~~outstanding~~conversion ~~balance to~~of $7530,000 ~~with~~of ~~interest~~convertible ~~accruing~~debt atheld ~~the~~by ~~rate~~IBC ~~of 8% per annum~~Funds, ~~compounding daily~~LLC, ~~based~~which onconsisted entirely aof ~~360-day~~principal. ~~year,~~The ~~commencing~~note onwas ~~the~~converted ~~date. The~~in ~~Company~~accordance ~~has~~with the ~~right~~conversion toterms; ~~repay~~therefore ~~the~~no ~~note~~gain ator ~~any~~loss ~~time~~has been recognized.

~~Debt~~On ~~Conversions~~April ~~into~~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.

On ~~November~~April 316, 2014, the Company issued 1 20,~~500,~~000~~,000 pre-reverse split~~ shares of Class A Common Stock pursuant to the conversion of $520,~~994~~000 of convertible debt held by ~~JMJ~~ ~~Financial~~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 ~~November~~April 322, 2014, the Company issued ~~350~~20,000~~,000~~ ~~pre-reverse split~~ shares of Class A Common Stock pursuant to the conversion of $120,~~399~~000 of convertible debt held by ~~JMJ~~IBC ~~Financial~~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 ~~November~~April 1024, 2014, the Company ~~issued 2~~granted 1,~~272,730,~~000 ~~pre-reverse split~~ shares of Class A Common Stock ~~pursuant~~ to ~~the~~GG ~~conversion~~Mars ~~of $15~~Capital,~~000~~ ofa ~~convertible~~related ~~debt~~party ~~held~~entity owned by ~~St.~~Vivienne ~~George Investments~~Passley, as a loan origination ~~LLC,~~cost ~~which~~in ~~consisted~~consideration ~~entirely~~for ofa ~~principal~~$150,000 short term promissory note. The ~~note~~total fair value of the common stock was ~~converted~~$3,000 inbased ~~accordance~~on ~~with~~the closing price of the ~~conversion~~Company’s ~~terms;~~common ~~therefore~~stock noon ~~gain or~~the ~~loss~~date ~~has~~of ~~been~~grant. ~~recognized~~The shares were subsequently issued on August 29, 2014.

~~Issuances~~On April 28, 2014, the Company issued 20,000 shares of Class A Common Stock ~~for~~pursuant to the conversion of $20,000 of convertible debt held by IBC Funds, LLC, which consisted ~~Stock~~entirely ~~Class~~of ~~Conversion~~principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On ~~October~~May 101, 2014, the Company issued 3020,000~~,000~~ ~~post reverse split~~ shares of Class A Common Stock pursuant to ~~our~~the ~~CEO~~conversion ~~from~~of a$20,000 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion ~~notice~~terms; ~~from~~therefore ~~Preferred~~no Cgain or loss has been recognized.

On ~~October~~May 103, 2014, the Company issued 120,~~500,~~000 ~~post reverse split~~ shares of Class A Common Stock pursuant to ~~Star~~the ~~Financial~~conversion of $20,000 aof ~~company~~convertible ~~owned~~debt held by ~~our~~Star ~~CEO’s~~Financial ~~family member~~Corporation, a related party, ~~from~~ awhich consisted entirely of principal. The note was converted in accordance with the conversion ~~notice~~terms; ~~from~~therefore no ~~Preferred~~gain Cor loss has been recognized.

On ~~October~~May 106, 2014, the Company issued 120,~~400,~~000 ~~post reverse split~~ shares of Class A Common Stock pursuant to GGthe ~~Mars~~conversion ~~Capital.~~of $10,000 aof ~~company~~convertible ~~owned~~debt held by ~~our~~IBC ~~CEO’s~~Funds, ~~family member~~LLC, awhich ~~related party,~~consisted ~~from~~entirely aof principal. The note was converted in accordance with the conversion ~~notice~~terms; ~~from~~therefore ~~Preferred~~no Cgain or loss has been recognized.

~~Debt~~On ~~Financing~~May 6, ~~Related~~2014, ~~Parties~~the Company issued 16,912 shares of Class A Common Stock pursuant to the conversion of $8,456 of convertible debt held by IBC Funds, LLC, which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Originated November 10, 2014, an unsecured $60,000 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 February 15, 2015. The note also carried a liquidated damages fee of $1,000 upon default.

On November 10, 2014 the Company issued 250,000,000 pre reverse split shares of Class A Common Stock to Wellington Shields Holdings, LLC, as a fee for closing on an acquisition. The total fair value of the common stock was $5,000 based on the closing price of the Company’s common stock on the date of grant.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

On July 30, 2014 the Company issued 27,778 shares of Class A Common Stock to Wellington Shields Holdings, LLC, as a fee for closing on an acquisition. The 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 August 29, 2014 the Company issued 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 that was previously granted on April 23, 2014 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.

On October 10, 2014 the Company issued 30,000,000 shares of Class A Common to our CEO from a conversion notice from 10,000,000 shares of Preferred C which convert at the ratio of 1 to 3. 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 500,000 shares of Preferred C which convert at the ratio of 1 to 3. 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 466,667 shares of Preferred C which convert at the ratio of 1 to 3. 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 3, 2014 the Company issued 150,000 shares of Class A Common Stock pursuant to the November 13, 2013 promissory note entered into with JMJ Financial. The conversion amount was $5,994. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.

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. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.

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. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.

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. As the conversion occurred within the terms of the conversion agreement; no gain or loss was recognized.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Class A Common Stock Issuances, 2015:

Debt Conversions into Class A Common Stock

Debt Conversion by JMJ Financial

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.

On January 2, 2015, the Company issued 1,695,000 shares of Class A Common Stock pursuant to the conversion of $2,542.50 of convertible debt held by JMJ Financial which consisted of $2,542.50 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On January 21, 2015, the Company issued 1,950,000 shares of Class A Common Stock pursuant to the conversion of $2,925 of convertible debt held by JMJ Financial, which consisted of $2,925 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 4, 2015, the Company issued 1,958,000 shares of Class A Common Stock pursuant to the conversion of $1,762 of convertible debt held by JMJ Financial, which consisted of $1,762 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 23, 2015, the Company issued 1,957,000 shares of Class A Common Stock pursuant to the conversion of $1,292 of convertible debt held by JMJ Financial, which consisted of $1,292 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversion by LG Capital Funding LLC

On January 7, 2015, the Company issued 1,774,082 shares of Class A Common Stock pursuant to the conversion of $2,998.20 of convertible debt held by LG Capital Funding LLC, which consisted of $2,958 of principal, $40.20 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 19, 2015, the Company issued 35,360,512 shares of Class A Common Stock pursuant to the conversion of $3,447.65 of convertible debt held by LG Capital Funding LLC, which consisted of $3,350 of principal, $97.65 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 12, 2015, the Company issued 1,757,230 shares of Class A Common Stock pursuant to the conversion of $1,256.42 of convertible debt held by LG Capital Funding, LLC, which consisted of $1,230 of principal, $26.42 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversion by St. George Investments, LLC

On January 9, 2015, the Company issued 3,400,000 shares of Class A Common Stock pursuant to the conversion of $4,896 of convertible debt held by St. George Investments, LLC, which consisted of $4,896 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 5, 2015, the Company issued 3,550,000 shares of Class A Common Stock pursuant to the conversion of $3,408 of convertible debt held by St. George Investments, LLC, which consisted of $3,408 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 18, 2015, the Company issued 3,750,000 shares of Class A Common Stock pursuant to the conversion of $2,700 of convertible debt held by St. George Investments, LLC, which consisted of $2,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 26, 2015, the Company issued 70,000,000 shares of Class A Common Stock pursuant to the conversion of $8,400 of convertible debt held by St. George Investment LLC, which consisted of $8,400 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Debt Conversion by Magna Equities LLC

On January 7, 2015, the Company issued 3,756,980 shares of Class A Common Stock pursuant to the conversion of $7,323.64 of convertible debt held by Magna Equities LLC, which consisted of $7,323.64 principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On January 30, 2015, the Company issued 4,090,910 shares of Class A Common Stock pursuant to the conversion of $4,500 of convertible debt held by Magna Equities LLC, which consisted of $4,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 12, 2015, the Company issued 4,802,745 shares of Class A Common Stock pursuant to the conversion of $2,800 of convertible debt held by Magna Equities LLC, which consisted of $2,800 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 20, 2015, the Company issued 5,291,006 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Magna Equities LLC, which consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 25, 2015, the Company issued 28,000,000 shares of Class A Common Stock pursuant to the conversion of $14,000 of convertible debt held by Magna Equities LLC, which consisted of $14,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 3, 2015, the Company issued 15,003,751 shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by Magna Equities LLC, which consisted of $2,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 10, 2015, the Company issued 41,996,249 shares of Class A Common Stock pursuant to the conversion of $3,500 of convertible debt held by Magna Equities LLC, which consisted of $3,500 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 20, 2015, the Company issued 53,731,344 shares of Class A Common Stock pursuant to the conversion of $3,600 of convertible debt held by Magna Equities LLC, which consisted of $3,600 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversion by IBC Funds LLC

On February 13, 2015, the Company issued 12,000,000 shares of Class A Common Stock pursuant to the conversion of $7,260 of convertible debt held by IBC Funds LLC, which consisted of $7,260 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 24, 2015, the Company issued 12,000,000 shares of Class A Common Stock pursuant to the conversion of $5,280 of convertible debt held by IBC Funds LLC, which consisted of $5,280 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 3, 2015, the Company issued 20,000,000 shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 5, 2015, the Company issued 20,000,000 shares of Class A Common Stock pursuant to the conversion of $2,200 of convertible debt held by IBC Funds LLC, which consisted of $2,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On March 9, 2015, the Company issued 20,000,000 shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 13, 2015, the Company issued 20,000,000 shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 18, 2015, the Company issued 20,000,000 shares of Class A Common Stock pursuant to the conversion of $1,100 of convertible debt held by IBC Funds LLC, which consisted of $1,100 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 23, 2015, the Company issued 36,000,000 shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 25, 2015, the Company issued 36,000,000 shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 27, 2015, the Company issued 36,000,000 shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 31, 2015, the Company issued 36,000,000 shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 1, 2015, the Company issued 36,000,000 shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 5, 2015, the Company issued 36,000,000 shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversion by Blackbridge Capital LLC

On February 18, 2015, the Company issued 14,876,033 shares of Class A Common Stock pursuant to the conversion of $9,000 of convertible debt held by Blackbridge Capital LLC, which consisted of $9,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 24, 2015, the Company issued 30,000,000 shares of Class A Common Stock pursuant to the conversion of $3,000 of convertible debt held by Blackbridge Capital LLC, which consisted of $3,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On February 26, 2015, the Company issued 37,000,000 shares of Class A Common Stock pursuant to the conversion of $3,700 of convertible debt held by Blackbridge Capital LLC, which consisted of $3,700 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 2, 2015, the Company issued 40,000,000 shares of Class A Common Stock pursuant to the conversion of $4,000 of convertible debt held by Blackbridge Capital LLC, which consisted of $4,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 5, 2015, the Company issued 28,424,700 shares of Class A Common Stock pursuant to the conversion of $2,842.47 of convertible debt held by Blackbridge Capital LLC, which consisted of $2,842.47 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Preferred C Stock

On January 21, 2015, the Company issued 12,564,800 shares of Preferred C Stock pursuant to the exchange agreement with our CEO in exchange for 12,564,800 shares of Class A Common Stock. The total fair value of the common stock was $4,112 based on an independent valuation on the date of grant. Although the common stock had a fair value higher than the preferred stock; as this was a related party transaction, no gain was recognized as a result of this exchange.

On February 13, 2015, the Company issued 210,000,000 shares of Class A Stock pursuant to the exchange agreement with our CEO in exchange for 70,000,000 shares of Preferred C Stock. As the stock was converted within the terms of the agreement, no gain or loss was recognized as a result of the exchange.

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.

Beneficial Conversion Feature

On October 20, 2014, the Company entered into a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion price that was $0.0333 below the market price of $0.20 on the October 20, 2014 origination date resulted in a debt discount value of $43,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

On October 31, 2014, the Company entered into a convertible promissory note with LG Capital. The beneficial conversion feature discount resulting from the conversion price that was $0.04329 below the market price of $0.125 on the October 31, 2014 origination date resulted in a debt discount value of $50,239 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

On November 6, 2014, the Company entered into a convertible promissory note with LG Capital. The beneficial conversion feature discount resulting from the conversion price that was $0.04329 below the market price of $0.08171 on the November 6, 2014 origination date resulted in a debt discount value of $33,600 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

On December 3, 2014, the Company entered into a convertible promissory note with Asher Enterprises. The beneficial conversion feature discount resulting from the conversion price that was $0.005 below the market price of $0.03 on the December 3, 2014 origination date resulted in a debt discount value of $33,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

On January 29, 2015, the Company entered into a convertible promissory note with KBM Worldwide. The beneficial conversion feature discount resulting from the conversion price that was $0.00126 below the market price of $0.0021 on the January 29, 2015 origination date resulted in a debt discount value of $43,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On February 13, 2015, the Company entered into a convertible promissory note with IBC Funds. The beneficial conversion feature discount resulting from the conversion price that was $0.00088 below the market price of $0.0003 on the February 13, 2015 origination date resulted in a debt discount value of $127,813 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

On March 2, 2015, the Company entered into a convertible promissory note with Star Financial Corporation. The beneficial conversion feature discount resulting from the conversion price that was $0.00008 below the market price of $0.0003 on the March 2, 2015 origination date resulted in a debt discount value of $5,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

On March 2, 2015, the Company entered into a convertible promissory note with GG Mars. The beneficial conversion feature discount resulting from the conversion price that was $0.00005 below the market price of $0.0003 on the March 2, 2015 origination date resulted in a debt discount value of $18,750 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

On March 31, 2015, the Company entered into a convertible promissory note with Star Financial Corporation. The beneficial conversion feature discount resulting from the conversion price that was $0.0002 below the market price of $0.00008 on the March 31, 2015 origination date resulted in a debt discount value of $30,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the loan.

Note 19 - Subsequent Events

Debt Financing

On April 8, 2015, the Company entered into an equipment financing agreement with Marlin for a total of $50,000 bearing an effective interest rate of 10.9%, consisting of 36 monthly payments of $1,781; maturing on April 7, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized.

On April 29, 2015, the Company entered into an equipment financing agreement with Macquarie for a total of $25,000 bearing an effective interest rate of 12%, consisting of 36 monthly payments of $833; maturing on April 29, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized.

On March 26, 2015, the Company entered into a loan for $65,250 from Pearl Capital (“Pearl”). The loan bears interest at an effective rate of 15%, consisting of 100 daily weekday payments of $650, maturing on August 26, 2015. 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.

On April 3, 2015, the Company entered into a loan for $63,000 from Capital Stack (“Capital Stack”). The loan bears interest at an effective rate of 15%, consisting of 100 daily weekday payments of $599, maturing on September 3, 2015. 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.

On April 15, 2015, the Company entered into a loan for $35,000 from 2 Dollars (“2 Dollars”). The loan bears interest at an effective rate of 15%, consisting of 80 daily weekday payments of $434, maturing on August 15, 2015. 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.

On May 7, 2015, the Company entered into a loan for $53,000 from Last Chance (“Last Chance”). The loan bears interest at an effective rate of 15%, consisting of 80 daily weekday payments of $699, maturing on August 7, 2015. 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.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Related Party Financing

Originated April 7, 2015, a $31,250 unsecured promissory note payable, including a $6,250 loan origination fee, to an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on April 7, 2016. The note also carries a liquidated damages fee of $1,500 upon default.

Originated May 7, 2015, an unsecured $13,750 promissory note payable, including a $2,750 loan origination fee, owed to GG Mars, 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, 2015. The note also carries a liquidated damages fee of $1,500 upon default.

Originated May 20, 2015, a $25,000 unsecured promissory note payable, including a $5,000 loan origination fee, to an immediate family member of the Company’s CEO. The note carries a 15% interest rate, matured on May 20, 2016. The note also carries a liquidated damages fee of $1,500 upon default.

Debt Conversions into Class A Common Stock

Debt Conversion by St. George Investments, LLC

On April 24, 2015, the Company issued 89,000,000 shares of Class A Common Stock pursuant to the conversion of $5,340 of convertible debt held by St. George Investment LLC, which consisted of $4,620 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On May 13, 2015, the Company issued 77,000,000 shares of Class A Common Stock pursuant to the conversion of $5,340 of convertible debt held by St. George Investment LLC, which consisted of $5,340 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversion by IBC Funds LLC

On May 4, 2015, the Company issued 36,000,000 shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted of $1,980 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On May 18, 2015, the Company issued 36,000,000 shares of Class A Common Stock pursuant to the conversion of $1,980 of convertible debt held by IBC Funds LLC, which consisted of $6,215 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversion by KBM Worldwide, Inc.

On May 13, 2015, the Company issued 227,100,000 shares of Class A Common Stock pursuant to the conversion of $11,355 of convertible debt held by IBC Funds LLC, which consisted of $11,355 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Common A Issuance

On April 30, 2015, the Company issued 450,000,000 shares of Common A Stock to our CEO for services.

EPAZZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Debt Conversion by Related Party

On April 3, 2015, the Company issued 5,700,000 shares of Class A Common Stock pursuant to the conversion of $2,850 of convertible debt held by Star Financial, a company owned by our CEO’s family member, a related party, which consisted of $2,850 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 7, 2015, the Company issued 40,000,000 shares of Class A Common Stock pursuant to the conversion of $2,000 of convertible debt held by GG Mars, a company owned by our CEO’s family member, a related party, which consisted of $2,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 14, 2015, the Company issued 100,000,000 shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt held by GG Mars, a company owned by our CEO’s family member, a related party, which consisted of $5,000 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversion

On April 13, 2015, the Company issued 110,500,000 shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Michael Dobbs, which consisted of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 13, 2015, the Company issued 110,500,000 shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Ronald Aarons, which consisted of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On April 13, 2015, the Company issued 110,500,000 shares of Class A Common Stock pursuant to the conversion of $11,050 of convertible debt held by Scott Sanchez, which consisted of $7,333.33 of principal and $3,716.67 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Issuances for Services

On April 24, 2015, the Company issued 1,080,000 shares of Class A Common Stock for services to Eduardo Cabrera.

On April 24, 2015, the Company issued 1,000,000 shares of Class A Common Stock for services to Wellington Shields Holding LLC.

On April 24, 2015, the Company issued 200,000 shares of Class A Common Stock for services to Metaxas Georgatos

On April 24, 2015, the Company issued 320,000 shares of Class A Common Stock for services to Vance Thinh.

On April 24, 2015, the Company issued 320,000 shares of Class A Common Stock for services to Marc Estigarribia.

On April 24, 2015, the Company issued 50,000 shares of Class A Common Stock for services to Juan Ramirez.

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

ALL STATEMENTS IN THIS DISCUSSION THAT ~~ARE~~ ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS", "ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES. THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS, EXCEPT AS PROVIDED BY LAW. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO ~~September~~March 3031, ~~2014~~2015. AS ~~USED~~ USED HEREIN, THE “COMPANY,” “EPAZZ,” “WE,” “US,” “OUR” AND WORDS OF ~~SIMILAR~~ SIMILAR MEANING REFER TO EPAZZ, INC., AND INCLUDE EPAZZ’S WHOLLY OWNED SUBSIDIARIES, DESK FLEX, INC., AN ILLINOIS CORPORATION (“DFI”), PROFESSIONAL RESOURCE MANAGEMENT, INC. (“PRM”), AN ILLINOIS CORPORATION, INTELLISYS, INC., A WISCONSIN ~~CORPORATION~~ CORPORATION ("INTELLISYS"), K9 BYTES, INC., AN ILLINOIS CORPORATION (“K9 BYTES”), MS HEALTH, INC., AN ILLINOIS ~~CORPORATION~~ CORPORATION (“MS HEALTH”), TELECORP PRODUCTS, INC., A MICHIGAN CORPORATION (“TELECORP”), JADIAN, INC., AN ILLINOIS CORPORATION (“JADIAN”), STRANTIN, INC., AN ILLINOIS CORPORATION (“STRAND”) AND FLEXFRIDGE, INC., AN ILLINOIS CORPORATION (“FLEXFRIDGE”), UNLESS OTHERWISE STATED, OR THE CONTEXT SUGGESTS OTHERWISE.

BUSINESS OVERVIEW

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

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

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

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

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

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

Autohire Software

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

IntelliSys, Inc.

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

K9 Bytes, Inc.

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

MS Health, Inc.

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

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.

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FlexFridge, Inc.

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

Telecorp Products, Inc.

	(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.

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.

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.

This acquisition was accounted for as a business combination under the purchase method of accounting. 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, consisting of $8,035 of software and $1,826 of an intangible asset for the trade name.

Jadian, Inc.

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

Jadian sells Enterprise Quality Manager (EQ/M) software. EQ/M is a web-based solution with remote tools that enables enforcement bodies to electronically manage compliance, audit, inspection, work order, and licensing/certification/permits, and enforcement activities. The first version of the software was written in 1990 to help manage the activities related to auditing and corrective actions. The software is now in its third generation, with the current Microsoft .NET™ version released commercially in 2003.

Strand, Inc.

On July 31, 2014, one of the Company’s subsidiaries, Telecorp Products, Inc., through a newly-formed wholly-owned Illinois subsidiary, Stratin, Inc. (“Stratin”), 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.

Strand's surveillance management system is a "lean client," which designates the server for a majority of the data processing. This setup ensures stability in the surveillance system, and allows users to control their system from any location in the world without having to download client software.

56Interaction Technology, Inc

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.

PLAN OF OPERATION

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

RESULTS OF OPERATIONS FOR THE THREE ~~MONTHS~~ MONTHS ENDED ~~SEPTEMBER~~MARCH 3031, ~~2014~~2015, AS COMPARED TO THE THREE MONTHS ENDED ~~SEPTEMBER~~MARCH 3031, ~~2013~~2014:

	For the Three Months Ended
	September 30,						Increase /
	March 31,						Increase /
	2014			2013			(Decrease)
	2015			2014			(Decrease)
Revenues	$	~~361~~461,~~150~~661		$	~~156~~252,~~750~~552		$	~~204~~209,~~400~~109
General and Administrative		~~113~~255,~~308~~732			~~231~~291,~~705~~693			(~~118~~35,~~397)~~961	)
Salaries and Wages		~~209~~150,~~667~~146			~~303~~2,~~716~~336,497			(942,~~049~~186,351	)
Depreciation and Amortization		5543,~~156~~965			6046,~~682~~157			(52,~~526)~~192	)
Bad Debts (Recoveries)		30152,~~813~~455			~~5,407~~(12	)		25152,~~406~~467
Total Operating Expenses		~~408~~602,~~944~~298			~~601~~2,~~510~~674,335			(~~192~~2,~~566~~072,037	)
Net Operating Loss		(47140,~~794~~637	)		(~~444~~2,~~760~~421,783	)		~~396~~2,~~966~~281,146
Total Other Income (Expense)		(175,332	)		(140,705	)		(34,627)
Total Other Expense		(368,328	)		(1,309,590	)		941,262
Net Loss	$	(~~223~~508,~~126~~965	)	$	(~~585~~3,~~465~~731,373	)	$	(~~527.181)~~3,222,408	)

Revenues:

For the three months ended ~~September~~March 3031, ~~2014~~2015 we had revenue of ~~361~~$461,~~150~~661 compared to revenue of $~~156~~252,~~750~~552 for the three months ended ~~September~~March 3031, ~~2013~~2014, an increase of $~~204~~209,~~400~~109, or ~~130~~83% from the comparative period. The increase in revenues was due primarily to the acquisition of our new subsidiaries.

General and Administrative:

General and administrative expenses decreased by $~~118~~35,~~397~~961, or 5112% to $~~113~~255,~~308~~732 for the three months ended ~~September~~March 3031, ~~2014~~2015 compared to general and administrative expense of $~~231~~291,~~705~~ 693 for the three months ended ~~September~~March 3031, ~~2013~~2014. The decrease in general and administrative expense is due primarily to decreased public relations fees and stock based compensation during the three months ending ~~September 30~~March 31, ~~2014~~2015 ~~that~~as ~~wasn’t~~compared ~~incurred~~to ~~during~~ the three months ending March ~~September 30~~31, ~~2013~~2014.

Salaries and Wages:

Salaries and wages decreased by $942,~~049~~186, or351, 31or 94% to $~~209~~150,~~667~~146 for the three months ended ~~September~~March 3031, ~~2014~~2015 compared to salaries and wages of $~~303~~2,~~716~~336,497 for the three months ~~ended~~ ~~September~~ended 30March 31, ~~2013~~2014. The decrease in salaries and wages is due primarily to decrease in professional services.

Depreciation and Amortization:

We had depreciation and amortization expense of $5543,~~156~~965 for the three months ended ~~September~~March 3031, ~~2014~~2015 as compared to $6046,~~682~~157 for the three months ended ~~September~~March 3031, ~~2013~~2014, aan ~~decrease~~ increase of $52,~~526~~192, or 95% from the comparative period. This decrease is principally due to certain assets reaching the end of their depreciable life cycle and intangible assets that were impaired on December 31, ~~2013~~ 2014 that are no longer being amortized. We anticipate the replacement of these assets as resources become available.

Bad Debts (Recoveries):

We had bad ~~debts~~debt ~~(recoveries)~~expense of $30152,~~813~~455 for the three months ended ~~September~~March 3031, ~~2014~~2015 as compared to bad ~~debts~~debt (recoveries) of ($~~5,407~~ 12) for the three months ended ~~September~~March 3031, ~~2013~~2014, an increase in bad ~~debts~~debt ~~(recoveries)~~expense of $25152,~~406~~467, ~~or 470%~~ from the comparative period. This decrease is due to changes in our allowance for doubtful accounts. We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days old, and are actively managing our receivables.

Net Operating Gain (Loss):

Total operating expenses for the three months ended ~~September~~March 3031, ~~2014~~2015 were $~~408~~602,~~944~~298, compared to $~~601~~2,~~510~~674,335 for the three months ended ~~September~~ 30March 31, ~~2013~~2014, a decrease of $~~192~~22,~~566~~072, 037, or 3277% from the comparative period. We had net operating ~~losses~~loss of $47140,~~794~~637, compared to $~~444~~2,~~760~~407,252 for the three months ended ~~September 30~~March 31, ~~2013~~2014, a decrease of $~~396~~2,~~966~~281,146, or 8994% from the comparative period. The decrease in operating ~~loss~~gain was primarily due to the decrease in stock based compensation to related parties.

Other Income (Expense):

Other Income (expense) was ($~~175~~368,~~332~~328) for the three months ended ~~September~~March 3031, ~~2014~~2015 compared to ($~~140~~1,~~705~~309,590) for the three months ended ~~September 30~~March 31, ~~2013~~ 2014, ana ~~increase~~ decrease of $34941,~~627~~262, or 2572% from the comparative period. Interest expense increased primarily due to significant increased borrowings since the three months ended ~~September~~March 3031, ~~2013~~2014.

Net Loss:

We had a net loss of $~~223~~508,~~126~~965 for the three months ended ~~September~~March 3031, ~~2014~~2015 compared to a net loss of $~~585~~3,~~465~~731,373 for the three months ended ~~September~~March 3031, ~~2013~~2014, resulting in a decreased net loss of $~~362~~3,~~339~~222,408, or 6286% from the comparative period. The decreased net loss was primarily due increased revenues and lowered PR Marketing and lower stock based compensation expense.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014, AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2013:

	For the Nine Months Ended
	September 30,						Increase /
	2014			2013			(Decrease)
Revenues	$	941,227		$	643,879		$	297,348
General and Administrative		683,447			519,339			164,108
Salaries and Wages		2,654,666			2,074,950			579,716
Depreciation and Amortization		152,711			204,842			(52,131	)
Bad Debts (Recoveries)		25,551			(3,333	)		28,884
Total Operating Expenses		3,516,375			2,795,798			720,577
Net Operating Loss		(2,575,148	)		(2,151,919	)		423,229
Total Other Income (Expense)		(2,143,582	)		(499,695	)		1,643,887
Net Loss	$	(4,718,730	)	$	(2,651,614	)	$	2,067,116

Revenues:

For the nine months ended September 30, 2014 we had revenue of $941,227 compared to revenue of $643,879 for the nine months ended September 30, 2013, an increase of $297,348 or 46% from the comparative period. The increase in revenues was due primarily to the acquisition of our new subsidiaries.

General and Administrative:

General and administrative expenses increased by $164,108 or 32% to $683,447 for the nine months ended September 30, 2014 compared to general and administrative expense of $519,339 for the nine months ended September 30, 2013. The increase in general and administrative expense is due primarily to increased public relations fees and general increases due to the acquisition of subsidiaries incurred during the nine months ending September 30, 2014 that wasn’t incurred during the nine months ending September 30, 2013.

Salaries and Wages:

Salaries and wages increased by $579,716, or 28% to $2,654,666 for the nine months ended September 30, 2014 compared to salaries and wages of $2,074,950 for the nine months ended September 30, 2013.

Depreciation and Amortization:

We had depreciation and amortization expense of $152,711 for the nine months ended September 30, 2014 as compared to $204,842 for the nine months ended September 30, 2013, a decrease of $52,131, or 25% from the comparative period. This decrease is principally due to certain assets reaching the end of their depreciable life cycle and intangible assets that were impaired on December 31, 2013 that are no longer being amortized. We anticipate the replacement of these assets as resources become available.

Bad Debts (Recoveries):

We had bad debts (recoveries) of $25,551 for the nine months ended September 30, 2014 as compared to bad debts (recoveries) of $3,333 for the nine months ended September 30, 2013, an increase in bad debts (recoveries) of $28,884, or 867% from the comparative period. This decrease is due to changes in our allowance for doubtful accounts. We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days old, and are actively managing our receivables.

Net Operating Loss:

Total operating expenses for the nine months ended September 30, 2014 were $3,516,375 compared to $2,795,798 for the nine months ended September 30, 2013, an increase of $720,577, or 26% from the comparative period. We had net operating losses of $2,575,148, compared to $2,151,919 for the nine months ended September 30, 2013, an increase of $423,229, or 20% from the comparative period. The increase in operating loss was primarily due the increase in stock based compensation to related parties.

Other Income (Expense):

Other expense was $2,143,582 for the nine months ended September 30, 2014 compared to $499,695 for the nine months ended September 30, 2013, an increase of $1,643,887, or 329% from the comparative period. Interest expense increased primarily due to significant increased borrowings, along with increased non-cash discounts of $611,988 attributable to the amortization of debt discounts, loan origination costs and a loss on convertible debt default provisions incurred during the nine months ended September 30, 2014, compared to the same period in 2013.

Loss on debt modifications, related parties was $172,864 for the nine months ended September 30, 2014 compared to $96,032 for the nine months ended September 30, 2013, an increase of $76,832 from the comparative period. The current period loss on debt modification was due to an amended promissory note with Vivienne Passley, which at the time of modification carried a balance of $57,621, consisting principal of $51,000 and $6,621 of interest. We amended the promissory note to include a fixed conversion price of $0.0001 per share. The Company compared the fair value of the debt immediately preceding the modification to the fair value after the modification to determine the loss on modification of $172,864. The prior period loss on debt modification was due to an amended convertible promissory note with Star Financial Corporation, which at the time of modification carried a balance of $190,849. We amended the convertible promissory note to revise the conversion terms from a $0.005 floor and 75% discount to market to conversion terms consisting of, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The Company compared the fair value of the debt immediately preceding the modification to the fair value after the modification to determine the loss on modification of $81,792.

Change in derivative liabilities was a loss of $777,664 for the nine months ended September 30, 2014 compared to $-0- for the nine months ended September 30, 2013, an increase of $777,664 from the comparative period. The current period loss on derivative liabilities consisted of a loss of $837,010 due to the value in excess of the face value of the convertible notes, as offset by a net gain in market value of $59,346 on the convertible debts.

Net Loss:

We had a net loss of $4,718,730 for the nine months ended September 30, 2014 compared to a net loss of $2,651,614 for the nine months ended September 30, 2013, resulting in an increased net loss of $2,067,116, or 78% from the comparative period. The increased net loss was primarily due the increase in stock based compensation to related parties and interest expense incurred with increased borrowings, along with a $777,664 loss attributable to the change in derivative liabilities incurred during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes total assets, accumulated deficit, stockholders’ equity (deficit) and working capital at ~~September~~March 3031, ~~2014~~2015 compared to December 31, ~~2013~~2014.

	September 30,			December 31,
	March 31,			December 31,
	2014			2013
	2015			2014
Total Assets	$	2972,~~382,194~~638		$	1,~~082~~087,~~961~~191
Total Liabilities	$	4,~~294~~903,~~798~~889		$	25,~~607~~005,~~576~~501
Accumulated (Deficit)	$	(1215,~~220~~678,~~724~~366	)	$	(715,~~501~~169,~~994~~401	)
Stockholders’ Equity (Deficit)	$	(13,~~912~~931,~~604~~251	)	$	(13,~~524~~918,~~615~~310	)
Working Capital (Deficit)	$	(3,~~383~~597,~~331~~771	)	$	(13,~~283~~453,~~338~~062	)

60We had total current assets of $184,233 as of March 31, 2015, consisting of cash of $32,765, net accounts receivable of $97,902, and other current assets of $53,566.

We had ~~total~~ non-current assets of $~~459~~788,~~972~~405 as of ~~September~~March 3031, ~~2014~~2015, consisting of ~~cash~~$104,532 of ~~$71~~property and equipment,~~963,~~ net, ~~accounts~~including ~~receivable~~accumulated depreciation and amortization, intangible assets of $~~256~~309,~~617~~055, ~~and~~net, ~~other~~including ~~current~~$495,186 ~~assets~~of accumulated amortization and goodwill of $~~131~~374,~~972~~818 related to the purchase of our subsidiaries.

We had non-current assets of $1,922,222 as of September 30, 2014, consisting of $115,470 of property and equipment, net, including accumulated depreciation and amortization, intangible assets of $451,391, net, including $423,017 of accumulated amortization and goodwill of $1,355,361 related to the purchase of our subsidiaries.66

We had total current liabilities of $3,~~383~~782,~~331~~004 as of ~~September~~March 3031, ~~2014~~2015, consisting of $~~552~~446,~~562~~241 of accounts payable and accrued expenses, $~~592~~401,~~408~~254 of deferred revenues, current ~~portion~~ portion of outstanding balances on lines of credit of $8372,~~260~~138, current portion of capitalized leases in the amount of $74,~~031~~748, current ~~maturities~~ maturities of notes payable, related parties of $1,~~186~~271,~~618~~198 current maturities on convertible debts of $~~152~~147,~~275~~885, net of discounts of $1222,~~112~~228, and current maturities on long term debts in the amount of $~~809~~1,~~177~~155,689.

We had negative working capital of $23,~~923~~597,~~359~~771 and a total accumulated deficit of $1215,~~220~~678,~~724~~366 as of ~~September~~March 3031, ~~2014~~2015.

We had total liabilities of $4,~~294~~903,~~798~~ 889 as of ~~September~~ 30March 31, ~~2014~~2015, which included total current liabilities of $3,~~383~~782,~~331~~004, ~~long-term portion of capitalized leases of $0~~ and long-term debts of $~~911~~1,~~467~~121,885, net of current portion.

We had net cash used in operating activities of negative $~~300~~171,~~001~~517 for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015, which was primarily due to our net loss of $4508,~~718,730~~965 after adjustments for non-cash operating expenses, a decrease of $1153,~~130~~935 in accounts receivable and ana ~~increase of $48,035 of other current assets, and an~~ decrease of $~~395~~68,~~307~~683 in ~~accounts payable and accrued expenses, and an increase of $270,277 in~~ deferred revenues.

We had negative $~~625~~7,~~721~~236 of net cash used in investing activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015, which consisted of $437,~~512~~236 of cash paid for the purchase of equipment~~, $582,945 paid for the acquisition of subsidiaries, offset by $736 received in cash with the merger~~.

We had $~~789~~104,~~118~~710 of net cash provided by ~~financing~~ financing activities during the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015, which represented proceeds from notes payable, related parties of $~~774~~113,~~524 and~~375, proceeds from convertible notes ~~payable~~ of $~~582~~253,~~206~~179 ~~repayments~~and onproceeds from notes payable, ~~related parties~~ of $82196,~~879~~052 offset by repayments on notes ~~payable~~ payable, related parties of $~~472~~38,~~841~~500, repayments on ~~convertible~~ notes payable of $1418,~~500~~255, and principal payments on capital leases of $101,~~392~~141.

Declaration of Dividends

On January 1, 2013, the Company declared and accrued dividends quarterly on its Convertible Series B Preferred Stock pursuant to the recognition of revenues in excess of $1 million during the year ended December 31, 2012. Dividends equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, 2013 accrue quarterly, resulting in a dividend payable of $11,000, which was subsequently paid with the issuance of 110,000,000 shares of Class A Common Stock in lieu of cash.

Recent Financing Activities

~~Third~~First quarter of ~~2014~~2015:

On January 30, 2015, the Company entered into an equipment financing agreement with CIT Finance for a total of $100,000 bearing an effective interest rate of 10.9%, consisting of 36 monthly payments of $3,210; maturing on January 30, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized.

On January 27, 2015, the Company entered into an equipment financing agreement with Direct Credit for a total of $50,000 bearing an effective interest rate of 19.7%, consisting 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.

On February 20, 2015, the Company entered into an equipment financing agreement with Safe Leasing for a total of $37,500 bearing an effective interest rate of 31.625%, consisting of 36 monthly payments of $1,549; maturing on February 20, 2018. The loan is collateralized with software. Given the nature and status of the software development, no equipment costs have been capitalized.

Debt Financing, Related Parties

Originated ~~July~~March 2818, ~~2014~~2015, ana ~~unsecured~~ $376,~~500~~250 unsecured promissory note payable, including a $71,~~500~~250 loan origination fee, owed to ~~Star~~GG ~~Financial~~Mars Capital, Inc., a corporation owned by an immediate ~~family~~ family member of the Company’s CEO. The note carries a 15% interest rate, ~~matures~~matured on ~~December 15~~August 18, ~~2014~~ 2015. The note also ~~carried~~ carries a liquidated damages fee of $1,000 upon default~~, which was amended and removed on September 19, 2014~~.

Originated ~~August~~January 122, ~~2014~~2015, aan unsecured $3647,000 ~~unsecured~~ promissory note payable, including ana $810,000 loan origination fee, owed to GGStar ~~Mars Capital~~Financial, ~~Inc.,~~ a corporation owned by an immediate family member of the Company’s CEO. The note carries a 15% interest rate, ~~matures~~matured on ~~December~~August 322, ~~2014~~2015. The note also ~~carried~~carries a liquidated damages fee of $1,~~000~~500 upon default~~, which was amended and removed on September 19, 2014~~.

Originated ~~August~~February 2124, ~~2014~~2015, an unsecured $1248,~~500~~ 000 promissory note payable, including a $210,~~500~~000 loan origination fee, owed to ~~L&F~~Star ~~Lawn Service~~Financial, ~~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 ~~December~~August 2122, ~~2014~~2015. The note also ~~carried~~ carries a liquidated damages fee of $1,~~000~~500 upon default~~, which was amended and removed on September 19, 2014~~.

61Originated 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.

Originated August 26, 2014, an unsecured $57,000 promissory note payable, including a $12,000 loan origination fee, owed to GG Mars, Inc., 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.67

~~Originated~~Convertible ~~September~~Debt 2, 2014, an unsecured $69,000 promissory note payable, including a $14,000 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, matures on December 1, 2014. The note also carried a liquidated damages fee of $1,000 upon default.Financing

Originated ~~September~~January 227, ~~2014~~2015, an ~~unsecured~~ unsecured $5342,~~750~~323.64 convertible promissory note ~~payable~~, ~~including~~carries a $12% interest rate,~~000~~ ~~loan~~matures ~~origination~~on ~~fee~~January 7, 2016, (“One Magna Group Note”) owed to GGMagna ~~Mars~~Group, ~~Capital~~LLC, ~~Inc~~consisting of one partial note acquired and assigned from Star Financial Corporation, a related party, ~~corporation~~consisting ~~owned~~of bya antotal ~~immediate~~of ~~family~~$75,000 ~~member~~of principal and $9,647.28 of accrued interest. The acquired promissory notes did not carry conversion terms, and were subsequently exchanged for the ~~Company’s~~convertible ~~CEO~~note. The principal and accrued interest is convertible into shares of common stock at the discretion of the note ~~carries~~holder at a 15price equal to fifty percent (50%) ~~interest~~of ~~rate,~~the ~~matures~~average onof the 3 lowest trading ~~December~~price 1of the Company’s common stock for the ten (10) days prior to the conversion date, ~~2014~~or $0.000075 per share, whichever is greater. The ~~note~~debt ~~also~~holder ~~carried~~was alimited ~~liquidated~~to ~~damages~~owning ~~fee~~4.99% of the Company’s issued and outstanding shares. The assigned principal of $142,~~000~~323.64 ~~upon~~was ~~default~~subsequently converted to a total of 309,445,417 shares of common stock over various dates from January 7, 2015 to March 18, 2015 in complete satisfaction of the debt.

Originated January 7, 2015, an unsecured $17,500 convertible promissory note, carries a 12% interest rate, matures on January 7, 2016, (“Two Magna Group Note”) owed to Magna Group, LLC. 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 ten (10) days prior to the conversion date, or $0.000075 per share, whichever is greater. The debt holder was limited to owning 4.99% of the Company’s issued and outstanding shares.

On January 29, 2015, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM an 8% Convertible Promissory 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 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 lowest three (3) Trading Prices for the Common Stock during the 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 with our operations, and there was no solicitation.

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.

Recent Debt Conversions

~~Third~~Debt ~~quarter~~Conversions ofinto ~~2014:~~Class A Common Stock

ADebt ~~total~~Conversion ofby ~~$152,275~~JMJ ofFinancial ~~convertible debentures remain outstanding as of the date of this filing, and are convertible at various hypothetical prices discounted to market as depicted in the table below:~~

				Potential issuable shares at various conversion prices
				below the most recent market price of $0.0001 per share
	Conversion	Principal		100%	75%	50%	25%
Lender / Origination	Terms	Borrowed		$0.0001	$0.000075	$0.00005	$0.000025
JMJ Financial (Second JMJ Note) November 13, 2013	Convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.00009 per share, whichever is greater.	$	33,000	330,000,000	440,000,000	660,000,000	1,320,000,000
St. George Investments, Inc. (First St. George Note) September 5, 2013	Convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest closing bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00005 per share, whichever is greater.	$	119,275	1,192,750,000	1,590,333,333	2,385,500,000	4,771,000,000
		$	152,275	1,522,750,000	2,030,333,333	3,045,500,000	6,091,000,000

62On January 2, 2015, the Company issued 1,695,000 shares of Class A Common Stock pursuant to the conversion of $2,542.50 of convertible debt held by JMJ Financial which consisted of $2,542.50 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Debt Conversion by LG Capital Funding LLC

Debt Conversion by St. George Investments, LLC

Debt Conversion by Magna Equities LLC

Debt Conversion by IBC Funds LLC

Debt Conversion by Blackbridge Capital LLC

First quarter of 2015:

A total of $147,885 of convertible debentures remain outstanding as of March 31, 2015.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Inherent Limitations of Internal Controls

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

Changes in Internal Control over Financial Reporting

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

6372

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

The following sales of equity securities by by the Company occurred during the three month period ended ~~September~~March 3031, ~~2014~~2015:

OnDebt ~~July~~Conversion ~~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~~JMJ ~~Passley,~~Financial 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.

OnUnsecured ~~July 7~~$33,000 ~~2014~~convertible ~~the Company issued 3,000,000~~promissory ~~shares~~note oforiginated ~~Convertible~~on ~~Series~~November ~~C Preferred Stock to GG Mars Capital~~13, ~~a related party entity owned by Vivienne Passley~~2013, asincluding aan ~~loan origination~~Original ~~cost~~Issue ~~that~~Discount ~~was~~(“OID”) ~~previously~~of ~~granted on March 26~~$3,000, ~~2014~~carries ~~in consideration for~~ a ~~$37,500~~12% ~~short term promissory note. The total~~interest ~~fair~~rate ~~value~~(“Second ofJMJ ~~the common stock was $2~~Note”),~~928~~ ~~based~~matures on anNovember ~~independent~~12, ~~valuation on the date of grant.~~2014

On ~~July~~January 72, ~~2014~~2015, the Company issued 3 1,~~000~~695,000 shares of ~~Convertible~~Class ~~Series~~A CCommon ~~Preferred~~ Stock pursuant to ~~Star~~the ~~Financial,~~conversion aof ~~company~~$2,542.50 ~~owned~~of byconvertible ~~our~~debt ~~CEO’s~~held ~~family~~by ~~member,~~JMJ aFinancial ~~related party,~~which asconsisted aof ~~loan origination cost that was previously granted on March 26, 2014 in consideration for a~~ $252,~~000~~542.50 ~~short~~of ~~term~~principal. ~~promissory~~The note~~. The~~ ~~total~~was ~~fair~~converted ~~value~~in ofaccordance with the ~~common~~conversion ~~stock~~terms; ~~was~~therefore ~~$2,928~~no ~~based~~gain onor anloss has ~~independent~~been ~~valuation on the date of grant~~recognized.

On ~~July~~January 721, ~~2014~~2015, the Company issued 2 1,~~000~~950,000 shares of ~~Convertible~~Class ~~Series~~A CCommon ~~Preferred~~ Stock pursuant to GGthe ~~Mars~~conversion ~~Capital~~of $2,925 aof ~~related~~convertible ~~party~~debt ~~entity~~held ~~owned~~ by ~~Vivienne~~JMJ ~~Passley~~Financial, ~~as a loan~~which ~~origination~~consisted ~~cost~~of ~~that was previously granted on March 28, 2014 in consideration for an~~ $182,~~750~~925 ~~short~~of ~~term promissory note~~principal. The ~~total fair~~note ~~value~~was ofconverted ~~the~~in ~~common~~accordance ~~stock~~with ~~was~~the ~~$1,594~~conversion ~~based~~terms; ontherefore anno ~~independent~~gain ~~valuation~~or onloss ~~the~~has been ~~date of grant~~recognized.

On ~~July~~February 74, ~~2014~~2015, the Company issued 3 1,~~000~~958,000 shares of ~~Convertible~~Class ~~Series~~A CCommon ~~Preferred~~ Stock pursuant to ~~Star~~the ~~Financial,~~conversion aof ~~company owned by our CEO’s family member~~$1,762 aof ~~related~~convertible ~~party, as~~debt aheld ~~loan~~by ~~origination~~JMJ ~~cost that was previously granted on March 28~~Financial, ~~2014~~which consisted inof ~~consideration for a~~ $251,~~000~~762 ~~short~~of ~~term~~principal. ~~promissory~~The note~~. The~~ ~~total~~was ~~fair~~converted ~~value~~in ofaccordance with the ~~common~~conversion ~~stock~~terms; ~~was~~therefore ~~$2,928~~no ~~based~~gain onor anloss ~~independent~~has been ~~valuation on the date of grant~~recognized.

On ~~July~~February 3023, ~~2014~~2015, the Company issued ~~277~~ 1,~~777~~957,~~778~~ 000 shares of Class A Common Stock pursuant to ~~Wellington~~the ~~Shields~~conversion ~~Holdings,~~of ~~LLC~~$1,292 asof aconvertible ~~fee~~debt ~~for~~held ~~closing~~by onJMJ anFinancial, ~~acquisition.~~which consisted ~~The~~of ~~total~~$1,292 ~~fair value~~ of ~~the~~principal. ~~common~~The ~~stock~~note was ~~$55,556~~converted ~~based~~in onaccordance ~~the~~with ~~closing price of~~ the ~~Company’s~~conversion ~~common~~terms; ~~stock~~therefore onno ~~the~~gain ~~date~~or ofloss ~~grant~~has been recognized.

OnDebt ~~August~~Conversion ~~29, 2014 the Company issued 3,500,000 shares of Class A Common Stock to Star Financial, a company owned~~ by ~~our~~LG ~~CEO’s~~Capital ~~family member, a related party, as a loan~~Funding origination cost that was previously granted on April 23, 2014 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.LLC

On ~~August~~January 297, ~~2014~~2015, the Company issued 10 1,~~000~~774,~~000~~ 082 shares of Class A Common Stock pursuant to GGthe ~~Mars~~conversion ~~Capital~~of $2,998.20 aof ~~related~~convertible ~~party~~debt ~~entity~~held ~~owned~~ by ~~Vivienne~~LG ~~Passley,~~Capital ~~as a loan origination cost~~Funding ~~that was previously granted on April 24~~LLC, ~~2014~~which inconsisted ~~consideration~~of ~~for a~~ $~~150~~2,~~000~~958 ~~short~~of ~~term~~principal, ~~promissory note~~$40.20 ~~The total fair value~~ of ~~the~~interest. ~~common~~The ~~stock~~note was ~~$3,000~~converted ~~based~~in onaccordance ~~the~~with ~~closing price of~~ the ~~Company’s~~conversion ~~common~~terms; therefore ~~stock~~no ongain ~~the~~or ~~date~~loss ofhas ~~grant~~been recognized.

On ~~August~~March 2919, ~~2014~~2015, the Company issued 1035,~~000~~360,~~000~~512 shares of Class A Common Stock pursuant to GGthe ~~Mars~~conversion ~~Capital~~of $3,447.65 aof ~~related~~convertible ~~party~~debt ~~entity~~held ~~owned~~ by ~~Vivienne~~LG ~~Passley,~~Capital asFunding aLLC, ~~loan origination cost~~which ~~that~~consisted ~~was~~of ~~previously~~$3,350 ~~granted~~of ~~on May 7~~principal, ~~2014 in consideration for a~~ $~~125,000~~97.65 ~~short~~of ~~term promissory note~~interest. The ~~total~~note ~~fair value of the common stock~~ was ~~$2,000~~converted ~~based~~in onaccordance ~~the~~with ~~closing price of~~ the ~~Company’s~~conversion ~~common~~terms; ~~stock~~therefore no ongain ~~the~~or ~~date~~loss ofhas ~~grant~~been recognized.

64On February 12, 2015, the Company issued 1,757,230 shares of Class A Common Stock pursuant to the conversion of $1,256.42 of convertible debt held by LG Capital Funding, LLC, which consisted of $1,230 of principal, $26.42 of interest. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

OnDebt ~~August~~Conversion ~~29, 2014 the Company issued 2,125,000 shares of Class A Common Stock to Star Financial, a company owned~~ by ~~our~~St. ~~CEO’s~~George ~~family member~~Investments, ~~a related party, as a loan~~ origination cost that was previously granted on June 12, 2014 in consideration for a $5,000 short term promissory note. The total fair value of the common stock was $213 based on the closing price of the Company’s common stock on the date of grant.LLC

by Magna Equities LLC

Debt Conversion by IBC Funds LLC

Debt Conversion by Blackbridge Capital LLC

Preferred C Stock

Debt Conversion by Related Party

On March 2, 2015, the Company issued 64,000,000 shares of Class A Common Stock pursuant to the conversion of $3,200 of convertible debt held by GG Mars, a company owned by our CEO’s family member, a related party, which consisted of $3,200 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 3, 2015, the Company issued 44,000,000 shares of Class A Common Stock pursuant to the conversion of $3,300 of convertible debt held by Star Financial, a company owned by our CEO’s family member, a related party, which consisted of $3,300 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

On March 11, 2015, the Company issued 22,000,000 shares of Class A Common Stock pursuant to the conversion of $1,650 of convertible debt held by Star Financial, a company owned by our CEO’s family member, a related party, which consisted of $1,650 of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

Issuance of Dividends Paid via Class A Common Stock in Lieu of Cash

On September 11, 2014 the Company issued a a total of ~~110~~11,000~~,000~~ shares of Class A Common Stock amongst three related party Convertible Series B Preferred Stockholders pursuant to a dividend payable of $11,000 that was earned at a rate of 1.5% of the Company’s revenues for the 2013 calendar year. The total fair value of the common stock was $11,000 based on the closing price of the Company’s common stock on the date of grant.

The Company claims an exemption from registration afforded by Section 3(a)(10) of the Securities Act of 1933, as amended (the “Act”), for the above conversions, as the securities were exchanged by the Company in exchange for securities, claims, or property interests, and not for cash and Section 4(2) of the Act for the issuances as the issuances did not involve a public offering, the recipients took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipients are (a) “accredited investors”; or (b) have access to similar documentation and information as would be required in a Registration Statement under.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

On September 24, 2014, St. George Investments, LLC (“note holder”) presented the Company with a notice of default. In accordance with the default provisions, the note shall accrue interest at twenty two percent (22%) per annum effective April 1, 2014. The unsecured convertible promissory note with $41,900 of principal outstanding (“First St. George Note”) matured on June 5, 2014 and was in default effective April 1, 2014 pursuant to Section 3.2 of the Note. 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 debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. In accordance with the default provisions, the outstanding balance prior to the occurrence of default shall increase to 150% of the outstanding balance of principal and interest a maximum of two times. In addition, the note holder was precluded from clearing the conversion of 125,000,000 shares of common stock received pursuant to a March 7, 2014 conversion of $15,000 of outstanding principal until September 10, 2014 (“Late Clearing Adjustment Amount”). Pursuant to Section 1.6(g) of the Note, the note holder is entitled to increase the outstanding balance of the Note by the Late Clearing Adjustment Amount of $25,000. As a result of the Late Clearing Adjustment Amount and Note defaults on April 1, 2014 and June 5, 2014, the principal and interest on the First St. George Note has increased to $136,738 as of September 24, 2014.

On November 7, 2014, Epazz, Inc. (the “Company”) signed a forbearance agreement with St. George Investments, LLC, which changed the outstanding balance to $75,000 with interest accruing at the rate of 8% per annum, compounding daily, based on a 360-day year, commencing on the date. The Company has the right to repay the note at any time.

ITEM 4. MINE SAFETY DISCLOSURES

Mine safety disclosures are not applicable.

ITEM 5. OTHER INFORMATION

None.

6577

ITEM 6. EXHIBITS

			Incorporated by reference
Exhibit	Exhibit Description	Filed herewith	Form	Period ending	Exhibit	~~Filingdate~~Filing date
3.1	Articles of Incorporation		SB-2	12/04/06	X	12/04/06
3.2	Articles of Amendment		SB-2	12/04/06	X	12/04/06
3.3	Articles of Amendment		SB-2	12/04/06	X	12/04/06
3.4	Articles of Amendment		SB-2	12/04/06	X	12/04/06
3.5	Statement of Change of Registered Agent		SB-2	12/04/06	X	12/04/06
3.6	Articles of Amendment		SB-2	12/04/06	X	12/04/06
3.7	Amended and Restated By-Laws		SB-2	12/04/06	X	12/04/06
3.8	Articles of Amendment		10-Q	09/30/12	X	12/18/12
3.9	Articles of Amendment		10-K	12/31/12	X	06/03/13
3.10	Articles of Amendment, January 14, 2014	*
4.1	Form of Stock Certificate		SB-2	12/04/06	X	12/04/06
10.1	February 22, 2013 – Equipment Finance Agreement with Summit Funding Group, Inc.		10-Q	03/31/13	X	06/14/13
10.2	March 7, 2013 – Lease Agreement with Baytree National Bank & Trust Company		10-Q	03/31/13	X	06/14/13
10.3	Promissory Note with Star Financial Corporation, April 1, 2013		10-Q	06/30/13	X	08/19/13
10.4	Promissory Note with Star Financial Corporation, April 12, 2013		10-Q	06/30/13	X	08/19/13
10.5	Promissory Note with Star Financial Corporation, May 16, 2013		10-Q	06/30/13	X	08/19/13
10.6	Promissory Note with Star Financial Corporation, June 12, 2013		10-Q	06/30/13	X	08/19/13
10.7	First JMJ Financial Convertible Promissory Note, June 12, 2013		10-Q	06/30/13	X	08/19/13
10.8	Software Finance Agreement with CIT Finance, LLC, May 1, 2013		10-Q	06/30/13	X	08/19/13
10.9	Loan and Security Agreement with Small Business Financial Solutions, LLC, April 5, 2013		10-Q	06/30/13	X	08/19/13
10.10	Merchant Agreement with Horizon Business Funding, LLC, June 11, 2013		10-Q	06/30/13	X	08/19/13
10.11	Business Loan Agreement with WebBank, June 19, 2013		10-Q	06/30/13	X	08/19/13
10.12	First Amendment to Executive Employment Agreement, August 16, 2013		10-Q	06/30/13	X	08/19/13
10.13	Promissory Note with Vivienne Passley, July 19, 2013		10-Q	09/30/13	X	11/19/13
10.14	Promissory Note with Vivienne Passley, August 12, 2013		10-Q	09/30/13	X	11/19/13
10.15	Promissory Note with Star Financial Corporation, July 31, 2013		10-Q	09/30/13	X	11/19/13
10.16	Promissory Note with Star Financial Corporation, August 2, 2013		10-Q	09/30/13	X	11/19/13
10.17	Promissory Note with Star Financial Corporation, August 7, 2013		10-Q	09/30/13	X	11/19/13
10.18	Promissory Note with Star Financial Corporation, August 27, 2013		10-Q	09/30/13	X	11/19/13
10.19	Promissory Note with GG Mars Capital, Inc., August 20, 2013		10-Q	09/30/13	X	11/19/13
10.20	Promissory Note with GG Mars Capital, Inc., September 7, 2013		10-Q	09/30/13	X	11/19/13
10.21	Convertible Promissory Note with GG Mars Capital, Inc., August 20, 2013		10-Q	09/30/13	X	11/19/13
10.22	Assignment Agreement with GG Mars Capital, Inc. and Accion Chicago, August 15, 2013		10-Q	09/30/13	X	11/19/13
10.23	Convertible Promissory Note with St. George Investments, Inc., September 5, 2013		10-Q	09/30/13	X	11/19/13
10.24	Note Purchase Agreement with St. George Investments, Inc., September 5, 2013		10-Q	09/30/13	X	11/19/13
10.25	Convertible Promissory Note with Asher Enterprises (Seventh Asher Note), August 19, 2013		10-Q	09/30/13	X	11/19/13
10.26	Securities Purchase Agreement with Asher Enterprises (Seventh Note), August 19, 2013		10-Q	09/30/13	X	11/19/13
10.27	Amendment #1 to Promissory Note with Asher Enterprises (Seventh Asher Note), November 7, 2013		10-Q	09/30/13	X	11/19/13
10.28	Convertible Promissory Note with Asher Enterprises (Eighth Asher Note), September 18, 2013		10-Q	09/30/13	X	11/19/13
10.29	Securities Purchase Agreement with Asher Enterprises (Eighth Note), September 18, 2013		10-Q	09/30/13	X	11/19/13
10.30	Amendment #1 to Promissory Note with Asher Enterprises (Eighth Asher Note), November 7, 2013		10-Q	09/30/13	X	11/19/13
10.31	Amendment #1 to Promissory Note with JMJ Financial (First JMJ Note), August 13, 2013		10-Q	09/30/13	X	11/19/13

6678

			Incorporated by reference
Exhibit	Exhibit Description	Filed herewith	Form	Period ending	Exhibit	~~Filingdate~~Filing date
10.32	Stock Purchase Agreement (Telecorp Acquisition), February 28, 2014	*
10.33	Closing Statement (Telecorp Acquisition), February 28, 2014	*
10.34	Non-Disclosure/Non-Compete Agreement (Telecorp Acquisition), February 28, 2014	*
10.35	Share Pledge Agreement (Telecorp Acquisition), February 28, 2014	*
10.36	Seller Financed Promissory Note (Telecorp Acquisition), February 28, 2014	*
10.37	Asset Purchase Agreement (Cynergy Acquisition), April 4, 2014	*
10.38	Bill of Sale (Cynergy Acquisition) , April 4, 2014	*
10.39	Asset Purchase Agreement (Jadian Acquisition), May 9, 2014	*
10.40	Bill of Sale (Jadian Acquisition), May 9, 2014	*
10.41	Closing Statement (Jadian Acquisition), May 9, 2014	*
10.42	Security Agreement (Jadian Acquisition), May 9, 2014	*
10.43	Consulting Agreement (Jadian Acquisition), May 9, 2014	*
10.44	Employment Agreement (Jadian Acquisition), May 9, 2014	*
10.45	Guaranty Agreement (Jadian Acquisition), May 9, 2014	*
10.46	Seller Financed Promissory Note (Jadian Acquisition), May 9, 2014	*
10.47	Asset Purchase Agreement (Strand Acquisition), July 31, 2014	*
10.48	Bill of Sale (Strand Acquisition), July 31, 2014	*
10.49	Guaranty Agreement (Strand Acquisition), July 31, 2014	*
10.50	Seller Financed Promissory Note (Strand Acquisition), July 31, 2014	*
10.51	Stock Exchange Agreement (S. Passley), January 17, 2014	*
10.52	Stock Exchange Agreement (S. Passley), March 22, 2014	*
10.53	Stock Exchange Agreement (C. Passley), March 22, 2014	*
10.54	Stock Exchange Agreement (L&F Lawn Services, Inc.), March 22, 2014	*
10.55	Convertible Promissory Note (Magna Group, LLC), February 4, 2014	*
10.56	Convertible Promissory Note (Magna Group, LLC), February 19, 2014	*
10.57	Convertible Promissory Note (V. Passley), April 2, 2014	*
10.58	Settlement Agreement and Stipulation Pursuant to Section 3(a)(10) (IBC Funds, LLC), February 12, 2014	*
10.59	Order Granting Approval of Settlement Agreement and Stipulation (IBC Funds, LLC), February 14, 2014	*
10.60	Convertible Promissory Note Default Notice (St. George Investments, LLC), September 24, 2014	*
10.61	Forbearance Agreement (St. George Investments, LLC), November 7, 2014	X
10.62	Promissory Note with Star Financial Corporation, August 21, 2014	X
10.63	Promissory Note with Star Financial Corporation, August 01, 2014	X
10.64	Promissory Note with Star Financial Corporation, September 22, 2014	X
10.65	Promissory Note with Star Financial Corporation, September 02, 2014	X
10.66	Promissory Note with Star Financial Corporation, August 26, 2014	X
10.67	Promissory Note with Star Financial Corporation, July 28, 2014	X
21.1	Subsidiaries	X
31.1	Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
101.INS	XBRL Instance Document	X**
101.SCH	XBRL Schema Document	X**
101.CAL	XBRL Calculation Linkbase Document	X**
101.DEF	XBRL Definition Linkbase Document	X**
101.LAB	XBRL Labels Linkbase Document	X**
101.PRE	XBRL Presentation Linkbase Document	X**

______________

* Previously filed.

67** To be filed by amendment.

SIGNATURES

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

	EPAZZ, INC.
DATED: November 24, 2014	By: /s/ Shaun Passley
DATED: June 16, 2015	By: /s/ Shaun Passley
	Shaun Passley, Ph.D.
	Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director

6880

Filing Compare · Epazz Inc