**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q/A**

**Amendment No. 2**

(Mark One)

 

 

[X]

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

 

For the quarterly period ended September 30, 2011

 

 

[   ]

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

For the transition period from ____________ to ______________

Commission file number: 333-139117

**EPAZZ, Inc.**

(Exact name of registrant as specified in its charter)

 

 

 

** Illinois**

  

**36-4313571**

(State or other jurisdiction of

incorporation or organization)

  

(IRS Employer Identification No.)

  

  

  

**309 W. Washington St. Suite 1225**

**Chicago, IL 60606**

(Address of principal executive offices)

**(312) 955-8161**

(Registrant's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   ̈    No  [X]

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

Large accelerated filer   ̈                                                    Accelerated filer    ̈

Non-accelerated filer   ̈                                                      Smaller reporting company  [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes    ̈ No   [X]

The number of shares of the issuer’s Series A common stock outstanding as of September 30, 2011, was 30,448,294 shares, par value $0.001 per share.

 

**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EPAZZ, INC.

Consolidated Balance Sheet

As of September 30, 2011 and Restated December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

September 30,

 

Restated

December 31,

 

 

 

 

 

 

2011

 

 2010

**ASSETS**

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

 

 

 

$

98,003 

 

40,613 

Accounts Receivable

 

 

 

194,897 

 

294,532 

Deferred Financing Cost, Current

 

 

2,317 

 

3,633 

Other Current Assets

 

 

 

13,252 

 

8,252 

Total Current Assets

 

 

 

308,469 

 

347,030 

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

 

184,187 

 

241,174 

Intangible Assets, net

 

 

 

534,446 

 

566,645 

Goodwill

 

 

 

53,588 

 

53,588 

 

 

 

 

 

 

 

**TOTAL ASSETS**

 

 

 

**$**

**1,080,690 **

 

**1,208,437 **

 

 

 

 

 

 

 

 

 

**LIABILITIES**

 

 

 

Accounts Payable and Accrued Liabilities

 

$

113,085 

 

153,937 

Deferred Revenue

 

 

 

 

204,659 

 

266,891 

Current Portion of Capitalized Lease

 

 

46,537 

 

55,800 

Current Portion of Long Term Debt

 

 

145,445 

 

111,120 

Derivative Liability

 

 

122,289 

 

 

Total Current Liabilities

 

 

$

632,015 

 

587,748 

 

 

 

 

 

 

 

Loan payable, net of current portion

 

 

 

257,675 

 

275,668 

Related Party Loan Payable – Star Financial

 

 

 

296,103 

 

296,103 

Other Related Party Loan Payable

 

 

 

197,906 

 

269,985 

Capitalized Lease, net of current portion

 

 

 

38,687 

 

52,295 

Total Liabilities

 

 

$

1,422,386 

 

1,481,799 

 

 

 

 

 

 

 

**STOCKHOLDERS' DEFICIT**

 

 

 

 

 

 

Common stock, Series A, $0.01 par value, 60,000,000 shares authorized, 30,448,294 shares issued and outstanding,

 

 

 

304,483 

 

304,483 

Common stock, Series B, $.01 par value 60,000,000 shares authorized, 2,500,000 shares issued and outstanding

 

 

 

25,000 

 

25,000 

Additional Paid-in Capital

 

 

 

2,268,360 

 

2,268,360 

   Shareholder’s Receivables

 

 

 

(1,000,000)

 

(1,000,000)

Accumulated Deficit

 

 

 

(1,939,539)

 

(1,871,205)

Total Stockholders' Equity (Deficit)

 

 

 

(341,696)

 

(273,362)

 

 

 

 

 

 

 

**TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT**

 

 

 

**1,080,690 **

 

**1,208,437 **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EPAZZ, INC.

 

 

 

 

CONSOLIDATED STATEMENT OF OPERATIONS

 

 

 

 

Three and Nine Months Ended  September 30, 2011 and 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

**Revenue**

 

 

 

 

205,724 

 

87,191 

 

646,023 

 

269,332 

 

 

 

 

 

 

 

 

 

 

 

 

**Operating Expenses**

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

161,495 

 

70,925 

 

462,198 

 

220,810 

Depreciation and Amortization Expense

 

31,623 

 

22,854 

 

91,626 

 

52,043 

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Expense

 

 

193,118 

 

93,779 

 

553,824 

 

272,853 

Operating Profit/(Loss)

 

 

12,606 

 

(6,588)

 

92,199 

 

(3,521)

 

 

 

 

 

 

 

 

 

 

 

 

**Other Income and Expense**

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

2 

 

12 

 

28 

 

58 

Interest Expense

 

 

 

(12,108)

 

(5,543)

 

(38,272)

 

(17,430)

Derivative Expense

 

 

 

(122,289)

 

 

 

(122,289)

 

 

Total Other Income and Expense

 

 

(134,395)

 

(5,531)

 

(160,533)

 

(17,372)

 

 

 

 

 

 

 

 

 

 

 

 

**Net Income/(Loss)**

 

 

 

**(121,789)**

 

**(12,119)**

 

**(68,334)**

 

**(20,893)**

Basic and diluted net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

                                        See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EPAZZ, INC.

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

Nine Months Ended September 30, 2011 and 2010 (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

**CASH FLOWS FROM OPERATING ACTIVITIES**

 

 

 

 

 

Net Income/(Loss)

 

 

 

 

 

 

$

(68,334) 

 

(20,893)

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

Depreciation and Amortization

 

 

 

89,186 

 

52,043

Amortization of Deferred Finance Cost

 

 

 

 

2,441

 

2,593

Derivative Expense

 

 

 

 

122,289

 

 

Change in Accounts Receivable

 

 

 

 

99,635 

 

7,417

Change in Other Assets

 

 

 

 

(5,000) 

 

(8,852)

Change in Accounts Payable and Deferred Revenue

 

 

 

 

(103,084)

 

46,142

Net cash provided by operating activities

 

 

 

$

137,133 

 

78,450

 

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM INVESTING ACTIVITIES**

 

 

 

 

 

Purchase of Property and Equipment

 

 

 

 

 

(187,484)

Deferred Financing Cost

 

 

 

 

 

 

Acquisition

 

 

 

 

 

(124,682)

Net cash used for investing activities

 

 

 

 

 

(312,165)

 

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM FINANCING ACTIVITIES**

 

 

 

 

 

Repayment of Long Term Debt and Capital Leases

 

 

 

 

$

(152,644)

 

(69,347)

Repayment of Related Party Loan Payable

 

 

 

 

(157,786)

 

-

Proceeds from Loans Payable and Capital Leases

 

 

 

 

146,102 

 

330,035

Payment of Deferred Financing Cost

 

 

 

 

(1,125)

 

 

Proceeds from Related Party Loan Payable

 

 

 

 

85,710 

 

3,542

Net cash (used for) provided by financing activities

 

 

 

$

(79,743)

 

264,230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH

 

 

 

 

 

 

57,390

 

31,115

 

 

 

 

 

 

 

 

 

 

CASH AT BEGINNING OF PERIOD

 

 

 

 

 

 

40,613

 

47,275

 

 

 

 

 

 

 

 

 

 

**CASH AT END OF PERIOD**

 

 

 

 

 

$

98,003

 

78,390

Supplemental Disclosures:

 

 

 

 

 

 

 

 

 

Interest paid

 

 

 

 

 

 

35,490

 

17,430

 

 

 

 

 

 

 

 

 

 

Non Cash Transactions:

 

 

 

 

 

 

 

 

 

Purchase of Subsidiary through Notes Payable

 

 

 

 

 

 

 

 

30,816

See notes to consolidated financial statements.

Epazz, Inc.

Consolidated Statement of Stockholders’ Equity (Deficit)

As of September 30, 2011

 

Series A Common Stock

Series B Common Stock

 

Additional Paid-In

Shareholder’s Receivables

Accumulated

Total Stockholders

 

Shares

Amount

Shares

Amount

 

Capital

 

Deficit

Equity

 

 

 

 

 

 

 

 

 

(Deficit)

Balance at December 31, 2008

39,482,940 

$394,829 

2,500,000

$25,000

 

$1,396,360 

 

$(1,937,310)

$ (476,467)

Net Loss

 

 

 

 

 

 

 

$(54,680)

$(54,680)

Shares Issued

19,000,000 

$190,000 

 

 

 

$158,000 

 

 

$ 177,000

Shares Cancelled

(4,000,000)

$(40,000)

 

 

 

(36,000)

 

 

$(40,000)

Balance at December 31, 2009

5,448,294 

$54,483 

2,500,000

$25,000

 

$1,518,360 

 

$(1,991,990)

$(394,147)

Adjustment to APIC 

25,000,000 

$250,000 

 

 

 

(750,000)

$(1,000,000)

 

 

Net Income

 

 

 

 

 

 

 

$120,785 

$120,785

Balance at

December 31, 2010

30,448,294 

$304,483 

2,500,000

$25,000

 

$2,268,360 

$(1,000,000)

$(1,871,025)

$(273,362)

Net Income

 

 

 

 

 

 

 

$(68,334)

$(68,334)

Balance at June 30, 2011

30,448,294 

$304,483 

2,500,000

$25,000

 

$2,268,360 

$(1,000,000)

$(1,939,539)

$(341,696)

 

 

 

 

 

 

 

 

 

 

Li

See notes to consolidated financial statements.

**EPAZZ, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2011**

NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying interim financial statements of Epazz, Inc. (“Epazz”), an Illinois corporation, have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Epazz’s Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2010.

In June 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) as the source of authoritative GAAP recognized by the FASB. The ASC supersedes all existing U.S. accounting standards; all other accounting literature not included in the ASC (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The ASC was effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the ASC changed the Company’s references to U.S. GAAP but did not have a material impact on the Company’s consolidated financial statements.

Basis of Consolidation

The consolidated financial statements include the accounts of Epazz and its subsidiaries. Intercompany transactions and balances have been eliminated.

Management Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit of 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.

Revenue Recognition

All revenue is recognized when persuasive evidence of an arrangement exists, the sale is complete, the price is fixed or determinable and collectability is reasonably assured.  Revenue from maintenance arrangements are recorded as deferred revenue and recognized as revenue ratably over the billing coverage period.

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.

 

NOTE 2 – GOING CONCERN

As of September 30, 2011, Epazz had an accumulated deficit of $1,939,539 and a working capital deficit of $323,546. This creates a substantial doubt as to Epazz's ability to continue as a going concern.

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

NOTE 3 –INTANGIBLE ASSETS

Intangible assets consisted of the following at September 30, 2011:

 

 

 

Description

Life

Amount

Technology-based intangible assets

15 years

$

680,720 

Less: accumulated amortization

 

(146,274)

Intangible assets, net

 

534,446 

NOTE 4 – LOANS PAYABLE TO RELATED PARTIES

During the nine months ended September 30, 2011, Epazz borrowed an additional $99,611 from related parties.  As of December 31, 2009, all interest related to related party loans payable was forgiven and no additional interest has been accrued as of June 30, 2011.

NOTE 5 – LINE OF CREDIT

On June 5, 2007, Epazz obtained a line of credit of $100,000 from a bank.  The outstanding balance on the line of credit bears interest at prime plus 4.5% (9.5% at December 31, 2008) and expires on July 5, 2010.  On June 5, 2010 this line of credit was converted to an unsecured term loan which bears interest at 7% and has a maturity date of June 5, 2014.  Payments of $1,050 are due monthly.  At September 30, 2011 the balance on this unsecured loan was $93,559.

NOTE 6 – CURRENT NOTE PAYABLE

On September 23, 2011, Epazz entered into a 6 month $25,000 note payable agreement with On Deck Capital.  Interest and fees of 1.9% are due on this loan; payments of $230.63 are due daily.  On September 30, 2011, the balance of this loan is $23,450.

On June 28, 2011, Epazz entered into a 9 month $37,500 note payable agreement with Asher Enterprise, Inc.  Principle and interest of 8% is due on March 30, 2012.  On September 30, 2011, the balance of this loan is $37,500.

On January 1, 2011, Epazz entered into a 9 month $14,400 loan payable agreement with MB Financial.  Payments and interest of 13% are due monthly until the note is paid in full.  On September 30, 2011, the balance of this loan is $1,011.

NOTE 6 – LONG-TERM NOTES PAYABLE

On June 4, 2008, the Company issued a note payable in the amount of $296,103 due to Star Financial Corporation, which is owned by Fay Passley, the mother of our Chief Executive Officer, Shaun Passley, which has since been amended (the “June 2008 Note”, as amended from time to time).  The loan is unsecured and bears interest at 10%, with annual payments of principal and interest in the amount of $106,951, originally due and payable beginning on December 1, 2009 and a maturity date of June 4, 2013.  In April 2010, Star Financial, agreed to modify the repayment terms of the June 2008 Note (as defined above), to provide for $100,000 to be due on August 1, 2011, $100,000 to be due on August 1, 2012, and the remaining balance of the June 2008 Note to be due on August 1, 2013 in return for junior lien on the Company’s assets.

In connection with the loan, the Company paid $14,100 (5%) in financing costs that are being amortized over the life of the loan using the effective interest method.  The majority of the funds borrowed pursuant to the June 2008 Note were used to pay the seller the $210,000 payment in connection with the purchase of DFI and PRMI, as described below.

As part of the acquisition of Desk Flex, Inc., an Illinois corporation (“DFI”), and Professional Resource Management, Inc., an Illinois corporation (“PRMI”) on June 18, 2008, Epazz provided a 7% promissory note in the amount of $225,000.  The promissory note bears interest at the rate of 7% per annum, and all past-due principal and interest bear interest at the rate of twelve percent (12%) per annum until paid in full.  The principal amount of the note is due on June 18, 2011.  The note is payable in monthly installments of $6,947 until such time as this Note is paid in full.  Additionally, Epazz agreed to secure the payment of the note with a security interest over all of the tangible and intangible assets of DFI and PRMI, and the outstanding stock of both companies until the note is repaid. As of June 30, 20111 this note has been paid in full

As part of the purchase of the AutoHire software product, Epazz provided a non-interest bearing promissory note in the amount of $50,000.   The note is payable in monthly installments of $416 beginning May 5, 2010.  As of  June 30, 2011 this note has been paid in full.

NOTE 7 – LEASE OBLIGATIONS

As part of the purchase of the AutoHire software product and associated assets acquired, the Company entered into two separate capital lease agreements.  The first lease calls for monthly lease payments of $2,238 with two months paid in advance and the remaining payments over 46 months.  The second lease calls for monthly lease payments of $2,221 for 36 months.

Future minimum lease payments are as follows:

Twelve months ended September 30

2011

$30,908

2012

53,508

2013

46,845

2014

11,190

Total

$142,451

 

 

 

 

NOTE 8 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date which the financial statements were available to be issued, and no such events have occurred.

NOTE 9 – ACQUISITION

Effective February 1, 2010, the Company entered into a Software Product Asset Purchase Agreement (the “Software Rights Agreement”) with Igenti, Inc., a Florida corporation (“Igenti”) to acquire the rights to Igenti’s AutoHire software, domain names, permits, customers, contracts, know-how, equipment, software programs, receivables totaling approximately $10,000 and the intellectual property of Igenti associated therewith (the “AutoHire Software”).  The Company did not purchase or assume any of Igenti’s liabilities in connection with the Software Rights Agreement.  The purchase price for the AutoHire Software was $170,000 payable as follows:

1) $120,000 in cash at the closing (which occurred February 1, 2010); and

2) $50,000 in the form of a promissory note (the “Igenti Note).

The Igenti Note does not bear interest and is payable in monthly installments of $416.67 per month beginning May 5, 2010, and ending May 5, 2012 (the “Maturity Date”), at which time the remaining amount of the Igenti Note, $39,999.92 is due and payable.  The payment of the Igenti Note is secured by all of the subscription agreements of customers relating to the AutoHire Software entered into prior to February 1, 2010.  Igenti has also guaranteed the Company that the Company will receive at least $173,700 (the “Guaranteed Amount”) in subscription cash receipts from the AutoHire Software during the year ending February 1, 2011.  The purchase price payable to Igenti is subject to reduction on a dollar-for-dollar basis in the event the subscription cash receipts from the AutoHire Software during the year ending February 1, 2011 are less than the Guaranteed Amount.

In connection with the Software Rights Agreement, the Company also entered into a Consulting Agreement and Non-Compete Agreement (the “Consulting Agreement”) with the owner of Igenti, Jim McArdle.  Pursuant to the Consulting Agreement, we agreed to engage Mr. McArdle as a consultant in connection with the AutoHire Software for a period of six months following the closing of the Software Rights Agreement at the rate of $2,962.70 per month, and Mr. McArdle agreed to provide consulting services for us.  We terminated the Consulting Agreement prior to the expiration of six months from the effective date of the Software Rights Agreement, which agreement can be cancelled for any reason, we agreed to pay Mr. McArdle $5,925.40 in one lump sum.  Pursuant to the Consulting Agreement, Mr. McArdle agreed to not compete with the Company or our products anywhere in the nation for a period of two years following the closing of the Software Rights Agreement.

 

**K9 Bytes Acquisition**

 

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 in consideration for an aggregate of $205,000, of which $175,000 was paid in cash at the closing and $30,000 was paid by way of a Balloon Installment Promissory Note (the “K9 Note”).   We did not purchase and K9 Bytes agreed to retain and be responsible for any and all liabilities of K9 Bytes.  We agreed to indemnify and hold K9 Bytes harmless against, among other things, any claims and liability associated with the future operations of the assets purchased pursuant to the Purchase Contract and K9 Bytes agreed to indemnify and hold us harmless against any misrepresentations made by K9 Bytes in the Purchase Contract; any failure of K9 Bytes to perform any required term or condition of the Purchase Contract and any debts or other obligations of K9 Bytes not specifically assumed pursuant to the Purchase Contract in excess of $2,000.

 

The K9 Note accrues interest at 6% per annum and is payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the K9 Note ($23,017, assuming no additional payments other than those scheduled) is due.  The repayment of the K9 Note is secured by all of the securities of K9 Sub, which owns all of the assets purchased as a result of the Purchase Contract, provided that Third Party Lender, as a result of the SBA Loan described below, has a first priority security interest to such securities.  The K9 Note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.

 

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

 

K9 Bytes agreed to subordinate the K9 Note to Third Party Lender’s rights under the SBA Loan.  Additionally, Mr. Passley agreed to subordinate the amount he is owed by the Company to the repayment of SBA Loan.

 

In connection with the Purchase Contract, the owner of K9 Bytes and the Company (through K9 Sub) entered into a Consulting Agreement, pursuant to which the owner of K9 Bytes agreed to provide part-time consulting services to the Company for a period of four weeks following closing and provide additional consulting services as requested by the Company for up to an additional 30 days at the rate of $75 per hour.  The owner of K9 Bytes and the Company also entered into an Agreement Not to Compete, pursuant to which such owner agreed not to compete against the Company for three years and four weeks from the closing of the Purchase Contract.

 

 

NOTE 10 - EXPLANATION OF OUR RESTATEMENT

Epazz, Inc. (hereinafter referred to as “us,” “we,” or the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “First Amendment”) to its Annual Report for the Annual period ended December 31, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on April 15, 2011 (the “Original Report”) in response to certain issues set forth in our Current Report on Form 10-Q filed with the SEC on November 22, 2010 (the “Form 10-Q”).   The condensed consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2010 and the Quarterly Report on Form 10-Q for the three months ended March 31, 2011 and the six months ending June 30, 2011 require restatement in order to correct errors related to the following:

The company determined that it had not properly recorded the September 30, 2010 acquisition of its subsidiary IntelliSys, Inc.  Subsequently, the balance sheet has been adjusted to properly reflect the Goodwill that should have been recognized when the acquisition was initially recorded.  Intangible assets, retained earnings and the Consolidated Statement of Operations have also been adjusted to correct related recording errors originally recorded at the time of the acquisition.  The company also determined that it had omitted accrued liabilities that should have been recorded on the balance sheet dated December 31, 2010.  Accounts payable and accrued liabilities have been adjusted to correct this omission.

The company also determined that it did not properly record stock issued in exchange for services rendered.  Accordingly, the stock transaction, which was originally recorded to prepaid expense has been reclassified to the company’s equity account.

EPAZZ, INC. and Subsidiaries

Consolidated Balance Sheet

 

 

As Originally Reported

September 30, 2011

 

Adjustments

 

As Restated

September 30, 2011

 

 

 

 

 

 

 

**ASSETS**

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash

 

98,003 

 

 

 

98,003 

Accounts Receivable

 

194,897 

 

 

 

194,897 

Deferred Financing Cost, Current

 

2,317 

 

 

 

2,317 

Other Current Assets

 

13,252 

 

 

 

13,252 

Total Current Assets

 

308,469 

 

 

 

308,469 

 

 

 

 

 

 

 

Property and Equipment, net

 

184,187 

 

 

 

184,187 

Intangible Assets, net

 

347,778 

 

186,668 

 

534,446 

Goodwill

 

253,588 

 

(200,000)

 

53,588 

Prepaid Expense

 

1,000,000 

 

(1,000,000)

 

 

TOTAL ASSETS

 

2,094,022 

 

(1,000,000)

 

1,080,690 

 

 

 

 

 

 

 

**LIABILITIES**

 

 

 

 

 

 

Accounts Payable and Accrued Liabilities

 

115,238 

 

(2,153)

 

113,085 

Deferred Revenue

 

204,659 

 

 

 

204,659 

Current Portion of Capitalized Lease

 

46,537 

 

 

 

46,537 

Current Portion of Long Term Debt

 

145,445 

 

 

 

145,445 

Derivative Liability

 

122,289 

 

 

 

122,289 

Total Current Liabilities

 

634,168 

 

(2,153)

 

632,015 

 

 

 

 

 

 

 

Loan payable, net of current portion

 

257,675 

 

 

 

257,675 

Related Party Loan Payable – Star Financial

 

296,103 

 

 

 

296,103 

Other Related Party Loan Payable

 

197,906 

 

 

 

197,906 

Long-term line of credit

 

- 

 

 

 

- 

Capitalized Lease, net of current portion

 

38,687 

 

 

 

38,687 

Total Liabilities

 

1,424,539 

 

(2,153)

 

1,422,386 

 

 

 

 

 

 

 

**STOCKHOLDERS’ EQUITY**

 

 

 

 

 

 

Common stock, Series A, $0.01 par value,

60,000 shares authorized, 30,448,294 and 5,448,294, shares issued and outstanding respectively

 

304,483 

 

 

 

304,483 

Common stock, Series B, $0.01 par value,

60,000 shares authorized, 2,500,000 shares issued and outstanding respectively

 

25,000 

 

 

 

25,000 

Additional Paid-in Capital

 

2,268,360 

 

 

 

2,268,360 

  Shareholder’s Receivables

Accumulated Equity (Deficit)

 

(1,928,360)

 

(1,000,000)(11,179)

 

(1,000,000)(1,939,539)

Total Stockholder’ Deficit

 

669,483 

 

(997,847)

 

(341,696)

 

 

 

 

 

 

 

**TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**

 

2,094,022 

 

(1,000,000)

 

1,080,690 

EPAZZ, INC. and Subsidiaries

Consolidated Statement of Operations

 

 

As Originally Reported

Three months ending

September 30, 2011

 

Adjustments

 

As Restated

Three months ending

September 30, 20111

 

 

 

 

 

 

 

**REVENUE**

 

205,724 

 

 

 

205,724 

 

 

 

 

 

 

 

**Operating Expenses**

 

 

 

 

 

 

General and Administrative

 

161,495 

 

 

 

161,495 

Depreciation and Amortization

 

28,290 

 

3,333 

 

31,623 

Other Operating Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Expense

 

189,785 

 

3,333 

 

193,118 

 

 

 

 

 

 

 

Operating Profit/(Loss)

 

15,939 

 

(3,333)

 

12,606 

 

 

 

 

 

 

 

**Other Income and Expense**

 

 

 

 

 

 

Interest Income

 

2 

 

 

 

2 

Derivative Expense

 

(122,289)

 

 

 

(122,289)

Interest Expense

 

(14,261)

 

2,153 

 

(12,108)

Total Other Income and Expense

 

(136,548)

 

 

 

(134,395)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Net Income/(Loss)**

 

**(120,609)**

 

**(1,180)**

 

**(121,789)**

EPAZZ, INC. and Subsidiaries

Consolidated Statement of Operations

 

 

As Originally Reported

Nine months ending

September 30, 2011

 

Adjustments

 

As Restated

Nine months ending

September 30, 20111

 

 

 

 

 

 

 

**REVENUE**

 

646,023 

 

 

 

646,023 

 

 

 

 

 

 

 

**Operating Expenses**

 

 

 

 

 

 

General and Administrative

 

462,198 

 

 

 

462,198 

Depreciation and Amortization

 

81,627 

 

9,999 

 

91,626 

Other Operating Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Expense

 

543,825 

 

9,999 

 

553,824 

 

 

 

 

 

 

 

Operating Profit/(Loss)

 

102,198 

 

(9,999)

 

92,199 

 

 

 

 

 

 

 

**Other Income and Expense**

 

 

 

 

 

 

Interest Income

 

28 

 

 

 

28 

Derivative Expense

 

(122,289)

 

 

 

(122,289)

Interest Expense

 

(40,425)

 

2,153 

 

(38,272)

Total Other Income and Expense

 

(162,686)

 

2,153 

 

(160,533)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Net Income/(Loss)**

 

**(60,488)**

 

**(7,846)**

 

**(68,334)**

EPAZZ, INC. and Subsidiaries

Consolidated Statement of Cash Flows

 

 

As Originally Reported

September 30, 2011

 

Adjustments

 

As Restated

September 30, 2011

 

 

 

 

 

 

 

**CASH FLOWS FROM OPERATING ACTIVITIES**

 

 

 

 

 

 

Net Income/ (Loss)

 

(60,488)

 

(7,846)

 

(68,334)

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

Depreciation and Amortization

 

79,187 

 

9,999 

 

89,186 

Decrease in Deferred Financing Cost

 

2,441 

 

 

 

2,441 

Derivative Expense

 

122,289 

 

 

 

122,289 

Change in Accounts Receivable

 

99,635 

 

 

 

99,635 

Change in Other Assets

 

(5,000)

 

 

 

(5,000)

Change in Current Liabilities and Deferred Revenue

 

(100,931)

 

(2,153)

 

(103,084)

 

 

 

 

 

 

 

Net cash provided by (used for) operating activities

 

137,133 

 

 

 

137,133 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM INVESTING ACTIVITIES**

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of Property and Equipment

 

 

 

 

 

 

Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used for investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM FINANCING ACTIVITIES**

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayment of Long Term Debt and Capital Leases

 

(152,644)

 

 

 

(152,644)

Repayment of  Notes Payable – Related Party

 

(157,786)

 

 

 

(157,786)

Proceeds from Long Term Debt and Capital Leases

 

146,102 

 

 

 

146,102 

Payment of Deferred Financing Cost

 

(1,125)

 

 

 

(1,125)

Proceeds from Notes Payable – Related Party

 

85,710 

 

 

 

85,710 

 

 

 

 

 

 

 

Net cash provided by (used for) financing activities

 

(79,743)

 

 

 

(79,743)

 

 

 

 

 

 

 

NET CHANGE IN CASH

 

57,390 

 

 

 

57,390 

 

 

 

 

 

 

 

CASH AT BEGINNING OF PERIOD

 

40,613 

 

 

 

40,613 

 

 

 

 

 

 

 

**CASH AT END OF PERIOD**

 

**98,003 **

 

 

 

**98,003 **

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

40,425 

 

 

 

40,425 

 

NOTE 11 - SUBSEQUENT EVENTS

 

On October 26, 2011, the Company, 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, the Company purchased all of K9 Bytes assets, including all of its intellectual property, its business trade name, website (k9bytessoftware.com), furniture, fixtures, equipment and inventory, accounts receivable and goodwill in consideration for an aggregate of $205,000, of which $175,000 was paid in cash at the closing and $30,000 was paid by way of a Balloon Installment Promissory Note (the “K9 Note”).   The Company did not purchase and K9 Bytes agreed to retain and be responsible for any and all liabilities of K9 Bytes.  The Company agreed to indemnify and hold K9 Bytes harmless against, among other things, any claims and liability associated with the future operations of the assets purchased pursuant to the Purchase Contract and K9 Bytes agreed to indemnify and hold the Company harmless against any misrepresentations made by K9 Bytes in the Purchase Contract; any failure of K9 Bytes to perform any required term or condition of the Purchase Contract and any debts or other obligations of K9 Bytes not specifically assumed pursuant to the Purchase Contract in excess of $2,000.

 

The K9 Note accrues interest at 6% per annum and is payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the K9 Note ($23,017, assuming no additional payments other than those scheduled) is due.  The repayment of the K9 Note is secured by all of the securities of K9 Sub, which owns all of the assets purchased as a result of the Purchase Contract, provided that the Third Party Lender (as defined below), as a result of the SBA Loan described below, has a first priority security interest to such securities.  The K9 Note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.

 

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

 

K9 Bytes agreed to subordinate the K9 Note to Third Party Lender’s rights under the SBA Loan.  Additionally, Mr. Passley agreed to subordinate the amount he is owed by the Company to the repayment of SBA Loan.

 

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

ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS", "ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES. THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS, EXCEPT AS PROVIDED BY LAW. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS.   REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO JUNE 30, 2011.  AS USED HEREIN, THE “COMPANY,” “EPAZZ,” “WE,” “US,” “OUR” AND WORDS OF SIMILAR MEANING REFER TO EPAZZ, INC., AND INCLUDE EPAZZ’S WHOLLY OWNED SUBSIDIARIES, DESK FLEX, INC., AN ILLINOIS CORPORATION (“DFI”), PROFESSIONAL RESOURCE MANAGEMENT, INC., AN ILLINOIS CORPORATION AND INTELLISYS, INC., A WISCONSIN CORPORATION ("INTELLISYS") 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 entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Desk Flex, Inc., an Illinois corporation (“DFI”), Professional Resource Management, Inc., an Illinois corporation (“PRMI” and collectively with DFI, the “Target Companies”) and Arthur A. Goes, an individual and the sole stockholder of the Target Companies.  The Purchase Agreement consummated the transactions contemplated by the February 25, 2008, non-binding letter of intent (the “Letter of Intent”) the Company entered into, to acquire 100% of the outstanding shares of the Target Companies.  Pursuant to the Purchase Agreement, the Company agreed to purchase 100% of the outstanding shares of the Target Companies for an aggregate purchase price of $445,000 (the “Purchase Price”).  The Purchase Price was payable as follows:

 

 

 

  

(a)

Mr. Goes retained the $10,000 originally paid by the Company in connection with the parties’ entry into the Letter of Intent;

  

  

  

  

(b)

The Company paid Mr. Goes $210,000 in cash (the “Cash Consideration”) at the Closing (as defined below) of the Purchase Agreement; and

  

  

  

  

(c)

The Company provided Mr. Goes with a 7% Promissory Note in the amount of $225,000 (the “Note”), described in greater detail below.

Additionally, the Company agreed to assume an aggregate of approximately $15,475 in outstanding liabilities of DFI and PRMI in connection with the Closing.

The Purchase Agreement closed on June 18, 2008 (“Closing”), at which time Mr. Goes delivered to the Company, 2,000 shares of DFI stock, representing 100% of the issued and outstanding shares of DFI, and 1,000 shares of PRMI stock, representing 100% of the issued and outstanding shares of PRMI.  Also at Closing, the Company delivered the Cash Consideration and the Note to Mr. Goes.  As a result of the Closing, DFI and PRMI became wholly-owned subsidiaries of the Company.

The Note bears interest at the rate of seven percent (7%) per annum, and all past due principal and interest (which failure to pay such amounts after a fifteen (15) day cure period, shall be defined herein as an “Event of Default”) bear interest at the rate of twelve percent (12%) per annum until paid in full.  The Note, however, additionally provides that the Company shall have two additional fifteen (15) day cure periods during the term of the Note resulting in two thirty (30) day cure periods before an Event of Default occurs.  The principal amount of the Note is due on June 18, 2011.  The Note is payable in monthly installments of $6,947.35 (each a “Monthly Payment”), with the first such Monthly Payment due on September 18, 2008, until such time as this Note is paid in full.  Provided, however, that if the total amount due under the Note is less than any Monthly Payment, the Company shall only be obligated to pay the remaining balance of the Note.  The Note may be prepaid at any time without penalty.  As of the date of this report, the Company is current with all of its required Monthly Payments. As June 30, 2011 this note has been paid in full.

Additionally, the Company agreed to secure the payment of the Note with a Uniform Commercial Code Security Interest filing, which the Company agreed to file, but which filing has not occurred to date, at Mr. Goes’ request, at the Company’s expense, to grant Mr. Goes a security interest over all of the Target Companies’ tangible and intangible assets, and the outstanding stock of both of the Target Companies until the Note is repaid.  Pursuant to such requirement of the Note, at the Closing, the Company entered into a Security Agreement with Mr. Goes, whereby the Company granted Mr. Goes a security interest in all inventory, equipment, appliances, furnishings and fixtures, stock certificates and intellectual property now or hereafter owned by the Target Companies.  Pursuant to the Security Agreement, the Company also assigned to Mr. Goes a security interest in all of its right, title, and interest to any trademarks, trade names, contract rights, and leasehold interests in which it now has or hereafter acquires to secure repayment of the Note.

**Professional Resource Management, Inc. and Desk Flex, Inc. Business Overview**

Professional Resource Management, Inc. was incorporated under the laws of Illinois in June 1985.  On or around December 31, 1997, Professional Resource Management, Inc. established a wholly-owned subsidiary, PRM Transfer Corp.  On or around December 31, 1997, Professional Resource Management, Inc., PRM Transfer Corp. and Arthur Goes entered into a Reorganization Agreement, whereby Professional Resource Management, Inc. transferred all of its assets and liabilities to PRM Transfer Corp., with the exception of those

assets pertaining to its proprietary source code or software product, Desk/Flex.  Also pursuant to the Reorganization Agreement, Professional Resource Management, Inc. amended its corporate charter to change its name to Desk Flex, Inc. (“DFI”), and PRM Transfer Corp. amended its charter to change its name to Professional Resources Management, Inc. (“PRMI”).  The transfer was effected in an effort by Mr. Goes to better promote the Desk/Flex product.

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.
 

**Recent Events**

**Convertible Note Fundings**

On May 27, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which Asher agreed to purchase an 8% convertible promissory note  in the amount of $50,000 (the “Convertible Note”) from the Company, which provides Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such Convertible Note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued.  The Convertible Note, which accrues interest at the rate of 8% per annum, is payable, along with interest thereon on February 28, 2012.  In the event any principal or interest is not timely paid, such amount accrues interest at 22% per annum until paid in full.  Asher is prohibited from converting the Convertible Note into shares of the Company’s common stock to the extent that such conversion would result in Asher beneficially owning more than 4.99% of the Company’s common stock, subject to 61 days prior written notice to the Company from Asher of Asher’s intention to waive or modify such provision.  The Company can repay the Convertible Note prior to maturity (or conversion), provided that it pays 135% of such note (and accrued and unpaid interest thereon) if the note is repaid within the first 90 days after the issuance date; 140% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 91 and 120 days after the issuance date; 145% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 121 and 150 days after the issuance date; and 150% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 151 days and prior to 180 days after the issuance date.  After 180 days have elapsed from the issuance date the Company has no right to repay the Convertible Note.

On June 28, 2011, the Company sold Asher an additional 8% Convertible Note in the amount of $37,500 on substantially similar terms as the Convertible Note described in the paragraph above (collectively the “Convertible Notes”), except that the maturity date of such note was March 30, 2012.

On July 28, 2010, the Company initiated a 10 for 1 stock split.  The result was $5,448,294 shares of common stock issued and outstanding.

On July 28, 2010 the Company issued 20,000,000 shares of .01 par common stock to Shaun Passley for prepaid compensation.  Shaun Passley will begin to earn these shares when the company reports revenue of $2 million on the 10k.

On July 28, 2010 the Company issued 2,500,000 shares of .01 par common stock to Vivienne Passley for prepaid interest.  Vivienne Passley will begin to earn these shares on July 29, 2012.

On July 28, 2010 the Company issued 2,500,000 shares of .01 par common stock to Fay Passley for prepaid interest.  Fay Passley will begin to earn these shares on July 29, 2012.

As a result of the above mentioned stock split and stock issuances the resulting outstanding shares of common stock as of September 30, 2011 was 30,448,294.

On September 30, 2010, Epazz, Inc. acquired 100% of the voting rights and net assets of IntelliSys, Inc. for $155,816.  The purchase was made with a cash payment of $125,000 and a $30,816 6% 10 year seller note payable.  The purchase resulted in goodwill of $53,588.  The reason for the acquisition was to expand Epazz, Inc.’s operations.  According to the purchase method of accounting the acquisition was recorded as follows:

 

Fair Value

 

 

Fair Value

 

 

 

 

 

Cash

319

 

Accounts Payable

49,838

Account Receivable

15,362

 

Notes Payable

25,000

Fixed Assets, net

5,137

 

Accrued Expenses

14,932

Goodwill

53,588

 

Deferred Revenue

28,820

Intangible Asset – Software

200,000

 

Cash

125,000

 

 

 

Note payable

30,816

Total Assets

274,406

 

Total Liabilities and Equity

274,406

The following table presents the unaudited proforma results of continuing operations for the three and nine months ended September 30, 2010 as if the retained acquisition had been consummated at the beginning of the year.  The proforma results of continuing operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the year presented or the results which may occur in the future.

 

 

Three Months Ending 9/30/2010

 

 

Nine Months Ending 9/30/2010

 

 

 

 

 

 

 

 

**Revenue**

 

$

153,492 

 

 

463,019 

 

 

 

 

 

 

 

 

**Operating Expenses**

 

 

 

 

 

 

General and Administrative

 

164,663 

 

 

462,971 

 

Depreciation and Amortization

 

22,202 

 

 

52,043 

 

Other Operating Expense

 

- 

 

 

- 

 

Total Operating Expense

 

186,865 

 

 

515,014 

 

 

 

 

 

 

 

 

Operating Loss

 

(33,373)

 

 

(51,995)

 

 

 

 

 

 

 

 

**Other Income and Expense**

 

 

 

 

 

 

Interest Income

 

12 

 

 

58 

 

Interest Expense

 

(6,102)

 

 

(18,626)

 

Total Other Income and Expense

 

(6,090)

 

 

(18,568)

 

 

 

 

 

 

 

 

**Net Loss**

 

(39,463)

 

 

(70,563)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Our Products**

The Company currently offers five primary product lines.  The EPAZZ BoxesOS v3.0 product is offered through EPAZZ, Inc., the Desk/Flex Software product is offered through Desk Flex, Inc., the Agent Power product is offered through Professional Resource Management, Inc. and the Company also offers the AutoHire software described below. Additionally, as described above, subsequent to September 30, 2010, the Company offers products through IntelliSys, described below.

**EPAZZ BoxesOS v3.0**

 

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

Services include: 

 

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

 

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

 

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

 

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

 

·  Email Management: Email server and web client.

 

·  Instant Messenger Services: Instant messaging and alerts.

 

·  Customer Relationship Management: Prospective students and alumni.

 

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

 

·  Administrative Support Services: Online payment services.

 

· Business Services: Facility Management and Online Bookstore.

*BoxesOS software provides:*

Web Portal Component

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

Administrative Content Management

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

Work Hub

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

Central Repository

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

ViewPoint

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

Learning Management System

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

Single Sign-on

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

Pathways Real-time Integration

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

**AutoHire Software**

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

One of the most useful features of the AutoHire system is the interactive question and online screening and ranking system. The interactive question system provides a means for the client to maintain their own library of questions and to attach selected questions to job opportunities posted. Responses obtained can be used to screen and rank candidates to permit hiring managers to focus their attention on only the most suitable candidates. We believe that result can have a substantial impact on the cost of recruiting and the quality of candidates selected.

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

**Desk Flex Software**

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

Key Features of Desk/Flex include:

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

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

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

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

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

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

Desk/Flex is responsive to office size and needs, servicing small to large businesses. Desk/Flex can be configured to administer a single site or multiple sites locally or remotely.  Desk/Flex has full integration capabilities with both Nortel and Avaya, which combined represent the majority of the telecommunications and inbound automatic call distributor (“ACD”) market.

**Agent Power Software**

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

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

 

 

 

  

· 

Planning and Scheduling;

  

· 

Agent Adherence;

  

· 

Agent Performance;

  

· 

ACD Group Performance;

  

· 

Real-Time Agent Status; and

  

· 

Info Screen.

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

**IntelliSys Software**

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

**SystemView**

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

**Features**

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

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

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

**MaintenanceView**

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

•       Fixed asset and rotating equipment.

•       Preventive scheduling and predictive reports and charts.

•       Work order management.

•       Inventory and purchasing.

•       Manufacture and vendor records.

•       Parts inventory.

**Features**

•       Ability to track maintenance costs by center, department, and location.

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

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

**Report View**

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

**Features**

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

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

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

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

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

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

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

**Energy View**

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

**Features**

•       Collect usage data manually and automatically.

•       Normalize energy variables creating benchmarking variables.

•       Provide comparisons of hourly usage to previous days.

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

•       Forecast and alarm peak demands.

•       Send alarms via local annunciation, email or pagers.

•       Benchmarking.

•       Local Factor Analysis.

•       Automate Energy Billing Audits.

•       Determine Changes in Energy Usage Patterns.

•       Setting Saving Targets and Tracking Progress.

 

 

**K9 Koordinator** **Software**

 

Included in the assets acquired through the Purchase Contract was the K9 Koordinator software.  The software was designed to focus on applications related to pet care: pet boarding, daycare, grooming, training, and other pet care services (including dog walking and pet sitting). Products can be used for most animal types such as dogs, cats, horses, birds, rodents, snakes and pigs.

 

The K9 Koordinator is a complete management system for pet resorts (boarding kennels), pet daycare centers, pet sitters, dog walkers, grooming shops, and mobile groomers. The K9 Koordinator was designed to efficiently and easily manage scheduling, clients, pet information, services, and retail information.

Key components of the K9 Koordinator software include webcam integration, giftcard processing and management, and virtual kennel layout for run assignments.

 

The K9 Koordinator has over 20 years of development and usage in the pet care industry. K9 Koordinator users include pet resorts, boarding kennels, grooming shops, mobile groomers, trainers, dog walkers, pet sitters, animal hospitals, shelters, rescue organizations, and pet retailers.

 

**PLAN OF OPERATION**

During the next twelve months, we plan to further develop our BoxesOS software, and hope to expand our customer base for our Desk/Flex and Agent Power software packages, funding permitting. We believe we can satisfy our cash requirements for the next three months with our current cash on hand and revenues generated from our operations. As such, continuing operations and completion of our plan of operation, including making the Monthly Payments on our Note with the IntelliSys Note (where required), the Third Party Lender Note and Convertible Notes as described above, are subject to generating adequate revenue. We cannot assure investors that adequate revenues will be generated. In the absence of our projected revenues, we may be unable to proceed with our plan of operations. Even without significant revenues within the next several months, we still anticipate being able to continue with our present activities, but we may require financing to potentially achieve our goal of profit, revenue and growth.

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011, AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2010**

For the three months ended September 30, 2011 we had revenue of $205,724 compared to revenue of $87,191 for the three months ended September 30, 2010, an increase of $118,533 or 136% from the prior period.   The increase in revenues is mainly attributable to the sales generated by the Company which were deferred that are now being recognized in accordance with the Company’s revenue recognition policy and from the sales generated by the company’s newly acquired companies.

General and administrative expenses increased by $90,570 or 128% to $161,495 for the three months ended September 30, 2011 compared to general and administrative expense of $70,925 for the three months ended September 30, 2010.  The increase in general and administrative expense is due mainly to the increase in cost associated with the company’s newly acquired companies.

We had depreciation and amortization expense of $31,623 for the three months ended September 30, 2011 compared to $22,854 for the three months ended September 30, 2010, an increase of $8,769 or 28% from the prior period.  This increase is due the Company having a greater depreciable asset base as a result of the recent acquisitions, as described above.

Total operating expenses for the three months ended September 30, 2011 were $193,118, compared to $93,779 for the three months ended September 30, 2010, an increase of $99,339or 106% from the prior period.

We had operating income of $12,606 for the three months ended September 30, 2011 compared to operating loss of $6,588 for the three months ended September 30, 2010, an increase of $19,194 or 291% from the prior period.  The increase in operating income is due to the company recognizing income that was deferred in prior periods and to the increase in income received from the company’s acquired subsidiaries.

Interest expense was $12,108 for the three months ended September 30, 2011 compared to $5,543 for the three months ended September 30, 2010, an increase of $5,234 or 94% from the prior period. Interest expense increased for the three months ended September 30, 2011 due to the increase in loans payable at September 30, 2011 as compared to September 30, 2010, as described below under “Liquidity and Capital Resources”.

We had a net loss of $121,789 for the three months ended September 30, 2011 compared to a net loss of $12,119 for the three months ended September 30, 2010, an increase in net loss of $109,670 or 905% from the prior period.  The increase in net loss is due to the company recognizing derivative expense in the current period.

**RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011, AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2010**

For the nine months ended September 30, 2011 we had revenue of $646,023 compared to revenue of $269,332 for the nine months ended September 30, 2010, an increase of $376,691 or 140% from the prior period.   The increase in revenues is mainly attributable to the sales generated by the Company which were deferred that are now being recognized in accordance with the Company’s revenue recognition policy and from the sales generated by the company’s newly acquired companies.

General and administrative expenses increased by $241,388 or 109% to $462,198 for the nine months ended September 30, 2011 compared to general and administrative expense of $220,810 for the nine months ended September 30, 2010.  The increase in general and administrative expense is due mainly to the increase in cost associated with the company’s acquisitions, as described above.

We had depreciation and amortization expense of $91,626 for the nine months ended September 30, 2011 compared to $52,043 for the nine months ended September 30, 2010, an increase of $39583 or 76% from the prior period.  This increase is due the Company having a greater depreciable asset base as a result of the recent acquisitions, as described above.

Total operating expenses for the nine months ended September 30, 2011 were $553,824, compared to $272,853 for the nine months ended September 30, 2010, an increase of $280,971 or 103% from the prior period.

We had operating income of $92,199 for the nine months ended September 30, 2011 compared to operating loss of $3,521 for the nine months ended September 30, 2010, an increase of $95,720 or 2719% from the prior period.  The increase in operating income was mainly due to the sales generated by the Company which were deferred that are now being recognized in accordance with the Company’s revenue recognition policy and sales generated by the company’s newly acquired subsidiaries.

Interest expense was $38,272 for the nine months ended September 30, 2011 compared to $17,430 for the nine months ended September 30, 2010, an increase of $20,842 or 120% from the prior period. Interest expense increased for the nine months ended September 30, 2011 due to the increase in loans payable at September 30, 2011 as compared to September 30, 2010, as described below under “Liquidity and Capital Resources.

We had a net loss of $68,334 for the nine months ended September 30, 2011 compared to a net loss of $20,893 for the nine months ended September 30, 2010, an increase in net loss of $47,441 or 227% from the prior period.  The increase in net loss is mainly attributable to the sales generated by the Company which were deferred and the company recognizing derivative expense in the current period.

**LIQUIDITY AND CAPITAL RESOURCES**

We had total current assets of $308,469 as of September 30, 2011, consisting of cash of $98,003, accounts receivable of $194,897, other current assets of $13,252 and current deferred financing costs of $2,317.

We had non-current assets of $785,553 as of September 30, 2011, consisting of property and equipment, net of accumulated depreciation of $184,187; intangible assets, net of accumulated amortization of $534,446, and goodwill resulting from the purchase of IntelliSys of $53,588.

We had total current liabilities of $632,015 as of September 30, 2011, consisting of $113,085 of accounts payable and accrued liabilities, $204,659 of deferred revenues, $46,537 of the current portion of capitalized leases, $122,289 of derivative liability and $145,445 of the current portion of notes payable.

We had negative working capital of $323,546 and a total accumulated deficit of $1,939,539 as of September 30, 2011.

We had total liabilities of $1,422,386 as of September 30, 2011, which included total current liabilities of $632,015 and long-term note payable, net of current portion of $257,675, which represented payments due on the Note, described below; long-term related party debt of $296,103 which represented amounts payable to Star Financial as described below, $197,906 of other related party debt, and long-term portion of capitalized leases of $38,687.

We had net cash provided by operating activities of $137,133 for the nine months ended September 30, 2011, which was mainly due to $(68,334) of net loss, depreciation and amortization of $91,627, $99,635 in changes in accounts receivable offset by $5,000 in changes to other current assets and $103,084 of changes to deferred revenue and accounts payable.

We did not use any cash for investing activities for the nine month ending September 30, 2011.

We had $79,743 of net cash used for financing activities during the nine months ended September 30, 2011, which represented the $152,644 repayment of long term debt and capital leases and $157,786 of repayment of related party loans payable offset by $146,102 of proceeds from long term debt and capital leases, $1,125 in payment of deferred financing cost and $85,710 of proceeds from related party loans.

On June 5, 2007, Epazz obtained a line of credit of $100,000 from a bank.  The outstanding balance on the line of credit bears interest at prime plus 4.5% (9.5% at December 31, 2008) and expired on July 5, 2010.  On June 5, 2010 this line of credit was converted to a unsecured term loan which bears interest at 7% and has a maturity date of June 5, 2014.  Payments of $1,050 are due monthly.  At September 30, 2011 the balance on this unsecured loan was $93,559.

We also borrow from our Chief Executive Officer, Shaun Passley and other related parties periodically under verbal agreements.  The related party loans bear no interest and are being repaid as funds become available.  During the nine months ended September 30, 2011, we borrowed an additional $85,710 from Mr. Passley and other related parties. During the nine months ended September 30, 2011 we also repaid $157,786 to Mr. Passley and other related parties.   At September 30, 2011, the total principal outstanding was $211,807.  All previously accrued interest associated with these related party loans have been forgiven as of December 31, 2009; accordingly no additional interest has been accrued as of September 30, 2011.

In June 2008, the Company provided Arthur A. Goes a promissory note in the amount of $225,000 (the “Note”) in connection with the Stock Purchase Agreement entered into with Desk Flex, Inc., Professional Resource Management, Inc. and Mr. Goes.  The Note bears interest at the rate of seven percent (7%) per annum, and all past due principal and interest (which failure to pay such amounts after a fifteen (15) day cure period, shall be defined herein as an “Event of Default”) bear interest at the rate of twelve percent (12%) per annum until paid in full.  The Note, however, additionally provides that the Company shall have two additional fifteen (15) day cure periods during the term of the Note resulting in two thirty (30) day cure periods before an Event of Default occurs.  The principal amount of the Note is due on June 18, 2011.  The Note is payable in monthly installments of $6,947.35, with the first such monthly payment due on September 18, 2008, until such time as this Note is paid in full.  Provided, however, that if the total amount due under the Note is less than any monthly payment, the Company shall only be obligated to pay the remaining balance of the Note.  The Note may be prepaid at any time without penalty.  As of the date of this report, the Company is current with all such monthly payments; however, the Company is currently in a dispute with Mr. Goes regarding who is the responsible party for the payment of certain accounting fees associated with the audit and review of the financial statements of DFI and PRMI.  As of September 30, 2011, this note has been paid in full.

On June 4, 2008, the Company issued a note payable in the amount of $296,100 due to Star Financial Corporation, which is owned by Fay Passley, the mother of our Chief Executive Officer, Shaun Passley, which has since been amended (the “June 2008 Note”, as amended from time to time).  The loan is unsecured and bears interest at 10%, with annual payments of principal and interest in the amount of $106,951, originally due and payable beginning on December 1, 2009 and a maturity date of June 4, 2013, which has since been extended and which repayment terms have since been amended as provided below.  In connection with the loan, the Company paid $14,100 (5%) in financing costs that are being amortized over the life of the loan using the effective interest method.  The majority of the funds borrowed pursuant to the June 2008 Note were used to pay the seller the $210,000 payment in connection with the purchase of DFI and PRMI, as described above.   In April 2010, Star Financial, agreed to modify the repayment terms of the June 2008 Note to provide for $100,000 to be due on August 1, 2011, $100,000 to be due on August 1, 2012, and the remaining balance of the June 2008 Note to be due on August 1, 2013 in return for junior lien on the Company’s assets.

In May 2009, the Company issued 250,000 shares of the Company’s Series A Common Stock to Vivienne Passley, the aunt of Shaun Passley, our sole Director and Chief Executive Officer, in connection with Ms. Passley’s conversion of her $6,000 note payable to shares of the Company’s Series A Common Stock in forgiveness of the note payable.

In May 2009, the Company issued 160,000 shares of the Company’s Series A Common Stock to L&F Lawn Services, Inc., a company own by Lloyd Passley the father of Shaun Passley, as an interest payment on a loan payable due to L&F Lawn Services, Inc.  These shares were valued at $12,800.

In May 2009 the Company issued 240,000 shares of the Company’s Series A Common Stock to Vivienne Passley, the aunt of Shaun Passley, as an interest payment on a loan payable due to Vivienne Passley.  These shares were valued at $19,200.

Effective February 1, 2010, the Company entered into a Software Product Asset Purchase Agreement (the “Software Rights Agreement”) with Igenti, Inc., a Florida corporation (“Igenti”) to acquire the rights to Igenti’s AutoHire software, domain names, permits, customers, contracts, know-how, equipment, software programs, receivables totaling approximately $10,000 and the intellectual property of Igenti associated therewith (the “AutoHire Software”).  The $170,000 purchase price included $50,000 in the form of a promissory note (the “Igenti Note).

On July 29, 2010, the Company issued 20,000,000 post-Reverse Split shares of Class A Common Stock to Shaun Passley, the Company’s sole Director and Chief Executive Officer in consideration for compensation for management services rendered.

On July 29, 2010, the Company issued 2,500,000 post-Reverse Split shares of Class A Common Stock to Vivienne Passley, a related party and the aunt of Shaun Passley, our Chief Executive Officer, in consideration for and in lieu of interest payments due to Star Financial Corporation on the June 2008 Note, from July 29, 2010 to July 29, 2015. Vivienne Passley will begin to earn these shares on July 29, 2012.

On July 29, 2010, the Company issued 2,500,000 post-Reverse Split shares of Class A Common Stock to Fay Passley, a related party and the mother of our Chief Executive Officer, Shaun Passley, for  and in lieu of interest payments due to Star Financial Corporation on the June 2008 Note, from July 29, 2010 to July 29, 2015. Fay Passley will begin to earn these shares on July 29, 2012.

On or about September 2, 2010, the Company entered into a Stock Purchase Agreement (the “IntelliSys Purchase Agreement”) with IntelliSys, Inc., a Wisconsin corporation (“IntelliSys”) and Paul Prahl, an individual and the sole stockholder of IntelliSys.  Pursuant to the IntelliSys Purchase Agreement, the Company purchased 100% of the outstanding shares of IntelliSys from Mr. Prahl, for an aggregate purchase price of $175,000 (the “Purchase Price”).  The Purchase Price included $125,000 in cash (the “Cash Consideration”) and a note for $30,816 (the “IntelliSys Note”, described below).  Additionally, the Company agreed to assume an aggregate of approximately $28,137.76 in outstanding liabilities of IntelliSys in connection with the Closing.

The Company also agreed to provide Mr. Prahl earn-out rights in connection with the purchase, 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 based on the following schedule (the “Earn-Out”):

 

 

 

 

**Revenue for the Relevant Year**

**Earn-Out**

$0 to $350,000

$

0

$350,000.01 to $380,000

$

6,675

$380,000.01 to $395,000

$

10,012.50

$395,000.01 or more

$

13,350

Provided that in no event shall the total amount payable to Mr. Prahl in connection with the Earn-Out exceed $13,350 per year or $40,050 in aggregate.

The IntelliSys Note bears interest at the rate of six percent (6%) per annum, and all past-due principal and interest (which failure to pay such amounts after a fifteen (15) day cure period, shall be defined herein as an “Event of Default”) bear interest at the rate of ten percent (10%) per annum until paid in full.  The IntelliSys Note, also provides that the Company shall have two additional fifteen (15) day cure periods during the term of the IntelliSys Note resulting in two thirty (30) day cure periods before an Event of Default occurs.

The principal amount of the IntelliSys Note is due on September 18, 2015.  The IntelliSys Note is payable in 60 monthly installments of $555.10 (each a “Monthly Payment”), with the first such Monthly Payment due on September 15, 2010, and by way of a balloon payment of the remaining amount due on the due date of the IntelliSys Note, subject to the requirements of the Newtek Note (described below).  Provided, however, that if the total amount due under the IntelliSys Note is less than any Monthly Payment, the Company shall only be obligated to pay the remaining balance of the IntelliSys Note.  The IntelliSys Note may be prepaid at any time without penalty.

Additionally, the Company agreed to secure the payment of the IntelliSys Note with a Uniform Commercial Code Security Interest filing, which the Company agreed to file, at Mr. Prahl’s request, at the Company’s expense, to grant Mr. Prahl a security interest over all of IntelliSys’ tangible and intangible assets, and the outstanding stock of both of IntelliSys until the IntelliSys Note is repaid, which security interest is junior to the Newtek Note (described below).

On September 30, 2010, the Company obtained a $185,000 U.S. Small Business Association Loan from Third Party Lender (the “Third Party Lender Note” and “Third Party Lender”).  The Third Party Lender Note bears interest at the rate of the Prime Rate in effect from time to time plus 2.75% (which has an initial interest rate of 6% per annum).  The Company agreed to repay the Third Party Lender Note at the rate of $2,053.88 per month, beginning in November 2010.  The Third Party Lender Note is due and payable on September 30, 2020.  The repayment of the Third Party Lender Note is secured by a security interest over substantially all of the Company’s property, including, but not limited to the stock of IntelliSys which was purchased in connection with the IntelliSys Purchase Agreement.  Additionally, the Third Party Lender Note is guaranteed by Shaun Passley, our Chief Executive Officer and Director, related parties, PRMI and DFI.  The Third Party Lender Note is also secured by a mortgage on the properties of related parties and Shaun Passley.  Mr. Prahl in connection with the IntelliSys Note and Shaun Passley in connection with amounts owed to him by the Company, agreed to accept no further payments on such debts until Third Party Lender is paid in full.  Finally, Shaun Passley agreed to further secure the Third Party Lender Note with the proceeds of a personal insurance policy, equal at least to the amount of the Third Party Lender Note.  An aggregate of $125,000 received in connection with the Third Party Lender Note was used to pay Mr. Prahl the Cash Consideration due under the IntelliSys Purchase Agreement, $50,000 was used for working capital, and $10,000 was paid in closing costs associated with the note.

On May 27, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which Asher agreed to purchase an 8% convertible promissory note in the amount of $50,000 (the “Convertible Note”) from the Company, which provides Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such Convertible Note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued.  The Convertible Note, which accrues interest at the rate of 8% per annum, is payable, along with interest thereon on February 28, 2012.  In the event any principal or interest is not timely paid, such amount accrues interest at 22% per annum until paid in full.  Asher is prohibited from converting the Convertible Note into shares of the Company’s common stock to the extent that such conversion would result in Asher beneficially owning more than 4.99% of the Company’s common stock, subject to 61 days prior written notice to the Company from Asher of Asher’s intention to waive or modify such provision.  The Company can repay the Convertible Note prior to maturity (or conversion), provided that it pays 135% of such note (and accrued and unpaid interest thereon) if the note is repaid within the first 90 days after the issuance date; 140% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 91 and 120 days after the issuance date; 145% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 121 and 150 days after the issuance date; and 150% of such note (and accrued and unpaid interest thereon) if the note is repaid during the period which is 151 days and prior to 180 days after the issuance date.  After 180 days have elapsed from the issuance date the Company has no right to repay the Convertible Note.

On June 28, 2011, the Company sold Asher an additional 8% Convertible Note in the amount of $37,500 on substantially similar terms as the Convertible Note described in the paragraph above (collectively the “Convertible Notes”), except that the maturity date of such note was March 30, 2012.

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

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

 

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 in consideration for an aggregate of $205,000, of which $175,000 was paid in cash at the closing and $30,000 was paid by way of a Balloon Installment Promissory Note (the “K9 Note”).   We did not purchase and K9 Bytes agreed to retain and be responsible for any and all liabilities of K9 Bytes.  We agreed to indemnify and hold K9 Bytes harmless against, among other things, any claims and liability associated with the future operations of the assets purchased pursuant to the Purchase Contract and K9 Bytes agreed to indemnify and hold us harmless against any misrepresentations made by K9 Bytes in the Purchase Contract; any failure of K9 Bytes to perform any required term or condition of the Purchase Contract and any debts or other obligations of K9 Bytes not specifically assumed pursuant to the Purchase Contract in excess of $2,000.

 

The K9 Note accrues interest at 6% per annum and is payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the K9 Note ($23,017, assuming no additional payments other than those scheduled) is due.  The repayment of the K9 Note is secured by all of the securities of K9 Sub, which owns all of the assets purchased as a result of the Purchase Contract, provided that Third Party Lender (as defined below), as a result of the SBA Loan described below, has a first priority security interest to such securities.  The K9 Note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.

 

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

 

K9 Bytes agreed to subordinate the K9 Note to Third Party Lender’s rights under the SBA Loan.  Additionally, Mr. Passley agreed to subordinate the amount he is owed by the Company to the repayment of the SBA Loan.

 

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

 

**Critical Accounting Policies**

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivable, investment values, income taxes, the recapitalization and contingencies. We base our estimates on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

*Recently issued accounting pronouncements.* The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flows.

 

 

**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**

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based upon an evaluation conducted for the period ended December 31, 2010, Shaun Passley who is our Chief Executive Officer and Chief Financial Officer (which duties include that of principal accounting officer) as of December 31, 2010, and the date of this Report, concluded that we have the following material weakness in our internal controls:

 

 

 

 

  

· 

Reliance upon independent financial reporting consultants for review of critical accounting areas and disclosures and material non-standard transactions.

  

 

 

 

  

· 

Lack of sufficient accounting staff, which results in a lack of segregation of duties necessary for a good system of internal control.

In order to remedy our existing internal control deficiencies, as soon as our finances allow, we will hire a Chief Financial Officer who will be sufficiently versed in public company accounting to implement appropriate procedures for timely and accurate disclosures.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the fiscal quarter covered by this report that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
**PART II - OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

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

**ITEM 1A. RISK FACTORS**

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

 **RISKS RELATED TO OUR BUSINESS**

**We owed a total of $1,422,386 as of September 30, 2011, to repay our liabilities and we will need to raise additional funds in the future to repay these obligations and continue our operations and these funds may not be available on acceptable terms or at all. Failure to raise additional funds could require us to substantially reduce or terminate our operations.**

As of September 30, 2011, we owed approximately $1,104,642  in outstanding notes payable, which included $438,344 payable to third parties $197,906 owed to our Chief Executive and other related parties, the interest of which has been forgiven as of December 31, 2009 and which has not accrued any interest as of June 30, 2011and  derivative liability of $122,289.  We also owed $296,103 to Star Financial (as described above) in connection with the June 2008 Note, We anticipate raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support our business operations; however we currently do not have commitments from third parties for additional capital.

We currently anticipate that we will only be able to continue our business operations for the next three (3) months with our current cash on hand and the revenues we generate and will need approximately $100,000 to continue our operations for the next 12 months, including any funds we will need to make the Monthly Payments on our Note with Mr. Goes, the June 2008 Note, the IntelliSys Note, the Third Party Lender Note and the Convertible Notes (if such notes are not converted into shares of our common stock), each as described above.   We cannot be certain that any such financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue and expand our business. We intend to overcome the circumstances that impact our ability to remain a going concern through a combination of the commencement of additional revenues, of which there can be no assurance, with interim cash flow deficiencies being addressed through additional equity and debt financing. Our ability to obtain additional funding for the remainder of the 2011 year and thereafter will determine our ability to continue as a going concern. There can be no assurances that these plans for additional financing will be successful. Failure to secure additional financing in a timely manner to repay our obligations and supply us sufficient funds to continue our business operations and on favorable terms if and when needed in the future could have a material adverse effect on our financial performance, results of operations and stock price and require us to implement cost reduction initiatives and curtail operations. Furthermore, additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, and may require that we relinquish valuable rights.  In the event that we are unable to repay our current and long-term obligations as they come due, we could be forced to curtail or abandon our business operations, and/or file for bankruptcy protection; the result of which would likely be that our securities would decline in value and/or become worthless.

**The Notes payable in connection with the acquisition of IntelliSys and due to Third Party Lender are secured by a security interest in substantially all of the assets IntelliSys and the Company.**

The Company agreed to secure the payment of the $50,000 IntelliSys Note (described above) with a Uniform Commercial Code Security Interest filing, which the Company agreed to file, at Mr. Prahl’s request, at the Company’s expense, to grant Mr. Prahl a security interest over all of IntelliSys’ tangible and intangible assets, and the outstanding stock of IntelliSys until the IntelliSys Note is repaid, which security interest is junior to the Newtek Note (described below).   On September 30, 2010, the Company obtained a $185,000 U.S. Small Business Association Loan from Third Party Lender (the “Third Party Lender Note” and “Third Party Lender”).  The Third Party Lender Note bears interest at the rate of the Prime Rate in effect from time to time plus 2.75% (which has an initial interest rate of 6% per annum).  The Company agreed to repay the Third Party Lender Note at the rate of $2,053.88 per month, beginning in November 2010.  The Third Party Lender Note is due and payable on September 30, 2020.  The repayment of the Third Party Lender Note is secured by a security interest over substantially all of the Company’s property, including, but not limited to the stock of IntelliSys which was purchased in connection with the IntelliSys Purchase Agreement.  Additionally, the Third Party Lender Note is guaranteed by Shaun Passley, our Chief Executive Officer and Director, related parties, PRMI and DFI.  The Third Party Note is also secured by a mortgage on the properties of related parties, and Shaun Passley.  Mr. Prahl in connection with the IntelliSys Note and Shaun Passley in connection with amounts owed to him by the Company, agreed to accept no further payments on such debts until Third Party Lender is paid in full.  Finally, Shaun Passley agreed to further secure the Third Party Lender Note with the proceeds of a personal insurance policy, equal at least to the amount of the Third Party Lender Note.  An aggregate of $125,000 received in connection with the Third Party Lender Note was used to pay Mr. Prahl the Cash Consideration due under the IntelliSys Purchase Agreement, $50,000 was used for working capital, and $10,000 was paid in closing costs associated with the note.

If we default on the repayment of the IntelliSys Note and/or Third Party Lender Note, Mr. Prahl and/or Third Party Lender may enforce their security interest over the assets of IntelliSys and our assets which secure the repayment of such notes, and we could be forced to curtail or abandon our current business plans and operations. If that were to happen, any investment in the Company could become worthless.

**If we are deemed to be a “shell company,” shareholders who hold unregistered shares of our common stock will be subject to resale restrictions pursuant to Rule 144.**

Pursuant to Rule 144 of the Securities Act of 1933, as amended (“Rule 144”), a “shell company” is defined as a company that has no or nominal operations; and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets.  We do not currently believe that we are a “shell company” or a former “shell company” however, we may be deemed to be a “shell company” or a former “shell company.” If we are deemed to be a “shell company” pursuant to Rule 144, sales of our securities pursuant to Rule 144 will not be able to be made until 1) we have ceased to be a “shell company; 2) we are subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and have filed all of our required periodic reports for the prior one year period; and a period of at least twelve months has elapsed from the date “Form 10 information” has been filed with the Commission reflecting the Company’s status as a non-“shell company.”  Because none of our securities will be able to be sold pursuant to Rule 144, until at least a year after we cease to be a “shell company” (as described in greater detail above), or in the event we were a former “shell company”, unless we continue to timely file reports with the Commission, any securities we issue to consultants, employees, in consideration for services rendered or for any other purpose will have no liquidity in the event we are deemed to be a “shell company” or a former “shell company” and if we cease filing with the Commission, until and unless such securities are registered with the Commission and/or until a year after we cease to be a “shell company” and have complied with the other requirements of Rule 144, as described above.  As a result, it may be harder for us to fund our operations and pay our consultants with our securities instead of cash.  Furthermore, it will be harder for us to raise funding through the sale of debt or equity securities unless we agree to register such securities with the Commission, which could cause us to expend additional resources in the future.  If we are deemed to be a “shell company” or former “shell company” it could prevent us from raising additional funds, engaging consultants using our securities to pay for any acquisitions, which could cause the value of our securities, if any, to decline in value or become worthless.

**We have a history of losses and we anticipate that our expenses will dramatically increase as we execute our business plan. Thus, we will likely experience continued losses in the near future and may not ever achieve or maintain profitability.**

The Company has yet to generate significant sales or demonstrate that it can generate sufficient sales to become profitable. The Company incurred significant net losses since its inception in March 2000, including a net loss of $54,680 for the year ended December 31, 2009.  The Company had  net income of $124,118 for the year ending December 31, 2010 and net loss of $58,335 for the nine months ended September 30, 2011.  As of September 30, 2011, the Company had an accumulated deficit of $1,926,207 and negative working capital of $323,546.  Furthermore, we expect operating expenses to increase as we seek to update our products, build relationships with future customers, build additional distribution channels for our products, continue design and development projects, and increase administrative activities to support our planned growth. We expect to need approximately $100,000 to sustain our operations for the next 12 months. We anticipate only being able to continue our operations for the next three months if no additional funding is raised.  The extent of our future operating losses and the timing of our profitability are highly uncertain, we may never generate sufficient revenues to achieve or sustain profitability.

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

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

**Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock. Additionally, shares issued in our planned offering will cause immediate and substantial dilution to our existing shareholders.**

Shares eligible for future sale may have an adverse effect on the market price of our common stock by creating an excessive supply. We currently plan to raise additional funding through the sale of debt or equity securities (similar to the Convertible Notes), which would cause a significant increase in the number of outstanding shares which we currently have, and would cause immediate and substantial dilution to our existing shareholders.  Additionally in the future, shareholders, including our President and Chief Executive Officer, and any shareholders who purchase shares in the future may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations, which may decrease the trading value of our common stock.

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

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

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

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

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

 

 

 

  

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

 

 

  

● customer decisions to delay implementation of our products;

 

 

  

● any seasonality of technology purchases;

 

 

  

● demand for our products, which may fluctuate significantly;

 

 

  

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

 

 

  

● changes in our pricing policy; and

 

 

  

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

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

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

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

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

 

 

  

● lost or delayed market acceptance and sales of our software;

 

 

 

  

● loss of clients;

 

 

  

● product liability suits against us;

 

 

  

● diversion of development resources;

 

 

  

● injury to our reputation; and

 

 

  

● increased maintenance and warranty costs.

 

 

 

 

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

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

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

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

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

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

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

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

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

The markets for our software applications are characterized by rapid technological changes, changing customer needs, frequent introduction of new software applications and evolving industry standards. The introduction of software applications that embody new technologies or the emergence of new industry standards could make our software applications obsolete or otherwise unmarketable. As a result, we may not be able to accurately predict the lifecycle of our software applications, which may become obsolete before we receive any revenue or 

the amount of revenue that we anticipate receiving from them. If any of the foregoing events were to occur, our ability to retain or increase market share could be materially adversely affected.

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

  

● the establishment of our brand;

 

 

  

● the development and performance to our planned product introductions;

 

 

  

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

 

 

  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

  

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

 

 

 

  

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

 

 

  

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

 

 

 

  

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

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

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

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

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

 

 

  

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

 

 

  

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

 

 

  

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

 

 

  

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

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

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

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

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

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

 

 

 

  

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

 

 

 

  

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

 

 

  

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

 

 

  

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

 

 

  

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

 

 

 

 

  

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

 

 

  

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

 

 

  

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

 

 

  

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

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

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

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

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

**RISKS RELATED TO OUR CAPITAL STRUCTURE**

**There is currently a limited public market for our securities. Moving forward, our stock price may be volatile and illiquid.**

Our securities have been approved for quotation on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “EPAZ,” however; there is currently only a limited market for our securities.  If there is a market for our common stock in the future, we anticipate that such market would continue to be illiquid and would be subject to wide fluctuations in response to several factors, including, but not limited to:

 

 

   (1)

 actual or anticipated variations in our results of operations;

  

  

   (2)

 our ability or inability to generate new revenues;

  

  

   (3)

 increased competition; and

  

  

   (4)

 conditions and trends in the market for organizational software.

 

 

 

 

Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price and liquidity of our common stock.

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

The conversion price of the $87,500 in outstanding Convertible Notes is equal to 59% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to any conversion date.  As a result, any conversion of the Convertible Notes and sale of shares of common stock issuable in connection with the conversion thereof will likely cause the value of our common stock, if any, to decline in value, as described in greater detail under the Risk Factors below.

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

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

In addition, the common stock issuable upon conversion of the Convertible Notes may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company's stock in the market than there is demand for that stock. When this happens the price of the company's stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. The various Convertible Notes will be convertible into shares of our common stock at a discount to market of 59% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to any conversion date, and such discount to market provides the holders with the ability to sell their common stock at or below market and still make a profit. In the event of such overhang, the note holder will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock (which to date has been very limited) cannot absorb the discounted shares, then the value of our common stock will likely decrease.

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

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

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

Our existing stockholders will experience substantial dilution of their investment upon conversion of the Convertible Notes. The Convertible Notes are convertible into shares of common stock at a conversion price equal to 59% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to any conversion date. As a result, the number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of our common stock, which decrease would cause substantial dilution to our existing stockholders. As sequential conversions and sales take place, the price of our common stock may decline, and if so, the holder of the Convertible Notes would be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders and would likely cause the value of our common stock to decline.

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

The Convertible Notes are convertible into shares of our common stock at a conversion price equal to 59% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to any conversion date. The significant downward pressure on the price of our common stock as the holder of the Convertible Notes converts and sells material amounts of our common stock could encourage investors to short sell our common stock. This could place further downward pressure on the price of our common stock. In addition, not only the sale of shares issued upon conversion of the Convertible Notes, but also the mere perception that these sales could occur, may adversely affect the market price of our common stock.

**The price of our common stock may be volatile.**

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

 

 

 

  

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

 

 

  

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

 

 

  

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

 

 

  

● actual or anticipated changes in the expectations of securities analysts;

 

 

  

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

 

 

  

● general economic conditions and trends;

 

 

  

● major catastrophic events;

 

 

  

● sales of large blocks of our stock; or

 

 

  

● recruitment or departures of key personnel.

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

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

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

 

 

 

  

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

 

 

  

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

 

 

  

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

 

 

  

● market acceptance of our new applications and enhancements;

 

 

 

  

● our ability to control expenses;

 

 

  

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

 

 

  

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

 

 

  

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

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

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

Shaun Passley beneficially owns approximately 78% of our Class A Common Stock, and 100% of our Class B Common Stock, which is entitled to 100 votes per share, which represents approximately 98% of our aggregate outstanding voting stock.  Mr. Passley, as majority shareholder, sole Director, President and Chief Executive Officer of the Company possesses significant influence over our Company, giving him the ability, among other things, to elect a majority of the Board of Directors and to approve significant corporate transactions. Such stock ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company. While Mr. Passley has managed the Company since its inception, he has no other accounting or finance experience and has no experience relating to a public company.

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

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

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

 

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

**If we are late in filing our Quarterly or Annual Reports with the SEC, we may be de-listed from the Over-The-Counter Bulletin Board.**

Pursuant to Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing of periodic reports with the SEC, any OTCBB issuer which fails to file a periodic report (Form 10-Q's or 10-K's) by the due date of such report (not withstanding any extension granted to the issuer by the filing of a Form 12b-25), three (3) times during any twenty-four (24) month period is automatically de-listed from the OTCBB. Such removed issuer would not be re-eligible to be listed on the OTCBB for a period of one-year, during which time any subsequent late filing would reset the one-year period of de-listing. As we were late in filing our Form 10-K for the year ended December 31, 2009, if we are late in our filings two additional times prior to December 31, 2011, or three times in any subsequent 24 month period and are de-listed from the OTCBB, our securities may become worthless and we may be forced to curtail or abandon our business plan.

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

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

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

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

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

On May 27, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which Asher agreed to purchase an 8% convertible promissory note in the amount of $50,000 (the “Convertible Note”) from the Company, which provides Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such Convertible Note into shares of the Company’s common stock at a conversion price equal to 59% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to such conversion date, at any time after the expiration of 180 days from the date such Convertible Note was issued.  The Convertible Note, which accrues interest at the rate of 8% per annum, is payable, along with interest thereon on February 28, 2012. Asher is prohibited from converting the Convertible Note into shares of the Company’s common stock to the extent that such conversion would result in Asher beneficially owning more than 4.99% of the Company’s common stock, subject to 61 days prior written notice to the Company from Asher of Asher’s intention to waive or modify such provision.

On June 28, 2011, the Company sold Asher an additional 8% Convertible Note in the amount of $37,500 on substantially similar terms as the Convertible Note described in the paragraph above (collectively the “Convertible Notes”), except that the maturity date of such note was March 30, 2012.

We claim an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Act”) since the foregoing issuances did not involve a public offering, the recipient took the securities for investment and not resale, we took appropriate measures to restrict transfer, and the recipient was an “accredited investor” (as defined in the Act). No underwriters or agents were involved in the foregoing issuance and we paid no underwriting discounts or commissions.

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES.**

None.

**ITEM 4. (REMOVED AND RESERVED)
**ITEM 5. OTHER INFORMATION**

None.

ITEM 6. EXHIBITS        ExhibitNo.Description    3.1(1)Articles of Incorporation (filed March 23, 2000)    3.2(1)Articles of Amendment (filed April 5, 2005)    3.3(1)Articles of Amendment (filed July 12, 2005)    3.4(1)Articles of Amendment (filed March 2, 2006)    3.5(1)Statement of Change of Registered Agent (filed January 12, 2006)    3.6(1)Articles of Amendment (filed May 17, 2006)    3.7(1)Amended and Restated By-Laws    4.1(1)Specimen Stock Certificate    10.1(2)Form of Subscription Agreement of July 2005 Private Placement.    10.2(3) Promissory Note with Fay  Passley    10.3(3) Promissory Note with L &  F  Lawn Service, Inc.    10.4(3) Promissory Note with Shaun Passley     10.5(5)Stock Purchase Agreement with DFI, PRMI and Arthur Goes    10.6(5)Promissory Note between Epazz, Inc. and Arthur Goes    10.7(5)Security Agreement with Arthur Goes    10.8(6)June 2008 Promissory Note with Star Financial Corporation    10.9(7)Debt Conversion Agreement    10.10(8)Letter Amendment to June 2008 Promissory Note with Star Financial Corporation    10.11(8)Software Product Asset Purchase Agreement 10.12(9)Stock Purchase Agreement    10.13(9)Promissory Note with Paul Prahl    10.14(9)Third Party Lender Note    10.15(9)Third Party Lender Note Security Agreement    10.16(10)Securities Purchase Agreement (May 2011)    10.17(10)Convertible Promissory Note (May 2011)    10.18(10)Securities Purchase Agreement (June 2011) 10.19(10)Convertible Promissory Note (June 2011)     10.20(11)Purchase Contract and Receipt Agreement  – K9 Bytes Transaction    10.21(11)Bill of Sale  – K9 Bytes Transaction    10.22(11)Balloon Installment Promissory Note  – K9 Bytes Transaction    10.23(11)Small Business Finance - U.S. Small Business Administration Note – K9 Bytes Transaction    10.24(11)Consultant Agreement  – K9 Bytes Transaction    10.25(11)Agreement Not to Compete  – K9 Bytes Transaction    16.1(4)Letter from Malone & Bailey, PC    31*Certificate of the Chief Executive Officer and Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    32*Certificate of the Chief Executive Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INS**XBRL Instance Document    101.SCH**XBRL Taxonomy Extension Schema Document    101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document    101.DEF**XBRL Taxonomy Extension Definition Linkbase Document    101.LAB**XBRL Taxonomy Extension Label Linkbase Document    101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document* Filed herewith. (1)Filed as an Exhibit to our Form SB-2, filed with the Commission on December 4, 2006, and incorporated herein by reference.(2)Filed as an Exhibit to our Form SB-2A, filed with the Commission on May 11, 2007, and incorporated herein by reference.  (3)Filed as an Exhibit to our Form SB-2A, filed with the Commission on September 24, 2007, and incorporated herein by reference.(4)Filed as an Exhibit to our Form SB-2A, filed with the Commission on November 28, 2007, and incorporated herein by reference.(5)Filed as an Exhibit to our Form 8-K, filed with the Commission on June 24, 2008, and incorporated herein by reference. (6)Filed as an Exhibit to our Form 10-Q Quarterly Report, filed with the Commission on August 19, 2008, and incorporated herein by reference.(7)Filed as an Exhibit to our Form 10-Q Quarterly Report, filed with the Commission on May 19, 2009, and incorporated herein by reference.(8)Filed as an Exhibit to our Form 10-K Annual Report, filed with the Commission on April 16, 2010, and incorporated herein by reference.    (9)Filed as an Exhibit to our Form 10-Q Quarterly Report, filed with the Commission on November 22, 2010, and incorporated herein by reference.    (10)Filed as an Exhibit to our Form 10-Q Quarterly Report, filed with the Commission on August 17, 2011, and incorporated herein by reference.    (11)Filed as an Exhibit to our Form 8-K, filed with the Commission on November 21, 2011, and incorporated herein by reference.    **XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.SIGNATURESIn 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: April 13, 2012By: /s/ Shaun Passley                          Shaun Passley  Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director
 

 **