TXTM
Quarterly Report (10-q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to _____________
Commission file number 001-31590
ProText Mobility, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware
11-3621755
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
60 Queens Street, Suite 106,
Syosset, New York
11791
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number, including area code (516) 802-0223
N/A
(Former name or former address, if changed since last report)
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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “ large accelerated filer, ” “ accelerated filer, ” and smaller reporting company ” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchanges Act) Yes o No x
State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date.
The outstanding number of the issuer's common stock, par value $.0001, as of May 15, 2013 is 601,911,586 shares.
PROTEXT MOBILITY, INC. AND SUBSIDIARIES
INDEX
Page No.
Forward-Looking Statements
2
PART I FINANCIAL INFORMATION
ITEM 1 – Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012
3
Condensed Consolidated Statements of Operations For the Three Months ended March 31, 2013 (Unaudited) and 2012 (Unaudited)
4
Condensed Consolidated Statements of Cash Flows For the Three Months ended March 31, 2013 (Unaudited) and 2012 (Unaudited )
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
6 - 15
ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
ITEM 3 – Quantitative and Qualitative Disclosure about Market Risk
20
ITEM 4T –Controls and Procedures
20
PART II:
Item 1 – Legal Proceedings
21
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
21
Item 3 – Defaults upon Senior Securities
21
Item 4 – Mine Safety Disclosures
21
Item 5 - Other Information
21
Item 6 – Exhibits
21
Signature Page
22
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not undertake any duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q to conform these statements to actual results, unless required by law.
2
PROTEXT MOBILITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
December 31,
2013
2012
(Unaudited)
ASSETS
Current assets:
Cash
$ 1,632
$ 349
Total current assets
1,632
349
Other assets:
Security deposit
2,700
2,700
Total other assets
2,700
2,700
Total assets
$ 4,332
$ 3,049
LIABILITIES
Current liabilities:
Current portion of 10% convertible notes payable
$ 114,034
$ 114,034
Convertible short term bridge notes payable, net of
discount of $22,189 and $60,485 respectively
1,321,952
1,337,656
Loans payable
-
5,000
Derivative liability
39,542
-
Accounts payable
795,288
750,423
Accrued expenses
1,303,162
1,218,039
Total current liabilities
3,573,978
3,425,152
Other liabilities:
Dividends payable
1,148,715
1,033,757
Total liabilities
4,722,693
4,458,909
Stockholders' deficit
Preferred stock - $.0001 par value, authorized - 25,000,000 shares;
Series A Preferred stock - $.0001 par value, $2.62 liquidation value, 1,526,718 designated; issued and outstanding -
28,968 and 28,968 respectively
3
3
Series B Preferred stock - $.0001 par value, $9.09 liquidation value, 1,000,000 designated; issued
and outstanding -511,551
51
51
Common stock - $.0001 par value, authorized - 750,000,000 shares;
issued and outstanding - 460,403,566 and 293,313,312 shares, respectively
46,040
29,330
Additional paid-in capital
45,116,818
44,943,481
Accumulated deficit
(49,881,273)
(49,428,725)
Total stockholders' deficit
(4,718,361)
(4,455,860)
Total liabilities and stockholders' deficit
$ 4,332
$ 3,049
See notes to unaudited condensed consolidated financial statements
3
PROTEXT MOBILITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ending March 31,
2013
2012
Revenues
$ 265
$ 5,267
Cost of Sales
Amortization of software costs
-
27,168
Cost of sales
-
27,168
Gross Profit (loss)
265
(21,901)
Operating expenses:
Selling
271
9,090
Web site costs
26,805
41,840
General and administrative
167,926
318,073
Depreciation and amortization
-
2,502
Total operating expenses
195,002
371,505
Loss from operations
(194,737)
(393,406)
Other expenses:
Interest
39,176
92,293
Loss on change in derivative liability
39,542
-
Debt modification expense
15,839
-
Amortization of note discounts
48,296
69,559
Total other expenses
142,853
161,852
Net loss
(337,590)
(555,258)
Common stock dividends to be issued for Series B Preferred Stock
(114,958)
(471,458)
Net loss applicable to common stock holders
$ (452,548)
$ (1,026,716)
Per share data
Net Loss per share - basic and diluted
$ (0.00)
$ (0.01)
Weighted average number of shares outstanding- basic and diluted
347,213,077
148,194,879
See notes to unaudited condensed consolidated financial statements
4
PROTEXT MOBILITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31,
2013
2012
Cash flows from operating activities:
Net loss
$ (337,590)
$ (555,258)
Adjustments to reconcile net loss to net cash used in operating activities:
Debt modification expense
15,839
-
Common stock issued for services
23,200
25,542
Common stock issued for compensation
40,000
40,000
Stock issued for interest
3,459
3,421
Compensatory element of stock options
-
16,182
Loss on change in derivative liability
39,542
-
Amortization of software and website development costs
-
29,670
Amortization of discount related to debt
48,296
69,559
Increase (decrease) in cash flows as a result of changes in asset and liability account balances:
Deposit
-
6,754
Accounts payable and accrued expenses
131,689
89,473
Total adjustments
302,025
280,601
Net cash used in operating activities
(35,565)
(274,657)
Cash flows from investing activities
-
-
Cash flows from financing activities:
Proceeds from sale of common stock
20,848
45,000
Proceeds from loans payable
6,000
-
Proceeds from convertible bridge notes payable
10,000
311,000
Payments of bridge notes payable
-
(42,500)
Net cash provided by financing activities
36,848
313,500
Net increase in cash
1,283
38,843
Cash at beginning of period
349
60,209
Cash at end of period
$ 1,632
$ 99,052
Supplemental Schedules of Noncash Investing and Financing Activities:
Common stock issued as a result of loans payable conversions
$ 11,000
$ -
Common stock issued as a result of convertible debt conversion
$ 64,000
$ -
Common stock issued in lieu of accrued interest
$ 1,700
$ -
Debt discount of beneficial conversion feature in relation to bridge loans
$ 10,000
$ 189,524
Common stock dividends payable for Series B Preferred Stock
$ 114,958
$ 117,542
See notes to unaudited condensed consolidated financial statements
5
PROTEXT MOBILITY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013 and 2012
NOTE 1 - DESCRIPTION OF BUSINESS AND GOING CONCERN
ProText Mobility Inc. (formerly known as EchoMetrix Inc. and SearchHelp, Inc) was incorporated in the State of Delaware on September 5, 2001 and completed its initial public offering on July 23, 2003. During the fiscal year ended December 31, 2008, the Company acquired 100% of the stock of EchoMetrix, Inc, a wholly owned subsidiary, and in May of 2009 the Company filed a Certificate of Ownership and Merger with the state of Delaware pursuant to which EchoMetrix was merged into the Company, and the Company's corporate name was changed from SearchHelp, Inc. to EchoMetrix, Inc. In December of 2010, the Company formed a new Corporation (ProText Mobility, Inc) and filed a Certificate of Ownership and Merger with the state of Delaware pursuant to which the Company ’ s wholly owned subsidiary, ProText Mobility, Inc., was merged into the Company, and the Company ’
Protext Mobility develops, markets and sells software solutions for the mobile communications market primarily aimed at protecting children from dangers derived from mobile communications and mobile device use. The Company has evolved its business plan from developing software solely for personal computers ( “ PCs ” ) to developing software for products designed for the mobile industry. The Company’s offerings include solutions for both the consumer and enterprise markets, with downloadable applications for mobile communications devices: SafeText, DriveAlert & CompliantWireless.
SafeText is a service for mobile devices that provides parents a tool to help manage their children ’ s mobile communication activities. DriveAlert is a virtual "lock-box" designed to help mitigate the risk of driving while distracted. Compliant Wireless is a proprietary mobile platform designed for small to large companies to manage employee’s use of mobile devices for business through providing insight into the content and activity generated within their mobile work environment.
These circumstances raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's efforts have been directed towards the development and implementation of a plan to generate sufficient revenues to cover all of its present and future costs and expenses. This plan is to address mobile messaging market opportunities with novel, comprehensive and robust solutions for the consumer and enterprise market. Overall, we see a unique opportunity to add value to the underserved “trillion” text messaging market.
If the Company does not generate sufficient revenues from the sales of its products in an amount necessary to meet its cash needs, the Company will need additional financing to continue to operate. There are no assurances that the Company can continue to successfully raise additional financing. As the Company increases sales from its products and services, the Company expects to increase cash flows from operations. The Company has been successful in raising money from equity and debt transactions. For the three months ended March 31, 2013, the Company raised a total of approximately $37,000 comprised of proceeds from sale of common stock and issuance of debt. During the three months ended March 31, 2012, the Company raised a total of approximately $356,000 comprised of the proceeds from sale of common stock and issuance of debt. For the three months ended March 31, 2013 and 2012, approximately $75,000 and $0, respectively of the bridge notes payable have been converted into common stock.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the consolidated financial statements, the Company incurred net losses of $337,590 and $555,258 for the three months ended March 31, 2013 and 2012, respectively. In addition, the Company had negative working capital (current liabilities minus current assets) of approximately $3,572,000 and an accumulated deficit of approximately $49,881,000 at March 31, 2013.
The accompanying unaudited condensed consolidated financial statements have been prepared, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of Presentation:
ProText Mobility, Inc. is organized as a single reporting unit, with two operating divisions, and believes that it operates as a single business. References in this report to “ProText Mobility”, the “Company”, “we”, “us” or “our” refers to ProText Mobility Inc. and its consolidated subsidiaries. All intercompany transactions have been eliminated in consolidation.
(b) Revenue Recognition:
The Company recognizes revenues in accordance with authoritative guidance when services have been rendered, the sales price is determinable and collectability is reasonably assured. Revenue from online Internet sales is recognized upon the settlement of credit card charges, typically within three days of the sale.
(c) Use of Estimates:
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
(d) Earnings Per Share:
The Company utilizes the guidance per FASB Codification “ASC 260 "Earnings Per Share". Basic earnings per share is calculated on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share, which is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation, plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding, is not presented separately as it is anti-dilutive. Such securities, shown below, presented on a common share equivalent basis and outstanding as of March 31, 2013 and 2012 have been excluded from the per share computations as their effect would be anti-dilutive:
For the Three Months Ended
March 31,
2013
2012
2004 Stock Plan Options
-
-
Non ISO Stock Options
20,267,815
22,504,900
Convertible Preferred Stock
51,444,780
51,444,780
Convertible Bridge Notes and Notes Payable
53,413,096
4,552,439
Warrants
33,336,581
113,050,713
(e) Stock Based Compensation:
Effective January 1, 2006, the Company’s 2004 Stock Plan and options granted outside of the Plan are accounted for in accordance with the recognition and measurement provisions of Share Based Compensation as defined in FASB Codification, topic 718, which requires compensation costs related to share-based payment transactions, including employee stock options, to be recognized in the financial statements.
(f) Research and Development Costs:
Research and development costs are expensed as incurred. No research and development costs were incurred during the three months ended March 31, 2013 and 2012.
Research and development costs are generally expensed as incurred.
7
(g) Derivative Liabilities
The Company assessed the classification of its derivative financial instruments as of March 31, 2013, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.
During the three months ended March 31, 2013, the Company had notes payable outstanding in which the conversion rate was variable and undeterminable. Accordingly, the Company has recognized a derivative liability in connection with such instruments. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance at every balance sheet thereafter and in determining which valuation is most appropriate for the instrument (e.g., Black Scholes), the expected volatility, the implied risk free interest rate, as well as the expected dividend rate.
(h) Long-Lived Assets
In accordance with FASB Codification Topic ASC 360-10-15, Impairment or Disposal of Long-Lived Assets, we review long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. In such circumstances, we will estimate the future cash flows expected to result from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, we will recognize an impairment loss to adjust to the fair value of the asset. For the three months ended March 31, 2013 and 2012, the Company determined there was impairment to the software capitalization and website development expense and recorded write offs of approximately $0. Since 2012 the Company fully impaired software capitalization and website development expense.
(i) Cash Equivalents:
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a remaining maturity of three months or less, when purchased, to be cash equivalents.
(j) Fair Value of Financial Instruments:
The Company’s financial instruments are cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, notes payable and obligations under capital leases. The carrying amounts of accounts payable and accrued expenses approximate fair value due to the short term nature of these financial instruments. The recorded values of notes payable and obligations under capital leases approximate their fair values, as interest approximates market rates.
(k) Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company from time to time may maintain cash balances, which exceed the Federal
Depository Insurance Coverage limit. The Company performs periodic reviews of the relative credit rating of its bank to lower its risk. Concentrations of credit risk with respect to accounts receivable are limited because a number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk.
8
(l) Property and Equipment and Depreciation:
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided for over the estimated useful lives of the related asset using the straight-line method. The estimated useful lives for significant property and equipment categories are as follows:
Data processing equipment
3 to 5 years
Telecommunication equipment
5 years
Purchased software
3 years
(m) Recently Issued Accounting Pronouncements:
We have reviewed accounting pronouncements issued during the past two years and have adopted any that are applicable to our company. We have determined that none had a material impact on our unaudited condensed consolidated financial position, results of operations, or cash flows for the three months ended March 31, 2013 and 2012.
NOTE 3 - STOCK COMPENSATION
The Company’s 2004 Stock Plan (the “ 2004 Plan”), which is shareholder approved, permits the grant of share options and shares to its employees for up to 1,500,000 shares of Common Stock as stock compensation. All stock options under the 2004 Stock Plan are granted at the fair market value of the Common Stock at the grant date. Employee stock options vest ratably over a three-year period and generally expire 5 years from the grant date.
The Company’s 2009 Incentive Stock Plan, (the “2009 Plan”), which is Board of Director approved, permits the grant of share options and shares to directors, executives and selected employees and consultants for up to 25,000,000 shares of Common Stock as stock compensation. During the three months ended March 31, 2013, 36,743,336 shares of common stock have been issued to employees and consultants for services.
Accounting for Employee Awards:
The Company adheres to the provisions of Share Based Compensation as defined in the FASB codification, topic ASC 718. The codification focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. This guidance requires an entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is recognized over the period during which an employee is required to provide services in exchange for the award.
As a result of the adoption of the provision of Share Based Compensation, the Company's results for the three months ended March 31, 2013 and 2012 include share-based compensation expense for employees and board of directors totaled approximately $40,000 and $40,000, respectively, which have been included in the general and administrative expenses line item in the accompanying consolidated statement of operations. No income tax benefit has been recognized in the income statement for share-based compensation arrangements as the Company has provided a 100% valuation allowance on its’ net deferred tax asset. Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. The Company has not adjusted the expense by estimated forfeitures, as required for employee options, since the forfeiture rate based upon historical data was determined to be immaterial.
Accounting for Non-employee Awards:
The Company records its stock-based compensation expense in accordance with ASC 718-10, formerly SFAS 123R, “Share Based Payment” to its non-employee consultants for stock granted.
Stock compensation expense related to non-employee options was approximately $22,000 and $0 for the three months ended March 31, 2013 and 2012, respectively. These amounts are included in the Consolidated Statements of Operations within the general and administrative expenses line item.
There were no options granted to non-employees during the three months ended March 31, 2013.
9
The following table represents our stock options granted, exercised, and forfeited during the three months ended March 31, 2013.
Weighted
Weighted
Average
Average
Exercise
Remaining
Aggregate
Number
Price
Contractual
Intrinsic
Stock Options
of Shares
per Share
Term
Value
Outstanding at December 31, 2011
31,504,900
$
0.09
2.7715
$
0
Granted
-
-
-
-
Exercised
-
-
-
-
Forfeited/expired
(11,237,805
)
0.11
Outstanding at December 31, 2012
20,267,815
$
0.08
2.3099
$
0
Exercised
-
-
-
-
Forfeited/expired
-
-
-
-
Outstanding at March 31, 2013
20,267,815
$
0.08
2.0633
$
0
As of March 31, 2013 and 2012, $0 of compensation cost related to non-vested stock options was recognized.
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, at cost less accumulated depreciation, at:
March 31,
December 31,
2013
2012
Furniture and fixtures
$
3,780
$
3,780
Data processing equipment
212,730
212,730
Telecommunication equipment
21,262
21,262
Purchased software
2,395
2,395
240,167
240,167
Less: accumulated depreciation
(240,167
)
(240,167
)
Total property and equipment, net
$
-
$
-
Depreciation charged to operations amounted to approximately $0 for the three months ended March 31, 2013 and 2012. Property and equipment include gross assets acquired under capital leases of approximately $0 at March 31, 2013 and 2012. Capital leases are included as a component of data processing equipment. Amortization of assets under capital leases is included in depreciation expense.
NOTE 5 - 10% CONVERTIBLE NOTES PAYABLE
During the fiscal year ended December 31, 2011 the remaining 10% convertible notes outstanding were in default. The default provision requires an additional 2% interest per annum until the loans are repaid or converted. The 2% default penalty totaled approximately $3,000 for three months ended March 31, 2013 and 2012, respectively and is included in interest expense on the consolidated statement of operations and in accrued expenses on the consolidated balance sheet as of March 31, 2013 and December 31, 2012, respectively.
As reflected on the balance sheets, the value of the 10% convertible notes at March 31, 2013 and December 31, 2012 amounted to approximately $114,000 and are classified as current due to the fact that they are in default for the non-payment by the maturity date. The Notes are convertible at any time at the option of the holder into Common Stock at the conversion rate of $0.40 per share.
10
NOTE 6 - BRIDGE NOTES PAYABLE
Convertible Bridge Notes Payable:
2013
Convertible Bridge Notes Payable:
During the three months ended March 31, 2013, the Company fully converted one short-term convertible bridge note and partially converted two short term convertible bridge notes totaling $64,000 into 96,603,968 shares of common stock. During the three months ended March 31, 2013, the Company received $10,000 in short term convertible bridge notes payable. The notes bear interest at 12% interest and are payable upon maturity, 3 months from the date of the loans. As a result, the Company recorded $10,000 debt discount related to beneficial conversion feature.
Quarterly Report (10-q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to _____________
Commission file number 001-31590
ProText Mobility, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware
11-3621755
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
60 Queens Street, Suite 106,
Syosset, New York
11791
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number, including area code (516) 802-0223
N/A
(Former name or former address, if changed since last report)
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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “ large accelerated filer, ” “ accelerated filer, ” and smaller reporting company ” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchanges Act) Yes o No x
State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date.
The outstanding number of the issuer's common stock, par value $.0001, as of May 15, 2013 is 601,911,586 shares.
PROTEXT MOBILITY, INC. AND SUBSIDIARIES
INDEX
Page No.
Forward-Looking Statements
2
PART I FINANCIAL INFORMATION
ITEM 1 – Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012
3
Condensed Consolidated Statements of Operations For the Three Months ended March 31, 2013 (Unaudited) and 2012 (Unaudited)
4
Condensed Consolidated Statements of Cash Flows For the Three Months ended March 31, 2013 (Unaudited) and 2012 (Unaudited )
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
6 - 15
ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
ITEM 3 – Quantitative and Qualitative Disclosure about Market Risk
20
ITEM 4T –Controls and Procedures
20
PART II:
Item 1 – Legal Proceedings
21
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
21
Item 3 – Defaults upon Senior Securities
21
Item 4 – Mine Safety Disclosures
21
Item 5 - Other Information
21
Item 6 – Exhibits
21
Signature Page
22
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not undertake any duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q to conform these statements to actual results, unless required by law.
2
PROTEXT MOBILITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
December 31,
2013
2012
(Unaudited)
ASSETS
Current assets:
Cash
$ 1,632
$ 349
Total current assets
1,632
349
Other assets:
Security deposit
2,700
2,700
Total other assets
2,700
2,700
Total assets
$ 4,332
$ 3,049
LIABILITIES
Current liabilities:
Current portion of 10% convertible notes payable
$ 114,034
$ 114,034
Convertible short term bridge notes payable, net of
discount of $22,189 and $60,485 respectively
1,321,952
1,337,656
Loans payable
-
5,000
Derivative liability
39,542
-
Accounts payable
795,288
750,423
Accrued expenses
1,303,162
1,218,039
Total current liabilities
3,573,978
3,425,152
Other liabilities:
Dividends payable
1,148,715
1,033,757
Total liabilities
4,722,693
4,458,909
Stockholders' deficit
Preferred stock - $.0001 par value, authorized - 25,000,000 shares;
Series A Preferred stock - $.0001 par value, $2.62 liquidation value, 1,526,718 designated; issued and outstanding -
28,968 and 28,968 respectively
3
3
Series B Preferred stock - $.0001 par value, $9.09 liquidation value, 1,000,000 designated; issued
and outstanding -511,551
51
51
Common stock - $.0001 par value, authorized - 750,000,000 shares;
issued and outstanding - 460,403,566 and 293,313,312 shares, respectively
46,040
29,330
Additional paid-in capital
45,116,818
44,943,481
Accumulated deficit
(49,881,273)
(49,428,725)
Total stockholders' deficit
(4,718,361)
(4,455,860)
Total liabilities and stockholders' deficit
$ 4,332
$ 3,049
See notes to unaudited condensed consolidated financial statements
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PROTEXT MOBILITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ending March 31,
2013
2012
Revenues
$ 265
$ 5,267
Cost of Sales
Amortization of software costs
-
27,168
Cost of sales
-
27,168
Gross Profit (loss)
265
(21,901)
Operating expenses:
Selling
271
9,090
Web site costs
26,805
41,840
General and administrative
167,926
318,073
Depreciation and amortization
-
2,502
Total operating expenses
195,002
371,505
Loss from operations
(194,737)
(393,406)
Other expenses:
Interest
39,176
92,293
Loss on change in derivative liability
39,542
-
Debt modification expense
15,839
-
Amortization of note discounts
48,296
69,559
Total other expenses
142,853
161,852
Net loss
(337,590)
(555,258)
Common stock dividends to be issued for Series B Preferred Stock
(114,958)
(471,458)
Net loss applicable to common stock holders
$ (452,548)
$ (1,026,716)
Per share data
Net Loss per share - basic and diluted
$ (0.00)
$ (0.01)
Weighted average number of shares outstanding- basic and diluted
347,213,077
148,194,879
See notes to unaudited condensed consolidated financial statements
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PROTEXT MOBILITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31,
2013
2012
Cash flows from operating activities:
Net loss
$ (337,590)
$ (555,258)
Adjustments to reconcile net loss to net cash used in operating activities:
Debt modification expense
15,839
-
Common stock issued for services
23,200
25,542
Common stock issued for compensation
40,000
40,000
Stock issued for interest
3,459
3,421
Compensatory element of stock options
-
16,182
Loss on change in derivative liability
39,542
-
Amortization of software and website development costs
-
29,670
Amortization of discount related to debt
48,296
69,559
Increase (decrease) in cash flows as a result of changes in asset and liability account balances:
Deposit
-
6,754
Accounts payable and accrued expenses
131,689
89,473
Total adjustments
302,025
280,601
Net cash used in operating activities
(35,565)
(274,657)
Cash flows from investing activities
-
-
Cash flows from financing activities:
Proceeds from sale of common stock
20,848
45,000
Proceeds from loans payable
6,000
-
Proceeds from convertible bridge notes payable
10,000
311,000
Payments of bridge notes payable
-
(42,500)
Net cash provided by financing activities
36,848
313,500
Net increase in cash
1,283
38,843
Cash at beginning of period
349
60,209
Cash at end of period
$ 1,632
$ 99,052
Supplemental Schedules of Noncash Investing and Financing Activities:
Common stock issued as a result of loans payable conversions
$ 11,000
$ -
Common stock issued as a result of convertible debt conversion
$ 64,000
$ -
Common stock issued in lieu of accrued interest
$ 1,700
$ -
Debt discount of beneficial conversion feature in relation to bridge loans
$ 10,000
$ 189,524
Common stock dividends payable for Series B Preferred Stock
$ 114,958
$ 117,542
See notes to unaudited condensed consolidated financial statements
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PROTEXT MOBILITY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013 and 2012
NOTE 1 - DESCRIPTION OF BUSINESS AND GOING CONCERN
ProText Mobility Inc. (formerly known as EchoMetrix Inc. and SearchHelp, Inc) was incorporated in the State of Delaware on September 5, 2001 and completed its initial public offering on July 23, 2003. During the fiscal year ended December 31, 2008, the Company acquired 100% of the stock of EchoMetrix, Inc, a wholly owned subsidiary, and in May of 2009 the Company filed a Certificate of Ownership and Merger with the state of Delaware pursuant to which EchoMetrix was merged into the Company, and the Company's corporate name was changed from SearchHelp, Inc. to EchoMetrix, Inc. In December of 2010, the Company formed a new Corporation (ProText Mobility, Inc) and filed a Certificate of Ownership and Merger with the state of Delaware pursuant to which the Company ’ s wholly owned subsidiary, ProText Mobility, Inc., was merged into the Company, and the Company ’
Protext Mobility develops, markets and sells software solutions for the mobile communications market primarily aimed at protecting children from dangers derived from mobile communications and mobile device use. The Company has evolved its business plan from developing software solely for personal computers ( “ PCs ” ) to developing software for products designed for the mobile industry. The Company’s offerings include solutions for both the consumer and enterprise markets, with downloadable applications for mobile communications devices: SafeText, DriveAlert & CompliantWireless.
SafeText is a service for mobile devices that provides parents a tool to help manage their children ’ s mobile communication activities. DriveAlert is a virtual "lock-box" designed to help mitigate the risk of driving while distracted. Compliant Wireless is a proprietary mobile platform designed for small to large companies to manage employee’s use of mobile devices for business through providing insight into the content and activity generated within their mobile work environment.
These circumstances raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's efforts have been directed towards the development and implementation of a plan to generate sufficient revenues to cover all of its present and future costs and expenses. This plan is to address mobile messaging market opportunities with novel, comprehensive and robust solutions for the consumer and enterprise market. Overall, we see a unique opportunity to add value to the underserved “trillion” text messaging market.
If the Company does not generate sufficient revenues from the sales of its products in an amount necessary to meet its cash needs, the Company will need additional financing to continue to operate. There are no assurances that the Company can continue to successfully raise additional financing. As the Company increases sales from its products and services, the Company expects to increase cash flows from operations. The Company has been successful in raising money from equity and debt transactions. For the three months ended March 31, 2013, the Company raised a total of approximately $37,000 comprised of proceeds from sale of common stock and issuance of debt. During the three months ended March 31, 2012, the Company raised a total of approximately $356,000 comprised of the proceeds from sale of common stock and issuance of debt. For the three months ended March 31, 2013 and 2012, approximately $75,000 and $0, respectively of the bridge notes payable have been converted into common stock.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the consolidated financial statements, the Company incurred net losses of $337,590 and $555,258 for the three months ended March 31, 2013 and 2012, respectively. In addition, the Company had negative working capital (current liabilities minus current assets) of approximately $3,572,000 and an accumulated deficit of approximately $49,881,000 at March 31, 2013.
The accompanying unaudited condensed consolidated financial statements have been prepared, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of Presentation:
ProText Mobility, Inc. is organized as a single reporting unit, with two operating divisions, and believes that it operates as a single business. References in this report to “ProText Mobility”, the “Company”, “we”, “us” or “our” refers to ProText Mobility Inc. and its consolidated subsidiaries. All intercompany transactions have been eliminated in consolidation.
(b) Revenue Recognition:
The Company recognizes revenues in accordance with authoritative guidance when services have been rendered, the sales price is determinable and collectability is reasonably assured. Revenue from online Internet sales is recognized upon the settlement of credit card charges, typically within three days of the sale.
(c) Use of Estimates:
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
(d) Earnings Per Share:
The Company utilizes the guidance per FASB Codification “ASC 260 "Earnings Per Share". Basic earnings per share is calculated on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share, which is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation, plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding, is not presented separately as it is anti-dilutive. Such securities, shown below, presented on a common share equivalent basis and outstanding as of March 31, 2013 and 2012 have been excluded from the per share computations as their effect would be anti-dilutive:
For the Three Months Ended
March 31,
2013
2012
2004 Stock Plan Options
-
-
Non ISO Stock Options
20,267,815
22,504,900
Convertible Preferred Stock
51,444,780
51,444,780
Convertible Bridge Notes and Notes Payable
53,413,096
4,552,439
Warrants
33,336,581
113,050,713
(e) Stock Based Compensation:
Effective January 1, 2006, the Company’s 2004 Stock Plan and options granted outside of the Plan are accounted for in accordance with the recognition and measurement provisions of Share Based Compensation as defined in FASB Codification, topic 718, which requires compensation costs related to share-based payment transactions, including employee stock options, to be recognized in the financial statements.
(f) Research and Development Costs:
Research and development costs are expensed as incurred. No research and development costs were incurred during the three months ended March 31, 2013 and 2012.
Research and development costs are generally expensed as incurred.
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(g) Derivative Liabilities
The Company assessed the classification of its derivative financial instruments as of March 31, 2013, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.
During the three months ended March 31, 2013, the Company had notes payable outstanding in which the conversion rate was variable and undeterminable. Accordingly, the Company has recognized a derivative liability in connection with such instruments. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance at every balance sheet thereafter and in determining which valuation is most appropriate for the instrument (e.g., Black Scholes), the expected volatility, the implied risk free interest rate, as well as the expected dividend rate.
(h) Long-Lived Assets
In accordance with FASB Codification Topic ASC 360-10-15, Impairment or Disposal of Long-Lived Assets, we review long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. In such circumstances, we will estimate the future cash flows expected to result from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, we will recognize an impairment loss to adjust to the fair value of the asset. For the three months ended March 31, 2013 and 2012, the Company determined there was impairment to the software capitalization and website development expense and recorded write offs of approximately $0. Since 2012 the Company fully impaired software capitalization and website development expense.
(i) Cash Equivalents:
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a remaining maturity of three months or less, when purchased, to be cash equivalents.
(j) Fair Value of Financial Instruments:
The Company’s financial instruments are cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, notes payable and obligations under capital leases. The carrying amounts of accounts payable and accrued expenses approximate fair value due to the short term nature of these financial instruments. The recorded values of notes payable and obligations under capital leases approximate their fair values, as interest approximates market rates.
(k) Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company from time to time may maintain cash balances, which exceed the Federal
Depository Insurance Coverage limit. The Company performs periodic reviews of the relative credit rating of its bank to lower its risk. Concentrations of credit risk with respect to accounts receivable are limited because a number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk.
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(l) Property and Equipment and Depreciation:
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided for over the estimated useful lives of the related asset using the straight-line method. The estimated useful lives for significant property and equipment categories are as follows:
Data processing equipment
3 to 5 years
Telecommunication equipment
5 years
Purchased software
3 years
(m) Recently Issued Accounting Pronouncements:
We have reviewed accounting pronouncements issued during the past two years and have adopted any that are applicable to our company. We have determined that none had a material impact on our unaudited condensed consolidated financial position, results of operations, or cash flows for the three months ended March 31, 2013 and 2012.
NOTE 3 - STOCK COMPENSATION
The Company’s 2004 Stock Plan (the “ 2004 Plan”), which is shareholder approved, permits the grant of share options and shares to its employees for up to 1,500,000 shares of Common Stock as stock compensation. All stock options under the 2004 Stock Plan are granted at the fair market value of the Common Stock at the grant date. Employee stock options vest ratably over a three-year period and generally expire 5 years from the grant date.
The Company’s 2009 Incentive Stock Plan, (the “2009 Plan”), which is Board of Director approved, permits the grant of share options and shares to directors, executives and selected employees and consultants for up to 25,000,000 shares of Common Stock as stock compensation. During the three months ended March 31, 2013, 36,743,336 shares of common stock have been issued to employees and consultants for services.
Accounting for Employee Awards:
The Company adheres to the provisions of Share Based Compensation as defined in the FASB codification, topic ASC 718. The codification focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. This guidance requires an entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is recognized over the period during which an employee is required to provide services in exchange for the award.
As a result of the adoption of the provision of Share Based Compensation, the Company's results for the three months ended March 31, 2013 and 2012 include share-based compensation expense for employees and board of directors totaled approximately $40,000 and $40,000, respectively, which have been included in the general and administrative expenses line item in the accompanying consolidated statement of operations. No income tax benefit has been recognized in the income statement for share-based compensation arrangements as the Company has provided a 100% valuation allowance on its’ net deferred tax asset. Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. The Company has not adjusted the expense by estimated forfeitures, as required for employee options, since the forfeiture rate based upon historical data was determined to be immaterial.
Accounting for Non-employee Awards:
The Company records its stock-based compensation expense in accordance with ASC 718-10, formerly SFAS 123R, “Share Based Payment” to its non-employee consultants for stock granted.
Stock compensation expense related to non-employee options was approximately $22,000 and $0 for the three months ended March 31, 2013 and 2012, respectively. These amounts are included in the Consolidated Statements of Operations within the general and administrative expenses line item.
There were no options granted to non-employees during the three months ended March 31, 2013.
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The following table represents our stock options granted, exercised, and forfeited during the three months ended March 31, 2013.
Weighted
Weighted
Average
Average
Exercise
Remaining
Aggregate
Number
Price
Contractual
Intrinsic
Stock Options
of Shares
per Share
Term
Value
Outstanding at December 31, 2011
31,504,900
$
0.09
2.7715
$
0
Granted
-
-
-
-
Exercised
-
-
-
-
Forfeited/expired
(11,237,805
)
0.11
Outstanding at December 31, 2012
20,267,815
$
0.08
2.3099
$
0
Exercised
-
-
-
-
Forfeited/expired
-
-
-
-
Outstanding at March 31, 2013
20,267,815
$
0.08
2.0633
$
0
As of March 31, 2013 and 2012, $0 of compensation cost related to non-vested stock options was recognized.
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, at cost less accumulated depreciation, at:
March 31,
December 31,
2013
2012
Furniture and fixtures
$
3,780
$
3,780
Data processing equipment
212,730
212,730
Telecommunication equipment
21,262
21,262
Purchased software
2,395
2,395
240,167
240,167
Less: accumulated depreciation
(240,167
)
(240,167
)
Total property and equipment, net
$
-
$
-
Depreciation charged to operations amounted to approximately $0 for the three months ended March 31, 2013 and 2012. Property and equipment include gross assets acquired under capital leases of approximately $0 at March 31, 2013 and 2012. Capital leases are included as a component of data processing equipment. Amortization of assets under capital leases is included in depreciation expense.
NOTE 5 - 10% CONVERTIBLE NOTES PAYABLE
During the fiscal year ended December 31, 2011 the remaining 10% convertible notes outstanding were in default. The default provision requires an additional 2% interest per annum until the loans are repaid or converted. The 2% default penalty totaled approximately $3,000 for three months ended March 31, 2013 and 2012, respectively and is included in interest expense on the consolidated statement of operations and in accrued expenses on the consolidated balance sheet as of March 31, 2013 and December 31, 2012, respectively.
As reflected on the balance sheets, the value of the 10% convertible notes at March 31, 2013 and December 31, 2012 amounted to approximately $114,000 and are classified as current due to the fact that they are in default for the non-payment by the maturity date. The Notes are convertible at any time at the option of the holder into Common Stock at the conversion rate of $0.40 per share.
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NOTE 6 - BRIDGE NOTES PAYABLE
Convertible Bridge Notes Payable:
2013
Convertible Bridge Notes Payable:
During the three months ended March 31, 2013, the Company fully converted one short-term convertible bridge note and partially converted two short term convertible bridge notes totaling $64,000 into 96,603,968 shares of common stock. During the three months ended March 31, 2013, the Company received $10,000 in short term convertible bridge notes payable. The notes bear interest at 12% interest and are payable upon maturity, 3 months from the date of the loans. As a result, the Company recorded $10,000 debt discount related to beneficial conversion feature.
