PROTEXT MOBILITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 - DESCRIPTION OF BUSINESS AND GOING CONCERN
ProText Mobility Inc. (the
Company
) was incorporated in the State of Delaware on September 5, 2001 under the name SearchHelp, Inc. 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, which then became 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 with and into the Company, and the Company's corporate name was changed to EchoMetrix, Inc. In December 2010, filed a Certificate of Ownership and Merger with the state of Delaware pursuant to which the Company
s then wholly owned subsidiary, ProText Mobility, Inc., was merged with and into the Company, and the Company
s corporate name was changed to Protext Mobility, Inc.
ProText Mobility, Inc. 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 by providing insight into the content and activity generated within their mobile work environment.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. To date, the Company has generated minimal revenue and has a history of net losses. As reflected in the consolidated financial statements, the Company incurred net losses of approximately $1.4 million and $2.2 million during 2013 and 2012, respectively. In addition, the Company had negative working capital (current liabilities minus current assets) of approximately $4.2 million and an accumulated deficit of approximately $51.4 million at December 31, 2013.
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.
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. If the Company fail to raise additional financing, it might have to file for reorganization under bankruptcy laws to satisfy its outstanding liabilities.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
F-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. 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 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.
(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 2013 and 2012.
(g) Derivative Liabilities
The Company assessed the classification of its derivative financial instruments as of September 30, 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.
During 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.
F-7
(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. During 2012 the Company fully impaired software capitalization and website development expense and has not incurred any capital software or website development costs since.
(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.
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of December 31, 2013:
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Fair Value Measurements at December 31, 2013 using:
|
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|
|
December 31,
2013
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
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|
Significant
Other
Observable
Inputs (Level 2)
|
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|
Significant
Unobservable
Inputs
(Level 3)
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Liabilities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Derivative liabilities
|
|
$
|
345,857
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
345,857
|
|
|
|
|
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The debt derivative and warrant liabilities are measured at fair value using quoted market prices and estimated volatility factors based on historical prices for the Companys common stock and are classified within Level 3 of the valuation hierarchy.
The following table provides a summary of changes in fair value of the Companys Level 3 financial liabilities as of December 31, 2013:
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Debt Derivative
Liability
|
|
|
Balance, December 31, 2012
|
|
$
|
-
|
|
|
Initial fair value of debt derivatives at note issuances
|
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|
379,952
|
|
|
Extinguished derivative liability
|
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|
-
|
|
|
Mark-to-market at December 31, 2013-Embedded debt derivatives
|
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|
(34,095)
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Balance, December 31, 2013
|
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$
|
345,857
|
|
|
|
|
|
|
|
|
Net gain for the period included in earnings relating to the liabilities held at December 31, 2013
|
|
$
|
34,095
|
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|
(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.
F-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:
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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 consolidated financial position, results of operations, or cash flows for 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.
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 2013 and 2012 include share-based compensation expense for employees and board of directors totaled approximately $160,000 and $160,000, 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 $0 during 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 2013 and 2012.
F-9
The following table represents our stock options granted, exercised, and forfeited during 2013 and 2012.
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Weighted
|
|
Weighted
|
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Average
|
|
Average
|
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|
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Exercise
|
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Remaining
|
|
|
Aggregate
|
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|
|
Number
|
|
|
|
Price
|
|
Contractual
|
|
|
Intrinsic
|
Stock Options
|
|
|
of Shares
|
|
|
|
per Share
|
|
Term
|
|
|
Value
|
Outstanding at December 31, 2011
|
|
|
39,381
|
|
|
$
|
72
|
|
2.77
|
|
$
|
-
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
-
|
|
|
|
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Forfeited/expired
|
|
|
(14,047)
|
|
|
|
88
|
|
-
|
|
|
-
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
25,334
|
|
|
$
|
64
|
|
2.31
|
|
$
|
-
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
-
|
|
|
| |
Exercised
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
-
|
|
|
|
|
Forfeited/expired
|
|
|
(2,906)
|
|
|
|
120
|
|
-
|
|
|
-
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
22,428
|
|
|
$
|
56
|
|
1.62
|
|
$
|
-
|
|
|
|
|
As of December 31, 2013 and 2012, $0 and $16,000 of compensation cost related to non-vested stock options was recognized.
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, at cost less accumulated depreciation, at:
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December 31,
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|
December 31,
|
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|
|
2013
|
|
|
2012
|
|
Furniture and fixtures
|
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$
|
3,780
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|
$
|
3,780
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|
Data processing equipment
|
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|
212,730
|
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|
|
212,730
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|
Telecommunication equipment
|
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|
21,262
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|
21,262
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|
Purchased software
|
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|
2,395
|
|
|
|
2,395
|
|
|
|
|
|
240,167
|
|
|
|
240,167
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|
Less: accumulated depreciation
|
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|
(240,167
|
)
|
|
|
(240,167
|
)
|
|
Total property and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Depreciation charged to operations amounted to approximately $0 during 2013 and 2012. Property and equipment include gross assets acquired under capital leases of approximately $0 at December 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.
F-10
NOTE 5 - CONVERTIBLE NOTES PAYABLE
The Company generated proceeds of $368,500 and $655,500 from the issuance of convertible notes payable during 2013 and 2012, respectively. The Company generated proceeds of $6,000 from the issuance of loans payable during 2013.
The Company made principal repayments of $30,000 and $77,500 of the convertible notes payable during 2013 and 2012, respectively.
The Company issued 942,763 and 37,978 shares of its common stock to satisfy its obligations under an aggregate principal of $186,468 and $101,000 during 2013 and 2012, respectively.
The Company satisfied its obligations under convertible notes payable and accrued interest aggregating $45,861 by issuing a loan of $55,000. After principal repayments of $30,000 made during 2013, the note was assigned to a third-party as a convertible notes for $28,960.
The Company satisfied its obligations under convertible notes payable and accrued interest aggregating $61,986 by issuing a convertible notes payable of the same amount to a third-party during 2013.
The Company issued 18,219 and 50,570 shares of its common stock pursuant to the issuance of convertible notes payable during 2013 and 2012. The fair value of the shares amounted to $3,965 and $274,052 during 2013 and 2012, respectively.
The Company issued 12,366 shares of its common stock to satisfy its obligations under two loans payable aggregating $11,000 during 2013.
The Company issued 13,615 and 1,650 shares of its common stock as interest on debt during 2013 and 2012, respectively. The fair value of the shares amounted to $10,415 and $13,912 during 2013 and 2012, respectively.
The Company recorded debt modification of $45,339 during 2013 as a result of the modifications to certain convertible notes payable satisfied and exchanged for to the convertible notes payable. Additionally, the Company recognized beneficial conversion features amounting to $97,920 and $163,828 from the issuance of its shares of common stock pursuant to the issuance of certain convertible notes payable during 2013 and 2012, respectively.
The Company recognized beneficial conversion feature of $97,920 and $163,828 in connection with the issue of certain convertible notes payable during 2013 and 2012, respectively, which was recognized as debt discount.
The Company recognized amortization of debt discount of $296,470 and $417,779, in connection withdebt discount pursuant to beneficial conversion features and embedded conversion featues during 2013 and 2012, respectively.
Other terms- Revenue Linked Convertible Notes Payable:
During 2012, the Company entered in to several short term convertible notes totaling $401,000. These noninterest bearing notes are in default and convertible at a rate of $56 at maturity. The Company anticipates it will generate revenue relating to third party managed carrier branded corporate websites, as well as through the sales of its products, and through the proposed test and launch of a national direct response marketing and distribution campaign for its products. The noteholders, upon repayment in full, will be entitled to 10%, on a pro-rated basis, of the aforementioned gross revenue, as adjusted, over a 12 month period following the repayment.
NOTE 6 - DERIVATIVE LIABILITIES
The Company accounts for the embedded conversion features included in its convertible instruments. The Company has identified the embedded derivatives related to these convertible loans during the conversion kick in period. During 2013, the Company recognized $379,952 as the fair value at the date of issuance of the convertible instruments as derivative liability. During 2013, the fair value of such derivative liability between measurement dates decreased by $34,095 and amounted to $345,857 at December 31, 2013.
The fair values of the embedded derivatives at issuance and each measurement dates were determined using the binomial lattice method based on the following assumptions (1) dividend yield of 0%, (2) expected volatility of 183- 351% (3) weighted average risk free rate of 0.03% to 0.15%, expected life of 0.00 to 2.00 years and (5) estimated fair value of the Company
s common stock of $0.08 to $0.32 per share.
F-11
NOTE 7 - INCOME TAXES
The tax effect of the temporary differences that give rise to deferred tax assets are presented below:
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2013
|
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|
2012
|
|
Deferred Tax Assets:
|
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|
|
|
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|
|
Net Operating Losses
|
|
$
|
10,440,000
|
|
|
$
|
10,018,000
|
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Option Expense
|
|
|
2,469,000
|
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|
2,469,000
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Other
|
|
|
(153,000
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)
|
|
|
(153,000
|
)
|
Valuation Allowances
|
|
|
(12,756,000
|
)
|
|
|
(12,334,000
|
)
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|
Net Deferred Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2013 and 2012, a 100% valuation allowance was recorded to reduce the Company
s net deferred tax asset to $0. The Company could not determine that it was more likely than not that the deferred tax asset resulting from net operating loss carryforwards would be realized.
The Company has generated net operating loss carryforwards aggregating approximately $26.5 milliom at December 31, 2013 for federal and state income tax purposes. These carryforwards are available to offset future taxable income and expire at various dates through 2033.
A reconciliation of the difference between the expected tax rate using the statutory federal tax rate (34%) and the Company
s effective tax rate is as follows:
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| |
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2013
|
|
|
2012
|
|
U.S federal income tax at statutory rate
|
|
$
|
(467,000
|
)
|
|
$
|
(738,000
|
)
|
State income tax, net of federal income tax benefit
|
|
|
(69,000
|
)
|
|
|
(108,000
|
)
|
Other
|
|
|
4,000
|
|
|
|
5,000
|
|
Beneficial conversion feature
|
|
|
115,000
|
|
|
|
163,000
|
|
Equity based compensation
|
|
|
77,000
|
|
|
|
95,000
|
|
Valuation tax asset allowance
|
|
|
340,000
|
|
|
|
583,000
|
|
Effective tax rate
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 8 - RELATED PARY TRANSACTIONS
The Company had obligations under certain convertible notes payable certain related parties at December 31, 2013 and 2012.
The Company had senior secured convertible notes payable to one of its directors, amounting to $25,000 at December 31, 2013 and 2012. This class of notes bears interest at 10% and is convertible at the lesser of 1) 60% of the weighted-average price for the 5-day immediately prior to the conversion or 2) the lowest conversion price of the 120-day period prior to conversion, but no less than the par value. The accrued interest under such notes amounted to $6,250 and $3,750 at December 31, 2013 and 2012, respectively and the interest expense amounted to $2,500 during 2013 and 2012. The notes are currently due.
The Company had senior secured convertible notes payable to the father of one of the directors, amounting to $92,000 at December 31, 2013 and 2012. This class of notes bears interest at 10% and is convertible at the lesser of 1) 60% of the weighted-average price for the 5-day immediately prior to the conversion or 2) the lowest conversion price of the 120-day period prior to conversion, but no less than the par value. The accrued interest under such notes amounted to $5,000 and $2,500 at December 31, 2013 and 2012, respectively and the interest expense amounted to $2,500 during 2013 and 2012. The notes are currently due.
The Company had a convertible note payable of $5,000 to the son of the Companys chief executive officer at December 31, 2013. The note bears interest at 12% and matures in January 2014. The accrued interest under such notes amounted to $150 at December 31, 2013, and the interest expense amounted to $150 during 2013.
The Company incurred lease expenses of $12,500 with a company affiliated by means of common management during 2013. The monthly rent is $1,500.
The Company incurred $9,000 in compensation expenses during 2013 for the services rendered by one of the directors spouse, which assisted in transitioning certain administrative functions following the termination of employment of the then Companys Chief Executive Officer in April 2013. The services were billable monthly at a rate of $3,000 and were discontinued during the third quarter of 2013.
F-12
NOTE 9 - EQUITY TRANSACTIONS
Common Stock:
Payment of Interest
The Company issued 13,615 and 1,659 shares of its common stock as interest on debt during 2013 and 2012, respectively. The fair value of the shares amounted to $10,415 and $13,912 during 2013 and 2012, respectively.
Services Rendered
The Company issued 27,438 and 8,140 shares of its common stock pursuant to services rendered by third-parties during 2013 and 2012, respectively. The fair value of the shares amounted to $36,200 and $82,781 during 2013 and 2012, respectively.
The Company issued 319,042 and 26,468 shares of its common stock pursuant to the Company
s directors compensation during 2013 and 2012, respectively. The fair value of the shares amounted to $160,000 each during 2013 and 2012.
Debt Conversion of Interest
The Company issued 10,051 and 2,500 shares of its common stock as a result of converting $3,900 and $2,000 of accrued interest on the convertible note holders during 2013 and 2012, respectively.
Debt Conversion
The Company issued 942,763 and 37,978 shares of its common stock to satisfy its obligations under an aggregate principal of $186,468 and $101,000 during 2013 and 2012, respectively.
The Company issued 12,366 shares of its common stock to satsify obligations under a loan payable of $11,000 during 2013.
Common Stock Issued in Connection with Debt Issuance
The Company issued 18,219 and 50,570 shares of its common stock pursuant to the issuance of convertible notes payable during 2013 and 2012. The fair value of the shares amounted to $3,965 and $274,052 during 2013 and 2012, respectively.
Issuance of Common Stock as a Result of Sale of Securities
During 2013, the Company issued 23,436 shares of common stock for proceeds from the sale of the Company
s common stock of $20,848.
Common Stock
In May 2013, the Company increased its authorized share amount from 775,000,000 shares, of which 750,000,000 relate to common shares and 25,000,000 relate to preferred shares, to 975,000,000 shares of which 950,000,000 relate to common shares and 25,000,000 relate to preferred shares. On October 31, 2013, the Company increased its authorized share amount from 950,000,000 to 10,000,000,000 common shares and decreased the par value of its common stock to $0.00001.
Reverse stock-split
During February 28, 2014, the Company
s 1 for 800 reverse stock split of its common stock was declared effective. All information related to the Company
s common stock and price per share of common stock included in the Company
s 2013 and 2012 information has been restated to reflect the reverse stock split
Warrants:
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Weighted
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Average
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Common
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Exercise
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Shares
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Price
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Outstanding at December 31, 2011
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130,959
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$
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24
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Issued
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-
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-
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Exercised
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-
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-
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Expired
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(89,288)
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(168)
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Outstanding at December 31, 2012
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41,671
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$
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20.8
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Issued
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-
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-
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Exercised
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-
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-
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Expired
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(759)
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(197.6)
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Outstanding at December 31, 2013
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40,912
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$
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32
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NOTE 10 - PREFERRED STOCK
Series A Convertible Preferred Stock
At December 31, 2013 and 2012, the Company had 28,968 shares of Series A Convertible Preferred Stock issued. The holders of outstanding shares of Series A Preferred Stock are entitled to receive, in any fiscal year, when, if and as declared by the Board of Directors, out of any assets at the time legally available, dividends on a pro rata basis in cash at the rate of 7% per annum on the stated value of $2.62 per share. Each holder of shares of Series A Preferred Stock shall have the right, at any time and from time to time, to convert some or all such shares into fully paid and non-assessable shares of common stock at the rate of 10 shares of common stock for every one share of Series A Preferred Stock.
Series B Convertible Preferred Stock
On July 29, 2009, the Company and Rock Island Capital, LLC (
Rock Island
) entered into a Series B Convertible Preferred Stock Purchase Agreement, as amended on September 9, 2009 (the
Agreement
). Pursuant to the Agreement, the Company has sold to assignees of Rock Island an initial tranche of $2,000,000 of its Series B Convertible Preferred Stock (220,022 shares), in the aggregate, at a purchase price per share of $9.09, and has issued to such assignees Warrants to purchase 22,002,200 shares of the Company
s Common Stock, in the aggregate, at an exercise price of $0.15 per share. Each share of Series B Convertible Preferred Stock is convertible into 100 shares of the Company
s Common Stock at the sole discretion of the holder. Pursuant to the Agreement, Rock Island may designate one member for service on the Company
s board of directors. The holders of Series Preferred B Convertible B Stock are entitled to such number of votes equal to 51% of the outstanding common stock on an-converted basis only with respect to a proposal to increase the authorized number of shares of capital stock. Under the terms of the Agreement, Rock Island and its assignees could, at their discretion, purchase additional shares of Series B Convertible Preferred Stock and Warrants in two additional tranches of $2,000,000 and $1,000,000 payable on or before December 2, 2009, and January 8, 2010, respectively.
On March 4, 2010, ProText Mobility, Inc. (the
Company
) entered into Amendment No. 2 (
Amendment No. 2
) to the Series B Convertible Preferred Stock Purchase Agreement, dated July 29, 2009, as amended by Amendment No. 1 to the Series B Convertible Preferred Stock Purchase Agreement, with Rock Island Capital, LLC (the
Purchaser
), dated September 4, 2009 (as amended, the
Purchase Agreement
). Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchaser, in tranches (with the last tranche to occur within approximately 60 days from execution of Amendment No. 2), an aggregate of 551,551 shares of Series B Preferred Stock (of which 220,022 shares were sold prior to execution of Amendment No.2) for an aggregate purchase price of $5,000,000 (of which $2,000,000 was sold prior to execution of Amendment No. 2).
In addition, the Company agreed to issue to the Purchaser five-year warrants to purchase 50,000,000 shares at an exercise price of $0.03, exercisable on a cashless basis, and 50,000,000 shares at an exercise price of $0.06, not exercisable on a cashless basis, in tranches pro rata with the sale of the Series B Preferred Stock. The exercise price of the warrants not exercisable on a cashless basis shall be reduced to $0.03 if the closing price of the Company
s common stock has a volume weighted average price of less than $0.06 for a thirty day period during the term of such warrants. The Company also agreed to issue to the Purchaser 45,000,000 shares of common stock (the
Additional Shares
), in tranches pro rata with the sale of the Series B Preferred Stock. As amended by Amendment No. 3, the Purchaser may terminate the Purchase Agreement upon 10 days
written notice, in which event the Purchaser shall not be obligated to make any additional purchases under the Purchase Agreement.
In connection with the Purchase Agreement, the Company filed an Amended and Restated Certificate of Designation of Series B Preferred Stock (the
Certificate of Designation
) filed with the State of Delaware on September 5, 2010.
F-13
In accordance with the accounting guidance for modifications, for Amendment No. 2, the Company recorded approximately $2,783,000 as a deemed preferred dividend relating to warrant modification with a corresponding credit to additional paid in capital. The Company recorded $4,625,815 as a deemed preferred dividend relating to issuance of common stock and warrants with a corresponding credit to additional paid in capital.
On July 29, 2010 the Company entered into Amendment No. 4 to the Stock Purchase Agreement of its Series B Convertible Preferred Stock with Rock Island Capital LLC whereby it amended the termination clause to remove the penalties and the termination payment fee.
On October 19, 2010 the Company entered into Amendment No. 5 to the Stock Purchase Agreement of its Series B Convertible Preferred Stock with Rock Island Capital LLC (
Purchaser
) whereby the Purchaser agreed to purchase from the Company, and the Company agreed to sell to the Purchaser, up to 192,500 units, with each unit consisting of (i) one share of Series B Preferred Stock, (ii) 81.818181 shares of the Company
s common stock and (iii) five-year warrants to purchase 181.818181 shares of the Company
s common stock at an exercise price of $0.01 (which may be exercised on a cashless basis), for a purchase price of $9.0909 per unit. The units will be sold in installments of at least $100,000 each on before the 30 th day following the prior payment, with the first installment due on or before the thirtieth day following the final payment of the aggregate purchase price under the Agreement. In the event that the Purchaser shall fail to timely pay any installment and does not notify the Company in writing at least five days prior to such installment due date (upon which notice the Purchaser shall be granted a 7-day extension), the Company may, from and after the expiration of any and all applicable cure periods, terminate the Agreement, and the Company shall have no right to pursue any other remedy against Purchaser.
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¨
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The warrants issued or issuable under the Agreement shall be exercisable on a cashless basis.
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On October 20, 2010, the Company filed an Amended and Restated Certificate of Designation of Series B Preferred Stock, pursuant to which:
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Pursuant to the commitment of the additional financing of $1,750,000, the number of shares of authorized Series B Preferred Stock was increased from 550,055 to 1,000,000;
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▪
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Pursuant to the commitment of the additional financing of $1,750,000, the
Special Dividend Amount
payable to the holders of Series B Preferred Stock was increased from $2,500,000 to $3,375,000;and
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▪
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The holders of Series B Preferred Stock shall be entitled to cumulative dividends at a rate of 10% per annum, compounded annually and payable in cash upon conversion of the Series B Preferred Stock into shares of common stock or upon such other date as determined by the Board of Directors of the Company.
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In accordance with the accounting guidance for modifications, for Amendment No. 5, the Company recorded approximately $760,000 as a deemed preferred dividend relating to warrant modification with a corresponding credit to additional paid in capital.
On October 17, 2013 the Company entered into Amendment No. 6 to the Stock Purchase Agreement of its Series B Convertible Preferred Stock with Rock Island Capital LLC (
Purchaser
) whereby (i) the Purchase Price is reduced to $4,825,000, for which The Buyer will receive the 550,055 shares of Series B Preferred Stock. The Company acknowledges that it has received payment of $4,825,000 for the 550,055 Series B shares and that the Buyer has completed all of its obligations under the contract. As consideration, Rock Island is giving up the protective provisions in Section 7 Protective Provisions of the Certificate of Designation, The Buyer will have the following protective provision ; The Company shall allow the Buyer to designate for election to the Company
s Board of Directors such number of directors as will constitute a majority of the members of the Company
s Board of Directors, and to increase or decrease the authorized size of the Board or any committee thereof or create any new committee of the Board. The Buyer shall also have the right to remove such designees and to fill any vacancy caused by the resignation, death or removal of such designees (ii) At any time following the date of this Amendment, if it is determined that the Company
s authorized capital stock is insufficient to satisfy the obligations under the Agreement (as amended), including the purchase of the Units, as soon as practicable following the date of such determination, the Company shall use its best efforts to file an amendment to its articles of incorporation to increase the total authorized shares of common stock of the Company such that the Company is able to satisfy all obligations under the Agreement (as amended) and (iii) . As soon as practicable following the date of this Amendment, the Company will amend its Certificate of Designations of Series B Preferred Stock (the
Certificate
) and file such amendment with the Secretary of State of the State of Delaware, to conform the Certificate with the provisions of this Amendment in such form that is satisfactory to the Buyer.
In accordance with the agreement as amended, the Company has accrued dividends payable amounting to approximately $1,505,215 and $1,033,757 at December 31, 2013 and 2012, respectively which is included in the accompanying consolidated balance sheet.
Series C Preferred Stock
During 2013, the Company designated Series C Preferred Stock. The number of authorized shares of Series C preferred Stock amounts to 3,900,000 with a par value of $0.001. The holders of the Series C Preferred Stock have voting rights amounting to 100 votes per share, the Series C Preferred Stock may be redeemed at the option of the Company or the holder for an amount equal to the consideration initially received by the Company. During 2013, the Company issued 3,650,000 shares of Series C Preferred Stock to one of its Director in consideration for the satisfaction of $100,000 of compensation payable to the director.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In July 2012, a former employee filed suit against the Company alleging various employment related claims. In October 2013, the Company settled this matter for approximately $77,000.
NOTE 12 - SUBSEQUENT EVENTS
Since January 1, 2014, the Company issued approximately 7.1 million shares pursuant to the conversion of certain convertible notes payable.
Since January 1, 2014, the Company has generated proceeds of approximately $250,000 from the issuance of convertible notes payable.
F-14
EXHIBIT 31.1