TXTM ProText Mobility Inc (PK)

PROTEXT MOBILITY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 and 2013

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 & Compliant Wireless.   

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 consolidated balance sheet presented as of December 31, 2013 has been derived from our audited consolidated financial statements. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The unaudited consolidated financial statements and notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December 31, 2013 included in our Annual Report on Form 10-K/A filed with the SEC on August 19, 2014.  In the opinion of management, all adjustments, consisting of normal, recurring adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results of operations for the nine-month period ended September 30, 2014 are not necessarily indicative of the results for the year ending December 31, 2014.

The accompanying unaudited 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 $1.1million for the nine months ended September 30, 2014 and 2013, respectively.  In addition, the Company had a working capital deficiency of approximately $4.7 million and an accumulated deficit of approximately $53.1 million at September 30, 2014.

As noted in the Company’s auditor report for the year ended December 31, 2013, these circumstances raise substantial doubt about the Company's ability to continue as a going concern.  The unaudited 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 fails to raise additional financing, it might have to file for reorganization under bankruptcy laws to satisfy its outstanding liabilities.  

The accompanying unaudited 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.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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.

 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.

The Company has launched DriveAlert, one of the Company’s products, with certain dealerships during the second quarter of 2014.  Revenue from DriveAlert, consists of fees charged for the use of car device with downloadable software.  The terms with the end-users range between one to seven years and are payable upfront to the dealerships, which then remits the proceeds, net of their commissions to the Company.

The Company’s sold hardware contains software components that are essential to the overall functionality of the products. The Company recognizes revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance.

 For multiple element arrangements that include software and non-software related elements, the Company allocates revenue to each software and non-software element as a group based upon the relative selling price of each in accordance with the selling price hierarchy, which includes VSOE if available, third-party evidence (“TPE”), if VSOE is not available, and estimated selling price, if VSOE or TPE are not available.  Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element.

 In unique circumstances, we are unable to establish VSOE for all deliverables in a multiple-element arrangement.  This is due to an infrequent requested item from a customer.  When VSOE cannot be established, we attempt to establish a selling price based on TPE, which is primarily based on competitor prices for similar deliverables.  TPE and ESP are rarely used and mostly on insignificant items.

Revenue from online Internet sales is recognized upon the settlement of credit card charges, typically within three days of the sale.  

 Use of Estimates:

 The preparation of unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Actual results will differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable, useful life of fixed assets and intangible assets, and assumptions used in the valuation of derivative liability using the binomial method, such as expected volatility, risk-free interest rate, and expected dividend rate.

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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 September 30, 2014 and 2013 have been excluded from the per share computations as their effect would be anti-dilutive:

 Stock Based Compensation:

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is the vesting period.

The Company has elected to use the BSM option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Research and Development Costs:

Costs incurred in the research and development of software products and significant upgrades and enhancements thereto during the preliminary project stage and the post-implementation operation stage are expensed as incurred. Costs incurred for maintenance and relatively minor upgrades and enhancements are expensed as incurred. Costs associated with the application development stage of new software products and significant upgrades and enhancements thereto are capitalized when 1) management implicitly or explicitly authorizes and commits to funding a software project and 2) it is probable that the project will be completed and the software will be used to perform the function intended.

Research and development costs were expensed as incurred. The Company’s research and development costs amounted to $39,050, during the nine months ended September 30, 2014.

Inventory

Inventory at September 30, 2014 consists of 662 units of DriveAlert held at the Company’s premises.  The inventory is stated at the lower of cost or market.  Cost is determined using the first-in, first-out method

Derivative Liabilities:

The Company assessed the classification of its derivative financial instruments as of September 30, 2014, 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 the nine months ended September 30, 2014 and 2013, the Company had notes payable outstanding in which the conversion rate was variable and the embedded conversion feature was not clearly and closely related to the economic characteristics and risks of the host contract.  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., Binomial), the expected volatility, the implied risk free interest rate, as well as the expected dividend rate.

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.

Fair Value of Financial Instruments:

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 September 30, 2014 and December 31, 2013:

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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 Company’s 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 Company’s Level 3 financial liabilities as of and for the periods ended September 30, 2014 and December 31, 2013, respectively.

Level 3 Liabilities are comprised of our bifurcated convertible debt features on Companies our convertible notes.

The Company’s financial instruments are cash and cash equivalents, accounts payable, accrued expenses, notes payable. 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, based on the Company’s incremental borrowing rate.

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.

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 consolidated financial position, results of operations, or cash flows for the nine months ended September 30, 2014 and 2013.

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.

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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 nine months ended September 30, 2014 and 2013 include share-based compensation expense for employees and board of directors totaled approximately $120,000 and $120,000, 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 stock issued for services was $20,667 and $36,200 for the nine-month periods ended September 30, 2014 and 2013, respectively.  The amounts of stock compensation expense included in research development amounted to $3,200 during the nine-month ended September 30, 2014.  The amounts of stock compensation expense included in selling, general, and administrative expenses amounted to $17,467 and $0 during the nine-month ended September 30, 2014 and 2013, respectively.

There were no options granted to non-employees during the nine months ended September 30, 2014 and 2013.

As of September 30, 2014, $0 of compensation cost related to non-vested stock options was unrecognized.

NOTE 4 - CONVERTIBLE NOTES AND LOANS PAYABLE

The Company generated proceeds of $663,500 and $275,500 from the issuance of convertible notes payable during the nine-month period ended September 30, 2014 and 2013, respectively.

The Company generated proceeds of $49,980 and $6,000 from the issuance of loans payable during the nine-month period ended September 30, 2014 and 2013, respectively.

The Company made principal repayments of $112,080 and $30,000 of the convertible notes payable and loans payable during the nine-month period ended September 30, 2014.

The Company issued 602,189,407 and 392,312 shares of its common stock to satisfy its obligations under an aggregate principal of $402,342 and $155,110 of convertible promissory notes and loans payable during the nine-month period ended September 30, 2014 and 2013, respectively.   Additionally, upon conversion of such promissory notes during the nine month period ended September 30, 2014, the Company reclassified embedded conversion features associated with the promissory notes amounting to $359,090 from liability contracts to equity, which is recorded in the Company’s additional paid-in capital.

The Company satisfied its obligations accrued interest aggregating $3,900 by issuing 10,050 shares of its common stock during the nine-month period ended September 30, 2013.

The Company issued 125,000 shares of its common stock in connection with the issuance of two notes payable during the nine-month period ended September 30, 2014. 

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During the nine-month period ended September 30, 2014, certain holders of convertible notes aggregating $376,412 in principal assigned their rights to certain investors. Contemporaneously to the assignment, the Company restructured certain terms of the convertible notes, primarily as they related to the conversion terms.  The revised conversion terms provide for conversion rates ranging from 50% to 65% of  a price ranging from the volume weighted-average price for the ten days prior to conversion ( highest conversion ratio) to the lowest trading price s of the 45 days prior to conversion ( lowest conversion ratio).  This change in terms resulted in embedded conversion features amounting to approximately $961,736 recognized at the date of restructure and were recognized as derivative liabilities during the nine-month period ended September 30, 2014.

During the nine-month period ended September 30, 2013, the Company and a holder of three convertible notes payable and accrued interest aggregating $45,861 restructured such notes to a non-convertible loan amounting to $55,000.  The Company recorded an additional $9,139 as interest expense pursuant to this restructure.

The Company recognized amortization of debt discount amounting to $704,762 and $168,122 for the nine-month period ended September 30, 2014 and 2013, respectively, which are included in the Company’s interest expense of approximately $820,942 and $198,508 respectively.

The aggregate amount of outstanding principal under convertible notes payable which have matured at September 30, 2014 amounts to $981,341.

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 is unable to assert that 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 5 - DERIVATIVE LIABILITIES

The table in Note 2 provides a summary of changes in fair value of the Company’s derivative liabilities as of and for the periods ended September 30, 2014 and December 31, 2013, respectively.

The fair values of the embedded conversion features were determined using Binomial Lattice  based on the following assumptions (1) dividend yield of 0%, (2) expected volatility of 200 to 323% (3) weighted average risk free rate of 0.11% to 0.14%, expected life of 0.04 to 0.5 years and (5) estimated fair value of the Company’s common stock of $0.003 to $0.08 and $1 to $1.20 during the nine-month period ended September 30, 2014 and 2013, respectively.

NOTE 6 -    EQUITY TRANSACTIONS

Common Stock:

In May 2013, the Company increases its authorized share amount from 775,000,000 shares, of which 750,000,000 relate to common shares and 25,000,000 relates 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.

Reverse Stock-Split

During February, 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 information has been restated to reflect the reverse split.

Services Rendered

The Company issued 3,362,500 and 27,438 shares of its common stock (valued at $20,667 and $36,200, respectively) for services rendered by consultants during the nine-month period ended September 30, 2014 and 2013, respectively.

The Company issued 36,689,397 and 113,831,051 shares of its common stock (valued at $120,000 for both periods) as payment for services to the Board of Directors during the nine-month period ended September 30, 2014 and 2013, respectively.

Debt Conversion and related interest

The Company issued 602,189,407 and 392,312 shares of its common stock to satisfy its obligations under an aggregate principal of $402,342 and $155,110 of convertible promissory notes and loans payable during the nine-month period ended September 30, 2014 and 2013, respectively.   Additionally, upon conversion of such promissory notes during the nine month period ended September 30, 2014, the Company reclassified embedded conversion features associated with the promissory notes amounting to $359,090 from liability contracts to equity, which is recorded in the Company’s additional paid-in capital.

The Company satisfied its obligations accrued interest aggregating $3,900 by issuing 10,050 shares of its common stock during the nine-month period ended September 30, 2013.

The Company issued 125,000 shares of its common stock in connection with the issuance of two notes payable during the nine-month period ended September 30, 2014. 

Issuance of Common Stock as a Result of Sale of Securities

The Company issued 23,435 shares of common stock for proceeds from the sale of the Company’s common stock of $20,848 during the nine month period ending September 30, 2013.

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NOTE 7 - RELATED PARY TRANSACTIONS

The Company had outstanding obligations under certain convertible notes payable certain related parties at September 30, 2014 and 2013.

The Company had senior secured convertible notes payable to one of its directors, amounting to $25,000 at September 30, 2014 and December 31, 2013.  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 $8,229 at September 30, 2014, respectively and the interest expense amounted to $1,875 during the nine-month period ended September 30, 2014 and 2013, respectively. 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 September 30, 2014 and December 31, 2013.  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 $28,825 at September 30, 2014 and the interest expense amounted to $6,900 during the nine-month period ended September 30, 2014 and 2013, respectively.  The notes are currently due.

The Company had a convertible note payable of $5,000 to the son of the Company’s chief executive officer at September 30, 2014 and December 31, 2013.  The note bears interest at 12% and matured in January 2014.  The accrued interest under such notes amounted to $653 at September 30, 2014 and the interest expense amounted to $450 during the nine-month period ended September 30, 2014. 

NOTE 8 - SUBSEQUENT EVENTS

Since October 1, 2014, the Company issued 728,618,704 shares of its common stock pursuant to the conversion of convertible notes payable. 

 Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion of our results of operations and current financial position.  This discussion should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report, as well as our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K/A for the year ended December 31, 2013.

As used in this quarterly report on Form 10-Q, references to the “Company,” “we,” “us,” “our” or similar terms include ProText Mobility, Inc. and its consolidated subsidiaries.

Forward Looking Statements

Except for the historical information contained herein, the matters discussed below or elsewhere in this quarterly report may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements.  Forward-looking statements reflect the Company's views and assumptions based on information currently available to management. Such views and assumptions are based on, among other things, the Company's operating and financial performance over recent years and its expectations about its business for the current and future fiscal years.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.  Such statements are subject to certain risks, uncertainties and assumptions, including, but not limited to, (a) the Company's ability to secure necessary capital in order to continue to operate (b) the Company's ability to complete and sell its products and services, (c) the Company's ability to achieve levels of sales sufficient to cover operating expenses, (d) prevailing economic conditions which may significantly deteriorate, thereby reducing the demand for the Company's products and services, (e) regulatory or legal changes affecting the Company's business and (f) the effectiveness of the Company's relationships in the parental control and monitoring software and services.

General

Protext Mobility develops innovative products and solutions for the mobile communications market. As disclosed in public filings, the Company has evolved from a software developer for personal computers (“PC”) to products designed for the mobile industry.

We have built a proprietary & feature rich, mobile messaging platform.  The robust and flexible feature set can be customized and applied to various vertical markets.  The solutions are scalable and can be tailored to meet the specific demands or needs of a large, end user base. Our products are designed for mobile devices running on the Android & Blackberry OS providing parents and corporations, solutions to help manage their children's / employee’s mobile communications activities.

The mobile solutions we‘ve developed on our platform utilize our patent pending SmartMessageAnalysis to provide parents peace of mind as it relates to the 3 most serious dangers a child may encounter as they use mobile devices...Bullying, Sexting and Distracted Driving.  We have bundled certain features, and released them under SafeText and DriveAlert. The mobile solutions for the enterprise/corporate compliance are marketed under Compliant Wireless, with consumer solutions marketed under FamilyMobileSafety.

Comprehensive Feature Set Include:

Text Message & Picture Message Dashboard- Text/Pic Messaging Summary: At-a-glance view to text alerts by calendar; Text & email alerts to parent for quick attention. Text/Pic Messaging Detail View: Access to all message details; Flagging & highlighting of violation words & phrases with description; Category & descriptions for each violation.

Web Browser Dashboard- Easily monitor browsing activities via the SafeText online dashboard; At-a-glance view to web browsing activity by calendar; displayed by date/time the website addresses which have been visited.

GPS Location Dashboard- Easily review GPS Location history from the device via the Dashboard; Locate lost device via the “Locate Now” button; automatically collects positions at the time of phone use; One-click viewing of historical positions and speed.

Voice Call Dashboard- Easily review Voice Calls from the device via the Dashboard: View voice call logs including incoming and outgoing calls; Logs include indication of call direction and duration.

Application Install Dashboard-  Easily review Installed and uninstalled Apps log from the device via the Dashboard; Display includes application name, details and status; Includes GPS Location & speed indicator.

Consumer Market:

SafeText: 

A premium service for mobile devices that provides parents a solution to help manage their children’s mobile communication activities. SafeText is an easy to use and effective mobile solution, providing notification when potentially "dangerous" situations are happening through a text messaging interaction. The comprehensive offering enables and empowers parents with an easy to use, robust set of tools and features designed to help protect and manage their children’s text messaging activities. SafeText maintains a proprietary database including an extensive library of words, phrases, and slang that allow for a complete auto-analysis of text conversations. Furthermore, SafeText provides detailed information on voice calls, mobile web browsing, and geo-location. Core features of SafeText are proprietary, patent-pending technology, which we consider being competitively advantageous. The SafeText solution is designed to operate on multiple mobile platforms. The current configuration is fully compatible with the Android and Blackberry operating systems.  The SafeText solution incorporates the use of GPS technology, which enables “find my phone & locate now-on demand” & distracted driving notification with mapping displayed & speed recorded.

DriveAlert:

A virtual “lock-box”, designed to curb mobile device use while driving and to help mitigate the risks of driving while distracted.  A downloadable application, the smartphone solution launches automatically when the vehicle is in motion, sends customized auto-replies to incoming texts and emails, automatically sends in-coming calls to voicemail, and in an emergency, the driver can override DriveAlert to make out-going calls. DriveAlert not only blocks texting, but also all other applications the driver may be distracted by, while the phone is in motion. The current configuration is fully compatible with the Android and Blackberry operating systems.

Enterprise Market:

Compliant Wireless

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.  The current configuration is fully compatible with the Android and Blackberry operating systems.  Distracted Driving prevention is uniquely incorporated within a turnkey mobile management and productivity tool where essentially all employee mobile activity are viewable & archived, with violations to company policies being flagged and reported. 

Compliant Wireless offers company administrators secure access to a customized web-based and mobile dashboard to review corporate communications and activities taking place on their employee’s mobile devices via the SafeText and DriveAlert modules.  With Compliant Wireless, administrators are offered an effective and robust solution to deter, prevent and monitor for inappropriate mobile activities such as sexting, distracted driving, and bullying while importantly maintaining the integrity of data and content being sent via employer supplied devices.

The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2013 contains an explanatory paragraph regarding our ability to continue as a going concern.

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The accompanying unaudited 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 unaudited consolidated financial statements, the Company incurred net losses of approximately $1.4 million and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.  In addition, the Company had a working capital deficiency of approximately $4.7 million and an accumulated deficit of approximately $53.1 million at September 30, 2014.

These circumstances raise substantial doubt about the Company's ability to continue as a going concern.  The unaudited 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 fails to raise additional financing, it might have to file for reorganization under bankruptcy laws to satisfy its outstanding liabilities.

Results of Operations

Comparison of the Results for the Three- and Nine- Months Ended September 30, 2014 and 2013

The increase in research and development expenses during the three- and nine- month period ended September 30, 2014, when compared to the prior year periods, are primarily due to costs associated with the development of DriveAlert , which was launched in the second quarter of 2014, heavier emphasis on developing relationships to market our product.

The increase in Sales, general and administrative expenses during the three- and nine- month periods ended September 30, 2014, when compared to the prior year periods, are primarily due to increased costs associated with heavier emphasis on developing relationships to market our products.

The increase in interest expense during the three- and nine-month period ended September 30, 2014, when compared to the prior periods, is primarily due to increased amortization of our debt discount, which increased from approximately $123,866 and $348,860 during the three- and nine-month period ended September 30, 2013 to approximately $303,146 and $830,942 during the three- and nine-month period ended September 30, 2014.  The increase in amortization of debt discount is primarily due greater amounts of embedded conversion and beneficial conversion features given to noteholders in debt financing during the last quarter of fiscal 2013 and the first half of fiscal 2014, which resulted in greater amount of debt discount.

The change in fair value of derivative liability is primarily due to the differences in fair value of derivative liabilities between measurement dates.  The change in fair value is primarily due to a decrease in our stock prices, one of the main driver assumptions in our valuation of derivative liabilities, between measurement dates.

Liquidity and Capital Resources

The Company's liquidity and capital needs relate primarily to working capital and other general corporate requirements.  To date, the Company has funded its operations with stockholder loans, by issuing notes and by the sale of common and preferred stock.  Since inception, the Company has not generated any significant cash flows from operations.  At September 30, 2014, the Company had cash and cash equivalents of approximately $732 and a working capital deficiency of approximately $4.7 million.  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 fails to raise additional financing, it might have to file for reorganization under bankruptcy laws to satisfy its outstanding liabilities.

Net cash used in operating activities for the nine month period ended September 30, 2014 consists of our net loss of approximately $1,420,794 adjusted for certain non-cash expenses which are as follows:

Aforementioned debt discount of approximately $705,000;

Fair value of shares of common stock for services issued to consultants and directors of $141,000;

Changes in the fair value of derivative liabilities of approximately $150,000.

Additionally, our accounts payable and accrued expenses (including related parties) increased by approximately $124,000 between September 30, 2014 and December 31, 2013, which is primarily due to an increase in accrued interest.

Our cash flows provided by financing activities during the nine-month period ended September 30, 2014 amounted to approximately $601,000, which consists of proceeds from the issuance of convertible promissory notes and loans payable of approximately $713,000 offset by principal repayments on such convertible promissory notes and loans payable of approximately $112,000.

Net cash used in operating activities for the nine month period ended September 30, 2013 consists of our net loss of approximately $1,125,000 adjusted for certain non-cash expenses which are as follows:

Aforementioned debt discount of approximately $170,000;

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Fair value of shares of common stock for services issued to consultants and directors of $156,000.

Additionally, our accounts payable and accrued expenses (including related parties) increased by approximately $323,599 between September 30, 2013 and January 01, 2013, which is primarily due to an general increase in accounts payable resulting from our inability to generate enough funds to pay such liabilities during that period.

Our cash flows provided by financing activities during the nine-month period ended September 30, 2013 amounted to approximately $272,000, which consists of proceeds from the issuance of convertible promissory notes and loans payable of approximately $302,000 offset by principal repayments on such convertible promissory notes and loans payable of approximately $30,000.

Critical Accounting Policies:

There have been no changes to our accounting principles set forth in our Annual Report on Form 10-K/A for the year ended December 31, 2013 filed with SEC. Refer to such report for a listing of all such accounting principles.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not Applicable

Item 4T.  Controls and Procedures.

The Company's management, including the Chief Executive Officer and Chief Financial Officer, do not expect that the Company's disclosure controls or the Company's internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be detected. We will conduct periodic evaluations of our internal controls to enhance, where necessary, our procedures and controls.

PART II

Item 1.  Legal Proceedings.

None.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

The Company issued 1,500,000 shares of its common stock (valued at $1,850) for services rendered by four consultants during the three-month period ended September 30, 2014.

The Company issued 30,075,188 shares of its common stock ( valued at $40,000 ), in aggregate, to its two Board members,  as payment for services to the Board of Directors during the three-month period ended September 30, 2014.

The Company issued 559,667,961 shares of its common stock to satisfy its obligations under an aggregate principal of $190,296 of convertible promissory notes during the three-month period ended September 30, 2014.  The shares issued upon conversion of the notes payable were issued in reliance upon Section 3 (a) (9) of the Securities Act of 1933.

Unless otherwise stated, the above securities were issued pursuant to the exemption from registration under Section 4(a) (2) of the Securities Act for transactions not involving a public offering.

During the three-month period ended September 30, 2014, one of the Company’s note holders assigned a portion of its interest in a note to certain investors.  Pursuant to the assignments, the Company agreed to restructure the terms of the notes as follows:

Item 3.  Defaults upon Senior Securities.

The Company is currently in default on the 10% convertible notes totaling $114,034 of principal as of September 30, 2014.

Item 4.  Mine Safety Disclosures.

N/A

Item 5.  Other Information.

None.

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* Furnished herewith. XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

+ In accordance with SEC Release 33-8238, Exhibits 32.1 is furnished and not filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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