**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
**x**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the fiscal year ended December 31, 2012

 

OR

 

 ̈

**TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the transition period from __________ to __________

 

Commission File No: 001-31590

 

**PROTEXT MOBILITY, INC.**

**(Exact name of registrant as specified in its charter)**

 

**Delaware**

 

**11-3621755**

**(State or other jurisdiction of Incorporate or organization)**

 

**(I.R.S. Employer Identification No.)**

 

 

**60 Queens Street, Syosset, NY**

 

**11791**

**(Address of principal executive offices)**

 

**(Zip Code)**

 

**Registrant’s telephone number, including area code:**

**(516) 802-0223**

**(Former name or former address, if changed since last report)**

 
**Securities registered pursuant to section 12(b) of the Exchange Act: None**

 
**Securities registered pursuant to section 12(g) of the Exchange Act:**

 
**Common Stock, $0.0001 par value**

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

              Yes    ̈     No   x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.       Yes    ̈     No   x

 

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

              Yes   x     No    ̈

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      ̈

 

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

 

Large accelerated filer    ̈

 

Accelerated Filer    ̈

 

Non-accelerated Filer    ̈

 

Smaller reporting company

 

 

 

 

(Do not check if smaller reporting

company)

 

x

 

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

 

 

 

 

 

 

As of June 30, 2012, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock, under the symbol "TXTM" as quoted on the National Association of Securities Dealers Inc. OTC Bulletin Board of $0.015 was approximately $36,443,000. For purposes of the statement in the preceding statement, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Number of registrant’s shares of common stock outstanding at April 12, 2013 was 449,628,022.

 

**Documents incorporated by reference**: None.

 

 ** **

**TABLE OF CONTENTS**

 

Part I.

 

Item 1. Business

3

Item 1A. Risk Factors

5

Item 1 B. Unresolved Staff Comments

9

Item 2. Properties

9

Item 3. Legal Proceedings

9

Item 4. Mine Safety Disclosures

10

 

 

Part II.

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

10

Item 6. Selected Financial Data

12

Item 7. Management’s Discussion and Analysis of Financial Condition And Results of Operations

12

Item 8. Financial Statements and Supplementary Data

17

Item 9. Changes in and Disagreements with Accountants on Accounting And Financial Disclosure

18

Item 9A (T). Controls and Procedures

18

Item 9B. Other Information

19

 

 

Part III.

 

Item 10. Directors, Executive Officers and Corporate Governance

19

Item 11. Executive Compensation

23

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

25

Item 13. Certain Relationships and Related Transactions, and Director Independence

26

Item 14. Principal Accounting Fees and Services

26

 

 

Part IV.

 

Item 15. Exhibits, Financial Statement Schedules

27

 

**SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS**

 

This Annual Report contains forward-looking statements. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of, among other factors, risks related to the large amount of our outstanding term loan; history of net losses and accumulated deficits; reliance on third parties to market, sell and distribute our products; future capital requirements; competition and technical advances; ability to protect our patents and proprietary rights; reliance on a small number of customers for a significant percentage of our revenues; and other risks. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Annual Report will in fact occur.

 

 

**PART I**

 

**Item 1. Description of Business**

 

ProText Mobility Inc. (formerly known as EchoMetrix Inc. and SearchHelp, Inc.) was incorporated in the State of Delaware on September 5, 2001 and completed its initial public offering on July 23, 2003. During the fiscal year ended December 31, 2008, the Company acquired 100% of the stock of EchoMetrix, Inc., a wholly owned subsidiary, and in May of 2009 the Company filed a Certificate of Ownership and Merger with the Secretary of State of Delaware pursuant to which EchoMetrix, Inc. was merged into the Company, and the Company's corporate name was changed from SearchHelp, Inc. to EchoMetrix, Inc.  In December of 2010, the Company formed a new subsidiary, ProText Mobility, Inc., and filed a Certificate of Ownership and Merger with the Secretary of State of Delaware pursuant to which ProText Mobility, Inc. was merged into the Company, and the Company’s name changed from EchoMetrix, Inc. to ProText Mobility, Inc.

 

 

**Business Summary**

 

Protext Mobility develops, markets and sells software products and solutions for the internet and mobile communications markets aimed at protecting children from danger on the internet and in mobile communication.  The Company has expanded from developing software solely for personal computers (“PCs”) to developing software for products designed for the mobile industry. We currently have three products, one for PCs and two for the mobile communications devices.  Although we continue to derive a substantial portion of our revenue from our PC-based first technology, namely FamilySafe Parental Controls, we anticipate deriving a substantial portion of our future revenue from products designed for the mobile industry. Our lead mobile product, SafeText, is a service for mobile devices that provides parents a solution to help manage their children’s mobile communication activities.

 

 

**Business Strategy and Products**

 

The mobile phone handset market returned from the economic downturn and grew strongly in 2010. A particularly strong sector of the handset market in 2010, were “smartphones.” According to the TomiAhonen Almanac 2011, an industry summary eBook which includes updated data on the mobile telecom industry, mobile phone sales increased from 1.24 billion in 2009 to 1.38 billion in 2010, an 11% increase. Smartphones alone sold close to 300 million units in 2010. A press release issued in February 2011 by Gartner, Inc., an information technology research and advisory company, stated that worldwide smartphone sales will reach 468 million units in 2011, a 57.7% increase from 2010.  Specific to mobile messaging, the TomiAhonen Almanac 2011 reports that the industry generated $172 billion in 2010, with text messages representing $153 billion and the other messaging types, instant messaging (IM) and email, adding the remaining $19 billion.  Furthermore, mobile telecommunication service revenues grew from $865 billion in 2009 to $928 billion in 2010, a 7% growth rate, and consumer applications specifically grew from $1 billion in 2009 to $3 billion in 2010, a 300% increase. According to Gartner, Inc., worldwide PC unit growth is on pace to total 364 million units in 2011, a 3.8% increase from 2010. PC shipments are forecast to see better growth by the end of 2012, when units are expected to reach 404 million units, a 10.9% increase from 2011. However, according to Gartner, Inc., these numbers have been reduced from previous projections due to sharply downgraded forecasts for Western Europe and the United States and the increased usage of media tablets over more traditional PCs. We must constantly evolve our products in order to keep up with the changes in the economy and the online and mobile markets.

 

**Our Products**

 

In July 2011, Hart Research Associates, a survey research firm, conducted a research project on behalf of the Family Online Safety Institute in order to better understand parents’ knowledge and attitudes toward online safety, and their self-reported use of parental control technologies or other tools for monitoring children’s online activity across various platforms. Out of the 702 parents surveyed, more than half reported using parental control technologies to monitor their child’s online activities, which include the internet and mobile devices. We currently have three products*** ***aimed at protecting children from dangerous situations that arise on the internet and mobile communication devices.  Our SafeText and DriveAlert parental management products are for use with mobile communications devices, and our Family Safe Parental Controls product is for use on the internet.

 

**SafeText**

 

Our lead offering – AmberWatch® SafeText (“SafeText”), is a subscription service for parents, which is marketed direct-to-consumer through our exclusive branding with the AmberWatch Foundation. While our primary channel of distribution is through our mobile carrier partners, our direct-to-consumer service makes our solutions instantly available to parents so they are able to protect their children immediately.

 

The application empowers parents to keep their children safe by providing effective and comprehensive safeguards against text and social-based communications, such as “cyber-bullying” and “sexting.”  SafeText provides parents with a robust toolset which allows them to reliably monitor their children’s mobile phone activities including texts, photos, location, speed, mobile web history, call logs, and apps. It is a premium service that consists of a thin mobile application that is downloaded to the child’s smartphone, and a hosted webpage serving as the parent’s “control center.”  Once installed in the mobile device, the application instantly sends information from the child’s device to the SafeText hosted service for analysis to allow parents to monitor the mobile device and receive alerts of potentially dangerous activity.

 

SafeText has a proprietary database including an extensive library of words, phrases and slang that allows for a complete auto-analysis of text conversations Parents can see full text message history and message content within the guidelines of current privacy laws.

 

SafeText is offered in two configurations:  a network-based and a device-based solution.

 

Core features of SafeText are proprietary and patent-pending technology that we consider to be competitively advantageous.

 

*Network-based*

 

We believe the SafeText network-based parental management solution is the first carrier-grade, safe-texting solution for the mobile marketplace. Protext Mobility has formed an alliance with Acision, a world leader in mobile data, to deploy the SafeText parental management solution through integration with Acision’s Message Plus platform. Message Plus provides a set of enhancements across multiple mobile messaging technologies such as Short Message Service (“SMS”), MultiMedia Messaging Service (“MMS”), email and Session Integration Protocol (“SIP”), allowing mobile operators to offer services to their subscribers that have the same look and feel regardless of the communication channel of choice.

 

*Device-based*

 

The SafeText device-based parental management solution is designed to operate on multiple mobile platforms. The current configuration is fully compatible with the ANDROID operating system; other mobile offerings are currently in development.

 

**Drive Alert**

 

In August 2011 we launched the DriveAlert mobile application (“DriveAlert”) to combat the serious issue of distracted driving. DriveAlert automatically detects when a smartphone user is driving and sets the phone into ‘DriveAlert’ mode. Once the service is activated, it blocks access to text messages, e-mails, phone calls and applications while the car is in motion and sends an auto-reply to incoming text messages, helping drivers keep their attention on the road. DriveAlert not only blocks text message, e-mail and phone call activities, but also all applications a driver may be distracted by, such as Twitter, Facebook, Instant Messaging and web browsing while the phone is in motion. The solution features an override button allowing access to all phone functions in an emergency situation or if the user is a passenger. Parents can choose to be notified by text and/or email when an override occurs.  DriveAlert is targeted for parents seeking to ensure family members are driving safely and responsibly by restricting phone use while they are behind the wheel. DriveAlert is fully compatible with the ANDROID operating system.

 

 

**FamilySafe Parental Controls**

 

Through our FamilySafe Parental Controls product (“FamilySafe”) we offer software products designed to provide a comprehensive and an effective solution in protecting children using PCs from dangers on the Internet. Our products have been specially engineered to monitor, block and alert parents the moment a child encounters inappropriate material from any Internet related source.  FamilySafe allows parents to have complete control over their children’s instant messages by enabling them to control the messages they use and monitor all incoming and outgoing messages from a PC.  It also instantly blocks inappropriate websites on installation and complete browser applications on the PC.  In the event a child violates an online policy setting, parents receive instant alerts on their cell phones or emails.  FamilySafe also allows parents to control the time users can log onto the computer either by number of hours or by access times.  If a child tries to log in or reaches his or her time limit on the computer, he or she will be immediately logged off of the computer.

 

 

 

**Marketing**

 

**SafeText and DriveAlert**

 

Our marketing strategy for the SafeText and Drive Alert products is to provide products primarily directly to consumer. We are also leveraging mobile carrier platforms for solution sponsorship. Our products are offered directly to consumers on the ANDROID marketplace, through our association with the AmberWatch Foundation at www.amberwatchsafetext.com, at the Amazon App Store, GetJar and Blackberry App World.  SafeText is also offered to consumers by distribution through the AT&T App Center.

 

**FamilySafe Parental Control**

 

FamilySafe parental control programs are available online through a number of web sites and landing pages.  These web sites primarily point back to our FamilySafe division’s main site, www.sentryparentalcontrols.com. 

 

**Competition**

 

Our competition for the SafeText and DriveAlert products are other developers of applications available in the marketplaces within a subscriber carrier including  NetNanny, a provider of internet filter software, and SMobile Systems Inc, which provides parental controls for smartphones. The FamilySafe division competes for business with other companies that have child-monitoring software, including the following companies: NetNanny (ContentWatch, Inc.), Cybersitter (Solid Oak Software, Inc. (US)), CyberPatrol (SurfControl), McAfee Parental Controls (Networks Associates Technology, Inc.), Norton Parental Controls (Symantec Corporation), FilterPak (S4F, Inc.), Cyber Sentinel (Security Software Systems, Inc.) and Cyber Snoop (Pearl Software, Inc.).

 

We respond to the challenges of technological change, evolving standards and our competitors' innovations by continuing to enhance our products and services, as well as our work bolster our sales and marketing channels.   We have made regular updates to our platforms and products.  Since February 2011, when SafeText was first launched for Android, we launched the Blackberry-based SafeText application in April 2011 and the mobile parent control center in May 2011. Also in April 2011, we introduced a new payment option via carrier billing that allows customers to subscribe to SafeText by entering their mobile phone number and charging the payment directly to their mobile phone bill.  In June 2011, we launched an upgraded SafeText, whose new features include speed detection, mobile web browsing, voice call log and image archiving.  In August 2011 we launched DriveAlert, a “safe driving” solution in response to increased incidences of distracted driving.

 

**Economic Dependency**

 

Since 2009 we have sold our products primarily on-line.   There was no single customer that accounted for more than 10% of the sales for the fiscal years ended December 31, 2012 or 2011.

 

**Intellectual Property**

 

We have filed patent protection for our SafeText solution and seek to file additional protection measures. To date, we have filed provisional patents for our Smart Message Analyzer and various other proprietary processes and concepts and look to file additional protection measures, such as trademark, trade name and copyright protection.  We also rely on trade secret laws and confidentiality provisions in our agreements to prevent the unauthorized disclosure and use of our intellectual property.

 

**Employees**

 

As of April 15, 2013, the Company has one full time employee.

 

**Property**

 

Our principal executive offices are located at 60 Queens Street, Syosset, New York 11791.  Our lease for such premises commenced April 1, 2012 and is for one year term for a monthly rent of $1,350.00

 

**Legal Proceedings**

On May 10, 2010, the Company was served with an action from Ms. Von Biederman for breach of contract seeking damages in excess of $75,000. The Company was in mediation  proceedings, and has accrued $20,000 of prior consulting fees due to Ms. Von Biederman.

 

Ms. Von Biederman motioned for a summary judgment that the Company breached the employment agreement by terminating her employment without good cause and/or due to a change in control of the Company.  On August 8, 2012 Ms. Von Biederman's motion was denied.  

 

Further, on August 8, 2012, the Court granted Ms. Von Biederman a summary judgment that the Company breached the employment agreement by failing to pay her salary owed between July 29, 2009 and November 15, 2009 and the Company breached the consulting agreement by failing to pay Ms. Von Biederman the $20,000 owed under the consulting agreement.  

 

The Company is currently in the process of a settlement regarding this case.

In July 2012, a former employee filed suit against the Company alleging various employment related claims.  The case is ongoing and the Company has accrued roughly $24,000 relating to the fees in question.

**Item 1A. RISK FACTORS.**

 

*Investing in our common stock involves a high degree of risk, and you should be able to bear the complete loss of your investment. You should carefully consider the risks described below, the other information in this prospectus when evaluating our company and our business. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline and investors could lose all or a part of the money paid to buy our common stock.*

 

**RISKS RELATED TO OUR BUSINESS**

 

***If we continue our history of losses, we may be unable to continue our operations***

 

We cannot be certain whether we will ever make a profit, or, if we do, that we will be able to continue making a profit or earn a significant amount of revenues.  If we continue to lose money, our stock price could decline or we may be forced to discontinue our operations, either of which may result in you losing a portion or all of your investment.   We generated revenue of approximately $11,000 and $26,000 for the years ended December 31, 2012 and 2011, respectively, and incurred net losses of approximately $2,170,000 and $3,589,000 for the years ended December 31, 2012 and 2011, respectively. At December 31, 2012 we had an accumulated deficit of approximately $49,429,000 a stockholders’ deficit of approximately $4,456,000 and a working capital deficiency of $3,425,000.

 

***We may not be able to continue our business as a going concern***

 

If we are unable to continue as a going concern, you may lose your entire investment.  The report of our independent auditors for the fiscal years ended December 31, 2012 and December 31, 2011 is qualified subject to substantial doubt as to our ability as a going concern. As discussed in Note 1 to our financial statements for the fiscal year December 31, 2012, we have experienced operating losses over the past two years resulting in an accumulated deficit. Our independent auditors believe, based on our financial results as of December 31, 2012, that such results raised substantial doubts about our ability to continue as a going concern. If we are unable to continue as a going concern, you may lose your entire investment.

 

If we are unable to secure additional financing, our business may fail or our operating results and our stock price may be materially adversely affected

 

If we are not able to raise enough funds through the Equity Line or other sources, we may not be able to successfully develop and market our products and our business may fail. The Company's cash on hand at December 31, 2012 totaled approximately $350 and at December 31, 2011 totaled approximately $4,000. To date, the Company received proceeds from sale of the Company’s Series B Preferred Stock totaling $4,650,000, proceeds from the sale of the Company’s Series A Preferred Stock totaling $2,050,000, proceeds from the use of the Equity Line of $30,000, proceeds from the sale of common stock and exercise of warrants and options in the aggregate of approximately $5,598,000, and approximately $8,659,000 from the issuance of debt. However, we have generated minimal revenue from operations. We do not have any commitments for financing other than the Equity Line, and we will need additional financing to meet our obligations and to continue our business. Although we plan to raise funds through the Equity Line, due to the conditions of the Equity Line we cannot guarantee that we will be able to raise money through the use of the Equity Line or that we will be able to utilize the full Equity Line.

 

***As we raise additional capital, a shareholder’s percentage ownership interest in ProText Moblility will likely be reduced***

 

The raising of additional financing would in all likelihood result in dilution or reduction in the value of our securities. Our ability to operate is dependent upon obtaining sufficient capital. In September of 2009, we entered into a Stock Purchase Agreement for sales of our Series B Preferred Stock and to date we have issued 511,551 shares of preferred stock.  Each share of preferred stock converts to 100 shares of common stock at the option of the holder.  Preferred stock has a priority to the common stock, and will reduce common shareholders' percentage of ownership. In addition, we have also issued warrants which are exercisable for shares of common stock.  Upon conversion of the preferred stock and exercise of the warrants, common shareholders' ownership interest will be further reduced. If we issue additional stock in accordance with the Amended Stock Purchase Agreement, common shareholders' ownership interest will be further reduced. We have recently raised money from the sale of convertible notes that contain a conversion feature with a discount to market.  Such a discount will have a dilutive effect on our current shareholders as well.

 

***We are a development stage company with a limited operating history, making it difficult for you to evaluate our business and your investment.***

 

We are in the development stage and our operations and the development of our products are subject to all of the risks inherent in the establishment of a new business enterprise, including but not limited to:

 

 

•

the absence of an operating history;

 

•

the lack of commercialized products;

 

•

insufficient capital;

 

•

expected substantial and continual losses for the foreseeable future;

 

•

limited experience in dealing with regulatory issues;

 

•

an expected reliance on third parties for the development and commercialization of our proposed products;

 

•

a competitive environment characterized by numerous, well-established and well capitalized competitors; and

 

•

reliance on key personnel.

Because we are subject to these risks, you may have a difficult time evaluating our business and your investment in our company.

 

***We are currently in default under several of our notes.***

 

We have not made all of the required payments under several notes that matured during 2007 and 2008 in the aggregate principal amount of $114,034.  In addition, we have not made required payments under eight notes that matured between February 2011 and December 2011 in the aggregate principal amount of $746,125.  Should the holders of any of these notes demand payment and we are unable to renegotiate the terms of the note or raise funds at the time of any such demand to repay amounts owed, the note holders could declare the notes in default and take legal action against us.  Our ability to continue to operate is dependent upon our ability to raise additional funds to repay the notes secured by our assets and/or negotiate forbearance agreements.

 

***We have several notes that are due in 2012 and we will need additional capital to repay these loans when due and may not be able to obtain it*.**

 

As of December 31, 2012 we had notes in the aggregate principal amount of approximately $1,500,000 outstanding. We will need to raise additional funds in order to repay these loans.   In addition we will need to raise additional funds to support further expansion, meet competitive pressures, and respond to unanticipated requirements. We cannot assure you that additional financing will be available to us as needed or on terms favorable to us. We currently do not have any commitments for additional funding other than the Equity Line, which is dependent upon stock sales volume and our stock price over which we have no control.

 

***The holder of our Series B Preferred Stock controls the right to vote our common stock as well as our right to effectuate certain actions.***

 

The holder of our Series B Preferred Stock has the right to control the vote of 51% of our outstanding common stock with regard to an increase in our authorized shares and has the right to 51,155,100 votes based on their ownership of the Series B Preferred Stock.  As a result, the holder of our Series B Preferred Stock may be able to effectively control the management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate actions. In addition, we are required to obtain the approval of holders of 66% of the Series B Preferred Stock with respect to certain actions, including an increase or decrease in the board size or any committee, an amendment to or waiver of provisions of our organizational documents, the sale of any equity or debt security other than certain exempted transaction, declaration or payment of a dividend, redemption of stock, sale of a substantial portion of our debt or equity or the engagement in a transaction with an affiliate, officer or director. This concentration of control may delay or prevent a change of control and may adversely affect the market value of our common stock.

 

***We may need to increase our number of shares of authorized common stock prior to initiating puts for a substantial number of shares of common stock.***

 

We currently are authorized to issue 750,000,000 shares of common stock and have 293,313,312 shares of common stock outstanding and have reserved an additional 87,631,711 shares of common stock for issuance upon exercise of convertible securities that are currently outstanding.  In 2012, a total of 75,953,037 options/warrants and shares have been returned to the Company, however based upon our current market price, the remaining 369,054,977 shares may not be enough to allow us to raise substantial funds under the Equity Line and other financings and therefore we may need to increase our authorized stock in order to raise a substantial amount of funding under the Equity Line or other financings.  There can be no assurance that we will be able to obtain the necessary shareholder approval for such an increase.

 

***We have no independent audit committee nor do we have an audit committee financial expert at this time. Our full board of directors functions as our audit committee. This may hinder our board of directors’ effectiveness in fulfilling the functions of the audit committee.***

 

Currently, we have no independent audit committee nor do we have an audit committee financial expert at this time. Our full board of directors functions as our audit committee and is comprised of four directors, two of whom are not considered to be "independent" in accordance with the requirements of Rule 10A-3 under the Exchange Act. An independent audit committee plays a crucial role in the corporate governance process, assessing our company's processes relating to our risks and control environment, overseeing financial reporting, and evaluating internal and independent audit processes. The lack of an independent audit committee may prevent the board of directors from being independent from management in its judgments and decisions and its ability to pursue the committee's responsibilities without undue influence. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified, independent directors, the management of our business could be compromised. In addition, the director on our board of directors is not considered to be a “financial expert” in that he does not have the education or experience of being a chief financial officer.

  

***Our inability to retain and attract key personnel could seriously harm our business and adversely affect our ability to develop our products***

 

We believe that our future success will depend on the abilities and continued service of our senior management and executive officers, particularly Peter Charles, our Interim Chief Executive Officer, and those persons involved in the research and development of our products. If we are unable to attract additional qualified employees, researchers and consultants, we may be unable to successfully finalize and market our products and other future products being developed.

 

***Our software technology and strategy may not be successful***

 

Our success will depend almost entirely upon the acceptance of our products and services by parents with children under the age of 17, elementary and middle schools, media companies and households. Market acceptance will depend upon several factors, particularly the determination by parents that they need and want to monitor and protect their children while on the Internet and mobile devices. A number of factors may inhibit acceptance, including the existence of competing products, our inability to convince families that they need to pay for the products and services that we will offer, or failure by households and service companies to use our products. If our products are not accepted by the ultimate end user, we may have to curtail our business operations, which could have a material negative effect on operating results and most likely result in a lower stock price.

 

***The commercialization of our new technology and strategy may not be successful***

 

Our success will depend upon the acceptance of our products and services by consumers and companies within the computer and mobile industry. Market acceptance will depend upon several factors, particularly the determination by consumers and companies that they need and want a premium service for their computer or mobile devices that provide parents a solution to help manage their children’s communications activities. A number of factors may inhibit acceptance, including our inability to convince consumers and businesses that they need to pay for the products and services that we will offer. If our products are not accepted by the market, we may have to curtail our business operations, which could have a material negative effect on operating results and most likely result in a lower stock price. 

 

***We may not be able to compete successfully against current and future competitors***

 

We will compete, in our current and proposed businesses, with other companies, some of which have far greater marketing and financial resources and experience than we do. We cannot guarantee that we will be able to penetrate our primary market and be able to compete at a profit. In addition to established competitors, there is ease of market entry for other companies that choose to compete with us. Effective competition could result in price reductions, reduced margins or have other negative implications, any of which could adversely affect our business and chances for success. Competition is likely to increase significantly as new companies enter the market and current competitors expand their services. Many of these potential competitors are likely to enjoy substantial competitive advantages, including larger technical staffs, greater name recognition, larger customer bases and substantially greater financial, marketing, technical and other resources. To be competitive, we must respond promptly and effectively to the challenges of technological change, evolving standards and competitors’ innovations by continuing to enhance our services and sales and marketing channels. Any pricing pressures, reduced margins or loss of market share resulting from increased competition, or our failure to compete effectively, could seriously damage our business and chances for success.

 

***We may not be able to manage our growth effectively***

 

We must continually implement and improve our products and/or services, operations, operating procedures and quality controls on a timely basis, as well as expand, train, motivate and manage our work force in order to accommodate anticipated growth and compete effectively in our market segment. Successful implementation of our strategy also requires that we establish and manage a competent, dedicated work force and employ additional key employees in corporate management, product design, client service and sales. We can give no assurance that our personnel, systems, procedures and controls will be adequate to support our existing and future operations. If we fail to implement and improve these operations, there could be a material, adverse effect on our business, operating results and financial condition.

 

***If we do not continually update our products, they may become obsolete and we may not be able to compete with other companies***

 

Mobile technology, software applications and related infrastructure are rapidly evolving. Our ability to compete depends on the continuing development of our technologies and products. We cannot assure you that we will be able to keep pace with technological advances or that our products will not become obsolete. We cannot assure you that competitors will not develop related or similar products and bring them to market before we do, or do so more successfully, or that they will not develop technologies and products more effective than any that we have developed or are developing. If that happens, our business, prospects, results of operations and financial condition will be materially adversely affected.

 

Our business also depends on providing applications that wireless subscribers want to buy. We must continue to invest significant resources in research and development to enhance our offering of wireless applications and introduce new applications. Our operating results would suffer if our applications are not responsive to the preferences of our customers or are not effectively brought to market.

 

The planned timing or introduction of new applications is subject to risks and uncertainties. Unexpected technical, operational, deployment, distribution or other problems could delay or prevent the introduction of new applications, which could result in a loss of, or delay in, revenues or damage to our reputation and brand. If any of our applications is introduced with defects, errors or failures, we could experience decreased sales, loss of customers and damage to our reputation and brand. In addition, new applications may not achieve sufficient market acceptance to offset the costs of development. Our success depends, in part, on unpredictable and volatile factors beyond our control, including customer preferences and competing applications. A shift in mobile phone usage or the interest in parental control products could cause a decline in our applications' popularity that could materially reduce our revenues and harm our business.

 

We must make product development decisions and commit significant resources well in advance of the anticipated introduction of a new mobile phone model. New mobile phone models for which we are developing applications may be delayed, may not be commercially successful, may have a shorter life cycle than anticipated or may not be adequately promoted by wireless carriers or the mobile phone manufacturer. If the mobile phone models for which we are developing applications are not released when expected or do not achieve broad market penetration, our potential revenues will be limited and our business will suffer.

 

***Wireless carriers generally control the price charged for our applications either by approving the price of our applications or by establishing the price charged to their wireless subscribers. The carriers' control over the pricing of our applications could adversely affect market acceptance of our applications and our revenues.***

 

We must obtain approval from our wireless carriers for the pricing of the applications that we propose to offer to their subscribers. These approvals may not be granted in a timely manner or at all. Some of our carrier agreements may also restrict our ability to change prices. In addition, our carriers generally have the ability to set the price charged to their wireless subscribers. Failure to obtain, or a delay in obtaining, these approvals, or the price the carriers charge for our applications could adversely affect market acceptance of our applications.

 

***If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our applications, or if we incur excessive expenses promoting and maintaining our brand, our business could be harmed.***

 

We believe that establishing and maintaining our brand is critical to retaining and expanding our customer base. Promotion of our brand will depend on our success in providing high-quality wireless applications. However, such success will depend, in part, on the services and efforts of third parties, over which we have little or no control. For instance, if our wireless carriers fail to provide quality service, our customers' ability to access our applications may be interrupted, which may adversely affect our brand. If our customers and carriers do not perceive our existing products and services as high quality, or if we introduce new applications that are not favorably received by our customers and carriers, then we may be unsuccessful in building brand recognition and brand loyalty in the marketplace. In addition, globalizing and extending our brand may be costly. It will also involve extensive management time to execute successfully. Further, the markets in which we operate are highly competitive and many of our competitors, such as NetNanny and S-Mobile, already have substantially more brand recognition than we do. If we fail to successfully increase brand awareness and consumer recognition of our applications, our potential revenues could be limited, our costs could increase and our business could suffer.

 

***Credit market volatility and illiquidity may affect our ability to raise capital to finance our operations, planned expansion and growth.***

 

The credit markets have experienced extreme volatility in recent years, and worldwide credit markets have remained unstable despite injections of capital by the federal government and foreign governments. Banks and other lenders, such as equipment leasing companies, have significantly increased credit requirements and reduced the amounts available to borrowers. Companies with low credit ratings may not have access to the debt markets until the liquidity improves, if at all. If we do not meet the conditions necessary for use of the Equity Line, we will be forced to seek other funding.  If current credit market conditions do not improve, we may not be able to access debt or leasing markets to finance our expansion plans.

 

***We may not be able to successfully recruit and retain skilled employees, particularly scientific, technical and management professionals.***

 

We believe that our future success will depend in large part on our ability to attract and retain highly skilled technical, managerial and marketing personnel who are familiar with our technology. Industry demand for such employees, however, exceeds the number of personnel available, and the competition for attracting and retaining these employees is intense. We compete in the market for personnel against numerous companies, including larger, more established competitors who have significantly greater financial resources than we do and may be in a better financial position to offer higher compensation packages to attract and retain human capital. We cannot be certain that we will be successful in attracting and retaining the skilled personnel necessary to operate our business effectively in the future. Because of the highly technical nature of our products, the loss of any significant number of our personnel could have a material adverse effect on our business and operating results.

 

***Our business is concentrated, making our operations sensitive to economic fluctuations.***

 

Because of our limited financial resources, it is unlikely that we will be able to further diversify our operations. Therefore, we will be subject to economic fluctuations within our industry. If our business does not succeed, you could lose all or part of your investment.

 

***If we do not succeed in our expansion strategy, we may not achieve the results we project.***

 

Our business strategy is designed to expand the sales of our products and services. Our ability to implement our plan will depend primarily on the ability to attract customers and the availability of qualified and cost-effective sales personnel. There are no firm agreements for employment of additional marketing personnel, and we can give you no assurance that any of our expansion plans will be successful or that we will be able to establish additional favorable relationships for the marketing and sales of our products and services. We also cannot be certain when, if ever, we will be able to hire the appropriate marketing personnel and to establish additional merchandising relationships.

 

***Our officers and directors have limited liability against lawsuits.***

 

ProText Mobility is a Delaware corporation. Delaware law permits the indemnification of officers and directors against expenses incurred in successfully defending against a claim. Delaware law also authorizes Delaware corporations to indemnify their officers and directors against expenses and liabilities incurred because of their being or having been an officer or director. Our organizational documents provide for this indemnification to the fullest extent permitted by law.

 

***Our company is a party to various litigations.***

 

We have been engaged in various litigations (See “Legal Proceedings” below). A negative outcome in these actions could adversely affect our business. We could be subject to future litigations that could materially affect our ability to operate our business, which would negatively impact our results of operations and financial condition.

 

 

 

 

 

 

 

**RISKS RELATED TO OUR SECURITIES**

 

***Issuance of preferred stock could hurt holders of common stock.***

 

Our board of directors is authorized by our charter to create and issue preferred stock. The rights of holders of preferred stock take precedence over the rights of holders of common stock. Between February 2007 and December 31, 2007, we authorized a class of 1,526,718 Series A 7% of cumulative preferred stock and 28,968 Series A shares remain outstanding as of the date hereof. Our board of directors authorized a class of Series “B” preferred stock, with 1,000,000 shares designated, and since that date, we have sold 511,551 shares. We may issue additional shares of Series A or Series B stock in addition to other preferred stock. As future tranches of capital are received by the Company, additional preferred stock may be issued. The rights of future preferred stockholders could delay, defer or prevent a change of control, even if the holders of common stock are in favor of that change of control, as well as enjoy preferential treatment on matters like distributions, liquidation preferences and voting.

 

***Our stock price has been volatile.***

 

Our stock price fluctuated between $0.0016 and $0.038 for the year ended December 31, 2012, and between $0.01 and $0.16 for the year ended December 31, 2011. The price of our shares may fluctuate significantly despite the absence of any apparent reason. In addition, our stock is thinly traded, leading to even greater volatility. You should expect this volatility to continue. The price of our common stock may be subject to considerable fluctuations as a result of various factors, including but not limited to:

 

•

Technological innovations or commercialization of new products by our competitors;

•

The release of research reports by securities analysts;

•

Disputes concerning patents or proprietary rights;

•

Financial results of other firms, particularly those in our industry; and

•

Economic and other external factors.

  

***A limited trading market currently exists for our securities and we cannot assure you that an active market will ever develop, or if developed, will be sustained.***

There is currently a limited trading market for our securities on the OTC-BB. We cannot assure you when and if an active-trading market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our common stock to liquidate their investment in our company. If an active public market should develop in the future, the sale of unregistered and restricted securities by current shareholders may have a substantial impact on any such market.

 

Accordingly, an investment in our securities should only be considered by those investors who do not require liquidity and can afford to suffer a total loss of their investment. An investor should consider consulting with professional advisers before making such an investment.

 

***There will be a significant number of shares of common stock eligible for future sale and this may hurt the market price of the shares.***

 

The market price of our shares could decline as a result of sales, or the perception that sales could occur, of a large number of shares available in the public market. Such sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. At December 31, 2012, we had a total of 293,313,312 shares of common stock outstanding, but there were also 159,344,306 shares that could be acquired upon the conversion or exercise of outstanding preferred stock, notes, options and warrants. Upon the conversion or exercise of these securities, holders of our common stock will see their interest as a percentage of the total number of our common stock diluted.

 

***We have never paid any cash dividends.***

 

We have never paid any cash dividends on our shares of common stock and there are presently no plans being considered that would result in the payment of cash dividends.

 

***FINRA sales practice requirements may also limit a stockholder's ability to buy and sell our stock.***

 

 In addition to the “penny stock” rules described below, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares

***Because our common stock is deemed a low-priced “penny stock,” it will  be cumbersome for brokers and dealers to trade in our common stock, making the market for our common stock less liquid and negatively affect the price of our stock.***

 

We will be subject to certain provisions of the Securities Exchange Act of 1934 (the “Exchange Act”), commonly referred to as the “penny stock” rules as defined in Rule 3a51-1.  A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Since our stock is deemed to be a penny stock, trading is subject to additional sales practice requirements of broker-dealers.  These require a broker-dealer to:

 

 

•

Deliver to the customer, and obtain a written receipt for, a disclosure document;

 

 

•

Disclose certain price information about the stock;

 

 

•

Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;

 

 

•

Send monthly statements to customers with market and price information about the penny stock; and

 

 

• 

In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with information specified in the rules.

 

Consequently, penny stock rules may restrict the ability or willingness of broker-dealers to trade and/or maintain a market in our common stock.  Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares. 

**RISKS RELATED TO INTELLECTUAL PROPERTY**

 

 ***We may be involved in lawsuits to protect or enforce our patents, which could be expensive and time consuming.***

 

Competitors or others may infringe our future patents. To counter infringement or unauthorized use, we may be required to file patent infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover that technology. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure. In addition, during the course of this litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

 

We may not prevail in any litigation or interference proceeding in which we are involved. Even if we do prevail, these proceedings can be expensive and distract our management.

 

***Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.***

 

Patent applications in the United States are maintained in secrecy until the patents are published or are issued. Since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we are the first creator of inventions covered by pending patent applications or the first to file patent applications for these inventions. We also cannot be certain that our future patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will be issued. Furthermore, if these patent applications issue, some foreign countries provide significantly less effective patent enforcement than in the United States.

 

The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, we cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our operations.

 

***Our patents and other protective measures may not adequately protect our proprietary intellectual property.***

 

We regard our intellectual property as critical to our success. In addition, we generally enter into confidentiality and invention agreements with our employees and consultants. Such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:

 

 

•

our patent applications may not be granted for various reasons, including the existence of conflicting patents or defects in our applications;

 

 

•

the patents we are granted may be challenged, invalidated or circumvented because of the pre-existence of similar patented or unpatented intellectual property rights or for other reasons;

 

 

•

parties to the confidentiality and invention agreements may have such agreements declared unenforceable or, even if the agreements are enforceable, may breach such agreements;

 

 

•

the costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make aggressive enforcement prohibitive;

 

 

•

even if we enforce our rights aggressively, injunctions, fines and other penalties may be insufficient to deter violations of our intellectual property rights; and

 

 

•

other persons may independently develop proprietary information and techniques that are functionally equivalent or superior to our intellectual proprietary information and techniques but do not breach our patented or unpatented proprietary rights.

 

***We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.***

 

We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, former employees, contractors, consultants, outside scientific collaborators and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets or independently develop processes or products that are similar or identical to our trade secrets, and courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

  

 

**Item 1B. Unresolved Staff Comments.**

 

Not applicable.

 

**Item 2. Properties.**

 

Our principal executive offices are located at 60 Queens Street, Syosset, New York 11791.  In April 2012, we entered into a one year lease for a monthly rent of $1,350.00.

 

Rent expense was approximately $34,000 and $61,000 for the years ended December 31, 2011 and 2010, respectively.

We believe that our facilities are adequate for our current and near-term needs.

 

**Item 3. Legal Proceedings.**On May 10, 2010, the Company was served with an action from Ms. Von Biederman for breach of contract seeking damages in excess of $75,000. The Company was in mediation  proceedings, and has accrued $20,000 of prior consulting fees due to Ms. Von Biederman.

 

Ms. Von Biederman motioned for a summary judgment that the Company breached the employment agreement by terminating her employment without good cause and/or due to a change in control of the Company.  On August 8, 2012 Ms. Von Biederman's motion was denied.  

 

Further, on August 8, 2012, the Court granted Ms. Von Biederman a summary judgment that the Company breached the employment agreement by failing to pay her salary owed between July 29, 2009 and November 15, 2009 and the Company breached the consulting agreement by failing to pay Ms. Von Biederman the $20,000 owed under the consulting agreement.  

 

 

In July 2012, a former employee filed suit against the Company alleging various employment related claims.  The case is ongoing and the Company has accrued roughly $24,000 relating to the fees in question.

 

**Item 4. Mine Safety Disclosures.**

Not applicable.

 

 

 

 

 

 

 

 

 

 

**PART II**

 

**Item 5. Market for Common Equity and Related Stockholder Matters.**

 

**MARKET PRICE OF COMMON STOCK AND OTHER STOCKHOLDER MATTERS**

 

ProText Mobility Inc's public offering was completed on July 23, 2003. A total of 2,474,000 units were sold in the public offering. Each unit consisted of one share of Common Stock, one Class A Warrant, exercisable for five years, to purchase one share of Common Stock at $0.75 per share ("Class A Warrant") and one Class B Warrant, exercisable for seven years, to purchase one share of Common Stock at $1.75 per share ("Class B Warrant"). The Common Stock is quoted on the OTC Bulletin Board and trades under the symbol TXTM. The Class A and the Class B Warrant both expired June 30, 2011.

 

As of April 13, 2012, the Company had outstanding 293,313,312 shares of its Common Stock, par value $0.0001 per share.

 

**Price Range of Common Stock**

 

The following table shows the high and low bid prices of the Company’s Common Stock as quoted on the OTC Bulletin Board by quarter during each of our last two fiscal years ended December 31, 2012 and 2011. These quotes reflect inter-dealer prices, without retail markup, markdown or commissions and may not represent actual transactions. The information below was obtained from those organizations, for the respective periods.

 

 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

 

March 31, 2012

 

 

June 30, 2012

 

 

September 30, 2012

 

 

December 31, 2012

 

 

High

 

 

$

0.0309

 

 

$

0.038

 

 

$

0.0260

 

 

$

0.0134

 

 

Low

 

 

$

0.0060

 

 

$

0.014

 

 

$

0.0041

 

 

$

0.0016

 

 

 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

 

March 31, 2011

 

 

June 30, 2011

 

 

September 30, 2011

 

 

December 31, 2011

 

 

High

 

 

$

0.16

 

 

$

0.13

 

 

$

0.16

 

 

$

0.05

 

 

Low

 

 

$

0.10

 

 

$

0.06

 

 

$

0.04

 

 

$

0.01

 

 

The high and low bid prices for shares of the Company’s  Common Stock on April 12, 2013 was $0.0014 and $0.001, per share, respectively, based upon bids that represent prices quoted by broker-dealers on the OTC Bulletin Board.

 

**Penny Stock**

 

Our stock is considered to be a penny stock.  The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

 

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

 

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

 

**Holders**

 

As of April 12, 2013, the Company had approximately 1,515 holders, of which 185 are record holders of the Company's common stock.   

 

**Dividends**

 

Since its organization, the Company has not paid any cash dividends on its common stock, nor does it plan to do so in the foreseeable future.

 

**SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**

 

The following table provides information regarding the status of our existing equity compensation plans at December 31, 2012.

 

 

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

 

Weighted-average exercise price of outstanding options, warrants and rights

 

 

Number of securities remaining available for future issuance under equity compensation plans

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

 

-

 

 

$

0.00

 

 

 

18,404,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

 

 

20,267,815

 

 

$

0.08

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

20,267,815

 

 

$

0.08

 

 

 

18,404,071

 

 

 

The number of securities remaining available for future issuance under equity compensation plans approved by security holders totaled 18,404,071 shares at December 31, 2012.

 

**SALES OF UNREGISTERED SECURITIES FOR THE FOURTH QUARTER**

 

In the fourth quarter of 2012, the Company issued 27,282,564 shares of common stock pursuant to a conversion of a promissory note of $50,000 and accrued interest of $2,000.

 

The above shares of common stock were issued pursuant to the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.

 

**Item 6. – Selected Financial Data**

 

N/A

 

**Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations**

 

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Report, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Certain statements contained herein, including statements regarding the anticipated development and expansion of our business, our intent, belief or current expectations, primarily with respect to our future operating performance and other statements contained herein regarding matters that are not historical facts, are “forward-looking” statements. Future filings with the Securities and Exchange Commission, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may contain forward-looking statements, because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

 

All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section discusses our results of operations, liquidity and financial condition, and certain factors that may affect our future results. You should read this MD&A in conjunction with our audited financial statements and accompanying notes included herein. This plan of operation contains forward-looking statements that involve risks, uncertainties, and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under “Risk Factors” or elsewhere in this Report.

 

 

**Background**

 

Protext Mobility develops, markets and sells software products and solutions for the internet and mobile communications markets aimed at protecting children from danger on the internet and in mobile communication. The Company has expanded its business plan from developing software solely for personal computers (“PCs”) to developing software for products designed for the mobile industry. We offer three products, one for PCs and two for mobile communications devices. Although we continue to derive substantially all of our revenue from our first PC-based technology, namely FamilySafe Parental Controls, we anticipate deriving a substantial portion of our future revenues from products designed for the mobile industry. Our lead mobile product, SafeText, is a service for mobile devices that provides parents a tool to help manage their children’s mobile communication activities.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  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.

 

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. In the fiscal year 2012, the Company received approximately $655,000 from bridge notes and approximately $48,000 from common stock purchases. If the Company does not receive additional funding through the Equity Line, the Company will need to raise additional capital. As the Company increases sales from its products and services, the Company expects to increase cash flows from operations.

 

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 includes the marketing of the SafeText product to consumers and businesses as described in the Company’s business summary.

  

**Significant and Critical Accounting Policies:**

 

Our discussion of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States.  The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of the financial statements.  Management regularly reviews its estimates and assumptions, which are based on historical factors and other factors that are believed to be relevant under the circumstances.  Actual results may differ from these estimates under different assumptions, estimates or conditions.

 

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions.  See “Notes to Consolidated Financial Statements” for additional disclosure of the application of these and other accounting policies.

 

Revenue Recognition: The Company recognizes revenues in accordance with authoritative guidance and when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable and collectability is reasonably assured. Software products and services revenue is derived from online Internet sales is recognized upon the settlement of credit card charges, typically within three days of the sale.

 

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.

 

 

**Results of Operations**

 

**Comparison of the Results for the Years Ended December 31, 2012 and 2011**

 

Revenue for the year ended December 31, 2012 and 2011 was approximately $11,000 and $26,000, respectively, an approximate 60% decrease of approximately $15,000. Gross loss decreased approximately 133% to approximately $171,000 from $73,000 due to the decrease in sales and write off’s of software costs in the current period ended December 31, 2012 compared to the same period in the prior year.

 

Selling costs for the year ended December 31, 2011 and 2010 was approximately $15,000 and $21,000, respectively, a decrease of approximately 30% ($6,000).  

 

Website costs decreased slightly by approximately 4% ($6,000) for the year ended December 31, 2012 compared to the same period in the prior year.

 

General and administrative expenses decreased to approximately $1,347,000 from approximately $2,692,000 for the years ended December 31, 2012 and 2011, respectively.  The decrease of approximately 53% ($1,321,000) consists of the following changes:

 

 

●

Compensation costs (which includes stock compensation, salaries, taxes and benefits) decreased approximately $1,332,000 for the current period ended December 31, 2012 compared to the prior comparable period due to a decrease in salaries, the number of employees, employee benefits, related taxes and stock based compensation.

 

 

●

Professional fees (which includes accounting/auditing, consulting and legal fees) decreased approximately $110,000 for the year ended December 31, 2012 compared to the same period in 2011.  This is primarily a result of a decrease of approximately $205,000 in legal fees, $20,000 decrease in accounting fees coupled with an increase of approximately $107,000 in consulting fees.

 

Interest expense for the year ended December 31, 2012 and 2011 was approximately $233,941 and $111,936 respectively, an increase of approximately 109% ($122,000). The increase in interest expense is due to the fact that the Company has increased the number of outstanding loans and has been unable to repay the loans which in turn continues to accrue interest. 

  

Amortization expense from deferred note discounts for the year ended December 31, 2012 and 2011 was approximately $418,000 and $627,000, respectively. The decrease is due to a number of notes outstanding are fully amortized.

 

**Liquidity and Capital Resources**

 

The financial statements have been prepared on a going concern basis which assumes our company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.  We have a working capital deficit, and have incurred losses since inception, and further losses are anticipated in the development of our business raising substantial doubt about our company’s ability to continue as a going concern.  The ability to continue as a going concern is dependent upon our company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with existing cash on hand and loans from directors and/or private placement of securities.

 

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 and 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 December 31, 2012 and December 31, 2011, the Company had cash and cash equivalents of approximately $350 and $4,000, respectively and a working capital deficiency of approximately of $3,425,000 and $2,328,000, respectively.  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 would need additional financing to continue to operate. As the Company increases sales from its products and services, the Company expects to increase cash flows from operations although these cash flows may not be enough to support the Company’s operations.

 

Net cash used in operating activities for the year ended December 31, 2012 and 2011 was approximately $630,000 and $761,000, respectively.   The current period net cash used in operating activities relates to the net loss of approximately $2,170,000 offset by adjustments totaling approximately $1,540,000, which primarily relates to approximately $273,000 of non cash stock compensation expense, an increase in accounts payable and accrued expenses of approximately $634,000 and $534,000 of depreciation and amortization. The prior comparative period’s net cash used in operating was due to a net loss of approximately $3,589,000 offset by adjustments totaling approximately $2,827,000, which primarily relates to $1,001,000 of non cash stock compensation expense, debt modification expense of $27,000, an increase in accounts payable and accrued expenses of approximately $989,000 and depreciation and amortization of $749,000.

 

Net cash used in investing activities for the year ended December 31, 2012 and 2011 was approximately $0 and $192,000, respectively, and is attributable to the additions of capitalizable software and website development costs. 

 

Net cash provided by financing activities was approximately $626,000 and $897,000 for the year ended December 31, 2012 and 2011, respectively. The decrease was to due to  proceeds totaling approximately $933,000 from sales of restricted common stock and bridge note holders in the prior period compared to net proceeds totaling approximately $704,000 from sales of restricted common stock and bridge note holders in the current period.

 

 

 **Research and Development**

 

Research and development costs are generally expensed as incurred. In accordance with the provisions of FASB Codification Topic ACS 985-20, "Costs of Software to be Sold, Leased, or Marketed,” software development costs are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for release to customers. For the years ended December 31, 2012, and 2011 the Company capitalized approximately $0 and $192,000 of software and website development costs, respectively.  The software and website costs are amortized on a straight line basis over the estimated useful life of three years. Amortization expense for the years ended December 31, 2012 and 2011 was approximately $106,000 and $107,000 respectively.

 

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.  In the fourth quarters of the fiscal years ended December 31, 2012 and 2011 the Company determined there was an impairment to the software capitalization and website development costs related to obsolete product and legacy website costs and recorded write offs of approximately $88,000 and $81,000, respectively, which is included in the accompanying consolidated statement of operations.

 

The Company continually strives to enhance and improve the functionality of its software products.  As such all new programming must be tested, even if it is only a small component of a larger existing element of the software, before being released to the public. Testing is an ongoing process and generally occurs in three areas. First, upgrades and enhancements are done on a continual basis to prolong the lifecycle of the products and as new enhancements and upgrades are completed, each item must be tested for performance and function. Testing is also performed to assure that new components do not adversely affect existing software. Finally, as with all software, testing must assure compatibility with all third party software, new operating systems and new hardware platforms.

 

**Recent Accounting Pronouncements Affecting the Company:**

 

In July 2012, FASB issued Accounting Standards Update (“ASU”) No. 2012-02, “*Testing Indefinite-Lived Intangible Assets for Impairment” *(“ASU 2012-02”). ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. ASU 2012-02 did not have a material impact on our financial position or results of operations.

 In December 2011, the FASB issued ASU No. 2011-11, “*Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities*” (“ASU 2011-11”)*.* ASU 2011-11 enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared in conformity with U.S. GAAP and financial statements prepared on the basis of International Financial Reporting Standards (“IFRS”).  ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 did not have a material impact on our financial position or results of operations.

 In September 2011, the FASB issued ASU No. 2011-08 *Intangibles – Goodwill & Other* (“ASU 2011-08”), which updates the guidance in Accounting Standards Codification (“ASC”) Topic 350, *Intangibles – Goodwill & Other* (“ACS Topic 350”).  The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the examples are not intended to be all-inclusive and an entity may identify other relevant events and circumstances to consider in making the determination. The examples in this ASU 2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity should consider in determining whether it should test for impairment between annual tests, and also supersede the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test.

Under the amendments in ASU 2011-08, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have a material impact on our financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04 (“ASU 2011-04”), which updated the guidance in ASC Topic 820, *Fair Value Measurement.* The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.  The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on our financial position or results of operations.

We do not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.

  

 

**Item 9A (T). Controls and Procedures**

 

**Internal Controls**

 

**Evaluation of our Disclosure Controls and Internal Controls**

 

Under the supervision and with the participation of our senior management, including our chief executive and financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this annual report (the “Evaluation Date”). The disclosure controls and procedures are intended to insure that the information relating to us, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management has concluded that based on their evaluation that our disclosure controls and procedures were effective as of December 31, 2012.

 

**Management's Annual Report on Internal Controls and Procedures.**

 

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework.

Based upon our assessment and the COSO criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2012.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permanently exempt smaller reporting companies.

  

***Changes in Internal Controls.*** There were no significant changes in our internal controls over financial reporting that occurred during the three months ended December 31, 2012, that have materially affected, or are reasonably like to materially affect, our internal controls over financial reporting.

 

The Company's management does 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.

 

**Item 9B. Other Information.**

 

Not Applicable.

 

**PART III**

 

**Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance With Section 16(a) of the Exchange Act.**

 

The Company has a seven-member board of directors. The identity of each of our directors and executive officers and their principal occupations for the past five years are as follows.

 

 

 

 

 

 

Year

Name

 

Age

 

Position

 

Began Service

Peter Charles

 

43

 

Director, Interim Chief Executive Officer, Chief Operating Officer

 

2009

 

 

 

 

 

 

 

Erica Zalbert (2)

 

38

 

Chief Financial Officer

 

2008

 

 

 

 

 

 

 

Frank Chester

 

63

 

Director

 

2009

 

 

 

 

 

 

 

David Lewis

 

43

 

Director

 

2009

 

 

 

 

 

 

 

Tyler Olbres (1)

 

36

 

Director

 

2010

  

 

(1)

Mr. Tyler Olbres resigned from the board of directors on January 4, 2012.

 

(2)

On May 1, 2012, Erica Zalbert resigned as Chief Financial Officer and Secretary of ProText Mobility, Inc.

 

***Peter Charles – Chief Operating Officer and Interim Chief Executive Officer, Member of the Board***

 

Mr. Charles joined the Company in October 2009 as Vice President, Director of Corporate Affairs and has been a director of the Company since November 2009. Currently, Mr. Charles holds the position of Chief Operating Officer and Interim Chief Executive Officer. As part of his day-to-day operational and managerial duties, Mr. Charles oversees corporate and technology development, strategic planning and corporate communications. Prior to joining Protext Mobility, from 2006 to 2009, Mr. Charles was with Thorium Power, now Lightbridge Corporation (NASDAQ: LTBR), a developer of novel nuclear fuels, where his primary responsibilities were to carry out various treasury duties and he played an instrumental role in the company attaining a NASDAQ listing. While at Lightbridge, Mr. Charles was an industry expert for the Nuclear Energy Institute, promoting the use and development of nuclear energy. Prior to joining Thorium Power in 2006, from 2001 to 2006 Mr. Charles was with Oppenheimer & Co., a full service investment firm. At Oppenheimer, Mr. Charles was registered as a General Securities Professional and was licensed for Sales Supervision and Management. Mr. Charles has over 18 years of experience in financial markets, working with various levels of investors including middle-market institutional investors. As a focus, Mr. Charles specialized in Control and Restricted Stock where he is well versed in SEC and NASD rules and the associated filing procedures. Mr. Charles is also well versed in global macroeconomics and regularly studies financial and economic history. Mr. Charles's financial and economic knowledge and experience led to the conclusion he should serve on the Company's board of directors given the Company's business and structure. His business experience provides him with a broad understanding of the operational, financial and strategic issues facing public companies. Through his services as the Company’s Chief Operating Officer and interim Co-Chief Executive Officer, he developed extensive knowledge of the Company’s business.

 

***Erica Zalbert - Chief Financial Officer***

 

Since 2008, Ms. Zalbert has been responsible for the Company’s finances and regulatory reporting to the Securities and Exchange Commission. In addition, Ms. Zalbert maintains a close working relationship with the board of directors playing a crucial supportive role with regard to financial and operational initiatives. Ms. Zalbert resigned as Interim Co-Chief Executive Officer on October 11, 2011. Before Ms. Zalbert joined the Company, from 2006 to 2008, she served as Controller to Cambridge Who's Who, a privately held company where she established and lead the accounting department, and oversaw internal accounting and mergers consolidation and financial reporting. Prior thereto, from 2003 to 2006, Ms. Zalbert held the position of Vice President of Financial Reporting for Newtek Business Services (NASDAQ: NEWT) where she was trusted to re-engineer the accounting department responsible for consolidating financials of the company’s 60+ subsidiaries and SEC and audit compliance. Ms. Zalbert started her career in finance and accounting at PricewaterhouseCoopers as an Associate in 1998, leaving in 2003. On May 1, 2012, Erica Zalbert resigned as Chief Financial Officer and Secretary of ProText Mobility, Inc.

 

**Members of the Board**

 

***David M. Lewis - Senior Strategic Advisor, Member of the Board***

 

Mr. Lewis has served on the Board since September 2009 and currently serves as a senior strategic advisor. He is a founding partner of Rock Island Capital, a partnership established to invest in and acquire a controlling interest in a single public company, Protext Mobility. The Rock Island team and investment group is comprised of seasoned business professionals with decades of operational experience. The group seeks to invest in companies with compelling value and exceptional growth potential. At Rock Island, Mr. Lewis is responsible for developing corporate client relationships leading to investment opportunities as well as managing various aspects of public and private market transactions. Mr. Lewis began his investment career in 1994 and has had affiliations with leading investment banking firms including Alex Brown & Sons, Prudential Securities, and Oppenheimer & Co. Prior to forming Rock Island, Mr. Lewis specialized in public market transactions including initial & secondary public offerings, P.I.P.E. transactions, and institutional trading. In addition to private banking services, Mr. Lewis’s background also includes in depth asset management and asset allocation. Over the past several years, Mr. Lewis has advised numerous companies in various industries including software, mobile, energy, nuclear power, and consumer products. Mr. Lewis’s past experiences and knowledge led to the conclusion he should serve on the Company’s board of directors given the Company’s business and structure. Mr. Lewis brings to the board of directors significant strategic, business and financial experience related to our business and our efforts to raise financing.

 

***Tyler M. Olbres***

 

Mr. Olbres is a Founder and Chairman of Interex Inc., a privately-held marketing communications company founded in September 1993. The company’s primary operating focus is in tradeshow and event marketing. Interex, under Mr. Olbres' leadership, has built award-winning marketing programs for leading global consumer brands including Lacoste, The Rockport Company, Liz Claiborne, Deckers Outdoor Corp., Saucony and Houghton-Mifflin Harcourt. Mr. Olbres is also the General Partner of Lantern Rock Limited Partnership, a private equity investment company that invests in consumer, energy, internet and technology companies. Of note, Mr. Olbres is an original investor in Energy Brands Inc., dba Glacéau, the maker of vitaminwater and smartwater, which was acquired in 2007 by The Coca-Cola Company for $4.1 billion. Mr. Olbres also presides over Three Palms of Delaware, LLC, a private investment company, and Three Dunes LLC, a private real estate development company. Mr. Olbres boasts a depth of professional experience and knowledge including visionary executive leadership, organizational restructuring, and public and media relations. Mr. Olbres's marketing knowledge and experience led to the conclusion he should serve on the Company's board of directors, given the Company's business and structure. Mr. Olbres brings a strong business background to us and experience in overseeing the management of companies, having served in several management positions. Mr. Tyler Olbres resigned from the board of directors on January 4, 2012.

 

***Frank Chester***

 

Prior to joining the board in 2009, Mr. Chester was self-employed. With more than 40 years in the finance industry and on the New York Stock Exchange, Mr. Chester is a much requested guest-expert on financial news television and broadcast programs such as CNBC, Fox Business, and Bloomberg radio. Mr. Chester is a former member of the New York Stock Exchange with 24 years of experience. During his time as a New York Stock Exchange member, he owned a seat for 15 years until the exchange became a public entity. Mr. Chester serves as advisor to brokerage firms on becoming active members on the floor. Mr. Chester's financial knowledge and experience led to the conclusion he should serve on the Company's board of directors, given the Company's business and structure. Mr. Chester is uniquely qualified to bring strategic insight to the board in its financing efforts.

Each director holds office until the next annual stockholders meeting or until a successor is duly elected or appointed.  Officers are appointed to their positions, and continue in such positions, at the discretion of the directors.

 

No directors of the Company are directors of other companies with securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such act or any company registered under the Investment Company Act of 1940.

 

 

**Committees of the Board**

Our company has a compensation committee consisting of Msrs, Chester, Lewis and Olbres (Mr. Olbres until he resigned January 4, 2012). This committee performs several functions, including reviewing all forms of compensation provided to our executive officers, directors, consultants and employees, including stock compensation.

 

Our company currently does not have a nominating or audit committee or committees performing similar functions, nor does our company have a written nominating or audit committee charter. Our directors believe that it is not necessary to have such committees at this time, because the functions of such committees can be adequately performed by the board of directors. We do not have an audit committee financial expert at this time. Our full board of directors functions as our audit committee and is comprised of four directors, only two of whom are considered to be "independent" in accordance with the requirements of Rule 10A-3 under the Exchange Act.

 

Our company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.

 

A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our CEO and director, Peter Charles, at the address appearing on the first page of this prospectus.

 

**Code of Ethics**

 

Our board of directors adopted a Code of Ethics that covers all executive officers of our company and its subsidiaries as posted on our website www.protextmobility.net. The Code of Ethics requires that senior management avoid conflicts of interest; maintain the confidentiality of information relating to our company; engage in transactions in shares of our common stock only in compliance with applicable laws and regulations and the requirements set forth in the Code of Ethics; and comply with other requirements which are intended to ensure that such officers conduct business in an honest and ethical manner and otherwise act with integrity and in the best interest of our company.

 

All our executive officers are required to affirm in writing that they have reviewed and understand the Code of Ethics.

 

Any amendment of our Code of Ethics or waiver thereof applicable to any of our principal executive officer, principal financial officer and controller, principal accounting officer or persons performing similar functions will be disclosed on our website within 5 days of the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver will also be disclosed. A copy of our Code of Ethics is incorporated by reference to the Company’s form 10-KSB filed with the Securities and Exchange Commission on March 16, 2004.

 

 

**Family Relationships**

 

There are no family relationships among our executive officers and directors.

 

**Legal Proceedings**

 

None of the current officers or directors of the Company have been the subject of litigation over the past ten years nor was any the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

 

 

 

 

 

·

Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time; or

 

 

 

 

·

Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or

 

 

 

 

·

Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

 

 

 

 

·

Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; or

 

 

 

 

·

Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or

 

 

 

 

·

Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

**Section 16(a) Beneficial Ownership Reporting Compliance**

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires all of ProText Mobility’s officers and directors, and persons who own more than ten percent of a registered class of ProText Mobility’s equity securities, to file reports of ownership and changes in ownership of equity securities of ProText Mobility with the SEC and any applicable stock exchange. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish ProText Mobility with copies of all Section 16(a) forms that they file. 

 

**Changes in Nominating Procedures**

 

None.

 

**Item 11. Executive Compensation**

 

Each of our named executive officers has entered into a three year employment agreement with ProText Mobility. Pursuant to the respective employment agreements, each executive officer receives an annual base salary, a non-ISO option grant, paid health insurance and between three to four weeks of vacation annually. The employment agreements require the named executive officers to maintain the confidentiality of ProText Mobility information and subject them to non-competition and non-solicitation restrictions during their employment.

 

The following table shows the compensation earned by each of the named executive officers for the years ended December 31, 2011 and 2010.

 

 

**SUMMARY COMPENSATION TABLE**

 

**Name and Principal**

 

 

 

**Salary**

**(1)**

 

 

**Bonuses**

 

 

**Option Grants**

**(2)**

 

 

**All Other**

**Compensation**

 

 

**Total**

 

**Position**

 

**Year**

 

**($)**

 

 

**($)**

 

 

**($)**

 

 

**($)**

 

 

**($)**

 

(a)

 

(b)

 

(c)

 

 

(d)

 

 

(e)

 

 

(f)

 

 

(g)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peter Charles, *Chief Operating*

 

2012

 

$

62,380

 

 

 

-

 

 

$

-

 

 

 

-

 

 

$

62,380

 

*Officer, Interim*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Executive Officer*

 

2011

 

$

135,000

 

 

 

-

 

 

$

-

 

 

 

-

 

 

$

135,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Erica Zalbert, *Chief Financial*

 

2012

 

$

   -

 

 

 

-

 

 

$

-

 

 

 

29,000(4)

 

 

$

29,000

 

*Officer,*(5)

 

2011

 

$

99,358

(3)

 

 

-

 

 

$

-

 

 

 

-

 

 

$

99,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)            Salary represents base salary earned in 2012 and 2011.

 

(2)            Represents the amount recognized by ProText Mobility for financial statement reporting purposes 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.

 

(3)           Ms. Zalbert compensation reflects her pro-rata salary for less than full time employment for the year ending December 31, 2011.

 

(4)            Ms. Zalbert compensation reflects her consulting fees earned in 2012 of which $24,000 was paid in cash and $5,000 paid in stock.

 

(5)           On May 1, 2012, Erica Zalbert resigned as Chief Financial Officer and Secretary of ProText Mobility, Inc.

 

**The following table shows outstanding option awards held by each of the named executive officers as of December 31, 2012.**

 

 

 

**OUTSTANDING OPTION AWARDS (1)**

**Name**

 

**Total**

**Outstanding**

**Option**

**Award**

**(#)**

 

 

**Number of Securities**

**Underlying Exercisable**

**but Unexercised Options**

**(#)**

 

 

**Number of**

**Securities**

**Underlying**

**Unexercised**

**Unearned**

**Options**

**(#)**

 

 

**Option**

**Exercise**

**Price**

**($)**

 

**Option**

**Expiration**

**Date**

(a)

 

 

 

 

 

 

 

(b)

 

 

(c)

 

(d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peter Charles,*Chief*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Operating Officer, Interim*

 

 

2,500,000

 

 

 

2,500,000

 

 

 

-

 

 

$

0.10

 

5/27/15

*Chief Executive Officer*

 

 

1,750,000

 

 

 

1,750,000

 

 

 

-

 

 

$

0.01

 

12/29/15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Erica Zalbert (1, 2),* Chief*

 

 

1,142,881

 

 

 

1,142,881

 

 

 

-

 

 

$

0.08

 

06/01/14

*Financial Officer,*

 

 

1,000,000

 

 

 

1,000,000

 

 

 

-

 

 

$

0.01

 

12/31/15

 

(1)

Options exercised according to Ms. Zalbert’s 10b5-1 plan as filed with the Securities and Exchange Commission on June 21, 2010. Such plan expired June 21, 2011.

 

 

 

(2)

On May 1, 2012, Erica Zalbert resigned as Chief Financial Officer and Secretary of ProText Mobility, Inc.

 

**Stock Plans**

 

The Company’s 2004 Stock Plan, which is shareholder approved, permits the grant of up to 1,500,000 shares of common stock. 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. The Company filed the 2009 Incentive Stock Plan with the Securities and Exchange Commission on October 19, 2010.

 

**Employment and Consulting Agreements**

We entered into an employment agreement with Erica Zalbert effective as of June 1, 2009 for a term of three years to serve as our Chief Financial Officer. The agreement provides that Ms. Zalbert will receive an annual base salary of One Hundred Fifty Thousand Dollars ($150,000), which is to be increased to $175,000 upon the raise of $3,000,000 in equity/debt or a combination thereof and $200,000 upon the raise of $4,000,000 within the first twelve months of the agreement. Ms. Zalbert receives a salary that is pro-rated for the numbers of days that she works based upon an annual salary of $175,000 per year and is entitled to a minimum 10% raise each year. Ms. Zalbert was issued 250,000 options upon signing the agreement which vested immediately and contained a cashless feature. Ms. Zalbert was also issued 1,500,000 options, 500,000 of which vested on the one year anniversary of the agreement and each subsequent one year anniversary. She also receives certain other benefits such as health insurance. Our company has the right to terminate the agreement for Good Cause as defined in the agreement. If the agreement is terminated by us during the initial term, she is entitled to one month’s salary during year one, two months’ salary during year two and three months’ salary during year three. If Ms. Zalbert terminates the agreement due to a Company Material Breach as defined in the agreement, she is entitled to receive her full salary and benefits for three months after termination. If Ms. Zalbert terminates the agreement within 180 days of any warrant, option or bonus grant not for Good Cause she will forfeit such warrant, option or bonus received within the 180 day period. If we terminate the agreement for Cause as defined in the agreement, Ms. Zalbert will be entitled to receive accrued salary only through the termination date and if she is terminated for any other reason, she is entitled to receive severance equal to one year’s salary. Upon her death or disability she is not entitled to receive any base salary and upon a change of control she is entitled to receive her base salary and benefits specified in the agreement. The agreement also contains non-competition and non-disclosure provisions. On May 1, 2012, Erica Zalbert resigned as Chief Financial Officer and Secretary of ProText Mobility, Inc.

 

We entered into an employment agreement with Peter Charles effective as of October 1, 2009 for a term of three years to serve as our Vice President and Director of Corporate Affairs. The agreement provides that Mr. Charles will receive an annual base salary of One Hundred Thirty Five Thousand Dollars ($135,000), subject to a minimum 10% raise each year. Mr. Charles was issued 1,500,000 options upon signing the agreement, 500,000 of which vested immediately and 500,000 of which vested on the one year anniversary of the agreement and 500,000 of which vested on the second anniversary, October 1, 2011. Mr. Charles was also eligible to receive and did receive 2,500,000 performance based options. He also receives certain other benefits such as health insurance. Our company has the right to terminate the agreement for Good Cause as defined in the agreement. If the agreement is terminated for Good Cause he has no right to any further base salary but if we terminate for any other reason during the initial term, he is entitled to one month’s salary during year one, two months’ salary during year two and three months’ salary during year three. If Mr. Charles terminates the agreement due to a Company Material Breach as defined in the agreement, he is entitled to receive his full salary and benefits for three months after termination. If Mr. Charles terminates the agreement within 180 days of any warrant, option or bonus grant not for Good Cause he will forfeit such warrant, option or bonus received within the 180 day period. If we terminate the agreement for Cause as defined in the agreement, Mr. Charles will be entitled to receive accrued salary only through the termination date and if he is terminated for any other reason, he is entitled to receive severance equal to one year’s salary. Upon his death or disability he is not entitled to receive any base salary and upon a change of control he is entitled to receive his base salary and benefits specified in the agreement. The agreement also contains non-competition and non-disclosure provisions.

 

We entered into a consulting agreement with Dmidnights, Inc., a company owned by one of our board members, David Lewis, effective as of October 2010 for a twelve-month term with automatic twelve month renewal periods unless terminated by either party in writing with 90 days advance notice. The agreement provides that Mr. Lewis will receive a monthly consulting fee of Fifteen Thousand Dollars ($15,000) or 2,000,000 shares annualized, commencing upon the effective date of the agreement, and payable in equivalent value in either equity options, and/or company stock. The amount of shares are to be calculated by dividing the dollar amount of compensation by the thirty day volume weighted average for the same month of service. Dmidnights, Inc. is also entitled to an equity bonus at year end at the discretion of our board of directors. The agreement also contains non-disclosure provisions.

 ** **

**Director Compensation**

 

Directors who are employees of the Company do not receive any fees for their service on the Board. We use equity-based incentive compensation to attract and retain qualified candidates to serve on our Board. Our non-employee directors receive quarterly equity compensation in the form of the Company’s restricted common stock and stock options to purchase shares of the Company's common stock.

  

**DIRECTOR COMPENSATION TABLE**

 

**Name**

 

 

 

 

**Fees**

**Earned**

**or Paid in**

**Cash**

**($)**

 

 

**Stock**

**and**

**Option**

**Awards**

**($)**

 

 

**Total**

**($)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David Lewis

 

 

2012

 

 

$

-

 

 

$

80,000

(4)

 

$

80,000

 

 

 

 

2011

 

 

$

-

 

 

$

80,000

(3)

 

$

80,000

 

Frank Chester

 

 

2012

 

 

$

-

 

 

$

80,000

(4)

 

$

80,000

 

 

 

 

2011

 

 

$

-

 

 

$

80,000

(3)

 

$

80,000

 

Tyler Olbres (2)

 

 

2012

 

 

$

-

 

 

 

-

 

 

 

-

 

 

 

 

2011

 

 

$

-

 

 

$

65,500

(3)

 

$

65,000

 

 

(1)

No options were exercised in 2012 or 2011 by any directors.

 

(2)

Mr. Olbres joined the Board in 2010 and resigned January 4, 2012.

 

(3)

Represents amounts recognized by ProText Mobility for financial statement reporting purposes of a) Mr. Lewis’ 1,658,759 shares of restricted common stock; b) Mr. Chester’s 1,658,759 shares of restricted common stock and c) Mr. Oblres’s 1,540,146 shares of restricted common stock.

 

(4)

Represents amounts recognized by ProText Mobility for financial statement reporting purposes of a) Mr. Lewis’ 10,587,039 shares of restricted common stock; b) Mr. Chester’s 10,587,039 shares of restricted common stock.

  

**Risk Management**

The Company does not believe risks arising from its compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the Company.

 

**Item 12. -Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters**

 

The following table sets forth certain information, as of April 12, 2013, with respect to the beneficial ownership of our common stock by: (i) each holder of more than five percent (5%) of the outstanding shares of our Common Stock; (ii) our executive officers and directors; and (iii) all our executive officers and directors as a group. The Company's issued and outstanding voting securities at the close of business on April 12, 2013, consisted of 449,628,022 shares of common stock.

 

Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. Unless otherwise indicated below, each entity or person listed below maintains an address of c/o ProText Mobility, Inc., 60 Queens Street, Syosset, New York 11791.

 

The number of shares beneficially owned by each stockholder is determined under rules promulgated by the Securities and Exchange Commission. The information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting or investment power and any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after April 12, 2013 through the exercise of any stock option, warrant or other right. The inclusion in the following table of those shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner.

 

 

 

 

Shares

 

 

 

 

 

 

Beneficially

 

 

Percentage

 

Name

 

Owned

 

 

Beneficially

 

Rock Island Capital, LLC (1)

 

 

119,821,139

 

 

 

26.65

%

Tyler Olbres (3)

 

 

65,437,053

 

 

 

14.55

%

David Lewis (3)

 

 

55,520,431

 

 

 

12.35

%

Frank Chester (4)

 

 

31,815,540

 

 

 

7.05

%

Peter Charles (5)

 

 

4,250,000

 

 

 

0.95

%

Erica Zalbert (5) (6)

 

 

2,142,881

 

 

 

0.48

%

All directors and executive officers as a group (4 persons)

 

 

93,728,852

 

 

 

20.85

%

  

 

(1)

Rock Island Capital, LLC, with an address of 1234 South Dixie Hwy, #342, Coral Gables, FL 33146, has six members, of which two non-managing members serve on our board of directors, David Lewis and Tyler Olbres (a company that Mr. Olbres has 100% control over is the invested member in Rock Island, however Mr. Olbres represents himself on the board). The amounts beneficially owned by Rock Island include Mr. Lewis’ and Mr. Olbres' ownership. Mr. Safier and Mr. Grossfeld are the managing members of Rock Island and as such have voting and disposition control over the shares owned by Rock Island. Neither Mr. Lewis nor Mr. Olbres have voting or disposition control over the shares owned by Rock Island; Mr. Olbres has control over a 60.622% ownership interest in Rock Island and Mr. Lewis has a 6.155 % ownership interest in Rock Island.

 

 

Included in the total beneficial ownership of Rock Island are:

 

(i)

511,551 shares of Series B Preferred Stock which convert to common stock at a ratio of 100 to 1, of which 77,100 are owned directly by Rock Island and the balance have been assigned to the members of Rock Island.

 

(ii)

38,927,670 shares of common stock, of which 158,260 are owned directly by Rock Island and the balance are owned by the members of Rock Island of which 12,622,500 shares owned by Mr. Richard Grossfeld; 13,810,500 shares are owned by Mr. David Lewis ; 8,810,500 are owned by Mr. Jamie Safier and 1,188,000 are owned by Mr. Tyler Olbres.

(iii)

Warrants exercisable for 28,799,555 shares of common stock, of which 21,312,000 are owned by Mr. Tyler Olbres and 7,196,666 are owned by Mr. Richard Grossfeld.

 

 

Mr. Safier owns: (i) directly (a) 9,221,879 shares of common stock, (b) 46,052 shares of Series B Preferred Stock that convert to common stock on a 100:1 basis; and (ii) indirectly as the managing member of Rock Island: (a) 158,260 shares of common stock owned directly by Rock Island (of which Mr. Safier will receive 51,152 shares of common stock upon liquidation of Rock Island), and (b) 77,100 shares of Series B Preferred Stock owned by Rock Island that convert to common stock on a 100:1 basis (of which Mr. Safier will receive 22,896 shares upon liquidation of Rock Island).

 

Mr. Grossfeld owns: (i) directly (a) 13,033,879 shares of common stock, (b) warrants exercisable for 7,196,666 shares of common stock, (c) 46,052 shares of Series B Preferred Stock that convert to common stock on a 100:1 basis; and (ii) indirectly as the managing member of Rock Island (a) 158,260 shares of common stock owned directly by Rock Island (of which Mr. Grossfeld will receive 51,152 shares of common stock upon liquidation of Rock Island) and (b) 77,100 shares of Series B Preferred Stock owned by Rock Island that convert to common stock on a 100:1 basis (of which Mr. Grossfeld will receive 22,896 shares upon liquidation of Rock Island).

 

 

 

(2)

Included in the share ownership of Mr. Lewis are: (i) 46,052 shares of Series B preferred stock that convert to common stock on a 100:1 basis; (ii) 22,896 shares of Series B Preferred stock owned by Rock Island which represent a portion of the shares owned that would be attributed to him based upon his ownership percentage of Rock Island; (iii) options exercisable for 4,074,867 shares of common stock that are currently exercisable for Mr. Lewis’s services as a board of director and as a consultant; (iv) 25,071,775 shares of common stock for Mr. Lewis’s service as a board of director; (v) 19,427,777 shares of common stock owned directly by Mr. Lewis, and 51,152 shares of common stock owned by Rock Island which represent a portion of the shares owned that would be attributed to him based upon his ownership percentage of Rock Island.

 

(3)

Included in the share ownership of Mr. Olbres are; (i) 225,514 shares of Series B preferred stock that convert to common stock on a 100:1 basis that are owned by Rock Island and indirectly owned by Mr. Olbres due to his ownership interest in Rock Island which represent a portion of the shares owned that would be attributed to him based upon his ownership percentage of Rock Island; (ii) 503,810 shares of common stock; (iii) 1,637,508 shares of common stock issued to him as compensation for services as a director; (iv) 8,649,816 shares of common stock directly owned by Mr. Olbres purchased before his affiliation with Rock Island;  (v) 1,188,000 shares of common stock directly owned by Mr. Olbres; (vi) warrants exercisable for 21,312,000 shares of common stock all of which are currently exercisable (vii)10,000,000 shares of common stock issued in connection with issuance of revenue linked notes to the Company.

 

 

(4)

Included in Mr. Chester’s share ownership are options exercisable for 146,815 shares of common stock that are currently exercisable and 25,071,775 shares of common stock for Mr. Chester’s service as a board of director.

 

(5)

All of the securities beneficially owned by Mr. Charles and Ms. Zalbert are options exercisable for common stock, all of which are currently exercisable.

 

(2)

On May 1, 2012, Erica Zalbert resigned as Chief Financial Officer and Secretary of ProText Mobility, Inc.

 

 

Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of the Company's common stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date on which beneficial ownership is to be determined, upon the exercise of options, warrants or convertible securities.  Each beneficial owner's percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such person (but not those held by any other person) and which are exercisable within such 60 day period, have been exercised.

 

 

**Item 13. Certain Relationships and Related Transactions, and Director Independence**

 

The Company is indebted to a board member, David Lewis, for approximately $102,000. Mr. Lewis was issued two notes each in the principal amount of $12,500, each bear interest at a rate of 10% per annum, each is convertible into common stock at a conversion price of $.07 per share and one note matures on August 8, 2011 and the other August 31, 2011. Mr. Lewis was issued one additional note in the principal amount of $77,000 for funds received from October through December 30, 2011, which bears interest at a rate of 10% per annum, and is convertible into common stock at a conversion price of $0.03 per share and matures on June 27, 2012.The notes to Mr. Lewis are secured by all of our assets.

 

We entered into a consulting agreement with Dmidnights, Inc., a company owned by one of our board members, David Lewis, effective as of October 2010 for a twelve-month term with automatic twelve month renewal periods 

unless terminated by either party in writing with 90 days advance notice. The agreement provides that Mr. Lewis will receive a monthly consulting fee of Fifteen Thousand Dollars ($15,000) or 2,000,000 shares annualized, commencing upon the effective date of the agreement, and payable in equivalent value in either equity options, and/or company stock. The amount of shares are to be calculated by dividing the dollar amount of compensation by the thirty day volume weighted average for the same month of service. Dmidnights, Inc. is also entitled to an equity bonus at year end at the discretion of our board of directors. The agreement also contains non-disclosure provisions.

 

Director Independence

 

The Board of Directors have determined that Mr. Frank Chester is an independent director as of December 31, 2011.

 

**Item 14. Principal Accountant Fees and Services**

 

Audit Fees:

 

 

 

 

 

 

 

Year ended December 31, 2012 -

 

$

35,000

 

Year ended December 31, 2011 -

 

$

55,000

 

 

Fees billed for audit of year end consolidated financial statements and annual reports.

 

Audit-Related Fees: 

 

 

 

Year ended December 31, 2012 -

 

$

19,500

 

Year ended December 31, 2011 -

 

$

28,500

 

 

Fees billed for quarterly review of unaudited consolidated financial statements and interim reports

 

Tax Fees:

 

 

 

Year ended December 31, 2012 -

 

$

5,000

 

Year ended December 31, 2011 -

 

$

10,000

 

  

 

All Other Fees:

 

 

 

Year ended December 31, 2012 -

 

NONE

 

Year ended December 31, 2011 -

 

NONE

 

 

 

**Audit Committee Pre-Approval Policies and Procedures**

 

We currently do not have any members serving on the audit committee.

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
**Item 15. Exhibits**
 

Exhibit No.

  Description

 

 

 

3.1

 

Certificate of Incorporation of the Company (incorporated herein by reference to the Company’s Form SB-2 filed with the Securities and Exchange Commission on May 22, 2002 (File No. 333-97687)

3.2

 

By-laws of the Company (incorporated herein by reference to the Company’s Form SB-2 filed with the Securities and Exchange Commission on May 22, 2002 (File No. 333-97687)

3.3

 

Certificate of Amendment effective April 26, 2005 (incorporated herein by reference to the Company’s Form 8-K filed May 2, 2005)

3.4

 

Form of Certificate Designations, Voting Powers, Preferences, Limitations, Restrictions, and Relative Rights of Series A 7% Convertible Preferred Stock, $0.0001 par value (incorporated herein by reference to Form 8-K filed on February 13, 2007)

3.5

 

Amended By-Laws of the Company  (incorporated herein by reference to Form 8-K filed March 4, 2009)

3.6

 

Certificate of Designation of Series B Preferred Stock (incorporated herein by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 16, 2009)

3.7

 

Amended and Restated Certificate of Designations of Series B Preferred Stock (incorporated herein by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2010)

3.8

 

Amended and Restated Certificate of Designation of Series B Preferred Stock (Second) (incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 21, 2010)

3.9

 

Certificate of Ownership and Merger filed with the State of Delaware (incorporated herein by referent to the Company’s Form 8K filed on December 29, 2010)

3.10

 

Certificate of Amendment to Certificate of Incorporation, filed July 7, 2010 *

4.1

 

Specimen Common Stock Certificate of the Company*

4.2

 

Company 2004 Stock Plan, dated January 1, 2004 (incorporated herein by reference to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on March 16, 2004)

4.3

 

2009 Incentive Stock Plan (incorporated by reference to S-8 filed on October 19, 2010)

4.4

 

Form of 10% Convertible Promissory Note*

4.5

 

Form of 10% Convertible Promissory Note with restrictions *

4.6

 

Form of Promissory Note dated May 27, 2010 (10% Interest Rate) *

4.7

 

Form of Senior Promissory Note dated May 27, 2010 *

4.8

 

Form of Senior Promissory Note dated March 15, 2011*

4.9

 

Form of Senior Promissory Note dated December 29, 2010, as amended *

4.10

 

Form of Convertible Promissory Note (8% Interest Rate)*

4.11

 

Form of Promissory Note (Up to a Maximum of $200,000)*

4.12

 

Form of Senior Promissory Note (10% Interest Rate)*

4.13

 

Form of Warrant with an exercise price of $.15 per share on a cashless basis*

4.14

 

Form of Warrant with an exercise price of $.15 per share (private placement)*

4.15

 

Form of Warrant with a ceiling exercise price of $.15 per share at 30 day VWAP*

4.16

 

Form of Warrant with an exercise price of $.15 per share (promissory note)*

4.17

 

Form of Warrant with an exercise price of $.10 per share*

4.18

 

Form of Warrant with an exercise price of $.01 per share*

4.19

 

Form of Warrant with an exercise price of $.25 per share*

4.20

 

Form of Warrant with an exercise price of $.25 per share and detailed piggyback registration rights*

4.21

 

Form of Warrant with an exercise price of $.35 per share and detailed piggyback registration rights*

4.22

 

Form of Warrant with an exercise price of $.35 per share*

4.23

 

Form of Warrant with an exercise price of $.14 per share and detailed piggyback registration rights*

4.24

 

Form of Warrant with an exercise price of $.14 per share*

4.25

 

Form of Warrant with an exercise price of $.10 per share (cashless exercise)*

 

 

 

10.1

 

Lease Agreement, dated June 1, 2006, between the Company and RA 6800 Jericho Turnpike LLC

10.3

 

Separation Agreement between the Company and Mr. William Bozsnyak dated February 10, 2009.

 

 

(incorporated herein by reference to Form 10-K filed April 14, 2009)

10.4

 

Erica Zalbert Employment Agreement dated as of June 1, 2009 (incorporated by reference to the Company’s Form 10-Q on November 16, 2009)

10.5

 

Series B Convertible Preferred Stock Purchase Agreement dated September 9, 2009 by and between the Company and Rock Island Capital, LLC (“Series B Convertible Stock Purchase Agreement”) (incorporated herein by reference to the Company’s 10-Q filed November 16, 2009)

10.6

 

Addendum to Series B Convertible Stock Purchase Agreement dated August 13, 2009 (incorporated herein by reference to the Company’s 10-Q filed November 16, 2009)

10.7

 

Addendum to Series B Convertible Stock Purchase Agreement dated August 26, 2009 (incorporated herein by reference to the Company’s 10-Q filed November 16, 2009)

10.8

 

Amendment No. 1 to Series B Convertible Preferred Stock Purchase Agreement (incorporated herein by reference to 10-Q filed November 16, 2009)

10.9

 

Amendment No. 2 to Series B Convertible Preferred Stock Purchase Agreement (incorporated herein by reference to 10-K filed March 31, 2010)

10.10

 

Amendment No. 3 to Series B Convertible Preferred Stock Purchase Agreement (incorporated by reference to the Company’s Form 8K filed on June 1, 2010)

10.11

 

Amendment No. 4 to Series B Convertible Preferred Stock Purchase Agreement (incorporated by reference to Form 10Q filed on August 23, 2010)

10.12

 

Amendment No. 5 to Series B Convertible Preferred Stock Purchase Agreement (incorporated by reference to 10-Q filed November 15, 2010)

10.13

 

Investment Agreement dated as of August 24, 2011 between the Company and Eclipse Advisors, LLC (incorporated by reference to Form 8-K filed August 26, 2011)

 

 

Exhibit No.

 

 

Description

10.14

 

Registration Rights Agreement dated as of August 24, 2011 between the Company and Eclipse Advisors, LLC (incorporated by reference to Form 8-K filed August 26, 2011)

10.15

 

Peter Charles Employment Agreement effective as of October 2009*

10.16

 

Dmidnights, Inc. Consulting Agreement effective as of October 2010*

14

 

Code of Ethics of the Company (incorporated by reference to the Company’s Form 10-KSB filed on March 16, 2004)

21

 

List of Subsidiaries (incorporated by reference to the Company’s Form 10-KSB filed on April 17, 2006)

31.1

 

Certification of Principal Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 **

31.2

 

Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. **

32.1

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. ** 

32.2

 

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. ** 

 

 

 

*

 

Incorporated herein by reference to the Company’s Form S-1 filed with the Securities and Exchange Commission on October 21, 2011.

 

 

 

** 

 

Filed herein 

 

 

  

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

**ProText Mobility, Inc.**

 

(Registrant)

 

By:

/s/ Peter Charles

 

Peter Charles, Chief Executive Officer, Principal Executive Officer

 

Date: April 16, 2013

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name

 

Title

 

Date

 

 

 

 

 

s/ Frank Chester

 

 

 

 

Frank Chester

 

Director

 

April 16, 2013

 

 

 

 

 

/s/ David Lewis

 

 

 

 

David Lewis

 

Director

 

April 16, 2013

 

 

 

 

 

  

 

**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**INDEX**

 

 

 

**Page No.**

 

 

 

**FINANCIAL STATEMENTS:**

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

F-1 – F-2

 

 

 

Consolidated Balance Sheets as at December 31, 2012 and 2011

 

F-3

 

 

 

Consolidated Statements of Operations For the Years Ended December 31, 2012 and 2011

 

F-4

 

 

 

Consolidated Statement of Stockholders' Deficit For the Years ended December 31, 2012 and 2011

 

F-5 - F-6

 

 

 

Consolidated Statements of Cash Flows For the Years Ended December 31, 2012 and 2011

 

F-7 - F-8

 

 

 

Notes to Consolidated Financial Statements

 

F-9 - F-25

 

 

 

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and Stockholders

Protext Mobility, Inc.

We have audited the accompanying balance sheet of Protext Mobility, Inc., for the year ended December 31, 2012 and the related statement of operations, stockholders’ deficit and cash flows for the year ended December 31, 2012. These financial statements are the responsibility of Protext Mobility, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audit. 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Protext Mobility, Inc., as of December 31, 2012 and the results of its operations and its cash flows for the year ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the Company  will  continue  as a  going  concern.  As discussed in Note 1 to the financial statements, the Company has an accumulated deficit of $49,943,429 through December 31, 2012, and a net loss of $2,169,751 at December 31, 2012. These matters raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are described in note A. The accompanying financial statements do not include any  adjustments relating to the  recoverability  and classification of asset carrying amounts or the amount and  classification  of  liabilities  that  might  result  should the Company be unable to continue as a going concern.

/s/ RBSM LLP

Certified Public Accountants

New York, New York

April 16, 2013

 

 

 

 

**F-1**

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and Stockholders

Protext Mobility, Inc.

We have audited the accompanying balance sheet of Protext Mobility, Inc., for the year ended December 31, 2011 and the related statement of operations, stockholders’ deficit and cash flows for the year ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Protext Mobility, Inc., as of December 31, 2011 and the results of its operations and its cash flows for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the Company  will  continue  as a  going  concern.  As discussed in note 1 to the financial statements, the Company has an accumulated deficit of $44,092,616 through December 31, 2011, and a net loss of $3,588,825 at December 31, 2011. These matters raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are described in Note 1. The accompanying financial statements do not include any  adjustments relating to the  recoverability  and classification of asset carrying amounts or the amount and  classification  of  liabilities  that  might  result  should the Company be unable to continue as a going concern.

/s/ Sherb & Co., LLP

Certified Public Accountants

New York, New York

April 16, 2012

 

**F-2**

 
PROTEXT MOBILITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31,December 31, 20122011 ASSETS Current assets: Cash $ 349 $ 3,956 Prepaid expenses - 4,997 Total current assets349 8,953 Other assets: Capitalized software costs, less accumulated amortization of $317,367 and $211,428, respectively- 181,887 Website development costs, less accumulated amortization of $17,924 and $7,916, respectively- 22,084 Security deposit2,700 9,454 Total other assets2,700 213,425 Total assets $ 3,049 $ 222,378 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current portion of 10% convertible notes payable $ 114,034 $ 114,034 Convertible short term bridge notes payable, net of debt discount of $60,485 and $40,385 respectively1,337,656 885,756 Notes payable5,000 - Accounts payable750,423 607,522 Accrued expenses1,218,039 729,174 Total current liabilities3,425,152 2,336,486 Other liabilities: Dividends payable1,033,757 562,298 Total liabilities4,458,909 2,898,784 Stockholders' deficit Preferred stock - $.0001 par value, authorized - 25,000,000 shares; Series A Convertible Preferred stock - $.0001 par value, $2.62 liquidation value, 1,526,718 designated; issued and outstanding - 28,9683 3 Series B Convertible Preferred stock - $.0001 par value, $9.09 liquidation value, 1,000,000 designated; issued and outstanding -511,55151 51 Common stock - $.0001 par value, authorized - 750,000,000 shares; issued and outstanding -293,313,312 and 184,403,757 shares, respectively29,330 18,440 Additional paid-in capital44,943,481 44,092,616 Accumulated deficit (49,428,725) (46,787,516) Total stockholders' deficit (4,455,860) (2,676,406) Total liabilities and stockholders' deficit $ 3,049 $ 222,378 See notes to consolidated financial statements F-3
PROTEXT MOBILITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

For the Years Ending December 31,

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 $                                     10,634 

 

 $                          25,692 

 

 

 

 

 

 

Cost of Sales

 

 

 

 

   Write off of software costs

                                           75,948 

 

                                        -   

 

   Amortization of software costs

                                         105,939 

 

99,178 

 

Cost of Sales

                                         181,887 

 

99,178 

 

 

 

 

 

 

Gross Loss

                                       (171,253)

 

 (73,486)

 

 

 

 

 

 

Operating expenses:

 

 

 

 

  Selling

                                           14,831 

 

21,119 

 

  Web site costs

                                         132,405 

 

137,917 

 

  General and administrative

                                      1,189,534 

 

2,510,256 

 

  Depreciation and amortization

                                           10,008 

 

22,563 

 

Total operating expenses

                                      1,346,778 

 

2,691,855 

 

 

 

 

 

 

Loss from operations

                                    (1,518,031)

 

 (2,765,341)

 

 

 

 

 

 

Other (income) expenses: 

 

 

 

 

  Interest

                                         233,941 

 

111,936 

 

  Gain on extinguishment of liabilities

                                                  -   

 

 (19,814)

 

  Other income

                                                  -   

 

 (4,000)

 

  Write-off of website costs

                                                  -   

 

81,307 

 

  Debt conversion expense

                                                  -   

 

27,219 

 

  Amortization of note discounts

                                         417,779 

 

626,835 

 

Total other expenses 

                                         651,720 

 

823,483 

 

 

 

 

 

 

Net loss

                                    (2,169,751)

 

 (3,588,824)

 

 

 

 

 

 

Common stock dividends to be issued 

 

 

 

 

   for Series B Preferred Stock

                                       (471,458)

 

 (471,458)

 

 

 

 

 

 

  Net loss applicable to common stock holders

 $                              (2,641,209)

 

 $                   (4,060,282)

 

 

 

 

 

 

Per share data

 

 

 

 

  Net Loss per share - basic and diluted

 $                                       (0.01)

 

 $                            (0.03)

 

 

 

 

 

 

Weighted average number of

 

 

 

 

  shares outstanding- basic and diluted

                                  236,288,406 

 

148,194,879

 

 

 

 

 

 

See notes to consolidated financial statements

F-4

PROTEXT MOBILITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 For the Years Ended December 31, 

 

2012

 

2011

 

 

 

 

Cash flows from operating activities:

 

 

 

Net loss

 $  (2,169,751)

 

 $ (3,588,824)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Gain on extinguishment of debt

-   

 

 (19,814)

Debt modification expense

-   

 

27,219 

Write off of website development costs

12,076 

 

81,307 

Warrants/options issued for consulting services

-   

 

61,954 

Common stock issued for services

82,781 

 

369,391 

Common stock issued for compensation

160,000 

 

225,500 

Stock issued for interest

13,912 

 

13,836 

Compensatory element of stock options

16,182 

 

330,379 

Depreciation

-   

 

14,647 

Impairment of software development costs

75,948 

 

-   

Amortization of software and website development costs

115,947 

 

107,094 

Amortization of debt discount related to debt

417,779 

 

626,835 

Increase (decrease) in cash flows as a result of changes in asset and liability account balances:

 

 

 

Prepaid expenses and other assets

4,997 

 

7,133 

Deferred rent

-   

 

 (3,849)

Deposit

6,754 

 

-   

Accounts payable and accrued expenses

633,768 

 

990,170 

Due to stockholders

-   

 

 (4,314)

Total adjustments

1,540,144 

 

2,827,488 

 

 

 

 

Net cash used in operating activities

 (629,607)

 

 (761,336)

 

 

 

 

Cash flows from investing activities:

 

 

 

Capitalized software costs

-   

 

 (161,691)

Capitalized website development costs

-   

 

 (30,000)

Net cash used in investing activities

-   

 

 (191,691)

 

 

 

 

Cash flows from financing activities:

 

 

 

  Proceeds from sale of common stock

48,000 

 

427,938 

  Proceeds from exercise of stock options

-   

 

28,822 

  Proceeds from bridge notes payable 

655,500 

 

476,016 

  Payments of bridge notes payable

 (77,500)

 

 (30,000)

  Payments of note payable - equipment

-   

 

 (2,773)

  Payments under capital lease

-   

 

 (3,229)

Net cash provided by financing activities

626,000 

 

896,774 

 

 

 

 

Net decrease in cash

 (3,607)

 

 (56,253)

 

 

 

 

Cash at beginning of period

3,956 

 

60,209 

 

 

 

 

Cash at end of period

 $               349 

 

 $             3,956 

 

 

 

 

Supplemental Schedules of Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

Common stock issued in connection with extinguishment of payable

 $                   -   

 

 $        268,700 

Common stock issued as a result of debt conversion

 $          101,000 

 

 $     1,283,819 

Common stock issued in lieu of accrued interest

 $              2,000 

 

 $        127,694 

Restricted stock issued in connection to bridge loans

 $          274,052 

 

 $                 -   

Debt discount of beneficial conversion feature in relation to bridge loans

 $          163,828 

 

 $        132,166 

Common stock dividends payable for Series B Preferred Stock

 $          471,458 

 

 $        471,458 

 

 

 

 

See notes to consolidated financial statements

F-5

PROTEXT MOBILITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

Series B

 

 

 

 

 

 

Preferred Stock

Preferred Stock

Common Stock

Additional

 

Total

 

 

0.0001

 

0.0001

 

0.0001

Paid-In

Accumulated

Stockholders

 

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Deficit

Deficit

Balance at December 31, 2010

269,862 

 $        27 

511,551 

 $     51 

145,138,192 

 $14,514 

 $40,926,795 

 $(42,727,234)

 $(1,785,847)

 

 

 

 

 

 

 

 

 

 

Common stock issued as interest on debt

 

 

 

 

237,960 

24 

13,812 

 

13,836 

Common stock issued pursuant to Stock Purchase Agreements

 

 

 

 

7,924,009 

792 

427,146 

 

427,938 

Common stock issued for Debt settlement

 

 

 

 

2,462,421 

246 

268,453 

 

268,699 

Common stock issued pursuant to Preferred A conversion

(240,894)

 (24)

 

 

2,408,940 

241 

 (217)

 

                   -   

Fair value of common stock issued for services

 

 

 

 

7,535,702 

754 

368,637 

 

369,391 

Fair value of options issued for consulting services

 

 

 

 

 

 

61,954 

 

61,954 

Option expense 

 

 

 

 

 

 

330,379 

 

330,379 

Common stock issued in connection with option exercise

 

 

 

 

714,869 

71 

26,899 

 

26,970 

Common stock issued in connection with warrant exercise

 

 

 

 

738,273 

74 

1,778 

 

1,852 

Common stock issued board of directors compensation

 

 

 

 

4,857,663 

486 

225,014 

 

225,500 

Common stock issued pursuant to bridge note holder debt conversion

 

 

 

 

11,131,767 

1,113 

1,155,013 

 

1,156,126 

Common stock issued for accrued interest

 

 

 

 

1,253,961 

125 

127,569 

 

127,694 

Modification expense pursuant to warrant 

 

 

 

 

 

 

966 

 

966 

Modification expense pursuant to conversion of shares

 

 

 

 

 

 

26,252 

 

26,252 

Beneficial conversion feature recognized in connection with issuance of convertible notes payable

 

 

 

 

 

 

132,166 

 

132,166 

Deemed dividend related to Preferred B Shares

 

 

 

 

 

 

 

(471,458)

 (471,458)

Net loss

 

 

 

 

 

 

 

 (3,588,824)

 (3,588,824)

Balance at December 31, 2011

28,968 

3 

511,551 

        51 

184,403,757 

18,440 

44,092,616 

 (46,787,516)

 (2,676,406)

 

 

 

 

 

 

 

 

 

 

Common stock issued as interest on debt

 

 

 

 

1,320,180 

132 

13,780 

 

13,912 

Common stock issued pursuant to Stock Purchase Agreements

 

 

 

 

6,921,086 

692 

47,308 

 

48,000 

Fair value of common stock issued for services

 

 

 

 

            6,511,648 

             651 

              82,130 

 

            82,781 

Common stock issued board of directors compensation

 

 

 

 

21,174,077 

2,117 

157,883 

 

160,000 

Common stock issued pursuant to bridge note holder debt conversion

 

 

 

 

30,382,564 

3,038 

97,962 

 

101,000 

Common stock issued for accrued interest

 

 

 

 

2,000,000 

200 

1,800 

 

2,000 

Option expense 

 

 

 

 

 

 

16,182 

 

16,182 

Common stock issued in connection with issuance of debt

 

 

 

 

40,600,000 

4,060 

269,992 

 

274,052 

Beneficial conversion feature recognized in connection with issuance of convertible notes payable

 

 

 

 

 

 

163,828 

 

163,828 

Deemed dividend related to Preferred B Shares

 

 

 

 

 

 

 

 (471,458)

 (471,458)

Net loss

 

 

 

 

 

 

 

 (2,169,751)

 (2,169,751)

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

28,968 

 $             3 

511,551 

 $     51 

293,313,312 

 $ 29,330 

$44,943,481 

$(49,428,725)

$(4,455,860)

 

F-6

 

 

 

 

 

 

 

 

 

 

 

 

PROTEXT MOBILITY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012 and 2011

 

**NOTE 1 - DESCRIPTION OF BUSINESS AND GOING CONCERN**

 

ProText Mobility Inc. (formerly known as EchoMetrix Inc. and SearchHelp, Inc) was incorporated in the State of Delaware on September 5, 2001 and completed its initial public offering on July 23, 2003. During the fiscal year ended December 31, 2008, the Company acquired 100% of the stock of EchoMetrix, Inc, a wholly owned subsidiary, and in May of 2009 the Company filed a Certificate of Ownership and Merger with the state of Delaware pursuant to which EchoMetrix was merged into the Company, and the Company's corporate name was changed from SearchHelp, Inc. to EchoMetrix, Inc. In December of 2010, the Company formed a new Corporation (ProText Mobility, Inc) and filed a Certificate of Ownership and Merger with the state of Delaware pursuant to which the Company’s wholly owned subsidiary, ProText Mobility, Inc., was merged into the Company, and the Company’s name changed from Echo Metrix, Inc. to ProText Mobility, Inc.

 

Protext Mobility develops, markets and sells software products and solutions for the internet and mobile communications markets aimed at protecting children from danger on the internet and in mobile communication. The Company has expanded its business plan from developing software solely for personal computers (“PCs”) to developing software for products designed for the mobile industry. We offer three products, one for PCs and two for mobile communications devices. Although we continue to derive substantially all of our revenue from our first PC-based technology, namely FamilySafe Parental Controls, we anticipate deriving a substantial portion of our future revenues from products designed for the mobile industry. Our lead mobile product, SafeText, is a service for mobile devices that provides parents a tool to help manage their children’s mobile communication activities.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As reflected in the consolidated financial statements, the Company incurred net losses of approximately $2,170,000 and $3,589,000 for the years ended December 31, 2012 and 2011, respectively.  In addition, the Company had negative working capital (current liabilities minus current assets) of approximately $3,422,000 and an accumulated deficit of approximately $49,429,000 at December 31, 2012.

 

These circumstances raise substantial doubt about the Company's ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  Management's efforts have been directed towards the development and implementation of a plan to generate sufficient revenues to cover all of its present and future costs and expenses. This plan is to address mobile messaging market opportunities with novel, comprehensive and robust solutions for the consumer and enterprise market. Overall, we see a unique opportunity to add value to the underserved “trillion” text messaging market.

 

Our lead offering, SafeText, is a premium service for mobile devices that provide parents a solution to help manage their children’s mobile communications activities. SafeText is offered in two configurations; a device-based and a network-based solution as more fully described in Part I, *Business Strategy and Products*.

 

If the Company does not generate sufficient revenues from the sales of its products in an amount necessary to meet its cash needs, the Company will need additional financing to continue to operate. There are no assurances that the Company can continue to successfully raise additional financing.  As the Company increases sales from its products and services, the Company expects to increase cash flows from operations. The Company has been successful in raising money from equity and debt transactions. For the fiscal year ended December 31, 2012, the Company raised a total of approximately $704,000 comprised of proceeds from sale of common stock and issuance of debt. During the fiscal year ended December 31, 2011, the Company raised a total of approximately $933,000 comprised of the exercise of warrant and options ($29,000) and private placement of common stock and warrants and issuance of debt ($904,000). For the fiscal years ended December 31, 2012 and 2011, approximately $101,000 and $1,284,000, respectively of the bridge notes payable have been converted into common stock.

 

The accompanying consolidated financial statements have been prepared, in accordance with accounting principles 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:**

  

(a) Basis of Presentation:

 

ProText Mobility, Inc. is organized as a single reporting unit, with two operating divisions, and believes that it operates as a single business.   References in this report to “ProText Mobility”, the “Company”, “we”, “us” or “our” refers to ProText Mobility Inc. and its consolidated subsidiaries. All intercompany transactions have been eliminated in consolidation.

 

 (b) Revenue Recognition:

 

The Company recognizes revenues in accordance with authoritative guidance when services have been rendered, the sales price is determinable and collectability is reasonably assured. Revenue from online Internet sales is recognized upon the settlement of credit card charges, typically within three days of the sale.  

 

F-7

 

 

 

(c) Use of Estimates:

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

 

(d) Earnings Per Share:

 

The Company utilizes the guidance per FASB Codification “ASC 260 "Earnings Per Share". Basic earnings per share is calculated on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share, which is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation, plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding, is not presented separately as it is anti-dilutive. Such securities, shown below, presented on a common share equivalent basis and outstanding as of December 31, 2012 and 2011 have been excluded from the per share computations as their effect would be anti-dilutive:

 

 

 

**For the Years Ended December 31,**

 

 

 

**2012**

 

 

**2011**

 

2004 Stock Plan Options

 

 

-

 

 

 

-

 

Non ISO Stock Options

 

 

20,267,815

 

 

 

31,504,900

 

Convertible Preferred Stock

 

 

51,444,780

 

 

 

51,444,780

 

Convertible Bridge Notes and Notes Payable

 

 

53,480,601

 

 

 

26,436,060

 

Warrants

 

 

33,336,581

 

 

 

104,767,316

 

 

(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) Advertising Costs:

 

The Company expenses ordinary advertising and promotion costs as incurred. Advertising and promotion costs totaled approximately $10,000 and $73,000 for the fiscal year ended December 31, 2012 and 2011 respectively.

 

(g) Software Development Costs:

 

In accordance with the provisions of FASB Codification Topic ACS 985-20, "Costs of Software to be Sold, Leased, or Marketed,” software development costs are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for release to customers. For the years ended December 31, 2012, and 2011 the Company capitalized approximately $0 and $192,000 of software and website development costs, respectively.  The software and website costs are amortized on a straight line basis over the estimated useful life of three years. Amortization expense for the years ended December 31, 2012 and 2011 was approximately $117,000 and $107,000 respectively.

  

The Company continually strives to enhance and improve the functionality of its software products.  As such all new programming must be tested, even if it is only a small component of a larger existing element of the software, before being released to the public. Testing is an ongoing process and generally occurs in three areas. First, upgrades and enhancements are done on a continual basis to prolong the lifecycle of the products and as new enhancements and upgrades are completed, each item must be tested for performance and function. Testing is also performed to assure that new components do not adversely affect existing software. Finally, as with all software, testing must assure compatibility with all third party software, new operating systems and new hardware platforms.

 

(h) Research and Development Costs:

 

Research and development costs are expensed as incurred. No research and development costs were incurred during the years ended December 31, 2012 and 2011.

 

Research and development costs are generally expensed as incurred.

 

(i) Long-Lived Assets

 

In accordance with FASB Codification Topic ASC 360-10-15, Impairment or Disposal of Long-Lived Assets, we review long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.  In such circumstances, we will estimate the future cash flows expected to result from the use of the asset and its eventual disposition.  Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows.  If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, we will recognize an impairment loss to adjust to the fair value of the asset. For the fiscal years ended December 31, 2012 and 2011, the Company determined there was impairment to the software capitalization and website development expense and recorded write offs of approximately $88,000 and $81,000 which is included in the accompanying consolidated statement of operations.

 

F-8

 

 

 

(j) 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.

 

  

(k) 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 approximates 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.

 

(l) 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.

  

(m) Property and Equipment and Depreciation:

 

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided for over the estimated useful lives of the related asset using the straight-line method. The estimated useful lives for significant property and equipment categories are as follows:

 

Data processing equipment

 

3 to 5 years

Telecommunication equipment

 

5 years

Purchased software

 

3 years

 

(n) 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 the years ended December 31, 2012 and 2011.

 

  

**NOTE 3 - STOCK COMPENSATION**

 

The Company’s 2004 Stock Plan (the “ 2004 Plan”), which is shareholder approved, permits the grant of share options and shares to its employees for up to 1,500,000 shares of Common Stock as stock compensation. All stock options under the 2004 Stock Plan are granted at the fair market value of the Common Stock at the grant date. Employee stock options vest ratably over a three-year period and generally expire 5 years from the grant date.

 

The Company’s 2009 Incentive Stock Plan, (the “2009 Plan”), which is Board of Director approved, permits the grant of share options and shares to directors, executives and selected employees and consultants for up to 25,000,000 shares of Common Stock as stock compensation. During the year ended December 31, 2012, 6,511,648 shares of common stock have been issued to employees and consultants for services.

 

**Accounting for Employee Awards:**

 

The Company adheres to the provisions of Share Based Compensation as defined in the FASB codification, topic ASC 718. The codification focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. This guidance requires an entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is recognized over the period during which an employee is required to provide services in exchange for the award.

 

As a result of the adoption of the provision of Share Based Compensation, the Company's results for the year ended December 31, 2012 and 2011 include share-based compensation expense for employees and board of directors totaled approximately $160,000 and $714,000, 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.

 

During the year ended December 31, 2012, there were no options granted. In the year December 31, 2011, the Company granted 2,750,000 fully vested options to employees with an exercise price ranging from $0.01 to $0.11 and a five year term.

 

F-9

 

The fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. During the year ended December 31, 2012 and 2011 the assumptions made in calculating the fair values of options are as follows:

 

 

 

**For the Years Ended December 31,**

 

 

 

**2012**

 

 

**2011**

 

Expected term (in years)

 

 

-

 

 

 

5

 

Expected volatility

 

 

-

 

 

 

105.96%-108.94%

 

Expected dividend yield

 

 

-

 

 

 

0%

 

Risk-free interest rate

 

 

-

 

 

 

1.72%-3.75%

 

 

Accounting for Non-employee Awards:

 

The Company records its stock-based compensation expense in accordance with ASC 718-10, formerly SFAS 123R, “Share Based Payment” to its non-employee consultants for stock granted.

 

Stock compensation expense related to non-employee options was approximately $0 and $0 for the years ended December 31, 2012 and 2011, respectively.  These amounts are included in the Consolidated Statements of Operations within the general and administrative expenses line item.

 

There were no options granted to non-employees during the year ended December 31, 2012.

 

The following table represents our stock options granted, exercised, and forfeited during the year ended December 31, 2012.

 

 

 

 

 

 

**Weighted**

 

 

**Weighted**

 

 

 

 

 

 

 

 

 

**Average**

 

 

**Average**

 

 

 

 

 

 

 

 

 

**Exercise**

 

 

**Remaining**

 

 

**Aggregate**

 

 

 

**Number**

 

 

**Price**

 

 

**Contractual**

 

 

**Intrinsic**

 

**Stock Options**

 

**of Shares**

 

 

**per Share**

 

 

**Term**

 

 

**Value**

 

**Outstanding at December 31, 2010**

 

 

32,473,422

 

 

$

0.20

 

 

 

2.3029

 

 

$

0

 

**Granted**

 

 

2,750,000

 

 

 

0.06

 

 

 

4.6392

 

 

 

 

 

**Exercised**

 

 

(746,119

)

 

 

0.03

 

 

 

 

 

 

 

 

 

**Forfeited/expired**

 

 

(2,972,403

)

 

 

0.10

 

 

 

 

 

 

 

 

 

**Outstanding at December 31, 2011**

 

 

31,504,900

 

 

$

0.09

 

 

 

2.7715

 

 

$

0

 

**Granted**

 

 

-

 

 

 

-

 

 

 

-

 

 

 

- 

 

**Exercised**

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

**Forfeited/expired**

 

 

(11,237,805

)

 

 

0.11

 

 

 

 

 

 

 

 

 

**Outstanding at December 31, 2012**

 

 

20,267,815

 

 

$

0.08

 

 

 

2.3099

 

 

$

0

 

 

**  **As of December 31, 2012 and 2011, approximately $16,000 and $330,000, respectively, 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 December 31:

 
 

 

2012

 

 

2011

 

Furniture and fixtures

 

$

3,780

 

 

$

3,780

 

Data processing equipment

 

 

212,730

 

 

 

212,730

 

Telecommunication equipment

 

 

21,262

 

 

 

21,262

 

Purchased software

 

 

2,395

 

 

 

2,395

 

 

 

 

240,167

 

 

 

240,167

 

Less: accumulated depreciation

 

 

(240,167

)

 

 

(240,167

)

Total property and equipment, net

 

$

-

 

 

$

-

 

 

Depreciation charged to operations amounted to approximately $0 and $15,000 for the years ended December 31, 2012 and 2011, respectively. Property and equipment include gross assets acquired under capital leases of approximately $0 and $108,000 at December 31, 2012 and 2011, respectively. Capital leases are included as a component of data processing equipment. Amortization of assets under capital leases is included in depreciation expense.

 

**NOTE 5 - 10% CONVERTIBLE NOTES PAYABLE**

 

During the fiscal year ended December 31, 2011 the remaining 10% convertible notes outstanding were in default. The default provision requires an additional 2% interest per annum until the loans are repaid or converted. The 2% default penalty totaled approximately $3,000 for years ended December 31, 2012 and 2011, respectively and is included in interest expense on the consolidated statement of operations and in accrued expenses on the consolidated balance sheet as of December 30, 2012 and 2011, respectively.

 

As reflected on the balance sheets, the value of the 10% convertible notes at December 31, 2012 and December 31, 2011 amounted to approximately $114,000 and are classified as current due to the fact that they are in default for the non-payment by the maturity date.  The Notes are convertible at any time at the option of the holder into Common Stock at the conversion rate of $0.40 per share. 

 

F-10

 

 

 

**NOTE 6 - BRIDGE NOTES PAYABLE**

 

**Convertible Bridge Notes Payable:**

**2012**

 

*Convertible Bridge Notes Payable:*

 

During the year ended December 31, 2012, the Company repaid two short-term convertible bridge notes totaling $77,500. In addition, the Company converted two short-term convertible bridge notes totaling $101,000 into 30,382,564 shares of common stock. During the year ended December 31, 2012, the Company received $244,500 in short term convertible bridge notes payable. The notes bear interest between 6% - 10% interest and are payable upon maturity, 9 months from the date of the loans.

 

*Revenue Linked Convertible Notes Payable:*

 

During the year ended December 31, 2012, the Company entered in to several short term convertible notes totaling $406,000. These notes mature in 9 months, are non-interest bearing and convertible into $0.07 a share after 9 months. In addition, the noteholders received 1,000,000 shares for every $10,000 invested for a total of 40,600,000 shares.

 

As a result of these issuance the Company recorded a beneficial conversion feature amounting to approximately $275,000 and recorded amortization expense amounting to $195,000.

 

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.

 ** **

**2011**

 

*Convertible Bridge Notes Payable:*

 

In 2011, bridge noteholders converted approximately $1,156,126 of principal and $80,000 in accrued interest into 12,385,728 shares of the Company’s common stock. During the year ended December 31, 2011 the Company received $476,016 in short term convertible bridge notes payable. The notes bear interest at 10% interest and are payable upon maturity, 90-180 days from the date of the loans. During the year ended December 31, 2011, the Company repaid $30,000 of notes payable.

 

During the year ended December 31, 2011, the Company recorded amortization expense of approximately $627,000 relating to current and prior year debt discount on bridge notes payable.

**Non-Convertible Bridge Notes Payable:**

**2012**

 

In October of 2012, the Company entered in to short term note payable totaling $5,000. This note matures on April 17, 2013 and bears interest at 8% per annum.

 

**2011**

 

In March of 2011, the principal balance of the note of approximately $125,000 and accrued interest of approximately $48,000 was converted into 1,424,028 shares of common stock of the Company.

 

**NOTE 7 - DUE TO STOCKHOLDERS**

 

At December 31, 2010, the Company was indebted to its former CEO, William Bozsnyak, in the amount of approximately $196,000, for working capital advances, accrued interest and unpaid salaries and vacation.  

 

In March of 2011, the Company settled all outstanding liabilities with Mr. Bozsnyak in exchange for 1,200,000 shares of common stock and recorded a gain on extinguishment of approximately $47,000, which is included in the accompanying consolidated statement of operations for the year ended December 31, 2011.

 

F-11

 

 

 

 

 

 

 

 

 

 

**NOTE 8 - INCOME TAXES**

 

The tax effect of the temporary differences that give rise to deferred tax assets are presented below:

 

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

Deferred Tax Assets:

 

 

 

 

 

 

 

 

Net Operating Losses

 

$

10,018,000

 

 

$

9,426,000

 

Option Expense

 

 

2,469,000

 

 

 

2,463,000

 

Other

 

 

(153,000

)

 

 

(130,000

)

Valuation Allowances

 

 

(12,334,000

)

 

 

(11,759,000

)

 

 

 

 

 

 

 

 

 

Net Deferred Tax Asset

 

$

-

 

 

$

-

 

 

At December 31, 2012 and 2011, 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 $25,687,000 at December 31, 2012 for federal and state income tax purposes.  These carryforwards are available to offset future taxable income and expire at various dates through 2032.

 

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:

 

 

 

2012

 

 

2011

 

U.S federal income tax at statutory rate

 

$

(738,000

)

 

$

(1,220,000

)

State income tax, net of federal income tax benefit

 

 

(108,000

)

 

 

(180,000

)

Other

 

 

5,000

 

 

 

5,000

 

Beneficial conversion feature

 

 

163,000

 

 

 

244,000

 

Equity based compensation

 

 

95,000

 

 

 

232,000

 

Valuation tax asset allowance

 

 

583,000

 

 

 

919,000

 

Effective tax rate

 

$

-

 

 

$

-

 

 

 

**NOTE 9 -    EQUITY TRANSACTIONS**

 

**Common Stock:**

 

***2012***

 

Payment of Interest

 

For the year ended December 31, 2012, the Company issued 1,320,180 shares (valued at $13,912) of the Company’s common stock as payment for interest due on the Company’s 10% convertible notes.

 

Services Rendered

 

The Company issued 6,511,648 shares (valued at $82,781) for the year ended December 31, 2012 of the Company’s restricted common stock as payment for compensation to consultants and employees. The Company issued 21,174,077 shares (valued at $160,000) for the year ended December 31, 2012 of the Company’s restricted common stock as payment for services to the Board of Directors.

 

Debt Conversion of Interest

 

In the year ended December 31, 2012, the Company issued 2,000,000 shares of its common stock as a result of converting $2,000 of accrued interest on the bridge note holders.

 

Debt Conversion

 

In the year ended December 31, 2012, the Company issued 30,382,564 shares of its common stock as a result of converting $101,000 of principal on the bridge note holders.

 

Issuance of Common Stock as a Result of Sale of Securities

 

In the year ended December 31, 2012, the Company issued 6,921,686 shares of common stock for proceeds from the sale of the Company’s common stock of $48,000. 

 

Common Stock Issued in Connection with Debt Issuance

 

In the nine months ended December 31, 2012, the Company issued 40,100,000 shares of its common stock as a result of the issuance of $401,000 of principal on the bridge notes.

 

 

F-12

 

 

***2011***

 

Payment of Interest

 

For the year ended December 31, 2011, the Company issued 237,960 shares (valued at $13,836) of the Company’s common stock as payment for interest due on the Company’s 10% convertible notes.

 

Services Rendered

 

The Company issued 7,535,702 shares (valued at $369,391) for the year ended December 31, 2011 of the Company’s restricted common stock as payment for compensation to consultants and employees. The Company issued 4,857,663 shares (valued at $225,500) for the year ended December 31, 2011 of the Company’s restricted common stock as payment for services to the Board of Directors.

 

Extinguishment of Accounts Payable

 

During the year ended December 31, 2011 the Company issued 2,462,421 shares (valued at $268,700) of its common stock in lieu accounts payable and the due to shareholder totaling approximately $287,500.  The resulting net gain of approximately $19,000 is included within the gain on extinguishment of liabilities line item in the accompanying consolidated statement of operations.

 

Option and Warrant Exercises

 

During the year ended December 31, 2011 the Company issued 714,869 shares of common stock as a result of option exercises (500,000 were cashless and the Company received proceeds totaling $26,970 for the non-cashless exercise of 246,119 options).

 

During the year ended December 31, 2011, the Company issued 738,273 shares of common stock as a result of 787,099 warrants exercised on a cashless basis.

 

Debt Conversion of Interest

 

In the year ended December 31, 2011, the Company issued 1,253,961 shares of its common stock as a result of converting $125,012 of accrued interest on the bridge note holders.

 

Debt Conversion

 

In the year ended December 31, 2011, the Company issued 11,131,767 shares of its common stock as a result of converting $1,158,807 of principal on the bridge note holders.

 

Issuance of Common Stock as a Result of Sale of Securities

 

In the year ended December 31, 2011, the Company issued 7,924,009 shares of common stock for proceeds from the sale of the Company’s common stock of $427,938. 

 

Conversion of Preferred A

 

In the year ended December 31, 2011, shareholders converted 240,894 shares of Preferred A into 2,408,940 shares of common stock.

 

Warrants:

 

During the year ended December 31, 2012, the Company did not grant any warrants. In the year ended December 31, 2011, the Company granted 413,025 warrants with a 5 year term and a $0.01 cashless exercise price to a consultant and recorded approximately $62,000 of compensation expense which is included in the accompanying consolidated statement of operations in the general and administrative line item. All of these warrants were exercised within the first fiscal quarter of 2011.

 

 

 

 

 

 

 

**Weighted**

 

 

 

 

 

 

**Average**

 

 

 

**Common**

 

 

**Exercise**

 

 

 

**Shares**

 

 

**Price**

 

**Outstanding at December 31, 2010**

 

 

113,020,650

 

 

$

0.04

 

**Issued**

 

 

413,025

 

 

 

0.01

 

**Exercised**

 

 

(787,099

)

 

 

(0.01)

 

**Expired**

 

 

(7,879,260

)

 

 

(0.21)

 

**Outstanding at December 31, 2011**

 

 

104,767,316

 

 

$

0.03

 

**Issued**

 

 

-

 

 

 

-

 

**Exercised**

 

 

-

 

 

 

-

 

**Expired**

 

 

(71,430,735

)

 

 

(0.21)

 

**Outstanding at December 31, 2012**

 

 

33,336,581

 

 

$

0.03

 

 

 

F-13

 

 

**NOTE 10 -     PREFERRED STOCK**

 

**Series A Convertible Preferred Stock**

 

For the year ended December 31, 2012 and 2011, the Company has 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.  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.

 

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.

 

In accordance with the agreement, dividends payable in common stock amounting to 2,708,000 shares were issued for the year ended December 31, 2010.

 

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.

 

 

 

 

 

 

F-14                                    

 

 

 

 

 

 

 

 ̈

 

The warrants issued or issuable under the Agreement shall be exercisable on a cashless basis.

 

 ̈

On October 20, 2010, the Company filed an Amended and Restated Certificate of Designation of Series B Preferred Stock, pursuant to which:

 

 

 

 

▪

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;

 

 

 

 

▪

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

 

 

 

 

▪

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.

 

 

 

 

 

 

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.

 

For the year ended December 31, 2010, the Company received $2,650,000 from the sale of Series B Convertible Preferred Stock, and issued an additional 291,529 preferred B shares. The Company recorded the beneficial conversion feature and the warrant associated with such investment as a deemed preferred dividend of $2,650,000 with a corresponding credit to additional paid in capital. 

 

In accordance with Amendment No. 5, the Company has accrued dividends payable amounting to approximately $1,034,000 and $562,000 at December 31, 2012 and 2011, respectively which is included in the accompanying consolidated balance sheet.

 

 

**NOTE 11 -     COMMITMENTS AND CONTINGENCIES**

 

Legal Proceedings

 

On May 10, 2010, the Company was served with an action from Ms. Von Biederman for breach of contract seeking damages in excess of $75,000. The Company was in mediation proceedings, and has accrued $20,000 of prior consulting fees due to Ms. Von Biederman.

 

Ms. Von Biederman motioned for a summary judgment that the Company breached the employment agreement by terminating her employment without good cause and/or due to a change in control of the Company.  On August 8, 2012 Ms. Von Biederman's motion was denied.  

 

Further, on August 8, 2012, the Court granted Ms. Von Biederman a summary judgment that the Company breached the employment agreement by failing to pay her salary owed between July 29, 2009 and November 15, 2009 and the Company breached the consulting agreement by failing to pay Ms. Von Biederman the $20,000 owed under the consulting agreement.  

 

The Company is currently in the process of a settlement regarding this case.

In July 2012, a former employee filed suit against the Company alleging various employment related claims.  The case is ongoing and the Company has accrued roughly $24,000 relating to the fees in question.

 

Lease Obligation

 

Our principal executive offices are located at 60 Queens Street, Syosset, New York 11791.  Our lease for such premises commenced April 1, 2012 and is for one year term for a monthly rent of $1,350.00

  

**NOTE 12 - SUBSEQUENT EVENTS**

 

In April 2013, the Company increased its authorized share amount from 425,000,000 shares, of which 400,000,000 relate to common shares and 25,000,000 relate to preferred shares, to 775,000,000 shares of which 750,000,000 relate to common shares and 25,000,000 relate to preferred shares. 

 

F-15