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EX-23.1 - ProText Mobility, Inc.v216373_ex23-1.htm
EX-3.1(B) - ProText Mobility, Inc.v216373_ex3-1b.htm
EX-10.43 - ProText Mobility, Inc.v216373_ex10-43.htm
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, 2010

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.)
  
  
6800 Jericho Turnpike – Suite 208E, 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 
 
 
     
Class A Warrant to Purchase Common Stock
 
 
     
Class B Warrant to Purchase Common Stock
 
 

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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   o     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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, 2010, 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 "EHMI" as quoted on the National Association of Securities Dealers Inc. OTC Bulletin Board of $0.14 was approximately $6,369,499. 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 March 30, 2011 was 159,614,603.

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. Removed and Reserved
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; dependence on the oil services market for pipe and well cleaners; 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.
 
 
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PART I

Item 1. Description of Business

ProText Mobility Inc. (formerly known as EchoMetrix Inc. and SearchHelp, Inc) (the “Company”, “ProText Mobility”, “we”, “us”, or “our”) 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, 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 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.

Business Summary

Protext Mobility develops innovative products and solutions for the mobile communications market. As disclosed in public filings, the Company has evolved from a software developer for personal computer (“PC”) to products designed for the mobile industry. Our first technology, FamilySafe Parental Controls continues to generate revenue for the Company. Going forward, the Company’s mission is to leverage our core intellectual property; namely, the ability to analyze and contextualize digital data streams and apply the results towards high-growth markets, such as mobile communications and messaging. Our lead offering, SafeText is a premium service for mobile devices that provides parents a solution to help manage their children’s mobile communication activities.

Business Strategy and Products

Mobile Background
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.” This continues to be the case. To understand the significance of the mobile market, consider the personal computer industry sells a little over 300 million units per year — this includes all desktops, laptops, notebooks, netbooks and the tablet PCs like the iPad and Kindle. Similarly, television sets sell in the same range, about 300 million units per year, and DVD players sell approximately 250 million units annually. These are the global giants in electronics. Other electronic gadgets, like video-gaming consoles, digital cameras, and MP3 players like the iPod, sell in far smaller numbers per year.
 
In the past year, the world saw sales of 1.37 billion mobile phones. Smartphones alone sold close to 300 million units in 2010, and according to Ahonen Consulting, next year more Smartphones will be sold than every type of personal computer combined. Specific to mobile messaging, the industry generated $172 billion in 2010, with text messages representing $153 billion and the other messaging types, IM and email, adding the remaining $19 billion.

Our goal 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 Solutions
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 Parental Management is an easy to use and effective mobile solution providing instant notification when potentially "dangerous" situations are happening through a text messaging interaction. The offering enables and empowers parents with an easy to use, robust set of tools and features designed to help protect and manage their children’s text messaging activities against cyber-bullying and other threats that exist in the digital world. SafeText has a proprietary database including an extensive library of words, phrases and slang that allow for a complete auto-analysis of text conversations. The parents can see full text message history and message content within the guidelines of current Privacy laws.
 
 
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SafeText is offered in two configurations; a device-based and a network-based solution.
 
Core features of SafeText are proprietary and patent-pending technology that we consider to be competitively advantageous.

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.
 
Network-based
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. The SafeText parental management solution is integrated with Acision’s Message Plus platform. Message Plus provides a rich set of enhancements across multiple mobile messaging technologies (e.g. 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.

FamilySafe Parental Controls
 
Through our FamilySafe Parental Controls product we offer software products designed to provide comprehensive and an effective solution in protecting children 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. Online safety remains the primary concern for parents across America. The prevalence of online predators coupled with adult content, and high-risk behavior (such as “cyber-bullying”, “text rage” and “sexting”) reinforces the need for advanced online safety products.

Marketing
 
SafeText
 
Our marketing strategy for the SafeText device-base solution is primarily direct to consumer. We are also leveraging mobile carrier platforms for solution sponsorship. Our product is offered on the ANDROID marketplace and through our association with the AmberWatch Foundation at www.amberwatchsafetext.com. This website and the information contained on this website are not incorporated into this annual report. The Company is in discussions with numerous carriers.

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.  This website and the information contained on this website are not incorporated into this annual report.

Competition

The Company’s competition for the SafeText product are other developers of applications available on the marketplaces within a subscribers carrier. SafeText competition includes NetNanny and S-Mobile. 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.).
 
 
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The Company responds promptly and effectively to the challenges of technological change, evolving standards and the competitors' innovations by continuing to enhance the Company's products and services, as well as bolstering the Company's sales and marketing channels.

Economic Dependency

The Company sold its products primarily on line in the current year and for fiscal year 2009.   There was no customer that accounted for more than 10% of the sales for the fiscal year ended December 31, 2010.
 
Intellectual Property

ProText Mobility has filed patent protection for the Company’s SafeText solution and seeks to file additional protection measures. To date, we have filed provisional patents for the Company’s Smart Message Analyzer and various other proprietary processes and concepts and look to file additional protection measures, such as, trademark, trade name or copyright protection.  We therefore 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 March 30, 2011, the Company has five full time employees.

Item 1A. Risk Factors.

IF WE CONTINUE OUR HISTORY OF LOSSES, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS

We incurred net losses of approximately $5,679,000 and of $4,481,000 for the years ended December 31, 2010 and 2009, respectively. Since inception, we have an accumulated deficit approximating $42,727,000.  As a result, as of December 31, 2010, we had a stockholders’ deficit of approximately $1,786,000 and a working capital deficiency of approximately $1,916,000. We cannot be certain whether we will ever make a profit, or, if we do, that we will be able to continue earning a significant amount of revenues or making a profit. 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 MAY NOT BE ABLE TO CONTINUE OUR BUSINESS AS A GOING CONCERN

The report of our independent auditors for the fiscal year ended December 31, 2010 was issued under the assumption that we would continue as a going concern. As discussed in Note 1 to our financial statements for the fiscal year December 31, 2010, 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, 2010, that such results raised substantial doubts about our ability to continue as a going concern. The financial statements included in the Annual Report on Form 10-K do not include any adjustments to asset values or recorded liability amounts that might be necessary in the event we are unable to continue as a going concern. If we are in fact unable to continue as a going concern, you may lose your entire investment.
 
 
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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

The Company's cash on hand at December 31, 2010 totaled approximately $60,000. To date, the Company received proceeds from sale of the Company’s Series B Preferred Stock totaling $4,650,000. If we do not receive funding as stipulated in the agreement, we will need additional financing to meet our obligations and to continue our business. If we are not able to raise funds, we may not be able to successfully develop and market our products and our business will most likely fail.

AS WE RAISE ADDITIONAL CAPITAL, A SHAREHOLDER'S PERCENTAGE OWNERSHIP INTEREST IN PROTEXT MOBILITY 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, the Company entered into a Stock Purchase Agreement for sales of its Series B Preferred Stock and to date has issued 511,551 shares of preferred stock.  Preferred stock has a priority to the common stock, and will reduce common shareholders' percentage of ownership. If the Company receives additional tranches and issues additional stock in accordance with the Amended Stock Purchase Agreement, common shareholders' ownership interest will be further reduced.

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 our Chief Executive Officer, Chief Financial Officer and Chief Operating 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 phones. 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 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.

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 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 mobile devices that provide parents a solution to help manage their children’s mobile 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.
 
 
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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 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.
 
 
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OUR COMPANY IS A PARTY TO VARIOUS LITIGATION

We have been engaged in various litigations (See Litigation section below).  A negative outcome in these actions could adversely effect our business.  We could be subject to future litigations that could materially affect our ability to operate our Business.

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 created a class of 1,526,718 Series A 7% of cumulative preferred stock, since that date, we have sold an aggregate of 901,237 shares of Series “A” preferred stock and may issue additional shares of our Series “A” preferred stock at any time. The preferred stock has a liquidation preference of $2.62. Our board of directors created the Series “B” preferred stock, with 1,000,000 shares designated, and since that date, we have sold 511,551 shares.  As future tranches of capital are received by the Company, additional preferred B stock may be issued. The rights of future preferred stockholders could delay, defer or prevent a change of control of ProText Mobility, 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 $0.05 and $0.23 for the year ended December 31, 2010 and between $0.05 and $0.28 for the year ended December 31, 2009. 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.

The Company’s Common Stock does not currently have an active or liquid public market. As a result, investors may find it difficult to sell their shares of our Common Stock. There can be no assurance that a liquid market for our securities will ever develop in the United States, or elsewhere, or that if such a market does develop, that it will continue; or that the trading price of our securities will not be subject to significant price fluctuations. Investors may also find it difficult to obtain accurate information and quotations as to the price of the Company’s securities. 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.

OUR SHARES ARE CLASSIFIED AS “PENNY STOCK” AND BECAUSE “PENNY STOCK” RULES WILL APPLY, YOU MAY FIND IT DIFFICULT TO SELL YOUR SHARES

A “penny stock” is a common stock that is not listed on a national securities exchange and trades for less than $5.00 per share. Additional disclosure is required in connection with trades in a penny stock. These disclosure requirements may have the effect of reducing the level of trading activity in our common stock, making the market for the shares of common stock illiquid.
 
 
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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, 2010, we had a total of approximately 145,138,000 shares of common stock outstanding, but there were also approximately 212,519,000 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

ProText Mobility has never paid any cash dividends on its shares of common stock and there are presently no plans being considered that would result in the payment of cash dividends.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

The Company leases an executive office consisting of 1,868 square feet at 6800 Jericho Turnpike, Suite 208E, Syosset, New York 11791. The lease commenced on July 31, 2006 and has a five year and two month term. The current rent is approximately $4,800 per month ($57,600 per year) and increases approximately 3% per annum. The Company has a security deposit with its landlord of $8,406.
 
Rent expense was approximately $61,000 and $50,000 for the years ended December 31, 2010 and 2009, respectively.

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

Item 3. Legal Proceedings.

Freifeld

On or about November 2008, the plaintiffs, Freifelds brought an action against the Company seeking summary judgment in lieu of complaint on two debt conversions.  The plaintiffs converted their notes and received the Company’s stock certificates in November 2008. Subsequently, the plaintiffs brought suit, requesting repayment of their converted notes.  The Company has retained legal counsel and has filed pre-answer motion for summary judgment for the Company.  The Plaintiffs have moved for summary judgment in lieu of a complaint and we cross-moved for summary judgment. The Court has indicated that it is going to set the matter down for an evidentiary hearing. On October 20, 2010, the Company reached a settlement with the plaintiff resulting in an additional 527,175 shares for interest accrued from October 23, 2008 until settlement date. 
 
 
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Attorney General Inquiry

On or about September 24, 2009, the Company received a subpoena duces tecum from the Attorney General’s Office of the State of New York that seeks documents and information related to the PULSE. As disclosed in the Company’s 8-K filed on September 17, 2010, the Company entered into an Assurance of Discontinuance Pursuant to Executive Law §63(15) (the “Assurance”) with the Office of the Attorney General of the State of New York (the “OAG”). The Company neither admits nor denies the findings of the OAG, made in connection with the OAG’s inquiry relating to the Company’s discontinued “PULSE” project. Pursuant to the Assurance of Discontinuance, (i) the Company is permanently enjoined from using or selling the PULSE product. (The Company had voluntarily ceased marketing the PULSE product shortly after the commencement of the OAG’s inquiry; (ii) the Company will pay $100,000 to the OAG in disgorgement, penalties, and costs; and (iii) the OAG will discontinue its investigation of the “PULSE” project. The Company paid $100,000 in the year ended December 31 2010.

Federal Trade Commission Civil Investigative Demand

On or about December 16, 2009, the Company received a Civil Investigative Inquiry from the Federal Trade Commission (“FTC”) related to PULSE.  In October of 2010, the Company entered into a Final Order for Permanent Injunction and Other Equitable Relief in settlement of the FTC’s allegations. Pursuant to the Order, the Company is permanently enjoined from using or selling the PULSE product (which the Company had voluntarily ceased marketing the PULSE product shortly after the commencement of the FTC’s inquiry) and to destroy an information collected from PULSE. There was no monetary settlement.

Almut Von Biedermann

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 is currently in mediation proceedings, and has accrued $20,000 of prior consulting fees due to Ms. Von Biedermann.

Item 4. Removed and Reserved.

PART II

Item 5. Market for Common Equity and Related 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.

On December 31, 2007, we extended the term to exercise the Class A Warrant from December 31, 2007 to March 31, 2008. The exercise price of the Class A Warrant was lowered on from $0.75 to $0.17 per share of our common stock, and we reduced the exercise price of our Class B Warrant from $1.50 to $0.22 per share of our common stock. All other terms and conditions of the Warrants remained the same.

On December 31, 2007, we also extended the term to exercise Placement Agents’ Class A Warrant from December 31, 2007 to December 31, 2008. The exercise price of the Class A Warrant was lowered from $0.985 to $0.17 per share of our common stock, and we reduced the exercise price of our Class B Warrant from $2.285 to $0.17 per share of our common stock. All other terms and conditions of the Warrants remained the same.

 On March 25, 2008, we extended the term to exercise the Class A Warrant from March 31, 2008 to July 31, 2008. All other terms and conditions of the Warrants remained the same and became effective on June 11, 2008 when the Company received a Notice of Effectiveness from the Securities and Exchange Commission
 
 
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On August 28, 2008, the Company extended the term to exercise the Class A Warrant from August 31, 2008 to March 31, 2009.  All other terms and conditions of the Warrants remained the same and became effective on October 8, 2008 when the Company received a Notice of Effectiveness from the Securities and Exchange Commission.

On June 9, 2009, when the Company received a Notice of Effectiveness from the Securities and Exchange Commission, the Company extended the terms to exercise the Class A Warrant from March 31, 2009 to June 30, 2010 and to extend the term of the Class B Warrant from December 31, 2009 to June 30, 2010. All other terms and conditions of the Warrants remained the same.
 
On October 20, 2010 (the date the SEC deemed Amendment No. 5 to the S-1 effective), these warrants were extended to June 30, 2011.

The Class A and Class B Warrants are currently not trading on the OTC market, as no market maker has quoted these securities. As of March 31, 2011, these securities are currently defunct.
 
As of March 30, 2011, the Company had outstanding 159,614,603 shares of its Common Stock, par value $0.0001 per share, 2,469,000 Class A Warrants and 2,474,000 Class B Warrants. 5,000 of the Class A Warrants have been exercised, and none of the Class B Warrants have been exercised.
 
Additionally outstanding were various placement agent warrants to purchase a total of 498,424 shares of the Company's Common Stock at a purchase prices ranging from $0.17 per share to $0.22 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, 2010 and 2009. 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, 2010
   
June 30, 2010
   
September 30, 2010
   
December 31, 2010
 
High
 
$
0.15
   
$
0.23
   
$
0.16
   
$
0.16
 
Low
 
$
0.05
   
$
0.06
   
$
0.06
   
$
0.05
 

   
Quarter Ended
   
Quarter Ended
   
Quarter Ended
   
Quarter Ended
 
   
March 31, 2009
   
June 30, 2009
   
September 30, 2009
   
December 31, 2009
 
High
 
$
0.14
   
$
0.14
   
$
0.29
   
$
0.19
 
Low
 
$
0.03
   
$
0.06
   
$
0.08
   
$
0.03
 

The high and low bid prices for shares of the Company’s  Common Stock on March 30, 2010 was $0.14 and $0.12, per share, respectively, based upon bids that represent prices quoted by broker-dealers on the OTC Bulletin Board.
 
Holders

As of March 30, 2011, there were approximately 1,500 holders of record of the Company's common stock, approximately 19 holders of record of the Company's Class A Warrants and approximately 34 holders of record of the Company's Class B Warrants.
 
 
11

 
 
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, 2010.

  
 
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
   
230,000
   
$
0.33
     
26,186,668
 
                         
Equity compensation plans not approved by security holders
   
32,243,422
   
$
 0.11
     
  0
 
                         
Total
   
 32,473,422
   
$
0.11
     
  26,186,668
 

The number of securities remaining available for future issuance under equity compensation plans approved by security holders totaled 26,186,668 shares at December 31, 2010.
 
SALES OF UNREGISTERED SECURITIES FOR THE FOURTH QUARTER
 
In the fourth quarter of 2010, pursuant to a stock purchase agreement the Company received $700,000 and issued 6,300,000 shares of common stock, 77,007 shares of its Series B Preferred Stock, and 14,000,000 cashless warrants at an exercise price of $0.01.
 
In the fourth quarter of 2010, the Company issued 890,250 shares of its restricted common stock in connection with a note payable of $445,125. 
 
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

Readers are cautioned that certain statements contained herein are forward-looking statements and should be read in conjunction with our disclosures under the heading "Forward-Looking Statements" on page 1. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. This discussion also should be read in conjunction with the notes to our consolidated financial statements contained in Item 8. "Financial Statements and Supplementary Data," of this Report.
 
 
12

 
 
Background

Protext Mobility develops innovative products and solutions for the mobile communications market. As disclosed in public filings, the Company has evolved from software based solutions for the personal computer (“PC) to products designed for the mobile industry. Our first technology, FamilySafe Parental Controls continues to generate revenue for the Company. Going forward, the Company’s mission is to leverage our core intellectual property; namely, the ability to analyze and contextualize digital data streams in real-time and apply the results towards high-growth markets, such as mobile communications and messaging. Our lead offering is a premium service for mobile devices that provides parents a solution 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 2010, the Company received $2,650,000 from Rock Island Capital, LLC pursuant to the Stock Purchase Agreement (September 2009) and Amendments (March, July and October 2010). If the Company does not receive additional funding as per the Amendment to the Series B Stock Purchase Agreement, 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 via two distinct methods: direct non- consignment sales, and online Internet sales: (i) revenue in the form of direct non- consignment sales of merchandise are recognized when title passes to the customer, typically upon shipment, less an estimated reserve if return privileges exist (ii) revenue from online Internet sales is recognized upon the settlement of credit card charges, typically within three days of the sale.
 
 
13

 
 
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, 2010 and 2009

Revenue for the years ended December 31, 2010 and 2009 was approximately $31,000. The static sales reflect steady online sales of the parental controls product.
 
Cost of sales for the years ended December 31, 2010 and 2009 was approximately $262,000 and $83,000, respectively for direct costs of software sales and software amortization.  This resulted in negative gross margins of approximately $231,000 and $52,000 for the fiscal years 2010 and 2009, respectively.  The increase in cost of sales relates to the increase in software amortization costs of approximately $46,000, as well as a $130,000 write off of capitalized software relating to software products no longer in use.

Selling costs increased to approximately $200,000 from approximately $57,000 for the fiscal years ended December 31, 2010 and 2009, respectively.  This is primarily attributable to the current year advertising expense of $110,000 to produce a campaign for TV to sell the AmberWatch SafeText product.
 
Website costs increased by approximately $14,000 for the year ended December 31, 2010 from the prior year primarily as a result of the Company’s additional resources needed to host our servers and related websites.

General and administrative expenses increased to approximately $3,900,000 from approximately $3,700,000 for the years ended December 31, 2010and 2009, respectively.  The increase of approximately $200,000 consists of the following changes:

 
·
Compensation costs (which includes stock compensation, salaries, taxes and benefits) decreased approximately $229,000 for the fiscal year ended December 31, 2010 compared to the prior year ended December 31, 2009.  The prior year included $180,000 payment as a bonus to a consultant under his contract.

 
·
Professional fees (which includes accounting/auditing, consulting and legal fees) increased approximately$414,000 for the fiscal year ended December 31, 2010.  This is primarily a result of increase legal fees of approximately $407,000, increase in consulting of approximately $93,000, increase in accounting of approximately $13,000 and a one time customer service expense of approximately $18,000. The increases are offset by a decrease in computer maintenance and public relations totaling approximating $117,000. Legal fees included costs to litigate and defend matters described in the legal section, as well as a $100,000 settlement fee, and approximately $112,000 in stock compensation settlements.
 
Interest expense for the years ended December 31, 2010 and 2009 was approximately $227,000 and $397,000 respectively, a decrease of approximately $170,000. The decrease in interest expense is due to the fact that the outstanding balance of convertible notes was lower for the fiscal year ended December 31, 2010 compared to the fiscal year ended December 31, 2009.

Gain on extinguishments of liabilities totaled approximately $492,000 for the year ended December 31, 2009 and was due to settlements of outstanding notes and liabilities. Specifically, the Company paid $150,000 to settle the principal balance of a $300,000 10% note payable, recording a $150,000 gain. The Company also settled with the former Chief Operating Officer and recorded a gain approximating $220,000 for the year ended December 31, 2009.   In addition, the Company settled with three vendors and recorded gains totaling approximately $122,000. The current year gain of approximately $3,500 is due to stock issued amounting to approximately $14,000 in value for a debt of approximately $17,000.
 
 
14

 
 
Debt conversion expense approximating $273,000 for the fiscal year ended December 31, 2010 was recorded as a result of debt and interest that was exchanged for non-defaulted notes and for conversion of principal and accrued interest into shares of common stock of the Company.
 
Amortization expense from deferred note discounts for the years ended December 31, 2010 and 2009 was approximately $684,000 and $650,000, respectively. Although the principal amount of notes payable is lower in the current fiscal year, the Company recorded additional debt discounts and related amortization expense when the debtors extended the notes in the second quarter of the fiscal year ended December 31, 2010.

Liquidity and Capital Resources

The Company's liquidity and capital needs relate primarily to working capital and other general corporate requirements.  To date, the Company has funded its operations with stockholder loans 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, 2010, the Company had cash and cash equivalents of approximately $60,000 and a working capital deficiency of approximately $1,916,000.  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, 2010 was approximately $2,390,000 compared to approximately $2,165,000 for the prior comparable year ended December 31, 2009. This increase in operating expenditures of approximately $225,000 relates to approximately $124,000 change in assets and liabilities (primarily payments for accounts payable and due to stockholder). In addition, the variance in the gain on extinguishment of liabilities compared to the debt conversion expense and write off of software approximated a $90,000 change.
 
Net cash used in investing activities for the years ended December 31, 2010 and 2009 was approximately $183,000 and $292,000, respectively.  The prior fiscal year additions to software costs of $247,000 were higher as the Company was working on multiple products. The current year software additions totaling approximately $168,000 related to the SafeText product.  The new website was launched at the end of the fiscal quarter ended March 31, 2010, therefore the capitalization of $15,000 was lower than the prior year additions of approximately $45,000.

Net cash provided from financing activities was approximately $2,596,000 and $2,470,000 for the years ended December 31, 2010 and 2009, respectively, a slight increase of approximately $126,000. Although proceeds from noteholders and the sale of the Company’s Series B Preferred shares in the fiscal year ended December 31, 2009 totaling approximately $3,160,000, was higher than proceeds in the fiscal year ended December 31, 2010 by approximately $300,000, the Company’s payments to noteholders and debtors and was lower by approximately $423,000.

Outstanding Indebtedness

The Company has outstanding 10% convertible notes payable of approximately $114,000 as of December 31, 2010 which are in default for non payment by maturity date.  In addition, the Company has approximately $1,116,000 of short term bridge notes outstanding as of December 31, 2010 of which approximately $125,000 is in default due to non payment by maturity date. Subsequent to December 31, 2010 approximately $1,116,000 of the short term bridge notes outstanding converted their debt balance into shares of the common stock.  In addition, subsequent to December 31, 2010, the Company issued 1,200,000 shares to convert approximately $196,000 for a liability to a shareholder.
 
 
15

 
 
While the Company has raised capital from equity and debt transactions totaling approximately $3,300,000 for the year ended December 31, 2010, we are dependent on improved operating results and raising additional funds over the next twelve month period. There are no assurances that we will be able to raise additional funding. In the event that we are unable to generate sufficient cash flow or receive proceeds from offerings of debt or equity securities, the Company may be forced to curtail or cease its activities.
 
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, 2010, and 2009 the Company capitalized approximately $183,000 and $292,000 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, 2010 and 2009 was approximately $145,000 and $87,000 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 quarter of the fiscal year ended December 31, 2010, the Company determined there was an impairment to the software capitalization related to the PULSE product and recorded a write off of approximately $130,000 which is included in the accompanying consolidated statement of operations. There was no impairment for the fiscal year ended December 31, 2009.

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 January 2010, the FASB issued Accounting Standards Update No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements." This Update requires new disclosures regarding the amount of transfers in or out of Levels 1 and 2 along with the reason for such transfers and also requires a greater level of disaggregation when disclosing valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This Update also includes conforming amendments to the guidance on employers' disclosures about postretirement benefit plan assets. The disclosures will be required for reporting beginning in the first quarter 2010. Also, beginning with the first quarter 2011, the Standard requires additional categorization of items included in the rollforward of activity for Level 3 inputs on a gross basis. Adoption of this standard will not have a material effect on the financial statements.

Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple-Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and various other ASU’s No. 2009-2 through ASU No. 2011-01 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued.  These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.
 
 
16

 
 
In March 2010, the FASB ratified the final consensus that offers an alternative method of revenue recognition for milestone payments. The guidance states that an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted, provided that the revised guidance is applied retrospectively to the beginning of the year of adoption. We have determined that the adoption of this guidance will not have a material effect on our consolidated financial statements.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX
   
Page No.
     
FINANCIAL STATEMENTS:
   
     
Report of Independent Registered Public Accounting Firm
 
F-1
     
Consolidated Balance Sheets as at December 31, 2010 and 2009
 
F-2 - F-3
     
Consolidated Statements of Operations For the Years Ended December 31, 2010 and 2009
 
F-4
     
Consolidated Statement of Stockholders' Deficit For the Years ended December 31, 2010 and 2009
 
F-5 - F-6
     
Consolidated Statements of Cash Flows For the Years Ended December 31, 2010 and 2009
 
F-7 - F-8
     
Notes to Consolidated Financial Statements
 
F-9 - F-25
 
 
17

 
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders of Protext Mobility, Inc. (f/k/a EchoMetrix, Inc.)
Syosset, New York
 
We have audited the accompanying consolidated balance sheets of Protext Mobility, Inc. (f/k/a EchoMetrix, Inc.). and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 2010 and 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Protext Mobility, Inc. (f/k/a EchoMetrix, Inc.) and Subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for the year ended December 31, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has negative working capital and a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Sherb & Co. LLP
 
New York, New York
March 30, 2011

 
F-1

 

PROTEXT MOBILITY, INC. (f/k/a EchoMetrix, Inc) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

   
December 31,
   
December 31,
 
   
2010
   
2009
 
             
Current assets:
           
Cash
  $ 60,209     $ 37,890  
Accounts receivable
    -       238  
Prepaid expenses
    12,130       12,671  
Total current assets
    72,339       50,799  
                 
Property and equipment - net
    14,647       68,094  
                 
Other assets:
               
Capitalized software costs, less accumulated amortization
               
of $112,250 and $82,120, respectively
    161,931       252,001  
Website development costs, less accumulated amortization of
               
of $21,250 and $5,000, respectively
    38,750       40,000  
Security deposit
    9,454       9,454  
Total other assets
    210,135       301,455  
                 
Total assets
  $ 297,121     $ 420,348  

See notes to consolidated financial statements
 
 
F-2

 
 
PROTEXT MOBILITY, INC. (f/k/a EchoMetrix, Inc) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)

LIABILITIES AND STOCKHOLDERS' DEFICIT

   
December 31,
   
December 31,
 
   
2010
   
2009
 
             
Current liabilities:
           
Current portion of long term debt and capital leases
  $ 6,002     $ 47,991  
Current portion of 10% convertible notes payable
    114,034       233,832  
Convertible short term bridge notes payable, net of
               
discount of $535,053 and $111,574 respectively
    976,407       1,642,249  
Non convertible short term bridge notes payable
    124,790       273,067  
Due to stockholder
    195,686       307,838  
Accounts payable
    370,126       295,771  
Accrued expenses
    201,234       501,727  
Total current liabilities
    1,988,279       3,302,475  
                 
Other liabilities:
               
Dividends payable
    90,840       -  
Obligations under capital lease, net of current portion
    -       5,735  
Deferred rent
    3,849       7,541  
Total liabilities
    2,082,968       3,315,751  
                 
                 
                 
Stockholders' deficit
               
Preferred stock - $.0001 par value,  authorized  - 25,000,000 shares;
               
Series A Preferred stock - $.0001 par value, $2.62 liquidation value, 1,526,718 designated; issued and outstanding -269,862 and 901,237 shares repectively
    27       90  
Series B Preferred stock - $.0001 par value, $9.09 liquidation value, 1,000,000 designated; issued and outstanding -511,551 and 220,022 respectively
    51       22  
Common stock - $.0001 par value,  authorized  - 400,000,000 shares; issued and outstanding -145,138,192 and 79,203,336  shares respectively
    14,514       7,921  
Additional paid-in capital
    40,926,795       26,470,579  
Accumulated deficit
    (42,727,234 )     (29,374,015 )
Total stockholders' deficit
    (1,785,847 )     (2,895,403 )
                 
Total liabilities and stockholders' deficit
  $ 297,121     $ 420,348  

See notes to consolidated financial statements
 
 
F-3

 
 
PROTEXT MOBILITY, INC. (f/k/a EchoMetrix, Inc) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
For the Years Ending December 31,
 
   
2010
   
2009
 
             
             
Revenues
  $ 30,853     $ 31,428  
                 
Cost of Sales:
               
Commissions
    2,977       699  
Amortization of software costs
    128,325       82,120  
Write off of capitalized software costs
    130,212       -  
Cost of Sales
    261,514       82,819  
                 
Gross Loss
    (230,661 )     (51,391 )
                 
Operating expenses:
               
Selling
    199,961       57,088  
Web site costs
    84,195       69,945  
General and administrative
    3,913,934       3,658,239  
Depreciation and amortization
    69,697       87,515  
Total operating expenses
    4,267,787       3,872,788  
                 
Loss from operations
    (4,498,448 )     (3,924,179 )
                 
Other (income) expenses:
               
Interest
    226,993       396,410  
Interest - related party
    -       1,008  
Gain on extinguishment of liabilities
    (3,500 )     (491,830 )
Debt conversion expense
    272,862       -  
Other expenses
    -       889  
Amortization of note discounts
    684,186       650,254  
Total other expenses
    1,180,541       556,731  
                 
Net loss
    (5,678,989 )     (4,480,910 )
                 
Common stock dividends to be issued for Series B Preferred Stock
    (260,939 )     (43,556 )
Deemed preferred stock dividend related to warrant modification
    (2,783,291 )     -  
Deemed preferred stock dividend related to issuance of warrants and common stock
    (4,630,000 )     (2,000,000 )
                 
Net loss applicable to common stockholders
  $ (13,353,219 )   $ (6,524,466 )
                 
Per share data
               
Loss per share - basic and diluted
  $ (0.12 )   $ (0.09 )
                 
Weighted average number of shares outstanding- basic and diluted
    111,287,250       76,074,372  

See notes to consolidated financial statements
 
 
F-4

 
 
PROTEXT MOBILITY, INC. (f/k/a EchoMetrix, Inc) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
   
Series A Preferred Stock
   
Series B Preferred Stock
   
Common Stock
   
Additional
         
Total
 
         
Par Value $.0001
         
Par Value $.0001
         
Par Value $.0001
   
Paid-In
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Deficit
 
                                                       
Balance at December 31, 2008
    901,237     $ 90         $       71,787,304     $ 7,178     $ 19,214,710     $ (22,849,549 )   $ (3,627,571 )
                                                                     
Common stock issued for interest on debt
                                675,795       66       79,771               79,837  
Common stock issued in connection with 2008 warrants exercised
                                24,000       2       (2 )              
Common stock issued for conversion of 10% notes-principal
                                766,237       77       93,083               93,160  
Common stock issued for conversion of Bridge Notes - principal
                                2,500,000       250       349,750               350,000  
Common stock issued for legal settlement
                                500,000       50       44,950               45,000  
Fair value of common stock issued for services
                                120,000       15       20,986               21,001  
Restricted stock issued in connection with bridge notes payable
                                2,830,000       283       266,461               266,744  
Warrants issued in connection with bridge notes payable
                                                94,368               94,368  
Beneficial conversion feature issued in connection with bridge notes
                                                341,393               341,393  
Interest related to modification of conversion price of debt
                                                133,398               133,398  
Fair value of warrants issued for consulting services
                                                663,629               663,629  
Fair value of options issued for consulting services
                                                94,000               94,000  
Fair value of warrants issued to employees
                                                360,000               360,000  
Option expense
                                                670,548               670,548  
Issuance of Preferred B securities
                    220,022       22                       1,999,978               2,000,000  
Dividends payable in common stock to Series B Preferred Stockholders
                                                    43,556       (43,556 )     -  
Deemed Dividend on Preferred B securities
                                                    2,000,000       (2,000,000 )     -  
Net Loss
                                                            (4,480,910 )     (4,480,910 )
                                                                         
Balance at December 31, 2009
    901,237     $ 90       220,022     $ 22       79,203,336     $ 7,921     $ 26,470,579     $ (29,374,015 )   $ (2,895,403 )

See notes to consolidated financial statements
 
 
F-5

 
 
PROTEXT MOBILITY, INC. (f/k/a EchoMetrix, Inc) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 (Continued)

   
Series A
   
Series B
                               
   
Preferred Stock
   
Preferred Stock
   
Common Stock
   
Additional
         
Total
 
         
Par Value $.0001
         
Par Value $.0001
         
Par Value $.0001
   
Paid-In
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Deficit
 
Balance at December 31, 2009
    901,237     $ 90       220,022     $ 22       79,203,336     $ 7,921     $ 26,470,579     $ (29,374,015 )   $ (2,895,403 )
Common stock issued as interest on debt
                                    215,908       22       24,429               24,451  
Common stock issued for legal settlement
                                    2,102,175       210       183,714               183,924  
Common stock issued for Debt settlement
                                    100,000       10       13,990               14,000  
Fair value of common stock issued for services
                                    738,717       74       71,234               71,308  
Fair value of warrants issued for consulting services
                                                    6,000               6,000  
Fair value of options issued for consulting services
                                                    209,196               209,196  
Option expense
                                                    1,390,613               1,390,613  
Common stock issued in connection with option exercise
                                    567,536       57       (57 )             -  
Common stock issued in connection with warrant exercise
                                    1,445,079       145       (145 )             -  
Common stock issued board of directors compensation
                                    1,170,638       117       108,144               108,261  
Common stock issued pursuant to Preferred A conversion
    (631,375 )     (63 )                     6,313,750       631       (568 )             -  
Common stock issued pursuant to 10% noteholder debt conversion
                                    855,703       86       119,713               119,799  
Common stock issued pursuant to bridge noteholder debt conversion
                                    1,398,319       140       195,625               195,765  
Common stock issued for accrued interest
                                    1,906,151       190       228,558               228,748  
Restricted stock issued in connection with convertible notes payable
                                    2,443,183       244       268,226               268,470  
Beneficial conversion feature recognized in connection with issuance of convertible notes payble
                                                    804,520               804,520  
Fair value of warrants issued in connection with issuance of convertible notes payable
                                                    34,719               34,719  
Debt conversion expense
                                                    272,862               272,862  
Common stock issued in connection with bridge noteholder settlement
                                    2,750,000       275       296,475               296,750  
Common stock dividends issued in accordance with Series B
                                                                    -  
Preferred Stock Agreement
                                    2,077,697       208       169,891       (170,099 )     -  
Series B Preferred Stock purchased
                    291,529       29                       2,649,971               2,650,000  
Deemed dividend related to issuance of warrants and common stock in connection with purchase of Series B Preferred Stock
                                    41,850,000       4,185       4,625,815       (4,630,000 )     -  
Deemed dividend related to modification of warrants issued with Series B Preferred Stock
                                                    2,783,291       (2,783,291 )     -  
Dividends payable
                                                            (90,840 )     (90,840 )
Net loss
                                                            (5,678,989 )     (5,678,989 )
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 )

See notes to consolidated financial statements
 
 
F-6

 
 
PROTEXT MOBILITY, INC. (f/k/a EchoMetrix, Inc) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
For the Years Ended December 31,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net loss
  $ (5,678,989 )   $ (4,480,910 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Gain on extinguishment of debt
    (3,500 )     (491,830 )
Debt modification expense
    272,862       -  
Write off of capitalized software
    130,212       -  
Warrants/options issued for consulting services
    215,196       1,117,629  
Common stock issued for  legal settlements
    111,924       -  
Common stock issued for services
    71,308       21,000  
Common stock issued for compensation
    108,261       -  
Stock issued for interest
    24,451       79,837  
Compensatory element of stock options
    1,381,775       670,548  
Depreciation
    53,447       62,859  
Amortization of deferred financing costs
    -       10,000  
Amortization of software and website development costs
    144,575       87,120  
Amortization of intangible assets
    -       9,657  
Amortization of discount related to debt
    684,186       650,254  
Interest and compensation expense as a result of modification of warrant exercise price
    -       133,398  
Increase (decrease) in cash flows as a result of changes in asset and liability account balances:
               
Accounts receivable
    238       1,653  
Prepaid expenses and other assets
    541       6,109  
Deferred rent
    (3,692 )     (1,957 )
Accounts payable and accrued expenses
    208,987       (68,886 )
Due to stockholders
    (112,152 )     28,719  
Total adjustments
    3,288,619       2,316,111  
                 
Net cash used in operating activities
    (2,390,370 )     (2,164,799 )
                 
Cash flows from investing activities:
               
Capitalized software costs
    (168,467 )     (247,207 )
Capitalized website development costs
    (15,000 )     (45,000 )
Net cash used in investing activities
    (183,467 )     (292,207 )

See notes to consolidated financial statements
 
 
F-7

 
 
 PROTEXT MOBILITY, INC. (f/k/a EchoMetrix, Inc) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

   
For the Years Ended December 31,
 
   
2010
   
2009
 
             
Cash flows from financing activities:
           
Proceeds from sale of Preferred B securities
  $ 2,650,000     $ 2,000,000  
Proceeds from exercise of stock options
    8,880       -  
Payments to stockholders
    -       (306,809 )
Proceeds from bridge notes payable
    645,125       1,600,000  
Payments of bridge notes payable
    (660,125 )     (513,109 )
Payments of note payable - equipment
    (2,962 )     -  
Payments of 10% investor notes payable
    -       (191,008 )
Payments of notes payable - bank
    -       (49,007 )
Payments under capital lease
    (44,762 )     (70,388 )
Net cash provided by financing activities
    2,596,156       2,469,679  
                 
Net increase in cash
    22,319       12,673  
                 
Cash at beginning of year
    37,890       25,217  
                 
Cash at end of year
  $ 60,209     $ 37,890  
                 
Supplemental Schedules of Noncash  Investing
               
and Financing Activities:
               
Cash payment made during the period-Interest
  $ 12,248     $ 11,745  
Common stock issued in connection with settlement agreement
  $ 72,000     $ 45,000  
Common stock issued in connection with extinguishment of payable
  $ 14,000     $ -  
                 
Common stock issued as a result of debt and accrued interest conversion
  $ 841,063     $ 443,160  
Restricted stock issued in connection to bridge loans
  $ 268,470     $ 266,744  
Warrants granted in connection to convertible loan issuance
  $ 34,719     $ 94,368  
Beneficial conversion feature in relation to bridge loans
  $ 804,520     $ 341,293  
Common stock dividends payable for Series B Preferred Stock
  $ 90,840     $ 43,556  
Common stock dividends issued for Series B Preferred Stock
  $ 170,099     $ -  
Deemed preferred stock dividend related to warrant modification
  $ 2,783,291     $ -  
Deemed preferred stock dividend related to issuance of warrants and and common stock
  $ 4,630,000     $ 2,000,000  
 
See notes to consolidated financial statements
 
 
F-8

 
 
PROTEXT MOBILITY, INC. (f/k/a EchoMetrix, Inc) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009

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 innovative products and solutions for the mobile communications market. As disclosed in public filings, the Company has evolved from a software developer for personal computer (“PC”) to products designed for the mobile industry. Our first technology, FamilySafe Parental Controls continues to generate revenue for the Company. Going forward, the Company’s mission is to leverage our core intellectual property; namely, the ability to analyze and contextualize digital data streams and apply the results towards high-growth markets, such as mobile communications and messaging. Our lead offering, SafeText is a premium service for mobile devices that provides parents a solution 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 $5,679,000 and $4,481,000 for the years ended December 31, 2010 and 2009, respectively.  In addition, the Company had negative working capital of approximately $1,916,000 and an accumulated deficit of approximately $42,727,000 at December 31, 2010.

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 financing from equity and debt transactions. For the fiscal year ended December 31, 2010, the Company raised approximately $3,304,000 from the sale of preferred stock ($2,650,000), exercise of options ($9,000) and private placement of common stock and warrants and issuance of debt ($645,000). During the fiscal year ended December 31, 2009, the Company raised approximately $3,600,000 from the sale of preferred stock ($2,000,000), and private placement of common stock and warrants, and issuance of debt ($1,600,000). In addition an approximate total of $120,000 and $93,000 of the 10% short term promissory notes have been converted into common stock for the fiscal years ended December 31, 2010 and 2009, respectively. For the fiscal years ended December 31, 2010 and 2009, approximately $376,000 and $350,000, 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 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.

 
F-9

 
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
(a) Basis of Presentation:

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

 (b) Revenue Recognition:

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

(c) Use of Estimates:

The preparation of 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, 2010 and 2009 have been excluded from the per share computations as their effect would be anti-dilutive:
 
  
 
For the Years Ended
December 31,
 
 
 
2010
   
2009
 
2004 Stock Plan Options
    230,000       470,000  
Non ISO Stock Options
    32,243,422       24,599,001  
Convertible Preferred Stock
    53,853,720       31,014,570  
Convertible Bridge Notes and Notes Payable
    13,170,757       15,894,045  
Warrants
    113,020,650       43,168,181  

(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-10

 
 
(f) Advertising Costs:

The Company expenses ordinary advertising and promotion costs as incurred. Advertising and promotion costs totaled approximately $176,000 for the fiscal year ended December 31, 2010.   There were no such costs in the prior fiscal year

(g) Software Development Costs:

Research and development costs are expensed as incurred. No research and development costs were incurred during the years ended December 31, 2010 and 2009.

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, 2010, and 2009 the Company capitalized approximately $183,000 and $292,000 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, 2010 and 2009 was approximately $145,000 and $87,000 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.

Estimated aggregate minimum amortization expenses for each of the next three years is:

2011
    63,000  
2012
    58,000  
2013
    16,000  

(h) Long-Lived Assets

In accordance with FASB Codification Topic ASC 360-10-15, Impairment or Disposal of Long-Lived Assets, we review long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.  In such circumstances, we will estimate the future cash flows expected to result from the use of the asset and its eventual disposition.  Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows.  If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, we will recognize an impairment loss to adjust to the fair value of the asset.  In the fourth quarter of the fiscal year ended December 31, 2010, the Company determined there was an impairment to the software capitalization related to the PULSE product and recorded a write off of approximately $130,000 which is included in the accompanying consolidated statement of operations. There was no impairment for the fiscal year ended December 31, 2009.

(i) Cash Equivalents:

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a remaining maturity of three months or less, when purchased, to be cash equivalents.

 
F-11

 
 
(j) Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at the amount the Company expects to collect. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Accounts receivable are presented net of an allowance for doubtful accounts of $0 and approximately $200 at December 31, 2010, and 2009, respectively.
 
 (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 receivable, 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 Affecting The Company:

In May of 2010, ProText Mobility applied the provisions of ASC 470-50 “Debtors Accounting for a Modification or Exchange of Debt Instruments” when it modified the terms of its 10% and Bridge notes. The Company evaluated these transactions under ASC 470-50 to determine if the modification was substantial and if extinguishment accounting should be applied. If the change in fair value of the conversion option is less than 10% of the carrying value of the debt, (and the debt modification was not determined to be substantial) then ASC 470-20 applies. The Company evaluated the new debt instrument and applied debt conversion expense. (Note 4 and 5)

 
F-12

 
 
The Company evaluates the new accounting provisions for guidance applicable to ProText Mobility, Inc.  During the period, the Company does not believe there are any new pronouncements that will materially impact the Company
 
Recent accounting pronouncements

Recent accounting pronouncements applicable to the Company are summarized below.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements." This Update requires new disclosures regarding the amount of transfers in or out of Levels 1 and 2 along with the reason for such transfers and also requires a greater level of disaggregation when disclosing valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This Update also includes conforming amendments to the guidance on employers' disclosures about postretirement benefit plan assets. The disclosures will be required for reporting beginning in the first quarter 2010. Also, beginning with the first quarter 2011, the Standard requires additional categorization of items included in the rollforward of activity for Level 3 inputs on a gross basis. Adoption of this standard will not have a material effect on the financial statements.

Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple-Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and various other ASU’s No. 2009-2 through ASU No. 2011-01 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued.  These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

In March 2010, the FASB ratified the final consensus that offers an alternative method of revenue recognition for milestone payments. The guidance states that an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted, provided that the revised guidance is applied retrospectively to the beginning of the year of adoption. We have determined that the adoption of this guidance will not have a material effect on our consolidated financial statements.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

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.   The Company filed the 2009 Incentive Stock Plan with the Securities and Exchange Commission on October 19, 2010.  During the fiscal year ended December 31, 2010, 83,332 shares of common stock have been issued to a consultant for services.

 
F-13

 

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 years ended December 31, 2010and 2009 include share-based compensation expense for employees and board of directors totaled approximately $1,500,000 and $580,000, 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 years ended December 31, 2010 and 2009, the Company granted 9,520,056 and 7,910,844 (respectively) of options to employees, consultants and board of directors.  The options are exercisable at a range of $0.01 to $0.18 and have a five year term.  As of December 31, 2010, 19,017,501 employee options have vested and the remaining 875,000 vest over the next year.

The fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. During the years ended December 31, 2010 and 2009, the assumptions made in calculating the fair values of options are as follows:
 
  
 
For the Years Ended
December 31,
 
 
 
2010
   
2009
 
Expected term (in years)
  5     5  
Expected volatilty
  100.25-105.63%     99.09%-100.00%  
Expected dividend yield
  0%     0%  
Risk-free interest rate
  2.45%-3.68%     2.51-3.85%  

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 $215,000 and $94,000 for the years ended December 31, 2010 and 2009, respectively.  These amounts are included in the Consolidated Statements of Operations within the general and administrative expenses line item.

During the years ended December 31, 2010 and 2009, the Company granted 2,598,214 and 5,400,000, respectively, of the options to non-employees.  The options are exercisable at a range of $0.08 to $0.30 and have a five year term.  As of December 31, 2010, 9,347,588 non-employee options have vested and the remaining 3,233,333 options vest over a two year period.

The following table represents our stock options granted, exercised, and forfeited during the year ended December 31, 2010.
 
 
F-14

 
 
 
       
Weighted
   
Weighted
       
 
       
Average
   
Average
       
 
       
Exercise
   
Remaining
   
Aggregate
 
 
 
Number
   
Price
   
Contractual
   
Intrinsic
 
Stock Options
 
of Shares
   
per Share
   
Term
   
Value
 
Outstanding at December 31, 2008
    13,438,158     $ 0.24       2.4235     $ 0  
Granted
    13,310,844       0.12                  
Exercised
    -       -                  
Forfeited/expired
    (1,680,000 )     0.30                  
Outstanding at December 31, 2009
    25,069,001     $ 0.18       3.3829     $ 0  
Granted
    12,118,270       0.05                  
Exercised
    (1,061,000 )     0.09                  
Forfeited/expired
    (3,652,849 )     0.33                  
Outstanding at December 31, 2010
    32,473,422     $ 0.20       2.3029     $ 0  
Exercisable at December 31, 2010
    28,365,089     $ 0.11       2.9366     $ 0  
Weighted average fair value of options
                               
Granted during the year
  $ 0.11                          

As of December 31, 2010, there was approximately $208,000 of unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately 1 year.
 
NOTE 4 -   PROPERTY AND EQUIPMENT

The following is a summary of property and equipment, at cost less accumulated depreciation, at December 31:

   
2010
   
2009
 
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
    (225,520 )     (172,073 )
  Total property and equipment, net
  $ 14,647     $ 68,094  

Depreciation charged to operations amounted to approximately $53,000 and $63,000 for the years ended December 31, 2010 and 2009, respectively. Property and equipment include gross assets acquired under capital leases of approximately $108,000 at December 31, 2010 and 2009, 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 -   NOTE PAYABLE - EQUIPMENT

On July 12, 2006, the Company entered into a secured loan agreement with GE Commercial Finance for the purchase of $21,262 of communications equipment related to the Company’s corporate office space. This loan has a five-year term with monthly payments of approximately $400 including interest at the rate of 8.15% per annum and is secured by the equipment purchased. The outstanding balance at December 31, 2010 and 2009 was approximately $3,000 and $8,000 respectively, of which approximately $3,000 and $4,000 is included in current liabilities. Future principal payments under the secured loan payable as of December 31, 2010 for the next year is approximately $3,000.

 
F-15

 
 
NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASE

On July 17, 2006 the Company entered into an equipment lease agreement with Citicorp Vendor Finance for the purchase of $87,098 of computer equipment related to the Company’s products. The lease has a five-year term and a $1 purchase option. In January 2009, the Company prepaid the Citicorp Vendor Finance lease for servers for $50,000 in lieu of the remaining payments totaling $65,125.
 
On September 16, 2007 the Company entered into an equipment lease agreement with GE Capital for the purchase of $71,914 of computer equipment. The lease has a three-year term and a $1 purchase option. The Company is accounting for this obligation as a capital lease. Assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair market value of the asset.  The assets are depreciated over their related estimated useful lives.

On February 28, 2008 the Company entered into an equipment lease agreement with GE Capital for the purchase of $36,312 of computer equipment. The lease has a three-year term and a $1 purchase option. The Company is accounting for this obligation as a capital lease. Assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair market value of the asset.  The assets are depreciated over their estimated useful lives.

Depreciation for assets under capital leases for the years ended December 31, 2009 and 2008 amounted to approximately $30,000 and $7,000, respectively, and is included in depreciation expense.

The following is a summary of assets held under capital leases at December 31, 2009 and 2008:

  
 
December 31,
2010
   
December 31,
2009
 
Data processing equipment, server and routers
  $ 108,226     $ 108,226  
Less: Accumulated depreciation
    (106,209 )     ( 76,126 )
 
  $ 2,017     $ 32,100  

The minimum future lease payments under the capital lease and the equipment loan for the next year is approximately $2,000.

NOTE 7-    10% CONVERTIBLE NOTES PAYABLE

In May of 2010, the Company sent each noteholder an inducement letter which (i) offered to lower their conversion from $0.40 to $0.14 per share or (ii) exchange their existing note for a new note with the same principal and interest terms to extend the maturity date by nine months.  In exchange for the new note, each noteholder would receive one restricted share of the Company’s common stock and one warrant (with a $0.35 exercise price and one year term) for each one dollar of principal outstanding.

During the fiscal year ended December 31, 2010 the Company exchanged $41,596 of principal, issuing 41,596 of the Company’s restricted common stock and 41,596 warrants (at an exercise price of $0.35 with a one year term). The new note is a nine month note with interest calculated at 10% per annum paid in stock on a quarterly basis. The note is senior to any cash distributions to the Company’s primary investor and has mandatory principal repayment terms when and if options and warrants are exercised and the Company receives the cash proceeds.

During the fiscal year ended December 31, 2010, the Company’s 10% Noteholders converted approximately $120,000 of their principal balances and received 855,703 shares of common stock. The Company applied the accounting per ASC 470-20, when conversion prices are lowered to induce conversion and recorded debt conversion expense totaling approximately $64,000 as a result of the decrease in the conversion price from $0.40 to $0.14. The offset of the conversion was to additional paid in capital.

 
F-16

 
 
During the fiscal year ended December 31, 2009 the Company repaid a total of approximately $191,000 of the outstanding principal to the 10% convertible note holders. Of the total repaid, the Company settled in principal note of $300,000 for $150,000 in cash and recorded a gain on extinguishment of debt of $150,000.  In addition, the Company converted principal totaling approximately $93,000 and accrued interest of approximately $3,000 into 794,636 shares of common stock at conversion rates between $0.10 and $0.16. For the year ended December 31, 2009 the Company recorded interest expense as a result of the modification of debt (due to lower conversion price) for 10% convertible notes totaling approximately $67,000.

As of December 31, 2010 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 $3,100 and $10,000 for years ended December 31, 2010 and 2009, 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 31, 2010 and 2009, respectively.
 
As reflected on the balance sheets, the value of the 10% convertible notes at December 31, 2010 and December 31, 2009 amounted to approximately $114,000 and $234,000, respectively and are classified as current due to the fact that they are in default for the non payment by the maturity date.

NOTE 8 –  BRIDGE NOTES PAYABLE

Convertible Bridge Notes Payable:

2010
In May of 2010, the Company sent each noteholder an inducement letter which (i) offered to lower their conversion from $0.15 to $0.14 per share of principal and to lower the accrued interest from $0.14 to $0.12 or (ii) exchange their existing note for a new note with the same principal and interest terms to extend the maturity date by nine months.  In exchange for the new note, each noteholder would receive one restricted share of the Company’s common stock and one warrant (with a $0.35 exercise price and one year term) for each one dollar of principal outstanding.
 
During the fiscal year ended December 31, 2010 convertible note holders converted approximately $376,000 of their principal balance and approximately $203,000 of their accrued interest into 3,928,571 and 1,689,520 shares , respectively of the Company’s common stock. In accordance with ASC 470-20, the Company applied the guidance for debt inducement, and recorded an expense for the debt modification of approximately $212,000 as a result of the decrease in the conversion price.

In addition, during the fiscal year ended December 31, 2010 the Company exchanged approximately $1,100,000 of principal bridge notes payable (which includes non convertible loans that exchanged their loans for convertible loans (of approximately $113,000 of principal) and issued 1,066,366 of the Company’s restricted common stock and 1,066,366 of warrants (at an exercise price of $0.35) with a one year term.  The new notes are for nine months and interest is calculated at 10% per annum, payable quarterly in stock.  For the year ended December 31, 2010 interest expense totaled approximately $108,000 which is accrued on the accompanying consolidated balance sheet. The notes are convertible at any time at $0.14 and carry mandatory principal repayments when options or warrants are exercised and the company receives cash proceeds.

The Company evaluated the extension event under ASC 470-50 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” to determine if the modification was substantial. Because the change in fair value of the conversion option was less than 10% of the carrying value of the debt, the debt modification determined not to be substantial and as a result, no gain or loss was recorded.
 
The Company received approximately $645,000 in new bridge notes during the year ended December 31, 2010 issuing 1,290,250 of restricted common shares, recording a discount of approximately $466,000. During the year ended December 31, 2010 the Company repaid approximately $645,000 to bridge note holders.
 
 
F-17

 
 
The Company recorded amortization expense totaling approximately $679,000 for the year ended December 31, 2010 related to bridge note holders.
In March of 2011, bridge noteholders converted approximately $1,116,000 of principal and $104,000 in accrued interest into 9,079,353 shares of the Company’s common stock.

2009
On November 7, 2007 the Company began a private placement was terminated in December of 2007, and the Company received gross proceeds of $300,000. These notes are payable the earlier of August 15, 2008 or when the Company raises $1,000,000 in its next qualified financing as defined. The notes bear interest at a rate of 10% per
annum, payable at the end of the term. The principal amounts of the notes are convertible into the Company’s common stock by the holder, at any time prior to the repayment of the principal, at the rate of $0.15 per share. In October of 2009, the Company repaid approximately $20,000 towards the principal balance of these notes. As of December 31, 2009, the total of approximately $280,000, of principal and accrued interest of approximately $64,000  is outstanding.

During 2008, the Company issued 10% short term promissory notes to accredited investors. These notes have maturity dates ranging from a period of three months to twelve months, bear interest at a rate of 10% per annum, payable at the end of the term. The Company raised a total of $905,000 from these promissory notes for the year ended December 31, 2008 and issued 1,715,000 restricted shares of the Company’s common stock to the note holders. The principal amounts of the notes are convertible into the Company’s common stock by the holder, at any
time prior to the repayment of the principal, at rates ranging from $0.14 to $0.20 per share. These shares were valued at the fair market value on the date of each note. As a result of the issuance of these convertible notes and related restricted shares and warrants, the Company recorded a total discount of approximately $290,000 with a corresponding credit to common stock and additional paid in capital. The discount is accreted over the term of the note using the straight line method. For the year ended December 31, 2009, the Company amortized a total of approximately $59,000 of the discount.

During the year ended December 31, 2009 the Company repaid approximately $164,000 of principal and converted a total of accrued interest and principal of approximating $223,000 ($200,000 was principal) into 1,591,667 shares of common stock of the Company. For the year ended December 31, 2009 the Company recorded interest expense as a result of the modification of debt (due to a lower conversion price) of approximately $67,000.

During 2009, the Company issued 10% short term promissory notes to accredited investors. These notes have maturity dates ranging from a period of nine months to eighteen months, bear interest at a rate of 10% per annum, payable at the end of the term. The Company raised a total of $1,300,000 from these promissory notes for the year ended December 31, 2009 and issued 2,530,000 restricted shares of the Company’s common stock to the note holders. The principal amounts of the notes are convertible into the Company’s common stock by the holder, at any time prior to the repayment of the principal, at rates ranging from $0.14 to $0.15 per share. These shares were valued at the fair market value on the date of each note. As a result of the issuance of these convertible notes and related restricted shares and warrants, the Company recorded a total discount of approximately $674,000 with a corresponding credit to common stock and additional paid in capital. The discount is accreted over the term of the note using the straight line method. For the year ended December 31, 2009, the Company amortized a total of approximately $562,000 of the discount. In July 2009, the Company issued 1,071,429 shares of restricted common stock for converting $150,000 of principal at $0.14. In 2009, the Company repaid approximately $92,000 of the principal portion of these notes.
 
Non Convertible Bridge Notes Payable:

On October 4, 2007, the Company issued a short term promissory note in the principal amount of $150,000. This note was payable on September 30, 2008 and bears an interest rate equal to the prime rate plus three percent, 6.25% per annum and is payable at the end of the term.  During the year ended December 31, 2009, the Company repaid approximately $25,000 of this note. As of December 31, 2010 and 2009 the total of approximately $125,000 of principal and accrued interest of approximately $45,000 and $27,000, respectively is outstanding and currently in default for non payment of principal on maturity date.

 
F-18

 
 
In March of 2011, the entire principal balance of the note and accrued interest was converted into common stock of the Company.
 
NOTE 9 - DUE TO STOCKHOLDER
 
At December 31, 2010 and 2009, the Company was indebted to its former CEO, William Bozsnyak, in the amounts of approximately $29,000 and $44,000, respectively, for working capital advances made to the Company.  In accordance with Mr. Bozsnyak’s separation agreement dated February 2009, in the fiscal year ended December 31, 2009, the Company repaid approximately $15,000 of the loan previously made for working capital advances. For the years ended December 31, 2010 and 2009, interest expense was charged in the amounts of $0 and approximately $1,000, respectively.  The interest rate used in this calculation is 5.5% at December 31, 2009 and was the same interest rate paid to the Company’s short term lender under the revolving line of credit. At December 31, 2010 and 2009, approximately $164,000 in accrued interest was due to Mr. Bozsnyak, respectively.

At December 31, 2010 and 2009, approximately $3,000 and $100,000, respectively, was owed for unpaid salaries and accrued vacation to Mr. Bozsnyak. During the year ended December 31, 2009, the Company repaid approximately $97,000 of unpaid salaries to Mr. Bozsnyak, which was repaid in accordance with his February 2009 separation agreement.
 
Subsequent to December 31, 2010, the Company settled all outstanding liabilities with Mr. Bozsnyak in exchange for 1,200,000 shares of common stock.
 
NOTE 10 – ECONOMIC DEPENDENCY

The Company sold its products via the internet in the current year and for fiscal year 2009.   There was no customer that accounted for more than 10% of the sales for the fiscal years ended December 31, 2010 and 2009.

NOTE 11 - INCOME TAXES

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

    December 31,  
   
2010
   
2009
 
             
Deferred Tax Assets:
           
Net Operating Losses
  $ 8,671,000     $ 7,505,000  
Option Expense
    2,310,000       1,687,000  
Other
    (131,000 )     (104,000 )
Valuation Allowances
    (10,850,000 )     (9,088,000 )
                 
Net Deferred Tax Asset
  $ -     $ -  

At December 31, 2010 and 2009, 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 $22,200,000 at December 31, 2010 for federal and state income tax purposes.  These carryforwards are available to offset future taxable income and expire at various dates through 2030.

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:

    December 31,  
   
2010
   
2009
 
U.S federal income tax at statutory rate
  $ (1,931,000 )   $ (1,524,000 )
State income tax, net of federal income tax benefit
    (284,000 )     (224,000 )
Non cash interest
    10,000       121,000  
Beneficial conversion feature
    267,000       216,000  
Other permanent differences
    70,000       8,000  
Valuation tax asset allowance
    1,868,000       1,403,000  
Effective tax rate
  $ -     $ -  
 
 
F-19

 

NOTE 12 - EQUITY TRANSACTIONS

 (a)   Preferred Stock:

The Company is authorized to issue up to 25,000,000 shares of preferred stock. Currently, we have designated 1,526,718 shares of Series A 7% Cumulative Convertible Preferred Stock, or Series A Preferred Stock and 1,000,000 shares of Series B Preferred Stock.

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. In the fourth quarter of 2010, a shareholder converted 631,375 shares of Series A into 6,313,750 shares of common 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.

For the year ended December 31, 2009 the Company recorded the beneficial conversion feature and the warrant associated with such investment as a deemed preferred dividend of $2,000,000 with a corresponding credit to additional paid in capital.  In connection with the Stock Purchase Agreement and Certificate of Designation, the Preferred B stockholders were entitled to a quarterly dividend paid in common stock.

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 550,055 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.

 
F-20

 
 
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 June 5, 2010.

In accordance with the accounting guidance for modifications, for Amendment No. 2, the Company recorded approximately $2,024,000 as a deemed preferred dividend relating to warrant modification with a corresponding credit to additional paid in capital. The Company recorded $1,980,000 as a deemed preferred dividend relating to issuance of common stock with a corresponding credit to additional paid in capital.

In accordance with the agreement, dividends payable in common stock amounting to 1,617,578 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 Preferre