UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to__________
Commission File Number: 000-21202
Textmunication Holdings, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 58-1588291 | |
|
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
1940 Contra Costa Blvd. Pleasant Hill, CA 94523
(Address of principal executive offices)
925-777-2111
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
| [ ] Large accelerated filer | [ ] Accelerated filer |
| [ ] Non-accelerated filer | [X] Smaller reporting company |
| [ ] Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,256,452 common shares as of November 14, 2018
TABLE OF CONTENTS
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1: | Financial Statements | 3 |
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 4 |
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 7 |
| Item 4: | Controls and Procedures | 8 |
| PART II – OTHER INFORMATION | ||
| Item 1: | Legal Proceedings | 9 |
| Item 1A: | Risk Factors | 9 |
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 10 |
| Item 3: | Defaults Upon Senior Securities | 10 |
| Item 4: | Mine Safety Disclosures | 10 |
| Item 5: | Other Information | 10 |
| Item 6: | Exhibits | 11 |
| 2 |
PART I - FINANCIAL INFORMATION
Our consolidated financial statements included in this Form 10-Q are as follows:
| 3 |
TEXTMUNICATION HOLDINGS, INC.
(UNAUDITED)
| September 30, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 11,044 | $ | 10,158 | ||||
| Receivables | 28,625 | 2,849 | ||||||
| Prepaid | 4,048 | - | ||||||
| Total current assets | 43,717 | 13,007 | ||||||
| Fixed assets, net | - | - | ||||||
| Software , net | - | 45,229 | ||||||
| Investment in equity method investee | 450,099 | 452,336 | ||||||
| Total assets | 493,816 | 510,572 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 272,116 | $ | 480,719 | ||||
| Due to related parties | 11,750 | 11,750 | ||||||
| Convertible notes payable, net of discount | 45,000 | 172,230 | ||||||
| Derivative liability | 56,698 | 319,041 | ||||||
| Total current liabilities | 385,564 | 983,740 | ||||||
| Total liabilities | 385,564 | 983,740 | ||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock, 1,774,000 total shares authorized, $0.0001 par value, Series A - Preferred stock 4,000 Authorized $.0001 par value 4,000 issued and outstanding | 400 | 400 | ||||||
| Series B - Preferred stock, 20,000 shares authorized, $0.0001 par value, 20,000 issued and outstanding | 7 | 7 | ||||||
| Series C - Preferred stock, 1,750,000 shares authorized, $0.0001 par value, 1,750,000 issued and outstanding | 200 | 200 | ||||||
| Common stock; $0.0001 par value; 100,000,000 shares authorized; issued and outstanding 3,976,452 and 3,975,519 as of September 30, 2018 and December 31, 2017, respectively. | 244 | 244 | ||||||
| Additional paid-in capital | 15,273,224 | 14,676,221 | ||||||
| Accumulated deficit | (15,165,823 | ) | (15,150,240 | ) | ||||
| Total stockholders’ equity (deficit) | 108,252 | (473,168 | ) | |||||
| Total liabilities and stockholders’ equity (deficit) | $ | 493,816 | $ | 510,572 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| F- 2 |
TEXTMUNICATION HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| The Three Months Ended | The Nine Months Ended | |||||||||||||||
| September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | |||||||||||||
| Revenues | $ | 218,251 | $ | 184,835 | $ | 709,375 | $ | 721,383 | ||||||||
| Cost of revenues | 117,241 | 87,028 | 232,145 | 244,494 | ||||||||||||
| Gross profit | 101,010 | 97,807 | 477,230 | 476,889 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Officer compensation | 34,500 | 85,639 | 109,500 | 6,263,166 | ||||||||||||
| General and administrative expenses | 182,737 | 448,019 | 620,936 | 743,840 | ||||||||||||
| Impairment of Inhouse Software | 85,092 | - | 85,092 | - | ||||||||||||
| Total operating expenses | 302,329 | 533,658 | 815,528 | 7,007,006 | ||||||||||||
| Loss from operations | (201,309 | ) | (435,851 | ) | (338,298 | ) | (6,530,117 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (1,207 | ) | (97,020 | ) | (7,222 | ) | (136,767 | ) | ||||||||
| Gain (loss) on change of derivative liability | 19,261 | (37,684 | ) | 119,369 | (651,147 | ) | ||||||||||
| Amortization of debt discount | (47,794 | ) | (42,534 | ) | (159,208 | ) | ||||||||||
| Gain on settlement of notes payable | 9,893 | 1,726 | 255,339 | 95,346 | ||||||||||||
| Total other income (expense) | (27,947 | ) | (180,772 | ) | 324,952 | (851,776 | ) | |||||||||
| Income (loss) from investment in equity method investee | (1,116 | ) | (492 | ) | (2,237 | ) | (2,218 | ) | ||||||||
| Net income (loss) | $ | (174,488 | ) | $ | (617,115 | ) | $ | (15,583 | ) | $ | (7,384,111 | ) | ||||
| Basic weighted average common shares outstanding | 3,976,452 | 1,486,956,888 | 3,641,249 | 2,722,097,440 | ||||||||||||
| Net loss per common share: basic and diluted | $ | (0.04 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| F- 3 |
TEXTMUNICATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, 2018 | September 30, 2017 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | (15,583 | ) | $ | (7,384,111 | ) | |||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Amortization of debt discount | 42,534 | 158,903 | ||||||
| (Gain) loss on derivative liability | 196,168 | 651,147 | ||||||
| Non cash interest expense | 51,621 | |||||||
| Depreciation | 305 | |||||||
| Write off Inhouse software | 85,092 | |||||||
| Share based compensation | 6,115,100 | |||||||
| Gain on the settlement of debt | (261,256 | ) | (95,346 | ) | ||||
| Income from equity method investee | 2,237 | 2,218 | ||||||
| Changes in assets and liabilities | ||||||||
| Receivables | (25,776 | ) | (14,733 | ) | ||||
| Accounts payable and accrued expenses | (41,119 | ) | 464,162 | |||||
| Prepaid expenses | (4,048 | ) | - | |||||
| Net cash provided by operating activities | (21,751 | ) | (50,734 | ) | ||||
| Purchase of Fixed Assets | (43,068 | ) | ||||||
| Capitalized cost for internal use software | (39,863 | ) | - | |||||
| Net cash used in investing activities | (39,863 | ) | (43,068 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds on loans payable | - | 11,500 | ||||||
| Payments on loans payable | (31,871 | ) | ||||||
| Proceeds from convertible notes payable | 129,489 | |||||||
| Payments on convertible notes payable | (37,500 | ) | - | |||||
| Proceeds on issuance of common stock | 100,000 | |||||||
| Net cash used in financing activities | 62,500 | 109,118 | ||||||
| Net increase in cash | 886 | 15,316 | ||||||
| Cash, beginning of period | 10,158 | - | ||||||
| Cash, end of period | $ | 11,044 | $ | 15,316 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | 4,431 | $ | - | ||||
| Cash paid for tax | $ | - | $ | - | ||||
| Non-Cash investing and financing transactions | ||||||||
| Conversion of Notes Payable | $ | - | ||||||
| Common Stock Issued for debt and accounts payable settlement | $ | 117,862 | ||||||
| Conversion of common Stock to preferred stock | $ | 175,000 | ||||||
| Derivative liabilities from conversion feature | $ | 129,849 | ||||||
| Derivative liability reclassified to paid in capital | $ | 142,973 | $ | 1,085,344 | ||||
| Settlement of derivative liability | $ | 262,343 | $ | 247,305 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| F- 4 |
TEXTMUNICATION HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
Textmunication Holdings, Inc. (Company) was incorporated on May 13, 2010 under the laws of the State of California. Textmunication Holdings, Inc.is an online mobile marketing platform service that will connect merchants with their customers and allow them to drive loyalty and repeat business in a non-intrusive, value added medium. For merchants we provide a mobile marketing platform where they can always send the most up-to-date offers/discounts/alerts/events schedule, such as happy hours, trivia night, and other campaigns. The consumer can also access specials and promotions that merchants choose to distribute through Textmunication Holdings, Inc.by opting in to keywords designated to the merchant’s keywords.
On November 16, 2013, the Company entered into a Share Exchange Agreement (SEA) with Textmunication Holdings (Holdings). a Nevada corporation, whereby the sole shareholder of the Company received 65,640 (post-split) new shares of common stock of Holdings in exchange for 100% of the Company’s issued and outstanding shares.
The 1 – 1,000 Reverse Split of “Textmunication Holdings, Inc.” (TXHD) was announced 7/6/2018. This corporate action from FINRA took effect at the open of business 7/9/2018.
Textmunication Holdings, Inc. (“TXHD”) entered into Advisory Agreements with Mr. Thomas DiBenedetto and Mr. Joseph Griffin on July 9th, 2018. Mr. DiBenedetto will advise Textmunication on business execution, growth initiatives and strategic investment opportunities. Mr. Joseph Griffin will join Textmunication as a financial investment advisor. In his role, he will advise the company on strategic investment opportunities and investment execution.
Basis of Presentation
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
Going concern
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of September 30, 2018, the Company has an accumulated deficit of $15,165,823. The company’s ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements and its ability to achieve and maintain profitable operations. While the Company is expanding its best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. These consolidated financial statements do not include any adjustments that might arise from this uncertainty.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At September 30, 2018, no cash balances exceeded the federally insured limit.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at the amount management expects to collect. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. As of the reporting date no allowance for bad debts necessary.
| F- 5 |
TEXTMUNICATION HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018
Revenue Recognition
Revenues are recognized when control of the promised is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
The Company currently derives a substantial majority of its revenue from fees associated with our subscription services, which generally include mobile marketing platform services. Customers are billed for the subscription on a monthly basis. For all of the Company’s customers, regardless of the method, the Company uses to bill them, subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets. As services are performed, the Company recognizes subscription revenue on a monthly basis over the applicable service period. When the Company provides a free trial period, the Company does not begin to recognize subscription revenue until the trial period has ended and the customer has been billed for the services.
Professional services revenues are generated from SMS and RCS packages where client logs into a cloud-based application to send targeted SMS messages to their subscribers base. Our custom web application SMS/RCS platform is typically billed on a fixed-price based on the number of SMS/RCS allocated for each package our client purchases. Generally, revenue for SMS/RCS services is recognized immediately as our clients have instant access to their web-based application to send out messages, the number of SMS/RCS messages allocated to a client expires at the end of each month and renews beginning of each month. The Company offers whereby control of the product passes to the customer when delivered and revenue is recognized at the time of delivery.
Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605
We did not have a cumulative impact as of January 1, 2018 due to the adoption of Topic 606 and there was not an impact to our consolidated statement of operations for the nine months ended September 30, 2018 as a result of applying Topic 606.
Software Development Costs
The Company applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.
The Company also applies the principles of FASB ASC 350-40, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (“ASC 350-40”). ASC 350-40 requires that software development costs incurred before the preliminary project stage be expensed as incurred. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed, and the software will be used to perform the function intended.
As of September 30, 2018, after series of testing and evaluation, management had concluded that the software is inadequate and cannot be fully utilize with the ever-increasing transactions of the company and customer demands. As a result, the balances as of September 30, 2018 and December 31, 2017, the capitalized software development costs in the amount of $85,092 and $45,229 respectively was determined to be fully impaired.
Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items.
| F- 6 |
TEXTMUNICATION HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that is observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
The fair value of the accounts receivable, accounts payable, notes payable are considered short term in nature and therefore their value is considered fair value.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below for the three months ended September 30, 2018:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative Financial Instruments | $ | — | $ | — | $ | 56,698 | $ | 56,698 | ||||||||
Financial assets and liabilities measured at fair value on a recurring basis are summarized below for the year ended December 31, 2017:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative Financial Instruments | $ | — | $ | — | $ | 319,041 | $ | 319,041 | ||||||||
Net income (loss) per Common Share
Basic net income (loss) per share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Fully diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| F- 7 |
TEXTMUNICATION HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018
Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered.
The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital over the period during which services are rendered.
Investments in Securities
Investments in securities are accounted for using the equity method if the investment provides the Company the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate.
Recent Accounting Pronouncements
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. Management evaluated ASU 2016-18 and determined that the adoption of this new accounting standard did not have a material impact on the Company’s consolidated financial statements.
NOTE 3 – RELATED PARTY TRANSACTIONS
As of September 30, 2018, the Company had advances due to a related party. The loans are due on demand and have no interest. Amounts outstanding as of September 30, 2018 and December 31, 2017 were approximately $11,750 and $11,750, respectively
NOTE 4 - CONVERTIBLE NOTE PAYABLE
Convertible notes payable consists of the following as of September 30, 2018 and December 31, 2017:
| 2018 | 2017 | |||||||
| Total convertible notes payable | 45,000 | 214,764 | ||||||
| Less discounts | - | (42,534 | ) | |||||
| Convertible notes net of discount | $ | 45,000 | $ | 172,230 | ||||
The Company accounts for the fair value of the conversion features of its convertible debt in accordance with ASC Topic No. 815-15 “Derivatives and Hedging; Embedded Derivatives” (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for’ any unrealized change in fair value as a component of results of operations. The Company values the embedded derivatives using the Black-Scholes pricing model.
| F- 8 |
TEXTMUNICATION HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018
The following table presents details of the Company’s derivative liabilities associated with its convertible notes as of September 30, 2018 and December 31, 2017:
| Amount | ||||
| Balance December 31, 2017 | $ | 319,041 | ||
| Adjustment to derivative liability due to debt conversion | (142,973 | ) | ||
| Change in fair market value of derivative liabilities | (119,370 | ) | ||
|
Balance September 30, 2018 |
$ | 56,698 | ||
During the nine months ended September 30, 2018, the Company issued 647,458 shares of common stock with a fair value of $54,631 for the partial conversion of convertible notes payable. The converted portion of the notes also had associated derivative liabilities with fair values on the date of conversion of 866,361. The conversion of the derivative liabilities has been recorded through additional paid-in capital.
The Black-Scholes model utilized the following inputs to value the derivative liability at the date of issuance of the convertible note and at September 30, 2018:
| Fair value assumptions – derivative notes: | September 30, 2018 | |||
| Risk free interest rate | 1.27-1.63 | % | ||
| Expected term (years) | 0.01 - 0.01 | |||
| Expected volatility | 554 | % | ||
| Expected dividends | 0 | % | ||
Settlement Agreements
During the nine months ended September 30, 2018, the Company entered into certain cancellation agreements with the holder of a certain notes payable in the amounting to $96,721, including accrued interest issued from December 10, 2015 through August 27, 2017. The face value of the canceled debt of $96,721 has been recorded as a gain on settlement of notes payable as of September 30, 2018. The company also have settled convertible notes amounting to $172,230 for a total amount of $32,500
NOTE 5 – INVESTMENT IN ASPIRE CONSULTING GROUP, LLC
On January 5, 2016, the Company entered into a Share Exchange Agreement with Aspire Consulting Group, LLC, a Maryland limited liability company and certain members of Aspire. Pursuant to the terms of the Exchange Agreement, the Company agreed to acquire 49% of all of the issued and outstanding membership units of Aspire in exchange for the issuance of 66,667 shares of the Company’s newly created Series B Convertible Preferred Stock to the Members valued at $460,002.
The Company has concluded that it has the ability to exercise significant influence, but not control, over an Aspire through its acquired 49% equity interest and therefore has accounted for the acquisition of the interest under the equity method.
The following table presents details of the Company’s investment is Aspire as of June 30, 2018 and December 31, 2017:
| Amount | ||||
| Balance December 31, 2017 | $ | 452,336 | ||
| Income (loss) from equity method investee | (2,237 | ) | ||
| Distributions received from Aspire | - | |||
| Balance September 30, 2018 | $ | 450,099 | ||
| F- 9 |
TEXTMUNICATION HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Office Lease
On January 6, 2015 the Company signed an amendment to its lease originally signed on May 9, 2008. The amended lease commenced January 1, 2015 and expires on thirty days’ notice. Rent expense was approximately $15,872 and $15,803 for the nine months ended September 30, 2018 and 2017, respectively.
Executive Employment Agreement
The Company has an employment agreement with the CEO/Chairman to perform duties and responsibilities as may be assigned by the Board of Directors. The base salary is in the amount of $120,000 per annum plus an annual discretionary bonus plus benefits commencing on December 17, 2013 and ending May 1, 2019 with an automatic renewal on each anniversary date (May 1) thereafter.
NOTE 7 – STOCKHOLDERS’ EQUITY
During the nine months ended September 30, 2018, the Company issued 892,882 shares of common stock (post-split) valued at $299,469 for the settlement of debt related to a 3a10 settlement.
During the six months ended June 30, 2018, the Company issued 647,459 shares of common stock (post-split) for the settlement of $54,541 in notes payable.
On June 8, 2018 the Company entered into a subscription agreement for 9.98% of the company common shares outstanding for $100,000.
During the three months ended June 30, 2018, the Company’s Board of Directors approved a one to one thousand (1:1000) reverse stock split, which became effective July 9, 2018. The Company consolidated financial statements have been retroactively restated to the reflect the effect of the stock split
NOTE 8 – SUBSEQUENT EVENTS
On October 12, 2018, Textmunication Holdings, Inc. (“Company”), Wais Asefi, the Company’s CEO, and David Thielen, the Company’s COO, entered into a Settlement Agreement and Release (the “Agreement”) with Lester Einhaus (“Holder”) concerning a $25,000 convertible note issued by the Company to the Holder on September 23, 2015 (the “Note”).
The Holder initiated litigation against the Company on April 27, 2017, in the Circuit Court of Cook County, Illinois, Case No. 2017 L 506, which was later removed to the United States District Court for the Northern District of Illinois, Case No. 17 C 4478 (the “Einhaus Lawsuit”). Messrs. Asefi and Thielen also brought claims against The Holder. The Agreement settled the Note and all claims, and the parties signed an order to dismiss the Einhaus Lawsuit.
The Agreement requires the Company to issue to the Holder 475,000 shares of the Company’s common stock, subject to the condition that the Holder does not own more than 4.99% of the Company’s outstanding shares at any time. As such, the shares will be issued out in tranches, with the first such tranche due within 10 days of signing the Agreement for 198,000 shares. The Holder agreed to a daily leak out of the greater of 10,000 shares or 15% of the trading volume.
On October 20, 2018, the Company issued 80,000 to a consultant for professional services.
The company has evaluated subsequent events for recognition and disclosure through September 30, 2018 which is the date the financial statements were available to be issued. No other matters were identified affecting the accompanying financial statements and related disclosures.
| F- 10 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Company Overview
We are a developing player in the mobile marketing and loyalty industry, providing cutting-edge mobile marketing solutions, rewards and loyalty to our clients. With a powerful yet intuitive suite of services, clients are able to reach more customers faster and reward them for repeat business. We help clients reach their marketing and revenue goals by educating clients with the most effective tools in mobile marketing, rewards, paperless redemption and loyalty.
In the past 4 years, we have grown to over 765 clients and more than 950 different locations in the United States and Canada. We have achieved this with an expanded focus on a variety of industries, including restaurants, retailers, entertainment venues and other partnership opportunities. We are looking to open new SMS markets in Europe and Asia based on new client relationships. We have decided to focus our energy on the gym, health and fitness club market. However, we are also working with Quick Service Restaurants (QSR), Beauty/Tanning salons, hospitality, entertainment, digital marketing and sporting events. Our new Smart Automated Messaging (SAM) platform is fully operational and has completely replaced our legacy software platform. The SAM platform has the capacity to bring on several thousand new clients while adding new functionality such as Rich Communication Services (RCS) and Artificial Intelligence (AI). We will be introducing both technologies to SAM in early 2019.
Our new software platform provides a powerful nonintrusive and valued-added engagement tool capable of delivering more than one billion SMS per month. CIOReview Magazine recognized Textmunication as one of the “Top 20 Most Promising Digital Marketing Solution Providers” in its annual 2018 edition. We offer cutting-edge technology with upcoming solutions such as Rich Communication Services (RCS). We were chosen as an early adopter of RCS by aleading mobile messaging provider, OpenMarket, which could create a paradigm shift in the text messaging world with rich images, videos, chat box features and multi-media in a single text.
We have built an advanced “Communication Platform as a Service” (CPaaS) backbone enabling developers to add real-time communication features in their own applications without needing to build backend infrastructure and interfaces. We are working to develop “Messaging as a Platform” (MaaP). A MaaP platform combines advanced messaging with standardized interfaces to plugins creating a richer experience for consumers, such as RCS. Textmunication is targeting its RCS solution for early 2019. Textmunication expanded its White Label program allowing companies of all sizes to implement an “out-of-the-box” solution “Powered by Textmunication”. In addition to White Label, the company offers standalone Application Programming Interfaces or APIs, integrated API solutions and non-integrated services.
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API development is a major focus for the remainder of 2018 and into 2019. We can produce a new API in 2-3 weeks for each new client. We now have 7 of the top 8 Health Club Management Software (CMS) companies using our integrated SMS fitness solution. There is no other automated health and fitness solution offering a completed end-to-end solution similar to ours. We now have access to more than 25,000 health clubs in North America and will focus on converting new clubs to our solution in the next 12 months.
By adding RCS and AI, we can add customer value and higher priced solutions to any vertical we are pursuing. The evolution of SMS into RCS will establish Textmunication as an innovator of new technology and upgraded services. We are pursuing AI assets to add to SAM which will establish us as a pure technology company with an advanced communication platform. We feel the transformation into a technology company with AI will open new revenue streams and add value to our technology assets.
We have also entered into the IT consulting business through our acquisition of a minority interest in Aspire Consulting, LLC. We plan to assist our controlling partner in the development of this consulting business in addition to improving the market position of our mobile marketing business.
Our principal executive office is located at 1940 Contra Costa Blvd. Pleasant Hill, CA 94523 and our telephone number is (925-777-2111).
Results of Operation for Three Months Ended September 30, 2018 and 2017
Revenues
For the three months ended September 30, 2018, we earned revenues in the amount of $218,251, as compared with revenues of $184,835 for the three months ended September 30, 2017. For the nine months ended September 30, 2018, we earned revenues in the amount of $709,375, as compared with revenues of $721,383 for the nine months ended September 30, 2017.
The slight decrease in revenues for the nine months ended September 30, 2018 over the prior year period is due to focusing on launching a new platform that we are hopeful will increase revenues in future quarters. We expect to achieve greater revenues for the rest of 2018 over 2017.
Cost of Revenues
Cost of revenues was $117,241 for the three months ended September 30, 2018, as compared with $87,028 for the same period ended September 30, 2017. Cost of revenues was $232,145 for the nine months ended September 30, 2018, as compared with $244,494 for the same period ended September 30, 2017.
Our gross profit was $101,010 for the three months ended September 30, 2018 or approximately 46% of revenues, as compared with $97,807 for the same period ended September 30, 2017, or approximately 53% of revenues. Our gross profit was $477,230 for the nine months ended September 30, 2018 or approximately 67% of revenues, as compared with $476,889 for the same period ended September 30, 2017, or approximately 66% of revenues.
Our cost of revenues increased for 2018 compared with the 2017 and our margins were less as a result of additional development resources. We expect a similar cost of revenues for the rest of 2018.
Operating Expenses
Our operating expenses were $302,329 for the three months ended September 30, 2018, as compared with $533,658 for the three months ended September 30, 2017. Our operating expenses were $815,52 for the nine months ended September 30, 2018, as compared with $7,007,006 for the nine months ended September 30, 2017.
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The main reason for our decreased operating expenses in 2018 was a result of less spent on officer compensation and general and administrative expenses. In 2017, we expensed $6,000,000 as a result of stock-based compensation to our CEO, Wais Asefi. We expect that our operating expenses for the rest of 2018 will remain similar to that in the present quarter, provided that we do not have to issue stock for services. Given our lack of operating capital, we have been forced to issue shares for services rendered to the company. We hope that increased revenues will lessen that trend for 2018 and beyond.
Other Income/Expenses
We had other income of $27,947 for the three months ended September 30, 2018 compared with other expenses of $180,772 for the same period ended September 30, 2017. We had other income of $324,952 for the nine months ended September 30, 2018 compared with other expenses of $851,776 for the same period ended September 30, 2017.
Other income for the three months ended September 30, 2018 consisted mainly of a $19,261 change in fair value of derivative liabilities based on the Black-Scholes option pricing model. Other expenses for the three months ended September 30, 2017 consisted mainly of interest expense of $97,020, amortization of debt discount of $47,794 and a gain on derivative liability of $37,684.
Other income for the nine months ended September 30, 2018 consisted mainly of a $255,339 gain on the settlement of notes payable and a $119,369 change in the fair value of derivative liabilities based on the Black-Scholes option pricing model, offset mainly by the amortization of debt discount of $42,534. Other expenses for the nine months ended September 30, 2017 consisted mainly of a $651,147 change in the fair value of derivative liabilities based on the Black-Scholes option pricing model, along with a $159,208 amortization of debt discount.
Net Income/Loss
We had a net loss of $174,488 for the three months ended September 30, 2018, as compared with a net loss of $617,115 for the three months ended September 30, 2017. We had a net loss of $15,583 for the nine months ended September 30, 2018, as compared with a net loss of $7,384,111 for the three months ended September 30, 2017.
Liquidity and Capital Resources
As of September 30, 2018, we had total current assets of $43,717, consisting of cash, receivables and prepaid expenses. Our total current liabilities as of September 30, 2018 were $385,564. We had a working capital deficit of $341,847 as of September 30, 2018, compared with a working capital deficit of $253,566 as of June 30, 2018.
Cash Flows from Operating Activities
Operating activities used $21,751 in cash for the nine months ended September 30, 2018, compared with cash used of $50,734 for the nine months ended September 30, 2017. Our negative operating cash flow for the nine months ended September 30, 2018 was largely the result of a gain on settlement of debt of $261,256, offset mainly by gain on derivative liability of $196,168. Our negative operating cash flow for the nine months ended September 30, 2017 was largely the result of our net loss for the period of $7,384,111, offset by share-based compensation of $6,115,100 and loss on derivative liabilities of $651,147.
Cash Flows from Investing Activities
Investing activities used $39,863 in cash for the nine months ended September 30, 2018, compared with cash used of $43,068 for the nine months ended September 30, 2017. Cash flows used in investing activities for the nine months ended September 30, 2018 resulted from the capitalized cost for internal use software. Cash flows used in investing activities for the nine months ended September 30, 2017 resulted from the purchase of fixed assets.
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Cash Flows from Financing Activities
Cash flows provided by financing activities during the nine months ended September 30, 2018 amounted to $62,500, compared with cash flows provided by financing activities of $109,118 for the nine months ended September 30, 2017. Our positive cash flows for the nine months ended September 30, 2018 consisted of proceeds from the issuance of equity securities, offset by payments on convertible notes payable. Our positive cash flows for the nine months ended September 30, 2017 consisted of proceeds from convertible notes and loans payable, offset by payments on loans payable.
The features of the debt instruments and payables concerning our financing activities are detailed in the footnotes to our financial statements.
Our optimum level of growth for success will be achieved if we are able to raise $250,000 in the next twelve months. However, funds are difficult to raise in today’s economic environment. If we are unable to raise $250,000 our ability to implement our business plan and achieve our goals will be significantly diminished.
We have experienced a history of losses. With our revenues increasing, however, we are less reliant on outside capital as we have been in the past. We have limiting raising money through convertible debt, since they are almost always on unfavorable terms. There is no guarantee that these small convertible loans will be available to us in the future or on terms acceptable to us.
We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.
Going Concern
As of September 30, 2018, we have an accumulated deficit of $15,165,823. Our ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements and our ability to achieve and maintain profitable operations. While we are expanding our best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations. These conditions raise substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty.
Off Balance Sheet Arrangements
As of September 30, 2018, there were no off-balance sheet arrangements.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are disclosed in Note 2 of our audited financial statements included in the Form 10-K filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
No new accounting pronouncements issued or effective during the fiscal year has had or is expected to have a material impact on the financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2018, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described below.
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following three material weaknesses that have caused management to conclude that, as of September 30, 2018, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
| 1. | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the period ending September 30, 2018. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| 2. | We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| 3. | Effective controls over the control environment were not maintained. Specifically, a formally adopted written code of business conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed and effectively communicated to employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. |
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To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.
We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.
Changes in Internal Control over Financial Reporting
No change in our system of internal control over financial reporting occurred during the period covered by this report, the period ended September 30, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On October 12, 2018, Textmunication Holdings, Inc. (“Company”), Wais Asefi, the Company’s CEO, and David Thielen, the Company’s COO, entered into a Settlement Agreement and Release (the “Agreement”) with Lester Einhaus (“Holder”) concerning a $25,000 convertible note issued by the Company to the Holder on September 23, 2015 (the “Note”).
The Holder initiated litigation against the Company on April 27, 2017, in the Circuit Court of Cook County, Illinois, Case No. 2017 L 506, which was later removed to the United States District Court for the Northern District of Illinois, Case No. 17 C 4478 (the “Einhaus Lawsuit”). Messrs. Asefi and Thielen also brought claims against The Holder. The Agreement settled the Note and all claims, and the parties signed an order to dismiss the Einhaus Lawsuit.
The Agreement requires the Company to issue to the Holder 475,000 shares of the Company’s common stock, subject to the condition that the Holder does not own more than 4.99% of the Company’s outstanding shares at any time. As such, the shares will be issued out in tranches, with the first such tranche due within 10 days of signing the Agreement for 198,000 shares. The Holder agreed to a daily leak out of the greater of 10,000 shares or 15% of the trading volume.
For our mobile marketing business, see risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2014 filed on April 15, 2015.
For our interest in Aspire Consulting Group, LLC, see risk factors included in our Current Report on Form 8-K filed on January 1, 2016.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933.
During the nine months ended September 30, 2018, we issued 892,882 shares of common stock (post-split) valued at $299,469 for the settlement of debt related to a 3a10 settlement.
During the nine months ended September 30, 2018, we issued 647,459 shares of common stock (post-split) for the settlement of $54,541 in notes payable.
On June 8, 2018 we entered into a subscription agreement for 9.98% of the company common shares outstanding for $100,000.
These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
N/A
None
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| Exhibit Number | Description of Exhibit | |
| 31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101** | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 formatted in Extensible Business Reporting Language (XBRL). | |
| **Provided herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Textmunication Holdings, Inc. | ||
| Date: | November 16, 2018 | |
| By: | /s/ Wais Asefi | |
| Wais Asefi | ||
| Title: | President, Chief Executive Officer, and Director | |
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