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EX-32.2 - WebSafety, Inc.v194324_ex32-2.htm
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EX-31.1 - WebSafety, Inc.v194324_ex31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:  June 30, 2010
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 333-140378
 
WEBSAFETY, INC.
(Exact name of small business issuer as specified in its charter)

Nevada
(State or other jurisdiction of incorporation or
organization)
20-5150818
(I.R.S. Employer Identification No.)

2201 W. Royal Lane, Suite 200, Irving, Texas 75063
(Address of Principal Executive Offices)

(214) 716-6909
(Issuer’s telephone number)

BLINDSPOT ALERT, INC.
(1 Hampshire Court, Newport Beach, CA 92660)
 
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.

¨ Large accelerated filer
¨  Accelerated filer
¨ Non-accelerated filer
x  Small reporting company

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of August 16, 2010:

Class
 
Outstanding shares as of August 16, 2010
Common Stock, $0.001 par value
 
66,876,774

 

 
 
INDEX
 
 
 
Page
     
PART 1-FINANCIAL INFORMATION
 
3
     
Item 1.  Financial Statements
 
3
     
Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009
 
F-1
     
Statements of Operations (unaudited) for the three and six months ended June 30, 2010 and June 30, 2009
 
F-2
     
Statements of Cash Flows (unaudited) for the six months ended June 30, 2010 and June 30, 2009.
 
F-3
     
Statements of Stockholders's Equity (deficit) for the year ended December 31, 2009 and the six months ended June 30, 2010 (unaudited)
 
F-4
     
Notes to Financial Statements
 
F-5
     
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
4
     
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
6
     
Item 4.  Control and Procedures
 
6
     
PART II-OTHER INFORMATION
 
7
     
Item 1.  Legal Proceedings
 
7
     
Item 1A.  Risk Factors
 
7
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
10
     
Item 6.  Exhibits
 
10
     
SIGNATURES
 
11
 
 
2

 
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
INTERIM FINANCIAL STATEMENTS
(UNAUDITED)

Table of Contents

 
PAGE
   
BALANCE SHEETS
F-1
   
STATEMENTS OF OPERATIONS
F-2
   
STATEMENTS OF CASH FLOWS
F-3
   
STATEMENTS OF STOCKHOLDERS EQUITY
F-4
   
FOOTNOTES TO FINANCIAL STATEMENTS
F-5
 
 
3

 

 WEBSAFETY, Inc.
 Formerly Known as BlindSpot Alert, Inc.
 BALANCE SHEETS
 
   
As of
       
   
June 30, 2010
   
December 31, 2009
 
 ASSETS
 
(Unaudited)
   
(Unaudited)
 
             
Current assets:
           
Cash
  $ 55,823     $ 5,748  
Accounts receivable
    -       17,171  
Total current assets
    55,823       22,919  
 
               
Property and Equipment:
               
Computer equipment, computer software and furniture, net
    12,944       14,433  
Software license and website development, net
    128,150       138,383  
Total property and equipment
    141,094       152,816  
                 
Other Assets:
               
Deposits
    6,820       6,820  
WebSafety Technology, net
    2,117,111       2,587,580  
Option to acquire
    -       -  
Total other assets
    2,123,931       2,594,400  
                 
    $ 2,320,848     $ 2,770,135  
                 
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 440,263     $ 233,733  
Accrued expense
    1,675       13,868  
Deferred revenue
    74,298       114,740  
Liability to issue shares
    115,864       103,120  
Total current liabilities
    632,101       465,461  
                 
Stockholders' equity:
               
Preferred stock; $.001 par value, 25,000,000 shares
               
authorized, 3,230,002 and 3,833,335  shares issued and
               
outstanding respectively
    3,230       4,230  
 
               
Common stock; $.001 par value, 300,000,000 shares
               
authorized, 66,704,549 and 54,895,714  shares issued and
               
outstanding, respectively
    66,705       54,896  
 
               
 
               
Additional paid in capital
    5,896,813       4,817,805  
Deficit accumulated
    (4,278,000 )     (2,572,257 )
Total stockholders' equity
    1,688,748       2,304,674  
                 
    $ 2,320,848     $ 2,770,135  
 
The accompanying notes are an integral part of these financial statements.

 
F-1

 

 STATEMENTS OF OPERATIONS
 For The Three  and Six Months Ended June 30, 2010 and 2009
 (Unaudited)
 
 
   
(Unaudited)
   
(Unaudited)
 
   
For The Three Months Ended June 30
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
                         
Revenue
  $ 76,712     $ -     $ 122,490       -  
Cost of goods sold
    (26,785 )     -       (58,142 )        
Gross margin
    49,927       -       64,348       -  
                                 
Operating expenses:
                               
General and administrative expenses
    657,678       156,764       1,270,185       329,550  
Impairment loss
    -       -       -       -  
Research & Development
    -       -       2,500       -  
Loss on option acquire
    -       -       -       245,000  
 Depreciation and amortization expense
    248,388       -       497,406       -  
Total operating expenses
    906,066       156,764       1,770,091       574,550  
      -       -                  
(Loss) from operations
    (856,139 )     (156,764 )     (1,705,743 )     (574,550 )
                                 
Other income (expense):
                               
Interest income
    -       -       -       -  
Other income
    -       -       -       -  
Interest expense
    -       -       -       -  
Total other income (expense)
    -       -       -       -  
                                 
(Loss) before provision for income taxes
    (856,139 )     (156,764 )     (1,705,743 )     (574,550 )
Provision for income taxes
                    -       -  
                                 
Net (loss)
  $ (856,139 )   $ (156,764 )   $ (1,705,743 )   $ (574,550 )
                                 
Basic and diluted loss per share
  $ (0.013 )   $ (0.007 )   $ (0.028 )   $ (0.026 )
                                 
Basic and diluted weighted average
                               
common shares outstanding
    64,635,157       22,300,000       61,144,778       22,300,000  

The accompanying notes are an integral part of these financial statements.

 
F-2

 

 Websafety, Inc.
 Formerly Known as BlindSpot Alert, Inc.
  STATEMENTS OF CASH FLOWS
 For the Six Months Ended June 30, 2010 and 2009
 (Unaudited)
 
   
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
Operating activities:
           
Net loss
  $ (1,705,743 )   $ (574,550 )
Adjustments to reconcile net loss to
               
net cash used in operating activities:
               
Depreciation and amortization expense
    497,406       -  
Stock compensation expense
    257,821          
Stock issued for services
    311,905       18,000  
Impairment charge for WQN License
    -       245,000  
Loss on option expiration
    -       -  
Loss on sale of equipment
    -       -  
Changes in operating assets and liabilities:
               
Decrease (increase) in accounts receivable
    17,171       -  
Decrease  in prepaid expense
    -       7,137  
Decrease in subscriptions receivable
    -       200  
Decrease in advance to shareholder
    -       (1,104 )
Increase in deposit
    -       -  
Increase (decrease) in advance from shareholder
    -       -  
Increase  in accounts payable
    206,530       98,035  
Decrease in short-term borrowing
    -       -  
Decrease in lease payable
    -       -  
Decrease in deferred revenue
    (40,442 )     -  
Increase in accrued expense
    551       54  
Net cash (used in) operating activities
    (454,801 )     (207,228 )
                 
Investing activities:
               
Purchase of long term assets
    (15,215 )     (89,295 )
Increase (decrease) investment in option to acquire
    -       (150,000 )
Net cash (used in) investing activities
    (15,215 )     (239,295 )
 
               
Financing activities:
               
Proceeds from borrowing
    -       -  
Proceeds from sale of equipment
    -       -  
Repayment of advances from shareholders
    -       -  
Proceeds from stock sales
    520,091       469,001  
Net cash provided by financing activities
    520,091       469,001  
 
               
Net changes in cash
    50,075       22,478  
 
               
Cash, beginning of year
    5,748       224,269  
 
               
Cash, end of period
  $ 55,823     $ 246,747  
 
               
Cash paid during the period for:
               
Interest paid
    -       -  
Tax paid
    -       -  
                 
Non Cash Investing and Financing Activities:
               
Issuance of common stock for services
  $ 123,785     $ 28,000  
Voluntary conversion of shareholders advance to pain in Capital
  $ -     $ -  
Common stock issued for equipment
  $ -     $ -  
 
The accompanying notes are an integral part of these financial statements.

 
F-3

 
 
 WEBSAFETY, INC.
 Formerly Known as BlindSpot Alert, Inc.
 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 For the Year Ended December 31, 2009 and the Six Months Ended June 30, 2010
(Unaudited)
 
                                 
Additional
         
Total
 
   
Preferred Stock
   
Common Stock
   
Subscription
   
Paid-in
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Receivable
   
Capital
   
(Deficit)
   
Equity (Deficit)
 
                                                 
 Balances December 31, 2009
    4,230,002     $ 4,230       54,895,714     $ 54,896     $ -     $ 4,817,805     $ (2,572,257 )   $ 2,304,674  
                                                                 
                                                                 
 Issuance of common stock for cash
                                                               
 January 6, 2010 one issuance at $0.45
                    100,000     $ 100               44,900               45,000  
 January 27, 2010 one issuance at $0.043
                    1,600,000     $ 1,600               68,400               70,000  
 March 9, 2010 one issuance at $0.05
                    400,000     $ 400               19,600               20,000  
 March 9, 2010 one issuance at $0.045
                    33,333     $ 33               14,967               15,000  
 March 9, 2010 one issuance at $0.045
                    23,000     $ 23               10,327               10,350  
                                                              -  
 Issuance of common stock for services
                                                            -  
 January 6, 2010 one issuance at $0.04
                    100,000     $ 100               3,900               4,000  
 January 6, 2010 one issuance at $0.04
                    200,000     $ 200               7,800               8,000  
 January 6, 2010 one issuance at $0.04
                    28,000     $ 28               1,092               1,120  
 March 17, 2010 one issuance at $0.025
                    7,000,000     $ 7,000               168,000               175,000  
                                                              -  
 Stock Compensation Expense
                                            128,911               128,911  
                                                                 
 Net loss for the period ended March 31, 2010
                                                    (849,604 )     (849,604 )
                                                                 
 Balances  March 31, 2010
    4,230,002     $ 4,230       64,380,047     $ 64,380     $ -     $ 5,285,701     $ (3,421,861 )   $ 1,932,451  
                                                                 
 Issuance of common stock for cash
                                                               
 April 5, 2010 one issuance at $0.45
                    26,500     $ 27               11,898               11,925  
 April 5, 2010 one issuance at $0.45
                    155,400     $ 155               69,775               69,930  
 April 5, 2010 one issuance at $0.45
                    22,222     $ 22               9,978               10,000  
 June 2, 2010 one issuance at $0.45
                    50,000     $ 50               22,450               22,500  
 June 18, 2010 one issuance at $0.45
                    534,192     $ 534               239,852               240,386  
Issuance of common stock for services
                                                               
 June 2, 2010 one issuance at $0.45
                    15,000     $ 15               6,735               6,750  
 June 2, 2010 one issuance at $0.45
                    4,522     $ 5               2,030               2,035  
 June 2, 2010 one issuance at $0.45
                    55,555     $ 56               24,944               25,000  
 June 18, 2010 one issuance at $0.45
                    200,000     $ 200               89,800               90,000  
                                                              -  
 Conversion of preferred shares to common shares at 1.25 to 1
    (1,000,000 )     (1,000 )     1,250,000     $ 1,250               (250 )             -  
                                                                 
 Issuance of common stock to adjust issue price
                    11,111     $ 11               4,989               5,000  
                                                                 
Stock Compensation Expense                                             128,910               128,910  
                                                                 
 Net loss for the period ended June 30, 2010
                                                    (856,139 )     (856,139 )
                                                                 
 Balances  June 30, 2010
    3,230,002     $ 3,230       66,704,549     $ 66,705     $ -     $ 5,896,813     $ (4,278,000 )   $ 1,688,748  

The accompanying notes are an integral part of these financial statements.

F-4

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
Note 1.  Condensed Financial Statement
 
The accompanying financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2010, and for all periods presented herein, have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2009 audited financial statements.  The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the operating results that can be anticipated for a complete operating period.
 
Note 2. Significant Accounting Policies
 
Going Concern
 
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has incurred cumulative net losses of approximately $4,149,090 from the period of July 3, 2006 (Inception) through June 30, 2010 and has used significant cash in support of its operating activities raising substantial doubt about the Company’s ability to continue as a going concern.  The Company in 2010 has raised additional capital and will seek additional sources of capital through the issuance of debt or equity financing, but there can be no assurance the Company will be successful in accomplishing its objectives.
 
The ability of the Company to continue as a going concern is dependent on additional sources of capital and the success of the Company’s plan.  The financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  The Company is subject to uncertainty of future events, economic, environmental and political factors and changes in the Company’s business environment; therefore, actual results could differ from these estimates.  Accordingly, accounting estimates used in the preparation of the Company’s financial statements will change as new events occur; more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.  Changes are made in estimates as circumstances warrant.  Such changes in estimates and refinement of estimation methodologies are reflected in the statements. 
 
Earnings per Share:

Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented. Diluted earnings per common share give the effect to the assumed exercise of stock options when dilutive. In a loss year, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive. At June 30, 2010, there were 2,100,000 stock options and 1,328,027 stock warrants issued and outstanding that could dilute future earnings.

 
F-5

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
Stock-Based Compensation: 
 
In December 2004, FASB issued FASB ASC 718 (Previously SFAS No. 123R, Share-Based Payment.)   FASB ASC 718 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.  It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.  FASB ASC 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.  FASB ASC 718 requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements.  That cost will be measured based on the fair value of the equity or liability instruments issued.

The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees.”  The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.  Stock-based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services, whichever is more readily determinable in accordance with SFAS 123R.
 
Fair Value of Financial Instruments

The fair value of the Company’s financial instruments is determined by using available market information and appropriate valuation methodologies. The Company’s principal financial instruments are cash, accounts receivable, accounts payable, common stock and preferred stock. At June 30, 2010 and December 31, 2009, cash, accounts receivable, and accounts payable, due to their short maturities, and liquidity, are carried at amounts which reasonably approximate fair value.

The Company measures the fair value of its financial instruments using the procedures set forth below for all assets and liabilities measured at fair value that were previously carried at fair value pursuant to other accounting guidelines.
 
Under FASB ASC 820(Prior authoritative literature: SFAS No. 157, “Fair Value Measurements”), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
 
FASB ASC 820 establishes a three-level hierarchy for disclosure to show the extent and level of judgment used to estimate fair value measurements.
 
Level 1 — Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
 
Level 2 — Uses inputs, other than Level 1, that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active.  Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data.  Instruments in this category include non-exchange-traded derivatives, including interest rate swaps.
 
Level 3 — Uses inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.  These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
 
The table below sets forth our financial assets and liabilities that were accounted for at fair value as of June 30, 2010 and December 31, 2009.  The table does not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.

 
F-6

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
  
 
June 30, 2010
 
December 31, 2009
 
  
 
Level 1
 
Level 2
Level 3
 
Level 1
   
Level 2
   
Level 3
 
It Measured at fair value at date of purchase:
                           
Investment in WebSafety Technology
  $
2,700,000
       
$
2,700,000
   
$
-
   
$
-
 
 
Note 3. Property and Equipment
 
Property and equipment consist of the following at :

   
June 30
2010
   
December 31,
2009
 
Computer Equipment
  $ 15,715     $ 15,715  
                 
Web Site Software
    166,178       150,963  
Accumulated depreciation
    (40,799 )     (13,862 )
Total              
  $ 141,094     $ 152,816  

The Company has incurred website development costs as part of web site application and infrastructure development activities. Specifically, activities include coordination of design, engineering, initial integration and design modifications, script writing, web site designs and revisions, application side designs, pre-video production build/test flash prototype for oversize video browser scaling, eCommerce engine, etc.   All of these development costs were capitalized in accordance with FASB ASC 350-50 (Prior authoritative literature: FASB EITF 00-2, “Accounting for Web Site Development Costs”) (see Exhibit 00-2A section a to f within Website Application and Infrastructure Development Stage).

The intended write-off did not include web site development costs of $201,523.  The Company plans to utilize the web site to launch the WebSafety software products and expects to generate revenues in the future.  The purchase of WebSafety assets from WQN, Inc. did not change the recoverability of the carrying amount of the capitalized website development cost and therefore is not considered impaired in accordance with FASB ASC 360-10 (Prior authoritative literature: FASB Statement No. 144, paragraph 8).  The website development costs will be amortized over its useful life once the Websafety software products are put in use in accordance with FASB ASC 350-30-50 (Prior authoritative literature: FASB Statement No. 142, “Goodwill and Other Intangible Assets”).

Note 4. WebSafety Technology
 
On July 2, 2009, the Company entered into an agreement with WQN, Inc. to acquire the software technology, known as “Websafety”. The Company capitalizes software development costs when technological feasibility has been established for the software in accordance with ASC 985-20, formerly SFAS No. 86, “Accounting for the Costs of Computer Software to be sold, leased, or otherwise marketed.” Such capitalized costs are amortized on a product-by-product basis over their economic life or the ratio of current revenues to current anticipated revenues from such software, whichever provides the greater amortization. The Company periodically reviews the carrying value of capitalized software development costs and impairments are recognized in the results of operations when the expected future undiscounted operating cash flow derived from the capitalized software is less than its carrying value. Should the Company inaccurately determine when a product reaches technological feasibility or the economic life of a product, results could differ materially from those reported. The Company uses what it believes are reasonable assumptions and where applicable, established valuation techniques in making its estimates.

 
F-7

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
Note 5. Intangible Asset

As a result of the Websafety Technology asset purchase, the Company gained all rights of ownership to the intellectual property of Websafety Technology.  The Company invested an additional $122,815 to develop technology to complete the project.  On October 1, 2009, the Company deemed the technology ready to be sold and used by the general public.  The Company recorded the Intangible Asset in the amount of $2,822,815 and elected to amortize the asset over a 36 month period.

   
June 30,
2010
   
December 31,
2009
 
Intangible assets
           
Websafety Technology
  $ 2,822,815     $ 2,822,815  
Total intangible assets before accumulated amortization
    2,822,815       2,822,015  
                 
Less accumulated amortization
    705,704       235,235  
Total intangible assets
    2,117,111       2,587,580  

Amortization expense for the period ending June 30, 2010 and for fiscal 2009 was $235,235.  Accumulated amortization at June 30, 2010 was $705,704.

In accordance with ASC 360-10-35 a long-lived asset shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances:
 
 
 
 
 
 
 
Management conducted an impairment analysis which reviewed the carrying value of capitalized software development costs and impairments against the expected future undiscounted operating cash flows derived from the capitalized software to determine if the cash flows were less than its carrying value of the asset.

Management based its analysis over a 3-year time-fame which is equal to the estimated life of the WebSafety Technology asset.  The analysis was conducted based on the following assumptions:

 
·
The Company came out of development in October 2009 with a fully-marketable product.
 
 
·
Revenue for the year-ended 2009 was approximately $33,000.  Given the fact that this was our first quarter as an operating company, management expected sales to be relatively small and gradually increase as the Company continued to roll-out its marketing plan.
 
 
·
Our gross revenue assumptions were based on the projected number of subscribers which was based on inputs received from our direct sales force.  Revenues are based on our established pricing model times the projected number of subscribers.
 
 
F-8

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
 
·
Gross margin is determined primarily by established commission rates for direct sales along with the amortization of the WebSafety Technology asset.
 
Based on our analysis as described above, we expect future undiscounted operating cash flows derived from the WebSafety Technology asset  to exceed the carrying value of the asset as of December 31, 2009 and therefore concluded that no impairment was necessary.
Due to a current-period operating or cash flow loss combined with a history of operating or cash flow losses associated with the use of our WebSafety Technology for the period ended June 30, 2010, Management deemed an impairment analysis necessary in accordance with ASC 360-10-35.

 
·
Revenue in the six months-ended June 30, 2010 was approximately $122,000.  Given the fact that this was our second quarter as an operating company, management expected sales to be relatively small and gradually increase as the Company continued to roll-out its marketing plan.  Revenue increased by 270% in the first six months of 2010, compared to the year-ended 2009.  This percent increase was comparable to Management’s expectations.
 
 
·
Our gross revenue assumptions were based on the projected number of subscribers.  Revenues are based on our established pricing models multiplied times the projected number of subscribers.
 
 
·
Gross margin is determined primarily by established commission rates for direct sales along with the amortization of the WebSafety Technology asset.
 
Based on our analysis as described above, we expect future undiscounted operating cash flows derived from the WebSafety Technology asset  to exceed the carrying value of the asset as of June 30, 2010 and therefore concluded that no impairment was necessary. Based on our analysis as described above, we expect future undiscounted operating cash flows derived from the WebSafety Technology asset  to exceed the carrying value of the asset as of June 30, 2010 and therefore concluded that no impairment was necessary.  However, to the extent actual results due not match projections and expectations an impairment charge might be necessary.

Note 6. Option to acquire and expiration

In November 2008 the Company entered into an option agreement with Auburg Adams LLC (AA) a Texas limited liability company to acquire certain software licensing rights it had contracted for pursuant to a licensing agreement entered into with Essential Security Software, Inc. the developer. The option would have allowed the Company to secure the rights of Auburg Adams once a payment of $270,000 has been made. Any payments made pursuant to the terms of the option to acquire were to be credited to the overall price of the licensing had the option been exercised. The rights that Auburg Adams has been granted are for the marketing and sales of software that provides for total digital rights management enabling users to exercise complete control over email transmissions and any attachments related to those transmissions to include restriction of forwarding and timed removal from a recipient computer.  This licensing was to be for an initial five-year period and would be automatically renewable for periods thereafter. The overall cost for the rights is $270,000.  The option expired on April 1, 2009 without the final payment of $25,000 being made or the option being renewed or extended notwithstanding the April 1, 2009 expiration date of the original option. The accounting treatment is in recognition of the substance of the occurrence management remains in discussion with principals of Auberg Adams and ESS.

A principal of Auburg Adams LLC is a minority shareholder in WebSafety, Inc.

Note 7. Stock Issuances
During the Six-Month period ended June 30, 2010 we had the following common stock issuances.

Date
 
Number of Shares
   
Value
 
January 2010     2,028,000     $ 128,120  
 February 2010     -          
 March 2010     7,456,333       220,350  
April 2010
    204,122     $ 91,855  
June 2010
    2,120,380     $
391,671
 
Total Common Issuances
    11,808,835     $ 831,996  

 
F-9

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
In addition to the common stock issued above, during the six month period ended June 30, 2010, we also recorded $21,250 of common stock cash receipts that at June 30, 2010 had not been issued.  These receipts were recorded as a current liability at June 30, 2010 and will be issued in the third quarter of 2010.   We also converted 1,000,000 preferred shares issued at $.30 to 1.25 common shares for a total of 1,250,000 common stock issued.  We also adjusted an issue price in the prior quarter, we issued 100,000 common stock on January 6, 2010 at $0.50 a share for a total of $50,000.  We adjusted the price to $0.45 and issued an additional 11,111 for total issuance of 111,111 common stock shares at $0.45 for $50,000.

Note 8. Related party transactions

In the aggregate, during the six month period ended June 30, 2010, the Company owed to related parties $ for consulting, legal and marketing services as reflected below.

Owed To
 
Consulting
   
Legal Services
   
Placement
Fee
   
Accounting
 
Rowland W. Day II
  $ 175,000     $ 109,512                
John Williams
                          $ 4,869  
Litchfield Enterprises, Inc.                   $ 30,000          

Rowland W. Day II is an affiliate in that he is a more than a 15% beneficial shareholder in the Company.  Mr. Day is our CEO and a director.  John Williams was the former contract Treasurer and CFO of the Company and is the Chief Accounting Officer of WQN, Inc. Mr. Williams resigned May 25, 2010.

The services that were provided are outlined below.

Legal- Rowland Day is the Company’s legal counsel. The amount listed in the above table for Legal Services includes $56,334 for expense reimbursement, that has not been repaid to Mr. Day.

Accounting- Accounting fees paid relates to the review of financial records and preparation of all financial reporting to SEC including audits and preparation of tax returns.

On July 2, 2009 the Company entered into an asset purchase agreement with WQN, Inc. E. Denton Jones, who is also a director of the Company, beneficially owns 335,000 shares of common stock in WQN, Inc. Also, in connection with the transactions contemplated by the Purchase Agreement, B. Michael Adler entered into an employment agreement with the Company to serve as the Company’s Chairman of the Board of Directors.  Mr. Adler still serves as the Chief Executive Officer of WQN, Inc. In addition the Company appointed David W. Sasnett, a director of WQN, Inc, as a director; and hired John Williams, Chief Financial Officer of the WQN, Inc., as the contract Treasurer and Chief Financial Officer.  Neither Mr. Sasnett nor Mr. Williams has resigned from their positions with WQN, Inc.

Concurrent with the asset purchase from WQN which was effective on September 14, 2009, the Company appointed a stockholder of WQN as the Chairman of the Board.  In connection with the appointment the Company entered into an employment agreement whereby the appointee is to receive a salary upon the achievement of a certain level of revenue. Additionally, he is to receive 1,500,000 shares of the Company’s common shares with 100,000 being vested upon the effective date of the agreement, and the remaining 1,400,000 being vested with the achievement of certain levels of revenue. The term of the agreement ends December 31, 2010.

Note 9. Facilities

The Company’s corporate headquarters are presently located at 2201 W Royal Lane, Suite 200, Irving, Texas 75063.

On March 22, 2010, we entered into a five year lease agreement for 5,502 square feet of corporate office space located in Irving, Texas.  The total lease payment will be $472,255 over the five year period beginning May 1, 2010 and expiring on April 30, 2015.  Total annual lease payments are $70,609 in the first year, $96,285 in the second year, $99,036 in the third year, $101,787 in the fourth year and $104,538 in the fifth year.  We expect this space to meet our needs for the foreseeable future.

 
F-10

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
Note 10. Sales and Marketing Program
 
In July 2010 we entered into a sales and marketing agreement with Manage Mobility.  Manage Mobility manages Telecom services for corporations and muncipalities and intends to market our products to their clients.

Management has developed direct selling, multi-level-marketing channels for the sales of the Websafety PC and Cell safety. This channel allows the sales of our services through a person-to-person transaction, away from a fixed retail location. All of the individuals offering our services are independent salespeople.

Note 11. Revenue Recognition
 
In August of 2009 the Company began recognizing revenue from the sales of WebSafety products.  WebSafety is a comprehensive software package that gives parents the capability to monitor and protect children against potentially dangerous emergency situations.  For the period August 2009 through March 2010 customers purchased annual subscriptions to the WebSafety service.  Since this revenue is earned over a 12-month period, the company recognizes 1/12 of sales in the month of sale.  The remaining 11/12 of revenue is deferred and recognized equally over an 11-month period.
 
Note 12. Newly issued pronouncements

In May 2009, the FASB issued FASB ASC 855-10 (Prior authoritative literature: Statement No. 165, “Subsequent Events”). FASB ASC 855-10 established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FASB ASC 855-10 will be effective in the second quarter of fiscal 2009. The adoption of FASB ASC 855-10 did not have a material effect on our financial position, cash flows, or results of operations.
 
Note 13.  Off-balance sheet arrangements
 
At June 30, 2010, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 
F-11

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
Note 14.   Legal Proceedings

On August 25, 2009, the Company terminated its President Clifton Jolley for cause.  In June 2010, the Company and Mr. Jolley agreed to settle the pending arbitration.  According to the settlement the Company must issue 80,000 shares of common stock to Mr. Jolley and receive a full release from Mr. Jolley. 

Note 15-Private Placement Agreement

On February 8, 2010 Litchfield Enterprises, Inc. signed a non-exclusive consulting agreement with the Company to assist with a private placement of the Company’s stock. Per this agreement, Litchfield Enterprises, Inc. will on a “best effort” basis, seek to raise one million one hundred and twenty-five thousand dollars ($1,125,000) by selling 2,500,000 shares at $.45 per share.  Also, under the private placement agreement, the Company grants Litchfield Enterprises, Inc. one (1) warrant exercisible at $.80 per share for each share sold.  These warrants will be valid for one (1) year from the date of issuance. As of June 30, 2010, we issued 734,192 shares of common stock to Litchfield and their investors along with  600,000 warrants.

Note 16-Stock Based Compensation

In November 2009, the Board of Directors and Shareholders adopted the 2008 Stock Option Plan providing for the issuance of up to 10,000,000 shares to Company officers, directors, employees and to independent contractors who provide services to the Company.

Options granted under the 2008 Stock Option Plan vest as determined by the Board of Directors and terminate after the earliest of the following events: expiration of the option as provided in the option agreement, 90 days subsequent to the date of termination of the employee, or ten years from the date of grant (five years from the date of grant for incentive options granted to an employee who owns more than 10% of the total combined voting power of all classes stock at the date of grant).  In some instances, granted stock options are immediately exercisable into restricted shares of common stock, which vest in accordance with the original terms of the related options. The Company recognizes compensation expense ratably over the requisite service period.

The option price of each share of common stock shall be determined by the Board of Directors or compensation committee (when one is established), provided that with respect to incentive stock options, the option price per share shall in all cases be equal to or greater than 100% of the fair value of a share of common stock on the date of the grant, except an incentive option granted under the 2008 Stock Option Plan to a shareholder that owns more than 10% of the total combined voting power of all classes of stock, shall have an exercise price of not less than 110% of the fair value of a share of common stock on the date of grant. No participant may be granted incentive stock options, which would result in shares with an aggregate fair value of more than $10,000,000 first becoming exercisable in one calendar year. 

In September 2009, 700,000 stock options with an exercise prices ranging from of $0.10 to $0.35 were granted to officers of the Company which vest as follows: 20% at the conclusion of each 12 month period from the 5 year term.  These options carry a grant expiration date of 5 years after issuance.  In January 2010, 1,400,000 stock options with exercise prices of $0.025 were granted to an officer and a board member of the Company which vest monthly over a 36 month term.  These options carry a grant expiration date of 3 years after issuance.  As of June 30, 2010, 233,333 of the options had vested.

For the six months ended June 30, 2010, the Company recorded compensation costs for options and shares granted under the plan amounting to $257,821.  There were no stock options or shares granted or outstanding prior to September 30, 2009, therefore no compensation expense was recorded for the three months ended June 30, 2009.  A deduction is not allowed for income tax purposes until nonqualified options are exercised. The amount o this deduction will be the difference between the fair value of the Company’s common stock and the exercise price at the date of exercise. The tax effect of the income tax deduction in excess of the financial statement expense, if any, will be recorded as an increase to additional paid-in capital.  No tax deduction is allowed for incentive stock options. Accordingly no deferred tax asset is recorded for GAAP expense related to these options.

 
F-12

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
Management has valued the options at their date of grant utilizing the Black Scholes Merton option pricing model.  The fair value of the underlying shares was determined based on the closing price of the Company’s publicly-traded shares as of date of the grant.   Further, the expected volatility was calculated using the historical volatility of the Company’s stock.  

 The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options depending on the date of the grant and expected life of the options.  The expected life of options used was based on the contractual life of the option granted.  The Company determined the expected dividend rate based on the assumption and expectation that earnings generated from operations are not expected to be adequate to allow for the payment of dividends in the near future. The following weighted-average assumptions were utilized in the fair value calculations for options granted:

  
 
Six months Ended
 
  
 
June 30, 2010
 
       
Expected dividend yield
    0 %
Expected stock price volatility
    418.5 %
Risk-free interest rate  (1)
    1.56 %

The Company has granted stock options to officers and employees as follows:

Date of
 
Options
   
Exercise
   
Options Outstanding
 
Expiration
 
Vesting
Grant
 
Granted
   
Price
   
As of 6/30/2009
 
Date
 
Date
                   
   
   
9/10/09
   
100,000
   
$
0.35
     
100,000
 
9/10/2014
 
9/102010
9/14/09
   
100,000
     
0.10
     
100,000
 
9/14/2014
 
9/14/2010
9/14/09
   
500,000
     
0.10
     
500,000
 
9/14/2014
 
9/14/2010
01/08/10
   
900,000
     
.025
     
900,000
 
01/08/13
 
01/08/13
01/08/10
   
500,000
     
.025
     
500,000
 
01/08/13
 
01/08/13
                               
Total
                   
2,100,000
 
   
   

The following table summarizes the status of The Company aggregate stock options granted under the incentive stock option plan:
 
  
  
Number
  
  
Weighted
  
  
 
  
  
 
  
  
  
of Shares
  
  
Average
  
  
Weighted
  
  
 
  
  
  
Remaining
  
  
Intrinsic
  
  
Average
  
  
Aggregate
  
Subject to Exercise 
  
Options
  
  
Price
  
  
Life (Years)
  
  
Value
  
                         
Outstanding as of September, 2008
   
-
   
$
-
   
-
   
-
 
Granted – 2009
   
700,000
   
$
0.214
     
5.00
 
$
150,000
 
Forfeited – 2009
   
-
   
$
       
-
     
-
 
Exercised – 2009
   
-
   
$
-
     
-
     
-
 
Granted – 2010
   
1,400,000
   
$
0.975
     
5.00
   
$
1,365,000
 
Forfeited – 2010
   
-
   
$
-
     
-
     
-
 
Exercised – 2010
   
-
   
$
-
     
-
     
-
 
Outstanding as of June 30, 2010
   
2,100,000
   
$
0.721
     
5.00
   
$
1,515,000
 
                                 
Exercisable as of June 30, 2010
   
233,333
   
$
-
     
-
   
$
-
 
 
 
F-13

 
WEBSAFETY, INC.
Formerly Known as Blindspot Alert, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2010
 
 
The weighted-average grant date fair value of options outstanding at June 30, 2010 was $0.062. The total intrinsic value of options exercised during the three months ended June 30, 2010 was $0

The following table summarizes the status of the Company aggregate non-vested shares granted under the 2008 Stock Option Plan.

   
Number of
Non-
vested
Shares
Subject to
Options
   
Weighted-
Average
Grant-
Date
Fair Value
 
Non-vested as of June 30, 2010
   
-
   
$
   
Non-vested granted — three months ended June 30, 2010
   
2,100,000
   
$
0.062
 
Vested — three months ended June 30, 2010
   
233,333
   
$
0.00
 
Forfeited — three months ended June 30, 2010
   
-
   
$
   
Non-vested as of June 30, 2010
   
1,866,667
   
$
0.062
 

As of June 30, 2010 the unrecognized compensation cost related to non-vested share based compensation arrangements granted under the plan that was approximately $1,370,761.  These costs are expected to be recognized on a straight line basis from September 10, 2009 through January 08, 2015.  The total fair value of options and shares vested during the year period ended June 30, 2010 was $137,200.

Note 17. Subsequent Events
 
On August 25, 2009, the Company terminated its President Clifton Jolley for cause.  In June 2010, the Company and Mr. Jolley agreed to settled the pending arbitration.  According to the settlement the Company must issue 80,000 shares of common stock to Mr. Jolley and receive a full release from Mr. Jolley.
 
On August 6, 2010, the Company retained Aegis Capital as an exclusive placement agent to raise a minimum of $1,350,000 and a maximum of $5,400,000 of capital for the Company.
 
F-14

 

The following discussion should be read in conjunction with our unaudited condensed financial statements as of, and for the three and six months ended June 30, 2010 and 2009, and with our annual report on Form 10-K for the year ended December 31, 2009. Certain items have been reclassified to conform to the current year’s presentation.

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for stock of WebSafety, Inc., and other matters. Statements in this report that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act and Section 27A of the Securities Act. Such forward-looking statements, including, without limitation, those relating to the future business prospects, revenues, and income of WebSafety, Inc., wherever they occur, are necessarily estimates reflecting the best judgment of the senior management of WebSafety, Inc. on the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the “Risk Factors” described below, that may affect the operations, performance, development, and results of our business. Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
Plan of Operation

WebSafety, Inc., a development stage company, formerly known as BlindSpot Alert, Inc., commenced a corporate redirection in June 2008 with the objective of marketing and selling through the internet a range of software applications and services for computers and cell phones that allow parents or other caregivers to monitor and be notified of occurrences of predator advances, cyber bullying and pornography received on children’s computers. The cell phone application would also restrict text messaging while driving and provide location information to parents using GPS technology. In June 2008 we acquired for $300,000 a worldwide non-exclusive license that permits the Company to sell the proprietary software that identifies the threats from predators, cyber bullies and transmitters of pornography. The license also allows for selective exclusivity within certain markets. We acquired this license from WQN, Inc.

In November 2008 we executed an option to acquire licensing rights to software that provides digital rights management to email and other data transmitted over the internet. We had intended to begin selling this proprietary software in 2009, however, the option to acquire the rights expired on April 1, 2009 and an expense in the amount of $245,000 was recorded as of March 31, 2009 to reflect the substance of the expiration as of that date.

On July 2, 2009 the Company entered into an asset acquisition agreement with WQN, Inc. Under the agreement we acquired all of the technology known as The WebSafety Technology and Software for approximately 27,000,000 shares of our common stock. Consequently, the Company no longer has any royalty commitments to WQN under the June 30, 2008 license agreement
Management believes that our products are a timely solution to the dangers that come with the unprecedented access to information and people that the internet and cell phones provide.

From June 2008 through September 30, 2009 we have refined our website and we commenced revenue activity in the third quarter of 2009.  We also intend to market our products and services through relationships developed with “trusted” sources consisting child protection advocacy groups including church, school and civic organizations. We intend to also explore opportunities to enter into strategic revenue sharing partnerships with companies having synergy with our products.  These partners may include auto insurers and cell phone manufacturers.

Cumulatively through June 30, 2010 we have raised $2,434,691 through the sale of common and preferred stock the proceeds of which are being used to implement WebSafety’s plan of operations. This funding has been utilized in the furtherance of our plan of operations. Future funding is intended to be used in the commercialization process.

 
4

 
 
Results of Operations
 
Three Months Ended June 30, 2010 compared to Three Months Ended June 30, 2009

Revenue

Revenues were $76,712 during the three months ended June 30, 2010.  We did not record any revenues for the three months ended June 30, 2009.

Cost of Revenue

Cost of revenue was $26,785 during the three months ended June 30, 2010.  We did not record any cost of revenues for the three months ended June 30, 2009.

Operating Expenses, Other Income and Expenses and Loss from Operations

For the three months ended June 30, 2010 we sustained a net operating loss of $856,139 compared to a net operating loss of $156,764 for the three months ended June 30, 2009.  The $699,375 net operating loss increase was mainly due to  higher general and administrative expense, which increased primarily due to an expansion in marketing and sales expenses.  Also, an increase in depreciation and amortization expense of $248,338 for the three months ended June 30, 2010.

Six Months Ended June 30, 2010 compared to Six Months Ended June 30, 2009

Revenue

Revenues were $122,490 during the six months ended June 30, 2010.  We did not record any revenues for the three months ended June 30, 2009.

Cost of Revenue

Cost of revenue was $58,142 during the six months ended June 30, 2010.  We did not record any cost of revenues for the six months ended June 30, 2009.

Operating Expenses, Other Income and Expenses and Loss from Operations

For the six months ended June 30, 2010 we sustained a net operating loss of $1,705,743 compared to a net operating loss of $574,550 for the six months ended June 30, 2009.  The $1,131,193 net operating loss increase was mainly due to higher general and administrative expense, which increased primarily due to an expansion in marketing and sales expenses.  Also, an increase in depreciation and amortization expense of $497,406 for the six months ended June 30, 2010 was offset by a $245,000 decrease in option to acquire expense for the six months ended June 30, 2009.
 
Financial Condition
 
Cash on hand at June 30, 2010 was $55,823 and working capital (the excess of current assets over current liabilities) was a negative $576,278 compared with  $442,542 at  December 31, 2009. The decrease in working capital was primarily attributable to increased disbursements in 2010 for payroll, marketing, legal, professional and other costs relating to the implementation of the operating plan.

Other assets decreased to $2,123,931 at June 30, 2010 from $2,594,400 at December 31, 2009.  The decrease in other assets was a result of $235,235 of amortization related to the WebSafety Technology asset.   Total current liabilities increase to $632,101 at June 30, 2010 from $465,461.  The increase was due to increased payables for marketing, legal, professional and other costs relating to the implementation of the operating plan

 
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Stockholders’ equity was $1,688,748 at June 30, 2010 compared to $2,304,674 at December 31, 2009.  The $615,927 decrease was due to the issuance of $831,996 worth of common shares and $128,910 of additional paid-in capital related to the compensation expense for stock options off-set by net operating losses of $1,705,743 for the six months ended June 30, 2010.
 
Liquidity
 
Cumulatively, through June 30, 2010, the Company had raised $2,434,691 in new equity including $359,741 being raised in Second Quarter 2010 to support planned operations. In light of recent operating results and negative cash flows, additional capital will be required to fund the Company’s operations. On February 8, 2010, the Company signed a non-exclusive consulting agreement Litchfield Enterprises, Inc. (LEI).  Through this agreement, LEI will assist with a private placement of the Company’s stock.  Per this agreement, LEI will on a “best effort” basis, seek to raise one million one hundred and twenty-five thousand dollars ($1,125,000) by selling 2,500,000 shares at $.45 per share. (See “Note 15-Private Placement Agreement” for further discussion).  If successful, the LEI private placement should generate sufficient capital needed to fund the Company through the fourth quarter of 2010; at which time Management expects operations to be generating positive cash flows.
 
There is no assurance that the Company will be successful with the LEI private placement or with the placement agent.  On August 6, 2010, the Company entered into a placement agreement with Aegis Capital (“Aegis”).  Aegis will act as the Company’s exclusive placement agent on a best efforts basis to raise a minimum of $1,350,000 and up to a maximum of $5,400,000.  It is management’s intent to continue fund raising efforts to generate the capital required to support expanding operations.  There can be no assurance that we will be able to raise any more additional capital on terms that are beneficial to us.
 
Critical Accounting Policies and Estimates
 
The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  Generally accepted accounting principles require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources.  Our actual results may differ from those estimates.
 
Off-balance sheet arrangements
 
At June 30, 2010, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not entered into, and do not expect to enter into, financial instruments for trading or hedging purposes.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer/Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer/ Chief Financial Officer has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of such period, are ineffective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 
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There have been no significant changes in our internal controls over financial reporting during the third quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

This Quarterly Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Quarterly Report. 
 
Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Those rules define internal control