ITEM 1. BUSINESS
Business Development
We were incorporated on July 3, 2006 in the State of Nevada under the name Promotions on Wheels Holdings, Inc. We changed our name to Blindspot Alert, Inc. on December 12, 2008 and to Websafety, Inc. on September 11, 2009. The Company was originally a developmental stage company with a principal business objective of offering live promotions and marketing events utilizing unique custom built mobile displays. On July 21, 2008, we discontinued that business.
On June 30, 2008, the Company entered into a License Agreement (“License”) with WQN, Inc., a Texas corporation (“WQN”), which, in consideration for the sum of $300,000 granted the Company the right to market and sell WQN’s Websafety software products. The License covered software products that had been developed by WQN and granted the Company an exclusive right for a period of 12 months to market and sell the software products through the Home Shopping Network, QVC, Inc., CVS Pharmacy, WalMart, and Walgreens and the non exclusive right to market and sell the software products worldwide.
The License provided for the Company to retain 65% of all revenue received from the sale of CYBERSAFETY software and to pay 35% of all revenue to the Licensor, WQN. The License Agreement required Licensor to provide Company technical and customer support and required Licensor to provide Company with all future updates of the software.
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 Websafety Technology 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 many of the dangers that come with the unprecedented access to information and people that is provided by the internet and cell phones provide.
From June 2008 through December 31, 2009 we refined our website and we commenced limited revenue activity in the fourth quarter of 2009. We intend to market our products and services through relationships developed with “trusted” sources consisting of 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 related companies, auto insurers, telecom logistic companies and cell phone manufacturers.
Business of Issuer
We focus on marketing, selling, and distributing a range of Internet software applications and services for computers and cell phones worldwide. These software applications allow parents or other caregivers to monitor and be notified of occurrences of predator advances, cyber bullying, and pornography received on children’s computers; and cell phone applications that restrict text messaging while driving and provide location information to parents using GPS technology. We intend to market our software products under the WEBSAFETY/CELLSAFETY brand name.
Since our inception on July 3, 2006 and as of December 31, 2010, we have generated a minimal amount of revenue and have incurred a cumulative net loss of $8,015,930. In 2010 our revenues were approximately $300,000, however, we believe that we must raise approximately $1,000,000 through the sale of equity for us to sustain operations through the next twelve (12) months. This amount of capital has been budgeted to maintain our infrastructure and marketing and sales campaign. We believe that the recurring revenues from sales of software products eventually will be sufficient to support ongoing operations. We can provide no assurance that the actual expenses we incur will not materially exceed our estimates or that cash flow from sales will be adequate to maintain our business. As a result, our independent auditors have expressed substantial doubt about our ability to continue as a going concern as noted in the independent auditor’s report to the financial statements included in this report.
We currently have a total of ten employees including our Chief Operating Officer. Our Chief Executive Officer and Chief Financial Officer/Director works for us on a part-time basis. We also have two other Directors.
ITEM 1A.
ITEM 1A. RISK FACTORS
The Company was organized during 2006 and is at an early stage of operation and has no substantial revenue. The Company devotes its full resources toward marketing, selling and distributing the software products. The Company began receiving revenue from sales of software products during the fourth quarter of 2009. The Company will need to generate significant revenues to overcome an accumulated deficit and obtain profitability. The Company may never achieve profitability. If revenues grow more slowly than anticipated, or if operating expenses exceed expectations the Company’s business, results of operations, and financial condition could be materially adversely affected.
RISKS RELATING TO OUR BUSINESS
THE COMPANY HAS A LIMITED OPERATING HISTORY AND FACES SIGNIFICANT RISKS AND CHALLENGES IN BUILDING THE BUSINESS
As a result of the Company’s limited operating history, to achieve profitability, the Company must successfully and timely market and sell its software products. Although the Company has very concrete and specific marketing and sales programs to be implemented, the Company cannot guarantee the success of such programs and alternately, more expensive marketing and sales programs may need to be implemented. Additionally, although the Company believes that a strong market exists for the software products, the Company has conducted no scientific, reliable market surveys but has only performed its own research and due diligence to ascertain the security concerns of parents and others responsible for the safety of children. A more scientific analysis could prove that no market exists for the software products that the Company intends to market and sell; or, if the market exists, the Company may not be able to reach the market with the Company’s limited financial resources and marketing budget. There can be no assurance that the Company will be able to successfully generate revenues. The Company has no significant historical basis to assess how it might respond to competitive, economic, regulatory, or technological challenges. The Company’s business must be considered in light of the risks and uncertainties frequently encountered by companies in the very early stages of operations, particularly companies that operate in new and rapidly developing industries and marketplaces. The Company’s failure to adequately address these risks and uncertainties and rapidly respond to adverse developments as they occur could materially impact the Company’s ability to achieve profitability and, if profitability is achieved, to sustain a level of operations that will cause profitability to be sustained. Although the Company intends to hire numerous people to implement the business of the Company, there is no assurance that the Company will hire the right people or that future changes will not have to be made to find the right people to implement the Company’s business strategy. There is no assurance that the Company’s business strategy or marketing plans will achieve success.
THE COMPANY’S RELIANCE ON THE CAPABILITIES OF THE SOFTWARE PRODUCTS
The Company is heavily dependent upon the capabilities of the software products. The failure of the software to accomplish the objectives as represented will damper if not destroy the Company’s marketing.
COMPANY’S RELIANCE UPON EXECUTIVES AND CONSULTANTS
The Company’s success is highly dependent upon executive officers and key consultants identified in this report for critical management decisions and to implement and pursue the Company’s business and marketing plan. A loss of any of the executives or consultants through incapacity or for any other reason could materially adversely impact the ability of the Company to complete its business and marketing plan and would require the Company to seek the assistance of other qualified personnel who may not be available.
CHALLENGES FROM COMPETITION
Although the Company is unaware of an available product that contains all the characteristics, features and capabilities of its software products, in the dynamic, ever changing field of technology, many companies of all sizes and capabilities are constantly engaged in software development. With the notoriety given to child molesters, pedophiles and others causing harm and sometimes death to children, a reasonable assumption is that many companies are currently engaged in software development activities that will possess many of the characteristics and capabilities possessed by the software. In the event another company successfully develops and markets a competitive product before the Company can establish a significant presence in its target markets, the Company may never be able to achieve a level of revenue to sustain the Company’s operations.
RISKS RELATED TO OUR COMMON STOCK
IF A MARKET FOR OUR COMMON STOCK DOES NOT DEVELOP, OUR STOCKHOLDERS MAY BE UNABLE TO SELL THEIR SHARES.
There is currently a limited market for our common stock and we can provide no assurance that a more liquid market will develop. If a liquid market does not develop for our shares, it will be difficult for stockholders to sell their stock. In such a case, stockholders may find that they are unable to achieve benefits from their investment.
IF A MARKET FOR OUR COMMON STOCK DEVELOPS, OUR STOCK PRICE MAY BE VOLATILE.
If a market for our common stock develops, the price at which our common stock will trade may be highly volatile and may fluctuate as a result of a number of factors, including the number of shares available for sale in the market, quarterly variations in our operating results, actual or anticipated announcements of new data, studies, products or services by us or competitors, regulatory investigations or determinations, acquisitions or strategic alliances by us or our competitors, recruitment or departures of key personnel, the gain or loss of significant customers, changes in the estimates of our operating performance, market conditions in our industry and the economy as a whole.
APPROXIMATELY 37% OF OUR COMMON STOCK IS CONTROLLED BY A SINGLE STOCKHOLDER WHO HAS THE ABILITY TO SUBSTANTIALLY INFLUENCE THE ELECTION OF DIRECTORS AND THE OUTCOME OF MATTERS SUBMITTED TO STOCKHOLDERS.
As of March 25, 2011, WQN, Inc. directly owns 27,000,000 shares, which represents approximately 37% of our 72,623,830 shares of outstanding common stock. As a result, WQN presently and is expected to continue to have the ability to substantially influence the outcome of issues submitted to our stockholders. The interests of this stockholder may not always coincide with our interests or the interests of other stockholders, and it may act in a manner that advances its best interests and not necessarily those of other stockholders. One consequence of this substantial stockholder’s interest is that it may be difficult for investors to remove management of the Company. It could also deter unsolicited takeovers, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.
INVESTORS’ INTERESTS IN OUR COMPANY WILL BE DILUTED AND INVESTORS MAY SUFFER DILUTION IN THEIR NET BOOK VALUE PER SHARE IF WE ISSUE ADDITIONAL SHARES OR RAISE FUNDS THROUGH THE SALE OF EQUITY SECURITIES.
In the event that we are required to issue any additional shares or enter into private placements to raise financing through the sale of equity securities, investors’ interests in our Company will be diluted and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold. If we issue any such additional shares, such issuances also will cause a reduction in the proportionate ownership and voting power of all other stockholders. Further, any such issuance may result in a change in our control.
WE HAVE NEVER PAID CASH DIVIDENDS AND DO NOT INTEND TO DO SO.
We have never declared or paid cash dividends on our common stock. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations and capital requirements, as well as other factors deemed relevant by our board of directors.
WE NEED ADDITIONAL FINANCING
We will need additional financing to maintain and expand the business, and such financing may not be available on favorable terms, if at all. We intend to finance our business through the private placement and public offering of equity and debt securities. If we need funds and cannot raise them on acceptable terms, we may not be able to execute our business plan, and our shareholders may lose substantially all of their investment.
TERRORIST ATTACKS, CONTINUED WAR OR OTHER CIVIL DISTURBANCES COULD LEAD TO FURTHER ECONOMIC INSTABILITY AND ADVERSELY AFFECT OUR BUSINESS
On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope. The United States is currently engaged in a war in Iraq and Afghanistan. These attacks and these wars have caused instability in the marketplace and contributed to a downturn in the global economy. In the future, there may be armed hostilities, continued wars, further acts of terrorism and civil disturbances in the United States or elsewhere, which may further contribute to economic instability in the United States. Such disturbances could have a material adverse effect on our business, financial condition and operating results.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
As of 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.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be a defendant or plaintiff in various legal proceedings arising in the normal course of our business. Except as set forth below, we are currently not a party to any legal proceeding that we believe could have a material adverse effect on our business, financial condition or operating results. On August 25, 2009, the Company terminated its President, Clifton Jolley for cause. In late November 2010, the Company and Mr. Jolley agreed to settle the dispute with neither party admitting any liability.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE FOR SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY. RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the OTCBB under the symbol “WBSI”. The following table shows the high and low bid prices of our common stock, as quoted on the OTCBB, by quarter during our last fiscal year when trading began. These quotes reflect inter-dealer prices, without retail markup, markdown or commissions and may not represent actual transactions.
Holders
As of March 25, 2011, there were approximately 135 holders of record of our common stock. This number does not include beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
Dividends
We have never declared or paid any dividends. We anticipate, as our board of directors deems appropriate, that we will continue to retain all earnings for use in our business.
Securities Authorized For Issuance Under Equity Compensation Plans
On January 8, 2010, we granted common stock options for services consisting of 500,000 options to David Sasnett, a member of the Board of Directors, 900,000 options to Travis Bond, the Chief Operating Officer of the Company. On March 17, 2010, we issued 7,000,000 shares of common stock to Rowland Day, the Chief Executive Officer and a member of the Board of Directors as consideration for services rendered. On February 18, 2011 we issued 2,000,000 options to Travis Bond, the Chief Operating Officer of the Company.
Item 6.
Item 6.
SELECTED FINANCIAL DATA
We are a smaller reporting company as defined in 17 CFR229.10(f)(I) and are not required to provide information required by this item, per Item 301 of Regulation S-K (17 CFR 229.201)
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Plan of Operations
Websafety, Inc. has 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 also restricts text messaging while driving and provides location information to parents through the use of GPS technology. In June 2008 the Company 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.
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 Websafety Technology 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.
Since our inception on July 3, 2006 through the end of the third quarter of 2009, we have generated a minimal amount of revenue. During the fourth quarter of 2009, management determined that sufficient revenues have been reached to bring us out of the Development Stage. As such, 2010 will be the first fiscal year the Company will be fully operational. We also intend to market the products and services by developing relationships with “trusted” sources consisting of 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.
In 2010, we raised $855,280 in new equity funding through the sale of common and preferred stock, the proceeds of which are being used to implement our plan of operations.
Results of Operations
For the year ended 2010 we sustained a net operating loss of $5,443,673 as compared to a loss of $1,927,449 for the same twelve month period ended December 31, 2009. In 2010 we had revenues of $309,382 as compared to revenues of $33,472 in 2009.
The table below highlights on a line item basis the significant elements of expense during the two periods that constituted the preponderance of expense incurred.
In 2009 the Company closed on an asset acquisition agreement with WQN, Inc. Under the agreement we acquired all of the technology known as Websafety Technology. This asset purchase, combined with the launch of our software products has resulted in a significant increase in payroll, accounting, legal, consulting and marketing costs as compared to 2009. We began our initial limited operations in the fourth quarter of 2009 and became fully operational in 2010, which resulted in increased revenue generation and an expansion of marketing and administrative activities.
In the fourth quarter of 2010 the Company fully wrote off the Technology asset that was purchased in the third quarter of 2009. 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. Due to the Company’s inability to meet cash flow projections established on the date the technology was acquired, management has decided to impair the asset fully and to take a loss of $1,881,877 at December 31, 2010.
Liquidity
Operating Activities. In 2010 cash used in operating activities was $1,572,147 and consisted primarily of a net loss of $5,443,673 reduced by non-cash items of $3,873,201 decrease in accounts receivable of $17,021, increase in accounts payable of $145,371, increase in accrued expense of $10,142; and offset by increase of deposit of $12,936, decrease in deferred revenue of $111,153 and increase to issue shares of $50,120.
In 2009, cash used in operating activities was $673,087 and consisted primarily of a net loss of $1,927,449 reduced by non-cash items of $842,928, decrease in prepaid expense of $7,137, increase in accounts payable of $196,617, decreases in deferred revenue of $114,740 and increase in accrued expense of $116,931; offset by a decrease in accounts payable of $17,171 and an increase of deposit of $6,820.
Investing Activities. In 2010 cash used to purchase long term assets decreased by $120,609 from 2009. Cash used in investing activities decreased to $17,921 for 2010 from $288,530 for 2009.
Financing Activities. Financing activities during 2010 consisted of three items; (i) the borrowing of $328,333; (ii) advances from shareholders of $426,875; and (iii) sale of common stock of$855,280. Net cash provided by financing activities was $1,610,488 for 2010.
Recent Accounting Pronouncements
In October 2009, the FASB issued No. 2009-14 Software (Topic 985) - Certain Revenue Arrangements That Include Software Elements - a consensus of the FASB Emerging Issues Task Force. The objective of this Update is to address concerns raised by constituents relating to the accounting for revenue arrangements that contain tangible products and software. Currently, products that contain software that is more than incidental to the product as a whole are within the scope of the software revenue guidance in Subtopic 985-605, Software-Revenue Recognition. Subtopic 985-605 requires a vendor to use vendor-specific objective evidence of selling price to separate deliverables in a multiple-element arrangement. The pronouncement is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Management does not expect the adoption to have a materially impact on the financial statements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2010, we have invested our cash in money market accounts and marketable securities. We consider any liquid investment with an original maturity of three months or less when purchased to be cash equivalents. We adhere to an investment policy which requires that all investments be investment grade quality and no more than ten percent of our portfolio may be invested in any one security or with one institution.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Websafety, Inc
1 Hampshire Court
Newport Beach, CA 92660
We have audited the accompanying balance sheets of Websafety, Inc as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 2010. Websafety, Inc’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Websafety, Inc as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, these conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
/s/ EFP Rotenberg, LLP
EFP Rotenberg, LLP
Rochester, New York
April 14, 2011
WEBSAFETY, INC.
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
WEBSAFETY, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2010 and 2009
The accompanying notes are an integral part of these financial statements.
WEBSAFETY, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2010 and 2009
The accompanying notes are an integral part of these financial statements.
WEBSAFETY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 2010 and 2009
The accompanying notes are an integral part of these financial statements.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business and organization
Websafety, Inc., a Nevada corporation, (hereinafter referred to as the “Company”) was incorporated in the State of Nevada on July 3, 2006. The Company from inception through June 2008 had been in the business of offering live promotions and marketing events.
In June 2008 a majority ownership change was made and the business emphasis was shifted to the marketing and sales through the internet of software and services that allow parents or other caregivers to monitor and be notified of occurrences of predator advances, cyber bullying and pornography.
On June 20, 2008, the Company issued 13,200,000 shares of its common stock to Texas Atlantic Capital Partners, LLC, (“Texas Atlantic”). The issuance of these shares represented approximately 62% of the then outstanding stock. The issuance resulted in a change of control and met the definition of a business combination under paragraph 9, of Statement of Financial Accounting Standards No 141, Business Combinations (FAS 141). Concurrent with the issuance of the shares to Texas Atlantic, the shareholders elected to cancel certain shares in order to effect the desired post change in control ownership ratio.
The business combination was accounted for under the purchase method of accounting followed by a recapitalization of the Company. The issuance of the 13,200,000 shares and the cancellation of the 35,500,000 shares of common stock was retroactively presented in the statements of stockholders’ equity (deficit) as if the transaction with Texas Atlantic had occurred as of the earliest period presented (See Note 7).
On June 30, 2008, the Company entered into a License Agreement (“License”) with WQN, Inc., a Texas corporation (“WQN”), which, in consideration for the sum of $300,000 granted the Company the right to market and sell WQN’s Websafety software products.
On July 2, 2009 the Company entered into an asset acquisition agreement with WQN, Inc. Under the agreement, the Company acquired all of the technology known as Websafety Technology for 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. As of December 31, 2010, the 27,000,000 common shares owned directly by WQN, Inc. represents approximately 38% of our 70,313,828 shares of outstanding common stock.
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 financial statements.
Cash and cash equivalents- concentration of risk
Cash and cash equivalents include interest bearing and non-interest bearing bank deposits, money market accounts, and short-term instruments with a liquidation provision of three months or less.
The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (FDIC). This government corporation insures balances up to $250,000 per depositor through December 31, 2013.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
Income taxes
The Company accounts for its income taxes in accordance with FASB Accounting Standards Codification (“ASC”) 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2010 are as follows:
Through December 31, 2010, a valuation allowance has been recorded to offset the deferred tax assets, including those related to the net operating losses. At December 31, 2010, the Company had approximately $8,015,930 of federal and state net accumulated operating losses. The net operating loss carry forwards, if not utilized will begin to expire in 2026. The utilization of these losses for tax purposes will be limited due to the operation of Internal Revenue Code Section 382 which restricts the utilization of net operating loss carry forwards is circumstances where there is a more than 51% change of control in a company.
Reconciliations of the U.S. federal statutory rate to the actual tax rate for the years ended December 31, 2010 and 2009 are as follows:
In accordance with FASB ASC-740-10, the Company has evaluated tax positions taken in the financial statements. Because of the significant net operating losses sustained, management does not believe that the Company has any uncertain federal of state tax position uncertainties at December 31, 2010.
Net loss per common share
The Company computes net loss per share in accordance with FASB ASC 260-10. Under the provisions of ASC 260-10, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive.
Beneficial Conversion Feature
Costs incurred with parties who are providing financing, which include the intrinsic value of beneficial conversion features associated with the underlying debt, are reflected as a debt discount. These discounts are generally amortized over the life of the related debt. In certain circumstances, the intrinsic value of the beneficial conversion feature may be greater than the proceeds associated to the convertible instrument. In such situations, the amount of the discount assigned to the beneficial conversion feature is limited to the amount of the proceeds allocated to the convertible instrument.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
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 in accordance with FASB ASC 820. The Company’s principal financial instruments are cash, accounts receivable and accounts payable. At December 31, 2010, cash, accounts receivable, and accounts payable, due to their short maturities, and liquidity, are carried at amounts which reasonably approximate fair value.
Revenue recognition
In October 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. Customers may pay for either a monthly or annual subscription to the Websafety service. Customers may request a full refund (within 30 days from the date of purchase) for the service if they are not satisfied. Revenue for an annual subscription is earned over a 12-month period, whereby the Company recognizes 1/12 of the sale in the month of sale and the remaining 11/12 of revenue is deferred and recognized equally over an 11-month period.
The Company recognizes software license revenue under ASC 985-605 and related interpretations.
Accounts receivable and billing
The Company conducts sales primarily through the Internet utilizing merchant services for the processing of customer credit card or other electronic means of paying. Merchant bank transactions normally settle within two to three days. As of December 31, 2010, no credit has been extended to “on account” customers. Because all sales have been booked via credit card, management does not deem it necessary to record a receivable allowance at December 31, 2010. We expect trade receivables to increase over time as our daily sales activity also increases.
Property and equipment
Property and equipment consisted primarily of web site development costs, software licensing fees, computer software and equipment, and furniture and fixtures. Property and equipment are stated at their historical cost net of accumulated deprecation and amortization. For the twelve months ended December 31, 2009, assets began to be depreciated and amortized as operations had commenced. Depreciation on furniture, fixtures and computer equipment is computed using the 200% DB method over the lesser of the estimated useful life and the actual life of the related asset. Amortization on software license and website development is computed using the straight-line method over the lesser of the estimated useful life and the actual life of the related asset. Expenditures relating to maintenance, repairs and renewals of minor items are expensed as incurred.
The estimated useful lives are as follows:
Software License
5 Years
Web Site Development
3 Years
Computer Equipment
5 Years
Furniture and Fixtures
7 Years
Web Site Development Costs:
The Company has incurred internal web site development costs during the development, implementation and operational stages. Specific activities include coordination of design, engineering, initial integration and design modifications, script writing, web site designs and revisions, application site designs, pre-video production build/test flash prototype for oversize video browser scaling, eCommerce engine, etc. These costs were expensed or capitalized in accordance with FASB ASC 350-40 and FASB ASC 350-50 ("Accounting for Web Site Development Costs").
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
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, “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. The Company uses what it believes are reasonable assumptions and where applicable, established valuation techniques in making its estimates.
Long-Lived Assets
FASB ASC 360-10, requires that we evaluate our long-lived assets for financial impairment on a regular basis. We evaluate the recoverability of long-lived assets not held for sale by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future discounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. There was an impairment of $1,881,877 at December 31, 2010 which pertained to the Websafety Technology asset that management deemed will not provide any future benefit. There was an impairment of $300,000 at December 31, 2009 which pertained to rights and options which management deemed will not provide any future benefit.
Stock Based Compensation
We follow the provisions of FASB ASC 718. FASB ASC 718 requires recognition in the financial statements of the cost of employee services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). FASB ASC 718 also requires measurement of the cost of employee services received in exchange for an equity award based upon the grant-date fair value of the award.
We account for non-employee share-based awards in accordance with FASB ASC 505-50.
The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50. Accordingly, the measurement date for the fair value of the equity instruments issued is determined at earliest 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.
In accordance with 505-50, each transaction involving the issuance of stock in exchange for goods or services is analyzed to determine whether the value of the stock given as consideration on the value of the goods on services received are the more representation of the value of the underlying transactions.
Beneficial Conversion Feature
Costs incurred with parties who are providing financing, which include the intrinsic value of beneficial conversion features associated with the underlying debt, are reflected as a debt discount. These discounts are generally amortized over the life of the related debt. In certain circumstances, the intrinsic value of the beneficial conversion feature may be greater than the proceeds associated to the convertible instrument. In such situations, the amount of the discount assigned to the beneficial conversion feature is limited to the amount of the proceeds allocated to the convertible instrument.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Note 2. 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 incurred cumulative net losses of approximately $8,015,930 through December 31, 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 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.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
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.
Note 3. Concentration of Credit Risk
For the years ended December 31, 2010 and 2009 the Company had only $309,382 and $33,472 in revenues, respectively. A concentration of credit risks exist due to the fact that the Company has a limited number of both customers and vendors. If a number of customers or vendors decided to take their business elsewhere, the Company’s losses could increase significantly. As of December 31, 2010, no credit has been extended to “on account” customers. Because all sales have been booked via credit card, management does not deem it necessary to record a receivable allowance at December 31, 2010.
Note 4. Property and Equipment
Property and equipment consist of the following at December 31, 2010 and 2009:
Depreciation expense for fiscal 2010 and 2009 totaled $57,169 and $13,862, respectively.
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.
Our intangible asset impairment did not include web site development costs of $167,610. The Company plans to utilize the web site to launch the WebSafety software products and expects to generate revenues in the future. The website development costs are being amortized over its useful life.
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 decided to amortize the asset over a 36 month period.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
Amortization expense for fiscal 2010 and 2009 totaled $705,703 and $235,235, respectively.
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. Due to the Company’s inability to meet cash flow projections established on the date the technology was acquired, management has decided to impair the asset fully and to take a loss of $1,881,877 at December 31, 2010.
Note 6. Note Payable
Debt consisted of the following at December 31:
·
$30,000 promissory note received December 30, 2010 including interest at 2%.
·
$100,000 loan received September 22, 2010 due March 22, 2011 including interest at 5%. The convertible promissory note provides the holder the right to convert at any time, all or any unpaid principal and interest into shares of the Company’s common stock at a price equal to $0.10 per share.
·
$80,000 loan received October 8, 2010 due July 11, 2011 including interest at 8%. The convertible promissory note provides the holder the right to convert at any time, all or any unpaid principal and interest into shares of the Company’s common stock at a price equal to 61% of the market price.
·
$37,500 loan received November 29, 2010 due September 1, 2011 including interest at 8%. The convertible promissory note provides the holder the right to convert at any time, all or any unpaid principal and interest into shares of the Company’s common stock at a price equal to 61% of the market price.
Three loans above have a right to convert to common stock. Based on the intrinsic value of the conversion feature, the Company determined that there was a beneficial conversion feature on all three promissory notes. As a result of the beneficial conversion feature exceeding the proceeds received from the promissory notes, management discounted the notes 100% and will amortize this discount over the life of the note.
As of December 31, 2010, $80,833 of the debt discount has been amortized as interest expense and the remainder will be amortized straight line over the remaining life of the corresponding note.
Note 7. Option to acquire
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. Management remains in discussion with principals of Auberg Adams and ESS.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
A principal of Auburg Adams LLC is a minority shareholder in WebSafety, Inc.
Note 8. Stock Issuances
During the year ended December 31, 2010 we had the following common stock issuances.
In addition to the common stock issued above we also recorded $53,000 of common stock cash receipts that at December 31, 2010 had not been issued. These receipts were recorded as a current liability at December 31, 2010 and will be issued in the first quarter of 2011.
We also converted 1,366,667 preferred shares issued at $.30 to 1.25 common shares for a total of 1,708,334 common stock issued. At June 30, 2010 we adjusted an issue price from the first quarter, we issued 100,000 shares of 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. At December 31, 2010 we adjusted an issue price from the third quarter, we issued 224,446 in September at $.0.45 a share for a total of $101,000. We adjusted the price to $0.25 and issued an additional 179,554 for total issuance of 404,000 common stock shares at $0.25 for $101,000. Each of the above conversions and adjustments to stock price has been included in the preceding table.
In connection with the Company’s subscription agreement, subscribers also receive warrants to purchase additional share of the Company’s common stock at the established exercise price. Subscribers vest in their right to exercise warrant on the date of grant. The following table displays warrants issued in connection with subscriptions during the year ended December 31, 2010:
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
Note 9. Related Party Transactions
In the aggregate, during the year ended December 31, 2010, the Company owed to related parties $508,249 for consulting, legal and marketing services as reflected below.
Rowland W. Day II is our CEO, CFO and Director. John Williams was the former contract Treasurer and CFO of the Company and is the Chief Accounting Officer of WQN, Inc.
The services that were provided are outlined below.
Accounting Services-Services consisted of financial consulting and preparation of the 10Q for the period March 31, 2010.
Administrative, Financial and Legal Services-These services consist of management oversight of the operations of the Company; review of financial operations, capital raising and meetings with investors, potential investors preparation of the Company’s legal requirements and documents for the Company’s operations.
On July 1, and December 31, 2010 the company received notes including interest at 5% from Rowland Day in the amount of $150,241 and $26,585, respectively.
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 was 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 ended on December 31, 2010. Due to the company not achieving the required level of revenue the employment agreement expired, no salary or shares were issued and it has not been renewed.
Note 10. Facilities
The Company’s corporate headquarters are presently located at 2201 W Royal Lane, Suite 200, Irving, Texas 75063.
As of 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.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
For the twelve months ended December 31, 2010 and 2009, actual lease expense was $45,539 and $0, respectively.
Note 11. 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 municipalities and intends to market our products to their clients.
In October 2010 we entered into an agreement with AAA of Northwest Ohio. AAA of Northwest Ohio offers auto related products and services to their members. AAA of Northwest Ohio has recently begun to market our software to its members.
Management has developed direct selling, multi-level-marketing channels for the sales of the Websafety PC and Cellular products. 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 12. Recent Pronouncements
In October 2009, the FASB issued No. 2009-14 Software (Topic 985) - Certain Revenue Arrangements That Include Software Elements - a consensus of the FASB Emerging Issues Task Force. The objective of this Update is to address concerns raised by constituents relating to the accounting for revenue arrangements that contain tangible products and software. Currently, products that contain software that is more than incidental to the product as a whole are within the scope of the software revenue guidance in Subtopic 985-605, Software-Revenue Recognition. Subtopic 985-605 requires a vendor to use vendor-specific objective evidence of selling price to separate deliverables in a multiple-element arrangement. The pronouncement is effective prosepectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Management does not expect the adoption to have a materially impact on the financial statements.
Note 13. Legal Proceedings
On August 25, 2009, the Company terminated its President Clifton Jolley for cause. In November 2010, the Company and Mr. Jolley settled the pending arbitration and litigation without any loss to the Company.
Note 14. 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 granted Litchfield Enterprises, Inc. one (1) warrant exercisable at $.80 per share for each share of their private placement placed. These warrants will be valid for one (1) year from the date of issuance. As of December 31, 2010, we issued 800,000 shares of common stock to Litchfield and their investors along with 600,000 warrants.
On September 11, 2010 Wakabayashi Fund, LLC signed a non-exclusive consulting agreement with the Company to act as a capital consultant for a six month period.. Under the private placement agreement, the Company agrees to pay Wakabayashi a success fee of seven percent (7%), inclusive of all fees, in cash of the amount of capital raised as a result of contact by Wakabayashi. There has been no measurable activity undertaken by Wakabayashi Fund, LLC to raise capital for the Company.
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; on September 20, 2010 the Company and Aegis Capital agreed to mutually terminate the exclusive placement agent.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
Note 15. 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 December 31, 2010 approximately 607,000 stock options had vested.
For the year ended December 31, 2010 and 2009, the Company recorded compensation costs for options and shares granted under the plan amounting to $515,641 and $16,331, respectively. A deduction is not allowed for income tax purposes until nonqualified options are exercised. The amount of 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.
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 in fiscal 2010:
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
The Company has granted stock options to officers and employees as follows:
The following table summarizes the status of The Company aggregate stock options granted under the incentive stock option plan:
The weighted-average grant date fair value of options outstanding at December 31, 2010 was $0.062. The total intrinsic value of options exercised during the year ended December 31, 2010 was $0.
WEBSAFETY, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2010
The following table summarizes the status of the Company aggregate non-vested shares granted under the 2008 Stock Option Plan.
As of December 31, 2010 the unrecognized compensation cost related to non-vested share based compensation arrangements granted under the plan that was approximately $1,281,685. These costs will be recognized on a straight line basis over the remaining vesting life which currently extends to January 08, 2015.
Note 16. Subsequent Events
On February 18, 2011, 2,000,000 stock options were granted to Travis Bond our COO for his continued employment..
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A(T).
ITEM 9A(T). Disclosure Controls and Procedures
Our management with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act for the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures were ineffective at December 31, 2010, including those to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; (iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed our internal control over financial reporting as of December 31, 2010. Management based its assessment on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this assessment, management has concluded that as of December 31, 2010, our internal control over financial reporting was ineffective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. We noted that there is a lack of segregation of certain duties at the Company due to the small number of employees with responsibility for general administrative and financial matters. This constitutes a deficiency in financial reporting. We therefore conclude that our internal control over financial reporting were ineffective as of and for the year ended December 31, 2010. At this time, management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties are insignificant and the potential benefits of adding additional employees to clearly segregate duties do not justify the additional expenses associated with such increases. Management will periodically reevaluate this situation. If the volume of business increases and sufficient capital is secured, it is the Company’s intention to further increase staffing to mitigate the current lack of segregation of duties within the general, administrative and financial functions.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to final rulings of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Controls
We have evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, that there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. Inherent limitations exist in any system of control including the possibility of human error and the potential of overriding controls. The effectiveness of an internal control system may also be affected by changes in conditions.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our current officers and directors are listed below. Each of our directors will serve for one year or until their respective successors are elected and qualified. Our officers serve at the pleasure of the board of directors.
Name
Age
Position
Start of Term
Rowland W. Day II
CEO
February 25, 2008
CFO
Director
Denton Jones
Director
July 21, 2008
B Michael Adler
Director and Chairman of the Board
July 2, 2009
Travis C Bond
Chief Operating Officer
July 2, 2009
Rowland W. Day II, 55 years of age, Chief Executive Office, Chief Financial Officer and Director.
Mr. Day is a business corporate lawyer and has practiced law since 1983. Mr. Day is currently a director of RE3W WorldWide and Restaurants on the Run. Mr. Day was the sole director of Promotions on Wheels Holdings, Inc. when the change of control occurred with Texas Atlantic Partners and the license was acquired from WQN, Inc. in April 2008.
Denton Jones, 59 years of age, Director.
Mr. Jones has been a private investor for over 30 years. He is the manager of Texas Atlantic Partners, LLC, the holder of 11,800,000 shares of common stock. Mr. Jones is a director of WQN, Inc. Mr. Jones requested that he become a director at the time Texas Atlantic Partner became the largest shareholder of the Company in April 2008.
B Michael Adler, 64 years of age, Director
Mr. Adler is founder of two public companies-Intellicall, Inc. and World Quest Networks, Inc. that have been pioneers in emerging telecommunications and internet technologies. Mr. Adler has been awarded ten United States patents that have been integral to telecommunications (answer supervision and automated collect used by MCI) and the Internet (click-to-talk used by Google). Mr. Adler is a director of WQN, Inc. and is its CEO and required that in connection with the acquisition of the WQN, Inc. asset by the Company that he become a director.
Travis C Bond, 53 years of age, Chief Operating Officer
Mr. Bond has been employed in the Direct Sales industry for over 18 years. He has held corporate positions as VP Sales, VP Marketing, VP Operations and COO. He has also owned two direct sales support companies. His consulting firm has worked with over 100 companies from start-up to revenues exceeding $60,000,000 a year.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Legal Proceedings
There have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees, including judgments finding violations of any federal or state securities or commodities law, material to the evaluation of the ability and integrity of any of our directors, executive officers, promoters or control persons during the past five years.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
We pay our Chief Operating Officer $12,500 per month. Our Chief Executive Officer/Chief Financial Officer are paid on an as-billed basis. No compensation of cash or equity has been paid or granted for the services of our directors.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the securities ownership of our directors, named executive officers, and any person or group who is known to us to be the beneficial owner of more than five percent of our voting stock as of March 25, 2011:
1 Applicable percentage ownership is based on 72,623,830 shares of total voting stock outstanding at March 25, 2011. The number of shares of voting stock owned are those “beneficially owned” as determined under the rules of the SEC, including any shares of voting stock as to which a person has sole or shared voting or investment power and any shares of voting stock which the person has the right to acquire within sixty days through the exercise of any option, warrant or right. All addresses are c/o 2201 West Royal Lane, Suite 200, Irving, Texas 75063, unless otherwise noted.
2 Includes 11,800,000 shares owned by Texas Atlantic Capital Partners. Mr. Jones is the Managing Member of Texas Atlantic Capital Partners.
3 Includes 27,000,000 shares owned by WQN, Inc. Mr. Adler is the CEO of WQN, Inc. and a director.
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all Shares beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within sixty days from the date on which beneficial ownership is to be determined, upon the exercise of options, warrants or convertible securities. Each beneficial owner’s percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such person (but not those held by any other person) and which are exercisable, convertible or exchangeable within such sixty day period, have been so exercised, converted or exchanged.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
In the aggregate, during the year ended December 31, 2010, the Company owed to related parties $508,249 for consulting, legal and marketing services as reflected below.
Rowland W. Day II is our CEO, CFO and Director. John Williams was the former contract Treasurer and CFO of the Company and is the Chief Accounting Officer of WQN, Inc.
The services that were provided are outlined below.
Accounting Services-Services consisted of financial consulting and preparation of the 10Q for the period March 31, 2010.
Administrative, Financial and Legal Services-These services consist of management oversight of the operations of the Company; review of financial operations, capital raising and meetings with investors, potential investors preparation of the Company’s legal requirements and documents for the Company’s operations.
Director Independence
It is our position that Messers, Adler, Day and Jones are not independent.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to us for the fiscal years ended December 31, 2010 and 2009 by EFP Rotenberg LLP.
(1)Review and assistance with comment letters and Company responses.
Tax Fees
There were no fees paid in either 2010 or 2009 for tax related matters.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
Exhibit No.
Description
3.1
Amended and Restated Certificate of Incorporation of Blindspot Alert, Inc., a Nevada corporation. Incorporated by reference to our current report on Form 14-C filed with the SEC on December 5, 2008.
10.1
Incorporated by reference to our current report on Form 8-K filed with the SEC on July 25, 2008 License Agreement dated June 30, 2008.
31.1
Rule 13a-14(a) Certification of Chief Executive Officer
31.2
Rule 13a-14(a) Certification of Chief Financial Officer
32.1
Certification of Chief Executive Officer Pursuant to 18.U.S.C. Section 1350, as Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18.U.S.C. Section 1350, as Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
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 hereunto duly authorized.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title(s)
Date
/s/ Rowland W. Day II
Chief Executive Officer
April 14, 2011
Rowland W. Day II
/s/ Denton Jones
Director
April 14, 2011
Denton Jones
/s/ B Michael Adler
Director
April 14, 2011
B Michael Adler