PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

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WEBSAFETY, INC.

CONDENSED BALANCE SHEETS

As of June 30, 2014 and December 31, 2013

(unaudited)

The accompanying footnotes are an integral part of these financial statements

F-1

WEBSAFETY, INC.

STATEMENTS OF OPERATIONS

For the three and six months ended June 30, 2014 and 2013

(Unaudited)

The accompanying footnotes are an integral part of these financial statements

F-2

WEBSAFETY, INC.

STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2014 and 2013

(Unaudited)

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

F-3

WEBSAFETY, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

Note 1.   Background Information

Organization and Business

Websafety, Inc. was originally incorporated as Promotions on Wheels Holdings, Inc.in July 2006 and was a development stage company with planned operations to offer live promotions and marketing events using custom-built mobile displays.

In 2008, we entered into a License Agreement with WQN, Inc. that provided us exclusive rights for 12 months to market and sell their software products to various national retail chains and  that also provided us with a nonexclusive right to market and sell worldwide.  In 2009 we acquired Websafety Technology from WQN, Inc. in exchange for 1,350,000 post-split shares of our common stock which was valued at $2,700,000.

Presently we are focused on marketing, selling, and distributing mobile software applications for cellphones.  These Websafety products help protect children from suspicious online behavior and cyberbullying.

The Company is currently revising and updating its mobile applications and intends to re-launch during 2014.

Note 2.  Significant Accounting Policies

Interim financial information

The financial statements included herein, which have not been audited pursuant to the rules and regulations of the Securities and Exchange Commission, reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods on a basis consistent with the annual audited statements. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for a full year. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with our audited financial statements included in 10K for the fiscal year ended December 31, 2013.

Basis of Presentation

The Financial Statements and related disclosures have been prepared pursuant to the rules and regulations of the SEC.  The Financial Statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States.

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Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2014, and for all periods presented herein, have been made.

Cash and Cash Equivalents

For the purpose of the financial statements cash equivalents include all liquid investments with maturity of three months or less. Cash and cash equivalents were $3,239 and $870 at June 30, 2014 and December 31, 2013, respectively.

Cash Flows Reporting

The Company follows ASC 230, Statement of Cash Flows, for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by ASC 230, Statement of Cash Flows, to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period.

Commitments and Contingencies

The Company follows ASC 440, Commitments and ASC 450, Loss Contingencies, to report accounting for commitments and contingencies.  

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.  There were no commitments or contingencies at June 30, 2014 or 2013.

Convertible Notes Payable

The Company evaluated the terms of their outstanding notes in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and determined that a portion of their outstanding debt had underlying common stock not indexed to the Company’s common stock. The Company determined that the conversion feature met the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability. For all other remaining outstanding debt, the Company evaluated the conversion feature for a beneficial conversion feature. The effective conversion price was compared to the market price on the date of the notes and was deemed to be less than the market value of underlying common stock at the inception of the note.

F-5

The Company recognized beneficial conversion features in the amounts of $1,820 and $-0- for the six months ended June 30, 2014 and 2013, respectively. The beneficial conversion features were recognized as increases in additional paid-in capital and discounts to the Convertible Notes Payable. The discount to the Convertible Notes Payable was amortized to interest expense over the life of the note.

The Company evaluated the application of ASC 470-50, Debtor’s Accounting for a Modification or Exchange of Debt Instrument as it applies to the notes described above and concluded that the revised terms constituted a debt modification rather than a debt extinguishment because the present value of the cash flow under the terms of each of the new instruments was less than 10% from the present value of the remaining cash flows under the terms of the original notes. No gain or loss on the modifications was required to be recognized.

Earnings per Share

The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, Earnings per Share. Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company.  

For the six months ended June 30, 2014 and 2013, the effect of common stock equivalents has been excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

At June 30, 2014, there were 1,815,000 stock options outstanding.

Fair Value of Financial Instruments

The Company follows paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments and paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

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The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts payable, accrued expenses and loans payable approximate their fair values because of the short maturity of these instruments. Loans payable are recorded at their issue value.

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

It is not, however, practical to determine the fair value of advances from stockholders, if any, due to their related party nature.

Property & Equipment

Property and equipment are stated at cost. Depreciation was calculated using the straight-line method over the estimated useful lives of the related assets, ranging from three to seven years.  Expenditures for additions and improvements were capitalized, while repairs and maintenance costs were expensed as incurred.  The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of were removed from the accounts and any gain or loss was recorded in the year of disposal.  Depreciation expense for the six months ended June 30, 2014 and 2013 was $1,062 and $1,580, respectively.

The Company follows ASC 985-20, Costs of Software to be Sold, Leased, or Marketed. Intangible property assets are stated at their fair value acquisition cost. Costs are expensed prior to technological feasibility and capitalized thereafter until available for general release to the public. After the software is brought to market, the costs of maintenance and customer support will be charged to expense when related revenue is recognized or when the costs are incurred.   Amortization of intellectual property assets is calculated by the straight line method over their remaining estimated economic lives and starts when the software is available for general release to customers.  Amortization is expensed to cost of sales. Historical costs are reviewed and evaluated for their net realizable value of the assets.  Amortization expense for the six months ended June 30, 2014 and 2013 was $0 and $0.

Related Parties

The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.  Related party transactions for the period were comprised of convertible notes payable (see Note 6) and related party debt converted to equity (see Note 10).

Stock Based Compensation

ASC 718, Compensation - Stock Compensation, prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired.  Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights.  Stock-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).  

F-7

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, Equity - based Payments to Non-Employees.  Measurement of stock-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable:  (a) the goods or services received; or (b) the equity instruments issued.  The fair value of the stock-based payment transaction is determined at the earlier of performance commitment date or performance completion date.  

Stock-based expense for the six months ended June 30, 2014 and 2013 was $390,000 and $0, respectively.

Research and Development

Research and development expenses include expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software product, is generally shortly before the products is released to manufacturing. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated life of the product.

Recently Issued Accounting Pronouncements

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company.  

We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

Note 3. 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 $14,986,556 from the period of July 3, 2006 (Inception) through June 30, 2014 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 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 4.  Property and Equipment

The Company follows ASC 360, Property, Plant, and Equipment, for its fixed assets.  Equipment is stated at cost less accumulated depreciation.  Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets (3-7 years). All equipment with an acquisition value greater than $500 and a useful life of over one year is capitalized.  

F-8

Property and equipment consist of the following at:

Depreciation expense for the six months ended June 30, 2014 and 2013 totaled $1,062 and $1,580 respectively.

Note 5.  Accrued expenses

Accrued expenses consist of professional fees, primarily audit and review fees.

Note 6.  Convertible Notes Payable - Shareholders

Unless otherwise stated, all convertible notes payable-shareholders are due on demand and bear interest at a rate of 5%.  Unless otherwise stated, holders have 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 $0.0075 per share.  The holder of all but one of the convertible notes is Rowland W Day II, a related party.  See Note 10.

The Company’s convertible promissory notes payable to shareholders consisted of the following:

During the six months ended June 30, 2014 and 2013, a total of $0 and $547,287, respectively, was converted. During the three months ended June 30, 2014 and 2013, $0 and $0, respectively, was repaid in cash.

F-9

In June 2012, the Company authorized a change in conversion of Rowland Day’s notes from $.005 to $0.0075.  That authorization should have been for $0.00075.  Effective September 1, 2013, the conversion rate of the notes was modified from $0.005 to $0.00075.  The debt transaction is considered an extinguishment since the fair value of the embedded conversion option changed by more than 10% of the carrying amount of the original debt instrument(s) immediately before the modification or exchange.  This change resulted in an additional beneficial conversion of the debt which is recorded as a loss on extinguishment of debt and totaled $166,928.

In January 2014, the Company authorized a change in conversion of Rowland Day’s notes from $0.00075 to $0.01.  No additional beneficial conversion was required.

In April 2014, the Company authorized a change in conversion of Rowland Day’s notes from $0.01 to $0.0075.  The change resulted in an additional beneficial conversion premium on pre-existing notes of $268.

Note 7. Notes Payable

Unless otherwise stated all notes payable are convertible, due on demand and bear interest at a rate of 8%.  Unless otherwise stated, all or any unpaid principal and interest are convertible into shares of the Company’s common stock at a price equal to $0.005 per share.

The Company’s convertible promissory notes payable consisted of the following at:  

During the six months ended June 30, 2014 and 2013, a total of $42,500 and $134,769, respectively was converted. During the six months ended June 30, 2014 and 2013, no amounts were repaid in cash.

Based on the intrinsic value of the conversion feature, the Company determined that there was a beneficial conversion feature associated with some of the notes payable and all the shareholders’ 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. During the six months ended June 30, 2014 and 2013, amortization of the beneficial conversion feature was $1,820 and $55,691, respectively. Concurrent with the conversion of the note in the amount of $42,500, the associated unamortized discount on notes was $11,854 was charged to expense.

Note 8.  Derivative Liability

The Company issued convertible notes payable that provide for the issuance of common stock with variable conversion provisions. The conversion terms of the convertible note are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted and as result pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option was recorded as derivative liabilities on the issuance date.

F-10

The fair values of the Company’s derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date. The Company recorded current derivative liabilities of $-0- and $13,448 at June 30, 2014 and December 31, 2013, respectively. Concurrent with the conversion of the note in the amount of $42,500, the associated derivative liability adjusted to $-0-.

Note 9.  Equity

Preferred Shares

The authorized preferred stock of the Company consists of 50,000,000 shares with a par value of $0.001.  

Series A

There were 2,063,335 shares of Preferred Stock, Series A issued and outstanding at June 30, 2014 and December 31, 2013.

Conversion rights - The holders of the Series A Preferred Stock have the right to convert any or all of their Series A Preferred Stock, at the option of the holder, at any time, into common stock on a one for 1.25 basis.

Series B

There were 1,000 and 0 shares of Redeemable Preferred Stock, Series B issued and outstanding at June 30, 2014 and December 31, 2013.

Voting rights - The Series B Preferred Stock is entitled to 5 times that number of votes multiplied by the number of shares of common stock into which the Series B Preferred Stock are convertible.

Dividend rights - The Series B Preferred Stock shall not pay dividend.

Conversion rights - The holders of the Series B Preferred Stock have the right to convert any or all of their Series B Preferred Stock, at the option of the holder, at any time, into common stock on a one for 909,090.909 basis.

Redemption rights - The holders of the Series B Preferred Stock may at each holder’s option to cause the Company to redeem any of shares or all shares of Series B Preferred Stock at a price of six hundred dollars ($600) per share.

Liquidation entitlement - In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the funds and assets of the Company that may be legally distributed to the Company’s shareholders shall be distributed to shareholders.

The Company has classified the Series B Preferred Stock as temporary equity because it is redeemable at the option of the holder.

On June 28, 2013, the Company issued 1,000 shares, to a related party, at $600 per share and totaling $600,000.

Common Shares

In January 2014, the Company completed a 1-for-20 reverse stock split of our common stock, effective as of January 16, 2014.  As a result of the reverse stock split, every 20 shares of issued and outstanding common stock have been converted into one share of the Company’s common stock. The following gives retroactive effect to the reverse split.

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The authorized common stock of the Company consists of 1,500,000,000 shares with a par value of $0.001.  There were 54,349,419 and 31,931,665 shares of common stock issued and outstanding at June 30, 2014 and December 31, 2013, respectively.

During the six months ended June 30, 2014, the Company authorized the issuance of 30,000,000 common shares to its CEO as compensation for services provided to the Company.  As of June 30, 2014, the Company had not yet issued the shares and has recorded $390,000 as common stock payable.

On April 24, 2014, 13,333,333 shares were issued at $0.0075 per share and totaling $100,000 in exchange for cash.

On December 31, 2013, 150,000 shares were issued at $0.0029 per share and totaling $8,579, in exchange for satisfaction of accounts payable.

On July 3, 2013, the Company issued 250,000 shares, at $0.001 per share and totaling $5,000, to a director in exchange for services rendered and another 1,000,000, also at $0.001 and totaling $20,000 per share to a consultant in exchange for administrative services rendered.

On June 30, 2013 the Company issued 3,174,600 shares at $0.0023 per share and totaling $60,568 in settlement of convertible notes payable.

On June 12, 2013 the Company issued a total of 485,000 shares at $0.0006 per share and totaling $5,820 in settlement of convertible notes payable.

On May 24, 2013 the Company issued a total of 2,222,223 shares at $0.0005 per share and totaling $24,000 in settlement of convertible notes payable.

On May 9, 2013 the Company issued a total of 1,698,276 shares at $0.0008 per share and totaling $19,700 in settlement of convertible notes payable.

On April 22 and 24, 2013 the Company issued a total of 2,715,094 shares at $0.0005 per share and totaling $27,820 in settlement of convertible notes payable.

On April 12, 2013 the Company issued a total of 954,545 shares at $0.0006 per share and totaling $10,500 in settlement of convertible notes payable.

In March 2013, the Company issued a total of 1,627,119 shares at $0.0006 per share and totaling $19,200 in settlement of convertible notes payable.

On February 20, 2013, the Company issued 759,493 shares at $0.0008 per share and totaling $12,000 in settlement of convertible notes payable.

On January 14, 2013, 500,000 shares were issued at $0.0012 per share and totaling $12,000 in settlement of convertible notes payable.

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Note 10.  Related Party Transactions

Consulting, Legal, and Administrative 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 SEC reports and documents for the Company’s operations.

In the aggregate, for the six months ended June 30, 2014, the Company owed to related parties as reflected below.

Rowland W. Day II is our CEO, CFO and Chairman of the Board, as well as, a principal owner of the company.   

Convertible Notes Payable

See Note 6 for the components of the convertible notes payable at June 30, 2014.

Equity - Preferred

On June 28, 2013, the Company issued 1,000 shares, to a related party, at $600 per share and totaling $600,000.

Equity - Common

On July 3, 2013, the Company issued 250,000 common shares, at $0.001 per share and totaling $5,000, to a director in exchange for services rendered. The director is also the sister of the company’s sole officer.

During the six months ended June 30, 2014, the Company authorized the issuance of 30,000,000 common shares to its CEO as compensation for services provided to the Company.  The shares were valued at fair value on the date of grant as follows:

As of June 30, 2014, the Company had not yet issued the shares and has recorded $390,000 as common stock payable.

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Note 11. 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.  In February 2011, 2,000,000 stock options with exercise price of $.10 were granted to an officer of the Company, which vest monthly over a 12 month term.  These options carry a grant expiration date of 1 year after issuance.  In February 2011, 330,000 stock options with exercise price of $0.10 were granted to employees of the Company, which vest monthly over a 48 month term.  These options carry a grant expiration date of 4 years after issuance.

Effective January 1, 2014, the Company’s Board of Directors granted the issuance of 2,500,000 common shares at the end of each calendar month to its CEO for services to the Company.   The shares issued each month vest immediately upon issuance and the Company records the transaction at the fair value on the date of grant.

On April 2, 2014, effective January 1, 2014, the Company’s Board of Directors granted the issuance of 5,000,000 common shares at the end of each calendar month to its CEO for services to the Company.   The shares issued each month vest immediately upon issuance and the Company records the transaction at the fair value on the date of grant.

For the six months ended June 30, 2014 and for the years ended December 31, 2013 and 2012, the Company recorded compensation costs for options and shares granted under the plan amounting to $390,000, $0 and $0, 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.

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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 table summarizes the status of the Company aggregate stock options granted under the incentive stock option plan:

There are no unvested stock options.

Note 12. Patent.

On February 19, 2013, the Company received Patent No: US8, 380,176, B2 which covers a method to inhibit the use of multifunction portable communications in moving vehicles.  Costs to file the patent were expensed as incurred. The patent does not have an assigned monetary value and it is not reflected in the Company’s financial statements.

Note 13. Subsequent Events.

Management has evaluated subsequent events through the date the financial statements were issued.  Based on our evaluation, no events have occurred requiring adjustment or disclosure.

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Item 2. Management’s Discussion and Analysis and Plan of Operations

The following discussion should be read in conjunction with our unaudited interim financial statements as of, and for the three and six months ended June 30, 2014 and 2013, and with our annual report on Form 10-K for the year ended December 31, 2013.

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. has the objective of marketing and selling through the internet a range of software applications for cell phones that allow parents or other caregivers to monitor and be notified of occurrences of predator advances, cyber bullying and pornography received on cell phones. The cell phone application may also restrict text messaging while driving and provides location information to parents through the use of GPS technology.

Since our inception on July 3, 2006 through the end of the June 30, 2014, we have generated a minimal amount of revenue.   We 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.   We suspended our operations in August of 2011 due to lack of working capital and have continued our product development and intend to launch our mobile software products during the second half of 2014.

Our CEO, Rowland W. Day II moved the administration of the business to his law office located in California which is the new address of the Company.

Mr. Day has continued to meet with prospective investors to fund the operations of the Company.  Mr. Day has loaned money to the Company for its working capital.  There is no assurance that enough money can be raised for the Company to become fully operational at any time in the future or that Mr. Day will continue to loan money to the Company.

4

Results of Operations

Revenue

Revenues for the three and six month periods ended June 30, 2014 and 2013 totaled $0 and $0 respectively. Management attributes the lack of revenue to the revisions that are being made to the software application, the current economic environment and a delay in the execution of sales contracts which has required a substantial investment of management’s time and marketing efforts of the Company. The ultimate outcome of such contracts remains unknown at June 30, 2014.

Operating Expenses, Other Income and Expenses and Loss from Operations

For the three and six months ended June 30, 2014 we sustained a net operating loss of $538,821 and $934,169 compared to a net operating loss of $121,405 and $216,637 for the three and six months ended June 30, 2013.  The overall net operating loss was mainly due to an increase in research and development and stock compensation.

Financial Condition

Cash at June 30, 2014 was $3,239 and working capital (the excess of current assets over current liabilities) was a negative $1,435,452 compared with a negative $1,038,365 at December 31, 2013. The increase in negative working capital was primarily attributable to an increase in current liabilities.

Total current liabilities increased to $1,438,691 at June 30, 2014 from $1,039,235 at December 31, 2013.  The increase was principally due to an increase in loans payable and increase in amount due to shareholders primarily from conversions to stock.

Stockholders’ equity was $(2,033,379) at June 30, 2014 compared to $(1,635,230) December 31, 2013.  The decrease in deficit was due to, the issuances of shares for conversion of debt offset by our current period loss.

Liquidity

On April 24, 2014, 13,333,333 shares were issued at $0.0075 per share and totaling $100,000 in exchange for cash. In light of recent operating results and negative cash flows, additional capital will be required to fund the Company’s operations.

To support planned operations through 2014 and beyond, additional capital will be required.  Management believes that $500,000 will be required over the next twelve months.  In that regard 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.

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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 $14,986,556 from the period of July 3, 2006 (Inception) through June 30, 2014 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 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.

Off-balance sheet arrangements

At June 30, 2014, 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.

Management Report 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.

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Management assessed our internal control over financial reporting as of June 30, 2014. 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 June 30, 2014, 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 our sole officer 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 quarter ended June 30, 2014.  At this time, management has decided that considering the sole officer 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.

Changes in Internal Control

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. 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.  

Item 1.A. 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 revising the software products, marketing, selling and distributing the software products. The Company began receiving revenue from sales of software products during the fourth quarter of 2009. We 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.  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.

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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 ITS SOLE EXECUTIVE OFFICER

The Company’s success is highly dependent upon its sole executive officer identified in this report for critical management decisions and to implement and pursue the Company’s business and marketing plan.  A loss of our sole executive officer 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.

OUR RECURRING OPERATING LOSSES HAVE RAISED SUBSTANTIAL DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.

Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the years ended December 31, 2013 and December 31, 2012 with respect to this uncertainty. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

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CHALLENGES FROM COMPETITION

Although the Company is unaware of an available product that contains all the characteristics, features and capabilities of the WEBSAFETY software, 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 WEBSAFETY 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 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.

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.

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WE WILL NEED ADDITIONAL FINANCING.

We will need additional financing to maintain and expand its 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.  Additional financing may not be available on favorable terms, if at all.  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.

APPROXIMATELY 88% OF OUR VOTING SECURITIES 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.

Our Chief Executive Officer, Rowland W. Day II, controls approximately 88% of voting securities and has the ability to direct the affairs and business of the Company.  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.

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 war with 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.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 4.  Mine safety Disclosures

Not applicable

Item 6. Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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