form10qa.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A
(Amendment No. 1)

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-51577

ESPRE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)


NEVADA
68-0576847
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
5700 W. Plano Parkway, Suite 2600, Plano, Texas
75093
(Address of principal executive offices)
(Zip Code)

(214) 254-3708
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes       o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
   
Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 355,640,130 shares of Common Stock as of November 12, 2008 .
 


 
 

 
 
EXPLANATORY NOTE
 
This Amendment No. 1 to the Quarterly Report on Form 10-QSB/A (the “Report”) for the quarterly period ended March 31, 2008, includes a restatement of our consolidated financial statements for the quarterly periods ended March 31, 2008 (and related disclosures), initially filed on May 20, 2008.

The Company has restated its Consolidated Balance Sheet as of March 31, 2008, and its Consolidated Statements of Operations and Cash Flows for the three and six months ended March 31, 2008 (as contained in this Report) to correct its accounting for its stock based compensation related to employee stock options, its expensing of performance based options, its accounting for minority interest, its classification of software licensing fee revenues, its classification of stock and options for services, its classification of interest income and its classification of amortization expense.  Finally, the Company has corrected its accounting for revenues reported in the prior year for the three and six months ended March 31, 2007, in accordance with its revenue recognition policies.  The errors were discovered and corrected in the quarter ended June 30, 2008 and for all prior quarters.

A further discussion of the restatement of the consolidated financial statements for these fiscal quarters is contained in Note 2 to the unaudited consolidated financial statements of this report.

 
 

 
 
 
CONTENTS
 
PART I — FINANCIAL INFORMATION (Unaudited)
PAGE
         
         
 
Item 1
Financial Statements
 
         
     
2
         
     
3
         
     
4
         
     
5
         
 
Item 2
21
         
 
Item 3
24
         
 
Item 4
24
         
         
PART II — OTHER INFORMATION
 
   
         
 
Item 1
25
         
 
Item 1A
25
         
 
Item 2
25
         
 
Item 3
25
         
 
Item 4
25
         
 
Item 5
25
         
 
Item 6
25
         
 
   
EX-31.1 Section 302 Certification
 
   
EX-31.2 Section 302 Certification
 
   
EX-32.1 Section 906 Certification
 
   
EX-32.2 Section 906 Certification
 

- 1 -

 
PART I — FINANCIAL INFORMATION
 
Item 1 — Financial Statements
 
ESPRE SOLUTIONS INC. AND SUBSIDIARY
Consolidated Balance Sheets

   
March 31,
2008
   
September 30,
2007
 
   
(Unaudited)
       
   
(As Restated)
       
ASSETS
           
Current assets:
           
Cash
  $ 1,374,728     $ 3,850,666  
Accounts receivable, net
    247,348       251,050  
Prepaid expenses and advances
    93,064       34,564  
Total current assets
    1,715,140       4,136,280  
                 
Equipment, net
    341,992       296,758  
Intangible assets, net
    79,038       73,191  
Loans to related parties
    69,432       69,432  
Other assets
    124,124       97,292  
Total assets
  $ 2,329,726     $ 4,672,953  
                 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
               
Current liabilities:
               
Notes payable to related parties
  $ 25,000     $ 1,667,944  
Accounts payable and accrued expenses
    1,227,687       1,449,399  
Total current liabilities
    1,252,687       3,117,343  
                 
Deferred revenue — related party
    -       1,000,000  
Minority interest
    1,332,505       348,093  
                 
Stockholders’ (deficit) equity
               
                 
                 
Common shares — $0.001 par value; authorized 500,000,000 shares; and 340,690,884 and 318,522,499 shares issued and outstanding , respectively
    340,690       318,522  
Additional paid-in capital
    76,630,778       71,110,086  
Stock subscription receivable
    (28,500 )     (190,000 )
Retained (deficit)
    (77,198,434 )     (71,031,091 )
Total stockholders’ (deficit) equity
    (255,466 )     207,517  
Total liabilities and stockholders’ (deficit )equity
  $ 2,329,726     $ 4,672,953  

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

- 2 -

 
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues:
 
(As Restated)
   
(As Restated)
   
(As Restated)
   
(As Restated)
 
Software licensing fees
  $ -     $ 600,000     $ 1,000,000     $ 1,240,000  
Custom engineering fees
    453,650       244,500       510,992       477,750  
Other
    13,992       116,534       27,764       124,160  
Total revenues
    467,642       961,034       1,538,756       1,841,910  
                                 
Expenses:
                               
General, administrative and selling expenses
    3,215,226       1,290,372       5,281,914       2,383,800  
General, administrative and selling expenses stock based compensation
    358,389       1,726,334       1,441,798       2,810,408  
Research and development
    974,795       366,900       1,626,063       451,500  
Amortization and depreciation
    32,086       23,399       70,173       46,746  
Total operating expenses
    4,580,496       3,407,005       8,419,948       5,692,454  
Loss from operations
    (4,112,854 )     (2,445,971 )     (6,881,192 )     (3,850,544 )
Interest income
    15,641       -       36,031       -  
Interest expense
    (675 )     (1,836 )     (675 )     (9,684 )
Net loss before minority interest
    (4,097,888 )     (2,447,807 )     (6,845,836 )     (3,860,228 )
                                 
Minority interest
    518,763       -       825,587       -  
Net (loss)
  $ (3,579,125 )   $ (2,447,807 )   $ (6,020,249 )   $ (3,860,228 )
                                 
Basic and diluted net loss per share
  $ (0.01 )   $ (0.01 )   $ (0.02 )   $ (0.02 )
                                 
Weighted average shares outstanding, basic and diluted
    330,385,415       208,334,315       323,934,532       208,334,315  

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

- 3 -

 
Consolidated Statements of Cash Flows
Six Months Ended March 31,
(Unaudited)

   
2008
   
2007
 
Cash flows from operating activities:
 
(As Restated)
   
(As Restated)
 
Net (loss) for period
  $ (6,020,249 )   $ (3,860,228 )
                 
Adjustments to reconcile net loss to cash used in operating activities:
               
Stock and options issued for services
    838,233       200,000  
Stock based compensation
    1,441,798       2,810,408  
Amortization and depreciation
    70,173       46,746  
Minority interest
    (825,587 )     -  
Changes in assets and liabilities:
               
Deferred revenue
    (1,000,000 )     150,000  
Accounts receivable
    4,702       (445,486 )
Prepaid expenses
    (58,500 )     27,811  
Other assets
    (26,833 )     (7,600 )
Accounts payable and accrued expenses
    (209,353 )     254,809  
Total cash used in operating activities
    (5,785,616 )     (823,540 )
                 
Net cash used in investing activities:
               
Purchase of equipment
    (86,545 )     (19,348 )
Purchase of intangible assets
    (34,709 )     (127,580 )
Loan to affiliate
    -       (250,000 )
Net cash used in investing activities
    (121,254 )     (396,928 )
                 
Cash flows provided by financing activities:
               
Payments on notes payable to related parties
    (100,000 )     102,957  
Proceeds from sale of stock
    1,781,932       1,140,000  
Minority capital raised
    1,749,000       -  
Net cash provided by financing activities
    3,430,932       1,242,957  
                 
Net (decrease) increase in cash
    (2,475,938 )     22,489  
                 
Cash, beginning of period
    3,850,666       291,426  
                 
Cash, end of period
  $ 1,374,728     $ 313,915  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ -     $ -  
Non-cash transactions:
               
Issuance of common stock to retire debt
  $ 1,542,943     $ 619,000  

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

- 4 -


ESPRE SOLUTIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION AND CONTROLLED SUBSIDIARY

The consolidated financial statements included herein have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes such disclosures are adequate to make the information presented not misleading. In the opinion of management, the amounts shown reflect all adjustments necessary to present fairly the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature.

It is suggested that the consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto for the year ended September 30, 2007 included in the Company’s Form 10 filed on March 31, 2008.

On April 27, 2007, the Company and Peter Leighton, who was then its President (“Leighton”), founded Blideo, Inc. (“Blideo”) (dba Openacircle.com) each with a 40% interest. The Company and Leighton control Blideo and it has therefore been consolidated in these condensed consolidated financial statements.

2.  RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

The Company has restated its Consolidated Balance Sheet as of March 31, 2008, and its Consolidated Statements of Operations and Cash Flows for the three and six months ended March 31, 2008, to correct its accounting for its stock based compensation related to employee stock options, its expensing of performance based options and its accounting for minority interest, its classification of interest income and its classification of amortization expense and its accounting for revenues for the three and six months ended March 31, 2007.

The Company’s originally filed financial statements for the quarter ended December 31, 2007, reflected stock option expense for the entire year in that quarter, rather than being amortized on a straightline basis over the vesting period. This also resulted in an overstatement of expenses for the three and six months ended March 31, 2008.  The Company also improperly expensed certain performance-based stock options in the quarter ended March 31, 2008, when the conditions for vesting had not been met.  The options were subsequently forfeited.  The company also corrected its classification of stock and options for services, which was previously classified as stock-based compensation, to general, administrative and selling expenses. The Company also corrected its accounting for minority interest for the three and six months ended March 31, 2008, which was previously based on an incorrect number of common shares outstanding and an incorrect percentage ownership in its consolidated subsidiary, which previously included the effects of a stock split authorized subsequent to March 31, 2008.  In addition, the Company corrected its classification of interest income, which was previously classified as revenues, as well as its classification of custom engineering fees, which was previously classified as other revenues, and its classification of amortization expense, which was previously improperly classified as a reduction of the underlying asset rather than as an increase in accumulated amortization.

Finally, the Company corrected its accounting for revenues reported in the prior year for the three and six months ended March 31, 2007, in accordance with its revenue recognition policies.  We corrected our software licensing fee revenues that were prematurely recognized in the prior year three month period ended December 31, 2006.  The revenues were subsequently recorded in the proper three and six months prior year period ended March 31, 2007 when all of the conditions for revenue recognition were fully met.  The errors were discovered and corrected in the quarter ended June 30, 2008, and for all prior quarters.

The impact of the restatement and other reclassifications on the Company's Consolidated Balance Sheet as of March 31, 2008, and its Consolidated Statements of Operations and Cash Flows for the three and six months ended March 31, 2008 and the three and six months ended March 31, 2007, is summarized in the tables below:

- 5 -

 
     
       
   
As of March 31, 2008
 
   
As previously
reported
   
Reclassifications
and
adjustment
   
As restated
 
ASSETS
                 
Current assets:
                 
Cash
  $ 1,374,728     $ -     $ 1,374,728  
Accounts receivable
    247,348       -       247,348  
Prepaid expenses and advances
    93,064       -       93,064  
Total current assets
    1,715,140       -       1,715,140  
                         
Equipment, net
    341,992       -       341,992  
Intangible assets, net
    79,038       -       79,038  
Loans to related parties
    69,432       -       69,432  
Other assets
    124,124       -       124,124  
Total assets
  $ 2,329,726     $ -     $ 2,329,726  
                         
LIABILITIES AND STOCKHOLDERS (DEFICIT)
                       
Current liabilities:
                       
Notes payable to related parties
  $ 25,000     $ -     $ 25,000  
Accounts payable and accrued expenses
    1,229,812       (2,125 )     1,227,687  
Total current liabilities
    1,254,812       (2,125 )     1,252,687  
                         
Minority interest
    1,186,414       146,091       1,332,505  
                         
Stockholders' (deficit)
                       
Common stock
    340,690       -       340,690  
Additional paid in capital
    78,782,089       (2,151,311 )     76,630,778  
Stock subscription receivable
    (28,500 )     -       (28,500 )
Retained (deficit)
    (79,205,779 )     2,007,345       (77,198,434 )
Total stockholders’ (deficit)
    (111,500 )     (143,966 )     (255,466 )
                         
Total liabilities and stockholders' (deficit)
  $ 2,329,726     $ -     $ 2,329,726  

- 6 -

 
CONSOLIDATED STATEMENT OF OPERATIONS
 
             
   
Three months ended March 31, 2008
   
Six months ended March 31, 2008
 
   
Previously
reported
   
Reclassifications
and
adjustments
   
As restated
   
As previously
reported
   
Reclassifications
and
adjustments
   
As restated
 
Revenues:
                                   
Software licensing fees
  $ -     $ -     $ -     $ 1,000,000     $ -     $ 1,000,000  
Custom engineering fees
    418,284       35,366       453,650       475,626       35,366       510,992  
Other
    13,380       612       13,992       63,130       (35,366 )     27,764  
Total revenues
    431,664       35,978       467,642       1,538,756       -       1,538,756  
                                                 
Expenses:
                                               
General, administrative and selling
    2,441,707       773,519       3,215,226       5,211,890       70,023       5,281,913  
General, administrative and selling stock based compensation
    1,801,577       (1,443,188 )     358,389       3,798,318       (2,356,520 )     1,441,798  
Research and development
    1,003,810       (29,015 )     974,795       1,590,697       35,366       1,626,063  
Amortization and depreciation
    25,886       6,200       32,086       57,673       12,500       70,173  
Total operating expenses
    5,272,980       (692,484 )     4,580,496       10,658,578       (2,238,631 )     8,419,947  
                                                 
Loss from operations
    (4,841,316 )     728,462       (4,112,854 )     (9,119,822 )     2,238,631       (6,881,191 )
                                                 
Interest income
    36,030       (20,389 )     15,641       36,030       -       36,030  
Interest expense
    (1,575 )     900       (675 )     (1,575 )     900       (675 )
Net loss before minority interest
    (4,806,861 )     708,973       (4,097,888 )     (9,085,367 )     2,239,531       (6,845,836 )
                                                 
Minority interest
    529,319       (10,556 )     518,763       910,678       (85,091 )     825,587  
Net (loss)
  $ (4,277,542 )   $ 698,417     $ (3,579,125 )   $ (8,174,689 )   $ 2,154,440     $ (6,020,249 )
                                                 
Basic and diluted net loss per share
  $ (0.01 )   $ -     $ (0.01 )   $ (0.03 )   $ 0.01     $ (0.02 )
                                                 
Weighted average shares outstanding, basic and diluted
    330,385,415       -       330,385,415       323,934,532       -       323,934,532  

- 7 -

 
CONSOLIDATED STATEMENT OF CASH FLOWS
     
       
   
Six months ended March 31, 2008
 
   
As previously
reported
   
Reclassifications
and
adjustments
   
As restated
 
Cash flows from operating activities:
                 
Net (loss) for period
  $ (8,174,689 )   $ 2,154,440     $ (6,020,249 )
                         
Adjustments to reconcile net loss to cash used in operating activities:
                       
Stock and options issued for services
    732,477       105,756       838,233  
Stock based compensation
    3,798,318       (2,356,520 )     1,441,798  
Amortization and depreciation
    57,673       12,500       70,173  
Minority interest
    (910,678 )     85,091       (825,587 )
Changes in assets and liabilities:
                       
Deferred revenue
    (1,000,000 )     -       (1,000,000 )
Accounts receivable
    3,702       1,000       4,702  
Prepaid expenses
    (58,501 )     -       (58,501 )
Other assets
    (26,832 )     -       (26,832 )
Accounts payable and accrued expenses
    (219,587 )     10,234       (209,353 )
Total cash used in operating activities
    (5,798,117 )     12,501       (5,785,616 )
                         
Net cash used in investing activities:
                       
Purchase of equipment
    (87,032 )     487       (86,545 )
Purchase of intangible assets
    (21,721 )     (12,988 )     (34,709 )
Net cash used in investing activities
    (108,753 )     (12,501 )     (121,254 )
                         
Cash flows provided by financing activities:
                       
Payments on notes payable to related parties
    (100,000 )     -       (100,000 )
Proceeds from sale of stock
    1,781,932       -       1,781,932  
Minority capital raised
    1,749,000       -       1,749,000  
Net cash provided by financing activities
    3,430,932       -       3,430,932  
                         
Net decrease in cash
    (2,475,938 )     -       (2,475,938 )
                         
                         
Cash, beginning of period
    3,850,666       -       3,850,666  
                         
Cash, end of period
  $ 1,374,728     $ -     $ 1,374,728  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid for interest
  $ -     $ -     $ -  
Non-cash transactions:
                       
Issuance of common stock to retire debt
  $ 1,542,943     $ -     $ 1,542,943  

- 8 -

 
CONSOLIDATED STATEMENT OF OPERATIONS
 
             
   
Three months ended March 31, 2007
   
Six months ended March 31, 2007
 
   
Previously
reported
   
Reclassifications
and
adjustments
   
As restated
   
As previously
reported
   
Reclassifications
and
adjustments
   
As restated
 
Revenues:
                                   
Software licensing fees
  $ -     $ 600,000     $ 600,000     $ 1,990,000     $ (750,000 )   $ 1,240,000  
Custom engineering fees
    244,500       -       244,500       477,750       -       477,750  
Other
    116,534       -       116,534       124,160       -       124,160  
Total revenues
    361,034       600,000       961,034       2,591,910       -       1,841,910  
                                                 
Expenses:
                                               
General, administrative and selling
    1,218,772       71,600       1,290,372       2,383,800       -       2,383,800  
General, administrative and selling: stock based compensation
    1,726,334       -       1,726,334       2,810,408       -       2,810,408  
Research and development
    366,900       -       366,900       451,500       -       451,500  
Amortization and depreciation
    23,399       -       23,399       46,746       -       46,746  
Total operating expenses
    3,335,405       71,600       3,407,005       5,692,454       -       5,692,454  
                                                 
Loss from operations
    (2,974,371 )     528,400       (2,445,971 )     (3,100,544 )     (750,000 )     (3,850,544 )
                                                 
Interest income
    -       -       -       -       -       -  
Interest expense
    (1,836 )     -       (1,836 )     (9,684 )     -       (9,684 )
Net loss before minority interest
    (2,976,207 )     528,400       (2,447,807 )     (3,110,228 )     (750,000 )     (3,860,228 )
                                                 
Minority interest
    -       -       -       -       -       -  
Net (loss)
  $ (2,976,207 )   $ 528,400     $ (2,447,807 )   $ (3,110,228 )   $ (750,000 )   $ (3,860,228 )
                                                 
Basic and diluted net loss per share
  $ (0.01 )   $ -     $ (0.01 )   $ (0.01 )   $ (0.01 )   $ (0.02 )
                                                 
Weighted average shares outstanding, basic and diluted
    220,393,640       -       220,393,640       220,393,640       -       220,393,640  

- 9 -

 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
       
   
Six months ended March 31, 2007
 
   
As previously
reported
   
Reclassifications
and
adjustments
   
As restated
 
Cash flows from operating activities:
                 
Net (loss) for period
  $ (3,110,228 )   $ (750,000 )   $ (3,860,228 )
                         
Adjustments to reconcile net loss to cash used in operating activities:
                       
Stock and options issued for services
    200,000       -       200,000  
Stock based compensation
    2,810,408       -       2,810,408  
Amortization and depreciation
    46,746       -       46,746  
Changes in assets and liabilities:
                       
Deferred revenue
    150,000       -       150,000  
Accounts receivable
    (1,195,486 )     750,000       (445,486 )
Prepaid expenses
    27,811       -       27,811  
Other assets
    (7,600 )     -       (7,600 )
Accounts payable and accrued expenses
    254,809       -       254,809  
Total cash used in operating activities
    (823,540 )     -       (823,540 )
                         
Net cash used in investing activities:
                       
Purchase of equipment
    (19,348 )     -       (19,348 )
Purchase of intangible assets
    (127,580 )     -       (127,580 )
Loan to affiliate
    (250,000 )     -       (250,000 )
Net cash used in investing activities
    (396,928 )     -       (396,928 )
                         
Cash flows provided by financing activities:
                       
Payments on notes payable to related parties
    102,957       -       102,957  
Proceeds from sale of stock
    1,140,000       -       1,140,000  
Net cash provided by financing activities
    1,242,957       -       1,242,957  
                         
Net decrease in cash
    22,489       -       22,489  
                         
                         
Cash, beginning of period
    291,426       -       291,426  
                         
Cash, end of period
  $ 313,915     $ -     $ 313,915  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid for interest
  $ -     $ -     $ -  
Non-cash transactions:
                       
Issuance of common stock to retire debt
  $ 619,000     $ -     $ 619,000  

- 10 -


3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary. All intercompany transactions have been eliminated in consolidation.

Reclassifications

Prior year’s information is reclassified whenever necessary to conform to current year’s presentation.

Revenue Recognition
 
The Company has adopted the following principles in which all of certain criteria must be met before revenues are recognized.  The principal standards include:
 
 
·
Persuasive evidence of a contractual arrangement exists;
 
·
Delivery of the service has occurred in accordance with the Company’s contractual obligations and title has passed to the customer;
 
·
The fee or revenue recognized is fixed or determinable; and,
 
·
The right to payment is unconditional and collectability is probable.

Stock Based Compensation

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment”, effective July 1, 2005, which requires companies to record compensation expense for stock options issued to employees or non-employee directors at the fair value of the options.  SFAS NO. 123R is effective for annual periods beginning after June 15, 2005.

The Company has adopted SFAS No. 123R using the “modified prospective application” and, therefore, financial statements from periods ending prior to October 1, 2005 have not been restated.  The Company’s net loss for the three months ended March 31, 2008 and 2007 was $358,389 and $1,726,334, respectively, higher than if it had continued to account for share-based compensation under APB No. 25.  The Company’s net loss for the six months ended March 31, 2008 and 2007 was $1,441,798 and $2,810,408, respectively, higher than if it had continued to account for share-based compensation under APB No. 25.

Recent pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 159 on October 1, 2008, and is currently evaluating the impact of such adoption on its financial statements.
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), Business Combinations , which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning October 1, 2008, and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value, with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning October 1, 2008, and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently assessing the potential impact that adoption of SFAS No. 160 would have on our financial statements.

- 11 -


In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133." SFAS No. 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows.

SFAS No. 161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently assessing the impact that SFAS No. 161 will have on its financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162”).  SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  This statement shall be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is in the process of evaluating the potential effect of adoption of SFAS 162.

4.  GOING CONCERN AND MANAGEMENT’S PLAN

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred significant and recurring losses and negative cash flow from operations, which raises substantial doubt about its ability to continue as a going concern. The Company’s continued existence is dependent upon its ability to achieve profitability and to generate cash either from operations or financing.
 
Management’s plan is as follows:
 
 
·
Obtain additional debt and equity financing

 
·
Market its principal product, VUELIVE (previously EspreLive), to customers wishing to build applications using video and provide custom engineering services to those customers as requested.

 
·
Engage in partnerships with firms in key vertical markets.  These partners will be market experts and have well defined application strategies that require VUELIVE to develop them.

 
·
Launch Blideo as an application service provider.

 
·
Establish independent sales agreements with representatives to sell its products and services.  The Company will actively pursue the engagement of additional independent sales representatives who can distribute the Company’s existing video products and services, both domestically and internationally.

In the period from inception to March 31, 2008, the Company has transacted a substantial amount of its business with related parties. The Company continues to be dependent on revenues from these related parties. The achievement of profitability and the ability to generate cash flows from operations is dependent upon, amongst other things, the acceptance of the Company’s products and services, competition from other products and the deployment of video applications by our customers. There is no assurance that management’s plan will be successful. Accordingly, substantial doubts exist about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

- 12 -


5.  CASH

At March 31, 2008 the Company had $247,340 in cash (excluding Blideo’s cash of $1,127,388, over which the Company may be deemed to have control through the ownership interests in Blideo of the Company and Mr. Leighton) compared with $3,352,415 (excluding Blideo’s cash of $498,251) at September 30, 2007.
 
6.  INVESTMENT IN AND LOANS TO RELATED PARTIES

Blideo, Inc.

On April 24, 2007, prior to joining the Company, Peter Leighton, who served as the Company’s President from July 26, 2007, and a director from May 1, 2007, founded Blideo, Inc., (“Blideo”) and invested $200,000 in May 2007 and $300,000 in July 2007. The Company invested the same amounts in the same time periods. In May of 2007, Blideo acquired an exclusive license from Media Distribution Solutions. LLC (“MDS”), a customer of the Company since April 2006, for the distribution and use of MDS’s software in any social networking application for $175,000 plus certain ongoing royalties. In September 2007, Espre’s Vice President — Sales invested $125,000 in Blideo. Certain former officers and employees of the Company are now officers and employees of Blideo. On October 31, 2007, the Company licensed VUELIVE on a non-exclusive basis to Blideo for five (5) years for a one time license fee of $1,000,000 plus 1% of gross revenues.

As an integral part of this agreement, Blideo agreed to pay the Company a one-time fee of $700,000 for engineering and design services to build the Blideo Application Release 1.0 from September 1, 2007 to March 31, 2008. The $700,000 contract engineering fees paid for core technology development will decrease the license fee. As part of this license the Company has agreed not to contract with any application service provider that plans to launch a service competitive to Blideo’s for one year following the acceptance by Blideo of the application the Company is designing and building. In addition, Blideo is obligated to pay the Company a product maintenance fee for the application the Company is building for Blideo of $70,000 for the first year commencing September 2007 and thereafter at a rate to be negotiated. In addition, until April 1, 2008, the Company provided office accommodation to Blideo for $2,000 per month.  On April 1, 2008, Blideo sublet offices from an independent third party and moved its entire staff to them.  The Company also provides accounting services to Blideo for $500 per month on a month to month basis. The Company believes all related party transactions have been consummated on terms equivalent to those that prevail in arms’ length transactions.
 
The assets of Blideo are not available to the Company other than through the contractual agreements more fully described above and trough direct control through the same management personnel.
 
7.  NOTES PAYABLE TO RELATED PARTIES

Notes payable consisted of the following:

   
March 31,
2008
   
September 30,
2007
 
Contingent repurchase agreement to Video Software Partners, secured by certain software products, payable on February 1, 2008, interest imputed at 10%
 
$
-
   
$
1,642,944
 
                 
Note payable to a related individual, at 10%, due November 25, 2004, extended year to year, unsecured
   
25,000
     
25,000
 
   
$
25,000
   
$
1,667,944
 

- 13 -


8.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following at:

   
March 31, 2008
   
September 30, 2007
 
Accounts payable - trade
 
$
845,349
   
$
543,487
 
Accrued expenses
   
38,845
     
242,151
 
Due to investment banker
   
-
     
139,825
 
Accrued vacation pay
   
76,640
     
76,640
 
Accrued payroll and payroll taxes
   
266,853
     
297,296
 
Customer advances
   
-
     
150,000
 
   
$
1,227,687
   
$
1,449,399
 


9.  OTHER RELATED PARTY TRANSACTIONS

The Company regularly engages the services of a related vendor.  The vendor became related when its principals purchased restricted common stock from the Company.  In the three and six month periods ending March 31, 2008, the Company incurred $213,615 and $411,980, respectively, in Product Development and Consulting expenses and $1,200 in General, Sales and Administrative expenses from this vendor.

10.  STOCKHOLDERS’ (DEFICIT) EQUITY

Common stock
 
Payments for Services
In the six months ended March 31, 2008, the Company issued a total of 4,596,719 shares of common stock for consulting, advisory and other services recorded at market values ranging between of $0.16 and $0.26 per share or $732,477.  For the same period in the previous fiscal year the Company issued 1,538,462 shares at a market price of $0.13 per share or $200,000 for consulting and advisory services.

Capital Raises
In the six months ended March 31, 2008, the Company issued 15,621,667 shares of restricted common stock with no demand or piggy-back registration rights to accredited investors for $1,620,432. The Company paid fees of $38,263 in connection with the sale of these common shares.

- 14 -


11.  STOCK OPTIONS

The Company's 2004 Equity Incentive Plan (the "Stock Option Plan”) provides employees, consultants and directors to be granted options to purchase shares of the Company's common stock, incentive stock options ("ISOs").  The maximum aggregate number of shares of common stock available for award under the Stock Option Plan is 100,000,000, and is subject to adjustment as set forth therein.  Under the plan, ISOs may not be vested until a date, or dates, subsequent to their date of grant, or until the occurrence of one or more specified events annually.   At March 31, 2008, the Company had granted 84,404,634 ISOs.  Of the granted ISOs, 69,865,000 vest on the anniversary of the date of grant equally over three years; 9,039,634 vested immediately; 2,125,000 vest completely thirteen months after the date of grant; and 3,375,000 vest completely over eighteen months after the date of grant.  All ISOs expire no later than ten years from the date of grant for participants that own no more than ten percent of all classes of voting stock of the Company and its subsidiaries.  The expiration for participants that own more than ten percent of all voting classes of stock of the Company and its subsidiaries is five years from the date of grant.

The exercise price for the ISOs is not to be less than the fair market value of the common stock of the Company at the date of grant for participants owning less than ten percent of all voting classes of stock in the Company and its subsidiaries and not less than 110% of the fair market value of the common stock of the Company at the date of grant for participants owning more than ten percent of all classes of voting stock in the Company and its subsidiaries.

At March 31, 2008, summarized stock options outstanding and exercisable were:

 
Outstanding Stock Options
     
Exercisable Stock Options
     
 
Options
 
Weighted Average Exercise Price
 
Options
 
Weighted Average Exercise Price
 
                     
Outstanding at beginning of period
79,904,634
 
$
.1174
 
              36,506,010
 
$
.1174
 
Granted
4,500,000
 
$
         .0883
 
               4,261,172
 
$
.0876
.
Outstanding at end of period
84,404,634
 
$
.1159
 
             40,767,182
 
$
.1159
 


The weighted average fair value of each option has been approximated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants; no dividend yield, volatility of 160%, risk free interest rate of 3.59%, and an expected term of five years.
 
At March 31, 2008, summarized stock options outstanding and exercisable were:

   
Outstanding Stock Options
   
Exercisable Stock Options
 
Exercise Price Range
 
Shares
 
Life
   
Weighted Average exercise Price
   
Shares
   
Life
   
Weighted Average exercise Price
 
                                               
$
0.010 - $0.085
 
51,979,634
   
8.33
   
$
0.08
     
19,619,273
     
8.33
   
$
0.08
 
                                               
$
0.100 - $0.200
 
26,945,000
   
7.70
   
$
0.10
     
19,730,749
     
7.70
   
$
0.10
 
                                               
$
0.210 - $1.333
 
5,480,000
   
6.90
   
$
0.54
     
1,417,160
     
6.90
   
$
0.61
 
                                               
     
84,404,634
                   
40,767,182
                 

- 15 -


The weighted average fair value of each option has been approximated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants; no dividend yield, volatility of 160%, risk free interest rate of 3.59%, and an expected term of five years.

As of March 31, 2008, there was approximately $3.1 million of unrecognized compensation costs related to unvested share-based compensation arrangements granted under the Stock Option Plan, including 4,500,000 of new grants authorized in the current quarter.  This expense will be recognized on a straight-line basis over the remaining requisite service period, currently through December 2010.
 
12.  WARRANTS

Transactions and other information relating to warrants as of March 31, 2008, are summarized as follows:

Outstanding Warrants
   
Exercisable Warrants
 
   
 
 
Shares
   
Weighted
Average
Exercise
Price
   
 
 
Shares
   
Weighted
Average
Exercise
Price
 
Outstanding at December 31, 2007
   
44,019,716
   
$
0.10
     
44,019,716
   
$
0.10
 
Granted during period
   
-
     
-
     
-
     
-
 
Exercised during the period
   
(892,858
)
 
 $
 0.10
     
 (892,858
)
 
 $
 0.10