UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





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





For the quarterly period ended March 31, 2010





OR





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





For the transition period from __________ to __________





Commission File No. 333-124405





DIGITALPOST INTERACTIVE, INC.


(Exact Name of Registrant in its Charter)





Nevada
26-1944595(State or Other Jurisdiction of
(IRS EmployerIncorporation)
Identification No.)





4040 Barranca Parkway, Suite 220, Irvine, CA 92602


(Address of Principal Executive Offices) (Zip Code)





(949) 333-7500


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.  Yes x   No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes o   No o





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





Large accelerated filer  o                                                                                                            Accelerated filer  o





Non-accelerated filer   o  (Do not check if a smaller reporting company)                           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). Yes o   No x





As of May 15, 2010, there were 138,014,451 shares of the Registrant’s common stock issued and outstanding.





INDEX





PART I - FINANCIAL INFORMATIONItem 1.
Financial StatementsCondensed Consolidated Balance Sheet at March 31, 2010 (unaudited) and December 31, 2009
1Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (unaudited)
2Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)
3Notes to Condensed Consolidated Financial Statements (unaudited)
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20Item 4.
Controls and Procedures
20PART II - OTHER INFORMATIONItem 1.
Legal Proceedings
21Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21Item 3.
Defaults Upon Senior Securities
21Item 4.
[Removed and Reserved]
21Item 5.
Other Information
21Item 6.
Exhibits
22Signatures
23








Item 1. Financial Statements


DIGITALPOST INTERACTIVE, INC.


CONDENSED CONSOLIDATED


BALANCE SHEETS





March 31,

December 31,2010

2009(Unaudited)AssetsCurrent assetsCash and cash equivalents
$
18,500
$
-Accounts receivable and other current assets

49,600

41,600Total current assets

68,100

41,600Property and equipment, net

22,600

26,300Website and software development costs, net

148,600

126,900Deferred financing costs


36,000

42,900Other assets


1,500

1,500Total assets

$
276,800
$
239,200Liabilities and Stockholders' DeficitCurrent liabilitiesAccounts payable

$
168,100
$
195,800Accrued expenses


254,500

289,800Deferred revenue


54,300

54,100Due to stockholder


36,600

36,600Convertible and other promissory notes, net - current (Note 6)


2,067,900

1,592,200Total current liabilities

2,581,400

2,168,500Convertible and other promissory notes, net  - long term (Note 6)

-

-Total liabilities

2,581,400

2,168,500Commitments and contingencies (Note 8 and 10)Stockholders’ deficit (Note 7)Preferred Stock, $.001 par value; 20,000,000shares authorized; no sharesissued and outstanding

-

-Common Stock, $.001 par value; 480,000,000 shares authorized;90,430,118 and 87,631,141 shares issued and outstandingat March 31, 2010 and December 31, 2009, respectively

90,500

87,600Additional paid in capital

7,523,200

7,096,900Accumulated deficit


(9,918,300)

(9,113,800)Stockholders’ deficit

(2,304,600)

(1,929,300)Total liabilities and stockholders’ deficit
$
276,800
$
239,200





The accompanying notes to condensed unaudited consolidated financial statements are


an integral part of this balance sheet.


1


DIGITALPOST INTERACTIVE, INC.


CONDENSED CONSOLIDATED


STATEMENTS OF OPERATIONS (UNAUDITED)





Three

ThreeMonths Ended

Months EndedMarch 31,

March 31,2010

2009Revenues:Subscription


$
131,200
$
206,700Professional services



12,400

104,300Total Revenue



143,600

311,000Cost of Revenues:Subscription



63,700

94,500Professional services



6,600

47,000Total Cost of Revenue


70,300

141,500Gross Profit




73,300

169,500Operating expenses:Research and development



21,300

54,400Sales and marketing



1,400

15,900General and administrative


640,400

389,500Total operating expenses

663,100

459,800Loss from operations


(589,800)

(290,300)Interest expense


(214,700)

(218,200)Net loss

(804,500)

(508,500)Weighted average outstanding shares

89,144,801

73,112,126Basic and Diluted Loss Per Share
$
(.009)
$
(.007)

















The accompanying notes to condensed unaudited consolidated financial statements are


an integral part of these statements.


2


DIGITALPOST INTERACTIVE, INC.


CONDENSED CONSOLIDATED


STATEMENTS OF CASH FLOWS (UNAUDITED)





Three

ThreeMonths Ended

Months EndedMarch 31, 2010

March 31, 2009Cash flows from operating activitiesNet loss




$
(804,500)

$
(508,500)Adjustments to reconcile net loss to net cashused by operating activities:Depreciation and amortization


29,600


35,200Non-cash stock-based compensation


353,000


142,500Amortization of debt discount


162,100


155,000Changes in operating assets and liabilities:Accounts receivable and other assets



(8,300)


(26,300)Other assets



-


6,800Accounts payable



(27,700)


61,000Accrued expenses



(35,300)


83,400Deferred revenue



200


(11,200)Net cash used by operating activities


(330,900)


(62,100)Cash flows from investing activitiesAcquisition and development of software


(40,600)


-Net cash used by investing activities


(40,600)


-Cash flows from financing activitiesProceeds from promissory notes


390,000


-Net cash provided by financing activities


390,000


-Net increase (decrease) in cash and cash equivalents


18,500


(62,100)Cash and cash equivalents, beginning of period


-


67,700Cash and cash equivalents, end of period

$
18,500

$
5,600Supplemental disclosures:Cash paid for income taxes


$
1,600

$
1,600Cash paid interest


$
28,100

$
18,400Supplemental disclosures of non cash activities:Common stock issued for interest (Note 7)


$
15,340

$
15,340Accretion of the promissory notes (Note 6)


$
154,600

$
-Common stock issued with promissory notes  (Note 6)


$
76,300

$
-








The accompanying notes to condensed unaudited consolidated financial statements are


an integral part of these statements.


3


DIGITALPOST INTERACTIVE, INC.


NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS








1.           BASIS OF PRESENTATION, ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization and Merger





Prior to January 30, 2007, the Company was known as HomAssist Corporation, a Nevada corporation (“HomAssist”).  On January 30, 2007, the Company acquired The Family Post, Inc, a privately held California corporation (“TFP”). Immediately following the acquisition of TFP, the Company changed its name to DigitalPost Interactive, Inc. (“DPI”, “we” or the “Company”) and began operating TFP’s business of internet content sharing as its operating subsidiary.





The Company produces destination websites that allow subscribers to securely share digital media, including photos, videos, calendars, message boards, and history. The Company’s proprietary website administration system, Qwik-PostTM, and online video uploading system, Video-PostSM, allow users of personal computers to manage these “virtual family rooms,” and provide a destination to display photo and video memories, discussions, and history. The Company also provides professional services by generating and developing custom website software.





Basis of Presentation





The accompanying condensed unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for the interim financial information and in accordance with the instructions per Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.





In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation have been included. The accompanying condensed unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s 2009 Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 31, 2010. Operating results for the three month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2010.





Basis of Consolidation





The accompanying consolidated financial statements include the accounts of DPI and TFP (as defined above) DPI’s wholly-owned subsidiary.





Cash and Cash Equivalents





For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents.





Property and Equipment





TheCompany’s property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over estimated useful lives of three to five years. Maintenance and repairs are charged to operations when incurred. Significant betterments are capitalized and depreciated over the estimated useful life of the related asset.








4


Website and Software Development Costs




Costs and expenses incurred during the planning and operating stages of the Company’s website are expensed as incurred. Costs incurred in the website application and infrastructure development stages are capitalized by the Company and amortized to expense over the website’s estimated useful life or period of benefit.





Costs incurred internally in creating its software products are charged to research and development expense until technological feasibility has been established for the related product.  Technical feasibility is deemed to have been established upon completion of a detail program design or completion of a working model.  Subsequent to technological feasibility having been established, software production costs shall be capitalized and reported at the lower of amortized cost or net realizable value.





As of March 31, 2010, and December 31, 2009 the Company capitalized $148,600 and $126,900, respectively, net of accumulated amortization, related to its website and software development (Note 4).





Research and Development Costs





The Company expenses research and development costs as incurred.





Revenue Recognition





The Company’s subscription revenues are generated from monthly subscriptions for website hosting services. The typical subscription agreement includes the usage of a personalized website and hosting services. The individual deliverables are not independent of each other and are not sold or priced on a standalone basis. Costs to complete the website and prepare it for the use of an end customer are minimal, and are expensed to cost of revenues as incurred. Upon the completion of a customer’s signup and initial hosting of the website, the subscription is offered free of charge for a two week trial period during which the customer can cancel at anytime. After the two week trial period has ended, revenue is recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of the Company’s fees is probable. These criteria are met monthly as the Company’s service is provided on a month-to-month basis, and collections are generally made in advance of the services. There is no provision for refunds as of March 31, 2010, as the Company’s historical refund experience has been minimal.





Customers signup and agree to purchase the website service on a monthly or annual basis, at the customer’s option. The monthly customers pay monthly in advance of the services, and as the services are performed, the Company recognizes subscription revenue on a daily basis.





For annual customers, upon payment of a full year’s subscription service, the subscription revenue is recorded as deferred revenue in the accompanying balance sheet. As services are performed, the Company recognizes subscription revenue ratably on a daily basis.





During the three months ended March 31, 2010, the Company also distributed its website through a marketing partnership and shared a portion of revenue generated with the marketing partner. Revenue is reported gross of the payment received from its marketing partner because the Company acts as the primary obligor and is responsible for the fulfillment of services. The Company derived 70% and 52% of its total revenue from such marketing partner during the three months ended March 31, 2010 and 2009, respectively.





Professional services revenue is generated from custom website design services. The Company’s professional services revenue from contracts for custom website design is recorded using a proportional performance model based on labor hours


5


incurred. The extent of progress toward completion is measured by the labor hours incurred as a percentage of total estimated labor hours to complete. Labor hours are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input to the provision of our professional services. The Company derived 6% and 65% of its total professional service revenue from a single customer during the three months ended March 31, 2010, and 2009 respectively.





Loss per Common Share





Basic loss per share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Fully diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Due to the anti-dilutive nature of the Company’s potential common shares, there is no effect on the calculation of weighted average shares for diluted net loss per common share. As a result, the basic and diluted net losses attributable per common share amounts are identical. 68,159,714 shares of potentially dilutive securities have been excluded for three month period ended March 31, 2010 respectively, because their effect was anti-dilutive. 46,972,306 shares of potentially dilutive securities have been excluded for each of the three month period ended March 31, 2009, because their effect was anti-dilutive.





Stock-Based Compensation





The cost of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the consolidated financial statements based on the estimated fair value of the awards. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period).





The Company’s 2010 calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions: expected life of 5 years; 430% stock price volatility; risk-free interest rate of 2.4%; forfeitures rate of 12% and no dividends during the expected term. During the three month period ended March 31, 2010, the Company recognized stock based compensation expense of $353,000. During three March 31, 2009, the Company recognized stock based compensation expense of $142,500.





Fair Value of Financial Instruments





The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange. As of March 31, 2010, the carrying value of accounts receivable and payable, loans from stockholders and accrued liabilities approximated fair value due to the short-term nature and maturity of these instruments.  The fair value of the 2007 Convertible Promissory Notes and 2008 Convertible Promissory Notes and 2010 Promissory Notes (See Note 6) have not been estimated since the cost of doing so would be excessively prohibitive and not practicable.





Concentration of Risk





Credit is extended based on an evaluation of the customer’s financial condition, and collateral is not required. The Company also evaluates its credit customers for potential credit losses. The accounts receivable balance at March 31, 2010 is primarily due from a single major marketing partner in the amount of $49,600. The accounts receivable balance at December 31, 2009 is primarily due from a single major marketing partner and a professional services customer which collectively accounted for 100% of the net accounts receivable with a balance of $41,600.





Advertising





Advertising and promotion costs are charged to operations when incurred. For the three months ended March 31, 2010 and 2009, advertising and promotion costs amounted to $1,500 and $9,700, respectively.





Impairment of Long-Lived Assets


6


The Company evaluates the recoverability of long-lived assets and the related estimated remaining lives when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable. For the three months ended March 31, 2010 and 2009, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required.





Deferred Finance Costs





The Company defers as other assets the direct incremental costs of raising capital until such time as the offering is completed. At the time of the completion of the offering, the costs are charged against the capital raised. Should the offering be terminated, deferred offering costs are charged to operations during the period in which the offering is terminated.





Estimates





The consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of March 31, 2010 and expenses for the three months ended March 31, 2010 and 2009. Actual results could differ from those estimates made by management.





Income Taxes





The process of preparing the financial statements requires management estimates of income taxes in each of the jurisdictions that the Company operates. This process involves estimating current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the balance sheet. The Company utilizes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Management must assess the likelihood that the deferred tax assets or liabilities will be realized for future periods, and to the extent management believes that realization is not likely, must establish a valuation allowance. To the extent a valuation allowance is created or adjusted in a period, the Company must include an expense or benefit, within the tax provision in the statements of operations. Significant management judgment is required in determining the provision for income taxes, deferred tax asset and liabilities and any valuation allowance recorded against net deferred tax assets. It is possible that different tax models, and the selection of different input variables, could produce a materially different estimate of the provision, asset, liability and valuation allowance. Management could not determine that it was more likely than not that the Company would realize any future benefit from the deferred tax asset in 2010 and 2009 and therefore booked a 100% valuation allowance in both years resulting in the elimination of the deferred tax asset from the Company's balance sheet as of March 31, 2010 and December 31, 2009.





2.           GOING CONCERN AND MANAGEMENT’S PLANS





The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates the continuation of the Company as a going concern. The Company has not established sufficient sources of revenue to cover its operating costs, and as such, has incurred an operating loss since inception. Further, as of March 31, 2010, the cash resources of the Company are insufficient to meet its current working capital needs and on going business plan. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. During the three months ended March 31, 2010, the Company raised additional working capital of $390,000 from private debt and equity financing.  Since inception through March 31, 2010, the Company has raised an aggregate amount of approximately $5.4 million in private debt and equity financing. The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in (i) Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder or (ii) Rule 501 of Regulation S.





Since the cash resources of the Company as of March 31, 2010 are insufficient to meet its current working capital needs and on going business plan, the Company is seeking to raise additional funds either through additional debt or equity financings


7


during 2010.  During the second quarter of 2010, the Company raised approximately $1.1 million in private debt and equity financing (see Note 10 for further discussion).





Also, the Company expects to improve its cash flow from operating activities through continued cost reductions and its continued implementation of strategic marketing partnerships.





3.           PROPERTY AND EQUIPMENT





Property and equipment consisted of the following:





March 31,2010


December 31, 2009Computer equipment and software
$
53,100

$
53,100Furniture and fixtures

37,500


37,500Less -accumulated depreciation and amortization

(68,000)


(64,300)$
22,600

$
26,300





4.           WEBSITE DEVELOPMENT COSTS





Website development costs consisted of the following:


March 31,2010


December 31, 2009Website development costs
$
364,500

$
323,800Less -accumulated amortization

(215,900)


(196,900)$
148,600

$
126,900





5.           DUE TO STOCKHOLDER AND RELATED PARTY TRANSACTIONS





As of March 31, 2010 and December 31, 2009, $36,600 was due to an officer of the Company, who is also a principal stockholder. The amount due to the officer does not bear interest, is not collateralized and has no formal repayment terms.  During the three months ended March 31, 2010 and 2009, no amounts of the net amount owed was paid to the officer, respectively.





As of March 31, 2010 and December 31, 2009, $45,000 was due to an officer of the Company pursuant to the 2007 Convertible Promissory Note agreements, as further discussed in Note 6 below.





During the three months ended March 31, 2010, the Company granted options to purchase up to 8,700,000 shares of common stock granted to the Company’s employees, which includes options to purchase up to 3,500,000 and 3,000,000 granted to the Company’s chief executive officer and chief financial officer, respectively.  The options granted can be exercised at $0.05 per share and vest in accordance with the Company's 2007 Stock Option Plan.





6.           CONVERTIBLE PROMISSORY NOTES





The 2007 Convertible Promissory Notes





During October 2007, the Company commenced a private offering of its securities for the purpose of raising capital whereby it entered into Convertible Notes with nine accredited investors, one of which is the chief financial officer of the Company. Pursuant to the terms of the offering, the investors purchased an aggregate of $767,000 of 8% senior secured convertible notes and were issued warrants to purchase shares of the Company’s common stock (the “2007 Convertible Notes”). The secured convertible notes in the event of default become secured by the Company’s assets and are due two years from the date of each note, but are subordinate to the AOI Fund Convertible Promissory Notes discussed below.  Initially, each secured convertible note holder had the right, at any time, to convert their note into shares of the Company’s common stock at a conversion ratio of one share of common stock for each $0.40 of principal amount of their note for a maximum potential aggregate of 1,917,500 shares of common stock; in addition, the investors were issued warrants to purchase an aggregate of


8


1,917,500 shares of common stock at an exercise price of $0.50 per share that expire five years from the date of  issuance.  Half of these warrants are exercisable immediately and the remaining half are exercisable upon the conversion of the related notes payable. Initially, for a period of twelve months after the effective date, if the Company sells common stock at a price per share below the conversion price of $0.40 per share, the conversion price will adjust accordingly downward to the new lower sales price per share.  Since then, the Company has sold securities at a lower price of $0.123 per share, as a result the Company was obligated to lower the conversion price from $0.40 per share to the same $0.123 per share price which gives each investor the right, at any time, to convert their note into shares of the Company’s common stock at a conversion ratio of one share of common stock for each $0.123 of principal amount of their note for a maximum potential aggregate of 6,235,772 shares of common stock.  In connection with this financing, a form of the convertible notes agreement was filed with the Securities and Exchange Commission on Form 8-K, dated October 4, 2007. The offer and sale of the securities underlying the convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.





One of the five investors who entered into the 2007 Convertible Notes is the chief financial officer of the Company.  The Company owed the chief financial officer $92,300 at the time of the offering, of which, the chief financial officer exchanged $45,000 of the $92,300 due for $45,000 of convertible notes. As a result, $45,000 of the $767,000 notes issued were purchased by the chief financial officer and, in 2007, the Company received $722,000 net cash proceeds from the $767,000 the convertible note financing.





Initially, the Company determined that the embedded conversion option in the 2007 Convertible Notes qualifies for equity classification under EITF 00-19, qualifies for the scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the host contract. The Company also determined that the warrants issued to the note holders qualify for equity classification under the provisions of SFAS 133 and EITF 00-19. In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the net proceeds received in this transaction to each of the convertible notes and common stock purchase warrants based on their relative estimated fair values. As a result, the Company allocated $480,800 to the convertible notes and $143,200 to the vested portion of the common stock purchase warrants, which was recorded in additional paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the convertible notes contained a beneficial conversion feature based on the effective conversion price after allocating proceeds of the convertible notes to the vested portion of the common stock purchase warrants. The amounts recorded for the common stock purchase warrants are amortized as interest expense over the term of the convertible notes.  If there are conversions of the convertible notes, then the Company will recognize the relative fair value of the warrants that vest upon such conversion in the amount of $143,200.





Upon issuance in 2007, the beneficial conversion feature qualified, under EITF 00-19, for classification as equity and $480,800 was recorded as additional paid in capital and discount on debt to be amortized over the term of 2007 Convertible Notes. Since the intrinsic value of the conversion feature was greater than the proceeds allocated to the convertible notes, the amount of the discount assigned to the conversion feature is limited to the amount of the proceeds allocated to the convertible notes.  On January 1, 2009, the conversion feature, under EITF 07-05, was reclassified from equity to liabilities and marked to market. The value of the conversion feature decreased by $883,100 from the date of issuance to January 1, 2009.  The cumulative effect at January 1, 2009 was a reduction to additional paid in capital of $480,800 to reclassify the conversion feature embedded in the 2007 Convertible Notes from equity to a liability, a net decrease in accumulated deficit of $356,100 to reflect the recording of the initial value and the change in the value of the conversion feature between its issuance date and January 1, 2009, and the recognition of a conversion feature liability of $124,700. Under EITF 07-05 and SFAS 133, the conversion feature will be carried at fair value and adjusted quarterly.  In October 2009, the adjustment provision (further discussed below) related to the conversion price expired and as a result there is no longer a beneficial conversion feature liability, therefore, the Company reclassified the beneficial conversion feature liability in the amount of $383,500 from liability to equity as of December 31, 2009.




Interest charges associated with the convertible notes, including amortization of the discounts associated with the conversion feature and the vested warrants, totaled $15,300 and $93,000 for the three months ended March 31, 2010 and 2009, respectively.





In September 2008, the Company entered into waiver agreements with the holders of the 2007 Convertible Notes whereby the holders waived once the provision to adjust the conversion price of $0.123 per share downward the new lower sales price of a financing made by the Company in September 2008.  As consideration, the Company provided the holders with warrants to purchase an aggregate of 500,000 shares of the Company's common stock at an exercise price of $0.07 per share and


9


provided a new provision for a period of twelve months after the effective date, that if the Company sells common stock for an aggregate amount in excess of $750,000 in such offering, the conversion price will adjust accordingly downward to the higher of $0.03 per share or the new lower sales price per share.In October 2009, this adjustment provision expired and as a result there is no longer a beneficial conversion feature liability, therefore, the Company reclassified the beneficial conversion feature liability in the amount of $383,500 from liability to equity as of December 31, 2009.





In May 2008, the Company entered into subordination agreements with the holders of the 2007 Convertible Notes whereby the holders agreed that their senior security interest shall be subordinate to the AOI Fund Convertible Promissory Notes (see below).  As consideration, the Company provided the holders with warrants to purchase an aggregate of 500,000 shares of the Company's common stock at an exercise price of $0.18 per share.





In March 2009, the Company entered into interest amendment agreements with the holders of the 2007 Convertible Notes whereby the holders agreed that with respect to the option of receiving payment of interest in the Company’s common stock  to include a minimum valuation of $0.01 per share whereas according to the amendment, the valuation of the interest shares paid shall be calculated at the higher of either $0.01 per share or 50% of the average closing price. As consideration, the Company provided the holders with warrants to purchase an aggregate of 2,000,000 shares of the Company's common stock at an exercise price of $0.01 per share.





On November 13, 2009, the 2007 Convertible Note holders extended the term of the notes from two years to three years, thereby extending the maturity date an additional year.  As consideration of the extension, the Company agreed to lower the conversion price from $0.123 per share to $0.08 per share.  As a result, the extension agreement gives each investor the right, at any time, to convert their note into shares of the Company’s common stock at a conversion ratio of one share of common stock for each $0.08 of principal amount of their note for a maximum potential aggregate of 9,587,500 shares of common stock.  This modification did not qualify for extinguishment accounting, and as a result, no adjustment was made to the carrying value of the notes.





The 2008 Convertible Promissory Notes





In May 2008, four individual investors purchased an aggregate of $100,000 of 12% secured convertible notes and were issued warrants to purchase shares of the Company’s common stock (the “2008 Convertible Notes”). Each convertible note holder has the right, at any time, to convert their note into shares of the Company’s common stock at a conversion ratio of one share of common stock for each $0.14 of principal amount of their note for a maximum potential aggregate of 714,285 shares of common stock; in addition, the investors were issued warrants to purchase an aggregate of 357,143 shares of common stock at an exercise price of $0.14 per share that expire five years from the date of issuance.  Additionally, the convertible notes are secured by approximately 1.4 million restricted shares of the Company’s common stock.  In December 2008, the maturity date of these notes was extended to December 2009 and remain past due as of the date of this report.  The offer and sale of the securities underlying the convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.





The Company determined that the embedded conversion option in the 2008 Convertible Notes qualifies for equity classification under EITF 00-19, qualifies for the scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the host contract. The Company also determined that the warrants issued to the note holders qualify for equity classification under the provisions of SFAS 133 and EITF 00-19. In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the net proceeds received in this transaction to each of the convertible notes and common stock purchase warrants based on their relative estimated fair values. As a result, the Company allocated $53,700 to the convertible notes and $46,300 to the vested portion of the common stock purchase warrants, which was recorded in additional paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the convertible notes contained a beneficial conversion feature based on the effective conversion price after allocating proceeds of the convertible notes to the vested portion of the common stock purchase warrants. The amounts recorded for the common stock purchase warrants and beneficial conversion feature are amortized as interest expense over the term of the convertible notes.





Interest charges associated with the convertible notes, including amortization of the discounts associated with the beneficial conversion feature and the vested warrants, totaled $3,000 and $3,000 for the three months ended March 31, 2010, and 2009, respectively.


10


The AOI Fund Convertible Promissory Notes





In each of the months of May 2008, June 2008 and July 2008, an investor purchased $242,400 of 15% secured convertible notes for an aggregate amount of $727,300 for all three notes and was issued warrants to purchase shares of our common stock (the “AOI Convertible Notes”). Initially, the convertible note holder had the right, at any time, to convert their note into shares of our common stock at a conversion ratio of one share of common stock for each $0.25 of principal amount of their note for a maximum potential aggregate amount of 2,909,088 shares of common stock; in addition, the investors were issued “Series A Warrants" to purchase an aggregate amount of 290,907 shares of common stock at an exercise price of $0.25 per share that expire five years from the date of issuance and “Series B Warrants” to purchase an aggregate amount of 290,907 shares of common stock at an exercise price of $0.30 per share that expire five years from the date of issuance.  Additionally, the convertible notes are secured by a security interest in all assets of the Company. On October 23, 2009, the Company amended the convertible notes and entered in to an Extension Option and Securities Amendment, which extends the due dates of the AOI Convertible Notes with an aggregate original face amount of $727,300 by successive one month periods up to December 31, 2010 at the Company’s option.  In consideration for the option to extend the maturity date of the convertible notes, the Company agreed to issue 500,000 shares of its restricted common stock to the investor, lower the conversion price of the convertible notes to $0.10 per share, which means the convertible notes are currently convertible into 7,272,730 shares of common stock in the aggregate, and, for every month the maturity date of the convertible notes have been extended, the Company agrees to increase the principal amount of each of convertible notes by one and one-half percent of the then current principal amount.  The warrant exercise price for Series A and Series B warrants were also amended to $0.10 per share.  The Extension Option and Securities Amendment was filed with the Securities and Exchange Commission on Form 8-K, dated October 23, 2009. The Series A Warrants also have a put option in the amount in aggregate of $180,000 which can only be exercised after the two year anniversary date of the convertible notes.  The Series B Warrants have no put option.  The convertible notes included an original issue discount in aggregate of $127,200.   The offer and sale of the securities underlying these convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.





The Company determined that the embedded conversion option in the AOI Convertible Notes qualifies for equity classification under EITF 00-19, qualifies for the scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the host contract. The Company also determined that the warrants issued to the note holders qualify for equity classification under the provisions of SFAS 133 and EITF 00-19. In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the net proceeds received in this transaction to each of the convertible notes and common stock purchase warrants based on their relative estimated fair values. As a result, the Company allocated an aggregate amount of $553,600 to the convertible notes and an aggregate amount of $46,300 to the common stock purchase warrants, which was recorded in additional paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the convertible notes did not contain a beneficial conversion feature based on the effective conversion price after allocating proceeds of the convertible notes to the common stock purchase warrants. The amounts recorded for the common stock purchase warrants are amortized as interest expense over the term of the convertible notes.





In September 2008, the same investor purchased for a fourth investment, $180,000 of the AOI Convertible Notes (15% secured convertible notes) and were issued warrants to purchase shares of our common stock. The convertible note holder has the right, at any time, to convert their note into shares of our common stock at a conversion ratio of one share of common stock for each $0.123 of principal amount of their note for a maximum potential aggregate of 1,463,414 shares of common stock; in addition, the investors were issued “Series C Warrants" to purchase 750,000 shares of common stock at an exercise price of $0.123 per share that expire five years from the date of issuance and “Series D Warrants” to purchase 750,000 shares of common stock at an exercise price of $.15 per share that expire five years from the date of issuance.  The Series D Warrants also have a put option in the amount of $45,000 which can only be exercised after the one year anniversary date of the convertible note.  The Series C Warrants have no put option.  The convertible note included an original issue discount of $30,000 and original maturity date of September 26, 2008.  Additionally, the convertible notes are secured by a security interest in all assets of the Company.  On October 16, 2009, we entered in to an Extension and Modification Agreement, which extends the due date of the AOI Convertible Note with an aggregate original face amount of $180,000 and an original maturity date of September 26, 2009  to a new amended due date of December 26, 2009.  In consideration for such extension, the Company agreed to issue 500,000 shares of its restricted common stock to the investor and increase the face of the note to $187,500.  The warrant exercise price for Series C and Series D warrants were also amended to $0.10 per share.  The Extension and Modification Agreement was filed with the Securities and Exchange Commission on Form 8-K, dated October 23, 2009. The offer and sale of the securities underlying these convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.


11





The Company determined that the embedded conversion option in the AOI Convertible Notes qualifies for equity classification under EITF 00-19, qualifies for the scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the host contract. The Company also determined that the warrants issued to the note holders qualify for equity classification under the provisions of SFAS 133 and EITF 00-19. In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the net proceeds received in this transaction to each of the convertible notes and common stock purchase warrants based on their relative estimated fair values. As a result, the Company allocated $105,000 to the convertible notes and $45,000 to the common stock purchase warrants, which was recorded in additional paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the convertible notes did not contain a beneficial conversion feature based on the effective conversion price after allocating proceeds of the convertible notes to the common stock purchase warrants. The amounts recorded for the common stock purchase warrants are amortized as interest expense over the term of the convertible notes.





In connection with the extension agreements for the AOI Convertible Notes entered into in October 2009 (discussed above), the Company determined that the modifications qualify for extinguishment accounting under Accounting Standards Codification 470-50.  As such, the Company recognized a gain on debt modification of $300,300 that resulted from the difference between the carrying value of the notes before the modification and estimated fair value of the modified notes.  The Company further determined that the embedded conversion option in the debt extension agreement qualifies for equity classification under EITF 00-19, qualifies for the scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the host contract. The Company also determined that the warrants issued to the note holders qualify for equity classification under the provisions of SFAS 133 and EITF 00-19. In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the new debt extension amounts in this transaction to each of the convertible notes and common stock purchase warrants based on their relative estimated fair values. As a result, the Company allocated an aggregate amount of $544,400 to the convertible notes, an aggregate amount of $115,900 to the common stock purchase warrants, $64,900 to the beneficial conversion feature and $60,000 to the 1,000,000 common shares issued, which were recorded in additional paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the convertible notes contained a beneficial conversion feature based on the effective conversion price after allocating the debt extension amounts of the convertible notes to the vested portion of the common stock purchase warrants and common stock issued.  The amounts recorded for the common stock purchase warrants, beneficial conversion feature and common stock issued are amortized as interest expense over the term of the new extended convertible notes.  Interest charges associated with all four AOI Fund Convertible Promissory Notes, including amortization of the discounts associated with the original issue discount, beneficial conversion, put option and the vested warrants, totaled $96,200 and $75,700 for year three months ended March 31, 2010 and 2009, respectively.





The 2010 Promissory Notes





During the first quarter of 2010, the Company received cash proceeds of $390,000 through short term loans from eight investors.  In exchange for these funds, the Company issued the investors an aggregate of 1,820,001 shares of common stock and also issued them promissory notes with an aggregate principal balance of $487,500 (the “2010 Promissory Notes”).  As a result, the Company recorded debt discount of $173,800 related to the original issue discount and common stock issued with the promissory notes.  The debt discount is amortized over for the same term of the notes.  The notes accrue interest at the rate of 8% per annum and are payable at maturity six months after issuance.  The Company plans to satisfy its obligation under these notes with the proceeds from additional equity offering discussed further below in Note 7.  Interest charges associated with the 2010 Promissory Notes including amortization of the discounts associated with the original issue discount and common stock issued totaled $57,600 and none for the three months ended March 31, 2010 and 2009, respectively. The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.











Outstanding Convertible and Other Promissory Notes are as follows:







March 31,2010


December 31,2009The 2007 Convertible Promissory Notes
$
767,000

$
767,000The 2008 Convertible Promissory Notes

123,000


120,000The AOI Fund Promissory Notes

727,800


637,100The 2010 Promissory Notes

492,700


-The AOI Fund Promissory Notes Put Option

205,600


215,000Total borrowings

2,316,100


1,739,100Debt discount

(248,200
)

(146,900
)Total borrowings less debt discount

2,067,900


1,592,200Less current portion

2,067,900


1,592,200Noncurrent portion
$
-

$
-











7.           STOCKHOLDERS’ DEFICIT





Authorized Capital Stock





The Company is authorized to issue 480,000,000 shares of common stock, par value $0.001 per share, and 20,000,000 shares of preferred stock, par value $.001 per share.





Common Stock





The common stock holders are entitled to one vote per share held and have the sole right and power to vote on all matters on which a vote of stockholders is taken. Voting rights are non-cumulative. Common stockholders are entitled to receive dividends when, as, and if declared by the Board of Directors, out of funds legally available therefore and to share pro rata in any distribution to stockholders. Upon liquidation, dissolution, or the winding up of the Company, common stock holders are entitled to receive the net assets of the Company in proportion to the respective number of shares held by them after payment of liabilities which may be outstanding. Common stock holders do not have any preemptive right to subscribe for or purchase any shares of any class of stock of the Company. The outstanding shares of common stock will not be subject to further call or redemption and are fully paid and non-assessable. To the extent that additional stock is issued, the relative interest of existing stockholders will likely be diluted.





Shares Issued





During the first quarter of 2010, the Company entered into an investment banking agreement whereby the Company agreed to raise capital in a private placement offering.  The Company offered a minimum of 1,000,000 Units and a maximum of 18,000,000 Units at a price of $0.10 per Unit to an unlimited number of investors who qualify as “accredited investors,” as such term is defined under Regulation D adopted under the Act (“2010 Stock Offering”).   Each “Unit” consists of four shares of common stock, $0.001 par value, plus one five-year A Warrant to purchase one share of common stock at an exercise price of $0.05 per share and one five-year B Warrant to purchase one share of common stock at an exercise price of $0.10 per share.  The A Warrants are callable by the Company at any time beginning on the first day after the twenty trading day volume weighted average price (“VWAP”) of one share of our common stock exceeds $0.10 and the B Warrants are callable by us at any time beginning on the first day after the twenty trading VWAP of one share of common stock exceeds $0.20.  A minimum investment of 250,000 Units for $25,000 is required, subject to the Company's right to accept a smaller investment in it's sole discretion. The Company may sell up to an additional 2,000,000 Units pursuant to overallotments.  As of March 31, 2010, the Company has not received any proceeds from this offering.  Subsequent to March 31, 2010, the Company sold $1,140,500 to seven investors who purchased 11,405,250 Units of the 2010 Stock Offering, whereby the Company issued 45,821,000 shares of common stock, 11,455,250 A Warrants and 11,455,250 B Warrants





During the second quarter of 2010, the Company amended the terms of the 2010 Stock Offering and its related investment banking agreement whereby the maximum offering amount of the 2010 Stock Offering was raised from 18,000,000 Units to 25,000,000 Units, subject to an over-allotment option of 2,000,000 Units.  Such amendment also extended the termination date to the earlier of the date on which the maximum offering amount is sold or July 15, 2010.





During the first quarter, the Company issued 1,820,001 restricted shares related to the 2010 Promissory Notes (see Note 6 above for further discussion).


12


During the three months ended March 31, 2010, the Company issued 730,476 shares of common stock for $15,340 of interest due on the 2007 Convertible Promissory Notes.   During the three months ended March 31, 2010, the Company issued 278,500 shares of common stock for professional services and fees of $11,100.  The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D adopted thereunder.





Options





Summary of the 2007 Option Plan





On January 30, 2007, the board of directors approved and a majority of the Company’s stockholders ratified by consent the Company’s 2007 incentive and nonstatutory stock option plan (“Plan”). The Plan is intended to further the growth and financial success of the Company by providing additional incentives to selected employees, directors, and consultants to the Company and its subsidiary corporations, as those terms are defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (“Code”) (such subsidiary corporations hereinafter collectively referred to as “Affiliates”) so that such employees and consultants may acquire or increase their proprietary interest in the Company. Stock options granted under the Plan (hereinafter the “Options”) may be either “Incentive Stock Options,” as defined in Section 422A of the Code and any regulations promulgated under said Section, or “Nonstatutory Options” at the discretion of the Board of Directors of the Company (the “Board”) and as reflected in the respective written stock option agreements granted pursuant hereto.





The Plan reserves thirty five million (35,000,000) shares of the Company's common stock for issuance.





Stock options granted under those certain stock option agreements were granted at prices no less than the estimated fair value of the shares on the date of grant as determined by the board of directors, provided, however, that (i) the exercise price of an incentive stock option (“ISO”) shall not be less than 100% of the estimated fair value of the shares on the date of grant, respectively; and (ii) the exercise price of an ISO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively. ISO and nonstatutory stock options (“NSO”) stock options generally vest every nine months, over a three year period.





The Company recognized stock-based compensation expense of $353,000 and $142,500 for the three months ended March 31, 2010 and 2009, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model. Until the quarterly period ended March 31, 2008, the expected volatility was based on industry comparables as the Company recently became a publicly held company and trading volumes have been low.  The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted is based on the remaining expected life of the option. The following weighted average assumptions were used for the options granted during the three months ended March 31, 2010 and 2009:




Three MonthsEndedMarch 31,2010

2009Expected volatility


430.0%


192.0%Risk-free rate


2.4%


2.8%Expected Term


5 years


4.5 years





A summary of stock option activity for the three months ended March 31, 2010, is as follows:





Number of

Shares

Weighted-

Average

Exercise

Price

Weighted-

Average

Remaining

Contractual

Term

Aggregate

Intrinsic

Value


Outstanding as of December 31, 2009


33,298,780

$
.08Granted


8,700,000

$
.05Cancelled


(8,025,000)

$
.04Outstanding as of March 31, 2010


33,973,780

$
.08


3

$
-





A summary of the status of the non-vested options for the three months ended March 31, 2010 is presented below:





Number of

Shares

Weighted-

Average

Grant Date

Fair ValueNon-vested as of December 31, 2009


15,495,597

$
.04Granted


8,700,000

$
.05Vested


(1,191,841)

$
.44Cancelled


(5,417,500)

$
.28Non-vested as of March 31, 2010


17,586,256

$
.09





Information regarding the weighted-average remaining contractual life and weighted-average exercise price of options outstanding and options exercisable at March 31, 2010, for selected price ranges is as follows:





Options Outstanding

Options ExercisableExercise

Prices


Number

Outstanding


Weighted

Average

Remaining

Contractual

Life(in Years)


Weighted Average

Exercise

Price

per Share


Number

Exercisable


Weighted Average

Exercise

Price

per Share$ .04 - .18


31,078,780


3.2


$   .06


14,273,774


$   .08$ .18 - .27


2,895,000


3.5


$   .27


2,113,750


$   .2833,973,780








16,387,524





Warrants





In conjunction with issuance of the 2007 Convertible Promissory Notes, the 2008 Convertible Promissory Notes, the AOI Fund Convertible Promissory Notes (see Note 6 for further discussion of these issuances) and various consulting arrangements entered into since inception, as of March 31, 2010, the Company has issued warrants to purchase an aggregate of 16,507,896 shares of common stock of the Company at exercise prices ranging from of $0.01 to $0.50 per share that expire five years from the date of issuance.





A summary of warrant activity for the three months ended March 31, 2010, is as follows:





Number of

Shares

Weighted-

Average

Exercise

Price

Weighted-

Average

Remaining

Contractual

Term

Aggregate

Intrinsic

ValueOutstanding as of December 31, 2009


12,507,896

$
.20


2.9

$
-Granted


4,000,000


.07


2.9

$
-


Cancelled


-Outstanding as of March 31, 2010


16,507,896

$
.15


3.8

$
-





A summary of the status of the non-vested warrants for the three months ended March 31, 2010 is presented below:





Number of

Shares

Weighted-

Average

Grant Date

Fair ValueNon-vested as of December 31, 2009


4,983,750

$
.22Granted


4,000,000

$
.04Vested


(4,050,000)

$
.04Cancelled


-

$
-Non-vested as of March 31, 2010


4,933,750

$
.23








8.           COMMITMENTS





During February 2009, the Company entered into a new two year lease for its new principal offices which the monthly rent is $3,500.  Rent expense incurred under this lease during the three months ended March 31, 2010 and 2009 was $10,500 and $3,300, respectively.





Total payments of $31,500 and $7,000 are due through the years ended December 31, 2010 and 2011, respectively.





9.           RECENT ACCOUNTING PRONOUNCEMENTS





The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification 105, Generally Accepted Accounting Principles (“ASC 105”). ASC 105 is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. ASC 105 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. ASC 105 is effective for financial statements issued for reporting periods ending after September 15, 2009. Most references to authoritative accounting literature in the Company’s financial statements issued for reporting periods ending after September 15, 2009 are referenced in accordance with ASC 105.





In September 2009, the FASB issued authoritative guidance (ASU 2009-13) regarding multiple-deliverable revenue arrangements that addresses how to separate deliverables and how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. This guidance is effective for annual periods beginning after June 15, 2010, but may be early adopted as of the beginning of an annual period. The Company is currently evaluating the effect that this guidance will have on its consolidated financial position and results of operations.





From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed in these financial statements and notes or in the Annual Report on Form 10-K for the year ended December 31, 2009, management believes the impact of any other recently issued standards that are not yet effective are either not applicable at this time or will not have a material impact on the consolidated financial statements upon adoption.







13


10.           SUBSEQUENT EVENTS




For the Company’s 2010 Stock Offering (see Note 7), subsequent to March 31, 2010, the Company sold $1,140,500 to seven investors who purchased 11,405,250 Units of the 2010 Stock Offering, whereby the Company issued 45,821,000 shares of common stock, 11,455,250 A Warrants and 11,455,250 B Warrants.  The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.





During the second quarter of 2010, the Company amended the terms of the 2010 Stock Offering and its related investment banking agreement whereby the maximum offering amount of the 2010 Stock Offering was raised from 18,000,000 Units to 25,000,000 Units, subject to an over-allotment option of 2,000,000 Units.  Such amendment also extended the termination date to the earlier of the date on which the maximum offering amount is sold or July 15, 2010.








14


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations





The statements, other than statements of historical fact, included in this report are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “seek,” or “believe” and similar expressions. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur. Our actual future performance could differ materially from such statements. You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to release publicly any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.





This section should be read in conjunction with our condensed unaudited consolidated financial statements and the related notes thereto as of March 31, 2010 and for the three months ended, which are included elsewhere in this report, with the audited consolidated financial statements and related notes thereto as of December 31, 2009 and for the year then ended, included in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2010 and with other company filings made with the SEC.





Business Overview





We are a SaaS (Software as a Service) and application provider that delivers digital media sharing solutions.  We produce destination websites that allow subscribers and other users to securely share digital media, including photos, calendars, videos, message boards and history. Our proprietary website administration system, Qwik-PostTM, and online video uploading system, Video-PostSMallow PC users to manage these “virtual family rooms” and provides a destination to display photo and video memories, discussions, and history.





We earn revenue primarily from subscriptions generated from monthly subscriptions for website hosting services and secondarily from providing professional software development services. The typical subscription agreement includes the usage of a personalized website and hosting services.  As of March 31, 2010, we have generated 33,033 subscribers, 10,948 recurring subscribers, and 43,066 users. However, to date, our revenues have not been sufficient to cover our operating costs and expenses.  During the three months ended March 31, 2010 and 2009 our revenues were $143,600 and $311,000, respectively.   During the first quarter we continued to focus on reducing our operating expenses while simultaneously maintaining our goal of increasing revenue generating activities and we intend to continue marketing our product more aggressively upon the implementation of business arrangements we’ve recently entered into with marketing partners and the completion of additional debt or equity financing.





Current Conditions





Historically we have incurred significant losses and we continued to incur additional losses during the three months ended March 31, 2010.  Our net loss was $804,500 and $508,500 for three months ended March 31, 2010 and 2009, respectively.  Our cash used in operations was $330,900 and $62,100 for the three months ended March 31, 2010 and 2009, respectively.  As of March 31, 2010, we had a accumulated deficit of approximately $9,918,300. We expect operating losses and negative cash flow to continue for the foreseeable future.  We expect that our losses may decrease as result of generating new revenues driven from the implementation of business arrangements we’ve entered into with our marketing partners, however, there is no assurance that the implementations will produce sufficient revenues to cover our costs and expenses.  Our ability to become profitable depends on our ability to generate new revenue and sustain substantially higher revenue while maintaining reasonable expense levels.  In particular, although we intend to increase significantly our spending on marketing and promotional activities, these efforts may not be effective in growing our brand, increasing our subscriber base or generating new revenues.  If we do not achieve profitability, we may not be able to continue our operations.





Historically, we have relied upon private debt and equity financings as our primary source of cash and we continue to rely on these financings to meet our working capital needs. Since inception through March 31, 2010, the Company has raised an aggregate amount of approximately $5.4 million in private debt and equity financing. We plan to use the proceeds of the most recent offerings for marketing of our product, increasing revenue generating activities and for general working capital purposes.


15


We plan to continue to raise capital by sales of additional private placement equity or debt offerings during 2010, although we have no assurance that such financings will be completed. As of the date of this report, we have raised approximately $1.1 million during the second quarter of 2010.





Commencing in the fourth quarter of 2008, we had launched a strategic marketing partnership with Online Solutions LLC, an affiliate of Kiddie Kandids LLC (“Kiddie Kandids”), to host digital websites for Kiddie Kandids’ customers sold through its retail stores.    We had derived 70% and 52% of our total revenue from this marketing partnership during the three months ended March 31, 2010 and 2009, respectively.  On January 11, 2010, Kiddie Kandids filed for bankruptcy.  While Online Solutions LLC is not a part of the bankruptcy and we continue to provide hosting services and earn revenue from existing customers at the time of the bankruptcy, the prospects for customer growth from this relationship were sidelined.  However, on March 27, 2010, CPI Corp. purchased all of the assets of Kiddie Kandids LLC with a plan to reopen all of its retail locations. Therefore we hope that our resulting customer base from this relationship may reinitiate its prior growth in the future upon the store reopenings.





Subsequent to the Kiddie Kandids’ bankruptcy, we obtained additional information regarding our recurring subscribers and determined that, as of March 31, 2010, we had 10,948 recurring subscribers as opposed to 16,559 as reported in our Annual Report on Form 10-K for the year ended December 31 ,2009.  Also, we determined that, as of December 31, 2010, we had 12,146 recurring subscribers as opposed to 16,559 as previously reported.





Going Concern





We have not established sufficient sources of revenue to cover our operating costs and, as such, we have incurred operating losses since inception. Further, as of March 31, 2010, our cash resources were insufficient to meet our current working capital needs and on-going business plan. These and other factors raise substantial doubt about our ability to continue as a going concern. The report of the independent registered public accounting firm accompanying our financial statements for the year ended December 31, 2009, included in our Form 10-K filed with the SEC on March 31, 2010, contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern because of our operating losses and our need for additional capital.  Such doubt could make it more difficult for us to raise additional capital and may materially and adversely affect the terms of any financing that we may obtain. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of us to continue as a going concern.





Results of Operations





The Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009





Total revenue was $143,600 and $311,000 for the three months ended March 31, 2010 and 2009, respectively, representing a decrease of $167,400. The change was due to a decrease in subscription revenues of $75,500 during the three months ended March 31, 2010 as compared the same period last year and a decrease in professional services of $91,900 during the three months ended March 31, 2010 as compared to the same period last year.





Subscription revenues for the three months ended March 31, 2010 were $131,200 as compared to $206,700 during the same period last year. Subscription revenues decreased $75,500 due to a decrease in our customers to 10,948 recurring subscribers as of March 31, 2010 from 15,171 subscribers as of March 31, 2009. The decrease in subscriptions was due to the bankruptcy in January 2010 of Kiddie Kandids LLC, an affiliate of our marketing partner Online Solutions LLC.  While Online Solutions is not a part of the bankruptcy and we continue to provide hosting services and earn revenue from existing customers at the time of the bankruptcy the prospects for customer growth from this relationship were sidelined.  However, on March 27, 2010, CPI Corp. purchased all the assets of Kiddie Kandids LLC with a plan to reopen all of its retail locations. Therefore we hope our resulting customer base may reinitiate its growth in the future upon the store reopenings.  Furthermore, we continue to believe that digital media sharing products and services are relatively new, and as a result, it is difficult to determine our current market share or predict our future market share.  We believe that the market for digital media sharing products and services can grow and that related market opportunities are also expected to grow. Our revenue, profitability and future growth depend not only on the anticipated market growth, but also our ability to execute our business plan and ultimate customer acceptance of our products and services and the success or failure of our competitors.  As a result, we expect the trend of our revenues to be positive, however, provide no assurance that such will occur.


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Professional services revenues for the three months ended March 31, 2010 was $12,400 as compared to $104,300 during the same period last year. The decrease was due to us providing custom website design services under software development contracts entered into during the first quarter of 2010.  Our contracts during the same period last year were different in scope and larger in total contract amount.  From time to time, we may enter into professional services agreements resulting from our strategic partnership marketing activities and as a result, revenues from professional services may recur in future periods.





Total cost of revenue was $70,300 and $141,500 for the three months ended March 31, 2010 and 2009, respectively, representing a decrease of $71,200. The decrease was due to a decrease in subscription cost of revenues of $30,800 and decreased cost of professional services revenue of $40,400 during the three months ended March 31, 2010, respectively.





The decrease in cost of subscription revenues for the three months ended March 31, 2010 as compared to the same period last year is due to primarily having a decrease in subscription sales. Cost of subscription revenues for the three months ended March 31, 2010 were mostly derived from our marketing partnerships, hosting and setup services incurred from website services provided to our subscribers.





The decrease in cost of professional services revenues for the three months ended March 31, 2010 as compared to the same period last year is due to having provided fewer professional services, primarily labor related costs, during the three months ended March 31, 2010 whereas there were more services provided during the same period last year.





Research and development expense was $21,300 and $54,400 for the three months ended March 31, 2010 and 2009, respectively, representing a decrease of $33,100. The decrease was primarily due to lower amounts of research and development activities including lowering development personnel and consultants which was part of our efforts of continuing to manage controllable costs.





Sales and marketing expense was $1,400 and $15,900 for the three months ended March 31, 2010 and 2009, respectively, representing a decrease of $14,500. The decrease was primarily due to slightly lower amounts of sales and marketing activities and promotions during the three months ended March 31, 2010.





General and administrative expense was $640,400 and $389,500 for the three months ended March 31, 2010 and 2009, respectively, representing an increase of $250,900. The change was primarily due to an increase of $233,100 in non-cash warrant and option expense, an increase of $101,400 in professional fees related to legal and other professional service fees, partially offset by a decrease in office occupancy expense of $23,700 and decrease in employee benefits of $8,500.





Interest expense was $214,700 and $218,200 for the three months ended March 31, 2010 and 2009, respectively, representing a decrease of $3,500.  The decrease was attributable to interest and debt discount amortization expense of $214,700 during the three months ended March 31, 2010, which was primarily related to our promissory note borrowings of approximately $2 million outstanding as of March 31, 2010





Liquidity and Capital Resources





Cash Flows





At March 31, 2010, our cash and cash equivalents were $18,500, an increase of $18,500 from none as of December 31, 2009.  The change in our cash was due to receiving $390,000 cash proceeds related to our private placement of our 2010 Promissory Notes (further discussed below) which was offset by cash used in operating activities of $330,900 and cash used in investing activities of $40,600.





Historically, we have incurred losses and have had capital and stockholders’ deficits and limited cash to fund our operations.  During the three months ended March 31, 2010, we have been able to rely upon cash generated from our debt financing along with some cash generated from our subscription and professional services revenues. We expect this trend to continue until we can solely rely upon cash generated from our revenues, however, until such time, we continue to rely upon cash generated from debt and equity financing activities.  As of March 31, 2010, we remain in a negative working capital position.  Moreover, principal portions of certain convertible promissory notes in the aggregate amount of $287,000 have already matured and were past due as of March 31, 2010 with all of the remaining balances due by December 31, 2010.   If those maturities are not satisfied through conversions of their principal balances into common stock, or if we are unable to successfully renegotiate the maturity dates of those notes, then we will need to rely upon additional debt or equity financing to satisfy those upcoming maturities.  As a result, we plan to continue to seek out and raise capital through additional


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private placement equity or debt offerings during 2010, although we have no assurance that such financings will be completed.





Additionally, we cannot be certain that such capital will be available to us or whether such capital will be available on terms that are acceptable to us.  Such financing likely would be dilutive to existing stockholders and could result in significant financial and operating covenants that would negatively impact our business.  If we are unable to complete additional financings or to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.





The 2010 Promissory Notes





During the first quarter of 2010, we received cash proceeds of $390,000 through short term loans from eight investors.  In exchange for these funds, we issued the investors an aggregate of 1,820,001 shares of our common stock and also issued them promissory notes with an aggregate principal balance of $487,500 (see Note 6 for further discussion relating on the 2010 Promissory Notes).  The notes accrue interest at the rate of 8% per annum and are payable at maturity six months after issuance.  We plan to satisfy our obligation under these notes with the proceeds from additional equity offering discussed further below. The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.





2010 Stock Offering





During the first quarter of 2010, the Company entered into an investment banking agreement whereby the Company agreed to raise capital in a private placement offering.  The Company offered a minimum of 1,000,000 Units and a maximum of 18,000,000 Units at a price of $0.10 per Unit to an unlimited number of investors who qualify as “accredited investors,” as such term is defined under Regulation D adopted under the Act (“2010 Stock Offering”).  Each “Unit” consists of four shares of common stock, $0.001 par value, plus one five-year A Warrant to purchase one share of common stock at an exercise price of $0.05 per share and one five-year B Warrant to purchase one share of common stock at an exercise price of $0.10 per share.  The A Warrants are callable by us at any time beginning on the first day after the twenty trading day volume weighted average price (“VWAP”) of one share of our common stock exceeds $0.10 and the B Warrants are callable by us at any time beginning on the first day after the twenty trading VWAP of one share of our common stock exceeds $0.20.  A minimum investment of 250,000 Units for $25,000 is required, subject to our right to accept a smaller investment in our sole discretion. We may sell up to an additional 2,000,000 Units pursuant to overallotments.





As of March 31, 2010, we had not received any proceeds from the 2010 Stock Offering.  However, subsequent to March 31, 2010, we sold $1,140,500 to seven investors who purchased 11,405,250 Units of the 2010 Stock Offering, whereby the Company issued 45,821,000 shares of common stock, 11,455,250 A Warrants and 11,455,250 B Warrants. The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.





During the second quarter of 2010, the Company amended the terms of the 2010 Stock Offering and its related investment banking agreement whereby the maximum offering amount of 2010 Stock Offering was raised from 18,000,000 Units to 25,000,000 Units, subject to an over-allotment option of 2,000,000 Units.  Such amendment also extended the termination date to the earlier of the date on which the maximum offering amount is sold or July 15, 2010.





During the second quarter of 2010, we had made principal payments towards our promissory notes in the amount of approximately $408,000 from the proceeds raised in the above equity offering including an exchange of a promissory note in the amount of $95,500 as part of the equity raise.





Off-Balance Sheet Arrangements





As of March 31, 2010, we had no off-balance sheet arrangements.








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Related Party Transactions





As of March 31, 2010 and December 31, 2009, $36,600 was due to an officer of the Company, who is also a principal stockholder. The amount due to the officer does not bear interest, is not collateralized and has no formal repayment terms.  During the three months ended March 31, 2010 and 2009, no amounts of the net amount owed was paid to the officer.





As of March 31, 2010 and December 31, 2009, $45,000 was due to an officer of the Company pursuant to the 2007 Convertible Promissory Note agreements (see Note 6 to the financial statements for further discussion).





During the three months ended March 31, 2010, the Company granted options to purchase up to 8,700,000 shares of common stock granted to the Company’s employees, which includes options to purchase up to 3,500,000 and 3,000,000 granted to the Company’s chief executive officer and chief financial officer, respectively.  The options granted can be exercised at $0.05 per share.





Critical Accounting Policies and Estimates





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





Website and Software Development Costs—Under Emerging Issues Taskforce Statement 00-2, Accounting for Website Development Costs (“EITF 00-2”), costs and expenses incurred during the planning and operating stages of the Company’s website are expensed as incurred. Under EITF 00-2, costs incurred in the website application and infrastructure development stages are capitalized by the Company and amortized to expense over the website’s estimated useful life or period of benefit.





The Company also applies Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed to costs incurred internally in creating its software products.  Under SFAS No. 86, costs are charged to research and development expense until technological feasibility has been established for the related product.  Technical feasibility is deemed to have been established upon completion of a detail program design or completion of a working model.  Subsequent to technological feasibility having been established, software production costs shall be capitalized and reported at the lower of amortized cost or net realizable value.





Revenue Recognition— Our subscription revenue is generated from monthly subscriptions for website hosting services. The typical subscription agreement includes the usage of a personalized website and hosting services. The individual deliverables are not independent of each other and are not sold or priced on a standalone basis. Costs to complete the website and ready it for the end customer are minimal and are expensed to cost of revenue as incurred. Upon the completion of a customer’s signup and initial hosting of the website, the subscription is offered free of charge for a two week trial period during which the customer can cancel at anytime. In accordance with Staff Accounting Bulletin (SAB) No. 104, after the two week trial period has ended, revenue is recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable. These criteria are met monthly as our service is provided on a month-to-month basis and collections are generally made in advance of the services. There is no provision for refunds as March 31, 2010, as the Company’s historical refund experience has been minimal.





Customers signup and agree to purchase the website service on a monthly or annual basis, at the customer’s option. The monthly customers pay monthly in advance of the services, and as the services are performed, the Company recognizes subscription revenue on a daily basis.





For annual customers, upon payment of a full year’s subscription service, the subscription revenue is recorded as deferred revenue in the accompanying balance sheet. As services are performed, the Company recognizes subscription revenue ratably on a daily basis.





During the three months ended March 31, 2010, the Company also distributed its website service through a marketing partnership and shared a portion of revenue generated with the marketing partner. In accordance with Emerging Issue Task Force No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, revenue is reported gross of the payment received from its marketing partner because the Company acts as the primary obligor and is responsible for the fulfillment of services.


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Professional services revenue is generated from custom website design services. Our professional services revenue from contracts for custom website design is recorded using a proportional performance model based on labor hours incurred. The extent of progress toward completion is measured by the labor hours incurred as a percentage of total estimated labor hours to complete. Labor hours are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input to the provision of our professional services.





Stock-Based Compensation—Accounting for stock options issued to employees follows the provisions of SFAS No. 123R, Share-Based Payment.  This statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. We use the Black-Scholes option pricing model to measure the fair value of options granted to employees. This model requires significant estimates related to the award’s expected life and future stock price volatility.





Derivatives - We may issue notes payable to investors that contain rights to covert the note payable into shares of our common stock.  We may also issue warrants to investors and to others for services rendered.  When we issue such instruments, we are required to determine whether such instruments are required to be accounted for as equity or debt instruments under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (and its corresponding amendments) and EITF 00-19, Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company’s Own Stock, as well as other applicable guidance.  Related analyses vary based on the specific terms of each consummated transaction and the application of U.S. Generally Accepted Accounting Principles in this area can be complex.





Recently Issued Accounting Standards





See Note 9. to the audited financial statements included elsewhere in this report.





Item 3. Quantitative and Qualitative Disclosures About Market Risk – N/A





Item 4. Controls and Procedures





Disclosure Controls And Procedures





As required by SEC Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our Chief Executive and Chief Financial Officers carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing evaluation, we have concluded that our disclosure controls and procedures are not effective as of March 31, 2010 in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.  Specifically, we had material weaknesses in our internal control over financial reporting as described in Item 9A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 as filed with the SEC on March 31, 2010 and those deficiencies have not yet been remediated by us.





Changes in Internal Control Over Financial Reporting





Pursuant to Rule 13a-15(d) of the Exchange Act, our management, with participation with the Company’s Chief Executive and Chief Financial Officers, is responsible for evaluating any change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act), that occurred during each of the Company’s fiscal quarters that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.





Based on the foregoing evaluation, we have concluded that there was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  We continue to have material weaknesses in our internal control over financial reporting as described in Item 9A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 as filed with the SEC on March 31, 2010 and those deficiencies have not yet been remediated by us.


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PART II - OTHER INFORMATION





Item 1.  Legal Proceedings





The following supplements the discussion set forth under Part I, Item 3 "Legal Proceedings" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.





On February 9, 2010, we filed a complaint in the United States District Court Southern District of NewYork against 1st SB Partners, Ltd., a Delaware corporation, doing business as 1st SB Communications, Ltd. and Sarah R. Speno (collectively "Defendants") for rescission of a prior purported agreement between us and Defendants and the cancellation of over 3 million shares of our common stock purportedly issued to 1st SB Partners pursuant to the agreement.
 
 On April 13, 2010, in response to our complaint, Defendants filed (1) a motion to dismiss, and (2) an answer with counterclaims against us and our officers. Defendants withdrew their motion to dismiss on April 20, 2010.
  On April 27, 2010, we filed an amended complaint against Defendants adding factual detail related to certain of our prior claims and alleging that the agreement violates New York Judiciary Law section 495 prohibiting the practice of law by a corporation.
  On May 11, 2010, in response to our amended complaint, Defendants filed (1) a motion to dismiss, and (2) an answer with counterclaims against us and our officers.




Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds





2010 Promissory Notes





During the first quarter of 2010, we received cash proceeds of $390,000 through short term loans from eight investors.  In exchange for these funds, we issued the investors an aggregate of 1,820,001 shares of our common stock and also issued them promissory notes with an aggregate principal balance of $487,500 (see Note 6 to the financial statements for further discussion relating on the 2010 Promissory Notes).  The notes accrue interest at the rate of 8% per annum and are payable at maturity six months after issuance.  The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.





2010 Stock Offering





During the first quarter of 2010, the Company entered into an investment banking agreement whereby the Company agreed to raise capital in a private placement offering.  The Company offered a minimum of 1,000,000 Units and a maximum of 18,000,000 Units at a price of $0.10 per Unit to an unlimited number of investors who qualify as “accredited investors,” as such term is defined under Regulation D adopted under the Act (“2010 Stock Offering”).  Each “Unit” consists of four shares of common stock, $0.001 par value, plus one five-year A Warrant to purchase one share of common stock at an exercise price of $0.05 per share and one five-year B Warrant to purchase one share of common stock at an exercise price of $0.10 per share.  The A Warrants are callable by us at any time beginning on the first day after the twenty trading day volume weighted average price (“VWAP”) of one share of our common stock exceeds $0.10 and the B Warrants are callable by us at any time beginning on the first day after the twenty trading VWAP of one share of our common stock exceeds $0.20.  A minimum investment of 250,000 Units for $25,000 is required, subject to our right to accept a smaller investment in our sole discretion. We may sell up to an additional 2,000,000 Units pursuant to overallotments.





As of March 31, 2010, we had not received any proceeds from the 2010 Stock Offering.  However, subsequent to March 31, 2010, we sold $1,140,500 to seven investors who purchased 11,405,250 Units of the 2010 Stock Offering, whereby the Company issued 45,821,000 shares of common stock, 11,455,250 A Warrants and 11,455,250 B Warrants.  The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.




Other Share Issuances
 
 During the first quarter, the Company issued 1,820,001 restricted shares related to the 2010 Promissory Notes (see Note 6 above for further discussion).During the three months ended March 31, 2010, we issued 730,476 shares of common stock for $15,340 of interest due on the 2007 Convertible Promissory Notes.   During the three months ended March 31, 2010, we issued 278,500 shares of common stock for professional services and fees of $11,100.  The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D adopted thereunder.
 
 Item 3.  Defaults Upon Senior Securities - None
 
 Item 4.  [Removed and Reserved]
 
 Item 5.    Other Information
 
 Up through May 15, 2010, we sold $1,140,500 to seven investors who purchased 11,405,250 Units of the 2010 Stock Offering, whereby the Company issued 45,821,000 shares of common stock, 11,455,250 A Warrants and 11,455,250 B Warrants.  The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.


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Item 6.   Exhibits





Exhibit No.

Description2.1

Merger Agreement, dated January 16, 2007, between HomAssist Corporation and The Family Post, Inc. as filed on Form 8-K, filed on February 1, 2007 with the SEC, incorporated by reference3.1

Articles of Incorporation as filed on Form SB-2, filed April 28, 2005 with the SEC, incorporated by reference3.2

Bylaws as filed on Form SB-2, filed on April 28, 2005 with the SEC, incorporated by reference3.3

Amendment to Bylaws as filed on Form 8-K, filed on January with the SEC 17, 2007, incorporated by reference3.4

Certificate of Amendment to Articles of Incorporation as filed on Form 8-K, filed on January 25, 2007 with the SEC, incorporated by reference10.1

2007 Incentive and Non Statutory Stock Option Plan as filed on Form 8-K, filed on February 1, 2007 with the SEC, incorporated by reference10.2

Independent Consultant Stock Option Agreement dated as of July 1, 2005 between The Family Post and William Sawtell as filed on Form 8-K, filed on February 1, 2007 with the SEC, incorporated by reference10.3

Employment Agreement and Stock Option Agreement dated as of March 15, 2006 between The Family Post and Samir Patel as filed on Form 8-K, filed on February 1, 2007 with the SEC, incorporated by reference10.4

Executive Employment and Indemnification Agreement dated as of January 30, 2007, between us and Michael Sawtell as filed on Form 8-K, filed on February 1, 2007 with the SEC, incorporated by reference10.5

Executive Employment and Indemnification Agreement dated as of January 30, 2007, between us and Steven Dong as filed on Form 8-K, filed on February 1, 2007 with the SEC, incorporated by reference10.6

Form Stock Subscription Agreement, Form Stock Option Agreement, Form Amended Stock Subscription Agreement as filed on Form 8-K, filed on February 1, 2007 with the SEC, incorporated by reference10.7

Form of Stock Subscription Agreement, incorporated by reference from the Registrant’s Form 10-QSB, filed with the Securities and Exchange Commission on May 15, 2007.10.8

Form of Convertible Note and Warrant Agreement, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 9, 2007.10.9

Form of Regulation-S Stock Purchase Agreement between the Registrant and Imini Enterprises Corporation, dated January 8, 200810.10

Form of Stock Subscription Agreement between the Registrant and Step Management Limited dated April 20, 2007.10.11

Financial Advisory Agreement between the Registrant and Norm Farra dated September 29, 2007.10.12

Investor Relations Agreement between the Registrant and Crown  Financial dated November 13, 200710.13

Amendment to Investor Relations Agreement between the Registrant and Crown  Financial dated February 12, 200810.14

Partner Agreement between DigitalPost Interactive, Inc and BowTie, Inc. dated October 26, 2007 incorporated by reference from the Registrant’s Form 8-K filed with the SEC on November 1, 2007.10.15

Agreement between DigitalPost Interactive, Inc and Upromise, Inc. dated November 9, 2007 incorporated by reference from the Registrant’s Form 8-K filed with the SEC on November 9, 2007.


10.16

Agreement between DigitalPost Interactive, Inc and Upromise, Inc. dated November 9, 2007 incorporated by reference from the Registrant’s Form 8-K filed with the SEC on November 9, 2007.10.17

Agreement between DigitalPost Interactive, Inc and Pictage, Inc. dated November 27, 2007 incorporated by reference from the Registrant’s Form 8-K filed with the SEC on November 28, 2007.10.18

Agreement between DigitalPost Interactive, Inc. and Mitsubishi Digital Electronics America, Inc. dated January 8, 2008, incorporated by reference from the Registrant’s Form 8-K filed with the SEC on January 9, 2008.10.19

Agreement between DigitalPost Interactive, Inc. and Onscribe, Inc. dated February 12, 2008, incorporated by reference from the Registrant’s Form 8-K filed with the SEC on February 15, 2008.10.20

Agreement between DigitalPost Interactive, Inc. and Disneyland® Resort, A Division of Walt Disney World Co. dated March 21, 2008, incorporated by reference from the Registrant’s Form 8-K filed with the SEC on March 21, 2008.10.21

Agreement between DigitalPost Interactive, Inc. and Disneyland® Resort, A Division of Walt Disney World Co. and Taylor Morrison, Inc. dated March 21, 2008, incorporated by reference from the Registrant’s Form 8-K filed with the SEC on March 21, 2008.10.22

Agreement between DigitalPost Interactive, Inc. and Local.com Corporation, dated February 19, 2009, incorporated by reference from the Registrant’s Form 8-K filed with the SEC on February 25, 2009 (Portions of the exhibit included in this filing have been omitted pursuant to the Company’s request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and the omitted material has been separately filed with the SEC).10.23

Agreement between DigitalPost Interactive, Inc. and Local.com Corporation, dated April 22, 2009, incorporated by reference from the Registrant’s Form 8-K filed with the SEC on April 28, 2009.10.24

Agreement between DigitalPost Interactive, Inc. and Local.com Corporation, dated July 16, 2009, incorporated by reference from the Registrant’s Form 8-K filed with the SEC on July 22, 2009.10.25

Agreement between DigitalPost Interactive, Inc. and Lucidiom, Inc., incorporated by reference from the Registrant’s Form 8-K filed with the SEC on September 29, 2009.10.26

Agreement between DigitalPost Interactive, Inc. and The Picture People, Inc., incorporated by reference from the Registrant’s Form 8-K filed with the SEC on October 22, 2009.10.27

Extension Option and Securities Amendment Agreement between DigitalPost Interactive, Inc. and Agile Opportunity Fund, LLC, dated November 3, 2009.10.28

Extension and Modification Agreement between DigitalPost Interactive, Inc. and Agile Opportunity Fund, LLC, dated November 3, 2009.10.29

Form Extension Agreement between DigitalPost Interactive, Inc. and The 2007 Convertible Promissory Note holders dated November 13, 2009.10.30

Form of Securities Purchase Agreement between DigitalPost Interactive, Inc. and the Original Issue Discount Promissory Note holders dated between January 10, 2009.10.31

Executive Employment and Indemnification Agreement dated as of March 29, 2010, between us and Michael Sawtell10.32

Executive Employment and Indemnification Agreement dated as of March 29, 2010, between us and Steven Dong10.33

Form Securities Purchase and Subscription Agreement entered into between DigitalPost Interactive, Inc, and investors, incorporated by reference from the Registrant’s Form 8-K filed with the SEC on May 7, 2010.14.1

Code of Business Conduct and Ethics as filed on form 8-K, filed January 30, 2007with the SEC, as filed on form 8k, filed February 1, 2007, incorporated by reference21.1

List of Subsidiaries of the Company as filed on form 8-K, filed January 30, 2007 with the SEC, as filed on form 8k, filed February 1, 2007, incorporated by reference31.1

Rule 13a-14(a)/ 15d-14(a) Certification of Michael Sawtell31.2

Rule 13a-14(a)/ 15d-14(a) Certification of Steven Dong32.1

Certification Pursuant to 18 U.S.C. section 1350 of Michael Sawtell32.2

Certification Pursuant to 18 U.S.C. section 1350 of Steven Dong








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SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.





DIGITALPOST INTERACTIVE, INC. (Registrant)May 17, 2010
/s/ Michael SawtellMichael SawtellChief Executive Officer, President, and Sole DirectorMay 17, 2010
/s/ Steven DongSteven DongChief Financial Officer





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