SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549


FORM 10-K


(Mark One)





[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


For the fiscal year ended December 31, 2009


or





[ ] 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 as Specified in Charter)


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





4040 Barranca Parkway, Suite 220, Irvine, CA 92602(Address of Principal Executive Offices) (Zip Code)





(949) 333-7500Registrant’s Telephone Number, Including Area Code




Securities registered under Section 12(b) of the Exchange Act: None.




Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.001




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] Yes   [X] No






Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  [  ] Yes   [X] No




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





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   [  ] No





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]





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





Large accelerated filer                                                                                                                     Accelerated filer


Non-accelerated filer (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   [X] No





State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to


the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last


business day of the registrant’s most recently completed second fiscal quarter: $1,327,000.





Number of common voting shares outstanding as of March 31, 2010: 90,743,451.





DOCUMENTS INCORPORATED BY REFERENCE


None.








Table of Contents
PagePART IItem 1.      Business
2Item 1A.   Risk FactorsItem 1B.   Unresolved Staff CommentsItem 2.      Properties
6Item 3.      Legal Proceedings
6Item 4.      [RESERVED]PART IIItem 5.      Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
7Item 6.      Selected Financial Data
8Item 7.      Management's Discussion and Analysis of Financial Condition and Results of Operations
8Item 7A.   Quantitative and Qualitative Disclosures About Market RiskItem 8.      Financial Statements and Supplementary Data
14Item 9.      Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
15Item 9A.  Controls and Procedures
15Item 9B.   Other Information
16PART IIIItem 10.   Directors, Executive Officers and Corporate Governance
17Item 11.   Executive Compensation
19Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
23Item 13.   Certain Relationships and Related Transactions and Director Independence
24Item 14.   Principal Accountant Fees and Services
25PART IVItem 15.   Exhibits, Financial Statement Schedules
26Signatures
27









1




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS






This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will” and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, among others, our need to raise additional financing, risks related to the development of our business, our history of losses; the historical volatility of our stock price; general market conditions; and other factors that may affect our business.






Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this Annual Report as a result of new information or future events or developments. You should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission (the “Commission”) that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.




ITEM 1.     Description of Business.





DigitalPost Interactive, Inc.  ("DPI" or "Company") was incorporated on July 15, 2004, in the State of Nevada.  The Company's principal executive offices are located at #4040 Barranca Parkway, Suite 220, Irvine, CA 92602. Our telephone number is (949) 333-7500. We maintain Internet websites at www.DigitalPostInteractive.com and www.TheFamilyPost.com.  These websites, and the information contained therein, are not a part of this Annual Report.





Business of the Issuer




We are primarily 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, history and family tree. 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 also provide professional software development services as a secondary business.





Industry Overview and Addressable Market




Internet and image-based technology today enables consumers to create an abundance of content that includes photos and video requiring highly functional, online destinations that can present, protect and preserve this content.  This is the new web, digital media sharing era.  We believe that the key forces driving the expansion of this segment of the digital media sharing market are:





- The proliferation of digital cameras and camcorders to a broader base of consumers


- The strong consumer desire for secure sharing digital content on the Internet


- The growing consumer desire to find an easy, single location for storing their user-generated digital content


- The increasing participation by consumers in online communities


- The increasing penetration of high-speed connectivity to a broader base of consumers





The addressable market for our platform and tools includes the vast population of users who create Internet content in text, and by digital photographic devices such as cameras and camcorders. We currently address several adjacent markets related to consumers’ desire to create and share content, including:





- The photo studio market


- The wedding industry


- The baby industry


- The scrapbooking industry


- The military


- Consumer ISPs / Hosting & Domain Services





2


Our platforms are highly scalable to a variety of additional vertical markets.  Our tools fit well in sectors and industries where simplified and powerful sharing of content, images, and video effectively brings groups of people together in an interactive online environment.  As the new web rushes forward, we will attempt to expand our market penetration to include:





- The sports industry


- The education sector


- The pet industry


- The travel industry


- The religious sector


- The newborn sector





Competition




The user-generated content industry is competitive, and we expect competition to increase in the future. These competitors include My Family, Famster, Family Lobby, My Great Big Family, EasySite and Connected Family.




The DPI Competitive Advantage




We have developed platforms and tools that allow us to offer consumers a better way to enjoy, share and preserve their user-generated content. We believe that our business model is supported by the following characteristics:




Viral network effect. Our customers create a viral network of new users and customers in a number of ways. They generate most of the content on our service by uploading their photos. They share their photos electronically with their friends and families, extending and endorsing our brand and creating a sense of community.




Loyal customer base. Our high-quality products and services, together with our focus on continuous innovation, have allowed us to establish high customer loyalty. As users populate their websites with content, photos, and videos, they remain as active subscribers, adding monthly revenue until the consumer cancels their service.




Premium pricing power. We believe that we are able to maintain premium pricing for our services as a result of our brand equity, the high-quality of our platform and tools, and the loyal customer base we have created.




Deep customer understanding. Customer insights are an important source of new product and service innovation for us, and we continually strive to understand our customers’ needs in order to improve customer satisfaction. We have invested significant time and resources to understand and address the needs of our customers through market research, focus groups, customer surveys, usability testing, customer response to promotions and customer service interactions.




Trusted premium brand. Our focus on ease of use, website quality, secure storage, continual product advancement and attentive customer service has established DPI as a trusted premium brand.




Customer-focused approach. The entire DPI customer experience - including free trial, the ability to upload, edit, store and share content in a dynamic website environment and the fact that a single subscription can host an unlimited number of users - reflects our customer-focused approach.




With DPI at the forefront of the digital media sharing space, we face competition from dozens of established Internet companies.




Our Growth Strategy




Our goal is to grow our suite of Internet services into a premium lifestyle brand and become the leading platform for highly functional, interactive website destinations dedicated to improving the sharing, protection and preservation of user-generated content. In addition to the strong market trends supporting our business, we believe our growth will be supported by the following initiatives:




3


Expansion of vertical integration. We will continue to introduce our platform and tools into additional verticals through strategic marketing partnerships.




Expansion products and services offerings. We will continue to develop our technology to include forward-thinking functionality and benchmarks increasing the widespread adoption of our platform and tools.




Promotion of brand awareness. We will continue to promote the DPI brand through marketing campaigns. We will leverage new and existing channels, which include word-of-mouth marketing, print and online advertising, affiliate and referral programs, search engine marketing and complementary strategic alliances to generate high visibility to the DPI brand.




International expansion. We intend to develop additional business opportunities through international expansion, targeting consumers in key geographic areas where user-generated content is high and where Internet usage is widespread.




Product Overview





The DPI Platform





The DPI platform provides user content generating tools for uploading content and digital media within a very easy user interface. Our platform is highly scalable to a variety of market verticals, effectively bringing groups of people together in an attractive and interactive online environment.





The DPI platform includes the following key features:





Security/Disaster Recovery - Our members’ information is safe and secure in our data center and further backed-up weekly to Iron Mountain,the industry standard third party data vault.





Ease Of Use - DPI uses a browser based interface providing easy-to-use, intuitive management of the customer sites.





Powerful Application Install – The DPI Management Interface, Qwik-Post, comes with the Aurigma Image Uploader, giving users the ability to upload any number of files at one time.  In addition, it also provides file compression before uploading, thereby greatly reducing the time needed to upload media.





Web Based - Because DPI is web-based, the application is accessed through the internet and resides on servers at our data center.  All standard browsers are 100% compliant with the DPI Platform.





Safe Access- Our members can securely access their website and Qwik-Post administration panel at anytime, from wherever they are, from any computer connected to the Internet.





Unlimited Members- Our members may grant website access into their accounts to as many other users as they like.





Compatibility- Our members can access their DPI websites and Qwik-Post using Internet Explorer, Firefox, Safari, Netscape and Opera Browsers.





Support – Our customer service team is available by email or phone, seven days a week.





Immediacy – Members can have their website up and running in minutes.





Affordability – Due to the highly-refined automation of the DPI engine, pricing can be tiered to accommodate all service levels and budgets.





4


The DPI Qwik-Post Application





Qwik-Post is the proprietary application that enables the user to administer all DPI functionality.  Qwik-Post allows users to add content to their websites within seconds and upload hundreds of pictures and videos in minutes. Accessible anywhere in the world, yet password-protected at the choice of the user, our interactive technology enables extended user bases to simultaneously upload and manage their digital media. With Qwik-Post, managing a website or a digital platform is made easy for users of all ages and levels of technical computer understanding.





The DPI Qwik-Post application includes the following key functionality:




Photo Albums - The Qwik-Post Photo Album feature enables users to gather their digital photos and post them quickly to their site. Users simply upload their images, then organize them in any order they like using our simplified drag and drop interface. In a matter of minutes users have created a professional quality multimedia slide show to share with friends and family over the Internet.






Videos - The Video-Post upload engine enables users to quickly upload video directly to their websites regardless of the digital file format. Within three clicks, users can securely share their self-generated content with other users over the Internet.






Family Tree - Allows user generation of relationships between family members in a visual and interactive format and provides families an entertaining and unique way to track their family history, share birthdays and lineage.






Online Photo Editor -Qwik-Edit is a user friendly photo-editing solution for enhancing photos directly online with no additional downloads or special user skills required.






Message Boards - Our variety of Chat Rooms and Message Boards feature real time delivery of content for conversation over the Internet. These interfaces are password protected and are enabled to be monitored through Qwik-Post. DPI provides a safe platform for children and families of all ages to communicate.






Site Calendar - Coordinating schedules, planning get-togethers and celebrations can involve endless phone calls and emails. DPI’s simple-to-use calendar makes event planning efficient as important dates such as meetings, birthdays, games, or anniversaries are all recorded in one place.






Newsletter – The newsletter feature enables users to create professional-looking newsletters that can be emailed to family and friends. Users simply select one of the pre-designed newsletter templates, add text, and insert photos from albums already on their family website.






Photo Store – The Photo Store application allows users to purchase prints and photo-related gifts such as mugs, T-shirts, calendars and more directly through their family website.






Many more features – Including eMail, News, History, Kids Pages, Directory, and Blogs.







Additional Product Enhancements





Our mission is to build the most advanced digital media sharing user content generating tools for uploading content and digital media within a very easy user interface.  In pursuit of that mission, we intend to rapidly respond to ongoing customer feedback, feature requests and continue additional product enhancements.





Intellectual Property





We have applied for certain trademarks and service marks and have a portfolio of intellectual property. When necessary, we intend to enforce our intellectual property rights by, among other things, searching the Internet to detect unauthorized use of our intellectual property, identifying products that feature unauthorized use of our intellectual property and seeking restraining orders and/or damages in court against individuals or entities infringing upon our intellectual property rights.  Our failure to thwart piracy, infringement or other unauthorized use of our intellectual property rights effectively could adversely affect our operating results.





Employees





As of December 31, 2009, we had 6 full-time employees and several independent contractors and consultants.  Our employees are located in Irvine, California.  We believe that our relationships with our employees are generally good.  None of our employees is represented by a union.




5


ITEM  1A.   Risk Factors.





Not Applicable





ITEM  1B.     Unresolved Staff Comments.





Not Applicable





ITEM  2.     Description Of Property.





In March 2009, we began a new lease of approximately 1,800 square fee as our principal offices located in Irvine, California which expires in February 2011.   From March 2007 through March 2009, our principal office was at a different location also in Irvine, California where we leased approximately 2,900 square feet of office space pursuant to a lease that expired in February 2009.  If we require additional space, we believe that we will be able to obtain such space on commercially reasonable terms.





ITEM 3.     Legal Proceedings.





From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.  We are not aware of any pending or threatened legal proceeding that, if determined in a manner adverse to us, could have a material adverse effect on our business and operations.




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 limited partnership, doing business as 1st SB Communications, Ltd. and Sarah R. Speno ("Defendants").  The case number is 10 CV 1059.  The complaint alleges eleven causes of action against Defendants and primarily asks the court for rescission of a prior agreement between us and Defendants based on fraudulent inducement and Defendants' violation of numerous New York Rules of Professional Conduct regulating attorneys and their dealings with clients in legal and non-legal matters, or in the alternative, if the agreement is not rescinded, for damages based on Defendants' non-performance under the agreement.  Under the terms of the agreement at issue we purported to award over 3 million shares to 1st SB Partners (solely owned by Speno, a lawyer admitted in New York) as "non-refundable" compensation for legal and non-legal consulting and other services to be provided by 1st SB Partners and Speno to us. Defendants, however, wholly failed to provide the promised services, misrepresented their ability to provide the promised services to induce us into entering the agreement and into issuing the stocks as "compensation," and induced us to sign an agreement and enter into a business relationship with Defendants in violation of several fundamental principles enshrined in the New York Rules of Professional Conduct and other rules and laws governing the conduct of attorneys in New York, rendering the agreement void and/or voidable. As a result of Defendants actions, we have the asked the court to cancel the shares issued pursuant to the agreement, and Defendants have, at most, a right to quantum meruit cash compensation for the market value of services actually performed, if any.





ITEM 4.     [REMOVED]











6


PART II






ITEM 5.     Market For Registrant’s Common Equity And Related Stockholder Matters And Issuer Purchases Of Equity Securities




Our shares of common stock, par value $0.001 per share, are quoted on the OTC Bulletin Board under the symbol “DGLP.”  Effective January 26, 2007, our stock quote symbol was changed to DGLP and remains quoted on the OTC Bulletin Board.  The following table sets forth the range of high and low closing sale prices for the common stock as reported by the OTC Bulletin Board for the periods indicated below.




High

Low2009Fourth Quarter
$
.07
$
.04Third Quarter

.07

.03Second Quarter

.04

.01First Quarter

.03

.012008Fourth Quarter
$
.06
$
.02Third Quarter

.16

.03Second Quarter

.24

.11First Quarter

.73

.19










The closing sale prices in the table above reflect inter-dealer prices, without retail mark-up or commissions and may not represent actual transactions.




Holders




As of March 31, 2010, there were approximately 100 holders of record of our common stock.




Dividend Policy




We have never declared or paid dividends on our common stock.  We intend to retain earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future.  Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.




Securities Authorized for Issuance Under Equity Compensation Plans




The following table sets forth information as of December 31, 2009 with respect to the stock options issued under our 2007 Incentive and Nonstatutory Stock Option Plan, for which our common stock is authorized for issuance.




7





Number of securities to

be issued upon exercise

of outstanding options

Weighted average

exercise price of

outstanding options

Number of securities

remaining available

for future issuanceEquity compensation plans or stock option agreements approved by security holders

33,298,780

$                                                     .08

1,701,220Equity compensation plans or stock option agreements not approved by security holders

—

—

—Total

33,298,780

$
.08

1,701,220






Recent Sales of Unregistered Securities




During the first quarter of 2010, we received cash proceeds of $390,000 through a bridge loan from eight investors.  In exchange for these funds, we issued the investors an aggregate of 1,820,001 shares of our common stock and we also issued to them promissory notes with an aggregate principal balance of $456,250 (the “Short-Term Notes”).  The Short-Term 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 the Short-Term Notes with the proceeds from the offering discussed 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.





Purchases of Equity Securities by the Issuer and Affiliated Purchasers




None.




Item 6.   Selected Financial Data.




Not applicable.




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations




The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements.





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, 16,559 recurring subscribers, and 43,066 users. However, to date, our revenues have not been  sufficient to cover our operating costs and expenses.  During the years ended December 31, 2009 and 2008, our revenues were $1,362,500 and $488,900, respectively.  During 2009 we focused 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.








8


Current Conditions





Historically we have incurred significant losses and we continued to incur additional losses during the year ended December 31, 2009.  Our net loss was $1,958,500 and $4,017,200 for the years ended December 31, 2009 and 2008, respectively.  Our cash used in operations was $267,700 and $1,515,700 for the years ended December 31, 2009 and 2008, respectively.  As of December 31, 2009, we had an accumulated deficit of approximately $9,113,800. 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 December 31, 2009, the Company has raised an aggregate amount of approximately $5 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.





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 an additional $390,000 cash proceeds during the first 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 39% and 17% of our total revenue from this marketing partnership during the years ended December 31, 2009 and 2008, 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 however prospects for customer growth from this relationship were sidelined.  However, on March 19, 2010,  CPI Corp. offered to buy all the assets of Kiddie Kandids LLC with a plan to reopen all of its locations once the purchase is approved by the bankruptcy court. Therefore our resulting customer base may reinitiate its growth as previously anticipated in the future upon the reopening.





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 December 31, 2009, 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, as filed with this report, 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.





9


Results of Operations





The Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008





Total revenue was $1,362,500 and $488,900 for the years ended December 31, 2009 and 2008, respectively, representing an increase of $873,600. The increase was due to an increase in subscription revenues of $414,800 during the year ended December 31, 2009 as compared the same period last year and an increase in professional services of $458,800 during the year ended December 31, 2009 as compared to the same period last year.





Subscription revenues for the year ended December 31, 2009 was $724,800 as compared to $310,000 during the same period last year. Subscription revenue increased $414,800 due to an increase in our customers to 16,559 recurring subscribers as of December 31, 2009 from 13,151 recurring subscribers as of December 31, 2008. The increase in subscriptions was due to additional sales and marketing activities performed through a major marketing partnership which was launched during the fourth quarter 2008.  We believe that the market for digital media sharing products and services is growing 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 mentioned above, Kiddie Kandids LLC filed for bankruptcy in January 2010 and that 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 19, 2010,  CPI Corp. offered to buy all the assets of Kiddie Kandids LLC with a plan to reopen all of its locations once the purchase is approved by the bankruptcy court. Therefore our resulting customer base may reinitiate its growth as previously anticipated in the future upon the reopening.





Professional services revenues for the year ended December 31, 2009 was $637,700 as compared to $178,900 during the same period last year. The increase was due to us providing custom website services under software development contracts completed during the year ended December 31, 2009.  We did not have similar contracts during the same period last year.  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. However, as of December 31, 2009, we had not entered into any significant professional services agreements and don’t expect the trend of future revenues from professional services to increase in the foreseeable future.





Total cost of revenue was $728,400 and $150,900 for the years ended December 31, 2009 and 2008, respectively, representing an increase of $577,500. The increase was due to an increase in subscription cost of revenues of $245,400 and increased cost of professional services revenue of $332,000 during the year ended December 31, 2009, respectively.





The increase in cost of subscription revenues for the year ended December 31, 2009 as compared to the same period last year is due to primarily having an increase in subscription sales. Cost of subscription revenues for the year ended December 31, 2009 were mostly derived from our marketing partnerships, hosting and setup services incurred from website services provided to our subscribers.  Gross margins from subscription revenues declined during the year ended December 31, 2009 as compared to the same period last year primarily due to the increase in number of subscription revenues being generated from marketing partnerships which carry higher costs as compared to internally generated subscriptions.





The increase in cost of professional services revenues for the year ended December 31, 2009 as compared to the same period last year is due to having provided professional services, primarily labor related costs, during the year ended December 31, 2009 whereas there were fewer such services provided during the same period last year.  Gross margins from professional service revenues declined during the year ended December 31, 2009 as compared to the same period last year primarily due to the nature of the professional service agreement entered into which carried additional development costs as compared to the professional service agreements entered into the same period last year.





Research and development expense was $99,200 and $299,200 for the years ended December 31, 2009 and 2008, respectively, representing an decrease of $200,000. The decrease was primarily due to lower amounts of research and development activities, including, lowering development personnel and consultants which was part of a company-wide cost reduction program implemented in the fourth quarter 2008 as compared to the same period last year.





Sales and marketing expense was $99,500 and $633,600 for the years ended December 31, 2009 and 2008, respectively, representing a decrease of $534,100. The decrease was primarily due to lower amounts of sales and marketing activities and promotions during the year ended December 31, 2009 including a decrease in media advertising of $165,000and a decrease in marketing salaries of $216,200 related to fewer marketing personnel primarily, both reductions due in part by a company-wide cost reduction program implemented in the fourth quarter 2008 as compared to the same period last year.  Also, the overall decrease in sales and marketing expense was due to a decrease in non-cash stock based compensation expense of $124,000.





10


General and administrative expense was $1,497,800 and $2,729,300 for the years ended December 31, 2009 and 2008, respectively, representing a decrease of $1,231,500. The decrease was primarily due to a decrease in warrant expense of $956,700 a majority of which relates to warrants granted to our investor relations firm which expired unexercised in July 2008.  There were no such warrants granted or outstanding to our investor relations firm the same period last year.  Also, the decrease was due to a decrease in salaries expense of $265,100 resulting from a company-wide cost reduction program implemented in the fourth quarter 2008 as compared to the same period last year.





Gain on debt modification was $300,300 and none for the years ended December 31, 2009 and 2008, respectively.  The increase was attributable to our debt extension agreements entered into in connection with extending our convertible promissory notes held with AOI Fund (See Note 6 to the audited financial statements included elsewhere in this report for further discussion on the extension agreement).   These modifications qualified for extinguishment accounting under US GAAP.





Interest expense was $937,600 and $693,100 for the years ended December 31, 2009 and 2008, respectively, representing an increase of $244,500.  The increase was attributable to interest and non-cash debt discount amortization expense of $937,600 during the year ended December 31, 2009, which was primarily related to additional borrowings of $850,000 during 2008 being outstanding the entire year during of 2009 and debt extension agreements entered into during 2009.










Liquidity and Capital Resources





Cash Flows





At December 31, 2009, our cash and cash equivalents were none, a decrease of $67,700 from $67,700 as of December 31, 2008.  The change in our cash was due to receiving $200,000 cash proceeds related to our private placement of our common stock in September 2009 and October 2009 which was offset by cash used in operating activities of $267,700.





Historically, we have incurred losses and have had capital and stockholders’ deficits and limited cash to fund our operations.  During the year ended December 31, 2009, we have been able to rely upon cash generated from our subscription and professional services revenues along with cash generated from equity financing. 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 or equity financing activities.  As of December 31, 2009, we remain in a negative working capital position.  Moreover, principal portions of certain convertible promissory notes in the aggregate amount of $287,000 matured in December 2009 with all of the remaining balances due within one year of December 31, 2009.   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 by through additional 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.





Private Placement Equity Financing





In September and October 2009, the Company entered into a $200,000 private placement with accredited investors, from which the Company had received $200,000 cash proceeds for the issuance of 6,666,667, restricted shares. 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.





11


The 2007 Convertible Note Extension Agreements





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 for 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 (See Note 6 to the audited financial statements included elsewhere in this report for further discussion on the extension agreement).





The AOI Fund Convertible Promissory Notes Extension Agreements





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 (See Note 6 to the audited financial statements included elsewhere in this report for further discussion on the extension agreement).





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 (See Note 6 to the audited financial statements included elsewhere in this report for further discussion on the extension agreement).




Subsequent Financing




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 is offering 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.  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.
 
 During the first quarter of 2010, we received cash proceeds of $390,000 through a bridge loan from eight investors.  In exchange for these funds, we issued the investors an aggregate of 1,820,001 shares of our common stock and we also issued to them promissory notes with an aggregate principal balance of $487,500 (the “Short-Term Notes”).  The Short-Term 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 the Short-Term Notes with the proceeds from the offering discussed above.  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.








Off-Balance Sheet Arrangements





As of December 31, 2009, we had no off-balance sheet arrangements.





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.





Web Site and Software Development Costs—Under Emerging Issues Taskforce Statement 00-2, Accounting for Web Site Development Costs (“EITF 00-2”), costs and expenses incurred during the planning and operating stages of the Company’s web site are expensed as incurred. Under EITF 00-2, costs incurred in the web site application and infrastructure development stages are capitalized by the Company and amortized to expense over the web site’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 Marketedto 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 December 31, 2009, as the Company’s historical refund experience has been minimal.





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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 year ended December 31, 2009, 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.





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 10. to the audited financial statements included elsewhere in this report.







13





Subsequent Events
 
 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 39% and 17% of our total revenue from this marketing partnership during the years ended December 31, 2009 and 2008, respectively.  On January 11, 2010, Kiddie Kandids filed for bankruptcy.  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 however prospects for customer growth from this relationship were sidelined.  However, on March 19, 2010,  CPI Corp. offered to buy all the assets of Kiddie Kandids LLC with a plan to reopen all of its locations once the purchase is approved by the bankruptcy court.  Therefore our resulting customer base may reinitiate its growth as previously anticipated in the future upon the reopening.
 
 On March 29, 2010, we entered into new employment agreements with Michael Sawtell and Steven Dong, further discussed in Item 9B. Other Information below.





ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk.





Not applicable.





ITEM 8.      Financial Statements And Supplementary Data.





The financial statements required by this Item begin on Page F-1 of this Form 10-K, and include:





PageReport of Independent Registered Public Accounting Firm
F-2Consolidated Financial Statements:Consolidated Balance Sheets
F-3Consolidated Statements of Operations
F-4Consolidated Statements of Stockholders’ Deficit
F-5Consolidated Statements of Cash Flows
F-6Consolidated Notes to Financial Statements
F-7








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ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.




None





ITEM 9A.  Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, 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.  The material weaknesses in our internal control over financial reporting as of December 31, 2009 are described below.





Management’s Report on Internal Control over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management, the Board of Directors and investors regarding reliable preparation and presentation of published financial statements. Nonetheless, all internal control systems, no matter how well designed, have inherent limitations. Even systems determined to be effective as of a particular date can only provide reasonable assurance with respect to reliable financial statement preparation and presentation.





A material weakness in internal control over financial reporting is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (United States) Auditing Standard No. 5), or a combination of control deficiencies, that result in there being a reasonable possibility that a material misstatement in the annual or interim financial statements would not be prevented or detected.





Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (COSO). Based on our assessment, we believe that, as of December 31, 2009, our internal control over financial reporting was ineffective based on those criteria, in consideration of the material weaknesses described below.





Control environment.  We did not maintain an effective control environment. Specifically, (i) our board of directors consists of a sole director and no other members, (ii) our audit committee consists of a single independent member, and, (iii) we did not maintain a sufficient number of personnel in the areas of accounting and financial reporting.


Financial close and reporting.  We did not maintain sufficient accounting personnel supporting the financial close and reporting processes to ensure: (i) changes and entry to spreadsheets utilized in the financial reporting process were properly reviewed, (ii) analysis and reconciliation of significant accounts were properly reviewed, and, (iii) proper review of period close entries and procedures.


This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.   Management’s report was not subject to  attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.  Management’s report is deemed furnished, rather than filed, for purposes of liability under Section 18 of the 1934 Act.
 
 15
 Remediation Activities





The following activities expect to remediate the material weaknesses: (i) we anticipate appointing additional members of our Board of Directors and Audit Committee, and, (ii) upon sufficient funding, we anticipate hiring additional accounting personnel to improve our overall control environment, account analysis and financial close and reporting process. Management is committed to correcting material weaknesses and will continue to evaluate appropriate remediation plans.
 
 Changes in Internal Control Over Financial Reporting.





There have been no changes in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  Our most recent assessment resulted in reaffirming the material weaknesses noted above.





ITEM 9B.   Other Information




On March 29, 2010, we entered into new employment agreements with Michael Sawtell and Steven Dong, as follows:
 
 Employment Agreement with Michael Sawtell
 
 We entered into an new employment agreement with Mr. Sawtell, our Chief Executive Officer on March 29, 2010. The employment agreement has a term of three years and automatically renews for additional one year terms unless either party terminates it with at least 30 days notice to the other party.  The agreement is only in effect to the extent we are successful of raising a minimum of $1,500,000 of financing.
 
 The material terms of the agreement are:  (i) base annual salary of $220,000; (ii) participation in our standard employee benefit plans; (iii) stock option grant to purchase up to 3,500,000 shares or our common stock; (iv) reimbursable expenses customarily given to Executives; (v) other bonuses at the discretion of the board of directors (vi) all previously grantedsecurities issued to Mr. Sawtell prior to this agreement shall be changed whereby the exercise price or conversion price shall become the same price per share equal to any subsequent financing made after the date of this agreement and (vii) severance arrangements described below.
 
 If we terminate Mr. Sawtell’s employment agreement without cause, or if Mr. Sawtell resigns for good reason, each as defined in the agreement, we are obligated to pay Mr. Sawtell the greater of his annual salary for the remaining term of the agreement or two years of his annual salary rate at the time of termination without cause or resignation for good reason, benefits for 24 months following the date of termination, and the right for 24 months from the date of termination to exercise all vested options granted to him prior to that time; provided that in the event the termination occurs within 120 days of the execution of an agreement which results in a change of control, as described below, vesting of all options will be accelerated and in the event the termination occurs outside of such 120 day period, all unvested options that would have vested had Mr. Sawtell’s employment agreement remained in force through the end of the initial term will be fully vested immediately prior to such termination.
 
 Employment Agreement with Steven Dong
 
 We entered into an new employment agreement with Mr. Dong, our Chief Financial Officer on March 29, 2010. The employment agreement has a term of two years and automatically renews for additional one year terms unless either party terminates it with at least 30 days notice to the other party. The agreement is only in effect to the extent we are successful of raising a minimum of $1,500,000 of financing.
 
 The material terms of the agreement are:  (i) base annual salary of $195,000; (ii) participation in our standard employee benefit plans; (iii) stock option grant to purchase up to 3,000,000 shares or our common stock; (iv) reimbursable expenses customarily given to Executives; (v) other bonuses at the discretion of the board of directors; (vi) all previously grantedsecurities issued to Mr. Dong prior to this agreement shall be changed whereby the exercise price or conversion price shall become the same price per share equal to any subsequent financing made after the date of this agreement and (vii) severance arrangements described below.
 
 If we terminate Mr. Dong’s employment agreement without cause, or if Mr. Dong terminates the agreement with good reason, each as defined in the agreement, we are obligated to pay Mr. Dong: (i) his annual salary and other benefits earned prior to termination, (ii) the greater of his annual salary for the remaining term of the agreement or his annual salary, (iii) benefits for 24 months following the date of termination, and (iv) the right for 24 months from the date of termination to exercise all vested options granted to him prior to that time; provided that in the event the termination occurs within 120 days of the execution of an agreement which results in a change of control, as described below, vesting of all options will be accelerated and in the event the termination occurs outside of such 120 day period, all unvested options that would have vested had Mr. Dong’s employment agreement remained in force through the end of the initial term will be fully vested immediately prior to such termination.
 
 Each of the employment agreements discussed above provide for the immediate vesting of stock options granted pursuant thereto upon (i) a change in control of us or (ii) a termination of the executive’s employment without cause or for good reason within 120 days prior to the execution and delivery of an agreement which results in a change in control. Additionally, a change in control constitutes “good reason” under the terms of each of the agreements, thus permitting each of Mr. Sawtell and Mr. Dong to terminate his respective employment and receive the severance benefits discussed above. Under the terms of each employment agreement, a change in control is deemed to have occurred if, as a result of a tender offer, other acquisition, merger, consolidation or sale or transfer of assets, any person(s) (as used in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934) becomes the beneficial owner (as defined in regulations promulgated under the Exchange Act) of a total of fifty percent (50%) or more of either our outstanding common stock or our assets; provided, however, that a change of control is not deemed to have occurred if a person who beneficially owned fifty percent (50%) or more of our common stock as of the effective date of the respective employment agreement continued to do so during the term the employment agreement. 
 The employment agreements with Mr. Sawtell and Mr. Dong also contain standard confidentiality provisions that apply indefinitely and non-solicitation provisions that will apply during the term of the employment agreements and for a 12-month period thereafter.


16


PART III







ITEM 10.  Directors, Executive Officers, Promoters And Control Persons And Corporate Governance; Compliance With Section 16(A) Of The Exchange Act




Directors and Executive Officers




The following persons are our current executive officers and directors since January 30, 2007, and hold the offices set forth opposite their names:




Name

Age

PositionMichael Sawtell

51

Chairman and Sole Director of the Board of Directors, Chief Executive Officer and PresidentSteven Dong

43

Chief Financial Officer










Michael Sawtell is the founder and Chief Executive Officer since July 2005.  Prior to then, he was President and Chief Operating Officer of Interchange Corporation, a publicly-held Internet advertising and local search company from March of 2000 to April of 2005. From 1993 to 2000, Mr. Sawtell was the Chief Operating Officer and the Vice President of Sales for Informative Research, one of the largest mortgage services firms in the United States. From 1986 to 1993, Mr. Sawtell worked as a director of operations on the B-2 Stealth Bomber program for Northrop Grumman Corporation, a global defense company. He has also held key operational positions at General Dynamics, another global defense company.





Steven Dong has been our Chief Financial Officer since January 30, 2007.  From March 2006, he served as our consulting CFO under an agreement with a professional services firm owned by Mr. Dong.  Prior thereto, from 1999 to 2002, Mr. Dong served as Chief Financial Officer of Taitron Components, Inc., a publicly-held semi-conductor company. From 1995 to 1999, Mr. Dong served as a financial consultant specializing in assisting publicly held companies by serving as their interim Chief Financial Officer. From 1988 to 1995, Mr. Dong was employed by Coopers & Lybrand, LLP. Mr. Dong is a Certified Public Accountant and a member in good standing with the American Institute of Certified Public Accountants and California State Board of Accountancy.





Family Relationships




There are no family relationships among the individuals comprising our board of directors, management and other key personnel.






Involvement in Certain Legal Proceedings.






During the past five years, none of the following have occurred that are material to an evaluation of the ability or integrity of any director, executive officer, promoter or control person of the Company:






1.  Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;






17


2.  Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);






3.  Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and




4.  Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.




Compliance With Section 16(a) of the Exchange Act






Section 16(a) of the Exchange Act requires "insiders," including our executive officers, directors and beneficial owners of more than 10% of our common stock, to file reports of ownership and changes in ownership of our common stock with the Securities and Exchange Commission and to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, or written representations from reporting persons, we believe that our insiders complied with all applicable Section 16(a) filing requirements during 2009, except for the following: (i) Mr. Dong filed a Form 5 on February 12, 2010 reporting the amendment of a conversion price to $.08 per share pursuant to the terms of an extension agreement entered into on November 9, 2009 for a convertible note purchased in October 2007, and, (ii) Mrs. Gauld filed a Form 5 on February 12, 2010 reporting the amendment of a conversion price to $.08 per share pursuant to the terms of an extension agreement entered into on November 9, 2009 for a convertible note purchased in October 2007.




Changes to Nominating Process






There have been no changes to the nominating process or adoption of procedures by which security holders may recommend nominees to our board of directors.




Board Committees




Audit Committee




David Vanderhorst is our Audit Committee member and non-board member. Mr. Vanderhorst is an “audit committee financial expert” in accordance with SEC rules. Stockholders should understand that this designation is a disclosure requirement of the SEC related to Mr. Vanderhorst’s experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon Mr. Vanderhorst any duties, obligations, or liability that are greater than are generally imposed on him as a member of the Audit Committee.  Because we are not a listed issuer, the members of the Audit Committee are not subject to the independence requirements of any national securities exchange or association.  Mr. Vanderhorst is a non-related party and independent of the Company.




REPORT OF THE AUDIT COMMITTEE





The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate this Report by reference therein.





The Audit Committee of the Board of Directors operates pursuant to a written charter. Our Audit Committee charter is available on our website, www.dglp.com. The Committee did not meet but on three ocassions acted by unanimous written consent during fiscal 2009 to fulfill its responsibilities. To ensure independence, the Audit Committee also meets separately with the Company’s independent registered public accounting firm and members of management. The sole member of the Audit Committee is a non-employee, non-board member and satisfies the SEC requirements with respect to independence, financial sophistication and experience.
  
 18





The role of the Audit Committee is to oversee the Company’s financial reporting process on behalf of the Board of Directors. Management of the Company has the primary responsibility for the Company’s consolidated financial statements as well as the Company’s financial reporting process, principles and internal controls. The independent registered public accounting firm is responsible for performing an audit of the Company’s financial statements and expressing an opinion as to the conformity of such consolidated financial statements with generally accepted accounting principles.





In this context, the Audit Committee has reviewed and discussed the audited financial statements of the Company as of and for the year ended December 31, 2009, with management and the independent registered public accounting firm. These reviews included discussion with the outside independent registered public accountants of matters required to be


discussed pursuant to Statement on Auditing Standards No. 61 (Communication with Audit Committees). In addition, the Audit Committee has received the written disclosures required by PCAOB Rule 3562, and it has discussed with the independent registered public accountants its independence from the Company.





Based on the reports and discussions described above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, for filing with the Securities and Exchange Commission.
 
 /s/ David Vanderhorst
 March 31, 2010







Other Committees




The Board intends to appoint such persons and form such committees as are required to meet the corporate governance requirements imposed by the national securities exchanges.  Therefore, we intend that a majority of our directors will eventually be independent directors and at least one director will continue to qualify as an “audit committee financial expert.” Additionally, the Board is expected to appoint a nominating committee and compensation committee, and to adopt charters relative to each such committee. Until further determination by the Board, the full Board will undertake the duties of the compensation committee and nominating committee.




Code of Ethics




We have formally adopted a written code of ethics that applies to our board of directors, principal executive officer, principal financial officer and employees; it can be found on our website at www.dglp.com.




ITEM 11.     Executive Compensation.




Compensation Discussion and Analysis




With respect to our executive compensation policies, the board of directors had determined that until a business combination or other strategic transaction was completed, we would continue to compensate our executive officer on a basis commensurate with cash compensation and benefit levels suitable with our cash position as a new company.




The following discussion and analysis reflects the compensation arrangements that we had with our executive officers.  Upon additional financing, if any, we expect to round out our management team. Our board of directors intends to review and modify, as necessary, our executive compensation policies in light of our current status as a new operating company and working capital (deficit) positions.  This review will be conducted with the goal of compensating our executives so as to maximize their, as well as our, performance.




Chief Executive Officer Compensation




Mr. Sawtell has served as our Chief Executive Officer and our Sole Director from July 2005.  From July 2005 through December 31, 2006, Mr. Sawtell did not have any employment agreement with us and received an annual salary of $75,000.  Effective January 30, 2007, we entered into an employment agreement with Mr. Sawtell to serve as our Chief Executive Officer and President and on March 29, 2010 entered into a new Employment agreement as further discussed in Item 9B. Other Information above.




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Compensation of Other Executive Officers




Mr. Dong has served as our Consulting Chief Financial Officer from March 2006 under a contract with a financial consulting firm owned by Mr. Dong.Effective January 30, 2007, we entered into an employment agreement with Mr. Dong to serve as our Chief Financial Officer and on March 29, 2010 entered into a new Employment agreement as discussed further in Item 9B. Other Information above.




Stock Options




Stock options generally have been granted to our executive officer at the time of hire and at such other times as the board of directors has deemed appropriate, such as in connection with a promotion or upon nearing full vesting of prior options.  In determining option grants, the board of directors has considered the same industry survey data as used in its analysis of base salaries and bonuses, and has strived to make awards that are in line with its competitors. In general, the number of shares of common stock underlying the stock options granted to each executive has reflected the significance of that executive’s current and anticipated contributions to us.




In addition, the stock option grants made by the board of directors are designed to align the interests of management with those of the stockholders. In order to maintain the incentive and retention aspects of these grants, the board of directors has determined that a significant percentage of any officer’s stock options should be unvested option shares.




The value that may be realized from exercisable options depends on whether the price of the common stock at any particular point in time accurately reflects our performance. However, each individual optionholder, and not the board of directors, makes the determination as to whether to exercise options that have vested in any particular year.




During 2009, 2008, and 2007, Mr. Sawtell was granted options to purchase up to 2,750,000, 875,000, and none, respectively, shares of our common stock, as discussed further below.




During 2009, 2008 and 2007, Mr. Dong was granted an option to purchase 2,250,000, 750,000 and 875,000, respectively, shares of our common stock, as discussed further below.




Compliance with Internal Revenue Code Section 162(m)




Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to a public company for compensation over $1 million paid to its Chief Executive Officer and its three other most highly compensated executive officers. However, if certain performance-based requirements are met, qualifying compensation will not be subject to this deduction limit.  Although the limitations of Section 162(m) generally have not been of concern to us while we were a shell corporation, we intend to consider the requirements of Section 162(m) in developing our compensation policies now that we are an operating company.




Summary Compensation Table




The following table sets forth certain compensation information as to our Chief Executive Officer and Chief Financial Officer who were our executive officers (the “Named Executive Officers”), for each of the years ended December 31, 2009, 2008 and 2007; no other executive officers had compensation of more than $100,000 annually for 2009, 2008, and 2007:




20


SUMMARY COMPENSATION TABLE




Name and Position
Year

Salary
Bonus
Stock Awards
Option Awards

Non-Equity Incentive Plan Compensation
Change in Pension Value and Nonqualified Deferred Compensation Earnings
All Other Compensation

Total($)
($)
($)
($)

($)
($)
($)

($)Michael Sawtell
2009
(1)
210,000


59,000
(8)


10,800
(6)
279,800President and CEO
2008
(2)
210,000
--
--
99,500
(8)
--
--
28,500
(6)
338,0002007
(2)
185,800
50,000
--
195,400
(8)
--
--
18,900
(3)
450,100Steven Dong
2009
(1)
175,000


119,600
(8)


11,500
(7)
306,100CFO
2008
(2)
175,000
--

86,800
(8)
--

7,100
(7)
263,8002007
(2)(5)
146,800
--

18,900
(8)
--
--
45,000
(4)
210,700














(1)
Mr. Sawtell and Mr. Dong entered into employment agreements on January 30, 2007, for annual salaries of $210,000 and $175,000, respectively.  For 2009, the amounts shown above include the amounts earned starting on January 1, 2009 through December 31, 2009. In October 2008, we started deferring salaries and therefore the amounts of cash compensation paid to Mr. Sawtell and Mr. Dong was $159,391 and $143,301, respectively, during the year ended December 31, 2009.  As of December 31, 2009, deferred salary owed to Mr. Sawtell and Mr. Dong was $31,400 and $50,200, respectively.


(2)
Mr. Sawtell and Mr. Dong entered into employment agreements on January 30, 2007, for annual salaries of $210,000 and $175,000, respectively.  For 2008, the amounts shown above include the amounts earned starting on January 1, 2008 through December 31, 2008. In October 2008, we started deferring salaries and therefore the amounts of cash salary paid to Mr. Sawtell and Mr. Dong was $203,900 and $169,900, respectively, during the year ended December 31, 2008.  As of December 31, 2008, deferred salary owed to Mr. Sawtell and Mr. Dong was $6,100 and $7,300, respectively. For 2007,the amounts shown above include the amounts of cash salary paid from January 30, 2007 through December 31, 2007.


(3)
Includes deferred salary for Mr. Sawtell in the amount of $8,100 that was accrued yet unpaid as of December 31, 2007, and car allowance paid in the amount of $10,800.


(4)
Includes deferred salary for Mr.Dong in the amount of $6,700, respectively, that was accrued yet unpaid as of December 31, 2007; and other compensation amounts due to Steven Dong in the amount of  $38,300; both the $6,700 and $38,300 were used as consideration from Mr. Dong to purchase $45,000 of convertible notes in October, 2004, see Note 7 of the Notes to the Consolidated Financial Statements included elsewhere in this report for a description of the convertible notes financing.


(5)
Mr. Dong became an employee on January 30, 2007, as a result, no amounts are shown paid to him as an employee during 2006. From March 2006 through January 30, 2007, Mr. Dong performed consulting work for us pursuant to a consulting agreement with a firm owned by Mr. Dong.  We paid this consulting firm $11,600 and $81,000 during 2006 and 2007, respectively.  Additionally, the consulting firm was granted options to purchase 1,127,958 shares of our common stock in 2006 which SFAS 123R related expense incurred amounted to $11,800 in 2006 and $21,500 in 2007.


(6)
Other compensation for Mr. Sawtell for payments made in 2009 of $10,800 of auto expense reimbursement pursuant to his employment agreement.  Payments made in 2008 of $17,200 bonus payments which was accrued in 2007 and $11,300 of auto expense reimbursement pursuant to his employment agreement.


(7)
Other compensation for Mr. Dong for payments made in 2009 and 2008 where for reimbursement for phone and auto expense reimbursement pursuant to his employment agreement.


(8)
The value of the options granted to our named executives has been estimated pursuant to Statement of Financial Accounting Standards No. 123R,  Share-Based Payment ("SFAS 123R"), using the Black-Scholes option pricing model with the following weighted average assumptions: For 2009: expected life of 5 years, volatility of 447%, risk-free interest of 2.6%, and no dividend yield; for 2008: expected life of 4.5 years, volatility of 336%, risk-free interest of 2.9%, and no dividend yield; and; for 2007: expected life of 4.5 years, volatility of 45%, risk-free interest of 4.43%, and no dividend yield.  See the table below for the grants made and see Note 7 of the Notes to the Consolidated Financial Statements included elsewhere in this report for a description of the vesting schedule of option awards granted under the 2007 SOP.











21


Grants of Plan-Based Awards








The following table provides information regarding grants of plan-based awards that we granted to the Named Executive Officers during the fiscal year ended December 31, 2009. All options were granted at the fair market value of our common stock on the date of grant, as determined by our board of directors.  Each option represents the right to purchase one share of our common stock. Generally, none of the shares subject to options are vested at the time of grant and 25% of the shares subject to such option grants vest on the date which is nine months from the date of grant. The remainder of the shares vests in equal nine month installments over the remaining 27 months thereafter.





2009 Plan-Based Awards Table and Outstanding Equity Awards at Fiscal Year-End


The following table provides information regarding exercisable and unexercisable stock options held by the Named Executive Officers as of December 31, 2009.








Name

Number of Securities Underlying Unexercised Options (#)  Exercisable

Number of Securities Underlying Unexercised Options (#) Unexercisable

Option Exercise Price ($)

Option Expiration DateMike Sawtell, CEO

--

2,750,000
(9)
$                   0.05

11/2/2014162,500

487,000
(3)
$                   0.06

9/30/13112,500

112,500
(4)
$                   0.27

2/28/136,767,749

--

$                   0.09

11/13/2012Steven Dong, CFO

--

2,250,000
(8)
$                   0.05

11/2/2014137,500

412,500
(5)
$                   0.06

9/30/13100,000

100,000
(6)
$                   0.27

2/28/13437,500

437,500
(7)
$                   0.27
(7)
10/4/2012451,183
(2)
--

$                   0.09

3/15/2011304,204
(2)
--

$                   0.04

3/15/2011225,592
(2)
--

$                   0.09

4/3/2011








Name

Grant Date


All Other Stock Awards: Number of Shares of Stock or Units(#)


Exercise or Base Price of Option Awards ($/Sh)

Grant Date Fair Value of Stock and Option AwardsMike Sawtell, CEO

11/2/2009


2,750,000

$
0.05

$          137,5009/30/2008


650,000

$
0.06

$          39,0002/28/2008


225,000

$
0.27

$          60,60011/13/2006


6,767,749

$
0.09

$         260,3007/14/2005
(1)

4,511,833

$
0.04

$           44,200Steven Dong, CFO

11/2/2009


2,250,000

$
.05

$          112,5009/30/2008


550,000

$
0.06

$            33,0002/28/2008


200,000

$
0.27

$            53,90010/4/2007


875,000
(7)
$
0.27
(7)
$          263,4003/15/2006
(2)

451,183
(2)
$
0.04

$           17,4003/15/2006
(2)

451,183
(2)
$
0.09

$           25,9004/3/2006
(2)

225,592
(2)
$
0.09

$           17,400










(1)
An option to purchase 4,511,833 shares of our common stock granted to Mr. Sawtell was cancelled unexercised pursuant to the Merger on January 30, 2007.  None of the 4,511,833 option shares remain outstanding.


(2)
Mr. Dong became an employee on January 30, 2007. From March 2006 through January 30, 2007, Mr. Dong performed consulting work for us pursuant to a consulting agreement with a firm owned by Mr. Dong.  We granted options to purchase 451,183, 451,183 and 225,592 to this consulting firm owned by Mr. Dong.


(3)
162,500 option shares will vest on each of the dates: June 30, 2009; March 30, 2010; December 31, 2010 and September 30, 2011.


(4)
56,250 option shares will vest on each of the dates: August 28, 2009; February 28, 2010; and November 28, 2010.


(5)
137,500 option shares will vest on each of the dates: June 30, 2009; March 30, 2010; December 31, 2010 and September 30, 2011.


(6)
50,000 option shares will vest on each of the dates: August 28, 2009; February 28, 2010; and November 28, 2010.


(7)
218,750 option shares will vest on each of the dates: April 4, 2009; January 4, 2010; and October 4, 2010.  Also, on May 13, 2008, the Board of Directors approved the changing of exercise price of compensation options granted in 2007 to purchase up to 3,355,000 shares (for all employees/consultants) of our common stock from a weighted average exercise price of $0.70 per share to a weighted average price of $0.27 per share; included in this re-price event were the 875,000 options owned by Mr. Dong.  The option to purchase up to 875,000 shares of the Company was originally granted on 10/4/07 at an exercise price of $.70 per share. The same option now has an amended exercise price of $.27 per share. All other terms of the option remains the same.


(8)
562,500 options shares will vest on each of the dates: August 2, 2010, May 2, 2011, February 2, 2012, November 2, 2012


(9)
687,500 options shares will vest on each of the dates: August 2, 2010, May 2, 2011, February 2, 2012, November 2, 2012





22


Compensation of Directors and Committee Members




During 2009, we agreed to pay Mr. Vanderhorst, our sole audit committee member $500 per fiscal quarter.  There are presently no other arrangements providing for payments to directors for director or consulting services.  We expect to establish these arrangements shortly upon increased business activities.




Executive Employment Contract




On March 29, 2010, we entered into new employment agreements with Michael Sawtell and Steven Dong, further discussed in Item 9B. Other Information above.
 Compensation Committee Interlocks and Insider Participation




During 2009, we did not have a compensation committee or another committee of the board of directors performing equivalent functions.  Instead the entire board of directors performed the function of compensation committee.  As a sole member of the board of directors, Mr. Sawtell, our chief executive officer and sole board of director, approved the executive compensation, however, there were no deliberations relating to executive officer compensation during 2009.




Compensation Committee Report




None.







ITEM 12. Security Ownership Of Certain Beneficial Owners And Management and Related Stockholder Matters





The following table set forth information regarding the beneficial ownership of our common stock after consummation of the forward stock split and the Merger, except as noted in the footnotes below, by:




- each person known to be the beneficial owner of 5% or more of our outstanding common stock;


- each of our executive officers;


- each of our directors; and


- all of our executive officers and directors as a group.





Beneficial ownership is determined in accordance with the rules of the SEC and is calculated based on 87,631,141 shares of our common stock issued and outstanding on December 31, 2009.  In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options held by that person that are currently exercisable, as appropriate, or will become exercisable within 60 days of the reporting date are deemed outstanding, even if they have not actually been exercised.  Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.




23


Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder’s name.  The address of each stockholder is listed in the table.




Name and Address of Beneficial Owner

Beneficially

Owned

Percent of ClassMike Sawtell, CEO and Sole Director (1)

31,467,087
(3)
32.92
%Steven Dong, CFO (1)

7,404,680
(4)
8.13
%Peter and Irene Gauld (2)

16,653,878
(5)
17.50
%All executive officers and directors as a group (2 persons)

38,871,767
(3)(4)
41.05
%








(1)  4040 Barranca Parkway, Suite #220, Irvine, CA  92604.


(2)  c/o DigitalPost Interactive, Inc., 4040 Barranca Parkway, Suite #220, Irvine, CA  92604.


(3)  Includes 7,948,999 shares that can be issued to Mr. Sawtell pursuant to options to purchase shares of our common stock within 60 days.


(4)  Includes 2,624,729 shares that can be issued to Mr. Dong or a consulting firm owned by Mr. Dong pursuant to options to purchase shares of our common stock within 60 days; 562,500 conversion shares that can be issued upon conversion of convertible notes and 288,510 warrant shares that can be issued pursuant to convertible note warrants.


(5)  Includes 6,250,000 conversion shares that can be issued to Mr. and Mrs. Gauld pursuant to conversion of convertible notes and 1,276,890 warrant shares that can be issued pursuant to convertible note warrants.





ITEM 13. Certain Relationships And Related Transactions and Director Independence




As of December 31, 2009 and 2008, $36,600 and $36,600, respectively, was due to an officer of the Company and principal stockholder. The amount due to the officer does not bear interest, is not collateralized and has no formal repayment terms.  During the years ended December 31, 2009 and 2008, none and $17,400 of the net amount owed was paid to the officer.





As of December 31, 2009 and 2008, $45,000 and $45,000, respectively, was due to an officer of the Company pursuant to the 2007 Convertible Promissory Note agreements (see further discussion in Note 6 of the Notes to Audited Consolidated Financial Statements included elsewhere in this report).





The Company filed on Form 8-K on November 3, 2009, the November 2009 granting of options to purchase up to 6,900,000 shares of common stock granted to the Company’s employees, which includes options to purchase up to 2,750,000 and 2,250,000 granted to the Company’s chief executive officer and chief financial officer, respectively.  The options granted can be exercised at $0.05 per share.





In March 2009, the Company entered into interest amendment agreements with the holders of the 2007 Convertible Notes and an executive officer was a party to those agreements (see further discussion in Note 6 of the Notes to Audited Consolidated Financial Statements included elsewhere in this report).




On March 29, 2010, we entered into new employment agreements with Michael Sawtell and Steven Dong, further discussed in Item 9B. Other Information above.





Director Independence




Presently, we are not required to comply with the director independence requirements of any securities exchange.  In determining whether our directors are independent, however, we intend to comply with the rules of the American Stock Exchange LLC, or the AMEX.  The board of directors also will consult with counsel to ensure that the board of director’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors, including those adopted under the Sarbanes-Oxley Act of 2002 with respect to the independence of audit committee members.  The AMEX listing standards define an “independent director” generally as a person, other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment.




Currently we do not satisfy the “independent director” requirements of the American Stock Exchange, which requires that a majority of a company’s directors be independent.  Our board of directors intends to appoint additional members, each of whom will satisfy such independence requirements.




24


ITEM 14. Principal Accountant Fees and Services




Audit Fees.





The aggregate fees billed by our independent registered public accounting firm for professional services rendered for the audit of our annual financial statements for the years ended December 31, 2009 and 2008 and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q (or 10-QSB) during those fiscal years were $43,500 and $69,100, respectively.





Audit Related Fees.





We incurred no other audit related fees during the years ended December 31, 2009 and 2008.





Tax Fees.





We incurred fees for tax related services during the years ended December 31, 2009 and 2008 in the amounts of $3,000 and $3,000, respectively.





All Other Fees.





We did not incur any other fees billed by auditors for services rendered to us, other than the services covered in "Audit Fees" for the years ended December 31, 2009 and 2008.





The Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence.





Audit Committee Pre-Approval Policies And Procedures





The Company’s Audit Committee has policies and procedures that require the pre-approval by the Audit Committee of all fees paid to, and all services performed by, the Company’s independent accounting firms. At the beginning of each year, the Audit Committee approves the proposed services, including the nature, type and scope of services contemplated and the related fees, to be rendered by these firms during the year. In addition, Audit Committee pre-approval is also required for those engagements that may arise during the course of the year that are outside the scope of the initial services and fees pre-approved by the Audit Committee.





Pursuant to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted in the table above were authorized and approved by the Audit Committee in compliance with the pre-approval policies and procedures described herein.







25


PART IV









ITEM 15. Exhibits and Financial  Statement Schedules




Exhibit No.

Description2.1

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

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

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

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

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

2007 Incentive and Non Statutory Stock Option Plan as filed on Form 8-K, filed February 1, 2007, 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 February 1, 2007, 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 February 1, 2007, 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 February 1, 2007, 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 February 1, 2007, incorporated by reference10.6

Form Stock Subscription Agreement, Form Stock Option Agreement, Form Amended Stock Subscription Agreement as filed on Form 8-K, filed February 1, 2007, 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 Securities and Exchange Commission 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 Securities and Exchange Commission 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 Securities and Exchange Commission 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 Securities and Exchange Commission 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 Securities and Exchange Commission 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 Securities and Exchange Commission 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 Securities and Exchange Commission 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 Securities and Exchange Commission 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 of 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 Dong14.1

Code of Business Conduct and Ethics as filed on form 8-K, filed January 30, 2007, 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, 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


















26


SIGNATURE




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




DigitalPost Interactive, IncBy: /s/ Mike SawtellName: Mike SawtellTitle: Chief Executive Officer, President and Sole DirectorAnd Principal Executive OfficerBy: /s/ Steven DongName Steven DongTitle: Chief Financial Officer and Principal Accounting Officer







Date:       March 31, 2010












27








INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2009 AND 2008














Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets as of December 31, 2009 and 2008
F-3Consolidated Statements of Operations for the years ended December 31, 2009 and 2008
F-4Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2009 and 2008
F-5Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
F-6Notes to Consolidated Financial Statements for the years ended December 31, 2009 and 2008
F-7










F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM









To the Board of Directors and Stockholders of


DigitalPost Interactive, Inc.




We have audited the accompanying consolidated balance sheets of DigitalPost Interactive, Inc. (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the each of the years ended December 31, 2009 and 2008.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.




We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.




In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the  consolidated financial position of the Company as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.




The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred losses from operations and negative cash flows from operations since inception and has limited working capital.  These and other matters raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans regarding those matters are also described in Note 2. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.




As discussed in Note 1 to the consolidated financial statements, on January 1, 2009, the Company adopted Accounting Standards Codification 815-40-15, which changed the manner in which the Company accounted for certain conversion rights.









/s/ HASKELL & WHITE LLP




Irvine, California


March 31, 2010










F-2











DIGITALPOST INTERACTIVE, INC.


CONSOLIDATED BALANCE SHEETS





December 31,

December 31,2009

2008AssetsCurrent assetsCash and cash equivalents
$
-
$
67,700Accounts receivable and other current assets

41,600

22,200Total current assets

41,600

89,900Property and equipment, net

26,300

46,900Web site development costs and software, net

126,900

195,200Deferred financing costs


42,900

89,200Other assets


1,500

8,300Total assets

$
239,200
$
429,500Liabilities and Stockholders' DeficitCurrent liabilitiesAccounts payable

$
195,800
$
104,100Accrued expenses


289,800

94,600Deferred revenue


54,100

91,600Due to stockholder


36,600

36,600Convertible promissory notes, net – current (Note 6)


1,592,200

1,092,000Total current liabilities

2,168,500

1,418,900Convertible promissory notes, net  - long term (Note 6)

-

328,600Total liabilities

2,168,500

1,747,500Commitments and contingencies (Note 8 and 11)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;87,631,141 and 72,005,906  shares issued and outstandingat December 31, 2009 and 2008, respectively

87,600

72,000Additional paid in capital

7,096,900

6,121,400Accumulated deficit


(9,113,800)

(7,511,400)Stockholders’ deficit

(1,929,300)

(1,318,000)Total liabilities and stockholders’ deficit
$
239,200
$
429,500








The accompanying notes to the audited consolidated financial statements are


an integral part of these balance sheets.





F-3





DIGITALPOST INTERACTIVE, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS











Year

YearEnded

EndedDecember 31, 2009

December 31, 2008Revenues:Subscriptions





$
724,800
$
310,000Professional services






637,700

178,900Total Revenue






1,362,500

488,900Cost of Revenues:Subscriptions






345,300

99,900Professional services







383,100

51,000Total Cost of Revenue





728,400

150,900Gross Profit







634,100

338,000Operating expenses:Research and development






99,200

299,200Sales and marketing






99,500

633,600General and administrative





1,497,800

2,729,3001,696,500

3,662,100Loss from operations





(1,062,400)

(3,324,100)Gain on debt modification





300,300

-Interest (expense)





(937,600)

(693,100)Change in fair value of conversion feature liability





(258,800)

-Net loss






$
(1,958,500)
$
(4,017,200)Weighted average outstanding shares




78,282,040

60,366,704Basic and diluted loss per share




$
(0.025)
$
(0.066)


























The accompanying notes to the audited consolidated financial statements are


an integral part of these statements.





F-4











DIGITALPOST INTERACTIVE, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLERS’ DEFICIT


YEARS ENDED DECEMBER 31, 2009 AND 2008










Common Stock, $.001 Par Value
Additional

TotalPaid In
Accumulated
Stockholders'Shares
Amount
Capital
Deficit
DeficitBalance at December 31, 2007
53,550,840
$                  53,600
$                  3,244,500
$            (3,494,200)
$                   (196,100)Issuance of common stock for cash
13,779,170
13,800
877,200
-
891,000Issuance of common stock for exercise of options
329,535
300
42,500
-
42,800Issuance of common stock for professional services
3,393,200
3,400
30,500
-
33,900Issuance of common stock for interest
953,161
900
59,400
-
60,300Beneficial conversion feature and warrants issued   related to issuance of convertible promissory notes
-
-
178,100
-
178,100Due from shareholder


(28,300)
-
(28,300)Non-cash stock based compensation related to stock options granted
-
-
620,900
-
620,900Non-cash stock based compensation related to warrants granted
-
-
1,096,600
-
1,096,600Net loss
-
-
-
(4,017,200)
(4,017,200)Balance at December 31, 2008
72,005,906
72,000
6,121,400
(7,511,400)
(1,318,000)Change in accounting principle (Note 1)
-
-
(480,800)
356,100
(124,700)Expiration of beneficial conversion liability (Note 6)


383,500

383,500Issuance of common stock for cash
6,666,666
6,700
193,300
-
200,000Issuance of common stock for exercise of options
124,069
100
3,000
-
3,100Issuance of common stock for professional services
2,632,500
2,600
70,700
-
73,300Issuance of common stock for interest
4,602,000
4,600
56,800
-
61,400Issuance of stock to employees
600,000
600
5,400
-
6,000Beneficial conversion feature, warrants and common stock issued related to debt modification
1,000,000
1,000
237,800
-
238,800Non-cash stock based compensation related to stock options granted
-
-
365,900
-
365,900Non-cash stock based compensation related to warrants granted
-
-
139,900
-
139,900Net loss
-
-
-
(1,958,500)
(1,958,500)Balance at December 31, 2009
87,631,141
$                 87,600
$                 7,096,900
$           (9,113,800)
$               (1,929,300)

















The accompanying notes to the audited consolidated financial statements are


an integral part of these statements.





F-5





DIGITALPOST INTERACTIVE, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS





Year

YearEnded

EndedDecember 31, 2009

December 31, 2008Cash flows from operating activitiesNet loss




$
(1,958,500)

$
(4,017,200)Adjustments to reconcile net loss to net cashused by operating activities:Depreciation and amortization


135,200


79,200Non-cash stock-based compensation


657,200


1,811,500Amortization of debt discount


409,500


519,600Change in fair value conversion feature liability


258,800


-Changes in operating assets and liabilities:Accounts receivable and other assets



(19,400)


(19,700)Other assets



-


-Accounts payable



91,800


62,500Accrued expenses



195,200


15,700Deferred revenue



(37,500)


32,700Net cash used by operating activities


(267,700)


(1,515,700)Cash flows from investing activitiesAcquisition of property and equipment


-


(3,300)Acquisition and development of software


-


(150,600)Net cash used by investing activities


-


(153,900)Cash flows from financing activitiesProceeds from the issuance of common stock


200,000


891,000Proceeds from convertible notes


-


850,000Payments made on shareholder loans


-


(17,400)Proceeds from the exercise of options


-


42,800Financing cost


-


(117,500)Net cash provided by financing activities


200,000


1,648,900Net decrease in cash and cash equivalents


(67,700)


(20,700)Cash and cash equivalents, beginning of period


67,700


88,400Cash and cash equivalents, end of period

$
-

$
67,700Supplemental disclosures:Cash paid for income taxes


$
3,400

$
1,600Cash paid for interest


$
114,100

$
52,300Supplemental disclosures of non cash investing and financing activities:Common stock issued for interest


$
61,400

$
60,300Common stock issued for professional services and fees


$
73,300

$
33,900








The accompanying notes to the audited consolidated financial statements are


an integral part of these statements.





F-6





DIGITALPOST INTERACTIVE, INC.


NOTES TO AUDITED 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 web sites that allow subscribers to securely share digital media, including photos, videos, calendars, message boards, and history. The Company’s proprietary web site 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 consolidated financial statements include the accounts of DPI and TFP,  its wholly-owned subsidiary.





Cash and Cash Equivalents





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.





Web Site Development Costs





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





Costs are incurred internally in creating the Company’s software products.  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 are capitalized and reported at the lower of amortized cost or net realizable value.





As of December 31, 2009, and December 31, 2008, the Company capitalized $126,900 and $195,200, respectively, net of accumulated amortization, related to its web site and software development (Note 4).





Research and Development Costs





The Company expenses research and development costs as incurred.








Revenue Recognition





F-7








The Company’s subscription revenues are generated from monthly subscriptions for web site hosting services. The typical subscription agreement includes the usage of a personalized web site 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 web site 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 web site, 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 December 31, 2009, as the Company’s historical refund experience has been minimal.





Customers signup and agree to purchase the web site 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 year ended December 31, 2009 and 2008, the Company also distributed its web site 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. The Company derived 39% and 17% of its total revenue from the marketing partner during the years ended December 31, 2009 and 2008, 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 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 43% and 28% of its total professional service revenue from a single customer during the years ended December 31, 2009 and 2008, 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. 65,181,182 and 49,172,309 shares of potentially dilutive securities have been excluded for years ended December 31, 2009 and 2008, respectively, 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 2009 calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions: expected life of 5 years; 447% stock price volatility; risk-free interest rate of 3.6%; forfeitures rate of 12.9% and no dividends during the expected term.  During the years ended December 31, 2009 and 2008, the Company recognized employee stock option expense of $365,900 and $607,000, respectively.





F-8








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 December 31, 2009, 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 (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 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.  At December 31, 2008, the Company had a single marketing partner, which individually accounted for more than 10% of the net accounts receivable with a balance of $22,200.





As of December 31, 2009, the Company maintained its cash account at one commercial bank. The cash balance at December 31, 2009, does not exceed the FDIC coverage.





Advertising





Advertising and promotion costs are charged to operations when incurred. For the years ended December 31, 2009 and 2008, advertising and promotion costs amounted to $26,900 and $189,500, respectively.





Impairment of Long-Lived Assets





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 years ended December 31, 2009 and 2008, no impairment of long-lived assets was required.





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 December 31, 2009 and 2008, and revenues and expenses during the years ended December 31, 2009 and 2008. 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. Under the provisions of SFAS No. 109, Accounting for Income Taxes, 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





F-9





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 2009 and 2008 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 December 31, 2009 and 2008.







Change in Accounting Principles





In June 2008, the FASB ratified EITF Issue No. 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”, or EITF 07-05. Equity-linked instruments (or embedded features) that otherwise meet the definition of a derivative as outlined in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, or SFAS 133, are not accounted for as derivatives if certain criteria are met, one of which is that the instrument (or embedded feature) must be indexed to the entity’s own stock. EITF 07-05 provides guidance on how to determine if equity-linked instruments (or embedded features) such as warrants to purchase our stock and convertible notes are considered indexed to our stock. The Company adopted EITF 07-05, beginning January 1, 2009, and applied its provisions to outstanding instruments as of that date. The cumulative effect at January 1, 2009 was a reduction to additional paid in capital of $480,800 to reclassify the beneficial conversion feature embedded in the 2007 Convertible Notes (see Note 6 for further discussion) 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 at January 1, 2009. Under EITF 07-05 and SFAS 133, the conversion feature will be carried at fair value and adjusted quarterly.





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 December 31, 2009, 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 fourth quarter, the Company raised additional working capital of $100,000 from private equity financing.  Since inception through December 31, 2009, the Company has raised an aggregate amount of approximately $5 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  Decmeber 31, 2009 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 during 2010.  During the first quarter of 2010, the Company raised $390,000 cash proceeds in private debt financing (see Note 11 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:





December 31, 2009


December 31, 2008Computer equipment and software
$
53,100

$
53,100Furniture and fixtures

37,500


37,500Less -accumulated depreciation and amortization

(64,300)


(43,700)$
26,300

$
46,900





4.           WEB SITE DEVELOPMENT AND SOFTWARE COSTS





Web site development costs consisted of the following:


December 31,2009


December 31, 2008Website development costs
$
323,800

$
323,800Less -accumulated amortization

(196,900)


(128,600)$
126,900

$
195,200





5.           DUE TO STOCKHOLDER AND RELATED PARTY TRANSACTIONS





As of December 31, 2009 and 2008, $36,600 and $36,600, respectively, was due to an officer of the Company and principal stockholder. The amount due to the officer does not bear interest, is not collateralized and has no formal repayment terms.  During the year ended December 31, 2009 and 2008, none and $17,400 of the net amount owed was repaid to the officer.





As of December 31, 2009 and 2008, $45,000 and $45,000, respectively, was due to an officer of the Company pursuant to the 2007 Convertible Promissory Note agreements, as further discussed in Note 6 below.





The Company filed on Form 8-K on November 3, 2009, the November 2009 granting of options to purchase up to 6,900,000 shares of common stock granted to the Company’s employees, which includes options to purchase up to 2,750,000 and 2,250,000 granted to the Company’s chief executive officer and chief financial officer, respectively.  The options granted can be exercised at $0.05 per share.





In March 2009, the Company entered into interest amendment agreements with the holders of the 2007 Convertible Notes and an executive officer was a party to those agreements (see further discussion in Note 6).





In September 2008, $100,000 of the aggregate $256,000 cash proceeds received by the Company from a private placement was provided by two executive officers of the Company and 3,333,333 restricted shares were issued to them as part of the private placement (see further discussion in Note 7).





In May 2008 and June 2008, the Company entered into subordination agreements with the holders of the 2007 Convertible Notes and an executive officer was a party to those agreements.  Also, in September 2008, the Company entered into waiver agreements with the holders of the 2007 Convertible Notes and an executive officer was also party to those agreements.





On May 13, 2008, the Board of Directors approved the re-pricing of compensation options granted in 2007 to purchase up to 3,355,000 shares (for all employees/consultants) of our common stock from a weighted average exercise price of $0.70 per share to a weighted average price of $0.27 per share; included in this re-price event were 875,000 options owned by an executive officer.  The option to purchase up to 875,000 shares of the Company was originally granted on October 4, 2007, at an exercise price of $0.70 per share. The same option now has an amended exercise price of $0.27 per share. All other terms of the option remains the same. The Company incurred an incremental excess non-cash compensation expense related to this re-pricing in the amount of $1,500 for the year ended December 31, 2008.











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





F-10





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 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 is 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.  For the year ended December 31, 2009, $258,800 was incurred in valuation expense to mark the conversion feature to its fair value of $383,500 as of December 31, 2009.  The change in the valuation of the conversion feature was primarily driven by an increase in the Company’s stock price including minor changes in the related volatility during the year ended December 31, 2009. Also see Changes in Accounting Principles above.





Interest charges associated with the convertible notes, including amortization of the discounts associated with the conversion feature and the vested warrants, totaled $295,300 and $373,000 for the years ended December 31, 2009, and 2008, respectively.





F-11








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 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 resultt there is no longer a benficial conversion feature liabilty, therefore, the Company reclassed 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 $12,000 and $100,600 for the years ended December 31, 2009 and 2008, respectively.





F-12








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.





F-13








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.  The Company recorded interest charges associated with the convertible notes, including amortization of the discounts associated with the beneficial conversion feature, the vested warrants and common stock issued, totaled $623,900 and $100,600 for the years ended December 31, 2009 and 2008, respectively.








Interest charges associated with all four AOI Fund Convertible Promissory Notes, including amortization of the discounts associated with the original issue discount, put option and the vested warrants, totaled $456,823 and $113,400 for year ended December 31, 2009 and 2008, respectively.





Convertible promissory notes summary:





December 31, 2009


December 31, 2008The 2007 Convertible Promissory Notes
$
767,000

$
767,000The 2008 Convertible Promissory Notes

120,000


108,000The AOI Fund Promissory Notes

637,100


907,300The AOI Fund Promissory Notes Put Option

215,000


192,500Total borrowings

1,739,100


1,974,800Debt discount

(146,900
)

(554,200
)Total borrowings less debt discount

1,592,200


1,420,600Less current portion

1,592,200


1,092,000Noncurrent portion
$
-

$
328,600














F-14


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 $0.001 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 stock holders 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 – 2009





In September and October 2009, the Company entered into a $200,000 private placement with accredited investors, which the Company received $200,000 cash proceeds for the issuance of 6,666,667, restricted shares. During the year ended December 31, 2009, the Company issued 4,602,000 restricted shares of common stock for $61,400 of interest due on the 2007 Convertible Promissory Notes.  During the year ended December 31, 2009, the Company issued 124,069 restricted shares of common stock for options exercised in the amount of $3,100 cash proceeds.  During the year ended December 31, 2009, the Company issued 2,632,500 restricted shares of common stock for professional services and fees valued at $73,300.  During the year ended December 31, 2009, the Company issued 600,000 restricted shares of common stock to its non-executive employees as additional compensation. In October 2009, the Company issued 1,000,000 restricted shares in connection with debt extension agreements entered into with existing note holder (see Note 6 for further discussion). 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) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder; or (ii) Rule 501 under Regulation S.





Shares Issued - 2008





In January 2008, the Company entered into a $1 million private placement with foreign investors under a Regulation S Stock Purchase agreement, which the Company received $619,000 cash proceeds for the issuance of 5,145,837, restricted shares in 2008. In February 2008, the Company entered into a one month unsecured loan with an unrelated party for an amount of $50,000.  The loan was fully paid in February 2008 and in conjunction with the loan, the Company issued 100,000 restricted common shares valued at $16,000 for a service fee related to the loan.  In September 2008, the Company entered into a $256,000 private placement with accredited investors, which the Company received $256,000 cash proceeds for the issuance of 8,533,333, restricted shares.  $100,000 of the $256,000 cash proceeds was received by two executive officers of the Company and 3,333,333 restricted shares were issued to them as part of the private placement in September 2008. During the year ended December 31, 2008, the Company issued 953,161 shares of common stock for $60,300 of interest due on the 2007 Convertible Promissory Notes.  During the year ended December 31, 2008, the Company issued 329,535 shares of common stock for options exercised in the amount of $42,800 cash proceeds.  In December 2008, the Company entered into an agreement for professional services and issued 3,393,200 restricted shares of common stock valued at $33,900. 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) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder; or (ii) Rule 501 under Regulation S.





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





F-15





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,” (“ISO”) as defined in Section 422A of the Code and any regulations promulgated under said Section, or “Nonstatutory Options” (“NSO”) 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.





Stock options granted under the Plan 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 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 NSO stock options generally vest every nine months, over a three year period.





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





In accordance with the provisions of SFAS 123R, and for nonemployees, the measurement criteria of EITF 96-18, the Company recognized stock-based compensation expense of $365,900 and $620,900 for the year ended December 31, 2009, and 2008, 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 years ended December 31, 2009 and 2008:





Years Ended

December 31,2009

2008Expected volatility


447%


336%Risk-free rate


3.6%


2.9%Expected term


5.0 years


4.5 years





A summary of stock option activity for the year ended December 31, 2009, is as follows:





Number of

Shares

Weighted-

Average

Exercise

Price

Weighted-

Average

Remaining

Contractual

Term

Aggregate

Intrinsic

ValueOutstanding as of December 31, 2008
27,399,032

$
.09Granted
7,300,000

$
.05Exercised
(124,069)

$
.08Cancelled
(1,276,183)

$
.24Outstanding as of December 31, 2009
33,298,780

$
.08

3.2

$
--








A summary of the status of the nonvested options for the year ended December 31, 2009 is presented below:








Number of

Shares

Weighted-

Average

Grant Date

Fair ValueNonvested as of December 31, 2008
10,182,439

$
.09Granted
7,300,000

$
.05Vested
(1,549,342)

$
.13Cancelled
(437,500)

$
.21Nonvested as of December 31, 2009
15,495,597

$
.04





Information regarding the weighted-average remaining contractual life and weighted-average exercise price of options outstanding and options exercisable at December 31, 2009, 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


30,403,780


3.2


$   .05


16,055,683


$   .07$ .18 - .27


2,895,000


2.9


$   .27


1,747,500


$   .2733,298,780








17,803,183





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 December 31, 2009, the Company issued warrants to purchase an aggregate of 12,507,896 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 year ended December 31, 2009 is as follows:





Number of

Shares

Weighted-

Average

Exercise

Price

Weighted-

Average

Remaining

Contractual

Term

Aggregate

Intrinsic

ValueOutstanding as of December 31, 2008
9,326,896

$
.22

2.9

$
-Granted
3,181,000


.03Cancelled
-


-Outstanding as of December 31, 2009
12,507,896

$
.20

2.9

$
-





A summary of the status of the non-vested warrants for the year ended December 31, 2009 is presented below:





Number of

Shares

Weighted-

Average

Grant Date

Fair ValueNon-vested as of December 31, 2008
4,083,750

$
.29Granted
3,181,000

$
.01Vested
(2,281,000)

$
.04Cancelled
-

$
-Non-vested as of December 31, 2009
4,983,750

$
.14











F-16





8.           COMMITMENTS





During February 2009, the Company entered into a new two year lease for its new principal offices which the monthly rent is $3,300.  Rent expense incurred under this lease during the years ended December 31, 2009 and 2008 was $ 33,000 and none, respectively.





Total payments of $42,000 and $7,000 are due through the years ended December 31, 2010 and 2011, respectively.





In February 2007, the Company entered into a two year lease for its principal offices. Monthly rent was $8,400 under this lease. Rent expense incurred under this lease during the year ended December 31, 2009 was $16,800 and $100,800, respectively.





9.           INCOME TAXES





Due to operating losses, there is no federal tax provision and $1,600 California minimum franchise state provision for income taxes is due annually.





Deferred income tax benefits result from the recognition of temporary differences between financial statements and income tax reporting of income and expenses and the recognition of net operating losses in the approximate amount of $5.1 million and $3.8 million and stock based compensation expense of approximately $2.3 and $1.7 million, as of December 31, 2009 and 2008, respectively. These deferred tax benefits have been fully offset by a valuation allowance, as management could not determine that it was “more likely than not” that the deferred tax assets would be realized. The gross deferred tax asset and related valuation allowance was approximately $2.4 million and $2.6 million at December 31, 2009 and 2008.





As of December 31, 2009, federal and state net operating loss carry-forwards amount to approximately $5.1 million and begin to expire in the year 2027 and 2017, respectively.





Pursuant to Section 382 of the Internal Revenue Code, use of the Company’s net operating loss and credit carry-forwards may be limited if the Company experiences a cumulative change in ownership of greater than 50% in a moving three-year period. Ownership changes could impact the Company’s ability to utilize net operating losses and credit carry-forwards remaining at the ownership change date.








10.           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.





F-17








11.           SUBSEQUENT EVENTS





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 is offering 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.  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.





On January 11, 2010, Kiddie Kandids LLC filed for bankruptcy.  Commencing in the fourth quarter of 2008, the Company had launched a strategic marketing partnership with Online Solutions LLC, an affiliate of Kiddie Kandids LLC.  The Company derived 39% and 17% of our total revenue from this marketing partnership during year ended December 31, 2009 and 2008, respectively.  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.  On March 19, 2009,  CPI Corp. offered to buy all the assets of Kiddie Kandids with a plan to reopen all of its locations once the purchase is approved by the bankruptcy court, therefore the Company’s resulting customer base may reinitiate its growth as previously anticipated in the future upon the reopening.





During the first quarter of 2010, the Company received cash proceeds of $390,000 through a bridge loan from eight investors.  In exchange for these funds, the Company 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 (the “Short-Term Notes”).  The Short-Term 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 the Short-Term Notes with the proceeds from the offering discussed above.




On March 29, 2010, we entered into new employment agreements with Michael Sawtell and Steven Dong, as follows:
  Employment Agreement with Michael Sawtell
 
 We entered into an new employment agreement with Mr. Sawtell, our Chief Executive Officer on March 29, 2010. The employment agreement has a term of three years and automatically renews for additional one year terms unless either party terminates it with at least 30 days notice to the other party.  The agreement is only in effect to the extent we are successful of raising a minimum of $1,500,000 of financing.
 The material terms of the agreement are:  (i) base annual salary of $220,000; (ii) participation in our standard employee benefit plans; (iii) stock option grant to purchase up to 3,500,000 shares or our common stock; (iv) reimbursable expenses customarily given to Executives; (v) other bonuses at the discretion of the board of directors (vi) all previously grantedsecurities issued to Mr. Sawtell prior to this agreement shall be changed whereby the exercise price or conversion price shall become the same price per share equal to any subsequent financing made after the date of this agreement and (vii) severance arrangements.
  Employment Agreement with Steven Dong
  We entered into an new employment agreement with Mr. Dong, our Chief Financial Officer on March 29, 2010. The employment agreement has a term of two years and automatically renews for additional one year terms unless either party terminates it with at least 30 days notice to the other party. The agreement is only in effect to the extent we are successful of raising a minimum of $1,500,000 of financing. The material terms of the agreement are:  (i) base annual salary of $195,000; (ii) participation in our standard employee benefit plans; (iii) stock option grant to purchase up to 3,000,000 shares or our common stock; (iv) reimbursable expenses customarily given to Executives; (v) other bonuses at the discretion of the board of directors (vi) all previously grantedsecurities issued to Mr. Dong prior to this agreement shall be changed whereby the exercise price or conversion price shall become the same price per share equal to any subsequent financing made after the date of this agreement and (vii) severance arrangements.


F-18