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Consent of
Sweeney, Gates & Co., dated March 31 ,
2008
You
should rely on the information contained in this document or to which we have
referred you. We have not authorized anyone to provide you with information that
is different. The information in this document may only be accurate on the date
of this document.
As used
in this Form 10, unless the context otherwise requires the terms “we,” “us,”
“our,” “Espre” and the “Company” refer to Espre Solutions, Inc., a Nevada
corporation.
FORWARD-LOOKING
STATEMENTS
Except
for statements of historical fact, certain information described in this
document contains “forward-looking statements” that involve substantial risks
and uncertainties. You can identify these statements by forward-looking words
such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,”
“should,” “will,” “would” or similar words. The statements that contain these or
similar words should be read carefully because these statements discuss our
future expectations, contain projections of our future results of operations or
of our financial position, or state other “forward-looking” information. Espre
Solutions, Inc., believes that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able accurately to predict or control. Further, we urge you to be
cautious of the forward-looking statements which are contained in this Form 10
because they involve both known and unknown risks, uncertainties and other
factors affecting our operations, market growth, service, products and licenses.
The factors listed below in the section captioned “Risk Factors” within Item 1,
“Description of Business,” as well as other cautionary language in this Form 10,
provide examples of risks, uncertainties and events that may cause our actual
results and achievements, whether expressed or implied, to differ materially
from the expectations we describe in our forward-looking statements. The
occurrence of any of the events described as risk factors could have a material
adverse effect on our business, results of operations and financial
position.
The safe
harbor for forward-looking statements provided in the Securities Litigation
Reform Act of 1995 are unavailable to issuers such as Espre Solutions, Inc.,
which are not subject to the reporting requirements set forth under Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended.
WHERE
YOU CAN FIND MORE INFORMATION ABOUT US
Our
Registration Statement on Form 10 became effective on January 7, 2008.
Accordingly, we are required to file reports, proxy statements, information
statements and other information with the Securities and Exchange Commission.
You may read and copy this information, for a copying fee, at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for more information on its public reference rooms.
Our Securities and Exchange Commission filings are also available to the public
from commercial document retrieval services, and at the web site maintained by
the Securities and Exchange Commission at http://www.sec.gov.
Our
internet address is
www.espresolutions.com. We will make available through a link to the
Securities and Exchange Commission’s web site, electronic copies of the
materials we file with the Securities and Exchange Commission (including our
annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K, the Section 16 reports filed by our executive officers,
directors and 10% shareholders and amendments to those reports). To receive
paper copies of our Securities and Exchange Commission materials, please contact
us by mail addressed to Forres McGraw, Chief Financial Officer, Espre Solutions,
Inc., 5700 W. Plano Parkway, Suite 2600, Plano, Texas 75093, (214)
254-3708.
General
Information
Our
business address is 5700 W. Plano Parkway, Suite 2600, Plano, Texas 75093
and our telephone number is 214-254-3708. General information concerning Espre
can be found on our website at www.espresolutions.com.
Background
We were
incorporated in New Jersey on March 4, 1953, under the name “Planning and
Redevelopment Associates,” subsequently changed to “Candeub, Fleissig and
Associates.” From our organization until the 1980’s, we provided planning and
environmental consulting services to local governmental agencies and private
organizations. In August 1981 we filed a notice on Form 15 with the Commission
suspending our reporting obligations because we then had less than three hundred
shareholders. From approximately 1985 until July 2004, when we merged with Espre
Solutions, Inc., a Texas corporation organized December 23, 2003 (“Espre
Texas”), we were not engaged in any material business activity. The Company was
re-domiciled as a Delaware corporation in April 2004 and in August 2004 was
re-domiciled in Nevada under the name “Espre Solutions, Inc.” in order to be
governed by Nevada’s corporate laws.
In July
2004, while domiciled in Delaware, we acquired Espre Texas in a merger in which
29,960,366 shares of our Common Stock and 5,000,000 shares of our preferred
stock were issued to the founders and certain employees of Espre Texas, a
startup company that had acquired a license for our proprietary video CODEC,
“Lightning Strike™,” and other technology (the “Vianet Technology”) from Video
Software Partners, LLC, a Texas limited liability company (“VSP”) on May 1,
2004, prior to our merger with Espre Texas. On September 4, 2004, we bought the
Vianet Technology from VSP. The Vianet Technology was developed by Vianet
Technologies, Inc., a Delaware corporation (“Vianet”), and was acquired by VSP
from Vianet upon Vianet’s foreclosure in April 2004 of its security interest in
the Vianet Technology pursuant to a security agreement dated February 5, 2003,
between Vianet and VSP. Vianet was a public company with which our President,
Peter Leighton, our Chief Executive Officer, Peter Ianace, and our
Chief Operating Officer, Robert Logan, were associated as shareholders,
officers and directors. Mr. Leighton served as an officer and director of
Vianet from its organization until December 2001; Mr. Ianace was President
of Vianet from its organization until September 2003; and Mr. Logan was an
officer of Vianet from its organization until January 2004. Vianet ceased to be
a reporting company on November 18, 2005, when the registration of Vianet’s
common stock under Section 12(g) of the Securities Exchange Act of 1934 was
revoked by the Securities and Exchange Commission for repeated failure to file
periodic reports with the Commission. Greg Somers, the manager and a member
of VSP, was an officer and director of Vianet commencing in December 2001, and
became Vianet’s President in May 2003. Mr. Somers was also a principal
shareholder of Vianet. Mr. Somers has never been an officer, director, or
employee of Espre.
In August
2004, we acquired Wireless Peripherals, Inc., a Texas corporation (“Wireless
Peripherals”), in exchange for 24,960,366 shares of our Common Stock and
fully-vested options to purchase an additional 3,539,634 shares of our Common
Stock (3,462,618 common shares at $0.02 per share and 25,672 shares at $0.01 per
share). Wireless Peripherals was a development stage company that had been
developing a product called eViewLink, which we now own and which we have
integrated into our ESPRE Live platform. On November 19, 2003, JOD Enterprises
sold its ViewMail Marketing System technology to Espre Consulting, a company
owned by Mr. Ianace’s wife. Espre Consulting assigned the JOD technology to
Espre Texas on December 23, 2003.
Until
August 2005, the Company’s business strategy was to market its video
applications to corporations, advertising agencies, ISPs, ASPs and value added
resellers. In August 2005, the Company changed its business strategy and
commenced marketing its services to the same customer base. Also until
approximately August 2005, the Company was engaged almost exclusively in the
research and development of its products. Accordingly, until that date the
Company had a very limited sales and marketing program and did not generate
material revenue. As we commenced our current operations upon the organization
of Espre Texas in December 2003, no discussion is provided for any period prior
to that time.
Our
Common Stock was forward split on a three share for one share basis on May 2,
2005, in order to increase liquidity in the trading market for our shares. All
shares of our Common Stock, all warrants and options, and all exercise prices
are stated in the balance of this Registration Statement on a post-split
basis.
Our
Technology and Products
We
participate in the trend towards the proliferation of video content on the web,
both user and provider generated. The continued global deployment of broadband
has created a market for digital media creation and delivery. Our strategy
includes focusing on providing our customers with powerful tools to enable the
rapid deployment of video offerings to customers and participating in the
success of our customers’ deployment. Our principal offerings are ESPRE Live,
our Lightning Strike™ CODEC, and our Video eXchange
Network, descriptions of which follow. We also provide custom engineering and
design services.
ESPRE Live. ESPRE Live has
Lightning Strike™ as its platform and utilizes all of the technology we have
acquired, including our ViewMail Marketing System, eViewChat, and eViewLink.
ESPRE Live is a software development kit, or “SDK,” that is designed to enable
customers to build applications that deliver high-quality video at low data
rates that Lightning Strike™ over IP-based networks (both wireless and
hardwired) and the internet to devices such as PDA’s, personal computers and,
eventually, Java-enabled smart phones. This approach is provided as one
integrated platform and delivered as an SDK for developers and integrators. This
comprehensive video platform facilitates real-time integration, delivery and
archiving of live and streaming interactive media. Our SDK is designed to enable
broadband service providers and developers to build and rapidly deploy multiple,
ubiquitous, robust live video services and applications. ESPRE Live solves
challenges of video delivery over the internet using a holistic approach. The
ESPRE Live platform provides the following features that resolve video delivery
issues over the internet:
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•
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Advanced Player. The ESPRE Live player
provides what we refer to as Advanced Player controls, such as gesturing,
so that the cursor can be used to pause, play, fast forward, rewind and
stop in addition to the ability to provide these functions through the
standard button type interface. Other Advanced Player controls can be
built by the web developer using the ESPRE SDK to build a webpage where
multiple video windows interact, under programmatic controls. The video
player for each video can be queued and directed as needed to deliver a
truly interactive multimedia experience. Still other Advanced Player
controls can be built by the web developer using the ESPRE SDK to insert
advertising or make user- and session-dependent choices for alternative
video materials and sequencing. The result is that the Advanced Player
delivers the benefits of a real time video editor. Advanced Player
controls take technology application issues off the table and allow
developers more freedom in applying “art” to the development of an
interactive video presentation to simplify and enhance the user
experience.
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Time Stamping. Since
video file is time stamped every one hundred milliseconds, the Advanced
Player has the ability to display the progress of the video presentation
in terms of chapters, percentage or other representations as the developer
chooses. Time stamping also provides the ability to synchronize two video
presentations such as a “talking head” synchronized with a PowerPoint
presentation in a collaborative session with full ability to control the
viewing experience of other participants through moderator
controls.
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Multiple Encoding
Formats. The ESPRE Live toolset has the ability to produce multiple
versions of encoded files from a single pass encoding process. These
multiple files are needed for offering tradeoffs between video quality
level, bandwidth that will be used and CPU resources that will be
consumed. Since there is a broad spectrum in available bandwidth to end
devices and available CPU resources in them, intelligent applications can
determine the resource availability and select the most appropriate
encoded file to match the resources and to maximize the user experience.
The multiple encoding formats also allow applications to switch between
formats in real time. Since the frame reference numbers are synchronized
between the various formats, the end device player is able to dynamically
switch between formats in real time without interruption or stall of the
video presentation in response to network interruptions, bandwidth
variability, bandwidth demand by the user, or available CPU
variability.
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Encoding Efficiency. The
ESPRE CODEC is highly efficient in speed of encoding, the high level
of compression achieved, and in color quality that is retained during
compression. Speed of encoding and the high level of compression are
critical to real time conferencing. This efficiency enables the ESPRE
toolset to perform local encoding and uplink of a video channel while
simultaneously performing decoding of several downlink video channels. No
other CODEC operates at the efficiency level that allows all these
sessions simultaneously. The encoding efficiency provides other benefits.
For content owners planning to post large volumes of video, the prospect
of lengthy encoding periods translates into purchasing large server farms
to maximize parallel processing. With the ESPRE CODEC, even high
definition encoding can be accomplished in nearly the same time as the
video running time, while other CODECs are known to need 5-7 times the
running time for the encode process. The retention of color quality during
the compression process is extremely important in order to maximize the
user experience and provide DVD-like quality video for entertainment
purposes.
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Pull Strategy Using
HTTP. The ESPRE Live player in the user end device controls the
streaming of video frames from the streaming server. This is in contrast
to the push strategy in most other video streaming technology that leads
to difficulties. With the intelligence of the player in the end device,
the player knows the exact status of the user experience and what to do
about it. Recovery from interruptions is simple: the player repeats the
pull requests from exactly where they were interrupted without any wasted
buffering, without loss of frames and especially without loss of
synchronization. This pull strategy also enables the smooth switchover in
real time from one streaming server to another. Nearly every video
provider invests heavily in redundant servers but they are of little use
if the player intelligence is centralized in those servers. With the pull
strategy, switchover from one server to another is smooth, since the pull
requests are simply directed to another server. Implementing a pull
strategy allows users to experience the best video quality possible over
adverse conditions such as delay, jitter, packet loss and connection loss.
The architectural strategy of having the Advanced Player in control on of
the user experience has proven to be a dramatic improvement over the
standard push strategy invoked by most companies delivering streaming
video today.
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Advanced Buffering
Strategy. The decoder (or player) automatically detects server
disconnects and then automatically reconnects to that server or another
server at the exact frame where the disconnect occurred. The result is
that the viewer has an uninterrupted experience even though the server may
experience multiple disconnects during the viewing of a short or long
video presentation.
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Audio Video
Synchronization. The ESPRE Live encoding process separates the
audio file from the video file in order to ensure synchronization of audio
and video in lengthy video presentations such as full length movies or
extended training videos. This approach also allows multiple language
audio tracks to be used and be perfectly synchronized with the original
video tracks. Time stamping the encoded files every one hundred
milliseconds and synchronizing the decoding insures that any loss of
synchronization will not be visible to the
viewer.
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Seamless Integration.
The ESPRE Live tool kit allows a developer to build an application that
provides the user the ability to watch a video on one device, then switch
to another device, and resume viewing at the exact same position in which
the viewer left off. In today’s world of frequently switching between
multiple electronic devices, seamless integration means that a user could
be watching a full-length movie while on a commuter train and stop the
video when they arrive at their destination. Later, the user could resume
watching the movie on either the home PC or IP Set Top Box connected to a
home theatre and start at the exact scene at which they had stopped
viewing earlier.
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Live Interactive Media
Presentation and Controls. ESPRE Live provides developers with the
ability to design applications that incorporate pre-recorded video
presentations with live interactive video capabilities within the same
browser page. Designers and developers are able to focus on the “art” of
creating compelling multimedia applications. In a video conferencing or
collaboration application, the moderator or presenter has the ability to
control the participant’s views and interactions. For example, in a
synchronous learning application with multiple participants, the moderator
has floor controls to allow participants to “take the floor” and address
all other active participants in the session, or to share materials with
participants.
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Broadband Distribution
Mirroring. Consumer broadband providers have deployed services
using a model of high down-link bandwidth and low up-link bandwidth. ESPRE
Live incorporates a patented and economical solution to providing
multiparty video conferencing to match up with this type of broadband
availability. Participants in a multiparty video conference need only
transmit one up-link and at the same time receive multiple down-links for
all the other participants in the conference. ESPRE uses a Virtual
eXchange Network (VXN) to efficiently manage the replication of down-links
in real time video conferencing. The VXN Server is capable of managing as
many as one thousand concurrent sessions at a
time.
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Internet Broadcasting.
The VXN is configurable to cascade to other VXN Servers. Use of a single
layer of cascading VXN severs enables the ESPRE Live solution to broadcast
to 1000x1000 or one million participants. Use of multiple layers of
cascading VXN servers surpasses current thinking on how live internet
video broadcasting can be applied. (See “Video eXchange Network (VXN),”
below.)
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Recording and Archiving.
Within the confines of a video messaging application, the user encodes and
compresses audio and video on his local machine using a Java applet. When
compression is complete the application sends a highly compressed version
up to a server for distribution and archiving. For live interactive
sessions, ESPRE Live has incorporated an HTTP Gateway acting as a virtual
file system to provide recording and archiving functionality on
demand.
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Lightning Strike™ CODEC
(LSVX™). We have developed our acquired proprietary video
compression/decompression (“CODEC”) software to deliver high-quality video at
low data rates over proprietary networks and the internet to set-top boxes,
personal computers and wireless devices. Unlike many other video CODECs that are
based on standard compression specifications set by industry groups (e.g.,
MPEG-2 and H.264), our video compression/decompression technology is based
solely on intellectual property that we have acquired or developed. We also are
devoting significant attention to enabling our CODEC to operate on an array of
chips. We plan to position these chips in set top boxes, PDA’s and other
wireless devices. This should encourage use by customers who want to develop
video-enabled consumer products in a short timeframe. We are developing
relationships with chip companies in order to ensure the deployment of our
technology to as wide a base as possible.
Video eXchange Network (VXN).
We have developed a Video eXchange Network (VXN) solution for delivering real
time conferencing, multicast and broadcast video applications across the
internet and private IP networks. This enables utilization of our video
applications to deliver high-quality, real time video services across a scalable
VXN infrastructure. Our dedicated, nationwide VXN server networks will be
deployed on all major internet systems. This comprehensive network will allow us
to deliver real time video content on the edge of the internet for faster,
higher quality video content delivery. This means fewer dropped frames and the
highest possible video quality for millions of concurrent streams. Our
intelligent routing guarantees uninterrupted video content delivery. We have
designed a video Java Player for both live and store-forward video that allows
video content to be effectively delivered to all desktops using any Web
browsers, via our VXN infrastructure. A single live video stream can be
replicated simultaneously to thousands of recipients while being recorded for
subsequent playback. Recipients can switch between the live and recorded stream
as if they were connected to a high quality digital video recorder.
Custom Engineering and Design
Services. We provide custom engineering and design services to support
customers and business partners wishing to build applications using our
products. These services include the architecture and design of the application
itself, technical support of the application, and integration of the application
with other products.
ESPRE
Live and Lightning Strike ™ Revenue Model
Our
revenue model is to license ESPRE Live and Lightning Strike™ for defined markets
for, in most cases, revenue sharing arrangements. We plan to market ESPRE Live
under the following revenue models:
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Vertical market application
developers. ESPRE Live will be licensed to web developers who are
in the business of selling a complete solution to their customer base. We
have identified a number of large vertical markets that include distance
learning, healthcare, government, homeland security, ISP’s, legal and
broadcasters that can best use ESPRE Live to develop applications relevant
to the specific market. We have initiated a plan to target a lead customer
or large systems integrator to partner within each of these vertical
markets. The end application will be developed one of three ways; by the
systems integrator, the lead customer’s technical staff, or our custom
engineering services organization under contract to that lead customer.
The revenue model will be to charge a combination of right to use licenses
and revenue sharing royalties.
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Hosting model. We plan
to make available some basic forms of ESPRE Live to the global web
developer community for free. Deployment of applications will be required
to be hosted on our VXN server network for which we will charge customary
industry rates.
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CODEC licensing. We will
license the stand alone LSVX CODEC to companies that choose to integrate
the CODEC into their own delivery platform. Our DSP Version will be sold
through OEM arrangements to set top box and mobile device
manufacturers.
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Custom Engineering and Design
Services. We charge engineering services to customers to build
applications to their specification and to assist in the design and
architecture of the application
itself.
|
We
believe that we have adopted the licensing model for ESPRE Live most appropriate
for a business of our size and expertise. The licensing model we have adopted is
one in which we license ESPRE Live to customers for licensing fees and, in some
cases, ongoing royalties based on the customers’ revenues. Other licensing
models could involve licensing ESPRE Live directly to individual customers, but
this would require a substantial investment in support and technical services
that we are not financially able to fund. A result of the licensing model we
have chosen is that the amount of revenue we generate is highly dependent on the
success of our customers’ products and application deployments. If the customer
delays or does not deploy the application as anticipated, we do not earn ongoing
revenues.
Blideo
Inc
Espre’s
business model is to develop its ESPRE Live toolkit (which is enabling software)
and to license this toolkit to customers that want to build service-based
applications using the video modules within the toolkit. In an effort to
demonstrate the capabilities of the ESPRE Live Toolkit, and to attract
customers, Espre first had to build a demonstrable application that would
showcase ESPRE Live. This effort would require a substantial capital
investment. While Espre’s ongoing efforts to raise capital from private
investors had been sufficient to continue to fund the development of our toolkit
and pay general corporate overhead, it was not sufficient to fund the
development of a complete and productized application. Therefore, in February
2007, Espre engaged an investment-banking firm to raise the required capital
from institutional investors. By April 2007 this effort had proven to be
unsuccessful and forced Espre to seek alternate financing
mechanisms.
While
our experience in attempting to raise additional capital in the period from
February to April 2007 had shown that some investors might not be willing to
invest in a publicly-traded company such as Espre, we believed that there might
be other investors willing to invest in a private company, especially one that
would develop a Web 2.0 service, one that would use the Internet as a computing
platform rather than just an information source. Leighton, who in April 2007,
was a shareholder but not an officer or director of Espre, expressed an interest
in establishing and investing in a privately-held company which would develop
such an application using the ESPRE Live toolkit. Accordingly, on April 27,
2007, Espre, together with Kyle Nelson (who until this time had been an officer
and director of Espre) and Leighton organized Blideo, Inc., to which Espre and
Leighton each initially contributed $200,000 in capital. In the period from the
inception of Blideo to September 30, 2007, Leighton and Espre have contributed
$500,000 and $650,000, respectively. It was perceived at the time
that although Espre could not fund the entire development of the application, it
would be beneficial for Espre to invest as much as it could afford in Blideo’s
initial round of funding to not only capture equity in the entity, but also help
attract other private equity investors to Blideo by demonstrating Espre’s
confidence in the Blideo business plan.
Espre
believed that the organization of Blideo as a separate entity engaged in the
development of an application using our toolkit would benefit Espre by making
available additional capital that Espre had not been able to access from either
institutional or private investors. Further, Blideo’s business plan called for
the deployment of the application as a “free” online service, a revenue
structure that was completely the opposite of that of Espre. The successful
deployment of Blideo would not only demonstrate the utility of the Espre
toolkit, but as a service that was designed to grow virally on the web, would
quickly spread to a wide global audience of users.
The
development and deployment of Blideo’s application requires a considerable
investment to research the market for, and design the functionality of, the
Blideo online service. It is estimated that these efforts, together with the
actual engineering development, pre-launch marketing and finally the deployment
of the Blideo online service, will cost at least $9,000,000. As a separate
entity, Blideo has been able to raise $1,850,000 (in addition to the total of
$1,150,000 contributed by Espre and Leighton), and Blideo plans to raise another
$6,000,000 in the second half of 2008 to complete the development of Blideo’s
online service and to bring that service to market.
Other
than Espre, the following are shareholders of Blideo:
Related
Party
|
How
Related
|
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Peter
Leighton
|
President
and Director (of both Espre and Blideo), shareholder of
Espre
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Pete
Ianace
|
CEO
and Director of Espre and director of Blideo
|
Peninsula
Group
|
Shareholder
of Espre and SureCast
|
Ernie
Ianace
|
VP
Sales and shareholder (and option holder) of Espre
|
Grant
Davis
|
Shareholder
of Espre
|
Kyle
Nelson
|
Shareholder
of Espre
|
Andy
Wilson
|
Shareholder
of Espre
|
Phil
Snowden
|
Shareholder
of Espre
|
Ryan
Williams
|
Shareholder
of Espre
|
William
Gatreaux
|
Shareholder
of Espre
|
Espre
anticipates that it will benefit from its relationship with Blideo as
follows:
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•
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We
will earn revenues through a licensing fee, engineering and design service
fees, application support fees and a participation in Blideo’s revenues.
(See Item 7, “Certain Relationships and Related Transactions, and Director
Independence.”)
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•
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If
Blideo is successfully deployed and adopted by users, our investment in
Blideo could become valuable.
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•
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If
Blideo is successful, we believe we will benefit from Blideo’s having
demonstrated the usefulness of ESPRE Live in deploying a video enabled
application.
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Blideo
was organized to create an application that can be used as a fully-equipped
online collaboration environment where business professionals can work together,
share information and communicate over the internet. Blideo’s goal is to become
an easy-to-use collaborative platform utilizing the concept of opening a
“circle” and then adding the people planning to work together in it. Once
included, a user will then able to video or audio-conference, share files,
create schedules and make presentations. All the files, information and
communication history relevant to a particular customer or project will be
stored within the circle, so there is no dispersal of information. All the tools
that a user needs to collaborate will be available at the click of a
mouse.
Espre
believes that Blideo’s service offering represents the convergence of several
web trends (including audio and video conferencing, web collaboration, web
presentations, blogging and social networking, Wiki’s and forums) and the
convergence of these newer technologies with older ones (including cell phones,
PDAs, contact managers, file-sharing solutions and video/PowerPoint
presentations). The principle features of Blideo will be:
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Video
Conferencing. Using Espre’s proprietary video technology, members
will be able to have scheduled or ad-hoc video conferences. Video
conferences can also be recorded and archived on servers for later review
or re-broadcast to other members. There will not be the traditional limits
of one-to-one video conferencing: conferences will be able to involve
thousands.
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Unified
Messaging. Unified messaging services will allow a user to
aggregate incoming emails, instant messages, text messages and
notifications in a single message center that is accessible from the
desktop, laptop and cell phone. The sender addresses of incoming messages
will be compared against the user’s contact lists to allow a variety of
responses: send a reply email, launch an IM, post a private video message,
or dial a VOIP call with a single click from the Blideo message
widget.
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Contact Management.
Users can import contacts from Outlook, Entourage, cell phones and many
other sources, to be placed in the appropriate circles. Once the contacts
are in a circle, the contact database is always maintained with each
user’s most recent information. Changing phone numbers, company
affiliations and addresses are synched for all members
automatically.
|
|
•
|
Shared Calendars. Each
circle includes a shared calendar displaying scheduled events that can be
viewed by the circle members participating in these events. The calendar
also sends notification of pending events, such as conference calls and
scheduled presentations. The calendars provide automatic tracking of daily
activities within the circle. When a circle member places a call, uploads
a new document or creates and sends a video email, for example, an entry
is automatically placed in the calendar, making it easy to track time and
activities performed by circle
members.
|
|
•
|
Document Libraries.
Document libraries allow anyone with permission to upload files to a
common area and set permissions for other members to view them. PowerPoint
presentations, Word and Excel documents, graphics, audio and PDF files can
be stored and shared in the document libraries. Uploaded videos can be
automatically converted to our proprietary format, to improve quality and
streaming performance. Documents can also be circulated through the
library for approval and commentary by selected
members.
|
|
•
|
Audio Conferencing and
VOIP. Blideo will provide free audio teleconferencing for members,
similar to services such as
“freeconference.com.”
|
|
•
|
Desktop Sharing. Using
our unique video technology will improve the desktop sharing experience.
Users will be able to experience the contents of members’ desktops in real
time without being required to load any software. Any application that can
be viewed on a member’s desktop can be shared, for example Photoshop,
PowerPoint, Word.
|
|
•
|
Blogs. Blogs provide a
one-way publishing medium to allow members of any circle to distribute
documents, concepts, white papers, and articles for use by members and,
with appropriate permissions, by guests of the circle. Readers can leave
comments if permitted by the blog’s
author.
|
|
•
|
Wikis. Wikis provide a
way to communally edit a document, allowing many participants to
contribute their ideas. Wikis can also have comments added by readers if
permitted by the Wiki’s creator.
|
|
•
|
Forums. Forums provide
an ongoing asynchronous chat environment for members of the circle, as
well as guests if permitted.
|
|
•
|
Blideo Concierge. The
online concierge will provide automated interfaces to business services
such as FedEx/Kinkos for automatic printing and distribution of documents
and presentations. Other business services will be added as appropriate,
creating additional revenue streams and partnership
opportunities.
|
|
•
|
Widget Interfaces. Many
of the core features of Blideo will be available to members using desktop
widgets compatible with the most common widget platforms, including Google
Gadgets, Yahoo Widgets, OSX Widgets and Windows Vista Widgets. These
miniature desktop objects will provide real time monitoring of messages,
contacts, events, calendars, blogs and forums so that users do not have to
have the Website open at all times.
|
Blideo’s Revenue Model. When
Blideo is launched in 2008, it will be web-based service offering an array of
useful features. The basic service will be free and Blideo will generate
revenues principally from advertising and premium services (such as storage).
The main elements of Blideo’s revenue model are:
|
•
|
Basic and Premium Memberships
— Basic Membership will be available for free to all users, with
revenue driven by advertising and sponsorships. However, Blideo will also
offer an enterprise-level or “Premium” membership for a monthly charge,
which might be free of advertisements, in addition to offering other
benefits.
|
|
•
|
Advertising — Online
advertising will be a key revenue driver throughout the Blideo community.
For Basic users, online advertising will be a mandatory condition of using
the system. Premium or Enterprise users will have the option of removing
advertising from their Blideo circle pages. In addition to ads throughout
Blideo.com, sponsorship advertising will be available on the Blideo email
alerts sent out to users and members of circles. Another advertising
opportunity lies in the “Daily Digest.” Each member can choose to receive
a “Daily Digest” of all activity in the circles of which they are a
member. This daily email will include comments on their blogs, new posts
to their circle user forums, and a list of documents changed or uploaded.
These Daily Digests will contain embedded advertising. Ads will be sold in
multiple cost tiers. At the least expensive level, ads will be rotated
throughout the site on any circle or personal page. At the second tier,
ads will be targeted based on keywords from the public circle description
and tags. At the third tier, an advertiser can target a specific list of
circles. This sort of specificity will provide the most focused target
audience and the highest CPM.
|
|
•
|
Affiliate Relationships
— Blideo will create affiliate relationships with a variety of key
service providers, such as cell phone companies and online travel and
hotel booking agencies, in order to gain referral fees for helping members
purchase new phones and other business
services.
|
|
•
|
SMS Alerts — Sending SMS
messages to many cell phone users results in small charges (typically 10
cents) billed by their cell phone companies. Blideo will negotiate with
cell phone companies to receive profit-sharing from these SMS charges.
Additionally, Blideo will include sponsorship advertising with each SMS
message sent to Blideo members.
|
|
•
|
Audio Conferencing —
Today’s “free” audio conferencing services aren’t actually free. Instead,
companies such freeaudioconference.com make their money by driving
participants to dial a long distance number to join the audio conference,
which drives a revenue-share from the Telco’s. With millions of minutes of
“free” audio conferencing, this revenue becomes substantial. Blideo will
partner with a company in this space to garner a revenue split from calls
scheduled or initiated through the Blideo
site.
|
|
•
|
VoIP —Blideo will team
with a leading VOIP service provider to give members the ability to place
long distance calls from their desktops, laptops or handhelds. Depending
on the terms of the joint venture, Blideo could receive a revenue-share,
or charge credits for VOIP
services.
|
|
•
|
BlideoStreams —
BlideoStreams will allow Blideo members to post videos on the Blideo
network and embed them in their own sites, or on other Websites
watermarked “Blideo.” Pre-roll advertising will be incorporated into each
stream, driving exposure and revenue back to
Blideo.
|
|
•
|
BlideoMail — Blideo
members can send video postcards and video meeting invitations to their
own Blideo audiences, or to other email lists they upload to the system.
Advertising will accompany the video and the actual HTML message to drive
revenue back to Blideo.
|
|
•
|
BlideoChat — BlideoChat
will be free. Advertising will be built around the video screens to
capitalize on the time that users spend on the Blideo site while
performing a video conference. In the case of desktop sharing
applications, a 15- second pre-roll will launch prior to the meeting start
to capture additional exposure for meeting sponsors and drive higher CPM
rates for Blideo.
|
Transactions
with Related Parties
The
Company derives a substantial portion of its revenues from companies which are
shareholders, or are affiliated with shareholders, officers or directors of the
Company, or in which the Company has an interest as a shareholder or other
beneficial ownership interest, as follows:
|
•
|
Blideo
Inc. See Item 7, “Certain Relationships and Related
Transactions, and Director Independence” for a description of the
Company’s relationship with Blideo. The Company anticipates ongoing
transactions with Blideo until Blideo launches its product offering in
September 2008. Thereafter, the Company expects that its business
relationship with Blideo will be limited to revenues from royalties
payable by Blideo to the Company and from providing support services to
Blideo and its customers.
|
|
•
|
Video Software
Partners, LLC. See Item 10, “Recent Sales of Unregistered
Securities—Purchase of Intellectual Property,” for a description of the
Company’s acquisition of its CODEC from Video Software Partners, LLC, and
the issuance of an aggregate of 7,788,000 shares of Espre Common Stock in
connection with that acquisition. The Company has no other business
relationship with Video Software Partners,
LLC.
|
|
•
|
SureCast Media
(“SureCast”). On April 30, 2007, the Company and SureCast executed
an intellectual property license agreement in which the Company granted
SureCast the exclusive perpetual right to use the Company’s software to
develop applications for the Entertainment Market, which the parties
defined as pay per view, ad insertion and subscription fee-based
professionally produced, pre-recorded video content in the form of
entertainment and sports entertainment video applications, defined as
sports shows, sporting events, sports shorts, full length movies, movie
trailers, previews and clips (commonly referred to as Hollywood
applications), as well as full length television shows, television shorts,
music videos and documentaries distributed over the Internet for
consumption by consumers. In consideration of the Company’s
granting the license, SureCast paid a license fee of $1,000,000 upon
signing the agreement and agreed to pay a further $450,000 upon completion
of pilot testing. The Company also granted SureCast a put option, valid
for three years from April 1, 2007, which would require the Company to
purchase the license back from SureCast for the amount of $2,000,000. As
of September 30, 2007 the revenue of $1,000,000 received from SureCast was
deferred due to the existence of the put option. SureCast is a related
entity to one of the Company’s major shareholders. The Company
recognized the $1,000,000 license fee as revenue in the first quarter of
Fiscal 2008, when SureCast terminated its put option in return for the
cancellation of the $450,000 due on completion of pilot testing in
November 2007. The SureCast license fee constitutes 92% of the
Company’s revenues in Fiscal 2008 through the date of this Registration
Statement. SureCast is owned by Peninsula Group, one of the
Company’s principal shareholders. See Item 4, “Security
Ownership of Certain Beneficial Owners and
Management.”
|
Also on
April 30, 2007, the Company executed another agreement with SureCast which
entitles the Company to 25% of the value received by SureCast in the event that
SureCast, or the underlying license, is sold.
In
November 26, 2007, SureCast and the Company agreed to terminate SureCast’s put
option of $2,000,000 in return for the Company waiving the final payment due
under SureCast’s license of $450,000.
The
Company believes that SureCast may be affiliated with the Peninsula Group, which
owns 32,500,000 restricted shares, or approximately 9.7% of the Company’s
outstanding common stock as of January 31, 2008.
|
•
|
Vizeo
Solutions, Ltd. In November 2006, the Company entered into a
non-exclusive license agreement with Vizeo Solutions, Ltd. (“Vizeo”), a
company formed by Mr. Leighton to market the Company’s technology in
Europe and the Middle East. This agreement was terminated by mutual
agreement in March 2007 when Mr. Leighton decided to establish Blideo
rather than to Market ESPRE Live licenses. Separately in November 2006
Vizeo entered into a license agreement with MDS which, as amended, gave
Vizeo the right to use MDS’ technology (acquired from the Company) for any
blogging and social networking offering; granted Vizeo the exclusive right
to market MDS’ technology in the European and Middle East markets; granted
Vizeo a perpetual right to use the name “Blideo”; granted MDS a
non-exclusive license as a reseller to use Vizeo’s Blideo technology in
the United States to white-label Blideo to third-parties; and prohibited
MDS from creating any blogging and social networking offering using the
Espre CODEC or related technology. In January 2008 Vizeo and Blideo
entered into an agreement conveying to Blideo the perpetual right to use
the name “Blideo” and right to develop any blogging and social networking
offering using the Espre CODEC or related technology. As
of the date of this Registration Statement the Company has no business
relationship with Vizeo except the collection of a note payable by Vizeo
to Espre in March 2009. See Item 7, “Certain Relationships and Related
Transactions, and Director Independence,” for additional information
concerning the Company’s relationship with
Vizeo.
|
|
•
|
Media Distribution
Solutions, LLC. On April 14, 2006, the Company entered into
a license agreement with Media Distribution Solutions, LLC (“MDS”),
pursuant to which the Company gave MDS a perpetual and exclusive right to
sublicense and distribute the Company’s product globally and exclusively
except in North Korea for the business-to-consumer and
consumer-to-consumer markets, and the Company received an approximate 10%
equity interest in MDS. The MDS license agreement was amended on April 14,
2007, to exclude sports and entertainment applications, which the Company
then licensed to SureCast on April 30, 2007. In addition to
giving the Company an equity interest in MDS, MDS agreed to pay the
Company a license fee of $2,000,000 on an installment basis, subject to
MDS’ raising capital. As of the date of this Registration Statement the
Company has invoiced MDS $1,850,000 and has received $950,000 (of the
$2,000,000 cash portion of the license fee), which constituted 95% of the
Company’s fiscal 2006 revenues,. The Company does not believe that MDS has
raised additional capital. The Company has not received any revenues from
MDS in fiscal 2008. The Company’s agreement with MDS requires MDS to pay
the Company 5% of MDS’ gross revenues from sales of the Company’s
products. The Company has not received any royalty payments. The Company
anticipates earning royalties from MDS in the future and proceeds from the
sale of its equity interest in MDS if MDS is
sold.
|
Espre
anticipates that from time-to-time its shareholders may bring business
opportunities to Espre, although except as set forth under this caption,
“Transactions with Related Parties,” no shareholder has brought any business
opportunity to the Company. Espre also anticipates that, as it has done with
Blideo, it will establish other entities alone or with others in order to take
advantage of financing opportunities or for other business
purposes.
Summary Description of Principal
License Agreements.
The
following chart summarizes the Company’s principal license agreements and, as
appropriate, the relationship of the Company with the other parties to these
agreements. The chart and its description are not intended to be inclusive of
all of the Company’s license agreements nor to describe in detail any of the
license agreements that appear in the chart. See Item 1, “Business,” Item 7,
“Certain Relationships and Related Transactions, and Director Independence,” and
the footnotes to the Company’s Consolidated Financial Statements.
Party
|
How Related
|
|
Business Relationship
|
Blideo
Inc.
|
As
at September 30, 2007 we owned 45.45% of Blideo
|
•
|
Blideo
has a non-exclusive five year right to use license for ESPRE
Live
|
|
|
•
|
We
have agreed not to compete with Blideo for a period of one year from the
date of delivery of Blideo’s application
|
|
|
|
|
Media
Distribution
Solutions,
LLC (MDS)
|
As
at September 30, 2007 we owned approximately 10% of MDS
|
•
|
MDS
holds a global (excluding North Korea) exclusive license for ESPRE
Live for the business-to-consumer and consumer-to-consumer
markets, excluding sports and entertainment and social networking and
blogging
|
|
|
|
|
SureCast
Media
|
SureCast
is controlled by Peninsula Group which, as at September 30, 2007, owned
10.2% of our issued and outstanding common shares
|
•
|
SureCast
holds an exclusive perpetual right to use our software to develop
applications for the entertainment market, which is defined as pay per
view, ad insertion and subscription fee based professionally produced pre
recorded video content in the form of Entertainment and Sports
Entertainment video applications defined as sports shows, sporting events,
sports shorts, full length movies, movie trailers, previews and clips
(commonly referred to as Hollywood applications), as well as full length
television shows, TV shorts, music videos and documentaries, distributed
over the Internet for consumption by consumers.
|
|
|
•
|
In
another agreement with SureCast we are entitled to 25% of the value
received by SureCast in the event that SureCast, or the underlying
license, is sold.
|
|
|
|
|
Global
IP Sounds
|
Not
related
|
•
|
Global
IP has a non-exclusive perpetual license for the source code of our LSVX
CODEC, granting Global IP the right to create derivate works in object
code or some code form; to distribute or sell derivate works in object or
some code form; and to sell the derivate works embedded in Global IP
products.
|
Outsourced
Engineering Services
The
Company outsources engineering services when such services can be provided in a
more cost-effective manner than if the services are provided in house. The
Company has outsourced $484,320 and $306,120 (31.4% and 54.1%) of its research
and development expenses in the fiscal year ended September 30, 2007, and the
three months ended December 31, 2007, respectively. All outsourced
engineering services have been for writing line code in connection with the
development of software.
Markets
and Marketing
Our sales
personnel provide our existing and prospective customers with sales, advertising
and promotional materials. Product demonstration facilities are maintained in
our corporate office. We also provides our sales force with ongoing training to
ensure that it has the necessary expertise to effectively market and promote our
product lines.
Espre
maintains an internet website, www.espresolutions.com,
which provides extensive information about the Company, its products and
services, and contact information.
Competition
We
operate in markets that are extremely competitive and are influenced
significantly by the marketing and pricing decisions of other industry members.
The barriers to entry are not insurmountable in any of the markets in which we
compete. We expect competition in these markets to intensify in the future. We
compete with both enterprise and consumer IP-based video communications
applications, some of which are larger, have longer operating histories, have
substantially greater financial, technical and marketing resources, larger
customer bases, greater name recognition and more established relationships in
the industry than we do. These competitors can devote greater resources to the
development, promotion, sale and support of their products. In addition,
competitors with a large, installed customer base may have a significant
competitive advantage over us. Accordingly, potential customers may not consider
or evaluate our products. We expect to face increased competition, particularly
price competition, from other technology providers. These vendors may develop
products with functionality similar to our products or may provide alternative
solutions. Our distributors and OEMs (Original Equipment Manufacturers) may also
compete with us by selling their own products, as well as by selling products
purchased from us. In addition, current and potential competitors may establish
cooperative relationships among themselves or with third parties to develop and
offer competing products.
We
believe that to remain competitive we must invest significant resources in
developing new products, enhancing current products and maintaining superior
customer satisfaction. Failing to do so may cause our products to compare
unfavorably with our competitors’ products, and our business could be materially
adversely affected.
It is
common in the video communications industry for competitors to acquire companies
for the purpose of introducing new products or emerging technologies.
Consequently, competitors with larger market capitalization or cash reserves
than we have will be better positioned to acquire new technology or products
capable of displacing our products. If we fail effectively to introduce new
products and enhancements on a timely basis, our business may be materially
adversely affected.
We
believe that even though bandwidth and high-speed broadband connections are
widely available, the need to provide better-quality video at lower data rates
remains an issue for our prospective customers. Our most significant competitive
advantage is our video compression technology and the sophistication and power
of our tool kit product, ESPRE Live, so that we must further distance itself
from our competition by integrating the applications which are enabled by our
ESPRE Live product.
Under the
terms of our license agreement with Blideo we are prohibited from competing with
Blideo’s initial application for a period of twelve months from the date of
Blideo’s acceptance of the application we are designing and building for them
which is expected to be in March 2008.
Research
and Development
In the
fiscal years ended September 30, 2007, 2006 and 2005, we spent an aggregate of
$3,773,938 on research and development. We intend to continue to spend at least
$2,000,000 per year for the next three years to improve and develop our
technological base.
Intellectual
Property
Espre
protects its CODEC and all related applications by relying on trademarks,
copyrights, patents, trade secret laws and confidentiality agreements. Espre
views its copyright, service marks, trademarks, trade secrets, proprietary
technology and intellectual property as critical to its success. Espre currently
holds by purchase agreement three U.S. patent and applications pending for seven
U.S. patents, as follows:
Serial #
|
|
Description
|
|
Status
|
09/038,562
|
|
Image
compression
|
|
Granted
as 7003168
|
|
|
|
|
|
09/727,241
|
|
Wavelet
transformation
|
|
Granted
as 6711299
|
|
|
|
|
|
09/727,242
|
|
Image
compression
|
|
Granted
as 6904175
|
|
|
|
|
|
10/307,613
|
|
Wireless
telepresence
|
|
Patent
Pending
|
|
|
|
|
|
60/761,554
|
|
Production,
Rights Management and Content Distribution
|
|
Patent
Pending
|
|
|
|
|
|
60/771,727
|
|
Digital
Media Player Factory
|
|
Patent
Pending
|
|
|
|
|
|
60/774,389
|
|
Wireless
communication system
|
|
Patent
Pending
|
|
|
|
|
|
60/864,963
|
|
High
Accurate Predictor Based Fractional Pixel Search for H.264
|
|
Patent
Pending
|
|
|
|
|
|
60/864,965
|
|
Hybrid
Integer Pixel Searching Method for Fast Block Based Motion
Estimation
|
|
Patent
Pending
|
|
|
|
|
|
60/894,372
|
|
Virtual
exchange Network (VXN)
|
|
Patent
Pending
|
We have a
trademark for “Lightning Strike.”
We
believe that the patents that are currently issued are material to our business.
While we try to ensure that the quality of the our brand is maintained through
such measures, there can be no assurance that steps we have taken and continue
to take to protect our proprietary rights will be adequate or that third parties
will not infringe on our intellectual property. In addition, there can be no
assurance that third parties will not assert infringement claims against us
which, even if not meritorious, could result in the expenditure of substantial
resources and management effort.
In our
third-party software license agreements, we seek to control access to and
distribution of our technology, documentation and other proprietary information.
Even with all of these precautions, it could be possible for someone else to
either copy or otherwise obtain and use proprietary information without our
authorization or to develop similar technology independently. Effective
trademark, copyright and trade secret protection may not be available in every
country in which our services are made available through the internet, and
policing unauthorized use of our proprietary information is difficult and
expensive. In addition, some of our technology is protected as a trade secret
for which government registration is not available. We cannot be sure that the
steps we have taken will prevent misappropriation of our proprietary
information. Any misappropriation could have a material adverse effect on our
business. In the future, we may need to go to court to either enforce our
intellectual property rights, to protect trade secrets or to determine the
validity and scope of the proprietary rights of others. That litigation might
result in substantial costs, as well as the diversion of resources and
management’s attention.
From
time-to-time, our licenses from third parties technologies are incorporated into
some of our products and services. Our only material third-party license is with
Radvision, from which we license an H.323 protocol stack that is integrated into
the VXN component of the ESPRE Live product. Although we continue to introduce
new services that incorporate new technologies, we may be required to license
additional technology from others. We cannot be sure that these third-party
technology licenses will continue to be available on commercially reasonable
terms, if at all.
Government
Regulation
We are
not currently subject to direct governmental regulation other than certain U.S.
export controls and import controls of other countries, including controls on
the use of encryption technologies, which may apply to our products. Laws and
regulations specifically pertaining to the internet are new and developing.
These laws or regulations govern matters such as online content, intellectual
property, user privacy, e-commerce, information security and taxation. In
addition, the applicability of existing laws to the internet is uncertain and
evolving. As a result of this uncertainty, it is difficult to predict the
impact, if any, that future regulation or changes in regulation may have on our
operations.
We may be
liable to third parties for any content that we encode, distribute or make
available on our website if that content violates a third party’s intellectual
property rights or violates any applicable laws, such as obscenity laws or
defamation laws. Although we try to mitigate this risk by seeking
indemnification from its customers and suppliers, we may still be subject to
liability if indemnification is not obtained, is contested or does not provide
us with enough resources to cover any potential liability.
Employees
As of
September 30, 2007, we had approximately 39 full-time employees. Of the total
employees, 27 (69%) were engineering and product development personnel, 7 (18%)
were sales and marketing personnel, and 5 (13%) were general and administrative
personnel.
None of
our employees are represented by a labor union, and we consider our relationship
with our employees to be good. We supplement our work force from time to time
with contractors, administrative, and part-time employees.
Our
business is subject to numerous risks, including the following:
Risks
Relating to Our Company
We
Have a History of Losses and Negative Cash Flow, and We Anticipate Continuing
Losses
Since our
inception, we have incurred significant and recurring losses and negative cash
flow from operations. As of September 30, 2007, we had an accumulated deficit of
$71,031,090, which included total non-cash charges of $56,056,397 (comprised of
$34,723,256 in stock-based compensation, $11,722,599 for in-process research and
development, $8,658,784 in stock and options for services, $315,337 in
depreciation and amortization and $636,421 in transition adjustments) and had
cash of $3,352,414 (exclusive of Blideo’s cash of $498,251 which is included in
our consolidated balance for financial reporting purposes, but over which we
exercise no control or access). The achievement of profitability and the ability
to generate cash flow from operations will depend on, among other things, the
acceptance of the Company’s products and services, competition, and the
deployment of video applications by our customers. There can be no assurance
that our cash from operations and other sources (such as sales of one or more of
our equity interests in affiliates) will be sufficient for our operating needs,
or that we will be able to achieve profitability on a consistent basis, if at
all. In the event that cash flow from operations is less than anticipated and we
are unable to secure additional funding, in order to preserve cash we would be
required to reduce expenditures and reduce our corporate infrastructure, either
of which could have a material adverse effect on our ability to continue our
operations. Even if we obtain additional working capital in the near future, to
the extent that operating expenses increase or we need additional funds to
develop new technologies or acquire strategic assets, the need for additional
funding may be accelerated and there can be no assurance that any such
additional funding can be obtained on terms acceptable to us, if at all. These
matters collectively represent substantial doubt that we can continue as a going
concern.
Our
Financial Results are Uncertain and are Difficult to Predict
In light
of the rapidly-evolving nature of our business and its limited operating
history, we have very little experience forecasting our revenues and believe
that the period-to-period comparisons of financial results are not necessarily
meaningful. Therefore, investors should not rely on period-to-period comparisons
of our historical financial results as an indication of our future financial
results. Moreover, our financial results may vary from period to period due to
the uncertainties of our business.
We
are Dependent on Key Personnel
We are
dependent on certain key personnel to carry out our business plans. While we
believe that these key personnel can be replaced in due course, their loss may
have a significant impact on our operations in the short term.
Our
Success Depends on our Ability to Continue to Attract, Retain and Motivate
Highly Skilled Employees
Our
ability to execute our business plan and be successful depends on our ability to
retain, attract, and motivate highly skilled employees. As we continue to grow,
we will need to hire additional personnel in all operational areas. We may be
unable to retain our key employees or find, hire, assimilate or retain other
highly qualified employees in the future. If we do not succeed in retaining and
motivating our current personnel and attracting new personnel, our business will
be adversely affected.
We
Cannot be Sure That Our Intellectual Property is Protected From its Use by
Others, Including Potential Competitors
We regard
much of our technology as proprietary and try to protect it by relying on
trademarks, patents, trade secret laws and confidentiality agreements. In
connection with our license agreements with third parties, we seek to control
access to and distribution of our technology, documentation and other
proprietary information. Even with all of these precautions, it could be
possible for someone else to either copy or otherwise obtain and use our
proprietary information without our authorization or to develop similar
technology independently. Effective trademark, copyright and trade secret
protection may not be available in every country in which our services are made
available through the internet, and policing unauthorized use of our proprietary
information is difficult and expensive. We cannot be sure that the steps we have
taken will prevent misappropriation of our proprietary information. Any
misappropriation could have a material adverse effect on our business. In the
future, we may need to go to court to either enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. That litigation might result in substantial
costs and diversion of resources and management attention.
We
currently license from third parties technologies incorporated into some of our
products and services. As we continue to introduce new services that incorporate
new technologies, we may be required to license additional technology from
others. We cannot be sure that these third-party technology licenses will
continue to be available on commercially reasonable terms, if at
all.
As more
particularly described in Item 1, “Business—Background,” we acquired our
proprietary video CODEC from Video Software Partners, LLC, which had acquired
that technology upon foreclosure of its security interest in Vianet’s
technology, which included our CODEC. VSP has represented to us in
various agreements with us that it has good title to the technology and knows of
no adverse claims against the technology. However, if a third-party,
whether as a creditor of Vianet or otherwise, were to claim an interest in the
technology to which VSP has represented that it had good title and a judgment
were entered against Espre, we could be obligated to pay such judgment and/or to
utilize a different CODEC, which could adversely affect our financial condition
and future prospects.
Third
Party Infringement Claims
Our
industry is characterized by a large number of patents and, consequently, is
subject to allegations of patent infringement. Although we are not aware of any
claim made against us for infringement of intellectual property rights, third
parties may from time-to-time assert patent, copyright, trademark, and other
intellectual property rights to our products and technologies domestically or
overseas. A successful infringement claim against us by any third party could
subject us to substantial liability for damages and litigation costs, subject us
to orders restraining us from using certain intellectual property, require us to
license intellectual property from a third party, require us to develop
non-infringing alternatives or new intellectual property, and have us indemnify
third parties under currently existing agreements or agreements which we may
enter into in the future. Even if a claim of infringement is made against us and
we are successful in defending such claim, we could incur substantial costs and
the diversion of the time and resources of our management.
Our
Industry is Highly Competitive
Our
industry is highly competitive and affected by rapid change. We believe that the
principal competitive factors in our business include technological innovation,
pricing, customer service, service offerings and the flexibility to adapt to
changing market conditions. In establishing our business strategy, we face a
number of strong, firmly entrenched competitors that currently provide similar
video-based services. Many of our existing competitors have, and some future
competitors may have, significantly greater financial and technical resources
than we have.
We
Must Keep Pace with Technological Change to Remain Competitive
Our
future success depends, in large part, on our ability to use leading
technologies effectively, to enhance our existing services, and to develop new
services that meet changing customer needs on a timely and cost-effective basis.
We are unable to predict which technological developments will challenge our
competitive position or the amount of expenditures that will be required to
respond to a rapidly changing technological environment. Our failure to respond
in a timely and effective manner to new and evolving technologies could have a
negative impact on our operating results and financial condition.
Related
Party Transactions
We have
engaged, and in all probability will continue to engage, in transactions with
persons or entities which are controlled by our officers, directors or holders
of at least 5% of our common stock; immediate family members of such persons; or
companies in which we hold an equity or profit interest. As these transactions
are with related parties, there is no assurance that their terms are
substantially the same as like transactions with unrelated parties, or that the
Company would enforce its rights under agreements with such related parties as
vigorously as it would with unrelated parties. While the Company believes these
related party transactions are beneficial and fair to the Company, the Company
has not sought or received an independent valuation or analysis of such
transactions. See Item 1, “Business—Transactions with Related
Parties.”
Risks
Relating to Our Common Stock
Our
Common Stock Price May be Volatile
The
market for our Common Stock has experienced significant price and volume
fluctuations. When we announce product improvements, new products or services,
or agreements for our products or services, any such announcement could have a
material impact on our stock price. These fluctuations are often unrelated to
the operating performance of our Company. Any inability to meet the operating or
financial expectations of securities analysts or our stockholders could also
adversely affect our stock price.
Penny Stock
Regulations
The
Securities and Exchange Commission has adopted regulations that generally define
a “penny stock” to be an equity security having a market price (as defined) of
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. As a result, broker-dealers selling our Common
Stock are subject to additional sales practices when they sell such securities
to persons other than established clients and “accredited investors.” For
transactions covered by these rules, a broker-dealer must first make a customer
suitability determination, receive the customer’s consent to the transaction,
and deliver risk disclosure documents relating to the penny stock market.
Further, the broker-dealer has to disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, that fact has to
be disclosed, as well as the broker-dealer’s presumed control over the market
for the stock. Last, a customer must receive monthly statements disclosing
recent price information for the penny stock held in the account and information
on the limited market for penny stocks. Accordingly, the “penny stock” rules may
restrict trading in our Common Stock.
No
Anticipation of Dividends
We have
not paid any dividends on our Common Stock since inception. Further, our credit
facilities and loan guarantee agreements prohibit dividend payments. Assuming we
can contractually pay dividends in the future, the determination of whether to
pay dividends will be made by our board of directors and will depend on the
earnings, capital requirements, and operating and financial condition of the
Company, among other factors. It is not anticipated that we will pay dividends
in the fiscal or in the foreseeable future.
Concentration
of Ownership in Officers, Directors and Principal Stockholders
Our
officers, directors and principal stockholders currently beneficially own or
control 69,914,122 shares, or 21.95%, of our outstanding Common Stock (see Item
4, “Security Ownership of Certain Beneficial Owners and Management”). There are
no outside directors on the Board, which consists only of the Chief Executive
Officer and the President. As a result, the Board and the officers can exert
substantial influence over matters requiring approval of our stockholders,
including the election or removal of directors, any proposed merger,
consolidation or sale of all or substantially all of our assets, and other
corporate transactions. This concentration of ownership could be disadvantageous
to other stockholders with interests different from those of our officers and
directors or from our other principal stockholders. For example, our directors
could approve a sale or merger of the Company at a time when it might be more
beneficial to other stockholders not to sell or merge the Company or to wait for
a better offer. In addition, this concentration of share ownership may adversely
affect the trading price for our Common Stock, because investors often perceive
disadvantages in owning stock in companies with a significant concentration of
ownership among a limited number of stockholders.
Limited
Trading Market
Our
Common Stock is traded on the Pink Sheets. The Pink Sheet market is often highly
illiquid, in part because it does not have a national quotation system by which
potential investors can follow the market price of shares except through
information received and generated by a limited number of broker-dealers that
make markets in particular stocks. There may be a greater chance of volatility
for securities that trade on the Pink Sheets as compared to a national exchange
or quotation system. This volatility may be caused by a variety of factors,
including the lack of readily available price quotations, the absence of
consistent administrative supervision of bid and ask quotations, lower trading
volume, and market conditions. Investors in our Common Stock may experience high
fluctuations in the market price and volume of the trading market for our
securities. These fluctuations, when they occur, have a negative effect on the
market price for our securities. Accordingly, our stockholders may not be able
to realize a fair price from their shares when they determine to sell them or
may have to hold them for a substantial period of time until the market for our
Common Stock improves.
Selected
Financial and Operating Data
The
following table sets forth selected historical financial statement of operations
data for the years ended September 30, 2007, 2006 2005 and 2004, that has
been derived from the Company’s audited financial statements. The selected
consolidated financial data below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our financial statements and notes thereto. The selected
statements of operations data for the years ended September 30, 2007, 2006 and
2005 are derived from, and are qualified by reference to, the audited financial
statements included elsewhere in this Registration Statement on Form 10. The
historical results presented below are not necessarily indicative of future
results.
|
|
Year Ended
September 30
|
|
|
For
the Period December 22, 2003 (inception) to
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licensing fees
|
|
$ |
2,000,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
22,229 |
|
Related
party software license fees
|
|
|
- |
|
|
|
900,000 |
|
|
|
- |
|
|
|
- |
|
Custom
engineering fees
|
|
|
336,200 |
|
|
|
- |
|
|
|
4,000 |
|
|
|
92,049 |
|
Revenue
sharing
|
|
|
95,847 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
30,679 |
|
|
|
44,147 |
|
|
|
91,478 |
|
|
|
11,900 |
|
|
|
|
2,462,726 |
|
|
|
944,147 |
|
|
|
95,478 |
|
|
|
126,178 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licensing fees repurchases - related party
|
|
|
(725,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
net revenue
|
|
|
1,737,726 |
|
|
|
944,147 |
|
|
|
95,478 |
|
|
|
126,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process
research and development
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,722,599 |
|
General,
administrative and selling expenses
|
|
|
5,861,223 |
|
|
|
3,588,339 |
|
|
|
2,986,179 |
|
|
|
811,772 |
|
General,
administrative and selling stock based compensation
|
|
|
4,804,362 |
|
|
|
5,399,198 |
|
|
|
31,916,213 |
|
|
|
500,000 |
|
Research
and development
|
|
|
1,541,367 |
|
|
|
890,299 |
|
|
|
1,459,005 |
|
|
|
683,698 |
|
Research
and development stock based compensation
|
|
|
258,816 |
|
|
|
517,630 |
|
|
|
- |
|
|
|
- |
|
Amortization
and depreciation
|
|
|
104,399 |
|
|
|
83,275 |
|
|
|
71,188 |
|
|
|
41,892 |
|
Transition
adjustment
|
|
|
- |
|
|
|
514,261 |
|
|
|
122,160 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
12,570,167 |
|
|
|
10,993,002 |
|
|
|
36,554,745 |
|
|
|
13,759,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(10,832,441 |
) |
|
|
(10,048,855 |
) |
|
|
(36,459,267 |
) |
|
|
(13,633,783 |
) |
Interest
expense
|
|
|
(12,948 |
) |
|
|
(76,035 |
) |
|
|
(204,215 |
) |
|
|
(15,453 |
) |
Net
loss before minority interest
|
|
|
(10,845,389 |
) |
|
|
(10,124,890 |
) |
|
|
(36,663,482 |
) |
|
|
(13,649,236 |
) |
Minority
interest
|
|
|
251,907 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
loss
|
|
|
(10,593,482 |
) |
|
|
(10,124,890 |
) |
|
|
(36,663,482 |
) |
|
|
(13,649,236 |
) |
Preferred
stock dividends and other charges
|
|
|
- |
|
|
|
- |
|
|
|
(495,000 |
) |
|
|
(273,887 |
) |
Net
loss for the period
|
|
|
(10,593,482 |
) |
|
|
(10,124,890 |
) |
|
$ |
(37,158,482 |
) |
|
$ |
(13,923,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share applicable to common
stockholders
|
|
$ |
(0.04 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
236,043,042 |
|
|
|
200,057,661 |
|
|
|
109,788,566 |
|
|
|
40,583,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalent
|
|
$ |
3,850,666 |
|
|
$ |
291,426 |
|
|
$ |
213,740 |
|
|
$ |
80,478 |
|
Working
capital (deficit)
|
|
|
1,018,939 |
|
|
|
(1,711,007 |
) |
|
|
(3,163,561 |
) |
|
|
(2,517,366 |
) |
Total
assets
|
|
|
4,672,953 |
|
|
|
1,594,447 |
|
|
|
583,084 |
|
|
|
349,472 |
|
Stockholders'
equity (deficit)
|
|
|
207,517 |
|
|
|
(2,361,981 |
) |
|
|
(2,879,369 |
) |
|
|
(2,268,988 |
) |
The
following table sets forth the selected historical financial statement of
operations data for the three months ended December 31, 2007 and 2006 that has
been derived from the Company’s unaudited financial statements for those
periods. The selected consolidated financial data below should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our financial statements and notes thereto. The
historical results presented below are not necessarily indicative of future
results.
|
|
Three Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Software
licensing fees
|
|
$ |
1,000,000 |
|
|
$ |
1,990,000 |
|
Custom
engineering fees
|
|
|
44,842 |
|
|
|
233,250 |
|
Other
|
|
|
41,116 |
|
|
|
7,626 |
|
|
|
|
1,085,958 |
|
|
|
2,230,876 |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
General,
administrative and selling expenses
|
|
|
2,037,182 |
|
|
|
1,093,428 |
|
General,
administrative and selling stock based compensation
|
|
|
2,101,950 |
|
|
|
472,218 |
|
Research
and development
|
|
|
565,754 |
|
|
|
84,600 |
|
Research
and development stock based compensation
|
|
|
- |
|
|
|
611,856 |
|
Amortization
and depreciation
|
|
|
31,762 |
|
|
|
23,347 |
|
Total
operating expenses
|
|
|
4,736,648 |
|
|
|
2,285,449 |
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(3,650,690 |
) |
|
|
(54,573 |
) |
Interest
expense
|
|
|
- |
|
|
|
(7,848 |
) |
Net
loss before minority interest
|
|
|
(3,650,690 |
) |
|
|
(62,421 |
)
|
Minority
interest
|
|
|
381,359 |
|
|
|
- |
|
Net
income (loss )
|
|
$ |
(3,269,331 |
) |
|
$ |
(62,421 |
) |
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$ |
0.01 |
|
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
324,093,718 |
|
|
|
205,085,889 |
|
The
registration of our common stock on this Form 10 is being made to increase our
potential for raising capital and so that the Company can become a reporting
company under the Exchange Act.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
The
following discussion should be read in conjunction with, and is qualified in its
entirety by, historical financial statements and related notes and the financial
statements and notes thereto included elsewhere in this prospectus. Some of the
information contained in this discussion and analysis are set forth elsewhere in
this prospectus, including information with respect to our plans and strategies
for our business, includes forward-looking statements that involve risks and
uncertainties. You should review the “Risk Factors” set forth elsewhere in this
Registration Statement for a discussion of important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in this prospectus.
Overview
History
of Our Operations
In July
2004, we merged with Espre Texas. As the shareholders of Espre Texas obtained a
majority ownership interest in the merged entity, the merger was accounted for
as a reverse merger, with Espre Texas treated as the acquirer. The merger was
deemed a recapitalization of our Company for accounting purposes, which was,
prior to the merger, effectively an inactive public shell. Accordingly, the
financial statements presented, and the discussion which follows, represent the
historical financial statements and operating history of Espre Texas, which
commenced in December 2003.
We are a
technology company specializing in media collaboration solutions powered by
patented video compression technology that provides television quality streaming
video over the internet. We offer a suite of services which have as their
platform the Company’s proprietary CODEC, “Lightning Strike™.” The Company’s
service offerings include hosting, video and email distribution, consulting,
encoding services and technical support. The Company’s existing business
commenced in December 2003 when Espre Texas acquired what was then known as
ViewMail Marketing System. (See Item 1, “Business — Background.”) In August
2004, the Company acquired Wireless Peripherals, and then proceeded to acquire
the Lightning Strike™ CODEC and related video products from Video Software
Partners in September 2004.
Planned
Future Operations
Our plans
for fiscal 2008 and beyond are as follows:
|
•
|
In
January 2008 we released the first commercially available version of ESPRE
Live 3.0. We plan to market this product to vertical market experts in the
design and deployment of applications built with ESPRE Live 3.0. We plan
to market this product through a combination of trade shows, partner
arrangements and through our web
site.
|
|
•
|
We
plan to complete the design and construction of Blideo, and to supply
ongoing engineering and support services to Blideo through its launch in
September 2008.
|
|
•
|
We
plan to evaluate and, if appropriate, launch an application service making
available applications designed and built with ESPRE Live to customers
over the internet. No specific designs have yet been
identified.
|
|
•
|
Our
current financial planning model assumes some revenues for which we do not
yet have definitive agreements. No assurances can be given that these
revenues will materialize nor that we will be successful in raising any
additional capital that we may require through existing shareholders
or institutional investors. See the discussion under “Liquidity and
Capital Resources,” below.
|
Results
of Operations for the Fiscal Year Ended September 30, 2005
During
the year ended September 30, 2005, we had total operating expenses of
$36,554,745, which included non cash expense of $31,916,213 for stock-based
compensation, and $122,160 of transition adjustments relating the accounting
treatment of our note payable to Video Partners. We generated revenues of only
$95,478 on the sale of video applications (principally Video Messenger Service
and eViewLink) and hosting services. Our expenses during this time period were
principally research and development costs to improve our products, which
amounted to $1,459,005, and general and administrative expenses of
$2,986,179.
Results
of Operations for the Fiscal Year Ended September 30, 2006
During
the year ended September 30, 2006, we generated revenues of $944,147, of which
$900,000 was from the sale of an exclusive right to use license for the consumer
market to Media Distribution Solutions, LLC (“MDS”). This license was comprised
of a fixed license fee of $2,000,000 (of which $900,000 was paid in the year
ended September 30, 2006, and $950,000 was reflected in accounts receivable and
deferred revenue at September 30, 2006), ongoing royalties of 5% of the
customers’ gross revenue, and a 10% equity interest in MDS. The license was
designed to enable MDS to video enable its service offering and to permit Espre
to earn ongoing royalties from the deployment of MDS’s service offering,
principally in the online advertising market.
We had
total operating expenses of $10,993,002, of which product development and
consulting expenses amounted to $890,299 (compared to $1,459,005 in fiscal 2005
or a decrease of 39%), general, administrative and selling expenses were
$3,558,339 (compared to $2,986,179 in fiscal 2005 or an increase of 19%). Our
stock-based compensation aggregated $4,581,078, reflecting our adoption of SFAS
No.123R on October 1, 2005. These results reflect our change in strategy to
extend our core technology into a software development kit (SDK) and to license
this to customers, such as MDS, to enable them to build applications for
specific market segments.
Results
of Operations for the Fiscal Year Ended September 30, 2007
During
the year ended September 30, 2007, we generated gross revenues of $2,462,726
(compared with $944,147 in fiscal 2006 or an increase of 161%). The major
components of revenue were:
|
•
|
$2,000,000
for a non-exclusive right to use license of our CODEC to Global IP Sound
Asia Pacific Limited . The license also earned support service fees of
$125,000. We are not entitled to any ongoing revenues from this customer
and have no ongoing support obligations beyond September 30,
2007.
|
|
•
|
We
repurchased a license for the Social Networking, Entertainment and Sport
Entertainment Market from MDS for $725,000. This purchase was accounted
for as a repurchase and accordingly is netted against revenues and treated
as related party revenue because we own approximately 10% of
MDS.
|
|
•
|
$336,200
for the design of our customers’ applications, including a major US
carrier. We expect continued engineering revenues if and when these
customers successfully deploy their product and/or service
offerings.
|
We sold
to SureCast Media an exclusive right to use our technology license for the
entertainment market for an initial amount of $1,000,000 and a further $450,000
contingent on our delivering certain design proofs of concept. The license
agreement granted the license holder a put option which could have required us
to repurchase the license for $2,000,000 at any time after January 31, 2008, and
before April 31, 2010. The revenue from this license was deferred and is
included on our balance sheet as deferred revenue. In December 2007, we
concluded an agreement with the licensee to waive the put option in return for a
waiver of the balance due under the license of $450,000, and accordingly we will
record the full license fee of $1,000,000 in the quarter ended December 31,
2007.
Our total
operating expenses were $12,570,167 (excluding interest expense of $12,948).
Product development and consulting expenses amounted to $1,541,367 (compared to
$890,299 in fiscal 2006 or an increase of 73%).This substantial increase is
primarily attributable to an increase in outsource engineering costs incurred in
the development of ESPRE Live, the design of Blideo’s application and the
provision of engineering services to third parties. General, administrative and
selling expenses were $5,861,223 (compared to $3,558,339, or an increase of
65%). This substantial increase was due to an increase in sales efforts. In
August 2007 we increased our sales and marketing staff by eight (8) persons in
response to sales efforts and the planned launch of our ESPRE Live version 3.0
in January 2008 and we anticipate this higher expense level to continue into
fiscal 2008. We also incurred increased salary expenses related to our sales and
marketing program of $959,150 and legal and accounting expenses relating to our
becoming a fully reporting company. Stock-based compensation aggregated
$6,063,178 (compared to $5,916,828 in fiscal 2006).
Results
of Operations for the Three Months Ended December 31, 2007
During
the three months ended December 31, 2007, we generated revenues of $1,085,959
(compared with $2,230,876 in the comparable 2006 period, or a decrease of 52%).
The major components of revenue were:
|
•
|
In
April 2007 we entered into a license agreement an exclusive right to use
our technology license for the entertainment market for an initial amount
of $1,000,000 and a further $450,000 contingent on our delivering certain
design proofs of concept. The license agreement granted the license holder
a put option which could have required us to repurchase the license for
$2,000,000 at any time after January 31, 2008, and before April 31, 2010.
The revenue from this license was deferred and is included on our balance
sheet as deferred revenue at September 30, 2007. In December 2007, we
concluded an agreement with the licensee to waive the put option in return
for a waiver of the balance due under the license of $450,000, and
accordingly we recorded the full license fee of $1,000,000 in the quarter
ended December 31, 2007.
|
|
•
|
$44,000
for the design of our customers’ applications, including a major US
carrier. We expect continued engineering revenues if and when these
customers successfully deploy their product and/or service
offerings.
|
For the
three months ended December 31, 2007 our total operating expenses were
$4,736,650 (compared to $2,285,449 in the comparable 2006 period). Product
development and consulting expenses amounted to $565,754 (compared to $84,600 in
the comparable 2006 period, or an increase of 569%).This substantial increase is
primarily attributable to an increase in outsource engineering costs incurred in
the development of ESPRE Live, the design of Blideo’s application and the
provision of engineering services to third parties. For the three months ended
December 31, 2007 our general, administrative and selling expenses were
$2,037,182 (compared to $1,093,428 in the comparable 2006 period). In August
2007 we increased our sales and marketing staff by eight (8) persons in response
to sales efforts and the planned launch of our ESPRE Live version 3.0 in January
2008 and we anticipate this higher expense level to continue into through 2008.
We also incurred increased salary expenses related to our sales and marketing
program and legal and accounting expenses relating to our becoming a fully
reporting company.
Stock
based compensation amounted to $2,101,950 (compared to $1,084,074 in the quarter
ended December 31, 2007).
Liquidity
and Capital Resources
The
accompanying consolidated financial statements have been prepared assuming we
will continue as a going concern. We sustained substantial and recurring losses
for the period December 22, 2003 (inception) to December 31, 2007. As at
December 31, 2007, we had $1,758,364 in cash (excluding Blideo’s cash of
$1,538,725, over which we exercise no control) compared with $3,352,414 at
September 30, 2007. Working capital at December 31, 2007, was $2,304,864
(compared with $1,018,939 at September 30, 2007) and we are not in default of
any debt. However, our continued existence is dependent upon our ability to
achieve profitability and to generate cash either from operations or
financing.
Management’s
financial plan is as follows:
|
•
|
Market
our principal product, ESPRE Live, to customers wishing to build
applications using video and provide custom engineering services to those
customers as requested. In August 2007 we expanded our sales and marketing
staff to achieve this objective.
|
|
•
|
Engage
in partnerships with firms in key vertical markets. These partners will be
market experts and have well-defined application strategies that require
ESPRE Live to build them. Potential customers have been identified and we
are in active negotiations with them. No assurance can be given however
that we will be successful in entering into satisfactory commercial
arrangements with these or other
customers.
|
|
•
|
Establish
independent sales agreements with representatives to sell our products and
services. We will actively pursue the engagement of additional independent
sales representatives that can distribute the Company’s existing video
products and services both domestically and internationally. Potential
partners have been identified and we are in active negotiations with them.
No assurance can be given however that we will be successful in entering
into satisfactory commercial arrangements with these or other
partners.
|
|
•
|
Obtain
additional debt and equity
financing.
|
For the
years ended September 30, 2007, 2006 and 2005, respectively, we used net cash of
$4,258,435, $4,324,305 and $3,572,263 for operations and realized net cash of
$8,107,189, $4,476,269 and $3,780,682 from financing activities, primarily from
the sale of our Common Stock and receipts of stock subscription receivables. For
the three months ended December 31, 2007, we used net cash of $2,731,092
($153,930 in the comparable 2006 quarter) for operating activities and realized
net cash of $2,241,008 from financing activities, primarily from the sale of our
common stock and receipts of stock subscription receivables. The achievement of
profitability and the ability to generate cash flows from operations will depend
on, among other things, the acceptance of our products and services,
competition, and the deployment of video applications by our customers. These
matters by their nature contain uncertainties and our financial statements do
not include any adjustments that might occur from future efforts. There is
therefore substantial doubt about our ability to continue as a going concern. We
invested $200,000 in our affiliate, Blideo Inc, in May and June 2007 and a
further $300,000 in July and August 2007. We invested a further $150,000 in
October 2007. We have no current plans to invest further amounts in this
affiliate. See Item 7, “Certain Relationships and Related Transactions, and
Director Independence.”
Our
current cash requirements are approximately $850,000 per month, principally for
salaries, professional services and office expenses. Included in these
expenditures is approximately $450,000 of development expense for the design and
deployment of Blideo and other customers. Our capital expenditures (depending on
our hiring program) which principally consist of computer equipment, test
equipment and office requirements are approximately $15,000 per month. This is a
substantial increase over prior fiscal years due to the expansion of our sales
and marketing activities in response to customer interest. Based on our cash
flow projections, we expect that while our cash requirements will continue at
their current rate for the foreseeable future, we will be able to meet a portion
of our cash requirements from the proceeds of agreements for our services and
the sale of our products. However, we were cash flow negative for the balance of
calendar 2007, expect to remain cash flow negative for calendar year 2008, and
will therefore be dependent on the proceeds of the private sale of our equity
securities.
As with
any company engaged in the development of new technology, we have constantly
been challenged by the need to find continuing and new sources of capital to
meet our operating expenses. There can be no assurance that we will continue to
be successful in obtaining financing, or that we will, as we now anticipate, be
able to generate significant revenues from operations in calendar 2008, in which
event we may be unable to proceed with our business operations. Substantial
doubt exists about our ability to continue as going concern if we do not
generate significant revenues from operations.
The
Company now has, and in all probability will continue in the future to have,
transactions with related parties. While the Company believes these transactions
to be fair to the Company and that their terms are substantially the same as
would be negotiated with unrelated third parties, the Company has not received
the opinion of an independent party or to the fairness to the Company of any of
these transactions. See Item 1A, “Risk Factors—Related Party
Transactions.”
Contractual
Commitments
At
September 30, 2007, we had known contractual obligations of $4,117,341 comprised
of:
|
|
|
Deferred
revenues
|
|
$ |
1,000,000 |
|
Accounts
payable and accruals
|
|
|
1,449,397 |
|
Notes
payable
|
|
|
1,667,944 |
|
|
|
$ |
4,117,341 |
|
Critical
Accounting Policies
Our
financial position, results of operations and cash flows are impacted by the
accounting policies which we have adopted. A summary of our critical accounting
policies follows:
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
majority owned and controlled subsidiaries. All inter-company transactions have
been eliminated in consolidation.
Equipment
Equipment
is recorded at cost. We provide depreciation, for financial reporting purposes
over the estimated useful lives using the straight-line method.
Impairment
of Long-Lived Assets
Equipment
and intangible assets (core and product technologies) are reviewed for
impairment in the fourth quarter and whenever events or circumstances indicate
the carrying amount may not be recoverable. In reviewing for impairment, we
compare the carrying value of the assets to the estimated future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated future cash flows are less than their carrying amount, an impairment
loss is recognized equal to the difference between the asset’s fair value and
their carrying value.
Revenue
recognition
Revenue
is measured at the fair value of consideration received or receivable. Revenue
is recognized when there is persuasive evidence that an arrangement exists,
delivery has occurred or service has been rendered, our fee is fixed or
determinable, and collectability is probable. Some video software related
arrangements may include services not essential to functionality of any other
element of the transaction such that the total price of the arrangement would be
expected to vary as the result of the inclusion or exclusion of the services. If
the arrangement includes services, previously described revenue is allocated
among the services and software elements of the arrangement. Revenue allocated
to the service element is recognized as the services are performed or, if no
pattern of performance is discernable, on a straight-line basis over the period
the services are performed.
Income
taxes
We
account for income taxes on an asset and liability approach. Deferred income tax
assets and liabilities are computed annually for the difference between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period, plus or minus the change during
the period in deferred tax assets and liabilities. Based on the weight of
available evidence, both positive and negative, a valuation allowance to fully
provide for the net deferred tax assets has been recorded since it is more
likely than not that the deferred tax assets will not be realized.
Net
loss per share
Net loss
per share is determined by dividing net loss by the weighted average common
shares outstanding. We account for earnings or loss per share by presenting
basic earnings or loss per share including only outstanding Common Stock and
diluted earnings per share including the effect of dilutive Common Stock
equivalents. Our basic and diluted earnings per share are the same, as our
Common Stock equivalents are anti-dilutive.
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. These assumptions, if not realized, could affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Fair
Value of Financial Instruments
Our
financial instruments, primarily consisting of cash, accounts receivable,
accounts payable, and long-term debt, approximate fair value due to their
short-term nature or interest rates that approximate market.
Recent
Pronouncements
In May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
which provides guidance on the accounting for and reporting of accounting
changes and correction of errors. This statement changes the requirements for
the accounting for and reporting of a change in accounting principle and applies
to all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of this standard is not expected
to have a material effect on the Company’s results of operations or financial
position.
In July
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109” (“FIN
48”), which is a change in accounting for income taxes. FIN 48 specifies how tax
benefits for uncertain tax positions are to be recognized, measured, and
derecognized in financial statements; requires certain disclosures of uncertain
tax matters; specifies how reserves for uncertain tax positions should be
classified on the balance sheet; and provides transition and interim-period
guidance, among other provisions. FIN 48 was effective for fiscal years
beginning after December 15, 2006 and as a result, is effective for the Company
in the first quarter of fiscal 2008. The Company is in the process of evaluating
the impact of adoption of FIN 48 will have on the consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) which defines fair value, establishes a framework for measuring fair
value and expands disclosure about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company will
adopt SFAS No. 157 on October 1, 2009, and is currently evaluating the impact of
such adoption on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company will
adopt SFAS No. 159 on October 1, 2009, and is currently evaluating the impact of
such adoption on its financial statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007), Business
Combinations , which replaces SFAS No 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective for us
beginning July 1, 2009 and will apply prospectively to business combinations
completed on or after that date.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51 , which changes the
accounting and reporting for minority interests. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity separate from the parent’s equity, and purchases or sales of equity
interests that do not result in a change in control will be accounted for as
equity transactions. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement and, upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS No. 160 is effective for us beginning July 1, 2009
and will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. We are currently assessing the
potential impact that adoption of SFAS No. 160 would have on our financial
statements.
Impairment
of Long-Lived Assets
Equipment
and intangible assets (core and product technologies) are reviewed for
impairment in the fourth quarter and whenever events or circumstances indicate
the carrying amount may not be recoverable. In reviewing for impairment, we
compare the carrying value of the assets to the estimated future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated future cash flows are less than their carrying amount, an impairment
loss is recognized equal to the difference between the asset’s fair value and
their carrying value. During the period December 22, 2003 (inception) to
September 30, 2007, there was no impairment.
Off
Balance Sheet Arrangements
We have
not entered into any transactions with unconsolidated affiliates in which we
have financial guarantees, subordinated retained interest, derivative
instruments or other contingent arrangements that expose us to material
continuing risks, contingent liabilities or any other obligations under variable
interest in an unconsolidated entity that provides us with financing, liquidity,
market risk or credit risk support.
Quantitative
and Qualitative Disclosures About Market Risk
Our
financial instruments are limited to cash and cash equivalents. The main
investment objective is the preservation of capital. We do not use derivative
instruments for speculative or investment purposes. Our cash and cash
equivalents are not subject to significant interest rate risk due to the short
maturities of these instruments. At September 30, 2007, the carrying value of
our cash and cash equivalents approximates fair value. We may in the future
obtain marketable debt and securities (principally consisting of commercial
paper, corporate bonds and government securities) having a weighted average
duration of one year or less. Consequently, such securities would not be subject
to significant interest rate risk.
Espre
does not own any real property. The company leases approximately 10,378 square
feet of space at 5700 West Plano Parkway, Suite 2600, Plano, Texas 75093,
where its principal executive, administrative and engineering offices are
located, at an annual rental fee of approximately $283,000. This lease expires
on February 28, 2011. Management believes these facilities are all in usable
condition and that these facilities are sufficient to meet our needs for the
immediate future. Management also believes that the facility is adequately
covered by insurance.
The table
below sets forth information with respect to the beneficial ownership of our
Common Stock by (i) each person who is known to be the beneficial owner of more
than five percent of the Company’s Common Stock, (ii) all directors and
nominees, (iii) each executive officer, and (iv) all directors and executive
officers as a group. Unless otherwise indicated, the Company believes that the
beneficial owner has sole voting and investment power over such shares. Unless
otherwise indicated, the address of each beneficial owner is c/o Espre
Solutions, Inc., 5700 W. Plano Parkway, Suite 2600, Plano, Texas 75093. The
Company does not believe that any stockholders act as a “group,” as that term is
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
As of September 30, 2007, the end of our latest fiscal year, we had issued and
outstanding 318,225,998 shares of Common Stock.
Name and Address of Beneficial
Owner
|
|
Number
of Shares of Common Stock Beneficially
Owned (1)
|
|
|
Percentage
of Common Stock
|
|
Peninsula
Group
|
|
|
32,500,000 |
|
|
|
10.20 |
% |
Place
des Philosphes 10
Geneva
Switzerland 1205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Ianace
(2) (3)
|
|
|
9,920,697 |
(4) |
|
|
3.11 |
% |
5700
West Plano Parkway, Suite 2600
Plano,
Texas 75093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Leighton
(2) (3)
|
|
|
19,782,290 |
(5) |
|
|
6.21 |
% |
5700
West Plano Parkway, Suite 2600
Plano,
Texas 75093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forres McGraw
(3)
|
|
|
650,000 |
(6) |
|
|
0.20 |
% |
5700
West Plano Parkway, Suite 2600
Plano,
Texas 75093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Logan
(3)
|
|
|
2,090,667 |
(7) |
|
|
0.66 |
% |
5700
West Plano Parkway, Suite 2600
Plano,
Texas 75093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Nimon
(3)
|
|
|
4,970,468 |
(8) |
|
|
1.56 |
% |
5700
West Plano Parkway, Suite 2600
Plano,
Texas 75093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Officers and Directors as a Group (5 persons)
|
|
|
69,914,122 |
|
|
|
21.95 |
% |
(1)
|
Beneficial
ownership is determined in accordance with the rules of the Securities
Exchange Commission and generally includes voting power with respect to
securities. Shares of Common Stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible within
sixty days of September 30, 2007, are deemed outstanding for computing the
percentage of the person holding such option or warrant, but are not
deemed outstanding for computing the percentage of any other person.
Percentages are based on a total of 318,225,998 shares of Common Stock
outstanding on September, 2007, and the shares issuable upon the exercise
of options and warrants exercisable on or within sixty days of September
30, 2007, as described below.
|
(4)
|
Includes
options currently exercisable by Mr. Ianace for the purchase of
2,700,000 shares of Common Stock.
|
(5)
|
Pursuant
to Rule 13d-3, Mr. Leighton is deemed to be the beneficial owner of
all such shares and options, which are held of record by Nonsuch Holdings
Ltd. Includes options currently exercisable by Nonsuch Holdings Ltd. for
the purchase of 14,104,939 shares of Common
Stock.
|
(6)
|
Includes
options currently exercisable by Mr. McGraw for the purchase of
600,000 shares of Common Stock.
|
(7)
|
Includes
options currently exercisable by Mr. Logan for the purchase of
1,066,667 shares of Common Stock.
|
(8)
|
Includes
options currently exercisable by Mr. Nimon for the purchase of
1,633,333 shares of Common Stock.
|
The
directors, executive officers and key employees of Espre, and their ages as of
the date hereof, are set forth below. None of such persons has been involved in
any legal proceeding enumerated in Securities and Exchange Commission Regulation
S-K, Item 401, within the time periods described in that
regulation.
Name
|
|
Age
|
|
Position
|
Peter Ianace
|
|
59
|
|
Chief
Executive Officer and Director
|
Peter Leighton
|
|
55
|
|
President
and Director
|
Forres McGraw
|
|
48
|
|
Chief
Financial Officer
|
Robert Logan
|
|
61
|
|
Chief
Operating Officer
|
Robert Nimon
|
|
57
|
|
Chief
Technology Officer
|
Directors
and Executive Officers
Peter Ianace, Chief Executive
Officer and Director. Mr. Ianace has been Chief Executive
Officer and a Director of Espre, and its predecessor, Espre Texas, since July
2004. He served in the same capacity of from its organization in December 2003
until its merger with the Company in July 2004. From April 2001 to November
2003, Mr. Ianace was chief executive officer of Vianet Technologies, Inc.,
a company engaged in video software application and VOIP services. He served as
executive vice president of business development for Vianet from June 1989 to
April 2001. Mr. Ianace served as the President and Chief Executive Officer
of Intelect Network Technologies from April 1995 until April 1999, where he
managed the growth and integration of worldwide sales and product development
and was responsible for equity capitalization and strategic relationship
building and partnering. Mr. Ianace graduated from
Newburgh Free Academy in 1966 and attended St. John’s University
from 1966-1968.
Peter Leighton, President and
Director. Mr. Leighton has been a director of the Company since
May 1, 2007, and President since July 26, 2007. He was a principal shareholder
of Wireless Peripherals Inc. and, prior to becoming an officer and director of
Espre, was a principal shareholder of the Company. In April 2007 he founded and
funded Blideo Inc. along with the Company and Mr. Nelson. Mr. Leighton
was Chief Executive Officer and founder of Vianet Technologies, Inc. from which
the Company indirectly acquired its original intellectual property. He also
served as the Chief Financial Officer of Intelect Communication Systems Ltd.
(the parent company of Intelect Network Technologies) from April 1982 until
April 1987 and President and Chief Executive Officer from April 1987 to November
1997. Mr. Leighton is a graduate in Engineering Science of Exeter
University, a Chartered Accountant and was a partner in Thorne Riddell (a
member firm of KMG, the predecessor of KPMG) from 1982 to 1985. He provides us
with 30 years of financial management, capital raising and public reporting
experience, as well as strategic corporate development.
Forres McGraw, Chief Financial
Officer and Treasurer. Mr. McGraw has been the Chief Financial
Officer and Treasurer of the Company since April 2005. Prior to joining Espre,
he was an independent consultant from September 2003 until April 2005. He served
as chief financial officer of 8 Point Communications, Inc., a video conferencing
company from December 2001 to September 2003. He was the founder, a director and
the president of Nostrum Biotechnology, Inc., a start-up bio-medical company
from 1999 to 2001. Mr. McGraw founded and was president of International
Factoring Group, Ltd., from 1993 to 1999 prior to forming Nostrum Biotechnology,
Inc. He was a partner with Donahoe, McGraw & Associates, CPA’s, from 1984 to
1993. He is a graduate of Louisiana State University.
Robert Logan, Chief Operating
Officer. Mr. Logan has been our Chief Operating Officer since
our merger with Espre Texas in July 2004. From December 2003 to July 2004, he
served in the same capacity with Espre Texas. Mr. Logan was the Chief
Operating Officer of Vianet Technologies, Inc., from August 2000 until January
2004. From January 1999 until July 2000, he was Director of Sales, Systems
Integration Division, ASI Business Solutions, a company which provides a
network-connected print management and output consulting services. From
September 1997 until December 1998, he was Chief Executive Officer and Director
of Marketing of Mirus Ltd., a provider of high volume direct mail software. From
January 1996 to September 1997 Mr. Logan held senior positions of Ikon
Corp. He received a Bachelor of Science and Bachelor of Arts degree from
Kansas State University.
Robert Nimon, Chief
Technology Officer. Bob Nimon has been the Chief Technology Officer
since August 2004. Prior to joining Espre, Mr. Nimon was President of
Wireless Peripherals, Inc., a Dallas-based technology company which created
eViewLink until August 2004. Mr. Nimon has been Vice President of Nimon
Consulting, Inc., a Dallas-based consulting firm since its organization in 1996.
In that capacity, he has served as the chief architect for a major
inter-exchange carrier to manage the definition of architectural requirements
for equipment in a new network, served as Vice President of Engineering for a
firm manufacturing a hardware/software solution for IP traffic QoS policy
management, and served in interim senior management positions for two start-up
companies producing wireless multimedia peripherals. From 1981 to 1996,
Mr. Nimon was President of DNA Enterprises, Inc., a Dallas, Texas, company
providing services in software, hardware, signal processing and overall system
design consultation. DNA Enterprises, Inc., was sold to a public company in
1996. Mr. Nimon received a Bachelor of Science degree from the University
of Texas in 1971.
Board
Committees
There are
no committees of the Board of Directors. As the Board consists of two directors,
being the President and Chief Executive Officer, the Board meets always as a
whole and not as a committee, and accordingly does not have standing nominating,
audit, or compensation committees.
Meetings
of the Board of Directors
The Board
of Directors met twenty-one (21) times during the year ended September 30, 2006,
and ten (10) times during the year ended September 30, 2007. All directors were
present at all Board meetings.
Director
Independence
Neither
of our directors is independent within the meaning of Regulation S-K, Item
407(a).
Director
Compensation
None of
the directors receives compensation as a director.
Shareholder
Communications
Shareholders
may communicate with the Board of Directors by writing to Peter Leighton or
Peter Ianace, who are the sole directors, at the Company’s address, 5700 W.
Plano Parkway, Suite 2600, Plano, Texas 75093.
Code
of Ethics
The
Company adopted a code of ethics on July 26, 2006.
Compensation
Discussion and Analysis
The
individuals who served as our chief executive officer and our chief financial
officer during fiscal year ended September 30, 2007, as well as the other
individuals included in the Summary Compensation Table, are referred to in this
Form 10 as the “Named Executive Officers.” We do not have a Compensation
Committee because there are only two directors, comprised of the chief executive
officer and the president. Compensation for the Named Executive Officers is set
by the Board of Directors (the “Board”). We plan to expand the Board in fiscal
2008 and to establish a Compensation Committee comprised of independent
directors at that time. Both our directors have set their bonus potential for
2008.
Compensation
Philosophy and Objectives
Our
compensation program for the Named Executive Officers is intended to attract,
retain, motivate and appropriately reward talented executives who can contribute
significantly to our financial growth and success, and thereby build value for
our stockholders over the long term. The program has the following specific
goals:
|
•
|
To
offer a total compensation package to the Named Executive Officers that is
competitive in the marketplace for executive
talent.
|
|
•
|
To
motivate the Named Executive Officers to achieve our business objectives
by providing incentive compensation awards that take into account our
overall performance and that measure performance against those business
objectives.
|
|
•
|
To
provide equity-based, long-term compensation arrangements that creates
meaningful incentives for the Named Executive Officers to maximize our
near and long-term future performance that aligns their interests with our
shareholders’ and encourage the Named Executive Officers to remain with
the Company.
|
To
achieve these objectives, the Board is developing certain processes for setting
Named Executive Officer compensation and is constructing an overall compensation
program that consists of a number of elements, as described below.
Setting
Executive Compensation
General
Processes
The Board
has historically used personal contacts, rather than head hunters, to access the
necessary skills to execute its business plan and, in the absence of a formal
Compensation Committee, has negotiated employment terms with Named Executive
Officers based on their skills and experience. The majority of the Named
Executive Officers were either founders of the Company or investors in the
Company or Wireless Peripherals, which was acquired by the Company in August
2004. The Board is currently reviewing these compensation arrangements to
determine whether they reflect the compensation principles that the Board has
adopted, and will continue that process as and when those principles change. As
we renew our executives’ employment agreements, we will work to ensure that the
terms of the agreements dovetail with our compensation philosophy.
The Board
intends to use certain performance measures as the bases for determining annual
cash incentive compensation. The Board intends for annual cash incentive
compensation to be linked to attainment of specific target performance measures.
The specific target performance measure for 2008 will be sales generation. As
such, the Named Executive Officers will not receive a bonus unless we have
achieved sales targets.
Generally,
the bonus for each Named Executive Officer will be based on a percentage of
gross sales. The minimum amount of cash incentive compensation that Named
Executive Officers can achieve will be $0 and with no upper limit. We have very
little sales history upon which to base compensation expectations and therefore
the Board believes that establishing an upper limit in 2008 would not
incentivize the Named Executive Officers. The Board plans to make bonuses in
2009 based on our cash flow performance targets such that these subjective
targets must be attained for the Named Executive Officers to earn cash incentive
compensation. This change in compensation measurement is anticipated to be
reflected in our transition from the acquisition of customers in fiscal 2008 to
being cash flow focused in fiscal 2009. In addition to this programmatic
approach, the Board retains the discretion to grant cash bonuses as necessary to
account for special circumstances or extraordinary individual or company
performance.
The Board
intends annually to review and benchmark the total compensation program for the
Named Executive Officers against relevant market data. The Board anticipates
benchmarking our compensation which will involve a comparison of various
components of total compensation against a peer group of publicly traded
companies (the “Peer Group”). The Board will selected the Peer Group companies
based on their similarities to us in revenue, earnings and capital and
management structures, and the Board has adopted the Peer Group based on the
Board’s recommendation. The Board included in the Peer Group some companies
that, because of their recent acquisition or changes in ownership structure,
have recently ceased to be publicly traded. The Peer Group will be reviewed
periodically by the Board and Board and updated as necessary to maintain
comparability, including removing those companies that have recently ceased to
be publicly traded.
Allocating
Between Different Types of Compensation
The Board
believes that executive compensation should include a mix of different types of
compensation and takes this consideration into account when structuring the
total compensation for each Named Executive Officer. The allocation among
different types of compensation is based on the employment agreement with the
Named Executive Officer, where such agreements exist. Within the parameters set
by the employment agreements, if any, the Board intends to reward recent
performance and create incentives for long-term enhancements in shareholder
value. This is achieved through our annual cash incentive plan, which is further
described below. In setting the amounts potentially payable under the annual
cash incentive plan, the Board takes into account other annual cash compensation
payable to each Named Executive Officer.
The Board
also seeks to allocate a portion of total compensation to long-term,
equity-based compensation. Equity-based compensation is designed to motivate the
creation of long-term shareholder value and simultaneously enhance executive
retention. The Board typically uses stock options because this form of equity
compensation provides the executive with value only if the price of our stock
when the option is exercised exceeds the option’s exercise price. This provides
an incentive to increase stock price over the term of the option. To enhance
retention goals and provide balance with stock options, the Board may also grant
restricted stock. The Board anticipates that long-term, equity based
compensation will constitute a larger percentage of each Named Executive
Officer’s total compensation in future years as the Board has additional
opportunity to structure appropriately targeted awards of this
type.
Role
of Executive Officers in Compensation Decisions
Decisions
on the compensation of the chief executive officer are made by the President
since the Board consist only of the chief executive officer and the President.
Compensation decisions on the other Named Executive Officers and employees who
are not Named Executive Officers are made by the President, pursuant to
guidelines established by the Board in consultation with other members of
management. The President, in consultation with the chief executive officer,
annually reviews the performance of the other Named Executive Officers. The
Board may exercise discretion to modify any recommended salary adjustment or
award as it deems appropriate under the circumstances.
2006
and 2007 Executive Compensation Components
For the
2006 and 2007 fiscal years, the principal components of compensation for the
Named Executive Officers were:
|
•
|
Performance-based
incentive compensation; and
|
|
•
|
Long-term
equity incentive compensation.
|
The Board
does not currently believe that perquisites, such as club memberships or
automobile allowances, have a significant role to play in executive
compensation. Each of the elements of the executive compensation program is
discussed in the following paragraphs.
Base
Salary
Base
salaries are designed to compensate the Named Executive Officers for faithful
execution of their individual responsibilities. The base salaries of the chief
executive officer, president, vice president sales and chief technology officer
are set forth in the applicable employment arrangements with the executive. The
employment agreement of the President will expire on May 31, 2008. When we enter
into new or amended employment agreements with such Named Executive Officers, or
if we enter into an employment agreement with another executive officer, the
Board will review the base salaries and adjust them based on a number of
relevant factors. During its review of base salaries, the Board primarily
considers the following:
|
•
|
Relevant
market data developed in connection with the benchmarking process
described above.
|
|
•
|
The
executive’s role and
responsibilities.
|
|
•
|
In
cases of renewal, the past performance of the
executive.
|
Of the
factors described above, primary consideration will be given to relevant market
data in setting base salaries because the Board believes that upside potential
in total compensation is achieved through the performance-based and long-term
incentive compensation programs. Factors, other than those listed above, that
may cause the Board to deviate from the benchmarking salary data include an
executive’s experience in a particular role, retention concerns, and the Board’s
judgment based on an executive’s leadership qualities, career with us, and
long-term potential to enhance shareholder value.
Base
salaries for other Named Executive Officers are set by the chief executive
officer, within the guidelines established by the Board. Those guidelines are
based on the salaries set by the Board for those Named Executive Officers that
have employment agreements with us.
In
setting base salaries for the Chief Executive Officer in 2006, the Board
primarily relied upon data of the base salaries and total compensation for
recently placed chief executive officers in technology business of similar size
and life stage.
Annual
Cash Incentive Compensation
Our
annual cash incentive plan is designed to reinforce the importance of both
teamwork and individual initiative and effort, and to provide an incentive for
employees to achieve and surpass targeted performance goals. As described below,
bonuses to are linked to metrics established by the Board, primarily gross
revenues. Bonuses to other employees are payable from a bonus pool that is
budgeted for at the beginning of the fiscal year and are based on individual
performance or achievement of technical goals.
For 2008,
the annual bonus amount for Named Executive Officers will be based on one or
more Company-wide performance measures. The specific target performance measure
for 2008 will continue to be sales. Under the plan, Named Executive Officers
will not receive a bonus unless we have achieved specific revenue
targets.
Each
year, the Board will consider how to structure performance measures to ensure
that the amount of the cash incentive potentially payable under the plan is
properly aligned with our business objectives and strategic initiatives. As
noted above, for 2008, the Board has determined that sales is the primary
financial measure that should be used to measure performance with regard to the
annual cash incentive compensation plan.
Long-Term
Equity Incentive Compensation
Consistent
with our compensation philosophy, long-term equity incentives are an important
component of each Named Executive Officer’s total compensation package. We have
generally awarded stock options to the Named Executive Officers and other key
management employees. These stock option awards are designed to:
|
•
|
reward
and encourage long-term contribution to the
Company;
|
|
•
|
align
executives’ interests with the interests of shareholders;
and
|
|
•
|
help
achieve competitive levels of total
compensation.
|
During
fiscal 2006, the Company granted stock option awards for 3,670,000 shares of
Common Stock. The Board determines stock option award levels based on
consideration of a number of factors, including discussions with the President
and other executives. For fiscal 2007, stock option awards were approved and
granted in the third quarter of 2007. However, newly appointed or promoted
executives or management personnel may receive an additional stock grant at
other times during the year. During 2007, the Company changed the strike price
of certain fixed options.
Grants
are not directly connected to an executive’s salary or bonus. Grants of stock
options or restricted stock awards will usually be subject to less dramatic
variation than cash incentive compensation. For instance, in a year when an
executive’s performance evaluation was good, he might receive an equity award
that is slightly larger than that received by other executives. But if, in that
same year, our financial performance did not meet targets, then the executive
would not receive a bonus. If, however, in the following year, the executive’s
performance evaluation was again good and our financial performance exceeded
targets, then the executive would receive an equity award that, while higher
than other executives’, was approximately the same as in the previous year. On
account of our financial performance in that year, however, he would also
receive a bonus; like the award of equity, that bonus would also be adjusted
upward because of the employee’s exceptional performance.
Grants
will generally be awarded during the first quarter of the fiscal year in order
to coincide with the timing of annual reviews and compensation determinations,
and because our fiscal year-end results have generally been announced by this
time. Equity awards are awarded under our 2004 Equity Incentive Plan, which
requires that the option exercise price be based on the average of the high and
low price of our Common Stock on the trading day preceding the date the option
is granted. The Board does not grant options with an exercise price that is less
than the fair market value of our Common Stock, as determined according to the
2004 Equity Incentive Plan, or grant options which are priced on a date other
than the grant date, unless for some reason the date proceeding the date is not
a trading date, in which case the average of the high and low price of our
Common Stock on the preceding trading day is used.
Retirement
and Other Benefits
We no not
maintain a tax-qualified Section 401(k) savings plan available to our employees
or the Named Executive Officers.
Our other
benefit plans primarily include medical and other health care benefits, group
life insurance, disability and tuition assistance. The Board has reviewed these
other components of compensation in relation to the total compensation of the
Named Executive Officers, and determined that they are reasonable and
appropriate.
We do not
maintain any defined benefit pension plans or any nonqualified deferred
compensation arrangements.
Perquisites
and Other Personal Benefits
We do not
provide the Named Executive Officers with any perquisites or other similar
personal benefits and the Board does not currently believe that perquisites,
such as club memberships or automobile allowances, have a significant role to
play in executive compensation.
Employment
and Consulting Agreements
Leighton
is party to a consulting agreement with us. This agreement provides for certain
payments and other benefits if the consulting agreement terminates under
specified circumstances, as well as certain payments and benefits during the
executive’s employment. The chief executive officer believed that this
consulting agreement was an important part of our overall executive compensation
program at that time because it served as a recruitment and retention device.
However, the Board has not determined that it is necessary to enter into
employment agreements with other executives at this time. More information
concerning these employment agreements is contained under the caption “Narrative
to Summary Compensation Table and Plan-Board Awards Table-Employment and
Consulting Agreements,” below.
Summary
Compensation Table
The
following table provides summary information regarding compensation earned by
the Named Executive Officers during the fiscal years ended September 30, 2005,
2006 and 2007.
Summary
Compensation Table
Name and principal
position(s)
|
|
Year
|
|
Salary ($)
|
|
|
Option Awards ($)
|
|
|
Non-equity Incentive Plan
Compensation($)
|
|
|
All Other Compensation ($)
|
|
|
Total ($)
|
|
Peter Ianace
|
|
2005
|
|
$ |
18,800 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
18,800 |
|
Chief
Executive Officer
|
|
2006
|
|
$ |
180,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
9,194 |
|
|
$ |
189,194 |
|
|
|
2007
|
|
$ |
230,000 |
|
|
$ |
142,297 |
|
|
$ |
50,000 |
|
|
$ |
4,537 |
|
|
$ |
426,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Leighton
|
|
2005
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
President
|
|
2006
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
2007
|
|
$ |
120,000 |
|
|
$ |
348,422 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
468,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kyle Nelson
|
|
2005
|
|
$ |
11,667 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,667 |
|
Chief
Marketing Officer
|
|
2006
|
|
$ |
173,329 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,298 |
|
|
$ |
178,627 |
|
|
|
2007
|
|
$ |
143,332 |
|
|
$ |
99,608 |
|
|
$ |
30,000 |
|
|
$ |
2,940 |
|
|
$ |
275,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Logan
|
|
2005
|
|
$ |
13,154 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
13,154 |
|
Chief
Operating Officer
|
|
2006
|
|
$ |
135,652 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
135,652 |
|
|
|
2007
|
|
$ |
110,000 |
|
|
$ |
— |
|
|
$ |
10,000 |
|
|
$ |
— |
|
|
$ |
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forres McGraw
|
|
2005
|
|
$ |
37,500 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
37,500 |
|
Chief
Financial Officer
|
|
2006
|
|
$ |
116,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
116,000 |
|
|
|
2007
|
|
$ |
122,506 |
|
|
$ |
918,961 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,041,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Nimon
|
|
2005
|
|
$ |
73,800 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
73,800 |
|
Chief
Technology Officer
|
|
2006
|
|
$ |
213,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,400 |
|
|
$ |
215,400 |
|
|
|
2007
|
|
$ |
201,000 |
|
|
$ |
136,485 |
|
|
$ |
40,000 |
|
|
$ |
800 |
|
|
$ |
378,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greg Spindler
(5)
|
|
2005
|
|
$ |
110,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
110,000 |
|
Vice
President, Business
|
|
2006
|
|
$ |
120,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
120,000 |
|
Development
|
|
2007
|
|
$ |
127,500 |
|
|
$ |
170,606 |
|
|
$ |
76,567 |
|
|
$ |
— |
|
|
$ |
374,673 |
|
The value
of option awards is determined by multiplying the share options vesting during
the fiscal year times the fair market valuation for those options using the
Black Scholes Option pricing model.
All
Other Compensation Table
The All
Other Compensation in the Summary Compensation Table expenses paid on behalf of
the Named Executive Officers for telephone, transportation and certain other
personal expenses.
Grants
of Plan-Based Awards in 2006 and 2007
The
following table provides information about equity and non-equity awards granted
to the Named Executive Officers in 2006 and 2007. This information includes (1)
the grant date of the award; (2) the estimated payouts under non-equity
incentive plan awards, which consist of the potential payout levels under the
2006 and 2007 annual performance-based incentive plan; (3) the number of shares
underlying restricted stock awards; (4) the number of shares underlying stock
option awards; (5) the exercise price of the stock option awards, based on
closing price of our Common Stock on the date of grant and (6) the grant date
fair value of each equity award, computed under SFAS 123R.
Estimated
future payouts under non-equity
incentive
plan awards
Name and
principalposition(s)
|
|
Grant Date
|
|
Threshold($)
|
|
|
Target($)(4)
|
|
|
Maximum($)
|
|
|
All other option awards: number of securities
underlying options(#)(1)
|
|
|
Exercise or base price of option awards
($/Sh)(2)
|
|
|
Grant date
fair value of stock and option awards(3)
|
|
Peter Ianace
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
$ |
— |
|
|
$ |
130,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
July
8, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800,000 |
|
|
$ |
0.100 |
|
|
$ |
72,900 |
|
|
|
December
20, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700,000 |
|
|
$ |
0.080 |
|
|
$ |
203,850 |
|
|
|
August
10, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,000,000 |
|
|
$ |
0.085 |
|
|
$ |
1,135,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Leighton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
|
|
|
|
$ |
— |
|
|
$ |
120,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,750,000 |
|
|
$ |
0.085 |
|
|
$ |
696,600 |
|
|
|
October
1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,250,000 |
|
|
$ |
0.085 |
|
|
$ |
438,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Logan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Operating Officer
|
|
|
|
$ |
— |
|
|
$ |
50,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
8, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900,000 |
|
|
$ |
0.100 |
|
|
$ |
36,450 |
|
|
|
December
20, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000 |
|
|
$ |
0.080 |
|
|
$ |
37,750 |
|
|
|
August
10, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,800,000 |
|
|
$ |
0.085 |
|
|
$ |
288,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forres McGraw
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
14, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900,000 |
|
|
$ |
0.100 |
|
|
$ |
2,756,880 |
|
|
|
December
20, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600,000 |
|
|
$ |
0.080 |
|
|
$ |
120,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Nimon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Technology Officer
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
25, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200,000 |
|
|
$ |
0.100 |
|
|
$ |
278,400 |
|
|
|
December
20, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300,000 |
|
|
$ |
0.080 |
|
|
$ |
98,150 |
|
|
|
August
10, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000 |
|
|
$ |
0.085 |
|
|
$ |
516,000 |
|
(1)
|
This
column shows the number of stock options granted in 2004, 2005, 2006 and
2007 to the Named Executive
Officers.
|
(2)
|
This
column shows the exercise price (per share) for the stock options granted,
which was the average of the high and low prices of a share of our Common
Stock on the last date on which our stock was traded prior to the date on
which the Board granted the
options.
|
(3)
|
This
column shows the full grant date fair value of stock options under SFAS
123R granted to each of the Named Executive Officers in 2006 and 2007.
Generally, the full grant date fair value is the amount that we would
expense in our financial statements over the award’s vesting schedule. For
stock options, fair value is calculated using the Black-Scholes
option-pricing model which takes into account volatility in the price of
our stock, the risk-free interest rate, the estimated life of the award,
the closing market price of our stock on the date of grant and the
exercise price. These amounts reflect our accounting expense, and do not
correspond to the actual value that may be recognized by the Named
Executive Officers.
|
(4)
|
Our
sales target for fiscal 2008 is $10,000,000. Ianace, Leighton and Logan
have bonuses of 1.3%, 1.2% and 0.5% of net revenues
respectively.
|
Narrative
to Summary Compensation Table and Plan-Based Awards Table
Employment and Consulting
Agreements. During fiscal 2006 we had no written employment agreements
with any of the Named Executive Officers. The following compensation was agreed
with and paid to each of the Named Executive Officers in fiscal 2006 and
2007:
|
•
|
In
fiscal 2006, Ianace was paid $180,000 and received no Cash Incentive or
Long-Term Equity Compensation. In fiscal 2007, he was paid $230,000 and
received $50,000 Cash Incentive Compensation based on revenues generated
and was awarded 11,000,000 stock options on August 2007 at a price of
$0.085 vesting over three years as Long-Term Equity
Compensation.
|
|
•
|
In
fiscal 2007, Leighton was paid $120,000 under a consulting agreement. On
May 1, 2007 he was awarded 6,750,000 stock options at a price of $0.085 as
Long-Term Equity Compensation: these options were 50% vested on the date
of grant and the remainder is vesting over the eighteen months ending
November 1, 2008. On October 1, 2007, he was awarded 4,250,000 stock
options at a price of $0.085 as Long-Term Equity Compensation: these
options were 50% vested on the date of grant and the remainder is vesting
over the 13 months ending November 1,
2008.
|
|
•
|
In
fiscal 2006, Logan was paid $135,652 and received no Cash Incentive or
Long-Term Equity Compensation. In fiscal 2007, he was paid $110,000 and
received $10,000 Cash Incentive Compensation based on revenues generated
and was awarded 2,800,000 stock options on August 2007 at a price of
$0.085 vesting over three years as Long-Term Equity
Compensation.
|
|
•
|
In
fiscal 2006, the chief financial officer was paid $116,000 and received no
Cash Incentive or Long-Term Equity Compensation. In fiscal 2007, he was
paid $122,506 and received no Cash Incentive or Long-Term Equity
Compensation.
|
|
•
|
In
fiscal 2006, the chief marketing officer was paid $173,329 received no
Cash Incentive or Long-Term Equity Compensation. In fiscal 2007, he was
paid $143,332 and received $30,000 Cash Incentive Compensation based on
revenues generated and no Long-Term Equity
Compensation.
|
|
•
|
In
fiscal 2006, the chief technology officer was paid $213,000 and received
no Cash Incentive or Long-Term Equity Compensation. In fiscal 2007, he was
paid $201,000 and received $40,000 Cash Incentive Compensation based on
revenues generated and was awarded 5,000,000 stock options on August 2007
at a price of $0.085 vesting over three years as Long-Term Equity
Compensation.
|
|
•
|
In
fiscal 2006, the vice president, business development was paid $120,000
and received no Cash Incentive or Long-Term Equity Compensation. In fiscal
2007, he was paid $127,500 and received $76,567 Cash Incentive
Compensation based on revenues generated and no Long-Term Equity
Compensation.
|
Salary
and Cash Incentive Awards in Proportion to Total Compensation
As noted
in the Compensation Discussion and Analysis, the Board believes that a portion
of each Named Executive Officer’s compensation should be in the form of equity
awards; however, the Board awarded very little cash incentive compensation and
long-term equity incentive compensation as a result of the Company’s continued
negative cash flow and lack of sales in fiscal 2006. The following table sets
forth the percentage of each Named Executive Officer’s total compensation that
was paid in the form of base salary and cash incentive award under the 2006
performance-based incentive plan. The Board anticipates that salary and cash
incentive awards will constitute a smaller percentage of each Named Executive
Officer’s total compensation in future years as the Board has additional
opportunity to structure appropriately targeted long-term equity-based incentive
awards, such as stock options and restricted stock and the Company achieves
profitability.
Outstanding
Equity Awards at 2007 Fiscal Year End
The
following table provides information about the stock option awards held by the
Named Executive Officers as of September 30, 2007. This information includes
unexercised and unvested stock options. Each equity award is separately shown
for each Named Executive Officer. The vesting schedule for each stock option
award is shown immediately following the table based on the date on which the
stock option award was granted.
|
|
Option Awards
|
Name and principal position(s)
|
|
Number of securities underlying unexercised options (#) exercisable
|
|
|
Number of securities underlying unexercised options (#) unexercisable
|
|
|
Number of incentive plan awards: number of securities underlying unexercised unearned options (#)
|
|
|
Option exercise price ($)
|
|
Option exercise date
|
Peter Ianace
Chief
Executive Officer
|
|
|
1,800,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.100 |
|
July
8, 2007
|
|
|
|
900,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.080 |
|
December
20, 2007
|
|
|
|
— |
|
|
|
900,000 |
|
|
|
|
|
|
$ |
0.080 |
|
December
21, 2008
|
|
|
|
— |
|
|
|
900,000 |
|
|
|
|
|
|
$ |
0.080 |
|
December
22, 2009
|
|
|
|
— |
|
|
|
3,666,667 |
|
|
|
— |
|
|
$ |
0.085 |
|
August
10, 2008
|
|
|
|
|
|
|
|
3,666,667 |
|
|
|
|
|
|
$ |
0.085 |
|
August
10, 2009
|
|
|
|
|
|
|
|
3,666,667 |
|
|
|
|
|
|
$ |
0.085 |
|
August
10, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Leighton
President
|
|
|
3,375,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.085 |
|
May
1, 2007
|
|
|
|
187,500 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.085 |
|
June
1, 2007
|
|
|
|
187,500 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.085 |
|
July
1, 2007
|
|
|
|
187,500 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.085 |
|
August
1, 2007
|
|
|
|
187,500 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.085 |
|
September
1, 2007
|
|
|
|
2,312,500 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.085 |
|
October
1, 2007
|
|
|
|
350,962 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.085 |
|
November
1, 2007
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
December
1, 2007
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
January
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
February
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
March
31, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
April
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
May
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
June
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
July
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
August
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
September
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
October
1, 2008
|
|
|
|
— |
|
|
|
350,962 |
|
|
|
— |
|
|
$ |
0.085 |
|
November
1, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Logan
Chief
Operating Officer
|
|
|
900,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.100 |
|
July
8, 2007
|
|
|
|
166,667 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.080 |
|
December
20, 2007
|
|
|
|
— |
|
|
|
166,667 |
|
|
|
— |
|
|
$ |
0.080 |
|
December
20, 2008
|
|
|
|
— |
|
|
|
166,667 |
|
|
|
— |
|
|
$ |
0.080 |
|
December
20, 2009
|
|
|
|
— |
|
|
|
933,333 |
|
|
|
— |
|
|
$ |
0.085 |
|
August
10, 2008
|
|
|
|
— |
|
|
|
933,333 |
|
|
|
— |
|
|
$ |
0.085 |
|
August
10, 2009
|
|
|
|
— |
|
|
|
933,333 |
|
|
|
— |
|
|
$ |
0.085 |
|
August
10, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forres McGraw
Chief
Financial Officer
|
|
|
600,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.100 |
|
March
14, 2007
|
|
|
|
— |
|
|
|
300,000 |
|
|
|
— |
|
|
$ |
0.100 |
|
March
14, 2008
|
|
|
|
— |
|
|
|
533,333 |
|
|
|
— |
|
|
$ |
0.080 |
|
December
20, 2007
|
|
|
|
— |
|
|
|
533,333 |
|
|
|
— |
|
|
$ |
0.080 |
|
December
20, 2008
|
|
|
|
— |
|
|
|
533,333 |
|
|
|
— |
|
|
$ |
0.080 |
|
December
20, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Nimon
Chief
Technology Officer
|
|
|
1,200,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
August
25, 2007
|
|
|
|
433,333 |
|
|
|
— |
|
|
|
— |
|
|
$ |
0.100 |
|
December
20, 2007
|
|
|
|
— |
|
|
|
433,333 |
|
|
|
— |
|
|
$ |
0.100 |
|
December
20, 2008
|
|
|
|
— |
|
|
|
433,333 |
|
|
|
— |
|
|
$ |
0.100 |
|
December
20, 2009
|
|
|
|
— |
|
|
|
1,666,667 |
|
|
|
— |
|
|
$ |
0.085 |
|
August
10, 2008
|
|
|
|
— |
|
|
|
1,666,667 |
|
|
|
— |
|
|
$ |
0.085 |
|
August
10, 2009
|
|
|
|
— |
|
|
|
1,666,667 |
|
|
|
— |
|
|
$ |
0.085 |
|
August
10, 2010
|
Potential
Payments Upon Termination
Employment and Consulting
Agreements. As explained in the Narrative to the Summary Compensation
Table we have entered into a consulting agreement with Leighton. The agreement
provides for payments to be made for ten months after the termination of the
agreement on May 31, 2008. No other Named Executive Officer is entitled payments
on termination other than those required by applicable employment
laws.
Non-Management
Director Compensation for Fiscal 2006 and 2007
We
currently do not compensate our directors since both are Named Executive
Officers and are compensated as set forth above. As discussed above, we plan to
expand the Board and to use a combination of cash and equity-based incentive
compensation to attract and retain qualified candidates to serve as
non-management directors on the Board. Director compensation will be reviewed
annually by the Board and changes will be made to the total director
compensation package when the Board determines that such changes are
appropriate. The Board may from time to time engage independent compensation
consultants to evaluate our director compensation program relative to the same
Peer Group of companies that the Board will consider in setting executive
compensation, as described in the Compensation Discussion and Analysis
above.
2004
Equity Incentive Plan
Our 2004
Equity Incentive Plan (the “2004 Plan”) was adopted by our board of directors
and approved by our stockholders. Stock options, stock appreciation rights, or
SARs, stock awards and cash awards may be granted under the 2004 Plan. Each is
referred to as an award in the 2004 Plan. Options granted under the 2004 plan
may be either “incentive stock options,” as defined under Section 422 of the
Internal Revenue Code of 1986, as amended, or “non-statutory stock
options.”
The 2004
Plan is administered by the board of directors acting as a whole or by a
delegated officer or officers in certain instances. Awards under the 2004 plan
may be granted to our employees, directors and consultants. Incentive stock
options may be granted only to our employees. The administrator, in his
discretion, approves awards granted under the 2004 Plan. Generally, if an
awardees’ service to us terminates other than by reason of death, disability,
and retirement or for cause, vested options and SARs will remain exercisable for
a period of thirty days.
The plan
terminates on December 1, 2014. In the event of a termination of service of a
participant or death of a participant, the award grant may provide for exercise
within a reduced period. Unless otherwise determined by the administrator,
awards granted under the 2004 Plan are not transferable other than by will,
domestic relations order, or the laws of descent or distribution may be
exercised during the awardees’ lifetime only by the awardees.
The
administrator determines the exercise price of options at the time the options
are granted. The exercise price of an incentive stock option may not be less
than 100% of the fair market value of our Common Stock on the date of grant. The
term of an option may not be more than ten years from the date of grant. No
option may be exercised after the expiration of its term. Any incentive stock
option granted to a ten percent stockholder may not have a term of more than
five years. The administrator may grant SARs alone, in addition to, or in tandem
with, any other awards under the plan. An SAR entitles the participant to
receive the amount by which the fair market value of a specified number of
shares on the exercise date exceeds an exercise price established by the
administrator. The excess amount will be payable on ordinary shares, in cash or
in a combination thereof, as determined by the administrator. The terms and
conditions of an SAR will be contained in an award agreement. The grant of an
SAR may be made contingent upon the achievement of objective performance
conditions.
The
administrator may grant stock awards such as bonus stock, restricted stock or
restricted stock units. Generally, such awards will contain vesting features
such that awards will either not be delivered, or may be repurchased by us at
cost, if the vesting requirements are not met. The administrator will determine
the vesting and shared delivery terms.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
On July
6, 2004, Espre Texas and its then shareholders entered into a Business
Combination and Investment Agreement (the “Merger Agreement”) with Financial
Freedom Home Buyers, Inc., a Florida corporation, (subsequently called Financial
Freedom Business Development, Inc.) (“FFBD”) pursuant to which Espre Texas and
its shareholders agreed to merge Espre Texas into Candeub, Fleissig &
Associates (“Candeub”), a Delaware corporation then controlled by FFBD. FFBD,
which was dissolved in January 2006, was controlled by Michael Bokzam and
Patrick Castagna, who were officers and directors of Espre when it
redomiciled in Nevada.
Under the
terms of the Merger Agreement we issued the following shares:
|
•
|
29,059,500
shares to the Espre Texas shareholders in consideration of the merger of
Espre Texas with and into the
Company.
|
|
•
|
10,210,095
shares Common Stock to FFBD in exchange for 1,000,000 shares of Espre
Texas Common Stock which FFBD had previously purchased from Espre Texas
and 1,600,000 shares of Espre Texas Common Stock which FFBD had previously
purchased from a third party.
|
|
•
|
11,049,405
shares to FFBD of Common Stock and 2,500,000 shares of preferred stock to
FFBD in consideration of its $1,500,000 investment in the
Company.
|
A total
of 9,681,000 shares were held by the then shareholders of Candeub, which
resulted in the Company’s having 60,000,000 shares outstanding on completion of
the merger. The shares issued to the shareholders of Espre Texas and FFBD were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933.
Also in
connection with our merger with Espre Texas, FFBD and Ianace, the founder of
Espre Texas and its chief executive officer, were each issued 2,500,000
preferred shares. These shares were converted into 15,595,000 common shares in
May 2005. We consider this transaction to be a related party transaction because
certain of our officers and directors received shares in the
merger.
In July
2004, we orally agreed to engage Patrick Castagna and Michael Bokzam,
both of whom were directors of the Company, to provide general consulting
services for one year. In June 2005 we issued Messrs. Castagna and Bokzam
2,070,000 stock options each to purchase restricted common shares at $0.337
each. In addition, we issued a total of 2,552,103 restricted common shares for
expenses and other consulting services provided by Messrs. Castagna and
Bokzam.
In
February 2005, we entered into an oral one year consulting agreement with GPM, a
company wholly-owned by Gideon Djerassi, Patrick Castagna and
Michael Bokzam, all of whom were then directors of the Company. The
agreement required GPM to provide certain financial advisory services to the
Company. We paid GPM a one-time fee of 6,000,000 restricted shares of Common
Stock in consideration of GPM’s agreement to provide these
services.
In
February 2005, the Company orally agreed to engage Gideon Djerassi, then a
director of the Company, to assist the Company in coordinating its accounting
systems and control procedures, and to provide guidance for the management of
its cash flow for a term of one year. In consideration of his services, we paid
Djerassi Investments, Inc., an affiliate of Mr. Djerassi, 3,000,000
restricted shares of Common Stock of the Company.
Espre
Consulting invested $365,000 in Espre, for which it received 3,650,000 shares.
Included in accounts receivable at June 30 and September 30, 2006, and June 30,
2007, is an amount of $19,432 due from Espre Consulting. Espre Consulting is a
sole proprietorship owned and operated by Ronelle Ianace, the wife of
Peter Ianace, and is not now engaged in any business. The name of “Espre”
is derived from the initials of members of the Ianace’s family and has been used
by Peter and Ronelle Ianace from time-to-time in their business ventures.
We own the rights to the name “Espre.”
We sold
4,938,262 shares and issued 4,938,272 five year warrants to purchase shares at
$0.10 per share for $404,000 to Mr. Leighton and received a bridge loan of
$70,000 from him in February 2007, which loan was repaid in May 2007.
Mr. Leighton was a founding investor in Wireless Peripherals, in which he
invested $385,333. When Wireless Peripherals was acquired by us in 2004, he
received 6,693,706 Espre shares in exchange for his Wireless Peripheral shares.
We entered into a consulting contract with a company controlled by Leighton for
$10,000 per month commencing September 25, 2006, to September 25, 2007. We have
entered into a new consulting contract with the same entity for a minimum period
of October 1, 2007 to May 31, 2008, for $20,000 per month and 1.2% of our gross
revenues. In the event that consulting agreement is terminated on May 31, 2008,
the consulting agreement requires the continuation of monthly fees and 1.2% of
gross revenues for an additional ten months.
Mr. Leighton,
with Espre and Mr. Nelson formed Blideo and invested $200,000 in Blideo May 2007
and $300,000 in July 2007. We invested the same amounts in Blideo in the same
time periods. In April 2007 Blideo acquired an exclusive license from Media
Distribution Solutions. LLC (“MDS”), a customer of Espre since April 2006, for
the distribution and use of MDS’s software in any social networking application
for $175,000 plus certain ongoing royalties. In September 2007, Mr. Nelson,
who was then our Vice President — Sales, invested $125,000 in Blideo. Certain of
our former officers and employees are now officers, investors and employees of
Blideo. Messrs. Ianace and Leighton are directors of Blideo and were
granted stock options in Blideo.
We have
licensed ESPRE Live on a non-exclusive basis to Blideo for a one-time license
fee of $1,000,000 plus 1% of gross revenues. We have contracted with Blideo to
provide Blideo engineering and design services for a minimum of $700,000 payable
from September 1, 2007, to March 31, 2007. The engineering and design service
fees can be offset in full against the license fees. As part of this license we
have agreed not to contract with any application service provider that plans to
launch a service competitive to Blideo’s for one year following the acceptance
by Blideo of the application we are designing and building for Blideo. Blideo is
obligated to pay us a product maintenance fee for the application we are
building for Blideo of $70,000 for the first year commencing September 2008 and
thereafter at a rate to be negotiated.
Mr. Leighton
founded Vizeo Solutions Ltd. (“Vizeo”) and loaned Vizeo $50,000 in November
2006. We loaned Vizeo the same amount in January 2007 and this loan was
converted into a promissory note dated October 31, 2007, bearing interest at 5%,
payable on or before March 31, 2009, and secured by shares of Vizeo owned by
Leighton. On November 15, 2006, we granted Vizeo a non-exclusive license to
distribute our products in the territory of Europe and The Middle East and were
issued a 10% interest in Vizeo. On November 30, 2006, Vizeo entered into an
exclusive license with MDS for the distribution of MDS’s software in the
territory of Europe and the Middle East for $275,000 plus certain ongoing
royalties. On May 14, 2007, this license was extended to the non-exclusive use
of MDS’s software for any blogging and/or social networking offering and a
perpetual license for the use of the name Blideo and the URL, Blideo.com. MDS
was issued a 5% interest in Vizeo as part of this license. In March 27, 2007, we
terminated our non-exclusive license with Vizeo and the 5% interest in Vizeo was
cancelled. Vizeo received $100,000 from MDS for terminating Vizeo’s exclusive
right to the MDS’s software for the entertainment and sports entertainment
markets. Leighton is the sole director and officer of Vizeo.
All
shares of our Common Stock, options, warrants and exercise prices reported in
this Item 7 and elsewhere in this Registration Statement have been adjusted for
the Company’s 3:1 forward split effective May 2, 2005.
As of
February 4, 2008, the Company had no legal proceedings.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Our
Common Stock is quoted on The Pink Sheets (www.pinksheets.com)
centralized quotation service for OTC securities under the trading symbol
“EPRT.PK,” but is not quoted on the NASD OTC Bulletin Board or NASDAQ, nor
listed on any national or regional securities exchange. The following table
shows the high and low bid prices of our Common Stock on the Pink Sheets for
each quarters of the fiscal years ended September 30, 2007, 2006 and 2005.
Quotations from the Pink Sheets reflect inter-dealer prices (without adjustments
for retail mark-ups, markdowns or conversions) and may not reflect actual
transactions:
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High Bid
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Low Bid
|
|
Quarter
Ended December 31, 2004
|
|
$ |
2.33 |
|
|
$ |
1.95 |
|
Quarter
Ended March 31, 2005
|
|
$ |
3.18 |
|
|
$ |
2.17 |
|
Quarter
Ended June 30, 2005
|
|
$ |
4.25 |
|
|
$ |
3.00 |
|
Quarter
Ended September 30, 2005
|
|
$ |
3.05 |
|
|
$ |
2.88 |
|
Quarter
Ended December 31, 2005
|
|
$ |
0.62 |
|
|
$ |
0.54 |
|
Quarter
Ended March 31, 2006
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
Quarter
Ended June 30, 2006
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
Quarter
Ended September 30, 2006
|
|
$ |
0.19 |
|
|
$ |
0.17 |
|
Quarter
Ended December 31, 2006
|
|
$ |
0.10 |
|
|
$ |
0.09 |
|
Quarter
Ended March 31, 2007
|
|
$ |
0.12 |
|
|
$ |
0.11 |
|
Quarter
Ended June 30, 2007
|
|
$ |
0.10 |
|
|
$ |
0.09 |
|
Quarter
Ended September 30, 2007
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
Quarter
Ended December 31, 2007
|
|
$ |
0.15 |
|
|
$ |
0.15 |
|
On May 2,
2005, our Common Stock was forward split on a three shares for one share basis
in order to increase the liquidity in the trading our stock. All quotations for
any period prior to the forward split have been adjusted as if the split had
been in effect for each period reported.
Dividend
Policy
We have
never declared any cash dividends and do not anticipate paying cash dividends in
the near future. Any future determination to pay cash dividends will be at the
discretion of our board of directors who will be dependent on our results of
operations, financial condition, contractual restrictions and other factors that
our board of directors considers relevant. We are under no contractual
obligations or restrictions to declare or pay dividends to our
stockholders.
As of
September 30, 2007 a total of 318,522,499 shares of Common Stock were
outstanding and held of record by 889 persons. The following is a summary of
transactions by the Company within the past three years involving sales of its
securities that were not registered under the Securities Act.
Merger
with Espre Texas
On July
6, 2004, Espre Texas and its then shareholders entered into a Business
Combination and Investment Agreement (the “Merger Agreement”) with FFBD pursuant
to which Espre Texas and its shareholders agreed to merge Espre Texas into
Candeub, Fleissig & Associates (“Candeub”) a Delaware corporation then
controlled by FFBD. Under the terms of the Merger Agreement, we issued the
following shares of restricted common stock pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of
1933:
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•
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29,059,500
shares to the Espre Texas
shareholders
|
|
•
|
10,210,095
shares Common Stock to FFBD in exchange for 1,000,000 shares of Espre
Texas Common Stock which FFBD had purchased from Espre Texas and 1,600,000
shares of Espre Texas Common Stock which FFBD had purchased from a third
party.
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|
•
|
11,049,405
shares to FFBD of Common Stock and 2,500,000 shares of preferred stock to
FFBD in consideration of its $1,500,000 investment in the
Company.
|
A total
of 9,681,000 shares of Common Stock were held by the then shareholders of
Candeub upon completion of the merger, so that the Company had 60,000,000 shares
outstanding on completion of the merger.
Also at
closing of the merger, FFBD and Ianace, who was then the founder of Espre Texas
and chief executive officer of Espre Texas, were each issued 2,500,000
restricted preferred shares pursuant to the exemption from registration provided
by Section 4(2) of the Securities Act of 1933. The preferred shares were
converted into 15,595,000 restricted common shares in May 2005.
Acquisition
of Wireless Peripherals Inc.
In August
2004, Wireless Peripherals was merged into the Company in exchange for
24,960,366 restricted shares of our Common Stock and fully-vested options to
purchase an additional 3,539,634 restricted shares of our Common Stock
(3,462,618 at $0.02 per share and 77,016 at $0.01 per share). The shares and
options issued in connection with the Wireless Peripherals merger were issued
pursuant to the exemption provided by Section 4(2) of the Securities Act of
1933.
Purchase
of Intellectual Property
In 2003
we acquired our ViewMail Marketing System from JOD Enterprises for a note of
$200,000. In May 2006 the note was settled in exchange for 2,000,000 restricted
common shares. These securities were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of
1933.
On
September 10, 2004, Video Software Partners, LLC (“Video Partners”), sold its
entire interest in Espre’s CODEC to Espre in consideration of a Note for
$2,500,000 (the “Note”) payable by installments due March 1, 2006 secured on the
CODEC and the software applications. As at June 30, 2007, we had issued an
aggregate of 6,288,000 restricted common shares (the “Collateral Shares”) in
order to convert the Note into a contingent stock repurchase obligation that has
the effect of guaranteeing Video Partners the full repayment of the Note in the
event that the net proceeds on sale of the Collateral Shares is less than the
remaining outstanding balance on the Note ($1,650,000 as at June 30 and
September 30, 2007). All of the securities issued to Video Partners were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. In October 2007, we issued a further 1,500,000
restricted common shares in full satisfaction of all of our obligations of Video
Partners and its security interest in our CODEC was then
terminated.
Payments
for Services
We have
issued a total of 24,760,282 shares of restricted Common Stock for consulting,
advisory and other services as follows:
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•
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In
February 2005, we entered into an oral one year consulting agreement with
GPM, a company wholly-owned by Gideon Djerassi, Patrick Castagna
and Michael Bokzam, all of whom were then directors of the Company.
The agreement required GPM to provide certain financial advisory services
to the Company. We paid GPM a one-time fee of 6,000,000 restricted shares
of Common Stock in consideration of GPM’s agreement to provide these
services.
|
|
•
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In
February 2005, the Company orally agreed to engage Gideon Djerassi,
then a director of the Company, to assist the Company in coordinating its
accounting systems and control procedures, and to provide guidance for the
management of its cash flow for a term of one year. In consideration of
his services, we paid Djerassi Investments, Inc., an affiliate of
Mr. Djerassi, 3,000,000 restricted shares of Common Stock of the
Company.
|
|
•
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In
July 2004, we orally agreed to engage Patrick Castagna and
Michael Bokzam, both of whom were directors of the Company, to
provide general consulting services for one year. In June 2005 we issued
Messrs. Castagna and Bokzam 2,070,000 stock options each to purchase
restricted common shares at $0.337 each. In addition, we issued a total of
2,552,103 restricted common shares for expenses and other consulting
services provided by Messrs. Castagna and
Bokzam.
|
|
•
|
In
May 2005 we issued 240,000 restricted shares to an employee,
Rick Bansal, in payment for
services
|
|
•
|
In
February 2006 we issued 500,000 restricted shares to Phil Snowden for
financial consulting services
|
|
•
|
In
February 2006 we entered into a consulting agreement with KBK Ventures,
Inc. (“KBK”), an unrelated company, to provide financial consulting
services and paid a onetime fee of 3,000,000 restricted shares of Common
Stock in consideration of these services. The agreement granted KBK
piggyback registration rights to be included in any Registration Statement
undertaken by the Company.
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•
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In
February 2006 we entered into a consulting agreement with 3CD Consulting
(“3CD”), an unrelated company, to provide financial consulting services
and paid a onetime fee of 3,000,000 shares of restricted Common Stock in
consideration of these services. The agreement granted 3CD piggyback
registration rights to be included in any Registration Statement
undertaken by the Company.
|
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•
|
In
April 2006 we orally agreed to engage Langhofer Financial Group, Inc. to
provide financial consulting services and paid a onetime fee of 450,000
shares of restricted Common Stock in consideration of these
services
|
|
•
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In
April 2006 we orally agreed to engage Paul A. Kolbeck to provide
financial consulting services and paid a onetime fee of 25,000 shares of
restricted Common Stock in consideration of these
services
|
|
•
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In
February 2006 we entered into a finder agreement with Symphony Resource
Group, LLC (“Symphony”), an unrelated company, to provide technology and
other consulting services and paid a onetime fee of 300,000 shares of
restricted Common Stock in consideration of these services. We also issued
Symphony warrants to purchase 2,000,000 shares at $0.08 in increments of
500,000 exercisable on February 1, April 1, July 1, and October 1,
2006.
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•
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In
January 2007, the Company orally agreed to engage Designated Marketing to
provide financial consulting services and paid a one-time fee of 2,150,000
shares of restricted Common Stock in consideration of those
services.
|
|
•
|
In
February 2007 we entered into an Exclusive Investment Banking and
Placement Agent Agreement with Ackrell Capital, LLC (“Ackrell”), an
unrelated company, and paid a non-refundable retainer of 1,903,179 shares
of restricted Common Stock in consideration of these
services.
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•
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In
April 2007 we entered into a finder agreement with Jesteda Partners, LLC
(“Jesteda”), an unrelated company, to provide investment banking services
and paid a one-time fee of 750,000 shares of restricted Common Stock in
consideration of these services. In August 2007 we terminated this
agreement and paid Jesteda an additional 250,000 shares of restricted
Common Stock and warrants to purchase 500,000 shares at $0.08 per
share.
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•
|
In
July 2006 we issued 400,000 restricted shares to Steve Stuart for
financial consulting services
|
|
•
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In
July 2006 we issued 240,000 restricted shares to Evelyn Taylor for
financial consulting services
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All of
the securities described under this caption were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
Capital
Raises
In June
2005, we executed a memorandum of understanding with an unrelated party to
provide us with $15,000,000 of financing. We only received $575,000 under this
agreement and accordingly issued 1,916,667 restricted shares of Common Stock in
consideration for such payment. These securities were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
We have
issued the following shares of restricted Common Stock to accredited investors,
as that term is defined in Rule 501(a), with no demand or piggyback registration
rights, pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 and Regulation D, Rule 506:
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•
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In
the year ended September 30, 2005, we issued 8,881,308 shares at average
share prices of $0.41.
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•
|
In
the year ended September 30, 2006, we issued 62,333,112 shares at average
share prices of $0.07 and warrants to purchase a further 34,581,444 shares
at $0.10 per share.
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•
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In
the year ended September 30, 2007, we issued 107,396,238 shares at average
share prices of $0.08 and warrants to purchase a further 7,438,272 shares
at an average of $0.10 per share.
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•
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Subsequent
to September 30, 2007, we issued warrants to purchase 2,000,000 shares at
$0.10.
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Our
authorized capital stock consists of 500,000,000 shares of Common Stock, $0.001
par value, and 5,000,000 shares of preferred stock, $0.001 par
value.
Common
Stock
Voting Rights. The holders of
our Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the election of
directors, and do not have cumulative voting rights. Accordingly, the holders of
a majority of the shares of Common Stock are entitled to vote in any election of
directors can elect all of the directors standing for election, if they so
choose.
Dividends. Holders of our
Common Stock are entitled to receive ratably those dividends, if any, as may be
declared by the Board of Directors out of legally available funds.
Liquidation, Dissolution and Winding
Up. Upon our liquidation, dissolution or winding up, the holders of our
Common Stock will be entitled to share ratably in the net assets legally
available for distribution to stockholders after the payment of all of our debts
and other liabilities, subject to the prior rights of any preferred stock then
outstanding.
Pre-emptive Rights. Holders
of our Common Stock have no pre-emptive or conversion rights or other
subscription rights and there are no redemption or sinking funds provisions
applicable to our Common Stock.
Assessment. All outstanding
shares of our Common Stock are, and the shares of our Common Stock to be
outstanding upon completion of this offering will be, fully paid and
non-assessable.
Preferred
Stock
None of
the Company’s shares of preferred stock are issued and outstanding as of the
date of this Registration Statement. The Company has designated all of its
preferred stock Series A Preferred Stock, which has the following rights and
preferences:
Dividend
Preference
Commencing
with the fiscal year which began January 1, 2005, holders of Series A Preferred
Stock, in preference to the holders of Common Stock of the Company, were
entitled to receive, a Common Stock dividend of 0.096 shares of Common Stock per
annum payable monthly on the first day of each calendar month.
Voting
Rights
Each
holder of outstanding shares of Series A Preferred Stock is entitled to one vote
per each share of preferred stock. Shares of Series A Preferred Stock are to be
voted together with the shares of Common Stock as a single class.
Adverse
Effects, Mergers and Other Major Decisions
Without
the consent of the holders of two-thirds of the outstanding Series A Preferred
Stock, the Company cannot amend the rights and preferences of the Series A
Preferred Stock, and cannot authorize or issue any other series of preferred
stock which is in parity with or has a priority over the Series A Preferred
Stock. The consent of the holders of the Series A Preferred Stock is required
for sale of all or substantially all of the Company’s assets or any merger,
consolidation or share exchange, and is required for certain other major
decisions of the Company.
Conversion
Each
share of Series A Preferred Stock is convertible, at the option of the holder,
into one share of Common Stock.
Registration
Rights
The
holders of Series A Preferred Stock have the right to require the Company to
register their shares for sale in any registration statement of Common Stock
other than on Forms S-4 and S-8.
Anti-Takeover
Provisions. Nevada law provides that any agreement providing for the
merger or consolidation for sale of all or substantially all of the assets of a
corporation be approved by the owners of at least the majority of the
outstanding shares of that corporation, unless a different vote is provided for
in our Articles of Incorporation, as amended. Our Articles of Incorporation
provide for a super majority voting requirement of the holders of outstanding
Series A Preferred Stock in order to approve any such transactions. No shares of
Series A Preferred Stock are currently outstanding, but they could be issued by
the Company’s Board of Directors in the future. Nevada law also gives appraisal
rights for certain types of mergers, plans of reorganization, or exchanges or
sales of all or substantially all of the assets of a corporation. Under Nevada
law, a shareholder does not have the right to dissent with respect
to:
(a) a
sale of assets or reorganization, or
(b) any
plan of merger or any plan of exchange, if
(i) the
shares held by the shareholder are part of a class of shares which are listed on
a national securities exchange included in the national market system by the
NASD, or are held of record by not less than 2,000 shareholders,
and
(ii) the
shareholder is not required to accept for his shares any consideration other
than shares of a corporation that, immediately after the effective time of the
merger or exchange, will be part of a class of shares which are listed on a
national securities exchange included in the national market system by the NASD,
or are held of record by not less than 2,000 holders.
Control Share Acquisition
Provision. Under Nevada law, when a person has acquired or offers to
acquire one fifth, one third, or a majority of the stock of a corporation, a
shareholders’ meeting must be held after delivery of an “offeror’s” statement,
at the offeror’s expense, so that the shareholders of the corporation can vote
on whether the owner(s) of the shares proposed to be acquired (the “control
shares”) can exercise voting rights. Except as otherwise provided in a
corporation’s Articles of Incorporation, the approval of the owner(s) of a
majority of the outstanding stock not held by the offerors is required so that
the stock held by the offerors will have voting rights. The control share
acquisition provisions are applicable to any acquisition of a controlling
interest, unless the articles of incorporation or by laws of a corporation in
effect on the tenth day following the acquisition of a controlling interest by
an acquiring person provide that the control share acquisition provisions do not
apply. The control share acquisition provisions only apply to corporations that
have at least two hundred shareholders, one hundred of which have Nevada
addresses, and which does business in Nevada. We have not elected out of the
control share acquisition provisions of Nevada law.
Combination Moratorium
Provision. Nevada law provides that a corporation may not engage in any
“combinations,” which is broadly defined to include mergers, sales and leases of
assets, issuances of securities, and similar transactions with an “interested
shareholder” (which is defined as the beneficial owner of 10% or more of the
voting power of the corporation) and certain affiliates or their associates for
three years after an interested certain affiliates of their associates for three
years after an interested shareholder’s date of acquiring the shares, unless the
combination or the purchase of the shares by the interested shareholder is
approved by the Board of Directors by the date the interested shareholder
acquires the shares. After the initial three year period, any combination must
still be approved by majority of the voting power not beneficially owned by the
interested shareholder or the interested shareholders, affiliates or associates,
unless the aggregate amount of cash and the market value of the consideration
other than cash that could be received by shareholders as a result of the
combination is at least equal to the highest of:
(a) the
highest bid per share of each class or series of shares, including the common
shares, on the date of the announcement of the combination or on the date the
interested shareholder acquired the shares; or
(b) for
holders of preferred stock, the highest liquidation value of the preferred
stock.
Other Provisions. Under
Nevada law, the selection of a period for achieving corporate goals is the
responsibility of the directors. In addition, the directors and officers, in
exercising their respective powers with a view to the interests of the
corporation, may consider the interests of the corporation and its shareholders,
including the possibility that those interests may be best served by the
continued independence of the corporation.
Under
Nevada law, directors also may resist any change or potential change of control
of the corporation if the directors, by majority vote of a quorum, determine
that a change or potential change is opposed to or not in the best interests of
the corporation “upon consideration of the interest of the corporation’s
shareholders,” or for one of the other reasons described above. The directors
may also take action to protect the interests of the corporations’ shareholders
by adopting or executing plans that deny rights, privileges, powers, or
authority to a holder of a specific number of shares or percentage of share
ownership or voting power.
Options
and Warrants
Our 2004
Equity Incentive Plan authorizes an aggregate of 100,000,000 shares to be
available for grant. At September 30, 2007 we had granted options for 74,014,634
common shares with exercise prices of $0.02 to $0.337 per share of which
66,814,634 remained outstanding.
The
Company has outstanding warrants for the purchase of 44,019,716 shares of the
Common Stock of the Company at prices between $0.08 and $0.10 per share,
exercisable for a period of five years from the date of grant.
Transfer
Agent and Registrar
Island
Stock Transfer, a division of Island Capital Management, LLC, 100 Second Avenue
South, Suite 300N, St. Petersburg, Florida 33701, acts as the transfer
agent and registrar for the Company. Its telephone number is (727) 289-0010.
Island Stock Transfer is registered with the Commission and authorized to
conduct stock transfer transactions with the Depository Trust
Company.
Our
Articles of Incorporation provide that no officer or director shall be
personally liable to the corporation or its shareholders for money damages
except as provided pursuant to the Nevada Revised Statutes. Our Bylaws provide
that we will indemnify and hold harmless, to the full extent allowed by the laws
of the State of Nevada, each person who was, or is threatened to be made a party
to, or is otherwise involved in any threatened proceedings by reason of the fact
that he or she is or was a director or officer of Espre, against all losses,
claims, damages, liabilities and expenses actually and reasonably incurred or
suffered in connection with such proceedings. Nevada law provides that a Nevada
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other than
an action by or in the right of the corporation (i.e., a “non-derivative
proceeding”), by reason of the fact that he or she is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including attorneys’ fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with the
action, suit or proceeding if he or she:
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Is
not liable under Section 78.138 of the Nevada Revised Statutes for breach
of his or her fiduciary duties to the corporation;
or
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•
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Acted
in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful.
|
In
addition, a Nevada corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
(i.e., a “derivative proceeding”), by reason of the fact that he or she is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses, including amounts paid in settlement and attorneys’
fees actually and reasonably incurred by him or her in connection with the
defense or settlement of the action or suit if he:
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•
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Is
not liable under Section 78.138 of the Nevada Revised Statutes for breach
of his or her fiduciary duties to the corporation;
or
|
|
•
|
Acted
in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interests of the
corporation.
|
Under
Nevada law, indemnification may not be made for any claim, issue or matter as to
which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals there from, to be liable to the corporation or
for amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all of the
circumstances of the case, the person is fairly and reasonably entitled to
indemnify for such expenses as the court deems proper.
To the
extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any non-derivative
proceeding or any derivative proceeding, or in defense of any claim, issue or
matter therein, the corporation is obligated to indemnify him or her against
expenses, including attorneys’ fees, actually and reasonably incurred in
connection with the defense.
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets at September 30, 2007 and 2006
|
F-2
|
|
|
Consolidated
Statements of Operations — for the years ended September 30, 2007, 2006
and 2005
|
F-3
|
|
|
Consolidated
Statements of Cash Flows— for the years ended September 30, 2007, 2006 and
2005
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ (Deficit) — for the years ended September 30,
2007, 2006 and 2005
|
F-5
|
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
|
|
Consolidated
Balance Sheets at December 31, 2007 (unaudited)
|
F-21
|
|
|
Consolidated
Statements of Operations for the Three Months Ended December 31, 2007 and
2006(unaudited)
|
F-22
|
|
|
Consolidated
Statements of Cash Flows for the Three Months ended December 31, 2007 and
2006 (unaudited)
|
F-23
|
|
|
Consolidated
Statement of Shareholders’ Equity for the Three Months ended December 31,
2007 (unaudited)
|
F-24
|
|
|
Selected
Notes to Condensed Consolidated Financial Statements
(unaudited)
|
F-25
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors Espre Solutions, Inc. and Subsidiary
We have
audited the accompanying consolidated balance sheets of Espre Solutions, Inc.
and subsidiary as of September 30, 2007 and 2006 and the related consolidated
statements of operations, stockholders’ equity (deficit) and cash flows for the
three years ended September 30, 2007. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these 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). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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 balance sheets referred to above present fairly, in
all material respects, the financial position of Espre Solutions, Inc. and
subsidiary as of September 30, 2007 and 2006 and the related consolidated
statements of operations, stockholders’ equity (deficit) and cash flows for the
three years ended September 30, 2007, in conformity with United States generally
accepted accounting principles.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company’s significant operating losses
raise substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As
discussed in Note 2 to the consolidated financial statements the Company adopted
Financial Accounting Standard Board
Statement
No. 123(R), “Share-Based Payment” effective October 1, 2005.
Sweeney,
Gates & Co.
Fort
Lauderdale, Florida
December
18, 2007
ESPRE
SOLUTIONS INC. AND SUBSIDIARY
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,850,666
|
|
|
$
|
291,426
|
|
Accounts
receivable, net
|
|
|
251,050
|
|
|
|
17,610
|
|
Accounts
receivable, related party
|
|
|
—
|
|
|
|
950,000
|
|
Prepaid
expenses and advances
|
|
|
34,564
|
|
|
|
36,385
|
|
Total
current assets
|
|
|
4,136,280
|
|
|
|
1,295,421
|
|
|
|
|
|
|
|
|
|
|
Equipment,
net
|
|
|
296,758
|
|
|
|
165,974
|
|
Intangible
assets, net
|
|
|
73,191
|
|
|
|
68,858
|
|
Loans
to related parties
|
|
|
69,432
|
|
|
|
19,432
|
|
Other
assets
|
|
|
97,292
|
|
|
|
44,762
|
|
Total
assets
|
|
$
|
4,672,953
|
|
|
$
|
1,594,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable to related parties
|
|
$
|
1,667,944
|
|
|
$
|
2,253,987
|
|
Accounts
payable and accrued expenses
|
|
|
1,449,397
|
|
|
|
752,441
|
|
Total
current liabilities
|
|
|
3,117,341
|
|
|
|
3,006,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue — related party
|
|
|
1,000,000
|
|
|
|
950,000
|
|
Minority
interest
|
|
|
348,093
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit)
|
|
|
|
|
|
|
|
|
Common
shares — $0.001 par value; authorized 500,000,000 shares; and 318,522,499
shares issued and outstanding (note 18)
|
|
|
318,523
|
|
|
|
205,086
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
71,110,086
|
|
|
|
57,880,541
|
|
|
|
|
|
|
|
|
|
|
Stock
subscription receivable
|
|
|
(190,000
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
Retained
equity (deficit)
|
|
|
(71,031,090
|
)
|
|
|
(60,437,608
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
207,519
|
|
|
|
(2,361,981
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
4,672,953
|
|
|
$
|
1,594,447
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
ESPRE
SOLUTIONS INC. AND SUBSIDIARY
Consolidated
Statements of Operations
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licensing fees
|
|
$
|
2,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Related
party software license fees
|
|
|
—
|
|
|
|
900,000
|
|
|
|
—
|
|
Custom
engineering fees
|
|
|
336,200
|
|
|
|
—
|
|
|
|
4,000
|
|
Revenue
sharing
|
|
|
95,847
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
30,679
|
|
|
|
44,147
|
|
|
|
91,478
|
|
Total
gross revenue
|
|
|
2,462,726
|
|
|
|
944,147
|
|
|
|
95,478
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licensing fees repurchases — related party
|
|
|
(725,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Total
net revenue
|
|
|
1,737,726
|
|
|
|
944,147
|
|
|
|
95,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General,
administrative and selling expenses
|
|
|
5,861,223
|
|
|
|
3,588,339
|
|
|
|
2,986,179
|
|
General,
administrative and selling stock based compensation
|
|
|
4,804,362
|
|
|
|
5,399,198
|
|
|
|
31,916,213
|
|
Research
and development
|
|
|
1,541,367
|
|
|
|
890,299
|
|
|
|
1,459,005
|
|
Research
and development stock based compensation
|
|
|
258,816
|
|
|
|
517,630
|
|
|
|
—
|
|
Amortization
and depreciation
|
|
|
104,399
|
|
|
|
83,275
|
|
|
|
71,188
|
|
Transition
adjustment
|
|
|
—
|
|
|
|
514,261
|
|
|
|
122,160
|
|
Total
operating expenses
|
|
|
12,570,167
|
|
|
|
10,993,002
|
|
|
|
36,554,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(10,832,441
|
)
|
|
|
(10,048,855
|
)
|
|
|
(36,459,267
|
)
|
Interest
expense
|
|
|
(12,948
|
)
|
|
|
(76,035
|
)
|
|
|
(204,215
|
)
|
Net
loss before minority interest
|
|
|
(10,845,389
|
)
|
|
|
(10,124,890
|
)
|
|
|
(36,663,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
251,907
|
|
|
|
—
|
|
|
|
—
|
|
Net
loss
|
|
|
(10,593,482
|
)
|
|
|
(10,124,890
|
)
|
|
|
(36,663,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
(495,000
|
)
|
Net
loss applicable to common stockholders
|
|
$
|
(10,593,482
|
)
|
|
$
|
(10,124,890
|
)
|
|
$
|
(37,158,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share applicable to common
stockholders
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
236,043,042
|
|
|
|
200,057,661
|
|
|
|
109,788,566
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
ESPRE
SOLUTIONS INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for year
|
|
$
|
(10,593,482
|
)
|
|
$
|
(10,124,890
|
)
|
|
$
|
(36,663,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
and options issued for services
|
|
|
971,293
|
|
|
|
1,335,750
|
|
|
|
31,916,213
|
|
Stock
based compensation
|
|
|
4,091,885
|
|
|
|
4,581,078
|
|
|
|
—
|
|
Amortization
and depreciation
|
|
|
104,399
|
|
|
|
83,275
|
|
|
|
71,188
|
|
Transition
adjustment
|
|
|
—
|
|
|
|
514,261
|
|
|
|
122,160
|
|
Imputed
interest
|
|
|
6,569
|
|
|
|
51,992
|
|
|
|
170,872
|
|
Minority
interest
|
|
|
(251,907
|
)
|
|
|
—
|
|
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
50,000
|
|
|
|
950,000
|
|
|
|
—
|
|
Accounts
receivable
|
|
|
(233,440
|
)
|
|
|
(7,562
|
)
|
|
|
(26,480
|
)
|
Accounts
receivable — related party
|
|
|
950,000
|
|
|
|
(950,000
|
)
|
|
|
—
|
|
Prepaid
expenses
|
|
|
1,821
|
|
|
|
19,288
|
|
|
|
(38,056
|
)
|
Other
assets
|
|
|
(52,530
|
)
|
|
|
(4,400
|
)
|
|
|
(31,845
|
)
|
Accounts
payable and accrued expenses
|
|
|
696,957
|
|
|
|
(773,097
|
)
|
|
|
907,167
|
|
Total
cash used in operating activities
|
|
|
(4,258,435
|
)
|
|
|
(4,324,305
|
)
|
|
|
(3,572,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to related parties
|
|
|
(50,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Purchase
of equipment
|
|
|
(178,932
|
)
|
|
|
(70,292
|
)
|
|
|
(68,747
|
)
|
Purchase
of intangible assets
|
|
|
(60,582
|
)
|
|
|
(3,986
|
)
|
|
|
(6,410
|
)
|
Net
cash used in investing activities
|
|
|
(289,514
|
)
|
|
|
(74,278
|
)
|
|
|
(75,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
on notes payable — related party
|
|
|
170,000
|
|
|
|
590,000
|
|
|
|
—
|
|
Payments
on notes payable
|
|
|
(358,254
|
)
|
|
|
(402,431
|
)
|
|
|
(353,742
|
)
|
Proceeds
from sale of stock
|
|
|
7,875,443
|
|
|
|
4,288,700
|
|
|
|
2,925,292
|
|
Minority
capital raised
|
|
|
600,000
|
|
|
|
—
|
|
|
|
—
|
|
Receipts
of subscriptions receivable
|
|
|
(180,000
|
)
|
|
|
—
|
|
|
|
1,209,132
|
|
Net
cash provided by financing activities
|
|
|
8,107,189
|
|
|
|
4,476,269
|
|
|
|
3,780,682
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
3,559,240
|
|
|
|
77,686
|
|
|
|
133,262
|
|
Cash,
beginning of year
|
|
|
291,426
|
|
|
|
213,740
|
|
|
|
80,478
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year
|
|
$
|
3,850,666
|
|
|
$
|
291,426
|
|
|
$
|
213,740
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
12,948
|
|
|
$
|
76,035
|
|
|
$
|
204,215
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for debt
|
|
$
|
404,360
|
|
|
$
|
436,750
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
ESPRE
SOLUTIONS INC. AND SUBSIDARY
Consolidated
Statement of Stockholders’ Equity (Deficit)
|
|
Preferred Shares
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Par
|
|
|
Number
of
|
|
|
|
|
|
|
Paid-
In
|
|
|
Subscriptions
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Receivable
|
|
|
Deficit
|
|
|
Total
|
|
Balance,
October 1, 2004
|
|
|
5,000,000
|
|
|
$
|
5,000
|
|
|
|
96,971,733
|
|
|
$
|
96,972
|
|
|
$
|
12,487,409
|
|
|
$
|
(1,209,132
|
)
|
|
$
|
(13,649,236
|
)
|
|
$
|
(2,268,987
|
)
|
Private
placements
|
|
|
—
|
|
|
|
—
|
|
|
|
4,085,524
|
|
|
|
4,086
|
|
|
|
2,421,206
|
|
|
|
1,209,132
|
|
|
|
—
|
|
|
|
3,634,424
|
|
Conversion
of preferred stock to common stock
|
|
|
(5,000,000
|
)
|
|
|
(5,000
|
)
|
|
|
15,000,000
|
|
|
|
15,000
|
|
|
|
(5,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
Preferred
stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
595,000
|
|
|
|
595
|
|
|
|
494,405
|
|
|
|
—
|
|
|
|
—
|
|
|
|
495,000
|
|
Issuance
of common stock to guarantee note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
2,463,000
|
|
|
|
2,463
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,463
|
|
Issuance
of common stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
10,837,520
|
|
|
|
10,838
|
|
|
|
31,905,376
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,916,214
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36,663,482
|
)
|
|
|
(36,663,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
129,952,777
|
|
|
|
129,953
|
|
|
|
47,303,396
|
|
|
|
—
|
|
|
|
(50,312,718
|
)
|
|
|
(2,879,369
|
)
|
Private
placements
|
|
|
—
|
|
|
|
—
|
|
|
|
62,333,112
|
|
|
|
62,333
|
|
|
|
4,236,367
|
|
|
|
(10,000
|
)
|
|
|
—
|
|
|
|
4,288,700
|
|
Issuance
of common stock to guarantee note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
3,525,000
|
|
|
|
3,525
|
|
|
|
243,225
|
|
|
|
—
|
|
|
|
—
|
|
|
|
246,750
|
|
Issuance
of common stock for cancellation of royalty payments
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
188,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
190,000
|
|
Issuance
of common stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
7,275,000
|
|
|
|
7,275
|
|
|
|
1,328,475
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,335,750
|
|
Stock
based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,581,078
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,581,078
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,124,890
|
)
|
|
|
(10,124,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
205,085,889
|
|
|
|
205,087
|
|
|
|
57,880,541
|
|
|
|
(10,000
|
)
|
|
|
(60,437,608
|
)
|
|
|
(2,361,981
|
)
|
Private
placements
|
|
|
—
|
|
|
|
—
|
|
|
|
102,755,466
|
|
|
|
102,755
|
|
|
|
7,772,688
|
|
|
|
(180,000
|
)
|
|
|
—
|
|
|
|
7,695,443
|
|
Issuance
of common stock to guarantee note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
300
|
|
|
|
38,700
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,000
|
|
Issuance
of common stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
5,442,872
|
|
|
|
5,443
|
|
|
|
926,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
932,294
|
|
Issuances
of common shares for notes and interest — related party
|
|
|
—
|
|
|
|
—
|
|
|
|
4,938,272
|
|
|
|
4,938
|
|
|
|
399,422
|
|
|
|
—
|
|
|
|
—
|
|
|
|
404,360
|
|
Stock
based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,091,885
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,091,885
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,593,482
|
)
|
|
|
(10,593,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2007
|
|
|
—
|
|
|
$
|
—
|
|
|
|
318,522,499
|
|
|
$
|
318,523
|
|
|
$
|
71,110,087
|
|
|
$
|
(190,000
|
)
|
|
$
|
(71,031,090
|
)
|
|
$
|
207,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
ESPRE
SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1.
BUSINESS AND BASIS OF PRESENTATION
Business
Espre
Solutions, Inc. (Espre or the Company) is a Dallas, Texas based technology
Company, specializing in media collaboration solutions powered by patented video
compression technology that provides TV-quality streaming video over the
internet. In July of 2004, the Company merged with Espre Texas. As the
shareholders of Espre Texas obtained a majority ownership interest in the merged
entity, the merger was accounted for as a reverse merger, with Espre Texas
treated as the acquirer. The merger was deemed a recapitalization of the Company
for accounting purposes, which was, prior to the merger, effectively an inactive
public shell. Accordingly, the financial statements presented, and the
discussion which follows, represent the historical financial statements and
operating history of Espre Texas, which commenced in December of
2003.
The
Company’s principal product is a software development kit, ESPRE Live, which has
as its platform the Company’s proprietary video coder and decoder “LSVX” to
enable customers to build applications that deliver high-quality video at the
lowest possible data rates over any IP-based network (both wireless and
hardwired) and the Internet to devices such as PDA’s, personal computers and,
eventually, Java enabled smart phones.
In the
period from inception to September 30, 2007 the Company has been preparing its
products for general release. License agreements in this period have been
supported with customized engineering and technical support to assist customers
in building applications.
Espre’s
revenue model is to license ESPRE Live and LSVX for defined markets for fixed
fees, and in most cases, revenue sharing arrangements.
The
Company’s subsidiary, Blideo, Inc. (“Blideo”), plans to launch a web based
service, known as Blideo, in mid-2008 as a fully-equipped online collaboration
environment where business professionals can work together, share information
and communicate over the internet. This differs from the marketing of ESPRE Live
which is tool kit to be used to develop an application such as Blideo. Blideo
will aim to be an easy-to-use collaborative platform utilizing the concept of
opening a “circle” and then adding the people planning to work together in it.
Once set up, a user will then able to video or audio-conference, share files,
create schedules and make presentations. All the files, information and
communication history relevant to a particular customer or project will be
stored within the circle, so there is no dispersal of information. All the tools
that a user needs to collaborate are available at the click of a mouse. The
Company believes the Blideo service offering represents the convergence of
several web trends (including audio and video conferencing, web collaboration,
web presentations, blogging and social networking, Wiki’s and forums) and the
convergence of these newer technologies with older ones (including cell phones,
PDAs, contact managers, file-sharing solutions and video/PowerPoint
presentations).
Basis
of presentation and controlled subsidiaries
On March
22, 2005, the Board of Directors authorized a three-for-one split of the
Company’s common stock, effected by a distribution on May 2, 2005 of two shares
for each one share at the close of business on April 30, 2005. The capital stock
accounts, share data and per share data are presented as if the stock split
occurred as of October 1, 2004.
On April
27, 2007 the Company and Leighton, its President (“Leighton”), founded Blideo
each with a 40% interest. The Company and Leighton control Blideo and it has
therefore been consolidated in these financial statements. See Note
12.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its
majority owned and controlled subsidiary. All intercompany transactions have
been eliminated in consolidation.
Cash
and cash equivalents
Cash and
cash equivalents include cash and highly liquid short-term investments, with an
original maturity of three months or less.
Accounts
receivable
The
Company considers accounts receivable to be fully collectible; accordingly, no
allowance for doubtful accounts is made. If accounts become uncollectible, they
will be charged to operations when that determination is made.
Fair
value of financial instruments
The
Company’s financial instruments, primarily consisting of accounts receivable and
accounts payable, approximate fair value due to their short-term nature or
interest rates that approximate market.
Equipment
Equipment
is recorded at cost. The Company provides depreciation, for financial and tax
purposes over the estimated useful lives using the straight-line method. Useful
lives are as follows: Furniture and fixtures — 7 years, Office equipment — 5
years, Computer and peripheral equipment — 5 years, Leasehold improvements —
term of the lease.
Intangible
assets
The
Company records intangible assets, consisting of patents, core and product
technologies, at cost less accumulated amortization. Amortization is computed
over the estimated useful lives of the respective asset, generally four years,
using the straight-line method.
Software
development costs
SFAS No.
86, “Accounting for the Costs of Computer Software to be Sold, leased, or
Otherwise Marketed”, requires certain software development costs to be
capitalized upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors such as anticipated future revenue,
estimated economic life, and changes in software and hardware technologies.
Software development costs incurred beyond the establishment of technological
feasibility have not been significant.
Impairment
of Long-Lived Assets
Equipment
and intangible assets (patents, core and product technologies) are reviewed for
impairment in the fourth quarter and whenever events or circumstances indicate
the carrying amount may not be recoverable. In reviewing for impairment, the
Company compares the carrying value of the assets to the estimated future cash
flows expected from the use of the assets and their eventual disposition. When
the estimated future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the asset’s fair
value and its carrying value. No impairments have been recognized in the periods
presented.
Revenue
recognition
Revenue
is measured at the fair value of consideration received or receivable. Revenue
is recognized when there is persuasive evidence that an arrangement exists,
delivery has occurred or services has been rendered, the fee is fixed or
determinable and collectability is probable. Some video software related
arrangements may include services not essential to functionality of any other
element of the transaction such that the total price of the arrangement would be
expected to vary as the result of the inclusion or exclusion of the services. If
the arrangement includes services, previously described revenue is allocated
among the services and software elements of the arrangement. Revenue allocated
to the service element is recognized as the services are performed or, if no
pattern of performance is discernable, on a straight-line basis over the period
the services are performed. The Company has not reported any video revenue for
which the service element is not essential to the functionality of the video
software.
Since the
licensing and delivery of the Company’s CODEC does not involve any production,
alteration or customization, revenue derived from licensing of the CODEC is
recognized when the receipt of payment is probable, the sales price is fixed or
determinable, delivery has been made and the contract is
enforceable.
When
engineering and consulting services are sold together with a software license,
the arrangement typically requires customization and integration of the software
into a third party hardware platform. In these arrangements, we require the
customer to pay a fixed fee for the engineering and consulting services in
addition to the licensing fee. Revenue from custom engineering fees
is recognized as the services are performed or, if no pattern of performance is
discernable, on a straight-line basis over the term of the
contract. We account for engineering and consulting arrangements in
accordance with SOP 81-1, “Accounting for Performance of Construction Type and
Certain Production Type Contracts”. When reliable estimates are available for
the costs and efforts necessary to complete the engineering or consulting
services and those services do not include contractual milestones or other
acceptance criteria, we recognize revenue under the percentage of completion
contract method based upon input measures, such as hours. When such estimates
are not available, we defer all revenue recognition until we have completed the
contract and have no further obligations to the customer.
On
occasion a license revenue arrangement requires the Company’s client to share
with the Company a portion of its future revenue derived from its use of the
product. Since revenue sharing is neither fixed nor determinable
recognition is deferred until the customer’s revenue from the use of the product
is known.
Advertising
Advertising
costs are expensed as incurred. Advertising expenses for the years ended
September 30, 2007, 2006 and 2005 were $30,163, $135,547 and $122,006
respectively.
Research
and development
Research
and development costs are charged to expense when incurred. Research and
development expenses include payroll, employee benefits, consultants and other
personnel costs associated with product development. Purchased in-process
research and development expense represents the value assigned or paid for
acquired research and development for which there is no alternative future use
as of the date of the acquisition.
Stock
based compensation
The
Company accounted for stock options granted to directors and employees under APB
25 until September 30, 2005.
The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R,
“Share-Based Payment,” effective October 1, 2005, which requires companies to
record compensation expense for stock options issued to employees or
non-employee directors at the fair value of the options. SFAS No. 123R is
effective as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005, with early adoption
encouraged.
On
October 1, 2005, the Company adopted SFAS No. 123R using the “modified
prospective application” and therefore the consolidated financial statements
from periods ending prior to September 30, 2006, have not been restated. As a
result of adopting SFAS No. 123R, the Company’s loss before income taxes and net
loss for the years ended September 30, 2007 and 2006 was $4,077,706 and
$4,581,078 higher respectively, than if it had continued to account for
share-based compensation under APB No. 25. If the Company had not adopted SFAS
No. 123R, loss per share and diluted loss per share for the years ended
September 30, 2007 and 2006 would have increased $0.01 and $0.02 respectively.
Had compensation cost for the Company’s Stock Option Plan (see note 11) been
determined based upon the fair value at the grant dates for awards under the
Plan consistent with the method of SFAS No. 123R, the Company’s net loss and net
loss per share would have been changed to the pro forma amounts indicated below
for the periods ended.
|
|
|
|
|
|
|
September 30, 2005
|
|
Net
loss applicable to common stockholders as reported
|
|
$
|
(37,158,482
|
)
|
Add:
stock based compensation expense related to stock options determined under
fair market value
|
|
|
(1,987,875
|
)
|
Net
loss, pro forma
|
|
$
|
(39,146,357
|
)
|
Net
loss per common share
|
|
|
|
|
As
reported, basic and dilutive net loss, as reported
|
|
$
|
(0.34
|
)
|
Net
loss, pro forma
|
|
$
|
(0.36
|
)
|
The
weighted average grant date fair market values for options granted were $0.18
for the year ended September 30, 2005.
The fair
value of stock options in the proforma accounts for the years ended September
30, 2005 and the period December 22, 2003 (inception) to September 30, 2004 is
not necessarily indicative of the future effects on net income and earnings per
share. The fair value of each stock option grant has been estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions:
|
|
Years Ended September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Risk
free interest
|
|
|
3.86
|
%
|
|
|
3.78
|
%
|
|
|
3.64
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
90
|
%
|
|
|
60
|
%
|
|
|
42
|
%
|
Expected
life (years)
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Income
taxes
The
Company accounts for income taxes on an asset and liability approach. Deferred
income tax assets and liabilities are computed annually for the difference
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future, based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the year, plus or minus the change
during the period in deferred tax assets and liabilities. Based on the weight of
available evidence, both positive and negative, a valuation allowance to fully
provide for the net deferred tax assets has been recorded since it is more
likely than not that the deferred tax assets will not be realized.
Net
loss per share
Net loss
per share is determined by dividing net loss by the weighted average common
shares outstanding. The Company accounts for earnings or loss per share by
presenting basic earnings or loss per share including only outstanding common
stock and diluted earnings per share including the effect of dilutive common
stock equivalents. The effect of stock options, warrants and convertible
preferred shares is anti-dilutive for all the periods presented.
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. These estimates and assumptions, if not realized, could affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates and it is at least reasonably possible that a
change in estimates will occur in the near term.
Reclassifications
Prior
year’s information is reclassified whenever necessary to conform to current
year’s presentation.
Recent
pronouncements
In May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
which provides guidance on the accounting for and reporting of accounting
changes and correction of errors. This statement changes the requirements for
the accounting for and reporting of a change in accounting principle and applies
to all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of this standard is not expected
to have a material effect on the Company’s results of operations or financial
position.
In July
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109” (“FIN
48”), which is a change in accounting for income taxes. FIN 48 specifies how tax
benefits for uncertain tax positions are to be recognized, measured, and
derecognized in financial statements; requires certain disclosures of uncertain
tax matters; specifies how reserves for uncertain tax positions should be
classified on the balance sheet; and provides transition and interim-period
guidance, among other provisions. FIN 48 was effective for fiscal years
beginning after December 15, 2006 and as a result, is effective for the Company
in the first quarter of fiscal 2008. The Company is in the process of evaluating
the impact of adoption of FIN 48 will have on the consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) which defines fair value, establishes a framework for measuring fair
value and expands disclosure about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company will
adopt SFAS No. 157 on October 1, 2009, and is currently evaluating the impact of
such adoption on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company will
adopt SFAS No. 159 on October 1, 2009, and is currently evaluating the impact of
such adoption on its financial statements.
3.
GOING CONCERN AND MANAGEMENT’S PLAN
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred significant
and recurring losses and negative cash flow from operations which raises
substantial doubt about its ability to continue as a going concern. The
Company’s continued existence is dependent upon its ability to achieve
profitability and to generate cash either from operations or
financing.
Management’s
plan is as follows:
|
•
|
Market
its principal product, ESPRE Live, to customers wishing to build
applications using video and provide custom engineering services to those
customers as requested.
|
|
•
|
Engage
in partnerships with firms in key vertical markets. These partners will be
market experts and have well defined application strategies that require
ESPRE Live to develop them.
|
|
•
|
Launch
Blideo as an application service
provider
|
|
•
|
Establish
independent sales agreements with representatives to sell its products and
services. The Company will actively pursue the engagement of additional
independent sales representatives who can distribute the Company’s
existing video products and services both domestically and
internationally.
|
|
•
|
Obtain
additional debt and equity
financing.
|
In the
period from inception to September 30, 2007 the Company has transacted a
substantial amount of its business with related parties. The Company continues
to be dependent on revenues from these related parties. The achievement of
profitability and the ability to generate cash flows from operations is
dependent upon, amongst other things, the acceptance of the Company’s products
and services, competition from other products and the deployment of video
applications by our customers. There is no assurance that management’s plan will
be successful. Accordingly, significant doubts exist about the Company’s ability
to sustain its operations. The consolidated financial statements do not include
any adjustments that might result from the outcome of these
uncertainties.
4.
EQUIPMENT
Equipment
consisted of the following at:
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
Furniture
and fixtures
|
|
$
|
88,926
|
|
|
$
|
45,075
|
|
Office
equipment
|
|
|
17,709
|
|
|
|
12,915
|
|
Computer
and peripheral equipment
|
|
|
283,468
|
|
|
|
162,802
|
|
Leasehold
improvements
|
|
|
9,860
|
|
|
|
—
|
|
|
|
|
399,963
|
|
|
|
220,792
|
|
Accumulated
depreciation
|
|
|
(103,205
|
)
|
|
|
(54,818
|
)
|
|
|
$
|
296,758
|
|
|
$
|
165,974
|
|
Depreciation
expense was $31,815 and $19,877 for the years ended September 30, 2006 and
September 30, 2007 respectively.
5.
INVESTMENT IN AND LOANS TO RELATED PARTIES
Blideo
Inc.
On April
24, 2007, prior to joining the Company, Leighton founded Blideo Inc. (“Blideo”)
and invested $200,000 in May 2007 and $300,000 in July 2007. The Company
invested the same amounts in the same time periods. In May of 2007, Blideo
acquired an exclusive license from Media Distribution Solutions. LLC (“MDS”), a
customer of the Company since April 2006, for the distribution and use of MDS’s
software in any social networking application for $175,000 plus certain ongoing
royalties. In September 2007, Espre’s Vice President — Sales invested $125,000
in Blideo. Certain former officers and employees of the Company are now officers
and employees of Blideo. Subsequent to year end, on October 31, 2007, the
Company licensed ESPRE Live on a non-exclusive basis to Blideo for five (5)
years for a one time license fee of $1,000,000 plus 1% of gross
revenues.
As an
integral part of this agreement, Blideo agreed to pay the Company $700,000 for
engineering and design services to build the Blideo Application Release 1.0 from
September 1, 2007 to March 31, 2008. The $700,000 contract engineering fees paid
for core technology development will decrease the license fee. As part of this
license the Company has agreed not to contract with any application service
provider that plans to launch a service competitive to Blideo’s for one year
following the acceptance by Blideo of the application the Company is designing
and building. In addition, Blideo is obligated to pay the Company a product
maintenance fee for the application the Company is building for Blideo of
$70,000 for the first year commencing September 2007 and thereafter at a rate to
be negotiated. In addition, the Company provides office accommodation and
accounting services to Blideo for $2,000 and $500 per month on a month to month
basis. The Company believes all related party transactions have been consummated
on terms equivalent to those that prevail in arms’ length
transactions.
The
following is condensed financial information of Blideo as of September 30,
2007:
Balance
sheet
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
498,251
|
|
Other
assets
|
|
|
161,830
|
|
Total
assets
|
|
$
|
660,081
|
|
Current
liabilities
|
|
$
|
21,911
|
|
Shareholder’s
equity
|
|
|
638,170
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
660,081
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
— from inception on April 27, 2007 to September 30, 2007
|
|
|
|
|
Interest
|
|
$
|
4,047
|
|
General
and administrative expenses
|
|
$
|
189,762
|
|
Research
and development expenses
|
|
|
261,431
|
|
Amortization
and depreciation
|
|
|
14,684
|
|
Total
expenses
|
|
|
465,877
|
|
Net
operating loss for period
|
|
$
|
461,830
|
|
The
assets of Blideo are not available to the Company other than through the
contractual agreements more fully described above.
Media Distributions
Solutions, LLC (“MDS”)
On April
14, 2006, the Company executed an Intellectual Property License Agreement with
MDS giving MDS the perpetual and exclusive right to sublicense and/or distribute
the Company’s products globally and exclusively, the Company received an equity
interest in MDS of 10%. No revenue for the equity interest was recorded since
MDS was a start up entity and had no significant net worth and accordingly the
investment is carried at no value. The Company will record any gain in the sale
of this investment as it occurs. See Note 8.
Vizeo Solutions Ltd.
(“Vizeo”)
Leighton
founded Vizeo and loaned to Vizeo $50,000 in November 2006. The Company loaned
the same amount to Vizeo in January 2007. This loan is offset able against
consulting fees payable to Leighton if not repaid by March 31, 2009. On November
15, 2006 the Company entered into a licensing agreement with Vizeo Solutions
Ltd, a company controlled by Leighton, granting Vizeo a non exclusive license
for Vizeo to distribute the Company’s software in the United Kingdom, the
European Union and the Middle East. The agreement provided for the license to
become exclusive if the royalties paid by Vizeo to the Company exceeded
$1,000,000 in the first two years after November 15, 2006. As consideration for
this license, Vizeo agreed to issue shares equal to 20% of Vizeo outstanding
capital and to pay the Company 20% of the net receipts received by Vizeo of
software sales. The agreement was terminated by mutual agreement on March 27,
2007. Vizeo also acquired an exclusive license from MDS, a customer of the
Company since April 2006, for the distribution of MDS’s software in Europe and
The Middle East for $100,000 plus certain ongoing royalties.
Leighton
is the sole director and officer of Vizeo. See Note 8.
Loans to
affiliates consist of at September 30:
|
|
2007
|
|
|
2006
|
|
Vizeo
Solutions Ltd.
|
|
$
|
50,000
|
|
|
$
|
—
|
|
Espre
Consulting Inc., a company related to the Chief Executive
Officer
|
|
|
19,432
|
|
|
|
19,432
|
|
|
|
$
|
69,432
|
|
|
$
|
19,432
|
|
6.
NOTES PAYABLE TO RELATED PARTIES
Notes
payable — related parties consisted of the following:
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
Contingent
repurchase agreement to Video Software Partners, secured by certain
software products, payable on February 1, 2008, interest imputed at
10%
|
|
$
|
1,642,944
|
|
|
$
|
1,642,944
|
|
Notes
payable to Video Software Partners, interest imputed at 10% maturing
between 6 to 12 months
|
|
|
—
|
|
|
|
186,043
|
|
Note
payable to an related individual, at 10%, due November 25, 2004, extended
year to year, unsecured
|
|
|
25,000
|
|
|
|
25,000
|
|
Note
payable to a company controlled by Leighton
|
|
|
—
|
|
|
|
400,000
|
|
|
|
$
|
1,667,944
|
|
|
$
|
2,253,987
|
|
On
September 10, 2004, Video Software Partners, LLC (“Video”) and Espre executed an
agreement for the acquisition of Video’s CODEC, including all source code,
patents, copyrights, license agreements, royalty interest and other income and
property rights by the Company for $2,500,000. The agreement included payment of
$50,000 immediately and a Note for $2,450,000 (the “Note”), payable by
installments due March 1, 2006, secured by the CODEC and the software
applications. The note was non-interest bearing. The note was recorded net of
imputed interest of approximately $533,000. Of the imputed interest, $443,445
was not recorded due to the early retirement of this note for stock, cash and a
new note.
On March
25, 2005, VSP agreed to accept 2,463,000 shares of ESPRE common stock, a new
note for $660,000 and an initial payment of $200,000 in exchange for the note
dated September 1, 2004, which had a remaining balance due of $2,007,555,
including $91,528 in imputed interest. The recordation of the new note, net of
imputed interest of $34,062 and the recordation of the stock at fair market
value generated a transition adjustment of $122,160. The transition adjustment
was due to fair value differences in the instruments on the date of the
transaction. In addition ESPRE included a contingent repurchase provision
guaranteeing VSP minimum proceeds of $1,650,000 from the sale of the 2,463,000
shares. ESPRE agreed to pay VSP any shortfall difference between $1,650,000 and
the proceeds, if any shortfall difference existed on March 11, 2005. The shares
were recorded but no charge to expense was made because Video had no obligation
to sell the shares and the liability was recorded. This contingent repurchase
liability was recorded net of imputed interest of $141,467, which was amortized
monthly through January 2006.
On
January 26, 2006, VSP agreed to accept an additional 3,525,000 shares of ESPRE
common stock and a new note for $350,000 in exchange for the note dated March
25, 2005, which had a remaining balance due of $162,280, which included $31,518
in imputed interest. With this new note ESPRE extended the guaranteed proceeds
that VSP would receive to the additional 3,525,000 shares issued. Though the
number of shares subject to the guaranteed proceeds increased the value of the
guarantee remained at $1,650,000. The replacement of the note dated March 25,
2005 with the new note, recorded net of imputed interest, and stock, recorded at
market price generated a transition adjustment of $420,409. Due to transfer of
the shares to VSP, the 3,525,000 shares were expensed at fair market value at
the date of the transaction.
On August
28, 2006 VSP agreed to exchange the note dated January 26, 2006 with a new note
with extended terms and reduced monthly payments. The balance of the January 26,
2006 note of $103,651, including imputed interest of $12,711, was due to be paid
in full September 1, 2006. The new note called for total payments of $204,500
with reduced monthly payments through February 1, 2007. The new note had no
stated interest rate and was recorded net of imputed interest of $6,854 or
$197,502. The difference in the recorded value of the note dated January 26,
2006 and the new note, recorded net of imputed interest, was recorded as a
transition adjustment of $93,851.
On
February 1, 2007, the Company agreed to a revised payment plan to the amended
forbearance agreement, whereby Video agreed to extend the remaining payment of
$52,500 and extend the time period for the contingent repurchase provision of
$1,650,000. Video received 300,000 shares of common stock as consideration for
this extension. The 300,000 shares were to be registered or otherwise tradable
within three months of issue. The shares were valued at market of $0.13, and
recorded as debt expense.
The
Company and Video executed a purchase agreement on October 24, 2007, and agreed
that cumulative payments of $894,000 had been paid and Video had received a
total of 6,288,000 shares of common stock. Espre paid Video an additional
$100,000 and issued 1,500,000 shares of common stock to Video Partners to
satisfy its obligations and release the Company’s CODEC and software
applications from the security.
A Note
payable dated September 25, 2006, to a company controlled by Leighton was due on
February 28, 2007, with interest at 5% secured by 1,000,000 shares of MDS and
all unencumbered assets of the Company. The note and accrued interest was repaid
in January 2007 by the issuance of 4,938,272 common shares and 4,938,272 five
year warrants at $0.10 per share.
7.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
Accounts
payable — trade
|
|
$
|
543,485
|
|
|
$
|
288,823
|
|
Accrued
expenses
|
|
|
242,151
|
|
|
|
70,419
|
|
Due
to investment bankers
|
|
|
139,825
|
|
|
|
—
|
|
Accrued
vacation payable
|
|
|
76,640
|
|
|
|
—
|
|
Accrued
payroll and payroll taxes
|
|
|
297,296
|
|
|
|
393,199
|
|
Customer
advances
|
|
|
150,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
1,449,397
|
|
|
$
|
752,441
|
|
8.
RELATED PARTY TRANSACTIONS
Deferred
Revenue
Media Distribution
Solutions, LLC (“MDS”)
On April
14, 2006, the Company executed an intellectual property agreement with MDS
giving MDS the perpetual and exclusive right to sublicense and or distribute the
Company’s software products throughout the world, excluding Korea. This
agreement is for licensing for use by businesses to the consumer as opposed to
business to business. In consideration for giving this license the Company was
issued 1,000,000 shares in MDS representing 10% of the shares outstanding at the
time and a license fee of $2,000,000. Additionally, the agreement included
installment payment guidelines subject to MDS raising capital. Moreover the
agreement stipulated that MDS would not be considered in default by missing
payments as long as MDS used its best efforts to raise capital and made payments
in accordance with the payments guidelines.
As of
September 30, 2006, the Company had invoiced MDS $1,850,000 and received
$900,000; the remaining $950,000 was deferred. As of September 30, 2007, no
further payments were received and, to the Company’s knowledge, MDS had not
raised any capital, the Company reversed the accounts receivable and the
deferred revenue.
In
addition, in consideration for the Company furnishing to MDS quarterly updates,
MDS agreed to pay royalties of five percent (5%) of the gross revenues, payable
quarterly.
SureCast Media
(“SureCast”)
On April
30, 2007, the Company and SureCast executed an intellectual property license
agreement wherein the Company granted SureCast the exclusive perpetual right to
use the Company’s software to develop applications for the Entertainment Market
defined as pay per view, ad insertion and subscription fee based professionally
produced pre recorded video content in the form of Entertainment and Sports
Entertainment video applications defined as sports shows, sporting events,
sports shorts, full length movies, movie trailers, previews and clips (commonly
referred to as Hollywood applications), as well as full length television shows,
TV shorts, music videos and documentaries, distributed over the Internet for
consumption by consumers.
In
consideration of the Company granting the license, SureCast paid a license fee
of $1,000,000 upon signing the agreement and agreed to pay a further $450,000
upon completion of pilot testing. The Company also granted SureCast a put
option, valid for three years from April 1, 2007, which would require the
Company to purchase the license back from SureCast for the amount of $2,000,000.
As of September 30, 2007 the revenue of $1,000,000 received from SureCast has
been deferred due to the put option and the completion of the pilot testing.
SureCast is a related entity to one of the Company’s major
shareholders.
Also on
April 30, 2007, the Company executed another agreement with SureCast which
entitles the Company to 25% of the value received by SureCast in the event that
SureCast, or the underlying license, is sold.
In
November 26, 2007 SureCast and the Company agreed to terminate SureCast’s put
option of $2,000,000 in return for the Company waiving the final payment due
under SureCast’s license of $450,000.
Repurchase
of Market Licenses
On May
14, 2007, Vizeo Solutions Ltd. (Vizeo), a UK company controlled by Espre’s
president, executed an intellectual property license agreement with MDS wherein
Vizeo purchased from MDS the perpetual and exclusive worldwide right to use and
market MDS’s video technology to the consumer market as part of any blogging
and/or social networking offering and Vizeo was granted the perpetual license
for the name Blideo and the URL, Blideo.com. This agreement also included Vizeo
transferring back to MDS the right to market the sports entertainment and
entertainment segments of the business for the European Union and Middle East.
At the same time, Vizeo executed an assignment of rights and market license
transferring all of its rights to the above license to Blideo, Inc. for
$175,000.
Contemporaneously,
the Company executed an amendment to its intellectual property license agreement
with MDS wherein the Company repurchased from MDS the global sports and
entertainment business for the sum of $450,000 and a five percent (5%) royalty
on all gross revenues generated from the sports and entertainment business.
Additionally, if SureCast should be acquired by a third party thus transferring
the sports and entertainment segment of the business to this third party, MDS
would receive five percent (5%) of the net proceeds received by the end licensee
in the transfer of the license.
Summary
Therefore,
as a result of the above described transactions, the Company was able to
repurchase major portions of the original global and perpetual license to MDS,
to license the blogging and social networking portion of the business to other
entities, will share in the revenues derived from SureCast utilizing its
products and will receive royalties from MDS when it raises capital. All of
these transactions have been consummated on terms equivalent to those that
prevail in arm’s length transactions.
9.
STOCKHOLDERS’ EQUITY (DEFICIT)
Series
A Voting Cumulative Convertible Preferred Stock
The
Company authorized 5,000,000 Series A Preferred shares none of which are
currently issued. The designated terms of the authorized Preferred Shares were
that the holders of the Preferred Shares were entitled to elect one or more of
the Board of Directors. If the Company proposed to register any of its
securities or the securities of its shareholders, the holders of Preferred
Shares had piggyback rights for the registration of the underlying common stock.
In 2004, the Company recorded beneficial conversion charges of
$273,118.
The
preferred stock Series A Preferred Stock has the following rights and
preferences:
|
•
|
Dividend
Preference — commencing with the fiscal year which began January 1, 2005,
holders of Series A Preferred Stock, in preference to the holders of
common stock of the Company, are entitled to receive, a common stock
dividend of 0.096 shares of common stock per annum. Each share of
preferred stock is payable monthly on the first day of each calendar
month. Preferred stock dividends of $595,000 were paid in common stock in
2005.
|
|
•
|
Voting
Rights — each holder of outstanding shares of Series A preferred stock is
entitled to one vote per each share of preferred stock. Shares of
preferred stock are to be voted together with the shares of common stock
as a single class.
|
On May
31, 2005, the preferred shares were converted to 15,000,000 common
shares.
Common
stock
Payments
for Services
The
Company has issued a total of 24,760,282 shares of common stock for consulting,
advisory and other services principally comprised of the following:
Fiscal
2005
|
•
|
In
February 2005, the Company entered into a consulting agreement with a
company owned by three individuals, all of whom were directors of the
Company. The agreement required this company to provide certain financial
advisory services to the Company. The Company paid a one-time fee of
6,000,000 shares of common stock in consideration of an agreement to
provide these services. The shares were valued at $3.21 per share for a
total of $19,230,325.
|
|
•
|
In
February 2005, the Company orally agreed to engage a company owned by a
director of the Company to assist the Company in coordinating its
accounting systems and control procedures, and to provide guidance for the
management of its cash flow. In consideration for his services, the
Company issued 3,000,000 shares of common stock of the Company at a value
of $3.21 per share for a total of
$9,615,163.
|
|
•
|
In
May of 2005, the Company entered into a consulting agreement with an
individual and issued him 240,000 shares of common stock valued at $3.57
per share for a total of
$856,800.
|
Fiscal
2006
|
•
|
In
February 2006, the Company entered into a consulting agreement with an
unrelated company to provide financial consulting services and paid a
onetime fee of 3,000,000 shares of common stock valued at $0.20 per share
for a total of $600,000. The agreement granted piggy back registration
rights to be included in any registration undertaken by the
Company.
|
|
•
|
In
February 2006, the Company entered into a consulting agreement with
another unrelated company to provide financial consulting services and
paid a onetime fee of 3,000,000 shares of common stock valued at $0.20 per
share for a total of $600,000. The agreement granted piggy back
registration rights to be included in any Registration Statement
undertaken by the Company.
|
|
•
|
In
February 2006, the Company entered into a finder agreement with a third
unrelated company to provide technology and other consulting services and
paid a onetime fee of 300,000 shares of common stock valued at $0.14 per
share for a total of $42,000. The Company also issued this company
warrants to purchase 2,000,000 shares at $0.08 in increments of 500,000
exercisable on February 1, April 1, July 1, and October 1, 2006, for a
total of $200,000.
|
|
•
|
In
February and April 2006, the Company issued a total of 975,000 shares of
common stock valued at $0.05 and $0.14 for a total of $93,750 to various
individuals for services rendered.
|
Fiscal
2007
|
•
|
In
January 2007, the Company orally agreed to engage to provide financial
consulting services with another company and paid a onetime fee of
2,150,000 shares of common stock at $.09 per share for a total of
$193,500.
|
|
•
|
In
February 2007, the Company entered into a banking and placement agent
agreement with an unrelated company, and paid a onetime non refundable
retainer of 1,538,462 shares of common stock valued at $0.13 per share for
a total of $200,000.
|
|
•
|
In
April 2007, the Company entered into a finder agreement with another
unrelated company, to provide investment banking services and paid a
onetime fee of 750,000 shares of common stock valued at $.09 per share for
a total of $67,500. In August 2007, the agreement was terminated and the
Company issued an additional 250,000 shares of common stock and warrants
to purchase 500,000 shares at $0.10 per share for total of
$75,700.
|
Capital
Raises
The
Company issued common stock to accredited investors with no demand or piggy-back
registration rights as follows:
|
•
|
In
the period December 22, 2003 (inception) to September 30, 2004, the
Company sold 15,000,000 shares valued at $0.067 for a total of
$1,000,000.
|
|
•
|
In
the year ended September 30, 2005, the Company sold 4,085,524 shares
valued at average share prices of $0.06 for a total of
$2,425,292.
|
|
•
|
In
the year ended September 30, 2006, the Company sold 62,333,112 shares
valued at average share prices of $0.07 for a total of $4,298,700 and
warrants to purchase a further 33,331,444 shares at $0.10 per
share.
|
|
•
|
In
the year ended September 30, 2007, the Company sold 102,457,966 shares at
an average share price of $0.08 for a total of $7,8757,443 and warrants to
purchase a further 5,750,000 shares at $0.10 per share to unrelated
parties.
|
|
•
|
In
the year ended September 30, 2007, the Company sold 4,938,272 shares at a
price of $0.081 per share for a total of $404,360 and warrants to purchase
a further 4,938,272 shares at $0.10 per share to a company controlled by
Leighton.
|
Purchases
of Intellectual Property
|
•
|
On
September 10, 2004, Video Software Partners, LLC (“Video Partners”), sold
its entire interest in its’ CODEC to the Company in consideration of a
Note for $2,500,000 (the “Note”), payable by installments due March 1,
2006, secured on the CODEC and the software applications. The Company paid
an aggregate of $895,500 in cash payments against the Note as of September
30, 2007. The Company also issued an 6,288,000 shares (the “Collateral
Shares”) in order to convert the Note into a contingent stock repurchase
obligation that guarantees the Note holder the full repayment of the Note
in the event that the net proceeds on sale of the Collateral Shares is
less than the remaining outstanding balance on the Note. On October 24,
2007 the Company terminated its obligations under the Video Partners note
for $100,000 in cash and the issuance of 1,500,000 common
shares.
|
|
•
|
On
May 11, 2006, the Company issued 2,000,000 shares of common stock valued
at $0.095 for a total of $190,000 to cancel royalty commitments to a
company providing ViewMail.
|
10.
STOCK OPTIONS
Effective
October 1, 2004, the Company established a stock option plan (2004 equity
incentive plan) under which employees, consultants and directors have been
granted options to purchase shares of the Company’s common stock. The maximum
aggregate number of shares of common stock available for award under the 2004
plan was 75,000,000. Under the 2004 plan, options at the discretion of the stock
option committee immediately vest in whole or in part, or that all or any
portion may not be vested until a date, or dates, subsequent to its date of
grant, or until the occurrence of one or more specified events, subject in any
case to the terms of the plan. Stock options expire 10 years from the date of
grant, unless the grantee owns ten percent or more of the outstanding common
stock in which case options expire five years from the date of grant. The option
price for any share of common stock may which may be purchased under the plan
must be at least equal to the fair market value of the common stock of the
Company on the date of grant.
On
September 10, 2007, the First Amendment to the 2004 Equity Incentive Plan
increased the number of share to be delivered to the awards granted in the 2004
plan to 100,000,000 common shares.
During
2007, the Company changed the strike price of certain fixed options causing them
to be re-characterized as variable options mandating variable option accounting
for those options. Variable option accounting will be applied from the date of
modification until the date of exercise. As a result of the changed strike price
there was an increase in stock-based compensation in 2007 of
$740,492.
Transactions
and other information relating to options are summarized as
follows:
Outstanding Stock Options
|
|
|
Exercisable Stock Options
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at September 30, 2004
|
|
|
15,179,634
|
|
|
$
|
0.10
|
|
|
|
3,539,634
|
|
|
$
|
0.02
|
|
Granted
during period
|
|
|
3,725,000
|
|
|
$
|
0.20
|
|
|
|
4,850,000
|
|
|
$
|
0.18
|
|
Outstanding
at September 30, 2005
|
|
|
18,904,634
|
|
|
$
|
0.12
|
|
|
|
8,339,634
|
|
|
$
|
0.11
|
|
Granted
during period
|
|
|
3,670,000
|
|
|
$
|
0.12
|
|
|
|
4,811,667
|
|
|
$
|
0.16
|
|
Outstanding
at September 30, 2006
|
|
|
22,574,634
|
|
|
$
|
0.12
|
|
|
|
13,201,301
|
|
|
$
|
0.13
|
|
Granted
during period
|
|
|
44,240,000
|
|
|
$
|
0.09
|
|
|
|
5,785,000
|
|
|
$
|
0.10
|
|
Outstanding
at September 30, 2007
|
|
|
66,814,634
|
|
|
$
|
0.10
|
|
|
|
18,986,301
|
|
|
$
|
0.12
|
|
The
following table summarizes stock options outstanding and exercisable at
September 30, 2007:
Outstanding stock options
|
|
Exercisable stock
options
|
Weighted
exercise
|
|
|
|
|
|
|
Average
remaining
|
|
Weighted
average
|
|
|
|
|
|
Average
remaining
|
|
Weighted
average
|
price range
|
|
|
Shares
|
|
contractual life
|
|
exercise price
|
|
Shares
|
|
contractual life
|
|
exercise price
|
$ |
0.001
— $0.085 |
|
|
|
43,989,634
|
|
|
|
8.6
|
|
|
$
|
0.01
|
|
|
|
3,539,634
|
|
|
|
6.9
|
|
|
$
|
0.02
|
|
$ |
0.100
— $0.200 |
|
|
|
20,905,000
|
|
|
|
7.9
|
|
|
$
|
0.09
|
|
|
|
13,686,667
|
|
|
|
7.4
|
|
|
$
|
0.10
|
|
$ |
0.210
— $1.333 |
|
|
|
1,920,000
|
|
|
|
7.4
|
|
|
$
|
0.48
|
|
|
|
1,760,000
|
|
|
|
7.7
|
|
|
$
|
0.50
|
|
|
|
|
|
|
66,814,634
|
|
|
|
|
|
|
|
|
|
|
|
18,986,301
|
|
|
|
|
|
|
|
|
|
11.
WARRANTS
Transactions
and other information relating to warrants are summarized as
follows:
Outstanding Warrants
|
|
|
Exercisable Warrants
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at September 30, 2005
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Granted
during period
|
|
|
34,581,444
|
|
|
$
|
0.10
|
|
|
|
34,581,444
|
|
|
$
|
0.10
|
|
Outstanding
at September 30, 2006
|
|
|
34,581,444
|
|
|
$
|
0.10
|
|
|
|
34.581,444
|
|
|
$
|
0.10
|
|
Granted
during period
|
|
|
9,438,272
|
|
|
$
|
0.10
|
|
|
|
9,438,272
|
|
|
$
|
0.10
|
|
Outstanding
at September 30, 2007
|
|
|
44,019,716
|
|
|
$
|
0.10
|
|
|
|
44,019,716
|
|
|
$
|
0.10
|
|
All
warrants have a term of five years.
12.
INCOME TAXES
The
Company had available at September 30, 2007, net operating loss carry forwards
for federal tax purposes of approximately $57 million that could be applied
against taxable income in subsequent years through September 30,
2022.
The
Company reduced the deferred tax asset resulting from its tax loss carry
forwards by a valuation allowance of an equal amount to the deferred asset as
the realization of the deferred tax asset is uncertain. Deferred tax assets are
as follows:
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
operating losses
|
|
$
|
19,433,000
|
|
|
$
|
16,451,000
|
|
|
$
|
13,944,000
|
|
In-
process research and development
|
|
|
1,528,000
|
|
|
|
2,325,000
|
|
|
|
3,122,000
|
|
Stock
based compensation
|
|
|
1,391,000
|
|
|
|
1,558,000
|
|
|
|
—
|
|
Transition
adjustment
|
|
|
217,000
|
|
|
|
217,000
|
|
|
|
42,000
|
|
|
|
|
22,569,000
|
|
|
|
20,551,000
|
|
|
|
17,108,000
|
|
Less
valuation
|
|
|
(22,569,000
|
)
|
|
|
(20,551,000
|
)
|
|
|
(17,108,000
|
)
|
Net
deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Reconciliation
of the differences between income tax benefit computed at the federal and state
statutory tax rates and the provision for income tax benefit for the year ended
September 30, 2006 as follows:
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
loss at federal statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Valuation
allowance
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
13.
RELATED PARTY TRANSACTIONS
The
Company has entered into related party transactions as follows:
On
January 6, 2007, the Company sold 4,938,262 shares and 4,938,272 five year
warrants to purchase shares at $0.10 per share for a total of $400,000 to
Leighton. On March 23, 2007, the Company received a bridge loan from Leighton of
$70,000, which was repaid in May 2007. On April 28, 2007, the Company received a
bridge loan from Leighton of $100,000, which was repaid in June 2007. Prior to
joining the Company, Leighton was a founding investor in Wireless Peripherals,
Inc. which was acquired by the Company and for which he received 6,693,706
shares for an investment of $385,000. The Company entered into a consulting
contract with a company controlled by Leighton for $10,000 per month commencing
September 25, 2006 to September 25, 2007. The Company has entered into a new
consulting contract with Leighton for a minimum period from October 1, 2007 to
May 31, 2008 for $20,000 per month and 1.2% of its gross revenues. In the event
that the consulting agreement is terminated on May 31, 2008, the agreement
requires the continuation of monthly fees and 1.2% of gross revenues for an
additional ten months.
On April
4, 2006 the Company sold Ianace 1,650,000 shares for $165,000. On January 23,
2007 the Company sold Ianace 2,000,000 shares for $200,000. Included in accounts
receivable at September 30, 2007 is $19,532 due from a company affiliated with
Ianace.
The
Company sold the rights to the entertainment market to a company whose
shareholders also shareholders of the Company for $1,450,000. The Company
received $1,000,000 of this license fee in fiscal 2007 which included on the
balance sheet at September 30, 2007 as Deferred Revenue — related
party.
14.
CONCENTRATION OF CREDIT RISK AND DEPENDENCY
During
the year ended September 30, 2007, the Company executed a license agreement and
performed custom engineering for one customer. The license agreement was for
$2,000,000 or 100% of the licensing revenues and the engineering services were
$300,000 or 50% of the sales revenues. Management believes the Company is not
vulnerable to the risk of near term adverse impact because of this concentration
since it expects to derive revenue sharing revenues in the future from this
license agreement.
For the
year ended September 30, 2006 the Company had sales to one customer who
individually accounted for more 95% of the total gross sales for that year. For
the year ended September 30, 2005, the Company had sales to five customers who
accounted for more than ten percent of the Company’s total gross sales for the
year.
For the
year ended September 30, 2007 the Company purchased services one supplier who
individually accounted for 71% percent of the Company’s total product and
development and consulting fees for the year.
The
Company maintains deposits in a financial institution that at times exceed
amounts covered by the insurance provided by the U.S. Federal Deposit Insurance
Corporation. The Company believes that there is no significant risk with respect
to these deposits.
15.
COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases its office facilities for approximately $15,200 per month. Rent
expense incurred by the Company for the years ended September 30, 2007, 2006 and
2005 was $178,027, $170,909 and $7,118 respectively. The following is a schedule
of future minimum lease payments for operating leases as of September 30,
2007:
Year
|
|
Amount
|
|
2007
|
|
$
|
181,000
|
|
2008
|
|
$
|
242,000
|
|
2009
|
|
$
|
244,000
|
|
2010
|
|
$
|
254,000
|
|
2011
|
|
$
|
107,000
|
|
16.
SUBSEQUENT EVENTS
On
October 1, 2007 the Company increased its authorized shares from 330,000,000 to
500,000,000.
In the
period from October 1, 2007 to January 8, 2007 Blideo raised $1,860,000
including $150,000 from the Company on October 19, 2007 and $1,000,000 from a
party related to SureCast which is a major shareholder of the Company. As of
January 8, 2008 the Company’s interest in Blideo is now 28.76%, Leighton’s is
22.12% and Ianace’s is 2.92%
In the
period from October 1, 2007 to January 8, 2007 the Company issued 7,779,167
shares for $639,000 or $0.082 per share.
ESPRE
SOLUTIONS INC. AND SUBSIDIARY
Consolidated
Balance Sheet
|
|
December 31,
|
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
|
|
$
|
3,297,089
|
|
Accounts
receivable, net
|
|
|
1,808
|
|
Prepaid
expenses and advances
|
|
|
113,418
|
|
Total
current assets
|
|
|
3,412,315
|
|
|
|
|
|
|
Equipment,
net
|
|
|
329,154
|
|
Intangible
assets, net
|
|
|
72,526
|
|
Loans
to related parties
|
|
|
69,432
|
|
Other
assets
|
|
|
114,846
|
|
Total
assets
|
|
$
|
3,998,273
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Notes
payable to related parties
|
|
$
|
25,000
|
|
Accounts
payable and accrued expenses
|
|
|
1,082,451
|
|
Total
current liabilities
|
|
|
1,107,451
|
|
|
|
|
|
Minority
interest
|
|
|
1,413,741
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
Common
shares — $0.001 par value; authorized 500,000,000 shares; and 329,217,550
shares issued and outstanding
|
|
|
329,217
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
75,458,285
|
|
|
|
|
|
|
Stock
subscription receivable
|
|
|
(10,000
|
)
|
|
|
|
|
|
Retained
equity (deficit)
|
|
|
(74,300,421
|
)
|
Total
stockholders’ equity
|
|
|
1,477,081
|
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
3,998,273
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
ESPRE
SOLUTIONS INC. AND SUBSIDIARY
Consolidated
Statements of Operations
Three
Months Ended December 31
(Unaudited)
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Software
licensing fees
|
|
$
|
1,000,000
|
|
|
$
|
1,990,000
|
|
Custom
engineering fees
|
|
|
44,842
|
|
|
|
233,250
|
|
Other
|
|
|
41,116
|
|
|
|
7,626
|
|
Total
revenue
|
|
|
1,085,958
|
|
|
|
2,230,876
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
General,
administrative and selling expenses
|
|
|
2,037,182
|
|
|
|
1,093,428
|
|
General,
administrative and selling expenses stock based
compensation
|
|
|
2,101,950
|
|
|
|
1,084,074
|
|
Research
and development
|
|
|
565,754
|
|
|
|
84,600
|
|
Amortization
and depreciation
|
|
|
31,762
|
|
|
|
23,347
|
|
Total
operating expenses
|
|
|
4,736,648
|
|
|
|
2,285,449
|
|
Loss
from operations
|
|
|
(3,650,690
|
)
|
|
|
(54,573
|
)
|
Interest
expense
|
|
|
—
|
|
|
|
(7,848
|
)
|
Net
loss before minority interest
|
|
|
(3,650,690
|
)
|
|
|
(62,421
|
)
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
381,359
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(3,269,331
|
)
|
|
$
|
(62,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
324,093,718
|
|
|
|
205,085,889
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
ESPRE
SOLUTIONS INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
Three
Months Ended December 31
(Unaudited)
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income (loss) for period
|
|
$
|
(3,269,331
|
)
|
|
$
|
(62,421
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock
and options issued for services
|
|
|
105,209
|
|
|
|
—
|
|
Stock
based compensation
|
|
|
1,996,741
|
|
|
|
1,084,074
|
|
Amortization
and depreciation
|
|
|
31,762
|
|
|
|
23,347
|
|
Minority
interest
|
|
|
(381,359
|
)
|
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
(1,000,000
|
)
|
|
|
150,000
|
|
Accounts
receivable
|
|
|
249,242
|
|
|
|
(1,798,220
|
)
|
Prepaid
expenses
|
|
|
(78,854
|
)
|
|
|
928
|
|
Other
assets
|
|
|
(17,555
|
)
|
|
|
4,400
|
|
Accounts
payable and accrued expenses
|
|
|
(366,947
|
)
|
|
|
443,962
|
|
Total
cash used in operating activities
|
|
|
(2,731,092
|
)
|
|
|
(153,930
|
)
|
|
|
|
|
|
|
|
Net
cash used in investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(51,922
|
)
|
|
|
1,411
|
|
Purchase
of intangible assets
|
|
|
(11,571
|
)
|
|
|
(35,991
|
)
|
Net
cash used in investing activities
|
|
|
(63,493
|
)
|
|
|
(34,580
|
)
|
|
|
|
|
|
|
|
Cash
flows provided by financing activities:
|
|
|
|
|
|
|
|
|
Payments
on notes payable to related parties
|
|
|
(100,000
|
)
|
|
|
(97,985
|
)
|
Proceeds
from sale of stock
|
|
|
714,000
|
|
|
|
—
|
|
Minority
capital raised
|
|
|
1,447,008
|
|
|
|
—
|
|
Receipts
of stock subscriptions receivable
|
|
|
180,000
|
|
|
|
—
|
|
Net
cash provided (used in) by financing activities
|
|
|
2,241,008
|
|
|
|
(97,985
|
)
|
|
|
|
|
|
|
|
Net decrease
in cash
|
|
|
(553,577
|
)
|
|
|
(286,495
|
)
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
3,850,666
|
|
|
|
291,426
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
3,297,089
|
|
|
$
|
4,931
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
—
|
|
|
$
|
7,848
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to retire debt
|
|
$
|
1,542,943
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
ESPRE
SOLUTIONS INC. AND SUBSIDARY
Consolidated
Statement of Stockholders’ Equity
(Unaudited)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
|
Paid-In
|
|
|
Subscriptions
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Receivable
|
|
|
Retained Deficit
|
|
|
Total
|
|
Balance,
October 1, 2007
|
|
|
318,522,499
|
|
|
$
|
318,522
|
|
|
$
|
71,110,087
|
|
|
$
|
(190,000
|
)
|
|
$
|
(71,031,090
|
)
|
|
$
|
207,519
|
|
Private
Placements
|
|
|
8,608,334
|
|
|
|
8,608
|
|
|
|
705,392
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
894,000
|
|
Stock
Based Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,996,741
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,996,741
|
|
Issuance
of common stock to eliminate contingent repurchase
agreement
|
|
|
1,500,000
|
|
|
|
1,500
|
|
|
|
1,541,443
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,542,943
|
|
Stock
for services
|
|
|
586,717
|
|
|
|
587
|
|
|
|
104,622
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,209
|
|
Net
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,269,331
|
)
|
|
|
(3,269,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
329,217,550
|
|
|
$
|
329,217
|
|
|
$
|
75,458,285
|
|
|
$
|
(10,000
|
)
|
|
$
|
(74,300,421
|
)
|
|
$
|
1,477,081
|
|
The
accompanying notes are an integral part of these condensed financial
statements
ESPRE
SOLUTIONS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION AND CONTROLLED SUBSIDIARY
The
consolidated financial statements included herein have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America and pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes such disclosures are adequate to make the information presented
not to be misleading. In the opinion of management, the amounts shown reflect
all adjustments necessary to present fairly the financial position and results
of operations for the periods presented. All such adjustments are of a normal
recurring nature.
It is
suggested that the financial statements be read in conjunction with the
financial statements and notes thereto included in the Company’s Form 10/A for
the year ended September 30, 2007.
On April
27, 2007 the Company and Leighton, its President (“Leighton”), founded Blideo
each with a 40% interest. The Company and Leighton control Blideo and it has
therefore been consolidated in these condensed consolidated financial
statements.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its
majority owned and controlled subsidiary. All intercompany transactions have
been eliminated in consolidation.
Reclassifications
Prior
year’s information is reclassified whenever necessary to conform to current
year’s presentation.
Recent
pronouncements
In May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
which provides guidance on the accounting for and reporting of accounting
changes and correction of errors. This statement changes the requirements for
the accounting for and reporting of a change in accounting principle and applies
to all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of this standard is not expected
to have a material effect on the Company’s results of operations or financial
position.
In July
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109” (“FIN
48”), which is a change in accounting for income taxes. FIN 48 specifies how tax
benefits for uncertain tax positions are to be recognized, measured, and
derecognized in financial statements; requires certain disclosures of uncertain
tax matters; specifies how reserves for uncertain tax positions should be
classified on the balance sheet; and provides transition and interim-period
guidance, among other provisions. FIN 48 was effective for fiscal years
beginning after December 15, 2006 and as a result, is effective for the Company
in the first quarter of fiscal 2008. The Company is in the process of evaluating
the impact of adoption of FIN 48 will have on the consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) which defines fair value, establishes a framework for measuring fair
value and expands disclosure about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company will
adopt SFAS No. 157 on October 1, 2009, and is currently evaluating the impact of
such adoption on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company will
adopt SFAS No. 159 on October 1, 2009, and is currently evaluating the impact of
such adoption on its financial statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007), Business
Combinations , which replaces SFAS No 141. The statement
retains the purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and liabilities are
recognized in the purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies, requires the
capitalization of in-process research and development at fair value, and
requires the expensing of acquisition-related costs as incurred. SFAS No. 141R
is effective for us beginning July 1, 2009 and will apply prospectively to
business combinations completed on or after that date.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of
ARB 51 ,
which changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent’s equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income on the face of the income statement and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings. SFAS No. 160 is effective for us
beginning July 1, 2009 and will apply prospectively, except for the presentation
and disclosure requirements, which will apply retrospectively. We are currently
assessing the potential impact that adoption of SFAS No. 160 would have on our
financial statements.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3.
GOING CONCERN AND MANAGEMENT’S PLAN
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred significant
and recurring losses and negative cash flow from operations which raises
substantial doubt about its ability to continue as a going concern. The
Company’s continued existence is dependent upon its ability to achieve
profitability and to generate cash either from operations or financing.
Management’s plan is as follows:
|
•
|
Market
its principal product, ESPRE Live, to customers wishing to build
applications using video and provide custom engineering services to those
customers as requested.
|
|
•
|
Engage
in partnerships with firms in key vertical markets. These partners will be
market experts and have well defined application strategies that require
ESPRE Live to develop them.
|
|
•
|
Launch
Blideo as an application service
provider
|
|
•
|
Establish
independent sales agreements with representatives to sell its products and
services. The Company will actively pursue the engagement of additional
independent sales representatives who can distribute the Company’s
existing video products and services both domestically and
internationally.
|
|
•
|
Obtain
additional debt and equity
financing.
|
In the
period from inception to December 31, 2007 the Company has transacted a
substantial amount of its business with related parties. The Company continues
to be dependent on revenues from these related parties. The achievement of
profitability and the ability to generate cash flows from operations is
dependent upon, amongst other things, the acceptance of the Company’s products
and services, competition from other products and the deployment of video
applications by our customers. There is no assurance that management’s plan will
be successful. Accordingly, substantial doubts exist about the Company’s ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
4.
INVESTMENT IN AND LOANS TO RELATED PARTIES
Blideo
Inc.
On April
24, 2007, prior to joining the Company, Leighton founded Blideo Inc. (“Blideo”)
and invested $200,000 in May 2007 and $300,000 in July 2007. The Company
invested the same amounts in the same time periods. In May of 2007, Blideo
acquired an exclusive license from Media Distribution Solutions. LLC (“MDS”), a
customer of the Company since April 2006, for the distribution and use of MDS’s
software in any social networking application for $175,000 plus certain ongoing
royalties. In September 2007, Espre’s Vice President — Sales invested $125,000
in Blideo. Certain former officers and employees of the Company are now officers
and employees of Blideo. Subsequent to year end, on October 31, 2007, the
Company licensed ESPRE Live on a non-exclusive basis to Blideo for five (5)
years for a one time license fee of $1,000,000 plus 1% of gross
revenues.
As an
integral part of this agreement, Blideo agreed to pay the Company $700,000 for
engineering and design services to build the Blideo Application Release 1.0 from
September 1, 2007 to March 31, 2008. The $700,000 contract engineering fees paid
for core technology development will decrease the license fee. As part of this
license the Company has agreed not to contract with any application service
provider that plans to launch a service competitive to Blideo’s for one year
following the acceptance by Blideo of the application the Company is designing
and building. In addition, Blideo is obligated to pay the Company a product
maintenance fee for the application the Company is building for Blideo of
$70,000 for the first year commencing September 2007 and thereafter at a rate to
be negotiated. In addition, the Company provides office accommodation and
accounting services to Blideo for $2,000 and $500 per month on a month to month
basis. The Company believes all related party transactions have been consummated
on terms equivalent to those that prevail in arms’ length
transactions.
The
assets of Blideo are not available to the Company other than through the
contractual agreements more fully described above.
5.
NOTES PAYABLE TO RELATED PARTIES
Notes
payable —consisted of the following:
|
December
31,
|
|
|
2007
|
|
Note
payable to a related individual, at 10%, due November 25, 2004, extended
year to year, unsecured
|
|
$ |
25,000 |
|
|
|
$ |
25,000 |
|
6.
STOCKHOLDERS’ EQUITY
Common
stock
Payments
for Services
In the
three months ended December 31, 2007 the Company issued a total of 586,717
shares of common stock for consulting, advisory and other services recorded at
market value of $0.18 per share or $105,209.
Capital
Raises
In the
three months ended December 31, 2007 the Company issued 8,608,334 restricted
common stock to accredited investors for cash with no demand or piggy-back
registration rights. The company paid fees of $7,100 in connection with the sale
of these common shares.
Issuance
of Common Stock to Eliminate Contingent Repurchase Agreement
The
Company and Video Software Partners (“Video”) executed a purchase agreement on
October 24, 2007 and agreed that the cumulative payments of $894,000 had been
paid and Video had received a total of 6,288,000 shares of common stock. The
Company paid Video an additional $100,000 and issued 1,500,000 shares of common
stock to Video to satisfy its obligations and release the Company’s CODEC and
software applications from security.
7.
STOCK OPTIONS
Transactions
and other information relating to options are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
|
|
Exercisable Stock Options
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at October 1, 2007
|
|
|
66,814,634
|
|
|
$
|
0.10
|
|
|
|
18,986,301
|
|
|
$
|
0.12
|
|
Granted
during period
|
|
|
7,200,000
|
|
|
$
|
0.09
|
|
|
|
3,014,423
|
|
|
$
|
0.08
|
|
Outstanding
at December 31, 2007
|
|
|
74,014,634
|
|
|
$
|
0.10
|
|
|
|
22,000,724
|
|
|
$
|
0.10
|
|
8.
WARRANTS
Transactions
and other information relating to warrants are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Warrants
|
|
|
Exercisable Warrants
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at October 1, 2007
|
|
|
44,019,716
|
|
|
$
|
0.10
|
|
|
|
44,019,716
|
|
|
$
|
0.10
|
|
Granted
during period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at December 31, 2007
|
|
|
44,019,716
|
|
|
$
|
0.10
|
|
|
|
44,019,716
|
|
|
$
|
0.10
|
|
All
warrants have a term of five years.
9.
CONCENTRATION OF CREDIT RISK AND DEPENDENCY
For the
three months ended December 31, 2007 the Company had one sale to one customer
who individually accounted for more 96% of the total gross sales for that
period. For the three months ended December 31, 2006, the Company had sales to
one customer who accounted for more than ten percent of the Company’s total
gross sales for that period.
For the
three months ended December 31, 2007 the Company purchased services one supplier
who individually accounted for 82% percent of the Company’s total product and
development and consulting fees for the period.
The
Company maintains deposits in a financial institution that at times exceed
amounts covered by the insurance provided by the U.S. Federal Deposit Insurance
Corporation. The Company believes that there is no significant risk with respect
to these deposits.
10.
DEFERRED INCOME TAXES
The
Company reduced the deferred tax asset resulting from its tax loss carry
forwards by a valuation allowance of an equal amount to the deferred asset as
the realization of the deferred tax asset is uncertain. Deferred tax assets are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Net
operating losses
|
|
$
|
19,624,000
|
|
|
$
|
19,239,000
|
|
In-
process research and development
|
|
|
1,329,000
|
|
|
|
1,528,000
|
|
Stock
based compensation
|
|
|
587,000
|
|
|
|
1,386,000
|
|
Transition
adjustment
|
|
|
217,000
|
|
|
|
217,000
|
|
|
|
|
21,757,000
|
|
|
|
22,370,000
|
|
Less
valuation
|
|
|
(21,757,000
|
)
|
|
|
(22,370,000
|
)
|
Net
deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
11.
SUBSEQUENT EVENTS
In the
period from January 1, 2008 to January 31, 2008 Blideo raised $250,000. As of
December 31, 2008 the Company’s interest in Blideo was 30.44%, Leighton’s is
23.42% and Ianace’s is 3.09%
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
2.1
|
Agreement
and Plan of Merger between Espre Solutions, Inc., a Texas corporation, and
Candeub, Fleissig & Associates dated July 26, 2004
(2)
|
|
|
2.2
|
Merger
Agreement among the Company, Wireless Peripherals, Inc., and
Gunnar J. Korpinen, Robert Nimon and Adam Ruef dated
August 30, 2004 (2)
|
|
|
3.1
|
Articles
of Incorporation (1)
|
|
|
3.2
|
Amended
and Restated By-laws (1)
|
|
|
3.3
|
Certificate
of Amendment filed August 2, 2004 (1)
|
|
|
3.4
|
Articles
of Merger filed with the Nevada Secretary of State on August 6, 2004
(1)
|
|
|
3.5
|
Certificate
of Merger filed with the State of Delaware on August 6, 2004
(1)
|
|
|
3.6
|
Articles
of Merger filed with the Nevada Secretary of State on August 30, 2004
(1)
|
|
|
3.7
|
Articles
of Merger filed with the Secretary of State of Texas on August 30, 2004
(1)
|
|
|
3.8
|
Certificate
of Amendment filed on April 19, 2005 (1)
|
|
|
3.9
|
Certificate
of Amendment filed on April 4, 2006 (1)
|
|
|
3.10
|
Certificate
of Amendment filed January 8, 2007 (1)
|
|
|
3.11
|
Certificate
of Amendment filed October 1, 2007 (1)
|
|
|
4.1
|
Form
of stock certificate (1)
|
|
|
4.2
|
Certificate
of Designation for the Company’s Series A Cumulative Convertible Preferred
Stock filed September 23, 2004 (1)
|
|
|
4.3
|
Amendment
to Certificate of Designation After Issuance of Class or Series of the
Company’s Series A Cumulative Convertible Preferred Stock filed March 30,
2005 (1)
|
|
|
10.1
|
Software
Purchase Agreement between Espre Consulting and JOD Enterprises dated
November 19, 2003 (1)
|
|
|
10.2
|
Business
Combination and Investment Agreement dated July 6, 2004
(1)
|
|
|
10.3
|
Intellectual
Property License Agreement between Media Distribution Solutions, LLC, and
the Company dated April 14, 2006 (1)
|
|
|
10.4
|
Intellectual
Property License Agreement between Global IP Sounds Inc. and the Company
dated April 14, 2006 (1)
|
10.5
|
Shareholder
Agreement between Knight Enterprises, Ltd., Kyle Nelson, Blideo Inc, and
the Company dated May 1, 2007 (1)
|
|
|
10.6
|
Amendment
to 2004 Equity Incentive Plan (1)
|
|
|
10.7
|
Acron
office lease between Acron Kings Park, L.P, and the Company
dated August 25, 2004 (1)
|
|
|
10.7(a)
|
Software
License Agreement between Radvision Inc., and the Company dated April 19,
2005 (2)
|
|
|
10.7(b)
|
Amendment
No. 1 to Software License Agreement between Radvision, Inc., and the
Company dated October 14, 2005 (2)
|
|
|
10.7(c)
|
Software
and Royalty License Agreement between the Company and Vizeo Solutions Ltd.
Dated November 15, 2006 (2)
|
|
|
10.8
|
Intellectual
Property License Agreement between SureCast Media and the Company dated
April 30, 2007 (1)
|
|
|
10.9
|
Distribution
of Proceeds and Revenue Share Agreement between SureCast Media and the
Company dated May 1, 2007 (1)
|
|
|
10.10
|
Release
Agreement between Video Software Partners, LLC, and the Company dated
October 24, 2007 (1)
|
|
|
10.11
|
Purchase
Agreement between Video Software Partners, LLC, and the Company dated
October 24, 2007 (1)
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10.12
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Intellectual
Property Assignment between Video Software Partners, LLC, and the Company
dated October 24, 2007 (1)
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10.13
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Letter
Agreement between Video Software Partners, LLC, and the Company dated
October 24, 2007 (1)
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10.14
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Amendment
#1 to Intellectual Property License Agreement between Media Distribution
Solutions, LLC, and the Company dated April 17, 2007
(1)
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10.15
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Investment
Banking and Placement Agent Letter Agreement between Ackrell Capital, LLC,
and the Company dated February 20, 2007 (1)
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10.16
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Software
and Royalty License Agreement between Blideo Inc and the Company dated
October 31, 2007 (1)
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10.17
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Letter
Agreement between SureCast Media and the Company dated November 26, 2007
(2)
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10.18
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First
Amended and Restated Engagement Agreement between the Company and Ackrell
Capital, LLC, dated January
18, 2008 (2)
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10.19
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Assignment
between the Company and Espre Consulting dated January 18, 2008
(2)
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14.1
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Code
of Business Conduct and Ethics (1)
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Consent
of Sweeney, Gates & Co., regarding Espre Solutions, Inc., dated March
31 , 2008 (3)
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(1)
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Previously
filed as an exhibit to the Company’s Registration Statement on Form 10
filed on November 8, 2007, and incorporated herein by
reference.
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(2)
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Previously
filed as an exhibit to the Company’s Registration Statement on Form 10/A
filed on February 4, 2008, and incorporated herein by
reference.
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SIGNATURES
Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated:
March 31 , 2008
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ESPRE
SOLUTIONS, INC.
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By:
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/s/ Peter Leighton
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Peter Leighton,
President
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