UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FormFORM S-1
Amendment No. 5
REGISTRATION STATEMENT UNDER
UNDER
THE SECURITIES ACT OF 1933
DIGITALTOWN, INC.
(Exact name of registrant as specified in its charter)
DIGITALTOWN, INC. | ||
(Exact Name of Registrant as Specified in its Charter) |
Minnesota | 3570 | 41-1427445 | ||
(State or of Incorporation) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
11974 Portland Ave
Burnsville, MN 55337
(952) 890-2362
(Address and Telephone Number of Registrant’s Principal
Executive Offices and Principal Place of Business)
Parsons/Burnett/Bjordahl/Hume, LLP
1850 Skyline Tower
10900 NE 42155 112th StreetAve NE
Bellevue, WA 98004
(425) 451-8036295-4564
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
James B. Parsons
2155 112th Ave NE
Bellevue, WA 98004
(Name, Addressaddress, including zip code, and Telephone Numbertelephone number, including area code, of Agentagent for Service)service)
Approximate date of commencement of proposed sale to the public: As soon as practicable From time to time after the effective date of this Registration Statement becomes effective. registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.box: x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, of 1933, please check the following box and list the Securities Act registration Statement number of the earlier effective registration statement for the same offering.o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.o¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ¨
CALCULATION OF REGISTRATION FEE | ||||||||||||||||
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Title of Each Class of Securities To be Registered |
| Amount to be Registered |
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| Proposed Maximum Offering Price Per Share |
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| Proposed Maximum Aggregate Offering Price |
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| Amount of Registration Fee |
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Common Stock, par value $.01 per share |
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| 3,000,000 | (1) |
| $ | 2.795 | (2) |
| $ | 8,385,000 |
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| $ | 597.85 |
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CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
| Amount to be Registered (1) |
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| Proposed Maximum Offering Price Per Share (2)(3) |
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| Proposed Maximum Aggregate Offering Price |
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| Amount of Registration Fee |
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Common Stock, $0.01 value per share |
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| 20,000,000 |
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| $ | 0.01 |
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| $ | 200,000 |
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| $ | 24.90 |
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(1) |
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(2) |
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(3) | Based on the |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until thisthe Registration Statement shall become effective on such date as the Securities and Exchange Commission, (or the “SEC”), acting pursuant to said Section 8(a), may determine.
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.
SELLING STOCKHOLDERSPROSPECTUS
SUBJECT TO COMPLETION, DATED ____________________
The information in this Prospectusprospectus is not complete and may be changed. Our Selling StockholdersWe may not sell these securities until the Registration Statementregistration statement filed with the United States Securities and Exchange Commission is effective. This Prospectusprospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
3,000,000SUBJECT TO COMPLETION, DATED ___________________
PRELIMINARY PROSPECTUS
Digitaltown, Inc.
20,000,000 Shares of Common Stock
DIGITALTOWN, INC.
This Prospectusprospectus relates to the issuance from timeoffer and resale of up to time20,000,000 shares of 3,000,000 shares ofour common stock, par value $.01 of DigitalTown, Inc., a Minnesota corporation$0.01 per share, by the selling stockholders identified on page 9. All such shares represent shares that Triton Funds LLC (“DGTW” or the “Company”Triton”), being offered for sale has agreed to purchase from us pursuant to a Drawdownthe terms and conditions of an Equity FinancingPurchase Agreement (“Drawdownwe entered into with them on April 23, 2018 (the “Equity Purchase Agreement”) entered in. Subject to between the Companyterms and Auctus Privateconditions of the Equity Fund, LLC (“Auctus”Purchase Agreement, we have the right to “put,” or “Selling Stockholder”). The total amountsell, up to $1,000,000 worth of shares of our common stock which,to Triton. This arrangement is also sometimes referred to herein as the “Registered Offering.”
For more information about the selling stockholders, please see the section of this prospectus entitled “Selling Stockholders” beginning on page 9.
The selling stockholders may sell any shares offered under this prospectus at fixed prices, prevailing market prices at the time of sale, at varying prices or negotiated prices.
Triton is an “underwriter” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the resale of our common stock under the Registered Offering, and any broker-dealers or agents that are involved in such resales may be sold pursuantdeemed to this Prospectus would constitute 9.7%be “underwriters” within the meaning of our issuedthe Securities Act in connection therewith. In such event, any commissions received by such broker-dealers or agents and outstanding common stock as of December 8, 2010, if allany profit on the resale of the shares had been soldpurchased by that date.
Pursuantthem may be deemed to be underwriting commissions or discounts under the Drawdown Agreement, which has a total drawdown amountSecurities Act. For more information, please see the section of ten million dollars ($10,000,000), DGTW has the right to sell to Auctus at its sole discretion and Auctus has the obligation to purchase through advances to the Company, the Company’s common stock through Draw-Down Notices issued by the Company. The number of shares of common stock that Auctus shall purchase shall be determined by dividing the amount of the advance by the purchase price. No fractional shares will be issued.
The Selling Stockholder is selling all of the shares of common stock offered by this Prospectus. It is anticipated that the Selling Stockholder will sell these shares of common stock from time to time in one or more transactions, in negotiated transactions or otherwise, at prevailing market prices or at prices otherwise negotiated (seeprospectus titled “Plan of Distribution”). beginning on page 9.
We will not receive any proceeds from the resale of shares of common stock by the selling stockholders. We will, however, receive proceeds from the sale of shares bydirectly to Triton pursuant to the Selling Stockholder. However, we will receive the sale price of any common stock that we sell to Auctus under the drawdown line of equity credit facility.Registered Offering.
There are no underwriting agreements.
We have agreed to pay all the costs and expenses of this registration.
Our common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”)OTCQB Marketplace operated by the OTC Markets Group, Inc., or “OTCQB,” under the ticker symbol “DGTW.” On July 15, 2018, the average of the high and low sales prices of our common stock was $0.08 per share.
We may amendInvesting in our common stock involves risks that are described in the “Risk Factors” section beginning on page 2 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or supplementdisapproved of these securities or determined if this Prospectus from timeprospectus is truthful or complete. Any representation to time by filing amendments or supplements as required. You should read the entire Prospectus and any amendments or supplements carefully before you make your investment decision.contrary is a criminal offense.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PLEASE REFER TO “RISK FACTORS” BEGINNING ON PAGE 8.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this preliminary Prospectusprospectus is _________, 2010September _____, 2018.
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PROSPECTUS
DIGITALTOWN, INC.
3,000,000 SHARES COMMON STOCK
DETERMINATION OF OFFERING PRICE
INTEREST OF NAMED EXPERTS AND COUNSEL
INFORMATION WITH RESPECT TO THE REGISTRANT
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE 23
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTOR AND OFFICER COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
DISCLOSURE OF COMMISSION POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND CORPORATE GOVERNANCE 30
WHERE YOU CAN FIND MORE INFORMATION
ABOUT THIS PROSPECTUS
This Prospectus is part of a registration statement we filed with the SEC. You should rely only on the information providedcontained in this Prospectus and incorporated by reference in this Prospectus.prospectus. We have not authorized anyone to provide you with information different from that contained in or incorporated by reference into this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the common stock offered by this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any common stock in any circumstances in which such offer or solicitation is unlawful. The selling stockholder isinformation. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted.
Neither the delivery of this Prospectus nor any sale made in connection with this Prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this Prospectus or that the information contained by reference to this Prospectus is correct as of any time after its date. The information in this Prospectusprospectus is accurate only as of the date of this Prospectus,prospectus, regardless of the time of delivery of this Prospectusprospectus or of any sale of shares of our common stock. The rules of the SECOur business, financial condition, operating results and prospects may require us to update this Prospectus in the future.
SUMMARYhave changed since that date.
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The following summary highlights selected information contained elsewhere in this Prospectus. This summaryprospectus and does not contain all of the information that you should consider beforein making your investment decision in our common stock. Before investing in the securities. Before making an investment decision,our common stock, you should carefully read this entire prospectus, including our financial statements and the entire Prospectus carefully, includingrelated notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,Operations.” and the financial statements and the notes to the financial statements includedAs used in this Prospectus.prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” “Company,” “Digitaltown” refer to Digitaltown, Inc.
GeneralOur Business
DigitalTown, Inc. (throughout this Prospectus referred to as “we,” “us,” “the Company,”(“The Company”, “We”, “Us”, “Our” and “DigitalTown” or “DGTW”) is a development stage companywas incorporated in the State of Minnesota on April 7, 1982. We provide turn-key hosted solutions to power a comprehensive platform for government entities, citizens and merchants. Our solutions improve the quality of life for residents and visitors through integrated technology for economic development, civic engagement, digital inclusion and smart tourism for cities around the world. The easy to use platform helps city officials and local merchants manage a feature-rich Smart City for web and mobile devices, and provides residents and visitors with access to Content, Community and Commerce.
The Company’s fiscal year end is the last day in February. Our current fiscal year ends on February 28, 2019 and we refer to it as “fiscal 2019”. Last year, our fiscal year ended on February 28, 2018 and we refer to this year as “fiscal 2018”.
During the yearquarter ended February 28, 2010,May 31, 2018, we generated revenues of $7,511,$86,218, and during the yearquarter ended February 28, 2009May 31, 2017 we generated no revenues.revenues of $80,271. For the six monthsquarter ended AugustMay 31, 2010, we generated $5,077 in revenues. For the six months ended August 31, 2010,2018, we have incurred a net loss of $516,540.$2,256,142, compared to $1,101,248 for the quarter ended May 31, 2017. As of AugustMay 31, 2010,2018, we had $9,673 in$20,506 cash on hand, $1,380,156 of digital currencies on hand, total assets of $1,061,144,$1,495,836, total liabilities of $259,300,$2,325,766, an accumulated deficit of $19,082,682$51,142,038 and a stockholders’ equitystockholder’s deficit of $801,844.($829,930).
Digitaltown owns the domain names for approximately 27,000 high school “spirit” websites throughout the United States. The domain names include the name of the school and their mascot (i.e. www.pasadenabulldogs.com) and the majority of the domain names are in the .com format. The Company is currently creating a nationwide network of local internet “communities” built around these domain names, and the schools and the physical communities they represent.OFFERING SUMMARY
The Company was founded in 1982 under the laws of the State of Minnesota as Command Small Computer Learning Center, Inc., a computer training company, and has operated under several different names in the computer hardware and training sector. In 2005, the Company began acquiring domain names. On March 1, 2007, the Company changed its name to Digitaltown, Inc. and began developing a business plan to develop their platform and monetize their domain names. The Company’s headquarters are located at 11974 Portland Avenue, Burnsville, MN 55337, and its telephone and facsimile numbers are (952) 890-2362 and (952) 890-7451, respectively. The Company's Internet address iswww.digitaltown.com. The company is traded in the over-the- counter market under the ticker DGTW.
Drawdown Equity Financing Agreement.
On December 5, 2010, we entered into a drawdown equity financing agreement and registration rights agreement (collectively the “Agreements”) with Auctus Private Equity Fund, LLC (“Auctus”), the selling stockholder. In accordance with the Agreements, Auctus has committed, subject to certain conditions set forth in the Agreements, to
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purchase up to $10 million of the Company’s common stock over a term of up to three (3) years. Although the Company is not mandated to sell shares under the Agreements, the Agreement gives the Company the option to sell to Auctus shares of common stock at a per share purchase price of equal to 94% of the lowest closing Volume Weighted Average Price (“VWAP”) during the five trading days following the Company’s delivery of notice to Auctus (the “Notice”). At its option, the Company may set a floor price under which Auctus may not sell the shares which were the subject of the Notice. The floor shall be 75% of the average closing VWAP of the stock over the preceding ten (10) trading days prior to the Notice and can be waived at the discretion of the Company. The maximum amount of Common Stock that the Company can sell pursuant to any Notice is the greater of: (i) an amount of shares with an aggregate maximum purchase price of $150,000 or (ii) 200% of the average daily trading volume based on 10 days preceding the drawdown notice date.
Auctus is not required to purchase the shares unless: a) the shares which are subject to the Notice have been registered for resale and are freely tradable in accordance with the federal securities laws, including the Securities Act of 1933, as amended; and b) under certain conditions which are set forth in the Agreements and which are outside of Auctus’ control. The Company is obligated to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1, of which this Prospectus forms a part, within 30 days from the date of the Agreements and to use all commercially reasonable efforts to have such registration statement declared effective by the SEC within 120 days of filing. The Company has agreed to pay Auctus an aggregate amount of $15,000 as an origination fee with respect to the transaction.
Summary Financial Information
The table below summarizes our audited financial statements for the fiscal years ended February 28, 2010 and February 28, 2009, as well as the unaudited financial statements for the six months ended August 31, 2010 and 2009.
Balance Sheet Summary:
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| Fiscal Year Ended |
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| At August 31 |
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| At February 28, 2010 (Audited) |
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| At February 28, 2009 (Audited) |
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Balance Sheet |
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Cash |
| $ | 34,178 |
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| $ | 43,914 |
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| $ | 9,673 |
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Total Assets |
| $ | 940,899 |
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| $ | 858,203 |
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| $ | 1,061,144 |
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Total Liabilities |
| $ | 232,068 |
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| $ | 142,805 |
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| $ | 259,300 |
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Total Stockholders’ Equity |
| $ | 708,831 |
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| $ | 715,398 |
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| $ | 801,844 |
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Statement of Operations Summary:
THE OFFERING
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Common stock outstanding before this offering | 126,602,321 shares | |
Common stock to be outstanding after this offering | 146,602,321 shares (1) | |
Use of proceeds | We will not receive any proceeds from the resale or other disposition of the shares covered by this prospectus by the selling stockholders. We will receive proceeds from the sale of shares to Triton. Triton has committed to purchase up to $1,000,000 worth of shares of our common stock over a period of time terminating on the earlier of the date on which Triton shall have purchased shares under the Equity Purchase Agreement for an aggregate purchase price of $1,000,000 or December 31, 2018. |
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(1) Assumes the issuance of 20,000,000 shares offered hereby that are issuable under our Equity Purchase Agreement with Triton.
We are subject to various risks that may materially harm our business, financial condition and results of operations. An investmentInvesting in our common stock involves a high degree of risk. In addition toYou should carefully consider the risks described below, as well as the other information in this Prospectus, you should carefully considerprospectus, including our financial statements and the following factorsrelated notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in evaluating us andour common stock. The occurrence of any of the events or developments described below could harm our business, before purchasingfinancial condition, operating results, and growth prospects. In such an event, the sharesmarket price of our common stock offered hereby. This Prospectus contains, in addition to historical information, forward-looking statements that involvecould decline, and you may lose all or part of your investment. Additional risks and uncertainties.uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Related Toto Our BusinessCompany
We Have Historically Lost Moneyhave a history of operating losses and Losses May Continuethe report of our independent accountants issued in connection with the Futureaudit of our financial statements contained a qualification raising substantial doubt about our ability to continue as a going concern.
We have historically lost money. Theincurred operating losses of $1,662,728 and $1,091,524 for the first quarter of fiscal years 2019 and 2018 respectively, and had an accumulated deficit of $51,142,038 at May 31, 2018. In addition, we have incurred net losses of $10,243,396 and $7,219,626 for the fiscal years 2018 and 2017, respectively. As a result of these conditions, the report of our independent accountants issued in connection with the audit of our financial statements as of and for the fiscal years ended February 28, 20102018 and 2009 were $1,245,049 and $2,964,062, respectively and future losses are likely to occur. Our accumulated deficit at February 28, 2010, is $18,566,142.2017 contained a qualification raising substantial doubt about our ability to continue as a going concern. We can provide no assurance regarding when, if ever, we will become profitable. As of February 28, 2010, there exists negative working capital of $123,065. For the year ended February 28, 2010, we had negative cash flows from operations of $691,221. Accordingly,a result, we may experience liquiditycontinue to generate losses for the foreseeable future and cash flow problems if we arein the extreme case, discontinue operations.
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We may not be able to collect on our stock subscription receivablessubscriptions receivable or raise capital through the sale of our common stock as needed or raise additional capital on acceptable terms.
We May Not Be Able To Collect On Our Stock Subscription Receivables As Needed To Fund Our Operationsto fund our operations.
As of February 28, 2010,For fiscal years 2018 and 2017, the Company had stock subscription receivablessold shares of $1,894,463 and for the year ended February 28, 2010, the Company received stock subscription payments of $337,500.
On February 25, 2010, due to the recent economic downturn and the market value of the Company’sits common stock which was trading below $2.50 per share, the Company amended the initial pricing termsgenerated cash of the subscription agreements received on October 5, 2007, for 1,300,000 shares. The amendment decreased the amount due per share from $2.50 to $0.75$1,662,732 and as a result, the Company’s subscription receivable decreased $2,275,000 from $4,169,463 to $1,894,463.$2,377,950, respectively.
We believe our current cash reserves, andthe amounts we expect to collect on our outstandingbooked software licensing revenue, and proceeds from the sale of our common stock subscription receivables should be sufficient to enable us to operate for the next 12 months. In the event that we are unable to collect amounts due to us or raise capital through the sale of our outstandingcommon stock subscription receivables as they become due and payable,needed, we would be forced to reduce operating expenses alter our business plan and operations and/or cease operations altogether.
No assurances can be given that we will be successful in reaching or maintaining profitable operations. Our current monthly cash operating expenses going forward are approximately $62,000$325,000 per month. We believe our current cash reserves, the amount received pursuant to this offering and amounts we expect to collect on our outstanding stock subscription receivables should be sufficient to enable us to operate for the next 12 months.
We May Needmay need to Raise Additional Capitalraise additional capital to Finance Operationsfinance operations.
Funding of our operations over the past 2 years has relied almost entirely on proceeds from the collectionssale of our common stock and the collection of outstanding subscription receivables.subscriptions receivable. We willcurrently do not have any bank debt. We may need to raise additional capital to fund our anticipated operating expenses and future development and design ofexecute our websites.business plan. We cannot assure yoube assured that financing whether from internal or external sources, will be available if needed or onat favorable terms. TheAny sale of our common stock to raise capital maywill cause dilution to our existing stockholders. Our inabilitystockholders, unless the existing holders participate in the capital raise. If we are unable to obtain adequate financing, we will result in the need to curtailreduce or cease business operations. Any of these events maywould be materially harmful to our business and may result in a lower stock price.
Our Common Stock May Be Affected By Limited Trading Volumecommon stock may be affected by limited trading volume and May Fluctuate Significantlymay fluctuate significantly.
There has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop or be sustainable.develop. As a result, this could adversely affect our stockholders'stockholders’ ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Our Common Stockcommon stock is Tradedtraded on the "Over-the-Counter Bulletin Board," Which May MakeOTC markets, which may make it More Difficult For Investorsmore difficult for investors to Resell Their Shares Dueresell their shares due to Suitability Requirementssuitability requirements.
Our common stock is currently traded on the OverOver-The-Counter market “OTC” and quoted on the Counter Bulletin Board (OTC-BB).OTC Markets. Broker-dealers often declineare challenged to trade in OTC-BBOTC stocks given that the market for such securities is often limited, the stocks are more volatile, and the risks to investors are greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline. ItThe Company is exploring the Company’s desire to have its common stock traded on a national exchange but there are no guarantees the Company’s stock will ever be traded on a national exchange.
We Could Fail to Retain or Attract Key Personnel
Our future success depends, in significant part, on the continued servicespossibility of Richard Pomije, our Chairman, CEO and Secretary/Treasurer. We cannot assure you that we would be able to find an adequate replacement for him or any other key personnel retained by the Company now or in the future. Any loss or interruption of our key personnel's services could adversely affect our ability to develop our business plan. We do not have an employment agreement with Mr. Pomije nor do we presently maintain a key-man life insurance policy on him.
We Could Fail to Renew our Domain Names on a Timely Basis
Our future success depends, in significant part, on our ability to continue to renew our domain names on a timely basis. In order to retain the rights to our domain names, they need to be renewed on an annual basis by paying the annual renewal feelisting within a specified time period. If the domain names are not renewed within the specified time period, they become availabledifferent level of OTC or transitioning to the general public andNASDAQ exchange in an effort to help increase the rights could be obtained by any outside third party if
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they pay the registration fee and annual renewal fee thereafter. Any loss of rights in our domain names could adversely affect our ability to develop our business plan. The Company does have controls and procedures in place to ensure that all domain names are renewed in a timely manner.
Minnesota Law and Our Charter May Inhibit a Takeover of Our Company That Stockholders May Consider Favorable
Provisions of Minnesota law, such as its business combination statute, may have the effect of delaying, deferring or preventing a change in control of our Company. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock.
Our Officers and Directors Have the Ability to Exercise Significant Influence Over Matters Submitted for Stockholder Approval and Their Interests May Differ From Other Stockholders
Our executive officers and directors, in the aggregate, have the ability to nominate two (2) members to the Board of Directors. Accordingly, our directors and executive officers, whether acting alone or together, may have significant influence in determining the outcome of any corporate transaction or other matter submitted to our Board for approval, including issuing common and preferred stock, and appointing officers, which could have a material impact on mergers, acquisitions, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of these board members may differ from the interests of the other stockholders.
Our Common Stock Price May be Volatile
The trading price of our common stock may fluctuate substantially. The priceliquidity of the Company’s common stock, at any given time, may be higher or lower than the price you pay for your shares, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following:
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Price and volume fluctuations in the overall stock market from time to time;
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Volatility resulting from trading in derivative securities related to our common stock including puts, calls, long-term equity anticipation securities, or leaps, or short trading positions;
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Actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;
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General economic conditions and trends;
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Loss of a major funding source; or
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Departures of key personnel
Our shares may be defined as "penny stock", the rules imposed on the sale of the shares may affect your ability to resell any shares you may purchase, if at all.
Shares of our common stock may be defined as a “penny stock” under the Securities and Exchange Act of 1934, and rules of the Commission. The Exchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to the sale. In addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons, and deliver certain disclosures required by the Commission. Consequently, the penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in this Offering in the public markets.
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Market For Penny Stock Has Suffered In Recent Years From Patterns Of Fraud And Abuse
Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
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Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
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Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
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Boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons;
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Excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and,
·
The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequential investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation, if any.
We have never paid cash dividends on our common stock and we do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover, investors may not be able to resell their shares of the Company at or above the price they paid for them.
Existing stockholders may experience significant dilution from the sale of our common stock pursuant to the Drawdown Agreement.
The sale of our common stock to Auctus Private Equity Fund LLC in accordance with the Drawdown Equity Facility Agreement may have a dilutive impact on our shareholders. As a result, our net income per share could decrease in future periods and the market price of our common stock could decline. In addition, the lower our stock price is at the time we exercise our put option, the more shares of our common stock we will have to issue to Auctus Private Equity Fund LLC in order to drawdown on the facility. If our stock price decreases, then our existing shareholders would experience greater dilution for any given dollar amount raised through the Offering.
The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.
Auctus Private Equity Fund LLC will pay less than the then-prevailing market price of our common stock which could cause the price of our common stock to decline.
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Our common stock to be issued under the Drawdown Equity Facility Agreement will be purchased at a six (6%) discount or 94% of the lowest closing VWAP during the five trading days immediately following our notice to Auctus Private Equity Fund LLC of our election to exercise our "put" right.
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Auctus Private Equity Fund LLC has a financial incentive to sell our shares immediately upon receiving the shares to realize the profit between the discounted price and the market price. If Auctus Private Equity Fund LLC sells our shares, the price of our common stock may decrease. If our stock price decreases, Auctus may have a further incentive to sell such shares. Accordingly, the discounted sales price in the Drawdown Agreement may cause the price of our common stock to decline.
Risk Factors Related to Our Securities, the Equity Line of Credit and This Offering
We are registering an aggregate of 3,000,000 shares of common stock to be issued under the Equity Line of Credit. The sale of such shares could depress the market price of our common stock.
We are registering an aggregate of 3,000,000 shares of common stock under the registration statement of which this Prospectus forms a part for issuance pursuant to the Equity Line of Credit. The sale of these shares into the public market by Auctus could depress the market price of our common stock.
We May Not Have Access to the Full Amount under the Equity Line.
During the period ended December 8, 2010, the closing price of our common stock was $3.90 based on very little volume. There is no assurance that the market price of our common stock will increase substantially in the near future. The entire commitment under the Equity Line of Credit is $10,000,000. The number of common shares that remains issuable is lower than the number of common shares we need to issue in order to have access to the full amount under the Equity Line of Credit. Therefore, we may not have access to the remaining commitment under the equity line unless the share price of our common stock remains at its current level.
There may not be sufficient trading volume in our common stock to permit us to generate adequate funds.
The Drawdown Equity Financing Agreement provides that the dollar value that we will be permitted to draw from Auctus will be the higher of: (A) 200% of the average daily volume in the US market of the common stock for the ten (10) trading days prior to the Drawdown Notice, or (B) $150,000. If the average daily trading volume in our common stock is too low, it is possible that we would only be permitted to draw down $150,000 at a time, which may not provide adequate funding for our planned operations.
Unless an active trading market develops for our securities, investors may not be able to sell their shares.
Although, we are a reporting company and our common shares are quoted on the OTC Bulletin Board (owned and operated by the Nasdaq Stock Market, Inc.) under the symbol “DGTW”, there is not currently an active trading market for our common stock and an active trading market may never develop or, if it does develop, may not be maintained. Failure to develop or maintain an active trading market will have a generally negative effect on the price of our common stock, and you may be unable to sell your common stock or any attempted sale of such common stock may have the effect of lowering the market price and therefore your investment could be a partial or complete loss.
Since our common stock is thinly traded it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the price paid.
Since our common stock is thinly traded, its trading price is more likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including (but not necessarily limited to):
· | the trading volume of our shares; |
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· | new products or services introduced or announced by us or our competitors; |
· | actual or anticipated variations in quarterly operating results; |
· | general conditions or trends in our business industries; |
· | announcements by us of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; |
· | additions or departures of key personnel; |
· | sales of our common stock; and |
· | general stock market price and volume fluctuations of publicly-traded, and particularly microcap, companies. | |
· | the number of securities analysts, market-makers and brokers following our common stock; |
Investors may have difficulty reselling shares of our common stock, either at or above the price they paid for our stock, or even at fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company. In addition, there is a history of securities class action litigation following periods of volatility in the market price of a company’s securities. Although there is no such litigation currently pending or threatened against the Company, such a suitactivity against us could result in the incursion of substantial legal fees, potential liabilities and the diversion of management’s attention and resources from our business. Moreover and as previously noted, below, our shares are currently tradedquoted on the OTC Bulletin BoardMarkets and further, are subject to the penny stock regulations. Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.
TradingWe could fail to retain or attract key personnel.
Robert Monster has been our Chief Executive Officer since May 18, 2015. Our future success depends, in significant part, on the continued services of Mr. Monster. We cannot be assured that we would be able to find appropriate replacements for Mr. Monster or any other key personnel. Any loss or interruption of our key personnel’s services could adversely affect our ability to execute our business plan. We do have an employment agreement with Mr. Monster through May 21, 2018, but we do not presently maintain an executive life insurance policy for him.
Minnesota law and our charter may inhibit a takeover of our company that stockholders may consider favorable.
Provisions of Minnesota law, such as its business combination statute, may have the effect of delaying, deferring or preventing a change in control of our Company. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock.
Our officers and directors have the ability to exercise significant influence over matters submitted for stockholder approval and their interests may differ from other stockholders.
Our current directors in the aggregate have the ability to appoint new members to the Board of Directors. Accordingly, our directors and executive officers, whether acting alone or together, may have significant influence in determining the outcome of any corporate transaction or other matter submitted to our Board for approval, including issuing common and preferred stock, and appointing officers. This influence could have a material impact on mergers, acquisitions, consolidations, the sale of all or substantially all of our assets and the power to prevent or cause a change in control. The interests of these board members may differ from the interests of the other stockholders.
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Our shares may be defined as penny stock, the rules imposed on the OTC Bulletin Boardsale of the shares may be limited thereby making it more difficult for investorsaffect your ability to resell any shares theyyou may own.purchase, if at all.
OurShares of our common stock is quoted onmay be defined as a penny stock under the OTC Bulletin Board (ownedSecurities and operated byExchange Act of 1934 (“Exchange Act”) and rules of the Nasdaq Stock Market, Inc.Securities and Exchange Commission (“SEC”). The OTC Bulletin BoardExchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000, individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must make a suitability determination for each purchaser and receive the purchaser’s written agreement prior to the sale. In addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons, and deliver certain disclosures required by the SEC. Consequently, the penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in the public markets.
Market for penny stock has suffered in recent years from patterns of fraud and abuse.
Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
· | Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; | |
· | Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; | |
· | Boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons; | |
· | Excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and, | |
· | The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices creating consequential investor losses. |
Our management team is aware of the abuses that have occurred historically in the penny stock market. Although we are not in a position to dictate the behavior of the market or of broker-dealers who participate in the market, we will strive within the confines of practical limitations to prevent the described abuses from being established with respect to our securities. The occurrence of these practices could increase the volatility of our share price.
Existing stockholders may experience significant dilution from the market sale or short sales of our common stock.
The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.
Currently, since there is relatively small use of digital currencies in the retail and commercial marketplace in comparison to relatively large use by speculators,futureprice volatility could adversely affect the use of such currencies on our platform, making our platform less attractive to users.
Digital currencies have only recently become accepted as a means of payment for goods and services by certain major retail and commercial outlets, and use of by consumers to pay such retail and commercial outlets remains limited. Conversely, a significant portion of digital currency demand is generated by speculators and investors seeking to profit from the short- or long-term holdings. We only provide a platform for transferring select currencies between consumers and retailers in exchange for goods or services; the platform is not an exchange and, because trading of securities on the OTC Bulletin Board is often more sporadic thanintended to enable the trading of securities listed ondigital currencies. If significant price volatility occurs with a national exchangecurrency we support for the benefit of our users, current or potential users may be less inclined to use our platform.
Risks Relating to our Registered Offering with Triton
Resales of shares purchased by Triton under the Equity Purchase Agreement may cause the market price of our common stock to decline.
Subject to the terms and conditions of the Equity Purchase Agreement, we have the right to “put,” or sell, up to $1,000,000 worth of shares of our common stock to Triton. Unless terminated earlier, Triton’s purchase commitment will automatically terminate on the Nasdaq National Market, investors mayearlier of the date on which Triton shall have difficulty reselling anypurchased shares pursuant to the Equity Purchase Agreement for an aggregate purchase price of $1,000,000 or December 31, 2018. This arrangement is also sometimes referred to herein as the “Registered Offering.” The common stock to be issued to Triton pursuant to the Equity Purchase Agreement will be purchased at a price equal to 75% of the “Market Price,” which is defined as the lowest traded price on the OTCQB, as reported by Bloomberg Finance L.P., during the five consecutive trading days including and immediately prior to the settlement date of the sale, which in most circumstances will be the trading day immediately following the date that a put notice is delivered to Triton (a “Put Date”). Triton will have the financial incentive to sell the shares of our common stock they own.
FORWARD LOOKING STATEMENTSissuable under the Equity Purchase Agreement in advance of or upon receiving such shares and to realize the profit equal to the difference between the discounted price and the current market price of the shares. This may cause the market price of our common stock to decline.
When used
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The foregoing description of the terms of the Equity Purchase Agreement does not purport to be complete and is subject to and qualified in its entirety by reference to the Equity Purchase Agreement itself.
Puts under Equity Purchase Agreement may cause dilution to existing stockholders.
From time to time during the term of the Equity Purchase Agreement, and at our sole discretion, we may present Triton with a put notice requiring Triton to purchase shares of our common stock. As a result, our existing stockholders will experience immediate dilution upon the purchase of any of the shares by Triton. Triton may resell some, if not all, of the shares that we issue to it under the Equity Purchase Agreement and such sales could cause the market price of our common stock to decline significantly. To the extent of any such decline, any subsequent puts would require us to issue and sell a greater number of shares to Triton in exchange for each dollar of the put amount. Under these circumstances, the existing stockholders of our company will experience greater dilution. The effect of this Prospectus,dilution may, in turn, cause the price of our common stock to decrease further, both because of the downward pressure on the stock price that would be caused by a large number of sales of our shares into the public market by Triton, and because our existing stockholders may disagree with a decision to sell shares to Triton at a time when our stock price is low, and may in response decide to sell additional shares, further decreasing our stock price. If we draw down amounts under the Registered Offering when our share price is decreasing, we will need to issue more shares to raise the same amount of funding.
There is no guarantee that we will satisfy the conditions to the Equity Purchase Agreement.
Although the Equity Purchase Agreement provides that we can require Triton to purchase, at our discretion, up to $1,000,000 worth of shares of our common stock in the aggregate, our ability to put shares to Triton and obtain funds when requested is limited by the terms and conditions of the Equity Purchase Agreement, including restrictions on when we may exercise our put rights, restrictions on the amount we may put to Triton at any one time, which is determined in part by the trading volume of our common stock, and a limitation on our ability to put shares to Triton to the extent that it would cause Triton to beneficially own more than 4.99% of the outstanding shares of our common stock.
We may not have access to the full amount available under the Equity Purchase Agreement with Triton.
Our ability to draw down funds and sell shares under the Equity Purchase Agreement requires that a registration statement be declared effective and continue to be effective registering the resale of shares issuable under the Equity Purchase Agreement. The registration statement of which this prospectus is a part registers the resale of 20,000,000 shares of our common stock issuable under the Registered Offering. This registration statement (and any post-effective amendments thereto) may be subject to review and comment by the staff of the Securities and Exchange Commission, and will require the consent of our independent registered public accounting firm. Therefore, the timing of effectiveness of the registration statement (and any post-effective amendments thereto) cannot be assured. Even if we are successful in causing the registration statement registering the resale of some or all of the shares issuable under the Equity Purchase Agreement to be declared effective by the Securities and Exchange Commission in a timely manner, we may not be able to sell the shares unless certain other conditions are met. Accordingly, because our ability to draw down any amounts under the Equity Purchase Agreement with Triton is subject to a number of conditions, there is no guarantee that we will be able to draw down all of the proceeds of $1,000,000 under the Equity Purchase Agreement.
Triton can refuse to purchase shares under the Equity Purchase Agreement if the total shares owned by Triton after the purchase would exceed 4.99% of our issued shares. Based on our recent share price, it is likely that the purchase of $1,000,000 of our stock would cause Triton to exceed 4.99%.
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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
This prospectus may contain certain “forward-looking” statements as such term is defined by the Securities and Exchange Commission in its rules, regulations and releases, which represent the registrant’s expectations or beliefs, including but not limited to, statements concerning the registrant’s operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words or phrases “will likely result,” “we expect,such as “may,” “will, continue,” “expect,” “believe,” “anticipate,” “estimate,” “project,” “outlook,“intent,” “could,” “would,“estimate,” “may,“might,” “plan,” “predict” or similar expressions“continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. We wishThese statements by their nature involve substantial risks and uncertainties, certain of which are beyond the registrant’s control, and actual results may differ materially depending on a variety of important factors, including uncertainty related to cautionacquisitions, governmental regulation, managing and maintaining growth, the operations of the company and its subsidiaries, volatility of stock price, commercial viability of OTEC systems and any other factors discussed in this and other registrant filings with the Securities and Exchange Commission.
These risks and uncertainties and other factors include, but are not limited to those set forth under “Risk Factors” of this prospectus. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any suchour forward-looking statements. All subsequent written and oral forward-looking statements eachattributable to us or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as otherwise required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this prospectus or in the documents we incorporate by reference, whether as a result of which speaks only as ofnew information, future events, changed circumstances or any other reason after the date made. Suchof this prospectus.
This prospectus contains forward-looking statements, are subject to certainincluding statements regarding, among other things:
· | our ability to continue as a going concern; | ||
· | our anticipated needs for working capital; | ||
· | our ability to secure financing; and | ||
· | actual capital costs, operating costs, production and economic returns may differ significantly from those that we have anticipated. |
Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in prospectus generally. In light of these risks and uncertainties, there can be no assurance that could cause actual resultsthe forward-looking statements contained in this prospectus will in fact occur. We caution you not to differ materially from historical earnings and those presently anticipated or projected. Suchplace undue reliance on these forward-looking statements. In addition to the information expressly required to be included in this prospectus, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
These risks and uncertainties and other factors include, among others, successbut are not limited to, those set forth under “Risk Factors.” All subsequent written and oral forward-looking statements attributable to the company or to persons acting on our behalf are expressly qualified in reaching target markets for products intheir entirety by these cautionary statements. Except as required by federal securities laws, we do not intend to update or revise any forward-looking statements, whether as a highly competitive market and the ability to attractresult of new information, future customers, the size and timing of additional significant orders and their fulfillment, the success of our business emphasis, the ability to finance and sustain operations, the ability to raise equity capital in the future, and the size and timing of additional significant orders and their fulfillment.events or otherwise.
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We will not receive any of the proceeds from the sale of the common stock by the selling security holder.stockholders. However, we will receive proceeds from the Company anticipates receivingsale of shares of our common stock pursuant to Triton under the Equity Purchase Agreement. We will use these proceeds for general corporate and working capital purposes, or for other purposes that our Board of Directors, in its good faith, deems to be in the best interest of our Company. We have agreed to bear the expenses relating to the registration of the offer and resale by the selling stockholders of the shares being offered hereby.
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The selling stockholders may offer and resale of up to $8,385,000 gross proceeds assuming a $2.79520,000,000 shares of our common stock, par value $0.01 per share, pursuant to this prospectus. All of such shares represent shares that Triton has agreed to purchase pricefrom us pursuant to the equity facilityterms and conditions of an Equity Purchase Agreement we entered into with Auctus. The ultimate amountthem on April 23, 2018 (the “Equity Purchase Agreement”), which are described below.
Equity Purchase Agreement and Registration Rights Agreement with Triton Funds LLC
Subject to the Company can receive is dependentterms and conditions of the Equity Purchase Agreement, we have the right to “put,” or sell, up to $1,000,000 worth of shares of our common stock to Triton. Unless terminated earlier, Triton’s purchase commitment will automatically terminate on the earlier of the date on which Triton shall have purchased shares pursuant to the Equity Purchase Agreement for an aggregate purchase price of $1,000,000 or December 31, 2018. We have no obligation to sell any shares under the Equity Purchase Agreement. This arrangement is also sometimes referred to herein as the “Registered Offering.”
As provided in the Equity Purchase Agreement, we may require Triton to purchase shares of common stock from time to time by delivering a put notice to Triton specifying the total number of shares to be purchased (such number of shares multiplied by the purchase price described below, the “Investment Amount”); provided there must be a minimum of ten trading days between delivery of each put notice. We may determine the Investment Amount, provided that such amount may not be more than 75% of the average daily trading volume in dollar amount for our common stock during the 5 trading days preceding the date on which we deliver the applicable put notice. Triton will have no obligation to purchase shares under the Registered Offering to the extent that such purchase would cause Triton to own more than 4.99% of our common stock.
For each share of the our common stock purchased under the Registered Offering, Triton will pay a purchase price equal to 75% of the “Market Price,” which is defined as volume weighted average price of the Company’s common stock the five trading days prior to the closing date. The closing date is six days after the shares have been delivered to Triton On the settlement date, Triton will purchase the applicable number of shares subject to customary closing conditions, including without limitation a requirement that a registration statement remain effective registering the resale by Triton of the shares to be issued under the Registered Offering as contemplated by the Registration Rights Agreement described below. The Equity Purchase Agreement is not transferable and couldany benefits attached thereto may not be less than $8,385,000. Ifassigned.
The Equity Purchase Agreement contains covenants, representations and warranties of us and Triton that are typical for transactions of this type. In addition, we and Triton have granted each other customary indemnification rights in connection with the Equity Purchase Agreement. The Equity Purchase Agreement may be terminated by us at any time.
In connection with the Equity Purchase Agreement, we also entered into a Registration Rights Agreement with Triton requiring us to prepare and file a registration statement registering the resale by Triton of shares to be issued under the Registered Offering, to use commercially reasonable efforts to cause such registration statement to become effective, and to keep such registration statement effective until (i) the date as of which the Investor may sell all of the Registrable Securities without restriction pursuant to Rule 144 promulgated under the Securities and (ii) the date on which the Investor shall have sold all the Registrable Securities covered thereby and no Available Amount remains under the Purchase Agreement. In accordance with the Registration Rights Agreement, on June 4, 2018, we filed the registration statement of which this prospectus is a part registering the resale by Triton of up to 20,000,000 shares that may be issued and sold to Triton under the Registered Offering. This registration statement was declared effective by the SEC on ___________, 2018.
The 20,000,000 shares being offered pursuant to this prospectus by Triton will represent approximately 13.64% of our shares of common stock issued and outstanding held by non-affiliates of our Company as of the date of this prospectus assuming the offering is fully subscribed.
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The foregoing description of the terms of the Equity Purchase Agreement and Registration Rights Agreement does not purport to be complete and is subject to and qualified in its entirety by reference to the agreements and instruments themselves, copies of which are filed as Exhibits 10.1 and 10.2 to our registration statement, and incorporated into this prospectus by reference. The benefits and representations and warranties set forth in such agreements and instruments are not intended to and do not constitute continuing representations and warranties of the Company receives $8,385,000, we expector any other party to disbursepersons not a party thereto.
We intend to sell to Triton periodically our common stock under the proceeds from this OfferingEquity Purchase Agreement and Triton may, in turn, sell such shares to investors in the priority set forth below within the first 12 months after successful completion of this Offering:
DGTW intends to use the proceeds from this Offering as follows:
Offering Proceeds |
| $ | 8,385,000 |
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Working Capital |
| $ | 3,385,000 |
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Website Development |
| $ | 5,000,000 |
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Total Estimated Use of Proceeds |
| $ | 8,385,000 |
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DETERMINATION OF OFFERING PRICE
The Selling Stockholder may sell its shares in the over-the-counter market or otherwise, at market prices prevailing at the time of sale, at prices related to the prevailing market price or at negotiated prices. WeThis may cause our stock price to decline, which will not receive any proceedsrequire us to issue increasing numbers of common shares to Triton to raise the intended amount of funds, as our stock price declines.
Likelihood of Accessing the Full Amount of the Registered Offering
Notwithstanding that the Registered Offering is in an amount of $1,000,000, we anticipate that the actual likelihood that we will be able access the full amount of the Registered Offering is low due to several factors, including that our ability to access the Registered Offering is impacted by our average daily trading price, which may limit the maximum dollar amount of each put we deliver to Triton. Our use of the Registered Offering will continue to be limited and restricted if our market price of our stock continue at its current levels or decrease further in the future from the salevolume and stock prices reported over the past year. Our ability to issue shares in excess of the 20,000,000 shares covered by the Selling Stockholder.
DILUTIONregistration statement of which this prospectus is a part may be subject to our filing a subsequent registration statement with the SEC and the SEC declaring it effective.
“Dilution” representsAccordingly, because our ability to deliver puts to Triton under the difference between the Offering priceEquity Purchase Agreement is subject to a number of conditions, there is no guarantee that we will receive all or any portion of the $1,000,000 that is available to us under the Registered Offering.
This prospectus covers the resale by the selling stockholders of 20,000,000 shares of our common stock which may be issued by us to Triton under the Equity Purchase Agreement. Triton is an “underwriter” within the meaning of the Securities Act in connection with its resale of our common stock pursuant to this prospectus. The selling stockholder has not had any position or office, or other material relationship with us or any of our affiliates over the past three years. The following table sets forth certain information regarding the beneficial ownership of shares of common stock andby the net book value per shareselling stockholders as of common stock immediately after completion of the Offering. “Net Book Value” is the amount that results from subtracting total liabilities from total assets. Please refer to the following table presentingMay 8, 2018 and the number of shares issued and the corresponding price per share paid before this Offering for more information. Following is a table detailing dilution as of August 31, 2010, to investors if 100%, 75%, 50%, or 10% of the Offering is sold.
SELLING STOCKHOLDER
Drawdown Equity Financing Agreement.
On December 5, 2010, we entered into a drawdown equity financing agreement and registration rights agreement (collectively the “Agreements”) with Auctus Private Equity Fund, LLC (“Auctus”, the “Selling Stockholder”). In accordance with the Agreements, Auctus has committed, subject to certain conditions, to purchase up to ten million dollars ($10,000,000) of the Company’s common stock over a term of up to three (3) years. Although the Company is not mandated to sell shares under the Agreements, the Agreements give the Company the option to sell to Auctus shares of common stock at a per share purchase price of equal to 94% of the lowest closing VWAP during the five
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trading days following the Company’s delivery of notice to Auctus (the “Notice”). At its option, the Company may set a floor price under which Auctus may not sell the shares which were the subject of the Notice. The floor shall be 75% of the average closing bid price of the stock over the preceding ten (10) trading days prior to the Notice and can be waived at the discretion of the Company.
Auctus is not required to purchase the shares, unless the shares which are subject to the Notice have been registered for resale and are freely tradable in accordance with the federal securities laws, including the Securities Act of 1933, as amended. The Company is obligated to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1, of which this Prospectus forms a part, within 30 days from the date of the Agreements and to use all commercially reasonable efforts to have such registration statement declared effective by the SEC within 120 days of filing. The Company has agreed to pay Auctus an aggregate amount of $15,000 as an origination fee with respect to the transaction, an amount that has already been paid.
During the five trading days following a drawdown request, we will calculate the amount of shares we will sell to Auctus and the purchase price per share. The purchase price per share of common stock will be based on the daily volume weighted average price of our common stock during each of the five trading days immediately following the drawdown date, less a discount of 6%. Auctus’ obligations under the equity line agreement are not transferrable.being offered pursuant to this prospectus
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| Shares beneficially |
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| Number of shares to be beneficially owned and percentage of beneficial ownership after the offering (1)(2) |
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Name of selling stockholder |
| owned as of the date of this prospectus (1) |
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| Number of shares being offered |
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| Number of shares |
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| Percentage of class (3) |
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Triton Funds LLC |
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| 0 |
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| 20,000,000 |
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| 20,000,000 |
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| 13.64 | % |
There is no minimum amount we can draw down at any one time, or a limitation on the number of drawdowns we may make, subject to the limitations of shares registered in this offering. The maximum amount we can draw down at any one time is the larger of:Triton Funds was founded by Yash Thukral, Sam Yaffa and Nathan Yee.
___________
(1) | Beneficial ownership is determined in accordance with Securities and Exchange Commission rules and generally includes voting or investment power with respect to shares of common stock. Shares of common stock subject to options and warrants currently exercisable, or exercisable within 60 days, are counted as outstanding for computing the percentage of the person holding such options or warrants but are not counted as outstanding for computing the percentage of any other person. | |
(2) | The amount and percentage of shares of our common stock that will be beneficially owned by the selling stockholder after completion of the offering assume that they will sell all shares of our common stock being offered pursuant to this prospectus. | |
|
|
|
9 | ||
| ||
|
Al Sollami is the natural person and Principal of Auctus Private Equity Fund, LLC who exercises the sole voting and dispositive powers with respect to the shares to be offered by the Company. Al Sollami has had no other material relationship with the Company and has owned no securities of the Company prior to the Offering.
Please note that the parties have agreed to $10,000,000 as the amount of the equity line. Although the parties believe it is unlikely that the full amount of the proceeds available under equity line will be used at the current stock price, the parties believe that with the proper use of the funds, the price of the stock will increase and we will be able to use the whole equity line.
PLAN OF DISTRIBUTION
The Selling Stockholder and any of its pledgees, donees, assignees and other successors-in-interestselling stockholders may, from time to time, (“Selling Stockholders”) sell any or all of their shares of our common stock covered hereby on the OTCQB Marketplace operated by the OTC Markets Group, Inc., or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These salesThe selling stockholders may besell all or a portion of the shares being offered pursuant to this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices. The Selling Stockholdersselling stockholders may use any one or more of the following methods when selling shares:securities:
· | ordinary brokerage transactions and transactions in which the broker-dealer solicits |
· | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as |
| principal to facilitate the transaction; |
· | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
· | an exchange distribution in accordance with the rules of the applicable exchange; | |
· |
|
· | in transactions through broker-dealers | |
· | through the writing or settlement of options | |
· | a combination of any such methods of sale; | |
· | any other method permitted pursuant to applicable law. |
The Selling Stockholdersselling stockholders may also sell sharessecurities under Rule 144 ofunder the Securities Act, of 1933, as amended (the “Securities Act”), if available, rather than under this Prospectus. The Selling Stockholders shall haveprospectus.
Broker-dealers engaged by the soleselling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, provided such amounts are in compliance with FINRA Rule 2121. Discounts, concessions, commissions and absolute discretion notsimilar selling expenses, if any, that can be attributed to accept any purchase offer or make anythe sale of shares if it deems the purchase price tocommon stock will be unsatisfactory at any particular time.
The Selling Stockholders or their pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions frompaid by the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasingpurchasers.
Triton Funds LLC is an underwriter within the shares will do so for their own account and at their own risk. It is possible that a Selling Stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then existing market price. We cannot assure that all or anymeaning of the shares offered in this Prospectus will be issued to, or sold by, the Selling Stockholders. The Selling StockholdersSecurities Act and any brokers, dealersbroker-dealers or agents upon effectingthat are involved in selling the sale of any of the shares offered in this Prospectus, may be deemed to be “underwriters” as that term is defined underwithin the meaning of the Securities Act the Securities Exchange Act of 1934, as amended, and the rules and regulations ofin connection with such acts.sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident Because Triton is an underwriter within the meaning of the Securities Act, it will be subject to the registrationprospectus delivery requirements of the shares, including feesSecurities Act.
Under applicable rules and disbursements of counsel to the Selling Stockholder, but excluding brokerage commissions or underwriter discounts.
The Selling Stockholders, alternatively, may sell all or any part of the shares offered in this Prospectus through an underwriter. The Selling Stockholders have not entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.
The Selling Stockholder may pledge the shares to brokersregulations under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The Selling Stockholders andExchange Act, any other persons participatingperson engaged in the sale or distribution of the sharesresale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations under such act,thereunder, including without limitation, Regulation M. These provisionsM, which may restrict certain activities of, and limit the timing of purchases and sales of anysecurities of the sharescommon stock by the Selling Stockholdersselling stockholders or any other such person. InWe will make copies of this prospectus available to the event that anyselling security holders and have informed them of the Selling Stockholders are deemed an affiliatedneed to deliver a copy of this prospectus to each purchaser at or distribution participant withinprior to the meaningtime of Regulation M, then the Selling Stockholders willsale.
Although Triton has agreed not to enter into any “short sales” of our common stock, sales after delivery of a put notice of a number of shares reasonably expected to be purchased under a put notice shall not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged indeemed a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities“short sale.” Accordingly, Triton may enter into arrangements it deems appropriate with respect to such securities for a specified periodsales of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In addition, if a short sale is deemed to be a stabilizing activity, then the selling stockholders will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares.
Auctus Private Equity Fund, LLC, the underwriter herein, may offer for sale up to an estimated 3,000,000 shares of our common stock whichafter it will have originally acquired pursuant toreceives a put notice under the terms of the equity line of credit agreementEquity Purchase Agreement so long as more fully described under "Selling Stockholder.” Auctus will be offering such shares for their own account. Wesales or arrangements do not know for certain how or when Auctus will chooseinvolve more than the number of put shares reasonably expected to sell itsbe purchased by Triton under such put notice.
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Capital Stock
Pursuant to our articles of incorporation, as amended to date, our authorized capital stock consists of 2,000,000,000 shares, consisting of 2,000,000,000 shares of common stock. However, it can sell such shares at any time or through any manner set forth in this plan of distribution at such time as we have “put” the shares to them. We may request Auctus to purchase shares by delivering a Drawdown Notice to Auctus.stock, par value $0.01 per share. We have acknowledged that Auctus may sellno shares corresponding with a particular Drawdown Notice after the Drawdown
11
Notice is received by Auctus which allows them to short sell the shares. There shall be a minimum of five (5) Trading Days between each Drawdown Notice Date.
To permit Auctus to resell thepreferred stock authorized. As of July 15, 2018, there were 126,602,321 shares of common stock issued and outstanding. Our common stock is quoted on the OTCQB Marketplace operated by the OTC Markets Group, Inc., under the trading symbol “DGTW.”
Common Stock
Holders of shares of common stock are entitled to it, we agreedone vote for each share on all matters to filebe voted on by the shareholders. Holders of common stock have no cumulative voting rights.
The Company does not currently anticipate paying any dividends on its common stock. In the event of a liquidation, dissolution or winding up of DigitalTown, the holders of shares of common stock are entitled to share pro-rata in all assets remaining after payment in full of all liabilities, subject however, to any rights of the shareholders of preferred shares issued and outstanding at the time of such liquidation, dissolution or winding up of the Company. Holders of common stock have no preemptive rights to purchase our common stock. There are no conversion rights or redemption or sinking fund provisions with respect to the common stock.
The following description summarizes the material terms of our capital stock. This summary is, however, subject to the provisions of our articles of incorporation and bylaws. For greater detail about our capital stock, please refer to our articles of incorporation and bylaws.
The transfer agent and registrar for our common stock is CleartTrust, LLC, 1654 Pointe Village Drive, Suite 205, Lutz, FL 33558. Telephone 813-235-4490.
Preferred Stock
Our Articles of Incorporation do not authorize the issuance of shares of Preferred Stock.
Anti-Takeover Provisions
Some features of Minnesota law may have the effect of delaying, deferring or preventing a change in control of our Company. This could decrease the chance that our stockholders would realize a premium over market price for their shares of common stock as a result of a takeover bid.
Parsons/Burnett/Bjordahl/Hume, LLP has assisted us in the preparation of this Prospectus and registration statement and will provide counsel with respect to other legal matters concerning the registration and Offering of the common stock. Parsons/Burnett/Bjordahl/Hume, LLP has consented to being named as an expert in our registration statement, of which this Prospectus forms a part. The consent has been filed as an exhibit to the registration statement.
M&K CPAs, PLLC, our independent registered public accounting firm, have audited our financial statements included in this Prospectus and registration statement to the extent and for the periods set forth in their audit reports. M&K CPAs, PLLC has presented its report with respect to our audited financial statements. The report of M&K CPAs, PLLC is included in reliance upon their authority as experts in accounting and auditing. Their consent to being named as Experts is filed as Exhibit 23.1 to the Registration Statement of which this Prospectus is a part.
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Parsons/Burnett/Bjordahl/Hume, LLP has provided us with an opinion on the validity of the shares of our common stock being offered pursuant to this prospectus. James B. Parsons, a partner of Parsons/Burnett/Bjordahl/Hume, LLP, is a shareholder. Mr. Parsons resigned from the Board effective June 26, 2018.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this Prospectus as having prepared or certified any part of this Prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the Offering, a substantial interest, direct or indirect, in our company or any of its parents or subsidiaries. Nor was any such person connected with our company or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
GENERAL
DigitalTown, Inc. (“The Company”, “We”, “Us”, “Our” and “DigitalTown”) provides turn-key hosted solutions to power a comprehensive platform for government entities, citizens and merchants. Our solutions improve the quality of life for residents and visitors through integrated technology for economic development, civic engagement, digital inclusion and smart tourism for cities around the world. The easy to use platform helps city officials and local merchants manage a feature-rich Smart City for web and mobile devices, and provides residents and visitors with access to Content, Community and Commerce.
The Company’s fiscal year end is the last day in February. Our current fiscal year ends on February 28, 2019 and we refer to it as “fiscal 2019”. Last year, our fiscal year ended on February 28, 2018 and we refer to this year as “fiscal 2018”.
Market Opportunity
We provide an integrated search, community, and commerce platform for both web and mobile devices. DigitalTown powers connected online communities that enable members of a community to find information and acquire the goods and services they need locally when possible. The DigitalTown platform is intended to improve how the local economy consumes and transacts. It does this by helping local community citizens interact with city government, as well as local merchants. Residents and visitors are able to use the DigitalTown powered search engine to access content, community and commerce from an easy search tool. If there are local vendors that can fulfill a product or service that relates to a search term, then those options are presented to the user. Local vendors can also become direct merchants on the platform, effectively allowing the local town to be its own hub for mass commerce.
The Strategic Importance of Local Online Economic Development
The DigitalTown platform elevates local communities to an advanced state of technical capability. To date, most cities have historically taken a hands-off approach towards the Internet. However, we believe city management will further consider the Internet as an integral part of their strategic plan for economic growth.
The continued expansion of big box retailers and steep growth of national eCommerce has created an increased number of challenges for locally owned small businesses. This requires a new approach to online economic development – one that equips local merchants with the means to compete locally and sell nationally. DigitalTown provides a cost-effective solution to help local businesses compete against entities with greater reach, scale and resources.
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Why the DigitalTown solution makes sense now
The DigitalTown platform is a cost-effective solution for enabling a community to become a smart community, which we define as connected to shared content and local commerce. A key enabler for this capability is the continued growth of smartphones that are powered by common frameworks, such as Apple iOS and Android. The use of smartphones has enabled individuals to communicate and transact in real-time anywhere they choose using their smartphone, which serves as a proxy for identity, reputation, preferences and method of payment. In effect, the smartphone has become the Digital Wallet. We believe this opportunity is global and our approach, which emphasizes public-private partnerships, will enable accelerated adoption particularly in rural communities where trust of technology is lower, the need is potentially the greatest, and economic models are at the greatest risk.
How the DigitalTown SmartCity Platform is part of the new SmartWeb
A core component of the DigitalTown approach is to build branded web destinations that are intuitive to discover. Part of what makes this possible is the emergence of new domain extensions that are descriptive. For example, .CITY routes a visitor to a website about a city and .MENU routes a user to a website about restaurants in that city. Due to management’s long-standing relation with domain registry operators, the Company will seek to bring structure to the emerging landscape of domain extensions, while at the same time emphasizing distribution of a unified mobile application to work as a digital companion alongside the growing network of direct navigation brands.
The DigitalTown Platform
The DigitalTown platform supports powerful online and mobile communities. We tap into locally relevant news and content in order to keep community members informed. We provide community tools to keep community members connected. We enable commerce and fulfillment in local communities thereby helping residents to buy locally while equipping merchants to sell locally, nationally and even globally.
Content Search
The DigitalTown search engine serves as the core of the local experience. Whereas most residents may go once or twice per year to the official city site, the DigitalTown-powered search engine is designed for daily use as a preferred homepage for local residents and businesses. This will be accomplished through a combination of marketing and education to residents. In addition, we believe adoption can happen through building a strong level of trust with the residents since our platform will be endorsed or supported by the local government whom the residents know. This compares to large national companies with limited to no connection to the local residents.
Community
Consumers are already familiar with social networking through applications like Facebook and Twitter. The integrated DigitalTown web service and mobile app make it easy to stay informed, as well as to connect and communicate with other members of a given community. Community members can message, join groups, shop online, and make payments.
Commerce
The DigitalTown platform provides merchants with a turn-key solution for online commerce. Once the approved merchant loads SKU’s and inventory available for sale, the merchants can begin selling without any setup fees or capital investment costs. Transaction processing services are provided by DigitalTown, thereby eliminating the need for each retailer to secure a merchant processing account. The community may also enable a private currency for use within the community.
Courier and Delivery Management
In a growing number of participating cities, an integrated courier and delivery application is included, enabling approved delivery service providers to be notified about items from merchants to be picked up and delivered to the customer, thereby enabling any approved merchant to also offer delivery services to the end-customer. Delivery time is chosen by the customer and can be hours to days.
Administration
The DigitalTown platform provides integrated administrative tools for managing Content, Community and Commerce, making it easy to administer. The administrative tools are designed to be the back end of the smart community. For example, administrators can create Frequently Asked Questions (FAQ) that are then presented through the site search. This FAQ article is then systematically provided as information when a user makes an inquiry that matches the keywords into the search box on the site.
SmartWallet
DigitalTown provides every user that signs up on a DigitalTown site or application with a free SmartWallet. It contains the account used for Single Sign On, and combines this verified identity with a public facing profile, location, personal preferences, links to social media accounts and the ability to pay a person or business instantly. The SmartWallet is the link between an individual, their data, and their crypto assets within the DigitalTown network.
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Intellectual Property
Domain Name Portfolio. The Company is developing a proprietary platform for Smart City Management. As part of this platform rollout, the Company has secured approximately 13,000 of the .CITY domains that map to significant population centers. DigitalTown has methodically secured the .CITY domains through both acquisition from existing registrants, or via direct purchase from the operator of the .CITY registrar.
Software: The Company has developed a proprietary platform for enabling any city to become a Smart City, incorporating advanced features for economic development, community engagement and digital inclusion. In addition, the Company has completed acquisitions of 4 software companies: Cloud.Market, Software Masters, Inc, Rezserve Technologies Ltd, and Appointment.com, each of which brought significant intellectual property and is in process of being fully integrated into the DigitalTown platform. The Company continues to invest in software with an emphasis on capital efficiency and return on investment.
EMPLOYEES
As of May 31, 2018, DigitalTown, Inc. has 16 employees. In addition, from time to time we use independent contractors, consultants and advisors to execute our business plan. The Company’s employees are not represented by a union.
From time to time, we may be a party to various claims, suits and complaints in the normal course of business. In the opinion of management, the resolutions of these matters are not expected to have a material adverse effect on the Company’s business, financial position or results of operations.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
DigitalTown, Inc.’s common stock is traded on the OTC Markets under the ticker symbol DGTW. The following table sets forth the quarterly high and low sales prices as reported during the last two fiscal years ended February 28, 2018 and February 28, 2017.
Fiscal Year 2018 |
| Low |
|
| High |
| ||
First Quarter |
| $ | 0.38 |
|
| $ | 0.49 |
|
Second Quarter |
|
| 0.23 |
|
|
| 0.48 |
|
Third Quarter |
|
| 0.19 |
|
|
| 0.40 |
|
Fourth Quarter |
|
| 0.19 |
|
|
| 0.36 |
|
Fiscal Year 2017 |
| Low |
|
| High |
| ||
First Quarter |
| $ | 0.08 |
|
| $ | 0.56 |
|
Second Quarter |
|
| 0.20 |
|
|
| 0.51 |
|
Third Quarter |
|
| 0.21 |
|
|
| 0.52 |
|
Fourth Quarter |
|
| 0.21 |
|
|
| 0.49 |
|
These quotations represent inter dealer prices, without retail markup, markdown, or commission, and may not reflect actual transactions. As of July 15, 2018, there were approximately 334 record holders of the Company's common stock.
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DIVIDEND POLICY
The Company has never paid cash dividends on any of its securities. The Company currently intends to retain any earnings for use in its operations and does not anticipate paying cash dividends in the foreseeable future. Any future dividend policy will be determined by the Company’s Board of Directors based upon the Company’s earnings, if any, its capital needs and other relevant factors.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in our accountants during the last two fiscal years, and we have not had any material disagreements with our existing accountants during that time.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning each of the directors and executive officers of DigitalTown, Inc.
Name | Position | |||
Robert Monster | Chief Executive Officer and Director | |||
Kenwei Chong | Director | |||
Derek R. Schumann | Director | |||
David Carter | Chief Financial Officer | |||
Jeffrey L. Mills | Director | |||
Darvin Habben | Director | |||
Greg Foss (1) | Director | |||
Michael Cartwright (2) | Chief Technology Officer | |||
Lawrence Lerner (3) | Director | |||
George Nagy (4) | Director |
___________
(1) Mr. Foss was appointed as a Director on November 15, 2017, and resigned September 6, 2018.
(2) Mr. Cartwright was appointed as a Director on October 3, 2017, and resigned August 20, 2018.
(3) Mr. Lerner was appointed as a Director on May 15, 2018.
(4) Mr. Nagy was appointed as a Director on June 19, 2018.
KENWEI CHONG. Mr. Chong was elected as a director in December 2016. Mr. Chong’s early career was in foreign exchange and global fixed income analysis and funds management for various firms in New York City and San Francisco; and later as product development manager for foreign exchange and fixed income risk management at Bloomberg. In 2001 Mr. Chong left the capital markets profession to pursue entrepreneurial interests and has been an active owner and investor in self-storage, physical and electronic records management and storage, restaurant and hospitality, food manufacturing and wholesale distribution, physical and virtual real estate investment and top level domain ventures. Mr. Chong received his BA in Finance from Boston University and his Chartered Financial Analyst designation from the Association of Investment Management and Research.
DARVIN R. HABBEN. Mr. Habben has been a director since May 11, 2015 and Chairman since June 1, 2015. Mr. Habben is currently the Founder, Chairman and Chief Executive Officer of Crossroads Trailer Sales and Service, Inc., a trucking company based in Albert Lea, MN. Mr. Habben is also owner and CEO of Agilis, a national donations processing and fulfillment company serving non-profit companies.
JEFFREY L. MILLS. Mr. Mills has served as a director since 2003. Mr. Mills worked for Xerox Corporation for 27 years in various management and operational roles and is currently consulting in the digital marketplace. Additionally, Mr. Mills has held a variety of leadership roles across various private equity companies, including President and Director level positions. He also currently serves as a director for one private company. Mr. Mills is a graduate of the University of Northern Iowa.
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ROBERT W. MONSTER. On May 11, 2015, Mr. Monster was appointed to the Board and appointed as CEO effective May 18, 2015. Mr. Monster is Founder, Chairman and CEO of Epik LLC and Managing Director of Monster Venture Partners LLC. Mr. Monster was the Founder of GMI (Global Market Insite, Inc.). Prior to founding GMI, Mr. Monster was a global product development manager with Procter & Gamble. Mr. Monster has both a BS and an MBA from Cornell University.
DEREK R. SCHUMANN. Mr. Schumann was appointed to the Board in December 2016 and is currently the Managing Partner of Go Toys Inc., Morris Trust and Kaplunk Development Group. All are investment holding companies focused primarily on investments in companies which create value through practical applications of disruptive new technology. Mr. Schumann is a resident of Vancouver, B.C. He received his B.A in Economics and Political Science from Bishop’s University.
MICHAEL CARTWRIGHT was appointed CTO and a member of the Board of Directors on October 3, 2017. Mr. Cartwright resigned as a director on August 20, 2018. Mr. Cartwright has over 20 years of IT experience with organizations of all sizes and across a range of industries including travel, consultancy and manufacturing. Prior to joining Digital Town, Mr. Cartwright was a co-founder and CEO of Comencia Inc., a Private Label Travel Platform, a Technology Vice President at Expedia, CTO of Pirean, a UK based identity and access management company, and a Technology Director at Nestle, Switzerland. Mr. Cartwright holds a BSc(Hons) in Computer Science from the University of Teeside.
LAWRENCE LERNER was appointed to the board on May 16, 2018. Mr. Lerner is the Managing Member of Catena Fund One, LP, which recently entered into an agreement for the purchase of common stock in Digitaltown. Mr. Lerner has worked in the cryptocurrency space since the late 1990’s. Today, he is the CEO of Pithia, a blockchain corporation with $170M in assets. Additionally, Mr. Lerner is associated with LERNER Consulting & LLBC, LLC (Lawrence Lerner Business Consulting), Ameritas Technologies and Genpact.
GEORGE NAGY was appointed to the board on June 19, 2018. Mr. Nagy is a principal of Terminus Group, LLC., which provides consulting services in the areas of mergers and acquisitions, business development, debt restructuring and operations. Mr. Nagy is the former Senior Vice President of IHS Markit (NASDAQ: INFO) and American Systems, and worked for Global Technology Company and Defense George. Mr. Nagy is a member of the Board of Directors of Cyber Maryland and a founder of Cyberavent. Mr. Nagy holds a Bachelor of Engineering from Michigan Technological University, a Masters in Finance from Madonna University and International Studies from the University of Chicago. The Company believes that Mr. Nagy’s knowledge and experience in information technology makes him a suitable Director.
DAVID CARTER was appointed as Chief Financial Officer on August 8, 2018. Mr. Carter is a principal of DK Consultancy Inc / InTune Communications and advises startup companies in the blockchain and cryptoasset spaces. Most recently, Mr. Carter was EVP with 3iQ Corp, a digital asset Investment Fund Manager in Toronto, Canada. Mr. Carter’s experience spans technology solutions, health care and legal services, and non-profit governance. Mr. Carter is on the Advisory Board of Blockchain Canada, and is Vice-Chair and Chair-Elect of the Board of Governors of Ridley College, one of Canada’s leading independent educational institutions. Mr. Carter holds a Bachelors of Economic from Western University, a CPA (Chartered Professional Accountant, CA, Canada) and is a former Certified Fraud Examiner. The Company believes that Mr. Carter’s knowledge and experience in financial information and technology makes him a suitable Chief Financial Officer .
Directors are elected at the annual meeting of the stockholders and serve until their successors are elected and qualified. Officers are elected by the Board of Directors and serve at the discretion of the Board of Directors or until their earlier resignation or removal.
Director Independence and Board of Directors’ Committees
A majority of our directors are considered to be an independent members of our Board of Directors under NASD Rule 4200(a)(15).
Code of Ethics
We have adopted a code of ethics that applies to all of our employees, including our executive officers, a copy of which is included as an exhibit to this report.
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Family Relationships
There are no family relationships between any director or executive officer.
Involvement in Certain Legal Proceedings
During the past ten years, none of our directors and executive officers has been involved in any of the events described in Item 401(f) of Regulation S-K.
Corporate Governance Matters
We have not adopted any material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
The following table sets forth the compensation paid for services rendered during the fiscal quarter of fiscal year ended February 28, 2019 and fiscal year ended February 28, 2018 to the Principal Executive Officer/Chief Executive Officer and the Principal Financial Officer/Chief Financial Officer.
Summary Compensation Table
Name and Principal Position Fiscal year Salary Bonus Stock Option Awards (1) Other Annual Compensation (2) Total Compensation Robert Monster 2019 CEO (Principal Executive Officer), & Director 2018 Darvin R. Habben 2019 Chairman & Director 2018 $ 60,000 $ - $ - $ 253,926 $ 313,926 $ 240,000 $ - $ - $ 1,026,710 $ 1,266,710 $ - $ - $ - $ - $ - $ - $ - $ - $ 144,000 $ 144,000
_____________
(1) | The amounts shown are the aggregate grant date fair values of these awards computed in accordance with FASB guidance now codified as ASC Topic 718, “Stock Compensation” (formerly under FASB Statement No. 123(R)). The assumptions and methodologies used to calculate these amounts are discussed in Note 7 in the Notes to Financial Statements contained elsewhere in this Annual Report. |
(2) | Other Compensation for Mr. Monster and Mr. Habben related to common stock grants during the year. See Note 6 in the Notes to Financial Statements contained elsewhere in this Annual Report. |
OPTIONS GRANTED IN THE LAST FISCAL YEAR
The following table sets forth information regarding options granted to the named executive officers and directors during fiscal 2018.
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Grants of Plan-Based Awards
Name | Grant Date | Number of shares - Underlying options granted | Exercise Price ($/Share) | Grant Date Fair Value | Expiration Date | |||||||||||||||
None |
OUTSTANDING OPTIONS AT FISCAL YEAR-END
The following table provides information relating to the value of shares of common stock subject to options held by the named executive officers and directors as of May 31, 2018.
Outstanding Equity Awards at Fiscal Year-End
Name |
| Number of Unexercised Options Exercisable |
|
| Number of Unexercised Options Unexercisable |
|
| Option Exercise Price ($/share) |
|
| Option Expiration Date | ||||
Jeffrey L. Mills |
|
| 75,000 |
|
|
| - |
|
| $ | 1.00 |
|
| 10/10/21 | |
Jeffrey L. Mills |
|
| 300,000 |
|
|
| - |
|
| $ | 0.54 |
|
| 2/3/24 | |
Jeffrey L. Mills |
|
| 300,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 11/13/24 | |
Jeffrey L. Mills |
|
| 300,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 12/1/24 | |
Jeffrey L. Mills |
|
| 200,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 5/5/25 | |
Jeffrey L. Mills |
|
| 200,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 6/3/25 | |
Jeffrey L. Mills |
|
| 200,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 12/4/25 | |
James B. Parsons |
|
| 200,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 12/4/25 | |
Robert Monster |
|
| 200,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 12/4/25 | |
Robert Monster |
|
| 400,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 6/3/25 | |
Robert Monster |
|
| 700,000 |
|
|
| - |
|
| $ | 0.10 |
|
| 2/16/19 |
OPTIONS EXERCISED BY THE EXECUTIVE OFFICERS AND DIRECTORS IN THE LAST FISCAL YEAR
NoneDIRECTORS’ COMPENSATION
In December 2017, all non-executive directors received a stock grant of 600,000 shares. Mr. Parsons and Mr. Mills received an additional 200,000 shares each, as recognition for completing tasks outside their director responsibilities.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our common stock, on an as converted basis, beneficially owned as of July 15, 2018for (i) each stockholder we know to be the beneficial owner of 5% or more of our outstanding common stock; (ii) all directors and executive officers; and (iii) all directors and executive officers as a group. The securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the SEC and, accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days, per rule 13d-3(d)(1) under the Securities and Exchange Act of 1934. As of July 15, 2018, we had 126,602,321 issued and outstanding shares of common stock.
Name of Beneficial Owner Number of shares Percentage of Outstanding Shares Directors and Officers: Robert Monster Darvin R. Habben Kenwei Chong Jeff L. Mills Greg Foss Derek Schumann James B. Parsons Michael Cartwright All directors and executive officers as a group 5% Stockholders: Richard A. Pomije Catena Fund One, LP 14,247,839 11.25 % 13,614,274 10.75 % 1,900,000 1.50 % 2,039,950 1.61 % 4,050,000 3.20 % 2,950,000 2.33 % 1,590,000 1.26 % 763,095 0.60 % 41,155,158 32.51 % 15,407,740 12.17 % 11,385,590 9.00 %
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, and the rules promulgated there under require the Company’s officers, directors, and holders of 10% or more of its outstanding common stock to file certain reports with the Securities and Exchange Commission (the “Commission”). To the Company’s best knowledge, based solely on information provided by the reporting individuals, all of the reports required to be filed by these individuals were filed.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other information with the Securities and Exchange Commission. Such filings are available to the public over the Internet at the Securities and Exchange Commission’s website at http://www.sec.gov.
We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the securities offered under this prospectus. This prospectus, which forms a part of that registration statement, does not contain all information included in the registration statement. Certain information is omitted and you should refer to the registration statement and its exhibits.
You may review a copy of the registration statement, and the reports and other information that we file with the Securities and Exchange Commission, at the Securities and Exchange Commission’s public reference room at 100 F Street, N.E. Washington, D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m. You may obtain information on the operation of the public reference room by calling the Securities and Exchange Commission at 1-800-SEC-0330. You may also read and copy any materials we file with the Securities and Exchange Commission at the Securities and Exchange Commission’s public reference room. Our filings and the registration statement can also be reviewed by accessing the Securities and Exchange Commission’s website at http://www.sec.gov.
Statements contained in this prospectus as to the contents of any contract or other document that we have filed as an exhibit to the registration statement are qualified in their entirety by reference to the exhibits for a complete statement of their terms and conditions.
The representations, warranties and covenants made by us in any agreement that is filed as an exhibit to the registration statement of which this prospectus is a part and all necessary amendments and supplements withwere made solely for the SECbenefit of the parties to such agreement, including, in some cases, for the purpose of registeringallocating risk among the parties to such agreements, and maintainingshould not be deemed to be a representation, warranty or covenant to you. Moreover, such representations, warranties or covenants were made as of an earlier date. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the registrationcurrent state of our affairs.
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DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Pursuant to our articles of incorporation and bylaws, we may indemnify an officer or director who is made a party to any proceeding, because of his position as such, to the fullest extent authorized by the corporation laws of the shares. We will bear all costs relatingState of Delaware, as the same exists or may hereafter be amended. In certain cases, we may advance expenses incurred in defending any such proceeding.
To the extent that indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the registrationforegoing provisions, we have been informed that, in the opinion of the common stock offeredSecurities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. If a claim for indemnification against such liabilities (other than the payment by this Prospectus. Weus of expenses incurred or paid by a director, officer or controlling person of our company in the successful defense of any action, suit or proceeding) is asserted by any of our directors, officers or controlling persons in connection with the securities being registered, we will, keepunless in the registration statement effective untilopinion of our counsel the date after which allmatter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue.
Subject to Completion, Dated ____________________
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the sharesfinancial condition and results of operations of the Company for the years ended February 28, 2018 and February 28, 2017, which should be read in conjunction with, and is qualified in its entirety by, the audited financial statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 2018 AND FEBRUARY 28, 2017
During fiscal 2018, the Company recorded revenues of $327,335 and cost of revenues of $1,031,344 for a gross loss of $(704,009) compared to revenues of $165,591 and cost of revenues of $473,056 for a gross loss of $(307,065) during fiscal 2017. For fiscal 2018, revenues mainly consisted of development fees related to our SmartCity platform and activities from our Rezserve and Comencia subsidiaries. Cost of revenues consisted of amortization of prepaid annual domain name renewal fees of $675,242 and $82,370, development expense of $354,121 and $390,686, for the two fiscal years, respectively.
The Company’s operating expenses are currently all related to selling, general and administrative activity. These expenses were $7,443,296 in fiscal 2018 compared to $5,168,512 in fiscal 2017, an increase of $2,274,784. There was one significant driver of this increase and it was a non-cash expense. Our stock-based compensation expense was $3,524,123 for fiscal 2018 as compared to $2,455,587 for fiscal 2017, an increase of $1,068,536. In addition, our increase in selling, general and administrative expenses was due to an increase in domain name renewal fees of $592,872, and an increase in contractor expense of $254,200.
The Company’s overall net loss for the current year increased by $3,023,770 to $10,243,396. The increase was mainly due to the increase in stock compensation expense and the increase in general and administrative items as detailed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash position at February 28, 2018 was $58,712, a decrease of $480,531 from $539,243 at February 28, 2017. During fiscal 2018, net cash used in operating activities was $3,162,324 compared to cash used of $1,934,540 for the fiscal 2017. When comparing the two periods, the increase in cash used in operating activities of $1,227,784 for fiscal 2018 is primarily due to an increase of cash operating expenses.
Net cash used in investing activities was $139,169 and $40,504 for fiscal years 2018 and 2017, respectively. In fiscal 2018, the Company invested in two acquisitions to enhance its Smart City platform.
Net cash provided by financing activities for fiscal 2018, was $2,817,732, which consisted primarily of proceeds from the issuance of common stock heldand borrowings from convertible and promissory notes. For fiscal 2017, the Company received net cash provided by Auctusfinancing activities of $2,377,950, which consisted primarily of proceeds from the issuance of common stock.
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Monthly cash operating expenses for fiscal 2018, were approximately $300,000 per month. Based on current projections, the Company’s monthly cash operating expenses going forward should be approximately $325,000 per month, which includes the monthly cost for the renewal of the existing domain names of approximately $30,000.
We believe our current cash reserves, the amounts we expect from future proceeds from the issuance of our common stock and the sale of existing domain names should be sufficient to enable us to operate for the next 12 months. In the event that we are unable to operate profitably, raise additional capital through the sale of our common stock or sell existing domain names on acceptable terms, we would be forced to further reduce operating expenses or cease operations altogether.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
Effective March 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the twelve months ended February 28, 2018 and 2017.
The discussion and analysis of DigitalTown, Inc.’s financial condition and results of operations are based on our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an ongoing basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While DigitalTown Inc.’s significant accounting policies are described in more detail in Note 1 to its financial statements, management believes the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements:Prepaid Domain Names
The annual domain name renewal fees are currently amortized over one year and the purchase of any new domain names are the only amounts capitalized. See Note 4 for further information.
Stock-Based Compensation
The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company’s stock-based payments is based on estimated fair values at the time of the grant.
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company’s common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are covered byultimately expected to vest.
Recently Issued Accounting Pronouncements
Information regarding recently issued accounting pronouncements is included in Note 1 to the registration statementconsolidated financial statements in “Item 8. Financial Statements and Supplemental Data” in this Annual Report on Form 10-K.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors andStockholders of Digitaltown, Inc.
Opinion on the Financial Statements
We have been sold by Auctus pursuantaudited the accompanying consolidated balance sheets of Digitaltown, Inc. (the Company) as of February 28, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended February 28, 2018, and the related notes and schedules (collectively referred to such registration statement.
DESCRIPTION OF SECURITIES
The authorized capital stockas the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company consistsas of February 28, 2018 and 2017, and the results of its operations and its cash flows for each of the following:years in the two-year period ended February 28, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company suffered losses from operations which raise substantial doubt about its ability to continue as a going concern. Managements plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLCWe have served as the Company’s auditor since 2012.
Houston, TX
June 13, 201823 |
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CONSOLIDATED BALANCE SHEETS
|
| February 28, |
|
| February 28, |
| ||
|
| 2018 |
|
| 2017 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash |
| $ | 58,712 |
|
| $ | 539,243 |
|
Accounts receivable, net |
|
| 12,089 |
|
|
| 25,609 |
|
Short term investment |
|
| 10,000 |
|
|
| - |
|
Prepaid domain name renewal fees |
|
| 77,977 |
|
|
| 105,775 |
|
Prepaid insurance |
|
| 3,103 |
|
|
| 21,198 |
|
Total current assets |
|
| 161,881 |
|
|
| 691,825 |
|
Property and equipment, net |
|
| 22,433 |
|
|
| 1,812 |
|
Total assets |
| $ | 184,314 |
|
| $ | 693,637 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 214,700 |
|
| $ | 166,847 |
|
Accounts payable – related parties |
|
| 458,125 |
|
|
| 10,612 |
|
Deferred revenue |
|
| 170,000 |
|
|
| 190,000 |
|
Domain marketing development obligation |
|
| 145,906 |
|
|
| - |
|
Interest payable |
|
| 34,783 |
|
|
| - |
|
Accrued expenses - related parties |
|
| 552,976 |
|
|
| 280,900 |
|
Notes payable - related parties |
|
| 105,479 |
|
|
| - |
|
Notes payable - third parties, net |
|
| 30,548 |
|
|
| - |
|
Convertible notes payable - related parties |
|
| 468,493 |
|
|
| 400,000 |
|
Convertible notes payable - third parties, net |
|
| 118,655 |
|
|
| - |
|
Total current liabilities |
|
| 2,299,665 |
|
|
| 1,048,359 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit): |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 84,509,824 and 52,606,000 shares issued and outstanding at February 28, 2018 and February 28, 2017, respectively |
|
| 845,098 |
|
|
| 526,060 |
|
Additional paid-in-capital |
|
| 43,698,746 |
|
|
| 34,333,479 |
|
Stock payable |
|
| 2,221,603 |
|
|
| 3,426,371 |
|
Subscriptions receivable |
|
|
|
|
|
| - |
|
Accumulated other comprehensive income |
|
| 5,098 |
|
|
| 1,868 |
|
Accumulated deficit |
|
| (48,885,896 | ) |
|
| (38,642,500 | ) |
Total stockholders’ equity (deficit) |
|
| (2,115,351 | ) |
|
| (354,722 | ) |
Total liabilities and stockholders’ equity (deficit) |
| $ | 184,314 |
|
| $ | 693,637 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
|
| For the Years Ended |
| |||||
|
| February 28, 2018 |
|
| February 28, 2017 |
| ||
Revenues |
| $ | 327,335 |
|
| $ | 165,991 |
|
Cost of revenues |
|
| 1,031,344 |
|
|
| 473,056 |
|
Gross loss |
|
| (704,009 | ) |
|
| (307,065 | ) |
|
|
|
|
|
|
|
|
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Operating expenses: |
|
|
|
|
|
|
|
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Selling, general and administrative expenses |
|
| 7,443,296 |
|
|
| 5,168,512 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (8,147,305 | ) |
|
| (5,475,577 | ) |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Impairment expense |
|
| (1,721,760 | ) |
|
| (1,725,009 | ) |
Interest expense |
|
| (374,331 | ) |
|
| (19,040 | ) |
Total other income (expense) |
|
| (2,096,091 | ) |
|
| (1,744,049 | ) |
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
| (10,243,396 | ) |
|
| (7,219,626 | ) |
Income tax provision |
|
| - |
|
|
| - |
|
Net loss |
| $ | (10,243,396 | ) |
| $ | (7,219,626 | ) |
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted |
| $ | (0.17 | ) |
| $ | (0.16 | ) |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted |
|
| 61,786,169 |
|
|
| 44,840,743 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended February 28, 2018 and February 28, 2017
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| Accumulated |
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There was no impact on the Company’s financial statements as a result of
DigitalTown, Inc.’s financial condition and results of operations are based on our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an ongoing basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While DigitalTown Inc.’s significant accounting policies are described in more detail in Note 1 to its financial statements, management believes the following
The
Stock-Based Compensation The Company recognizes the cost of
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Recently Issued Accounting Pronouncements Information regarding recently issued accounting pronouncements is included in Note 1 to the consolidated financial statements in “Item 8. Financial Statements and Supplemental Data” in this Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors andStockholders of Digitaltown, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Digitaltown, Inc. (the Company) as of February 28,
Basis for Opinion These consolidated financial statements are the responsibility of the Company’s We conducted our audits in accordance with the standards of the Our audits included performing procedures to assess the
Houston, TX June 13, 2018
CONSOLIDATED BALANCE SHEETS
The
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended February 28,
DigitalTown, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28,
Domain Marketing Development Obligation During fiscal 2018, the Company signed top-level domain marketing development fund agreements with owners of 13 top level domains whereby the Company markets and purchases domain names on behalf of the owners. The owner pays us an upfront deposit to be used to purchase a predefined number of domains based on a set schedule. As of February 28, 2018 and February 28, 2017, the Company has collected $930,556 and $0 in cash related to these contracts. As some of the services requested by the owners have not yet been completed, a total of $145,906 and $0 has been recorded as domain marketing development obligation as of February 28, 2018, and February 28, 2017, respectively. Note The Company’s primary means of generating operating capital and completing acquisitions has been through the use of issuing common stock. Fiscal
During fiscal 2018, a Director exercised one of his stock options for
During fiscal 2018, various contractors and employees converted an aggregate of $124,996 of their expenses to stock payable of the Company’s common stock, based on a conversion rate of $0.10 per share. The stock value on the conversion date was $0.23, resulting in a loss on conversion of $316,526. At February 28, 2018, the stock payable for these conversions is $276,769. On May 18, 2016, the Company granted 9,042,250 common shares During fiscal 2018, the Company signed employment agreements with three members of senior management, all of which are still active. All employment agreements were for a period of approximately 6 to 24 months. Included in the employment agreements were common stock grants of 120,000 to 1,025,000 shares which vest over a period of 6 to 24 months. A total of 1,585,000 shares were granted for the three employment agreements. During fiscal 2018, $165,436 was expensed related to these agreements. During fiscal 2018, the Company granted 8,512,776 shares of stock to various contractors and employees. The shares vest over a period of 6 to 24 months. The shares were valued based on the grant date. During fiscal 2018, $1,763,168 was expensed related to these shares. On July 1, 2017, the Company closed on an agreement and plan of share exchange and acquired Comencia, a related party Company, which was partly owned by an officer of the Company. The Company granted 2,500,000 shares of its common stock to the existing owners of Comencia, Inc. The closing price of the Company’s common stock on the acquisition date was $0.30 per share,
DigitalTown, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28,
On Fiscal 2017 Stock Transactions During fiscal 2017, the Company issued Included in the above, are an aggregate of 435,000 shares which were sold to the Company’s chairman and a related party investor at During fiscal 2017, the Company granted 1,600,812 shares of
During fiscal 2017, the Company entered into agreements to purchase domain name rights with three individuals. In exchange for the domain name rights, the Company issued 369,750 common shares
On December 1, 2016, the Company acquired all of the assets of Appointment.com. The purchase
DigitalTown, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28,
During fiscal 2017, the Company granted 495,000 shares of stock to four advisors and employees. The shares vest over a period of 24 months. The shares were valued based on the grant date. During fiscal year 2017, $44,508 was expensed related to these shares. On March 5, 2016, the Company acquired all of the assembled workforce, patents, intellectual property, technology, trademarks, trade names, copyrights, mask works and registrations, computer software, trade secrets and non-compete agreements related to the Cloud.Market business, pursuant to an agreement among the Company and the owner of Cloud.Market. The purchase price paid included issuance of 750,000 shares of our common stock and $7,500 of cash. The stock had a value of $60,000 at the closing date and was transferred on that date from common stock held in escrow to additional paid-in capital for that amount. See Note Stock Warrants The Company has regularly used warrants as a tool to attract and compensate advisors and directors of the board rather than to use cash. The Company feels this is an appropriate way to conserve cash and to incentivize its board of directors, advisors and consultants. As of February 28, 2018, the Company had 9,044,740 warrants outstanding with an average exercise price of $0.13. The warrants expire between one and ten years from the date of issuance and have a weighted average remaining exercise period as of February 28, 2018 of 6.17 years. During fiscal 2018, the Company issued an aggregate of 6,694,740 warrants to various investors, consultants and employees to purchase shares of the Company’s common stock at $0.10. All warrants vested immediately at the date of issuance. 4,000,000 warrants are exercisable through 2027. 30,000 warrants are exercisable through 2026. 2,964,740 warrants are exercisable through February 2019. The total estimated value using the Black-Scholes Model, based on a volatility rate between 153% and 263% and a call option value of $0.10 was $1,340,175. As of February 28, 2017, the Company had 4,660,000 warrants outstanding with an average exercise price of $0.14. The warrants expire between one and ten years from the date of issuance and have a weighted average remaining exercise period as of February 28, 2017 of 4.15 years. During fiscal 2017, the Company issued an aggregate of 150,000 warrants to 3 consultants to purchase shares of the Company’s common stock at prices which ranged from $0.10 to $0.30. All warrants vested immediately at the date of issuance and are exercisable through 2026. The total estimated value using the Black-Scholes Model, based on a volatility rate of 180% and a call option value of $0.0797, was $11,948.
DigitalTown, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2018 and 2017 The Company utilized the following key assumptions in computing the fair value of the warrants using the Black-Scholes pricing model:
The following table summarizes information about the Company’s stock warrant activity during the fiscal years 2018 and 2017:
The following table summarizes information about stock warrants outstanding as of February 28, 2018:
The Company recorded stock-based compensation expense of $0 and $11,948 for all outstanding stock warrants for fiscal years 2018 and 2017, respectively. This expense is included in stock-based compensation expense. Note 7. Stock Options The Company has one stock option plan called The 2006 Employee Stock and Option
DigitalTown, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2018 and 2017 The Company records its stock-based compensation arrangements calculating the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the consolidated
During fiscal 2018, 1,292,310 of previously issued stock options to 1 officer expired, and 200,000 stock options previously issued to another officer were exercised for $20,000 cash. The Company utilized the following key assumptions in computing the fair value of the options using the Black-Scholes
The Company recorded stock-based compensation expense of
The following table summarizes information about the Company’s stock options as of February 28,
The following table summarizes information about stock options outstanding as of February 28,
|
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F-13
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 20102018 and 20092017
Note 8. Loan from Director/StockholderRelated Party Transactions
Accounts Payable – Related Parties
As of February 28, 2018 and 2017, the Company owes $7,625 and $10,613, respectively, due to advances made to an employee which is included within accounts payable – related parties.
As of February 28, 2018 and 2017, the Company owes $450,500 and $0, respectively, to Epik Holdings Inc. related to annual domain name renewal fees to satisfy Domain marketing development obligations.
Prepaid Domain Names
During the fiscal years 2018 and 2017, the Company incurred $214,304 and $165,573, respectively, of annual domain name renewal fees. The amounts paid for the annual domain name renewal fees are paid directly to Epik Holdings Inc., a company which is controlled by Robert Monster, the Company’s Chief Executive Officer. Epik, then uses those funds to directly to pay Verisign and ICANN companies for the annual domain renewal costs. The costs paid to Epik are at terms similar or better than what Epik charges its other clients.
Convertible Notes Payable – Related Party
On March 25, 2008,September 14, 2016, subject to a stock purchase agreement, the Company signed an unsecured promissorya secured convertible note of $400,000 with Jeff Mills, a directorClint Skidmore, founder of Rezserve Technology Ltd (“Rezserve”). The interest free note is due and stockholderpayable within one year, at which time it can be converted into up to 1,000,000 shares of the Company’s common stock at a conversion price of $0.40 per share. The Company evaluated the note and determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present.
On December 22, 2017, the Company formalized its agreement to extend and convert the original convertible note of $400,000 for a working capital loanClint Skidmore to October 31, 2018, original founder of $145,000, due on demand at an annual interest rate of 6.5%,. In May 2009, the annual interest rate was increasedRezserve Technologies Ltd. The Company has repaid $30,000 to 7.0%. The outstanding balanceClint Skidmore, and converted $210,000 of the loannote to 1,100,000 shares of the Company’s common stock, resulting in a loss on conversion of $13,000. At February 28, 2018, the Company owes $160,000 to Clint Skidmore, bearing no interest. This note had imputed interest expense of $38,000 in fiscal 2018.
On June 9, 2017, the Company signed a convertible note of $500,000 with Darvin Habben, Chairman. This note is due and payable within one year, bears interest of 8%, and can be converted into up to 2,000,000 shares of the Company’s common stock at a conversion price of $0.25 per share. The Company recorded a debt discount equal to $300,000 due to this conversion feature. The note had accrued interest of $28,932 as of February 28, 2010 and 2009, was $137,370 and $102,767, respectively. For2018. The debt discount had a balance at February 28, 2018 of $191,507. The Company recorded debt discount amortization expense of $108,493 during the fiscal yearsyear ended February 28, 2010 and 2009,2018.
Promissory Notes Payable - Related Party
On July 20, 2017, the Company made principal paymentssigned a promissory note of $4,879$100,000 with Derek Schumann, Director. This interest free note is due and $42,233, respectively,payable within one year and received additional advancesbears no interest. The Company issued 1,000,000 warrants to Derek Schumann in connection with this note, with an exercise price of $39,482$0.10, and $0, respectively. Interestexpiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $69,452. The Company recorded warrant discount amortization expense incurred on this loan forof $30,548 during the fiscal yearsyear ended February 28, 20102018.
On July 20, 2017, the Company signed a promissory note of $100,000 with Greg Foss, Director. This interest free note is due and 2009 was $9,526payable within one year and $7,742, respectively.
Note 9. Income Taxes
Atbears no interest. The Company issued 1,000,000 warrants to Greg Foss in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2010, the Company2018. The warrant discount had net operating loss carryforwardsa balance at February 28, 2018 of approximately $7,380,000. The net operating loss carryforwards are available to offset future taxable income through 2029 and may be subject to the limitations under Section 382 of the Internal Revenue Code if significant changes in the equity ownership of the Company have occurred.
$69,452. The Company has recorded a full valuation allowance against its net deferred tax asset due towarrant discount amortization expense of $30,548 during the uncertainty of realizing the related net benefits as follows:
|
| 2010 |
| 2009 |
Deferred tax assets: |
|
|
|
|
Net operating loss carryforwards |
| $ 2,721,000 |
| $ 2,419,000 |
Stock compensation |
| 2,775,000 |
| 3,037,000 |
Total deferred tax assets |
| 5,496,000 |
| 5,456,000 |
Valuation allowance |
| (5,496,000) |
| (5,456,000) |
Net deferred tax assets |
| $ - |
| $ - |
Reconciliation between the federal statutory rate and the effective tax rate for the yearsyear ended February 28, 2010 and 2009 is as follows:
| 2010 | 2009 | ||
Federal statutory tax rate |
| 34.0% |
| 34.0% |
State taxes, net of federal benefit |
| 4.0% |
| 4.0% |
Non-deductible items |
| (1.0)% |
| (1.0)% |
Stock compensation adjustment |
| (34.6)% |
| - |
Change in valuation allowance |
| (2.4)% |
| (37.0)% |
|
|
|
|
|
Effective tax rate |
| 0.0% |
| 0.0% |
The Company adopted the provisions of FASB ASC 740-10 on March 1, 2008. As of the date of adoption, the Company had no uncertain tax positions. The adoption of ASC 740-10 did not result in an adjustment to retained earnings. The Company will recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The Company had recognized no interest or penalties upon the adoption of this standard.2018.
At February 28, 2010, the Company has no uncertain tax positions or associated interest and penalties. The Company does not expect any significant increases or decreases to its unrecognized tax positions within twelve months of this reporting date.
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Table of Contents |
F-14
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 20102018 and 20092017
On July 27, 2017, the Company signed a promissory note of $150,000 with Darvin Habben, CEO. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Darvin Habben in connection with this note, with an exercise price of $0.10, and expiry date of July 27, 2027. The Company recorded a warrant discount equal to $150,000 due to this warrant feature. The note had imputed interest of $8,877 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $105,616. The Company recorded warrant discount amortization expense of $44,384 during the year ended February 28, 2018.
Appointment.com Acquisition
On December 1, 2016, the Company acquired all assets related to Appointment.com, Inc. (“Appointment”), an online scheduling software system based in Seattle, Washington. This transaction is considered related party since the Company’s CEO, Rob Monster, owned a controlling interest in Appointment through a company owned 100% by Mr. Monster. The purchase price pursuant to an asset purchase agreement was 1,625,000 shares of common stock. This amount was paid with the issuance of 1,625,000 shares of our common stock, of which 536,364 shares were issued to Mr. Monster’s company. Due to the related party nature of the transaction, the Company did not record any goodwill related to the transaction and assets and liabilities acquired were recorded at cost. The difference between the cost of the assets received and the purchase price is recognized as compensation expense on the Company’s consolidated statement of operations. The agreement included customary representations, warranties, and covenants by us and Appointment. See Note 11 for additional information.
Sales of Common Stock
During fiscal 2018, the Company sold an aggregate of 2,100,000 shares to two of the Company’s board members at the market price of $250,000.
During fiscal 2017, the Company sold an aggregate of 435,000 shares which were sold to the Company’s chairman and a related party investor at terms below the market price and share prices available other investors at the time of the sales. As a result, the Company recorded additional stock compensation expense of $30,450 to additional paid in capital to account for the preferential common share pricing.
Employment Agreements
During fiscal 2018, the Company signed employment agreements with three members of senior management, all of which are still active. All employment agreements were for a period of approximately 6 to 24 months. See Note 6 for more information about these employment agreements.
During fiscal 2017, the Company signed employment agreements with four members of senior management, three of which are still active. All employment agreements were for a period of approximately 12 months, however in one case there is no end date but can be terminated by either party. See Note 6 for more information about these employment agreements.
Directors and Officers
In December 2017, all non-executive directors received a stock grant of 600,000 shares. Mr. Parsons and Mr. Mills received an additional 200,000 shares each, as recognition for completing tasks outside their director responsibilities. This resulted in a stock-based compensation expense of $956,800 in fiscal 2018.
In December 2016, all non-executive directors received a stock grant of 300,000 shares, except for Mr. Habben who received 350,000 as chairman and Mr. Parsons who received 140,000 shares and $40,000 in cash. As of the date of this report, all shares granted have been issued. This resulted in a stock-based compensation expense of $835,800 in fiscal 2017.
CEO Employment Agreement Share Issuance
The Company expensed $240,000 in annual salary and $1,026,710 in stock-based compensation in fiscal 2018, and $240,000 in annual salary and $1,191,349 in stock-based compensation in fiscal 2017, related to the employment agreement with Robert Monster, CEO.
39 |
Table of Contents |
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
On February 10, 2016, the Company issued 3,312,811 shares of common stock to Robert Monster, CEO, in accordance with his employment agreement dated May 18, 2015. The shares were valued based on the employment agreement date using the Black-Scholes model. See Note 6 for more information about this share issuance.
On May 22, 2016, the Company granted 9,042,250 common shares to Robert Monster, CEO, in accordance with his employment agreement dated May 22, 2016, which vest monthly over the new employment agreement period which ends on May 21, 2018, a period of two years. The shares were valued based on the employment agreement date. See Note 6 for more information about this share issuance.
CEO Accrued Salary Conversion
On February 16, 2018, Robert Monster, CEO converted $70,000 of his accrued salary into 700,000 shares of common stock and 700,000 stock options with an exercise price of $0.10 and a vesting period of 12 months. The shares and options were valued on the conversion date in the amounts of $161,000 and $92,507, respectively.
On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 shares of common stock and 1,292,310 stock options with an exercise price of $0.15 and a vesting period of 12 months. The shares and options were valued on the conversion date in the amounts of $109,846 and $19,385, respectively.
Accrued Expenses - Related Parties
The Company was founded in 1982 and managed by Richard Pomije since at least 1987. On May 17, 2015, Mr. Pomije resigned as CEO of the Company and on June 1, 2015, he resigned as the CFO and Chairman. At that time of his resignation, the Company and the Board of Directors were not aware of any continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with his closing of the Burnsville, MN office.
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of February 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2018, $552,976 has been accrued as payable to Mr. Pomije. The Company is subjectin the process of filing an appeal. See Note 15 for additional information about transactions between the Company and its former officer.
Note 9. Income Taxes
The Company accounts for income taxes under standards issued by the FASB. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to U.S. Federaltemporary differences between the financial statement carrying amounts of existing assets and Minnesota stateliabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income tax. However,in the years in which those temporary differences are expected to the extent allowed by law, thebe recovered or settled. A valuation allowance is provided for significant deferred tax authorities may have the rightassets when it is more likely than not that such assets will not be realized through future operations.
No provision for federal income taxes has been recorded due to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward amount.carry forwards totaling $15,888,098 as of February 28, 2018 that will offset future taxable income. The available net operating loss carry forwards will expire in various years through 2038. Future tax benefits which may arise as a result of these losses have not been recognized in these consolidated financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carry forwards.
40 |
Table of Contents |
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
The Company is not currently under Internal Revenue Service ("IRS") or Minnesotaactual income tax examinations.provisions differ from the expected amounts calculated by applying the statutory income tax rate to the Company’s loss before income taxes. The components of these differences are as follows at February 28, 2018 and February 28, 2017:
|
| 2018 |
|
| 2017 |
| ||
Net tax loss carry-forwards |
| $ | 15,888,098 |
|
| $ | 11,627,532 |
|
Statutory rate |
|
| 21 | % |
|
| 34 | % |
Expected tax recovery |
|
| 3,336,501 |
|
|
| 3,953,361 |
|
Change in valuation allowance |
|
| (3,336,501 | ) |
|
| (3,953,361 | ) |
Income tax provision |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Components of deferred tax asset: |
|
|
|
|
|
|
|
|
Non capital tax loss carry forwards |
| $ | 3,336,501 |
|
| $ | 3,953,361 |
|
Less: valuation allowance |
|
| (3,336,501 | ) |
|
| (3,953,361 | ) |
Net deferred tax asset |
| $ | - |
|
| $ | - |
|
Note 10. Commitments and Contingencies
Litigation
The Company, is exposed to asserted and unasserted claims encountered in the normal course of business. While the outcome of these matters cannot be predicted, inbusiness, is a party to various ordinary course claims and legal proceedings. In the opinion of management, the ultimate resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the Company's financial position or results of operations, or cash flows.operations.
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of February 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2018, $552,976 has been accrued as payable to Mr. Pomije. The Company is in the process of filing an appeal. See Note 15 for additional information about transactions between the Company and its former officer.
Lease Commitments
As of February 28, 2018, we have one outstanding operating lease. The lease is for 700 square feet of office space in Vancouver, British Columbia for our Rezserve subsidiary. The lease is month-to-month with either party able to terminate the lease with 30 days of notice. Gross rent is approximately $2,600 per month.
Note 11. Common Stock Subscriptions Receivable
From time to time, the Company has had various stock subscription agreements outstanding all of which were due from a related party. As of February 28, 2010,2016, the Company haswas owed $5,000 for stock issued and had accrued an additional $7,150 for stock which was payable during the following stock subscription agreements outstanding2017 fiscal year under the employment agreement with Robert Monster. The total amount of which the majority is due from a related party:
2005 Agreements
Material terms of the subscription agreements, after the cancellation of the final pricing terms (see Note 5), received by the Company on August 31, 2005, for 78,376 restricted common shares and on December 30, 2005 for 4,733,333 restricted common shares at $0.75 per share (total value of $3,608,782) are as follows:
·
Payment is due$12,150 was satisfied in full in 60 months.fiscal 2017. No amounts are outstanding for fiscal 2018.
·
At 24 months, the Company can demand at its option, monthly 1/36 payments on the subscription agreement.
·
The Company has the option to charge simple annual interest of up to 4%.
·
The Company will provide downside protection of up to 30% of the stock price upon conversion.
The outstanding balance owed on the 2005 subscription agreements at February 28, 2010 is $919,463.
2007 Agreements
On October 5, 2007, the Company received subscriptions for 1,300,000 restricted common shares at $2.50 per share (total value of $3,250,000). Significant terms of the original subscription agreement are as follows:
·
The price per share of $2.50 was based on the closing price on October 4, 2007.
·
At 24 months, 1/36 payments are due monthly.
·
The Company, at its option, may call up to 1/12 of the gross receivable per month if the preceding 30 day average trading price is at or above $7.00 a share with minimum trading volume of 5,000 shares per day.
·
If the purchaser sells these common shares, the purchaser shall be entitled to an amount equal to 200% of the original purchase price of each share and the Company shall be entitled to 50% of any additional net sales proceeds from the stock sale.
On February 25, 2010, due to the recent economic downturn and the market value decline of the Company’s stock, which was trading below $2.50 per share, the Company amended the pricing terms of the subscription agreements received by the Company on October 5, 2007. The amendment changed the following significant terms of the subscription agreement:
F-15
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2010 and 2009
The parties agree that the Initial Pricing terms in the Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be amended to state as follows:
1.
The Subscriber offers to purchase shares of the Company for $0.75 per share. After the price adjustment, the revised total value of this subscription agreement is $975,000.
The following other provisions of the Initial Pricing and Final Pricing terms in the Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be deleted, and are not enforceable by either party:
·
Beginning October 5, 2009, 1/36 payments are due each month thereafter on the 5th of every month.
·
The Company at its option may call up to 1/12 of the (gross) receivable note per month if the preceding 30 day average trading price is at or above $7.00 a share. Minimum trading Volume must be 5,000 shares a day.
·
As total consideration for the purchase and sale of the Company’s stock, purchaser shall ultimately pay to the Company the following amount (the “Purchase Price”):
A.
Purchaser shall first be entitled to an amount equal to 200% of the face amount of each share.
B.
After the purchaser receives the amount in A above, the Company shall be entitled to 50% of any additional net sales proceeds of the stock. Net sales proceeds shall mean the gross proceeds received from the sale of the stock, less reasonable brokerage commissions.
C.
Final adjusted net sales proceeds will be wired to the Company within 7 days from the final settlement of the sale of stock sold.
The outstanding balance owed on the revised 2007 subscription agreements at February 28, 2010 is $975,000.
Summary
As of February 28, 2010, the Company had stock subscription receivables of $1,894,463 and for the twelve months ended February 28, 2010, the Company received stock subscription payments of $337,500. The following table summarizes the stock subscription receivables, for the twelve months ended February 28, 2010 and 2009, respectively:
The following tables summarize information about the stock subscription receivable:
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(1)
Amendment to the terms of the subscription agreements received by the Company on October 5, 2007 for 1,300,000 restricted common shares reducing the price paid per share from $2.50 to $0.75.
F-16
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2010 and 2009
The Company has not exercised its rights to charge up to 4% interest on the subscription amounts outstanding and the Company has provided no “downside protection” to the subscribers. The “downside protection” in the terms for the subscription agreements received on August 31, 2005 and December 30, 2005 requires the Company to reimburse the subscription holder up to 30% of the $.75 purchase price, or $.225, if the market price of the stock is below $.75, when converted. The protection may be provided in additional shares if necessary. For the twelve month period ended February 28, 2010, there was no downside protection provided because the stock price did not go below $.75 when converted. The subscription agreements do not define the term “when converted.” The Company has taken the position that if at the time that a purchaser pays in full for the shares under a subscription agreement and the closing price of the shares of the Company’s stock is less than $.75, the shareholder would be entitled to up to 30% additional shares, depending on the trading share price. Once the subscription shares have been paid for in their entirety, the downside protection ceases.
Note 12. Earnings (Loss) Per Share
The Company computes earnings per share using two different methods, basic and diluted, and presents per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding.
Due to the recent net losses generated by the Company, there are no dilutive elements. Therefore, basic and diluted EPS are the same.
41 |
Table of Contents |
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the fiscal years ended February 28, 20102018 and 2009:2017:
| Years ended | ||
| February 28, | ||
| 2010 |
| 2009 |
Basic income (loss) per share calculation: |
|
|
|
Net income (loss) to common shareholders | $ (1,245,049) |
| $ (2,964,062) |
Weighted average of common shares outstanding | 27,350,072 |
| 27,125,928 |
Basic net income (loss) per share | $ (0.05) |
| $ (0.11) |
|
|
|
|
Diluted income (loss) per share calculation: |
|
|
|
Net income (loss) to common shareholders | $ (1,245,049) |
| $ (2,964,062) |
Weighted average of common shares outstanding | 27,350,072 |
| 27,125,928 |
Stock options (1) | - |
| - |
Warrants (2) | - |
| - |
Diluted weighted average common shares outstanding | 27,350,072 |
| 27,125,928 |
|
|
|
|
Diluted net income (loss) per share | $ (0.05) |
| $ (0.11) |
|
| Fiscal 2018 |
|
| Fiscal 2017 |
| ||
Basic earnings (loss) per share calculation: |
|
|
|
|
|
| ||
Net loss to common shareholders |
| $ | (10,243,396 | ) |
| $ | (7,219,626 | ) |
Weighted average number of common shares outstanding |
|
| 61,786,169 |
|
|
| 44,840,743 |
|
Basic net loss per share |
| $ | (0.17 | ) |
| $ | (0.16 | ) |
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share calculation: |
|
|
|
|
|
|
|
|
Net loss to common shareholders |
| $ | (10,243,396 | ) |
| $ | (7,219,626 | ) |
Weighted average number of common shares outstanding |
|
| 61,786,169 |
|
|
| 44,840,743 |
|
Stock options (1) |
|
| - |
|
|
| - |
|
Warrants (2) |
|
| - |
|
|
| - |
|
Diluted weighted average common shares outstanding |
|
| 61,786,169 |
|
|
| 44,840,743 |
|
Diluted net loss per share |
| $ | (0.17 | ) |
| $ | (0.16 | ) |
__________
(1) | At both February 28, | |
|
| |
(2) | At February 28, |
Note 13. Acquisitions
Congo Ltd. Acquisition
F-17On December 7, 2017, the Company closed on an asset purchase agreement for the acquisition of Congo Ltd. (Congo). Congo, based in Houston, TX, owns and operates a web-based platform offering; a portal connecting attorneys to prospective clients through a marketplace setting; a software-as-a-service (SaaS) subscription, selling web features to attorneys for their use on their respective law firm websites, and; the creation of customized online directories. The Company granted 3,000,000 shares of its common stock to the existing owners of Congo. The closing price of the Company’s common stock on the acquisition date was $0.28 per share, therefore, the fair value of common stock issued was $840,000. The stock was issued in February 2018.
This acquisition was accounted for using the replacement cost method, where the cost to replace or recreate the subject asset is estimated. The agreement included customary representations, warranties, and covenants by us and Congo.
According to the replacement cost method of accounting, the Company recognized the identifiable assets acquired as follows:
Developed Technology, Platform and code base | 420,000 | |||
Developed Technology, New code base and databases | 432,000 | |||
Assembled Workforce | 35,000 | |||
Goodwill | 78,000 | |||
Total intangibles and goodwill | 965,000 | |||
Total assets acquired, net | 965,000 |
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DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 20102018 and 20092017
The purchase price consisted of the following:
Common stock | 840,000 | |||
Cash consideration | 75,000 | |||
Earnest money | 50,000 | |||
Total purchase price | 965,000 |
The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $926,252 related to this acquisition in fiscal 2018.
As the company is not using the assets in the same manner as the predecessor company, no proforma financials are presented.
CityInformation, B.V. Acquisition
On October 27, 2017, the Company closed on an asset purchase agreement for the acquisition of CityInformation. CityInformation, based in Amsterdam (Netherlands), develops and operates mobile apps for cities and towns worldwide. The Company granted 2,833,333 shares of its common stock to the existing owners of CityInformation. The closing price of the Company’s common stock on the acquisition date was $0.29 per share, therefore, the fair value of common stock issued was $821,667. The stock was issued in November 2017.
This acquisition was accounted for using the replacement cost method, where the cost to replace or recreate the subject asset is estimated. The agreement included customary representations, warranties, and covenants by us and CityInformation.
According to the replacement cost method of accounting, the Company recognized the identifiable assets acquired as follows:
Developed Technology, App Portfolio | 250,000 | |||
Developed Technology, App Handles | 135,000 | |||
Assembled Workforce | 40,000 | |||
Goodwill | 396,667 | |||
Total intangibles and goodwill | 821,667 | |||
Total assets acquired, net | 821,667 |
The purchase price consisted of the following:
Common stock | 821,667 | |||
Total purchase price | 821,667 |
The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $795,508 related to this acquisition in fiscal 2018.
As the company is not using the assets in the same manner as the predecessor company, no proforma financials are presented.
Comencia, Inc. Acquisition
On July 1, 2017, the Company closed on an agreement and plan of share exchange and acquired Comencia, a related party Company, which was partly owned by an officer of the Company. The Company granted 2,500,000 shares of its common stock to the existing owners of Comencia, Inc. The closing price of the Company’s common stock on the acquisition date was $0.30 per share, therefore, the fair value of common stock issued was $750,000. As part of the closing of this agreement, the Company made a cash payment and issued a note receivable from Comencia for $55,000. The terms of the note include payable on demand within 30 days of notice and a 3.0% annual interest rate. This note has not yet been repaid.
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DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of Comencia’s assets and ongoing operations were acquired. The agreement included customary representations, warranties, and covenants by us and Comencia.
According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
Cash | 11,989 | |||
Other assets | 13,115 | |||
Total assets | 25,104 | |||
Accrued expenses | (12,741 | ) | ||
Long-term payables | (52,422 | ) | ||
Total liabilities | (65,163 | ) | ||
Customer Lists | 33,000 | |||
Intellectual Property | 48,800 | |||
Trademarks | 7,000 | |||
Total intangibles | 88,800 | |||
Total assets acquired, net | 48,741 | |||
Additional consideration given as compensation expense | 701,259 | |||
Total consideration | 750,000 |
The purchase price consisted of the following:
Common stock | 750,000 | |||
Total purchase price | 750,000 |
This transaction was a non-arms length transaction, as one of Comencia’s owners was a Director of Digitaltown. As such, $750,000 was recorded as a stock-based compensation in fiscal 2018.
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DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
The unaudited supplemental pro forma results of operations of the combined entities had the date of the acquisition been March 1, 2017 or March 1, 2016 are as follows:
|
| Combined Pro Forma: |
| |||||
|
| For Fiscal Years |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Revenues |
| $ | 367,923 |
|
| $ | 251,713 |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
| 1,053,184 |
|
|
| 562,216 |
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
| (685,261 | ) |
|
| (310,503 | ) |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 7,454,580 |
|
|
| 5,218,597 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (8,139,841 | ) |
|
| (5,529,100 | ) |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
| (2,096,091 | ) |
|
| (1,744,049 | ) |
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (10,235,932 | ) |
| $ | (7,273,149 | ) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
|
|
|
|
|
|
Outstanding – basic and fully diluted |
|
| 61,786,169 |
|
|
| 44,840,743 |
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and fully diluted |
| $ | (0.17 | ) |
| $ | (0.16 | ) |
Appointment.com Acquisition
On December 1, 2016, the Company acquired all assets related to Appointment.com, Inc. (“Appointment”), an online scheduling software system based in Seattle, Washington. This transaction is considered related party since Epik Holdings Inc. is a controlling owner of Appointment and the Company’s CEO, Rob Monster, is the controlling owner of Epik Holdings Inc. The purchase price pursuant to an asset purchase agreement was 1,625,000 common shares. Due to the related party nature of the transaction, the Company did not record any goodwill related to the transaction. The sum of the cost basis of the liabilities assumed and the stock value of $731,500 is recognized as $853,955 expense on the Company’s consolidated statement of operations. The agreement included customary representations, warranties, and covenants by us and Appointment.
The allocation of the purchase price to assets based upon fair value determinations was as follows:
Cash |
| $ | 2,240 |
|
Related Party Payable |
|
| (42,380 | ) |
Accrued Salary |
|
| (82,565 | ) |
Total Net Liabilities Assumed |
| $ | (122,705 | ) |
The purchase price consisted of the following:
Total Net Liabilities Assumed |
| $ | 122,705 |
|
Common Stock |
|
| 731,250 |
|
Total Compensation Expense and Purchase Price |
| $ | 853,955 |
|
The unaudited supplemental pro forma results of operations of the combined entities are not included in this disclosure as the acquisition of Appointment does not materially affect the Company's results from operations.
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DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
Rezserve Technologies Ltd. Acquisition
On September 14, 2016, the Company entered into a Stock Purchase Agreement for 100% of Rezserve Technologies, Ltd. (Rezserve), a travel industry software company based in Vancouver, British Columbia. Pursuant to the terms of the agreement, the Company purchased all of the issued and outstanding stock of Rezserve in consideration for a total purchase price of $1,480,000. This price was paid with 3,000,000 shares of the Company’s common stock and a $400,000 secured convertible note payable to Rezserve’s founder Clint Skidmore. The terms of the note include interest at 0% per annum. Principal is due and payable within one year of September 13, 2016.
On December 22, 2017, the Company formalized its agreement to extend and convert the original convertible note of $400,000 for Clint Skidmore to October 31, 2018, original founder of Rezserve Technologies Ltd. The Company has repaid $30,000 to Clint Skidmore, and converted $210,000 of the note to 1,100,000 shares of the Company’s common stock, resulting in a loss on conversion of $13,000. At February 28, 2018, the Company owes $160,000 to Clint Skidmore, bearing no interest. This note had imputed interest of $38,000 in fiscal 2018. See Note 13. Supplemental Disclosure14 for more information about the convertible note payable – related party.
This acquisition was accounted for as a business combination under the purchase method of Cash Flow Informationaccounting, given that substantially all of Rezserve’s assets and ongoing operations were acquired. The purchase resulted in $1,445,292 of impairment expense. This was due to the use of common stock by the Company to pay for the acquisition and the corresponding the value of the stock was in excess of the fair value of the assets received. The agreement included customary representations, warranties, and covenants by us and the Rezserve owner.
| Years ended February 28, | |
| 2010 | 2009 |
Non-cash flow information: |
|
|
Cash paid for interest | $ 9,526 | $ 18,898 |
Subscription receivable amendment | $ 2,275,000 | $ - |
Cancelation of common stock issued previously for payment of outstanding accounts payable | $ - | $ 31,000 |
According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
Assets, net |
| $ | 34,708 |
|
Customer Lists |
|
| 77,295 |
|
Intellectual Property |
|
| 30,842 |
|
Trademarks |
|
| 19,475 |
|
Goodwill |
|
| 1,317,680 |
|
Total Assets Acquired |
| $ | 1,480,000 |
|
The purchase price consisted of the following:
Convertible note payable – related party |
| $ | 400,000 |
|
Common Stock |
|
| 1,080,000 |
|
Total Purchase Price |
| $ | 1,480,000 |
|
The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $1,445,292 related to this acquisition in fiscal 2017.
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DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been March 1, 2016 is as follows:
|
| Combined Pro Forma: |
| |
|
| For Fiscal Years |
| |
|
| 2017 |
| |
Revenues |
| $ | 333,879 |
|
|
|
|
|
|
Cost of revenues |
|
| 475,308 |
|
|
|
|
|
|
Gross profit (loss) |
|
| (141,429 | ) |
|
|
|
|
|
Operating expenses: |
|
|
|
|
Selling, general and administrative expenses |
|
| 5,323,560 |
|
|
|
|
|
|
Loss from operations |
|
| (5,464,989 | ) |
|
|
|
|
|
Other income (expense) |
|
| (1,744,049 | ) |
|
|
|
|
|
Net loss |
| $ | (7,209,038 | ) |
|
|
|
|
|
Weighted average number of common shares |
|
|
|
|
Outstanding – basic and fully diluted |
|
| 44,840,743 |
|
|
|
|
|
|
Net loss per share – basic and fully diluted |
| $ | (0.16 | ) |
Cloud.Market Acquisition
On March 5, 2016, the Company acquired all of the assembled workforce, patents, intellectual property, technology, trademarks, trade names, copyrights, mask works and registrations, computer software, trade secrets and non-compete agreements related to the Cloud.Market business, pursuant to an agreement among the Company and the owner of Cloud.Market. The purchase price paid included issuance of 750,000 shares of our common stock and $7,500 of cash. The agreement included customary representations, warranties, and covenants by us and the Cloud.Market owner.
The allocation of the purchase price to assets based upon fair value determinations was as follows:
Non-compete agreements |
| $ | 700 |
|
Customer Lists |
|
| 66,800 |
|
Total Assets Acquired |
| $ | 67,500 |
|
The purchase price consisted of the following:
Cash |
| $ | 7,500 |
|
Common Stock |
|
| 60,000 |
|
Total Purchase Price |
| $ | 67,500 |
|
The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $67,500 related to this acquisition in fiscal 2017.
The unaudited supplemental pro forma results of operations of the combined entities are not included in this disclosure as the acquisition of Cloud.Market does not materially affect the Company's results from operations.
Note 14. Subsequent EventsDebt
Convertible Note Payable - Related Party
On September 14, 2016, subject to a stock purchase agreement, the Company signed a secured convertible note of $400,000 with Clint Skidmore, founder of Rezserve Technology Ltd (“Rezserve”). The interest free note is due and payable within one year, at which time it can be converted into up to 1,000,000 shares of the Company’s common stock at a conversion price of $0.40 per share. The Company evaluated the note and determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present.
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DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
On December 22, 2017, the Company formalized its agreement to extend and convert the original convertible note of $400,000 for Clint Skidmore to October 31, 2018, original founder of Rezserve Technologies Ltd. The Company has repaid $30,000 to Clint Skidmore, and converted $210,000 of the note to 1,100,000 shares of the Company’s common stock, resulting in a loss on conversion of $13,000. At February 28, 2018, the Company owes $160,000 to Clint Skidmore, bearing no interest. This note had imputed interest expense of $38,000 in fiscal 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has collected $358,950 from stock subscription receivables forsufficient authorized shares.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Promissory Note Payable - Related Party
On July 20, 2017, the Company signed a promissory note of $100,000 with Derek Schumann, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Derek Schumann in connection with this note, with an exercise price of $4.00,$0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $69,452. The Company recorded warrant discount amortization expense of $30,548 during the year ended February 28, 2018.
On July 20, 2017, the Company signed a unitpromissory note of $100,000 with Greg Foss, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Greg Foss in connection with this note, with an exercise price of $1.50.$0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $69,452. The Company recorded warrant discount amortization expense of $30,548 during the year ended February 28, 2018.
On July 27, 2017, the Company signed a promissory note of $150,000 with Darvin Habben, CEO. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Darvin Habben in connection with this note, with an exercise price of $0.10, and expiry date of July 27, 2027. The Company recorded a warrant discount equal to $150,000 due to this warrant feature. The note had imputed interest of $8,877 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $105,616. The Company recorded warrant discount amortization expense of $44,384 during the year ended February 28, 2018.
Convertible Note Payable - Third Party
On October 30, 2017, the Company issued a convertible note to PowerUp Lending Group Ltd. for $75,000 of cash consideration. The note bears interest at 12%, matures on October 30, 2018, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $47,951 due to this conversion feature. The note had accrued interest of $2,885 as of February 28, 2018. The debt discount had a balance at February 28, 2018 of $32,055. The Company recorded debt discount amortization expense of $15,896 during the year ended February 28, 2018. The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the conversion price floor and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares and a conversion floor of $0.00009.
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DigitalTown, Inc.
UNAUDITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
AUGUST 31, 2010 AND 2009
On November 30, 2017, the Company issued a convertible note to PowerUp Lending Group Ltd. for $58,000 of cash consideration. The note bears interest at 12%, matures on November 30, 2018, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $38,164 due to this conversion feature. The note had accrued interest of $1,716 as of February 28, 2018. The debt discount had a balance at February 28, 2018 of $28,754. The Company recorded debt discount amortization expense of $9,410 during the year ended February 28, 2018. The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the conversion price floor and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares and a conversion floor of $0.00009.
On January 18, 2018, the Company issued a convertible note to PowerUp Lending Group Ltd. for $53,000 of cash consideration. The note bears interest at 12%, matures on January 18, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $33,164 due to this conversion feature. The note had accrued interest of $714 as of February 28, 2018. The debt discount had a balance at February 28, 2018 of $30,079. The Company recorded debt discount amortization expense of $3,806 during the year ended February 28, 2018. The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the conversion price floor and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares and a conversion floor of $0.00009.
On January 30, 2018, the Company issued a convertible note to Crown Bridge Partners, LLC. for $55,000 of cash consideration. The note bears interest at 10%, matures on January 30, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 20 trading days prior to conversion. The Company recorded a debt discount equal to $33,246 due to this conversion feature. The Company also recorded a $3,000 debt discount due to issuance fees. The note had accrued interest of $437 as of February 28, 2018. The debt discount had a balance at February 28, 2018 of $33,366. The Company recorded debt discount amortization expense of $2,880 during the year ended February 28, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Promissory Note Payable - Third Party
On July 20, 2017, the Company signed a promissory note of $100,000 with Donovan Olson. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Donovan Olson in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $69,452. The Company recorded warrant discount amortization expense of $30,548 during the year ended February 28, 2018.
Note 15. Transactions with Former Officer
The Company was founded in 1982 and managed by Richard Pomije since at least 1987. On May 17, 2015, Mr. Pomije resigned as CEO of the Company and on June 1, 2015, he resigned as the CFO and Chairman. At that time of his resignation, the Company and the Board of Directors were not aware of any continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with his closing of the Burnsville, MN office.
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of February 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2018, $552,976 has been accrued as payable to Mr. Pomije. The Company is in the process of filing an appeal.
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DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
Note 16. Intangible Assets and Goodwill
Goodwill
The carrying value of goodwill at February 28, 2018 and February 28, 2017 was $0. During fiscal 2018 and fiscal 2017, the Company made three acquisitions which resulted in $549,667 and $1,317,680 of goodwill being recorded, and subsequently impaired, respectively. See Note 13 for more information about acquisitions.
Intangible assets
The carrying value of intangible assets at February 28, 2018 and February 28, 2017 was $0. During fiscal 2018, the Company acquired $1,237,000 of intangible assets, including $432,000 of code base and databases, $420,000 of platform and code base, $250,000 of app portfolios, and $135,000 of app handles. During fiscal 2018, the Company recorded $64,907 of amortization expense related to intangible assets.
During fiscal 2017, the Company entered into agreements to purchase domain name rights with five individuals. In exchange for the domain name rights, the Company issued 369,750 common shares and paid $69,500 in cash. The total fair value of the shares was $154,740 based on the respective domain name purchase agreements date and the closing market price on that date.
Impairments
We evaluate our goodwill and intangible assets for an impairment on an annual basis each fiscal year end. Based upon our review and analysis, we deemed all of the goodwill and intangible assets acquired in fiscal 2018 as fully impaired as of February 28, 2018. Accordingly, we recognized an impairment expense of $1,721,760 in fiscal 2018. In fiscal 2017, we recognized an impairment of $1,725,009. This reflects the full amount of goodwill and the unamortized balance of the intangible assets each year.
Note 17. Subsequent Events
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2017, $260,900 had been accrued. As at February 28, 2018, the accrual has increased by $292,076 to $552,976. The Company is in the process of filing an appeal.
On April 25, 2018, the Company received a $1,000,000 investment commitment from Triton Funds LP to purchase registered DGTW shares. The Company has filed an S-1 with the SEC. Once approved, Triton will purchase up to 5% of the Company’s fully diluted shares.
On May 15, 2018, the Company received a $2,400,000 investment from Pithia, Inc. in exchange for 10% of the Company’s fully diluted shares. Pithia invested $1,200,000 on May 15, 2018 in the form of RHOC cryptocurrency. The remaining $1,200,000 will be received 90 days from the agreement date, again in the form of RHOC cryptocurrency, as long as the Company meets certain conditions. The Company issued 11,385,590 shares of its common stock to Pithia, Inc. on May 31, 2018.
On May 17, 2018, Digitaltown amended the employment agreement of Michael Cartwright, its Chief Technology Officer, to extend his employment term by two years to June 1, 2020. This included a base salary increase, additional stock award, and a cryptocurrency coin award conditional on achieving specific development and product launch milestones. A copy of his amended employment agreement is attached as Exhibit 10.1.
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Table of Contents |
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2018 and 2017
In May 2018, the Company:
- | issued 8,644,838 shares of its common stock for stock payable of $1,274,376, | |
- | issued 16,940,804 shares for cash of $1,786,950, | |
- | converted the October 30, 2017 note from PowerUp Lending Group Ltd, with an original value of $75,000, to 1,277,498 shares of its common stock, | |
- | converted the $500,000 convertible note from Darvin Habben, plus accrued interest of $38,027, to 5,380,274 shares of its common stock, | |
- | converted the $150,000 promissory note from Darvin Habben to 1,500,000 shares of its common stock, | |
- | converted the $100,000 promissory note from Greg Foss to 1,000,000 shares of its common stock, | |
- | converted the $100,000 promissory note from Derek Schumann to 1,000,000 shares of its common stock, | |
- | converted the $100,000 promissory note from Donovan Olson to 1,000,000 shares of its common stock, | |
- | returned 15,000 shares of its common stock into treasury, at a value of $3,000, in exchange for sale of two .city domains, and | |
- | issued 4,511,082 shares of its common stock to various employees and contractors, with a value of $1,126,347. |
There were no additional significant subsequent events through June 13, 2018, the date the financial statements were issued.
51 |
Table of Contents |
DigitalTown, Inc.
CONSOLIDATED BALANCE SHEETS
|
| May 31, |
| February 28, |
| ||||||||
|
| 2018 |
| 2018 |
| ||||||||
| (Unaudited) |
|
| ||||||||||
ASSETS | ASSETS |
|
|
|
|
| |||||||
|
| August 31, |
| February 28, | |||||||||
|
| (unaudited) |
| (audited) | |||||||||
Current assets: |
|
|
|
|
|
|
|
|
| ||||
Cash |
| $ 9,673 |
| $ 34,178 |
| $ | 20,506 |
| $ | 58,712 |
| ||
Digital currencies |
| 1,380,156 |
| - |
| ||||||||
Accounts receivable, net |
| 11,383 |
| 12,089 |
| ||||||||
Short term investment |
| 10,000 |
| 10,000 |
| ||||||||
Prepaid domain name renewal fees |
| 84,822 |
| 54,825 |
| 42,451 |
| 77,977 |
| ||||
Prepaid expense |
| 20,000 |
| 20,000 | |||||||||
Prepaid expenses |
|
| 10,867 |
|
|
| 3,103 |
| |||||
Total current assets |
| 114,495 |
| 109,003 |
| 1,475,363 |
| 161,881 |
| ||||
Property and equipment, net |
| 18,794 |
| 1,719 |
|
| 20,473 |
|
|
| 22,433 |
| |
Intangible assets, net |
| 927,855 |
| 830,177 | |||||||||
Total assets |
| $ 1,061,144 |
| $ 940,899 |
|
| 1,495,836 |
|
| $ | 184,314 |
| |
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
|
|
|
|
|
| ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
| ||||||||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
| $ 146,377 |
| $ 55,412 |
| 302,705 |
| $ | 214,700 |
| |||
Loan from director/stockholder |
| 86,304 |
| 137,370 | |||||||||
Other liability |
| - |
| 15,000 | |||||||||
Accrued payroll |
| 1,331 |
| 2,563 | |||||||||
Deferred officer compensation |
| 25,288 |
| 21,723 | |||||||||
Accounts payable – related parties |
| 886,532 |
| 458,125 |
| ||||||||
Deferred revenue |
| 170,000 |
| 170,000 |
| ||||||||
Domain marketing development obligation |
| 192,869 |
| 145,906 |
| ||||||||
Interest payable |
| 10,496 |
| 34,783 |
| ||||||||
Accrued expenses |
| 542,066 |
| 552,976 |
| ||||||||
Notes payable - related parties |
| - |
| 105,479 |
| ||||||||
Notes payable - third parties, net |
| - |
| 30,548 |
| ||||||||
Convertible notes payable - related parties |
| 120,000 |
| 468,493 |
| ||||||||
Convertible notes payable - third parties, net |
|
| 101,098 |
|
|
| 118,655 |
| |||||
Total current liabilities |
| 259,300 |
| 232,068 |
| 2,325,766 |
| 2,299,665 |
| ||||
|
|
|
|
|
| ||||||||
Commitments and contingencies |
|
|
|
|
|
|
|
|
| ||||
Stockholders’ equity: |
|
|
|
| |||||||||
Common stock, $.01 par value, 2,000,000,000 shares authorized, 27,914,213 and 27,476,246 shares issued and outstanding at August 31, 2010 and February 28, 2010, respectively |
| 279,139 |
| 274,759 | |||||||||
Stockholders’ equity (deficit): |
|
|
|
|
| ||||||||
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 125,749,320 and 84,509,824 shares issued and outstanding at May 31, 2018 and February 28, 2018, respectively |
| 1,257,493 |
| 845,098 |
| ||||||||
Additional paid-in-capital |
| 21,368,400 |
| 20,894,677 |
| 49,246,963 |
| 43,698,746 |
| ||||
Subscription receivable |
| (1,763,013) |
| (1,894,463) | |||||||||
Stock payable |
| - |
| 2,221,603 |
| ||||||||
Subscriptions receivable |
|
|
|
|
| ||||||||
Accumulated other comprehensive income |
| (192,348 | ) |
| 5,098 |
| |||||||
Accumulated deficit |
| (19,082,682) |
| (18,566,142) |
|
| (51,142,038 | ) |
|
| (48,885,896 | ) | |
Total stockholders’ equity |
| 801,844 |
| 708,831 | |||||||||
Total liabilities and stockholders’ equity |
| $ 1,061,144 |
| $ 940,899 | |||||||||
Total stockholders’ equity (deficit) |
|
| (829,930 | ) |
|
| (2,115,351 | ) | |||||
Total liabilities and stockholders’ equity (deficit) |
|
| 1,495,836 |
|
| $ | 184,314 |
|
The accompanying notes are an integral part of these consolidated financial statements.
52 |
Table of Contents |
DigitalTown, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
|
| For the Three Months Ended May 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
|
| (Unaudited) |
|
| (Unaudited) |
| ||
|
|
|
|
|
|
| ||
Revenues |
| $ | 86,218 |
|
| $ | 80,271 |
|
Cost of revenues |
|
| 525,328 |
|
|
| 98,608 |
|
Gross loss |
|
| (439,110 | ) |
|
| (18,337 | ) |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 1,223,618 |
|
|
| 1,073,187 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (1,662,728 | ) |
|
| (1,091,524 | ) |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
| 593,414 |
|
|
| 9,724 |
|
Total other income (expense) |
|
| 593,414 |
|
|
| 9,724 |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
| (2,256,142 | ) |
|
| (1,101,248 | ) |
Income tax provision |
|
|
|
|
|
| - |
|
Net loss |
| $ | (2,256,142 | ) |
| $ | (1,101,248 | ) |
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted |
| $ | (0.03 | ) |
| $ | (0.02 | ) |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted |
|
| 86,876,957 |
|
|
| 55,059,804 |
|
DigitalTown, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six months ended August 31, 2010 |
| Six months ended August 31, 2009 |
| (unaudited) |
| (unaudited) |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
Net loss | $ (516,540) |
| $ (416,575) |
Adjustments to reconcile net loss to net cash flows used in operating activities: |
|
|
|
Depreciation | 2,926 |
| 1,152 |
Amortization of website development cost | 3,893 |
| 1,317 |
Stock-based compensation expense | 126,040 |
| 47,166 |
Non-cash stock issued for director fees | 13,859 |
| 12,000 |
Non-cash stock issued for deferred officer compensation | 28,204 |
| - |
Changes in operating assets and liabilities: |
|
|
|
Prepaid domain name registration fees | (29,997) |
| (99,926) |
Accounts payable | 90,965 |
| (65) |
Accrued payroll | (1,232) |
| (924) |
Deferred officer compensation | 3,565 |
| - |
Other liability | (15,000) |
| - |
Net cash used in operating activities |
(293,317) |
|
(455,855) |
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
Purchase of property and equipment | (20,001) |
| - |
Purchase of intangible asset-website development | (95,787) |
| (23,349) |
Purchases and renewal of intangible assets -domain names | (5,784) |
| (11,448) |
Net cash used in investing activities | (121,572) |
| (34,797) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
Proceeds from loan – director/stockholder | - |
| 39,482 |
Payments on loan – director/stockholder | (51,066) |
| (2,141) |
Payments received on stockholder subscription receivables | 431,450 |
| 135,500 |
Proceeds from issuance of common stock | 10,000 |
| 294,500 |
Net cash provided by financing activities | 390,384 |
| 467,341 |
|
|
|
|
Net change in cash and cash equivalents | (24,505) |
| (23,311) |
Cash and cash equivalents, beginning of period | 34,178 |
| 43,914 |
Cash and cash equivalents, end of period | $ 9,673 |
| $ 20,603 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
53 |
Table of Contents |
F-21
DigitalTown, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| For the Three Months Ended May 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
| (Unaudited) |
|
| (Unaudited) |
| ||
|
|
|
|
|
|
| ||
Net loss |
| $ | (2,256,142 | ) |
| $ | (1,101,248 | ) |
Adjustments to reconcile net loss to net cash flows used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation expense |
|
| 1,842 |
|
|
| 1,300 |
|
Debt discount amortization |
|
| 562,923 |
|
|
| - |
|
Imputed interest |
|
| 12,125 |
|
|
| 10,350 |
|
Stock based compensation |
|
| 436,406 |
|
|
| 346,071 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 706 |
|
|
| 17,692 |
|
Prepaid expenses |
|
| 24,762 |
|
|
| (27,013 | ) |
Accounts payable |
|
| 88,123 |
|
|
| (17,925 | ) |
Accounts payable – related parties |
|
| 428,407 |
|
|
| (765 | ) |
Accrued expenses |
|
| 7,331 |
|
|
| (20,000 | ) |
Deferred revenue |
|
| - |
|
|
| 155,613 |
|
Domain marketing development obligation |
|
| 46,963 |
|
|
| - |
|
Digital currencies |
|
| (15,882 | ) |
|
| - |
|
Net cash used in operating activities |
|
| (662,436 | ) |
|
| (635,925 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Cash received from sale of digital currencies |
|
| 98,656 |
|
|
| - |
|
Cash paid for equipment |
|
| - |
|
|
| (26,423 | ) |
Net cash used in investing activities |
|
| 98,656 |
|
|
| (26,423 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
| 566,950 |
|
|
| 162,500 |
|
Payments on promissory note |
|
| (40,000 | ) |
|
| - |
|
Net cash provided by financing activities |
|
| 526,950 |
|
|
| 162,500 |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
| (1,376 | ) |
|
| 3,528 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
| (38,206 | ) |
|
| (496,320 | ) |
Cash and cash equivalents, beginning of year |
|
| 58,712 |
|
|
| 539,243 |
|
Cash and cash equivalents, end of year |
| $ | 20,506 |
|
| $ | 42,923 |
|
|
|
|
|
|
|
|
|
|
Non-Cash Transactions: |
|
|
|
|
|
|
|
|
Issuance of common stock for stock payable |
| $ | 1,828,200 |
|
| $ | 1,506,250 |
|
Conversion of debt to common stock |
| $ | 1,067,528 |
|
|
| - |
|
Stock issued for digital currencies |
| $ | 1,659,000 |
|
|
| - |
|
Loss on digital currencies |
| $ | 196,070 |
|
|
| - |
|
Stock cancelled for sale of prepaid domains |
| $ | 3,000 |
|
|
| - |
|
Finders fee for stock issued |
| $ | 1,000 |
|
|
| - |
|
The accompanying notes are an integral part of these consolidated financial statements.
54 |
Table of Contents |
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)For the Three Months Ended May 31, 2018 and 2017
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial information has been prepared by DigitalTown, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC)(“SEC”). Accordingly, it does not include all of the information and notes required by accounting principles generally accepted in the United States of AmericaU.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim period presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period. This financial information should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10K10-K for the year ended February 28, 2010.2018.
The Company’s fiscal year end is the last day in February. Our current fiscal year ends on February 28, 2019 and we refer to it as “fiscal 2019”. Last year, our fiscal year ended on February 28, 2018 and we refer to this year as “fiscal 2018”.
Note 2. Nature of Business and Summary of Significant Accounting Policies:
Nature of Business
The Company was founded in 1982 under the laws of the State of Minnesota as Command Small Computer Learning Center, Inc., a computer training company and operated under several different names in the computer hardware and training sector. In 2005, the Company began acquiring domain names. On March 1, 2007, the Company changed its name to DigitalTown, Inc. and began developing a business plan to develop a platform to monetize thetheir domain names. DigitalTown currently provides turn-key hosted solutions to power a comprehensive platform for government entities, citizens and merchants. The easy to use platform helps city officials and local merchants manage a feature-rich Smart City for web and mobile devices and provides residents and visitors with access to Content, Community and Commerce. The Company’s headquarters are located at 11974 Portland Avenue, Burnsville, MN 55337, and its telephone and facsimile numbers are (952) 890-2362 and (952) 890-7451, respectively.in Bellevue, WA. The Company's Internet address iswww.digitaltown.com. The CompanyCompany’s common stock is traded inon the over-the-counter marketOTC Markets under the ticker symbol of DGTW.
The Company’s consolidated financial statements have been prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has sustaineda working capital deficit, recurring losses, and negative cash flows from operations and expects these conditionsoperations. These matters raise substantial doubt about the Company’s ability to continue intoas a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the foreseeable future. recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
At AugustMay 31, 2010,2018, the Company had an accumulated deficit of $19,082,682. Subsequent to August 31, 2010, the Company has received cash proceeds totaling $15,000 from its stock subscription receivables.$51,142,038. The Company anticipates that existing cash, stock subscription proceeds received to date,growth from its operations, expected future proceeds from its stock subscription receivables and any additional financing needed through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expendituresexpenditure needs through at least August 31, 2011.February 28, 2019. In the event that we arethe Company is unable to obtain additional capital in the future, wethe Company would be forced to reduce operating expenses and/or cease operations altogether.
Principles of Consolidation
The Company files consolidated financial statements that include the accounts of DigitalTown, Inc. and its wholly-owned subsidiary Tiger Media.subsidiaries and have been prepared by the Company in United States (U.S.) dollars and in accordance with accounting principles generally accepted in the United States, or GAAP. All material intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period amounts in the consolidated statement of cash flows have been reclassified to conform to the current period presentation. Proceeds from related party notes payable received in the prior period have been reclassified from the prior period classification. These reclassifications had no impact on previously reported net income or accumulated deficit for any year.
55 |
Table of Contents |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable arise from the software licensing of our Rezserve subsidiary. The Company evaluates collectability of accounts receivable based on a combination of factors including the age of the receivable or a specific customer’s inability to meet its financial conditions. In these circumstances, the Company records an allowance to reduce the receivable to an amount it deems collectible. The Company has recorded an allowance for doubtful accounts as of May 31, 2018 and February 28, 2018 of $5,389 and $5,456, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net tangible and identifiable intangible assets related to completed acquisitions. Goodwill has an indefinite life and is not amortized but instead tested for impairment annually, or more frequently if necessary.
Intangible assets are recorded at fair value and are comprised of amounts assigned to acquisition-related items, such as trade names, customer lists, non-compete agreements and intellectual property/technology. Intangible assets are considered either definite or indefinite lived assets. Definite lived intangible assets are amortized on a straight-line basis over their useful lives. Certain intangible assets may have an indefinite life and are not amortized, but rather evaluated for impairment annually.
We evaluate any goodwill and intangible assets for an impairment on an annual basis each fiscal year end. We also evaluate goodwill and intangible assets for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the goodwill and intangible assets below the carrying amounts. Based upon our review and analysis, we deemed all of the goodwill and intangible assets acquired in fiscal 2018 as fully impaired. Accordingly, we recognized an impairment expense of $1,721,760.
Revenue Recognition
Effective March 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three months ended May 31, 2018 and the twelve months ended February 28, 2018.
The Company recognizes revenue when itthe following four criteria have been met:
· | Persuasive evidence that a business relationship exists | |
· | Delivery has occurred | |
· | The price is fixed and determinable | |
· | Collectibility is reasonably assured |
The Company primarily recognizes revenue from sale of software licenses and related development services. Software licensing and development revenue is realized or realizablerecognized as invoiced and over the course of the applicable agreements. In the event projects have multiple project milestones, revenue is recognized as milestones are achieved and invoices are submitted for payment.
The Company may also be merchant of record for merchant transactions processed on the DigitalTown platform. When this happens, revenue is recognized on the date of the transaction. The Company has been earned. Revenue is generated from commerce-based transactions generated from our websites and display of graphical advertisements (“display advertising”).experience in merchant transaction fraud mitigation. To the extent chargebacks become material, the Company will implement a formal practice for allowance for doubtful accounts.
56 |
Table of Contents |
F-22
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Intangible Assets – Domain Names/Website Development CostsFair Value of Financial Instruments
Domain name costs are accounted for in accordance with theUnder Financial Accounting Standards Board (FASB)(“FASB”) Accounting Standards Codification (ASC 350-30) guidance pertaining(ASC) 820-10-5, fair value is defined as the price that would be received to Intangibles-Goodwillsell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and Other, Website Development Costs. Certain modulescreates a fair value hierarchy in order to increase the consistency and componentscomparability of fair value measurements and the related disclosures. Under U.S. GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
As of May 31, 2018 and February 28, 2018, the Company does not have any financial instruments that must be measured under the fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the Company’s overall website developmentfair value hierarchy. The three levels are readyas follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for their intended useidentical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect the Company’s resulting websitesassumptions about the assumptions that market participants would use in pricing the asset or liability.
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs during the first quarter of fiscal 2019 or the fiscal year 2018.
Cash Equivalents
The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. As of May 31, 2018 and February 28, 2018, the Company had no cash equivalents.
Cash Deposits in Excess of Federally Insured Limits
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are insured by the Federal Deposit Insurance Company and currently operational. Accordingly,have insurance coverage up to $250,000. At May 31, 2018 and February 28, 2018, the Company did not have any deposit accounts in excess of federally insured limits.
Prepaid Domain Names
The annual domain name renewal fees are currently beingcapitalized in the period of renewal then amortized over one year and the purchase of any new domain names are the only amounts being capitalized. Previously, during the infrastructure development stage of its websites, the Company capitalizedyear. Only the purchase of new domain names is capitalized. See Note 5 for further information.
Property and the annual domain name renewal fees. Additionally, since the ownership of each domain name can be renewed for a nominal renewal fee each year prior to their expiration date, the useful lives of the domain namesEquipment
Property and equipment are deemed to be indefinitestated at cost and no amortization of the capitalized costs for the domain names will be recorded.
Website development costs are accounted for in accordance with the FASB Accounting Standards Codification (ASC 350-30) guidance pertaining to Intangibles-Goodwill and Other, Internal-Use Software which requires that all internal and external costs incurred to develop the internal-use software necessary to operate the websites be capitalized. The guidance further states, amortization should begin when an individual module or component of the overall internal-use software is ready for its intended use. The cost of such module or component will be amortizeddepreciated on a straight-line basis over itstheir estimated useful lives, ranging from three to five years. Leasehold improvements are amortized over the shorter of the useful life as determined byor the Company, after taking into accountterm of the effects of obsolescence, technology, competition and other economic factors.related lease. The Company has componentsrecorded $1,842 and $1,300 of its website development that are operationaldepreciation expense for first quarters of fiscal years 2019 and are being amortized on a straight-line basis over a three year life.
Impairment of Long-Lived Assets
Long-lived assets, such as property2018, respectively. Repairs and equipment and intangible assets – domain names/website developmentmaintenance costs are reviewedexpensed as incurred; major renewals and improvements are capitalized. As items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operating income. See Note 4 for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. further information.
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Income Taxes
The Company accounts for income taxes by following an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferredDeferred tax assets (net of any valuation allowance) and liabilities ariseresulting from the difference between thetemporary differences, net operating loss carryforwards and tax basis ofcredit carryforwards are recorded using an asset or liabilityasset-and-liability method. Deferred taxes relating to temporary differences and its reported amount in the financial statements. Deferred tax amountsloss carryforwards are determinedmeasured using the tax ratesrate expected to be in effect when the taxes will actually be paidthey are reversed or refunds received, as provided under currently enacted tax law.are realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be ultimately realized. IncomeThe Company has recorded a full valuation allowance against the net deferred tax expense or benefit isasset due to the tax payable or refundable, respectively,uncertainty of realizing the related future benefits.
The Company accounts for income taxes pursuant to FASB guidance. This guidance prescribes a recognition threshold and a measurement attribute for the period plusfinancial statement recognition and measurement of tax positions taken or minusexpected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves or related accruals for interest and penalties have been recorded at May 31, 2018 or February 28, 2018. In accordance with the changeFASB guidance, the Company has adopted a policy under which, if required to be recognized in deferred tax assetsthe future, interest related to the underpayment of income taxes will be classified as a component of interest expense and liabilities duringany related penalties will be classified in operating expenses in the period.statements of operations. The Company has three open years of tax returns subject to examination.
The Company follows the recognition of a financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Stock-Based Compensation, Including Options and Warrants
Use of equity for compensation is a material part of the Company’s near-term strategy. The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and directors on a straight-line basis over the respective vesting period of the awards.advisors. The compensation expense for the Company'sCompany’s stock-based payments is based on estimated fair values at the time of the grant of the portion of stock-based payment awards that are ultimately expected to vest.grant.
F-23
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company'sCompany’s common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.
Recently Issued Accounting Pronouncements
The Company will adopt using the modified retrospective approach to initially apply the update and recognize the remaining contract value at the date of application. The Company does not expect the adoption of ASU 2014-09 to have any impact on its total cash flows from operating, investing or financing activities.
In January 2010,2017, the FASB issued Improving Disclosures About Fair Value Measurements,ASU 2017-04, Simplifying the Test for Goodwill Impairment, which requiresremoves the second step of the two-step goodwill impairment test. Under ASU 2017-04, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting entitiesunit’s carrying amount over its fair value, not to make new disclosures about recurringexceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or nonrecurring fair-value measurements including significant transfers intoany interim goodwill impairment tests in fiscal years beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not elected early adoption of this standard and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basisis currently in the reconciliationprocess of Level 3 fair- value measurements.evaluating the impact of adopting ASU 2017-04 and cannot currently estimate the financial statement impact of adoption.
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In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, ”Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual2018, including interim periods beginning after December 15, 2010.within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company does not expect the adoption of this guidance did notto have ana material impact on ourits consolidated financial statements.statements upon adoption.
The Company believes there are no other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Note 3. Intangible AssetsGoing Concern
IntangibleThe Company’s consolidated financial statements have been prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets netand liquidation of liabilities in the normal course of business. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
At May 31, 2018, the Company had an accumulated deficit of $51,142,038. The Company anticipates growth from its operations, expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least May 31, 2018. In the event that the Company is unable to obtain additional capital in the future, the Company would further reduce expenses or cease operations altogether.
Note 4. Property and Equipment
Property and equipment are as follows:
| August 31, 2010 | February 28, 2010 |
Domain names | $ 817,820 | $ 812,036 |
Website development costs | 119,136 | 23,349 |
Less accumulated amortization | (9,101) | (5,208) |
| $ 927,855 | $ 830,177 |
|
| May 31, |
|
| February 28, |
| ||
|
| 2018 |
|
| 2018 |
| ||
Office equipment and furniture |
|
| 42,745 |
|
|
| 43,088 |
|
Less accumulated depreciation |
|
| (22,272 | ) |
|
| (20,655 | ) |
Property and equipment, net |
|
| 20,473 |
|
|
| 22,433 |
|
Depreciation expense for the first quarter of fiscal years 2019 and 2018 was $1,842 and $1,300, respectively.
Note 5. Prepaid Domain Names
During the six months ended August 31, 2010, the Company capitalized $5,784 in additional domain name purchases. Since the useful lifefirst quarters of the domain names is deemed to be indefinite, no amortization has been recorded.
During the six months ended August 31, 2010,fiscal years 2018 and 2017, the Company incurred $130,599$19,001 and $81,702, respectively, of annual domain name renewal fees, andspecifically related to .CITY registrations. These amounts were recorded them as prepaid domain name renewal fees.fees, and are then amortized over one year on a straight-line basis. During the threefirst quarters of fiscal years 2019 and six months ended August 31, 2010,2018, the Company expensed $47,896recognized $54,574 and $100,602, respectively, on a straight line basis to$59,053 of expense as cost of revenues in the Company’s consolidated statementrelated to this amortization. As of operations. At AugustMay 31, 2010,2018, and February 28, 2018, the Company had $84,822has $42,451 and $77,977, respectively, of remaining prepaid domain name renewal fees recorded on the balance sheet. See Note 9 for information on Related Party activity within Prepaid Domain Names.
Note 6. Accrued Expenses and Deferred Revenue
Accrued Expenses
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which will be amortized over future periods.had been fully accrued for by the Company at February 28, 2017.
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On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2018, $552,976 had been accrued as payable to Mr. Pomije. During the quarter ending May 31, 2018, $10,910 was paid to Mr. Richard Pomije. As at May 31, 2018, $542,066 has been accrued as payable to Mr. Pomije. The Company is in the process of filing an appeal. See Note 16 for additional information about transactions between the Company and its former officer.
Deferred Revenue
During the six months ended August 31, 2010,fiscal 2017, the Company capitalized $95,787signed three customer agreements to perform digital support and construction services for three third party companies. Each customer agreement consists of websitemilestones and completion metrics to ensure that the requested services have been performed satisfactorily and to the customers’ full expectations. As the services requested by the customers have not yet been completed, the total of $170,000 has been recorded as deferred revenue as of February 28, 2018 and May 31, 2018.
Domain Marketing Development Obligation
During fiscal 2018, the Company signed top-level domain marketing development costsfund agreements with owners of 13 top level domains whereby the Company markets and hadpurchases domain names on behalf of the owners. The owner pays us an upfront deposit to be used to purchase a predefined number of domains based on a set schedule. As of May 31, 2018 and February 28, 2018, the Company has collected $46,963 and $930,556 in cash related to these contracts. As some of the services requested by the owners have not yet been completed, a total of $119,136 at August 31, 2010. The Company has determined that the $95,787 of website development costs capitalized during the six month period ended August 31, 2010 pertains to components of the Company’s website development that is not ready for its intended use$192,869 and no amortization$145,906 has been recorded for these costs. The Company had previously determined that $23,349 of the $119,136 total capitalized websiteas domain marketing development costs at August 31, 2010 pertained to components of its website development that is ready for its intended use and has an estimated useful life of three years. During the three and six months ended August 31, 2010, the Company recorded $1,946 and $3,893, respectively, of website development amortization expense pertaining to these components to cost of revenues in the Company’s consolidated statement of operations.
Note 4. Deferred Officer Compensation
Richard Pomije, the CEO and Chairman of the Company, has elected to forego a portion of his salary at various times due to limited operating funds. These amounts do not accrue interest and are due and payable as funds become available in the future. On June 7, 2010, the Company issued 20,892 restricted common shares at $1.35 per share, valued at $28,204, to pay the entire deferred compensation balance accruedobligation as of May 31, 2010. During the three months ended August 31, 2010, the Company recorded $25,288 of additional deferred officer compensation2018, and that amount is still owed as of August 31, 2010.February 28, 2018, respectively.
F-24
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5.7. Stockholders’ Equity
The Company’s primary means of generating operating capital and completing acquisitions has been through the use of issuing common stock.
Fiscal 2019 Stock Transactions
On August 15, 2010,During the first quarter of fiscal 2019, the Company issued 7,917 restricted26,774,352 shares of stock to various investors for stock payable of $1,828,200, cash of $566,950 and digital currencies of $1,659.000.
During the first quarter of fiscal 2019, the Company issued 3,322,372 shares to consultants and employees for services provided to the Company. During the first quarter of fiscal 2019, $436,406 was expensed related to these shares.
On May 9, 2018, the Company converted the $500,000 convertible note with Darvin Habben, Chairman, along with accrued and unpaid interest of $38,027.40, to 5,380,274 shares of its common stock, fully extinguishing this note. The issuance had no gain or less as the value of the shares issued equalled the debt converted.
On May 9, 2018, the Company converted the $150,000 convertible note with Darvin Habben, Chairman, to 1,5000,000 shares of its common stock, fully extinguishing this note. The issuance had no gain or less as the value of the shares issued equalled the debt converted.
On May 9, 2018, the Company converted the $100,000 promissory note with Derek Schumann, Director, to 1,000,000 shares of its common stock, fully extinguishing this note. The issuance had no gain or less as the value of the shares issued equalled the debt converted.
On May 9, 2018, the Company converted the $100,000 promissory note with Greg Foss, Director, to 1,000,000 shares of its common stock, fully extinguishing this note. The issuance had no gain or less as the value of the shares issued equalled the debt converted.
On May 9, 2018, the Company converted the $100,000 promissory note with Donovan, to 1,000,000 shares of its common stock, fully extinguishing this note. The issuance had no gain or less as the value of the shares issued equalled the debt converted.
On May 16, 2018, PowerUp Lending Group Ltd. converted $75,000 of the principal amount, plus $4,500 in accrued and unpaid interest, of the October 30, 2017 note into 1,277,498 shares of the Company’s common stock, fully extinguishing this note. There was no gain or loss due to the conversion within the terms of the note.
During the first quarter of fiscal 2019, the Company sold 2 domains valued at $3,000 to one of the Company’s shareholders in exchange for 15,000 shares, which were returned to treasury.
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Fiscal 2018 Stock Transactions
During fiscal 2018, the Company issued 14,857,715 shares of stock to various investors for stock payable of $2,559,061 and cash of $1,662,732.
During fiscal 2018, a Director exercised one of his stock options for 200,000 shares of stock for cash of $20,000.
During fiscal 2018, the Company issued 8,512,776 shares and recorded a stock payable of $521,792 to consultants and employees for services provided to the Company. During fiscal 2018, $1,763,168 was expensed related to these shares.
During fiscal 2018, various contractors and employees converted an aggregate of $124,996 of their expenses to stock payable of the Company’s common stock, based on a conversion rate of $0.10 per share. The stock value on the conversion date was $0.23, resulting in a loss on conversion of $316,526. At February 28, 2018, the stock payable for these conversions is $276,769.
On May 18, 2016, the Company granted 9,042,250 common shares at $1.20to Robert Monster, CEO, in accordance with his employment agreement dated May 18, 2016, which vest monthly over the new employment agreement period which ends on May 18, 2018, a period of two years. The shares were valued based on the employment agreement date. During fiscal year 2018, $1,191,349 was expensed related to these shares. 6,799,361 shares were issued on February 8, 2018, and 2,130,500 shares were issued on May 31, 2018.
During fiscal 2018, the Company signed employment agreements with three members of senior management, all of which are still active. All employment agreements were for a period of approximately 6 to 24 months. Included in the employment agreements were common stock grants of 120,000 to 1,025,000 shares which vest over a period of 6 to 24 months. A total of 1,585,000 shares were granted for the three employment agreements. During fiscal 2018, $165,436 was expensed related to these agreements.
On July 1, 2017, the Company closed on an agreement and plan of share exchange and acquired Comencia, a related party Company, which was partly owned by an officer of the Company. The Company granted 2,500,000 shares of its common stock to the existing owners of Comencia, Inc. The closing price of the Company’s common stock on the acquisition date was $0.30 per share, valued at $9,500,therefore, the fair value of common stock issued was $750,000.
On October 27, 2017, the Company closed on an asset purchase agreement for the acquisition of CityInformation. CityInformation, based in Amsterdam (Netherlands), develops and operates mobile apps for cities and towns worldwide. The Company granted 2,833,333 shares of its common stock to seventhe existing owners of CityInformation. The closing price of the Company’s common stock on the acquisition date was $0.29 per share, therefore, the fair value of common stock issued was $821,667. The stock was issued in November 2017.
On December 7, 2017, the Company closed on an asset purchase agreement for the acquisition of Congo Ltd. (Congo). Congo, based in Houston, TX, owns and operates a web-based platform offering; a portal connecting attorneys to prospective clients through a marketplace setting; a software-as-a-service (SaaS) subscription, selling web features to attorneys for their use on their respective law firm websites, and; the creation of customized online directories. The Company granted 3,000,000 shares of its common stock to the existing owners of Congo. The closing price of the Company’s common stock on the acquisition date was $0.28 per share, therefore, the fair value of common stock issued was $840,000. The stock was issued in February 2018.
Stock Warrants
The Company has regularly used warrants as a tool to attract and compensate advisors and directors of the board rather than to use cash. The Company for paymentfeels this is an appropriate way to conserve cash and to incentivize its board of director fees.directors, advisors and consultants.
On June 22, 2010, the Company issued 400,000 restricted common shares at a price of $0.75 per share to an existing shareholder (related party), valued at $300,000 in exchange for a stock subscription agreement (see further details in note 9, 2010 Agreements).
On June 7, 2010, the Company issued 20,892 restricted common shares at $1.35 per share, valued at $28,204, to Richard Pomije, the CEO and Chairman of the Company for payment of deferred compensation.
On May 15, 2010, the Company issued 2,491 restricted common shares at $1.75 per share, valued at $4,359, to six directors of the Company for payment of director fees.
During the quarter ended May 31, 2010, the Company entered into stock purchase agreements and issued 6,667 units (each unit consisting of one share of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $4.00 per share) at a unit price of $1.50, for total cash proceeds of $10,000.
Stock Warrants
As of AugustMay 31, 2010,2018, the Company has a total of 229,668 stock purchasehad 9,044,740 warrants outstanding with an average exercise price of $4.00.$0.13. The warrants expire twobetween one and ten years from theirthe date of issuance. Theissuance and have a weighted average remaining exercise period as of AugustMay 31, 2010 is 0.732018 of 5.92 years.
Other61 Table of Contents
In February 2010,The Company did not issue any warrants during the first quarter of fiscal 2019.
During fiscal 2018, the Company entered intoissued an agreement with an investment bankeraggregate of 6,694,740 warrants to promotevarious investors, consultants and sellemployees to purchase shares of the Company’s common stock to accreditedat $0.10. All warrants vested immediately at the date of issuance. 4,000,000 warrants are exercisable through 2027. 30,000 warrants are exercisable through 2026. 2,964,740 warrants are exercisable through February 2019. The total estimated value using the Black-Scholes Model, based on a volatility rate between 153% and institutional investors. In conjunction with263% and a call option value of $0.10 was $1,340,175.
The Company utilized the potential sale of shares of common stock,following key assumptions in computing the investment banker will receive a 10% commission, be reimbursed for expenses and granted a five-year warrantfair value of the Company's commonwarrants using the Black-Scholes pricing model:
|
| July 20, |
|
| July 27, |
|
| February 6, |
|
| February 15, |
|
| February 16, |
| |||||
|
| 2017 |
|
| 2017 |
|
| 2018 |
|
| 2018 |
|
| 2018 |
| |||||
Weighted-average volatility |
|
| 263 | % |
|
| 263 | % |
|
| 157 | % |
|
| 153 | % |
|
| 158 | % |
Expected dividends |
| None |
|
| None |
|
| None |
|
| None |
|
| None |
| |||||
Expected term (in years) |
|
| 10.00 |
|
|
| 10.00 |
|
|
| 1.00 |
|
|
| 1.00 |
|
|
| 1.00 |
|
Weighted-average risk-free interest rate |
|
| 1.17 | % |
|
| 1.16 | % |
|
| 2.00 | % |
|
| 1.99 | % |
|
| 2.00 | % |
Weighted-average fair value of warrants granted |
| $ | 0.20 |
|
| $ | 0.27 |
|
| $ | 0.15 |
|
| $ | 0.14 |
|
| $ | 0.17 |
|
The following table summarizes information about the Company’s stock equal to 10%warrant activity during the fiscal years 2018 and 2017:
Number of Warrants | ||||
Outstanding - February 28, 2017 | 4,480,000 | |||
Granted | 6,944,740 | |||
Canceled or expired | (2,430,000 | ) | ||
Outstanding - February 28, 2018 | 9,044,740 | |||
Granted | - | |||
Canceled or expired | - | |||
Outstanding - May 31, 2018 | 9,044,740 | |||
Exercisable at May 31, 2018 | 9,044,740 |
The following table summarizes information about stock warrants outstanding as of the shares of common stock sold. As of October 15, 2010, the Company has not received any proceeds from the sales of shares of common stock associated with this agreement. In February 2010, the Company paid the investment banker $20,000 as an advance on expenses and any potential commission earned. May 31, 2018:
Exercise Price |
|
| Number Outstanding |
|
| Weighted Average Remaining Life (years) |
|
| Weighted Average Exercise Price |
|
| Number Exercisable |
|
| Weighted Average Exercisable Price |
| ||||||
$ | 0.10 |
|
|
| 7,394,740 |
|
|
| 5.67 |
|
| $ | 0.10 |
|
|
| 7,394,740 |
|
| $ | 0.10 |
|
$ | 0.15 |
|
|
| 300,000 |
|
|
| 6.85 |
|
| $ | 0.15 |
|
|
| 300,000 |
|
| $ | 0.15 |
|
$ | 0.25 |
|
|
| 850,000 |
|
|
| 6.93 |
|
| $ | 0.25 |
|
|
| 850,000 |
|
| $ | 0.25 |
|
$ | 0.30 |
|
|
| 500,000 |
|
|
| 7.28 |
|
| $ | 0.30 |
|
|
| 500,000 |
|
| $ | 0.30 |
|
$ | 0.10 - $0.30 |
|
|
| 9,044,740 |
|
|
| 5.92 |
|
| $ | 0.13 |
|
|
| 9,044,740 |
|
| $ | 0.13 |
|
The Company has recorded the advance as a prepaidstock-based compensation expense as of August 31, 2010.$0 and $0 for all outstanding stock warrants for fiscal quarters 2019 and 2018, respectively. This expense is included in stock-based compensation expense.
Note 6.8. Stock Options
The Company has one stock option plan called The 2006 Employee Stock and Option Plan. AsPlan (the “2006 Plan”), which has reserved 5,000,000 shares of August 31, 2010, an aggregateour common stock for issuance. The types of 5,000,000awards that could be granted under the 2006 Plan include incentive and non-qualified options to purchase shares of common stock, may be granted under this planstock appreciation rights, restricted shares, restricted share units, performance awards and other types of stock-based awards. All grants are determined and approved by the Board of Directors. Through February 28, 2018, the Company has only granted non-qualified stock options under the 2006 Plan. The stock options may be granted to directors, officers employees, consultants and advisorsemployees of the Company. Options granted under this plan are non-qualified stock options andthe 2006 Plan have exercise prices and vesting terms establishedapproved by the Board of Directors at the time of each grant. Vesting terms of the outstanding options range from immediate to twofour years from the grant date anniversary.of grant. The termsexercise period of the options arerange from five to ten years from the date of grant.
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The Company records its stock-based compensation arrangements calculating the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the consolidated statements of operations based on their grant date fair values. The fair value of the Company’s stock options have been estimated using the Black-Scholes pricing model, which requires assumptions as to expected dividends, the options expected life, volatility and risk-free interest rate at the time of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite vesting periods in the Company’s consolidated financial statements as of and foroperations.
The Company did not issue any stock options during the six months ended August 31, 2010 and 2009, reflect the impactfirst quarter of their stock-based compensation. For the three months ended August 31, 2010,fiscal 2019.
During fiscal 2018, the Company grantedissued an aggregate of 1,035,159 stock options with a fair value of $151,627 to 1 officer, 6 employees and 2 contractors to purchase shares of the Company’s common stock at prices of $0.10. All options vested immediately and are exercisable for one year.
During fiscal 2018, 1,292,310 of previously issued stock options to one director allowing1 officer expired, and 200,000 stock options previously issued to another officer were exercised for $20,000 cash.
The Company utilized the purchase of up to an aggregate of 200,000 shares of common stock, with a weighted-average-grant-datefollowing key assumptions in computing the fair value of $1.14. Total stockthe options using the Black-Scholes pricing model:
February 16, | ||||
2018 | ||||
Weighted-average volatility | 153 | % | ||
Expected dividends | None | |||
Expected term (in years) | 1.00 | |||
Weighted-average risk-free interest rate | 2.00 | % |
The Company recorded stock-based compensation expense of $0 and $164,742 for all option grants was $93,049outstanding options for fiscal quarter 2019 and $(183,139) for the three months ended August 31, 2010 and 2009, respectively. For the six months ended August 31, 2010 and 2009, the Company has
F-25
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
recorded $126,040 and $47,166 in stock compensation expense,fiscal year 2018, respectively. This expense is included in selling, general and administrative expense. As of August 31, 2010, there was no tax benefit from recording this non-cash expense due to thestock-based compensation.
Company having a full valuation allowance against its deferred tax assets. The compensation expense impacted the three and six months ended August 31, 2010 basic (loss) per common share by $(0.003) and $(0.005), respectively. There remains $144,114 of total unrecognized compensation expense, which is expected to be recognized over future periods through July 31, 2012.
The following table summarizes information about the Company’s stock options:options as of May 31, 2018:
|
| Number of Options |
|
| Weighted Average Exercise Price |
| ||
Outstanding - February 28, 2017 |
|
| 6,692,310 |
|
| $ | 0.16 |
|
Granted |
|
| 1,035,159 |
|
| $ | 0.10 |
|
Canceled or expired |
|
| (1,492,310 | ) |
| $ | 0.14 |
|
Outstanding - February 28, 2018 |
|
| 6,235,159 |
|
| $ | 0.16 |
|
Granted |
|
| - |
|
|
| - |
|
Canceled or expired |
|
| - |
|
|
| - |
|
Outstanding - May 31, 2018 |
|
| 6,235,159 |
|
| $ | 0.16 |
|
Exercisable at May 31, 2018 |
|
| 6,235,159 |
|
| $ | 0.16 |
|
The following table summarizes information about stock options outstanding as of May 31, 2018:
Exercise Price |
|
| Number Outstanding |
|
| Weighted Average Remaining Life (years) |
|
| Weighted Average Exercise Price |
|
| Number Exercisable |
|
| Weighted Average Exercisable Price |
| ||||||
$ | 0.10 |
|
|
| 4,885,159 |
|
|
| 5.62 |
|
| $ | 0.10 |
|
|
| 4,885,159 |
|
| $ | 0.10 |
|
$ | 0.15 |
|
|
| 200,000 |
|
|
| 7.52 |
|
| $ | 0.15 |
|
|
| 200,000 |
|
| $ | 0.15 |
|
$ | 0.30 |
|
|
| 700,000 |
|
|
| 7.17 |
|
| $ | 0.30 |
|
|
| 700,000 |
|
| $ | 0.30 |
|
$ | 0.54 |
|
|
| 375,000 |
|
|
| 5.68 |
|
| $ | 0.54 |
|
|
| 375,000 |
|
| $ | 0.54 |
|
$ | 1.00 |
|
|
| 75,000 |
|
|
| 3.36 |
|
| $ | 1.00 |
|
|
| 75,000 |
|
| $ | 1.00 |
|
$ | 0.10 - $1.00 |
|
|
| 6,235,159 |
|
|
| 5.83 |
|
| $ | 0.16 |
|
|
| 6,235,159 |
|
| $ | 0.16 |
|
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Table of Contents |
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contract Life (years) | Aggregate Intrinsic Value (1) | |
Outstanding - February 28, 2010 | 4,003,000 | $ 2.326 | - | - | |
Granted | 200,000 | 1.720 | - | - | |
Canceled or expired | (150,000) | (10.583) | - | - | |
Exercised | - | - | - | - | |
Outstanding – August 31, 2010 | 4,053,000 | $ 1.991 | 1.76 | - | |
Exercisable at August 31, 2010 | 3,915,000 | $ 1.997 | 1.65 | - |
(2)
The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.
Note 7.9. Related Party Transactions
Accounts Payable – Related Parties
The Company enteredowes $7,625 and $9,847 due to advances made to an employee which is included within accounts payable – related parties as of May 31, 2018 and February 28, 2018, respectively.
As of May 31, 2018 and February 28, 2018, the Company owes $748,907 and $450,500, respectively, to Epik Holdings Inc. related to annual domain name renewal fees to satisfy Domain marketing development obligations.
Prepaid Domain Names
During the fiscal quarter 2019 and fiscal year 2018, the Company incurred $260,907 and $214,304, respectively, of annual domain name renewal fees. The amounts paid for the annual domain name renewal fees are paid directly to Epik Holdings Inc., a company which is controlled by Robert Monster, the Company’s Chief Executive Officer. Epik, then uses those funds to directly to pay Verisign and ICANN companies for the annual domain renewal costs. The costs paid to Epik are at terms similar or better than what Epik charges its other clients.
Convertible Notes Payable – Related Party
On September 14, 2016, subject to a stock purchase agreement, the Company signed a secured convertible note of $400,000 with Clint Skidmore, founder of Rezserve Technology Ltd (“Rezserve”). The interest free note is due and payable within one year, at which time it can be converted into up to 1,000,000 shares of the Company’s common stock at a conversion price of $0.40 per share. The Company evaluated the note and determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present.
On December 22, 2017, the Company formalized its agreement to extend and convert the original convertible note of $400,000 for Clint Skidmore to October 31, 2018, original founder of Rezserve Technologies Ltd. The Company has repaid $70,000 to Clint Skidmore, and converted $210,000 of the note to 1,100,000 shares of the Company’s common stock, resulting in a loss on conversion of $13,000. At May 31, 2018, the Company owes $120,000 to Clint Skidmore, bearing no interest. This note had imputed interest expense of $38,000 in fiscal 2018, and imputed interest of $3,500 in the first quarter of fiscal 2019.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
On June 9, 2017, the Company signed a convertible note of $500,000 with Darvin Habben, Chairman. This note is due and payable within one year, bears interest of 8%, and can be converted into up to 2,000,000 shares of the Company’s common stock at a conversion price of $0.25 per share. The Company recorded a debt discount equal to $300,000 due to this conversion feature. The note had accrued interest of $28,932 as of February 28, 2018. The debt discount had a balance at February 28, 2018 of $191,507. The Company recorded debt discount amortization expense of $108,493 during the year ended February 28, 2018.On May 9, 2018, the Company converted the $500,000 convertible note with Darvin Habben, Chairman, along with accrued and unpaid interest of $38,027.40, to 5,380,274 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $191,507 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception.Promissory Notes Payable - Related Party
On July 20, 2017, the Company signed a promissory note of $100,000 with Derek Schumann, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Derek Schumann in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature.
On May 9, 2018, the Company converted the $100,000 promissory note with Derek Schumann, Director, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
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On July 20, 2017, the Company signed a promissory note of $100,000 with Greg Foss, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Greg Foss in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature.
On May 9, 2018, the Company converted the $100,000 promissory note with Greg Foss, Director, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
On July 27, 2017, the Company signed a promissory note of $150,000 with Darvin Habben, CEO. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Darvin Habben in connection with this note, with an exercise price of $0.10, and expiry date of July 27, 2027. The Company recorded a warrant discount equal to $150,000 due to this warrant feature.
On May 9, 2018, the Company converted the $150,000 promissory note with Carvin Habben, Chairman, to 1,500,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $105,616 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $2,875 during the quarter ended May 31, 2018.
Sales of Common Stock
During the first quarter of fiscal 2019, the Company sold an aggregate of 2,950,000 shares to five year leaseof the Company’s board members at the price of $295,000.
During fiscal 2018, the Company sold an aggregate of 2,100,000 shares to two of the Company’s board members at the price of $250,000.
Employment Agreements
During fiscal 2018, the Company signed employment agreements with Jeffthree members of senior management, all of which are still active. All employment agreements were for a period of approximately 6 to 24 months. See Note 6 for more information about these employment agreements.
Directors and Officers
In December 2017, all non-executive directors received a stock grant of 600,000 shares. Mr. Parsons and Mr. Mills received an additional 200,000 shares each, as recognition for completing tasks outside their director responsibilities. This resulted in a director/stockholderstock-based compensation expense of $956,800 in fiscal 2018.
CEO Employment Agreement Share Issuance
The Company expensed $60,000 in annual salary and $253,926 in stock-based compensation in the first quarter of fiscal 2019, and $240,000 in annual salary and $1,026,710 in stock-based compensation in fiscal 2018, related to the employment agreement with Robert Monster, CEO.
CEO Accrued Salary Conversion
On February 16, 2018, Robert Monster, CEO converted $70,000 of his accrued salary into 700,000 shares of common stock and 700,000 stock options with an exercise price of $0.10 and a vesting period of 12 months. The shares and options were valued on the conversion date in the amounts of $161,000 and $92,507, respectively.
Accrued Expenses - Related Parties
The Company was founded in 1982 and managed by Richard Pomije since at least 1987. On May 17, 2015, Mr. Pomije resigned as CEO of the Company and on June 1, 2015, he resigned as the CFO and Chairman. At that time of his resignation, the Company and the Board of Directors were not aware of any continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with his closing of the Burnsville, MN office.
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On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for approximately 2,650 square feeta 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of space usedFebruary 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for offices and operations equipment storage at 11974 Portland Avenue, Burnsville, Minnesota. The lease commencedthe lawsuit he filed against the Company on December 16, 20065, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2018, $552,976 has been accrued as payable to Mr. Pomije. The Company is in the process of filing an appeal. See Note 15 for additional information about transactions between the Company and its former officer.
Note 10. Income Taxes
The Company accounts for income taxes under standards issued by the FASB. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.
No provision for federal income taxes has been recorded due to the net operating loss carry forwards totaling $17,132,786 as of May 31, 2018 that will offset future taxable income. The available net operating loss carry forwards will expire in various years through 2037. Future tax benefits which may arise as a monthly rentresult of $2,650these losses have not been recognized in these consolidated financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the five year term offuture tax loss carry forwards.
The actual income tax provisions differ from the lease and contains an option to renew for an additional term of one year at a monthly rent of $3,650. The Company’s lease payments madeexpected amounts calculated by applying the statutory income tax rate to the director for the three months ended AugustCompany’s loss before income taxes. The components of these differences are as follows at May 31, 20102018 and 2009 totaled $7,950 and $7,950, respectively. For the six months ended August 31, 2010 and 2009, the Company recorded $15,900 in lease payments to the director for each period. February 28, 2018:
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Loan from Director/Stockholder
As of August 31, 2010, the Company had an outstanding working capital loan of $86,304 from Jeff Mills, a director/stockholder of the Company. The loan is due on demand and bears annual interest at 7.0%. The Company made principal payments of $51,066 during the six months ended August 31, 2010. Interest expense incurred on this loan for the three and six months ended August 31, 2010 and 2009 was $1,544 and $3,792 and $2,509 and $4,565, respectively.
Note 8.11. Commitments and Contingencies
Litigation
The Company, is exposed to asserted and unasserted claims encountered in the normal course of business.business, is a party to various ordinary course claims and legal proceedings. In the opinion of management, the ultimate resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the Company'sCompany’s financial position or results of operations.
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of February 28, 2017.
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F-26
DigitalTown, Inc.On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2018, $552,976 has been accrued as payable to Mr. Pomije. During the quarter ending May 31, 2018, $10,910 was paid to Mr. Richard Pomije. As at May 31, 2018, $542,066 has been accrued as payable to Mr. Pomije. The Company is in the process of filing an appeal. The Company is in the process of filing an appeal. See Note 16 for additional information about transactions between the Company and its former officer.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSLease Commitments
(unaudited)As of February 28, 2018, we have one outstanding operating lease. The lease is for 700 square feet of office space in Vancouver, British Columbia for our Rezserve subsidiary. The lease is month-to-month with either party able to terminate the lease with 30 days of notice. Gross rent is approximately $2,600 per month.
Note 9.12. Common Stock Subscriptions Receivable
As of August 31, 2010,From time to time, the Company has the followinghad various stock subscription agreements outstanding all of which the majority iswere due from a related party:
2005 Agreements
Material termsparty. As of May 31, 2018, the company does not have any stock subscription agreements received by the Company on August 31, 2005, for 78,376 restricted common shares and on December 30, 2005 for 4,733,333 restricted common shares at $0.75 per share (total value of $3,608,782) are as follows:
·
Payment is due in full in 60 months.
·
At 24 months, the Company can demand at its option, monthly 1/36 payments on the subscription agreement.
·
The Company has the option to charge simple annual interest of up to 4%.
·
The Company will provide downside protection of up to 30% of the stock price upon conversion.
The outstanding balance owed on the 2005 subscription agreements at August 31, 2010 is $488,013.
2007 Agreements
On October 5, 2007, the Company received subscriptions for 1,300,000 restricted common shares at $2.50 per share (total value of $3,250,000). Significant terms of the original subscription agreement are as follows:
·
The price per share of $2.50 was based on the closing price on October 4, 2007.
·
At 24 months, 1/36 payments are due monthly.
·
The Company, at its option, may call up to 1/12 of the gross receivable per month if the preceding 30 day average trading price is at or above $7.00 a share with minimum trading volume of 5,000 shares per day.
·
If the purchaser sells these common shares, the purchaser shall be entitled to an amount equal to 200% of the original purchase price of each share and the Company shall be entitled to 50% of any additional net sales proceeds from the stock sale.
On February 25, 2010, due to the recent economic downturn and the market value decline of the Company’s stock, which was trading below $2.50 per share, the Company amended the pricing terms of the subscription agreements received by the Company on October 5, 2007. The amendment changed the following significant terms of the subscription agreement:
The parties agree that the Initial Pricing terms in the Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be amended to state as follows:
2.
The Subscriber offers to purchase shares of the Company for $0.75 per share. After the price adjustment, the revised total value of this subscription agreement is $975,000.
The following other provisions of the Initial Pricing and Final Pricing terms in the Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be deleted, and are not enforceable by either party:
·
Beginning October 5, 2009, 1/36 payments are due each month thereafter on the 5th of every month.
·
The Company at its option may call up to 1/12 of the (gross) receivable note per month if the preceding 30 day average trading price is at or above $7.00 a share. Minimum trading volume must be 5,000 shares a day.
·
As total consideration for the purchase and sale of the Company’s stock, purchaser shall ultimately pay to the Company the following amount (the “Purchase Price”):
F-27
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A.
Purchaser shall first be entitled to an amount equal to 200% of the face amount of each share.
B.
After the purchaser receives the amount in A above, the Company shall be entitled to 50% of any additional net sales proceeds of the stock. Net sales proceeds shall mean the gross proceeds received from the sale of the stock, less reasonable brokerage commissions.
C.
Final adjusted net sales proceeds will be wired to the Company within 7 days from the final settlement of the sale of stock sold.
The outstanding balance owed on the revised 2007 subscription agreements at August 31, 2010 is $975,000.
2010 Agreement
Material terms of the subscription agreement received by the Company on June 22, 2010, for 400,000 restricted common shares at $0.75 per share (total value of $300,000) are as follows:
·
Payment is due in full in 60 months.
·
At 24 months, the Company can demand at its option, monthly 1/36 payments on the subscription agreement.
·
The Company has the option to charge simple annual interest of up to 4%.
·
The Company will provide downside protection of up to 30% of the stock price upon conversion.
The outstanding balance owed on the 2010 subscription agreement at August 31, 2010 is $300,000.
Summary
As of August 31, 2010, the Company had stock subscription receivables of $1,763,013 and for the three months ended August 31, 2010, the Company received stock subscription payments of $72,500.outstanding.
The following tables summarize information about the stock subscription receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(1)
Amendment to the terms of the subscription agreements received by the Company on October 5, 2007 for 1,300,000 restricted common shares reducing the price paid per share from $2.50 to $0.75.
(2)
New subscription agreement received on June 22, 2010.
F-28
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company has not exercised its rights, per the 2005 subscription agreements, to demand monthly 1/36 payments or to charge up to 4% interest on the subscription amounts outstanding and they have provided no “downside protection” to the subscribers. The “downside protection” in the terms for the 2005 subscription agreements requires the Company to reimburse the subscription holder up to 30% of the $.75 purchase price, or $.225, if the market price of the stock is below $.75 when converted. The protection may be provided in additional shares if necessary. For the six month period ended August 31, 2010, there was no downside protection provided because the stock price did not go below $.75 when converted. The subscription agreements do not define the term “when converted.” The Company has taken the position that if at the time that a purchaser makes a payment in full for the shares under a subscription agreement and the closing price of the shares of the Company’s
stock is less than $.75, the shareholder would be entitled to up to 30% additional shares, depending on the trading share price. Once the subscription shares have been paid for in their entirety, the downside protection ceases.
Note 10.13. Earnings (Loss) Per Share
The Company computes earnings per share using two different methods, basic and diluted, and presents per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding.
Due to the recent net losses generated by the Company, there are no dilutive elements. Therefore, basic and diluted EPS are the same.
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The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the threefirst quarter of fiscal years 2019 and six month periods ended August 31, 2010 and 2009:2018:
| Three months ended | ||
| August 31, | ||
| 2010 |
| 2009 |
Basic earnings (loss) per share calculation: |
|
|
|
Net income (loss) to common shareholders | $ (273,325) |
| $ 3,379 |
Weighted average of common shares outstanding | 27,810,431 |
| 27,362,885 |
Basic net earnings (loss) per share | $ (0.01) |
| $ 0.00 |
|
|
|
|
Diluted earnings (loss) per share calculation: |
|
|
|
Net income (loss) to common shareholders | $ (273,325) |
| $ 3,379 |
Weighted average of common shares outstanding | 27,810,431 |
| 27,362,885 |
Stock options (1) | - |
| - |
Warrants (2) | - |
| - |
Diluted weighted average common shares outstanding | 27,810,431 |
| 27,362,885 |
|
|
|
|
Diluted net income (loss) per share | $ (0.01) |
| $ 0.00 |
|
| Fiscal 2019 |
|
| Fiscal 2018 |
| ||
Basic earnings (loss) per share calculation: |
|
|
|
|
|
| ||
Net loss to common shareholders |
| $ | (2,256,142 | ) |
| $ | (1,101,248 | ) |
Weighted average number of common shares outstanding |
|
| 86,876,957 |
|
|
| 55,059,804 |
|
Basic net loss per share |
| $ | (0.03 | ) |
| $ | (0.02 | ) |
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share calculation: |
|
|
|
|
|
|
|
|
Net loss to common shareholders |
| $ | (2,256,142 | ) |
| $ | (1,101,248 | ) |
Weighted average number of common shares outstanding |
|
| 86,876,957 |
|
|
| 55,059,804 |
|
Stock options (1) |
|
| - |
|
|
| - |
|
Warrants (2) |
|
| - |
|
|
| - |
|
Diluted weighted average common shares outstanding |
|
| 86,876,957 |
|
|
| 55,059,804 |
|
Diluted net loss per share |
| $ | (0.03 | ) |
| $ | (0.02 | ) |
F-29
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| Six months ended | |||
| August 31, | |||
| 2010 |
| 2009 | |
Basic earnings (loss) per share calculation: |
|
|
| |
Net income (loss) to common shareholders | $ (516,540) |
| $ (416,575) | |
Weighted average of common shares outstanding | 27,645,077 |
| 27,296,799 | |
Basic net earnings (loss) per share | $ (0.02) |
| $ (0.02) | |
|
|
|
| |
Diluted earnings (loss) per share calculation: |
|
|
| |
Net income (loss) to common shareholders | $ (516,540) |
| $ (416,575) | |
Weighted average of common shares outstanding | 27,645,077 |
| 27,296,799 | |
Stock options (1) | - |
| - | |
Warrants (2) | - |
| - | |
Diluted weighted average common shares outstanding | 27,645,077 |
| 27,296,799 | |
|
|
|
| |
Diluted net income (loss) per share | $ (0.02) |
| $ (0.02) |
_________
(1) | At |
| |
(2) | At |
Note 11. Supplemental Disclosure14. Acquisitions
Congo Ltd. Acquisition
On December 7, 2017, the Company closed on an asset purchase agreement for the acquisition of Cash Flow InformationCongo Ltd. (Congo). Congo, based in Houston, TX, owns and operates a web-based platform offering; a portal connecting attorneys to prospective clients through a marketplace setting; a software-as-a-service (SaaS) subscription, selling web features to attorneys for their use on their respective law firm websites, and; the creation of customized online directories. The Company granted 3,000,000 shares of its common stock to the existing owners of Congo. The closing price of the Company’s common stock on the acquisition date was $0.28 per share, therefore, the fair value of common stock issued was $840,000. The stock was issued in February 2018.
| Six months ended | |
| August 31, | |
| 2010 | 2009 |
Non-cash flow information: |
|
|
Cash paid for interest | $ 3,792 | $ 4,565 |
Non-cash financing activities: |
|
|
Common stock issued with subscription agreement | $ 300,000 | $ - |
F-30This acquisition was accounted for using the replacement cost method, where the cost to replace or recreate the subject asset is estimated. The agreement included customary representations, warranties, and covenants by us and Congo.
According to the replacement cost method of accounting, the Company recognized the identifiable assets acquired as follows:
P
Developed Technology, Platform and code base | 420,000 | |||
Developed Technology, New code base and databases | 432,000 | |||
Assembled Workforce | 35,000 | |||
Goodwill | 78,000 | |||
Total intangibles and goodwill | 965,000 | |||
Total assets acquired, net | 965,000 |
The purchase price consisted of the following:
Common stock | 840,000 | |||
Cash consideration | 75,000 | |||
Earnest money | 50,000 | |||
Total purchase price | 965,000 |
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The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $926,252 related to this acquisition in fiscal 2018.
As the company is not using the assets in the same manner as the predecessor company, no proforma financials are presented.
CityInformation, B.V. Acquisition
On October 27, 2017, the Company closed on an asset purchase agreement for the acquisition of CityInformation. CityInformation, based in Amsterdam (Netherlands), develops and operates mobile apps for cities and towns worldwide. The Company granted 2,833,333 shares of its common stock to the existing owners of CityInformation. The closing price of the Company’s common stock on the acquisition date was $0.29 per share, therefore, the fair value of common stock issued was $821,667. The stock was issued in November 2017.
This acquisition was accounted for using the replacement cost method, where the cost to replace or recreate the subject asset is estimated. The agreement included customary representations, warranties, and covenants by us and CityInformation.
According to the replacement cost method of accounting, the Company recognized the identifiable assets acquired as follows:
Developed Technology, App Portfolio | 250,000 | |||
Developed Technology, App Handles | 135,000 | |||
Assembled Workforce | 40,000 | |||
Goodwill | 396,667 | |||
Total intangibles and goodwill | 821,667 | |||
Total assets acquired, net | 821,667 |
The purchase price consisted of the following:
Common stock | 821,667 | |||
Total purchase price | 821,667 |
The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $795,508 related to this acquisition in fiscal 2018.
As the company is not using the assets in the same manner as the predecessor company, no proforma financials are presented.
Comencia, Inc. Acquisition
On July 1, 2017, the Company closed on an agreement and plan of share exchange and acquired Comencia, a related party Company, which was partly owned by an officer of the Company. The Company granted 2,500,000 shares of its common stock to the existing owners of Comencia, Inc. The closing price of the Company’s common stock on the acquisition date was $0.30 per share, therefore, the fair value of common stock issued was $750,000. As part of the closing of this agreement, the Company made a cash payment and issued a note receivable from Comencia for $55,000. The terms of the note include payable on demand within 30 days of notice and a 3.0% annual interest rate. This note has not yet been repaid.
This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of Comencia’s assets and ongoing operations were acquired. The agreement included customary representations, warranties, and covenants by us and Comencia.
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According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
Cash | 11,989 | |||
Other assets | 13,115 | |||
Total assets | 25,104 | |||
Accrued expenses | (12,741 | ) | ||
Long-term payables | (52,422 | ) | ||
Total liabilities | (65,163 | ) | ||
Customer Lists | 33,000 | |||
Intellectual Property | 48,800 | |||
Trademarks | 7,000 | |||
Total intangibles | 88,800 | |||
Total assets acquired, net | 48,741 | |||
Additional consideration given as compensation expense | 701,259 | |||
Total consideration | 750,000 |
The purchase price consisted of the following:
Common stock | 750,000 | |||
Total purchase price | 750,000 |
This transaction was a non-arms length transaction, as one of Comencia’s owners was a Director of Digitaltown. As such, $750,000 was recorded as a stock-based compensation in fiscal 2018.
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The unaudited supplemental pro forma results of operations of the combined entities had the date of the acquisition been March 1, 2017 is as follows:
|
| Combined Pro Forma: |
| |
|
| For Fiscal Quarter |
| |
|
| 2018 |
| |
Revenues |
| $ | 111,300 |
|
|
|
|
|
|
Cost of revenues |
|
| 120,448 |
|
|
|
|
|
|
Gross profit (loss) |
|
| (9,148 | ) |
|
|
|
|
|
Operating expenses: |
|
|
|
|
Selling, general and administrative expenses |
|
| 1,082,168 |
|
|
|
|
|
|
Loss from operations |
|
| (1,092,624 | ) |
|
|
|
|
|
Other income (expense) |
|
| 9,724 |
|
|
|
|
|
|
Net loss |
| $ | (1,101,348 | ) |
|
|
|
|
|
Weighted average number of common shares |
|
|
|
|
Outstanding – basic and fully diluted |
|
| 55,059,804 |
|
|
|
|
|
|
Net loss per share – basic and fully diluted |
| $ | (0.02 | ) |
ART IINote 15. Debt
Convertible Note Payable - Related Party
Clint Skidmore - Note
On September 14, 2016, subject to a stock purchase agreement, the Company signed a secured convertible note of $400,000 with Clint Skidmore, founder of Rezserve Technology Ltd (“Rezserve”). The interest free note is due and payable within one year, at which time it can be converted into up to 1,000,000 shares of the Company’s common stock at a conversion price of $0.40 per share. The Company evaluated the note and determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present.
On December 22, 2017, the Company formalized its agreement to extend and convert the original convertible note of $400,000 for Clint Skidmore to October 31, 2018, original founder of Rezserve Technologies Ltd. The Company has repaid $70,000 to Clint Skidmore, and converted $210,000 of the note to 1,100,000 shares of the Company’s common stock, resulting in a loss on conversion of $13,000. At May 31, 2018, the Company owes $120,000 to Clint Skidmore, bearing no interest. This note had imputed interest expense of $38,000 in fiscal 2018, and imputed interest of $3,500 in the first quarter of fiscal 2019.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Darvin Habben - Note
On June 9, 2017, the Company signed a convertible note of $500,000 with Darvin Habben, Chairman. This note is due and payable within one year, bears interest of 8%, and can be converted into up to 2,000,000 shares of the Company’s common stock at a conversion price of $0.25 per share. The Company recorded a debt discount equal to $300,000 due to this conversion feature. The note had accrued interest of $28,932 as of February 28, 2018. The debt discount had a balance at February 28, 2018 of $191,507. The Company recorded debt discount amortization expense of $108,493 during the year ended February 28, 2018.On May 9, 2018, the Company converted the $500,000 convertible note with Darvin Habben, Chairman, along with accrued and unpaid interest of $38,027.40, to 5,380,274 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $191,507 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception.
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Promissory Note Payable - Related Party
Derek Schumann - Note
On July 20, 2017, the Company signed a promissory note of $100,000 with Derek Schumann, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Derek Schumann in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $69,452. The Company recorded warrant discount amortization expense of $30,548 during the year ended February 28, 2018.
On May 9, 2018, the Company converted the $100,000 promissory note with Derek Schumann, Director, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
Greg Foss - Note
On July 20, 2017, the Company signed a promissory note of $100,000 with Greg Foss, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Greg Foss in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $69,452. The Company recorded warrant discount amortization expense of $30,548 during the year ended February 28, 2018.
On May 9, 2018, the Company converted the $100,000 promissory note with Greg Foss, Director, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
Darvin Habben - Note
On July 27, 2017, the Company signed a promissory note of $150,000 with Darvin Habben, Chairman. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Darvin Habben in connection with this note, with an exercise price of $0.10, and expiry date of July 27, 2027. The Company recorded a warrant discount equal to $150,000 due to this warrant feature. The note had imputed interest of $8,877 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $105,616. The Company recorded warrant discount amortization expense of $44,384 during the year ended February 28, 2018.
On May 9, 2018, the Company converted the $150,000 promissory note with Carvin Habben, Chairman, to 1,500,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $105,616 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $2,875 during the quarter ended May 31, 2018.
Convertible Note Payable - Third Party
PowerUp Lending - Note 1
On October 30, 2017, the Company issued a convertible note to PowerUp Lending Group Ltd. for $75,000 of cash consideration. The note bears interest at 12%, matures on October 30, 2018, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $47,951 due to this conversion feature.On May 3, 2018, PowerUp Lending Group Ltd. converted $12,000 of the principal amount of the October 30, 2017 note into 170,940 shares of the Company’s common stock, leaving a principal balance due of $63,000.
On May 7, 2018, PowerUp Lending Group Ltd. converted $13,000 of the principal amount of the October 30, 2017 note into 213,115 shares of the Company’s common stock, leaving a principal balance due of $50,000.
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On May 10, 2018, PowerUp Lending Group Ltd. converted $15,000 of the principal amount of the October 30, 2017 note into 245,902 shares of the Company’s common stock, leaving a principal balance due of $35,000.
On May 15, 2018, PowerUp Lending Group Ltd. converted $20,000 of the principal amount of the October 30, 2017 note into 327,869 shares of the Company’s common stock, leaving a principal balance due of $15,000.
On May 16, 2018, PowerUp Lending Group Ltd. converted $15,000 of the principal amount, plus $4,500 in accrued and unpaid interest, of the October 30, 2017 note into 319,672 shares of the Company’s common stock, fully extinguishing this note.
The Company recorded debt discount amortization expenses of $32,055 related to this note during the first quarter of fiscal 2019.
PowerUp Lending - Note 2
On November 30, 2017, the Company issued a convertible note to PowerUp Lending Group Ltd. for $58,000 of cash consideration. The note bears interest at 12%, matures on November 30, 2018, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $38,164 due to this conversion feature. The note had accrued interest of $3,456 as of May 31, 2018. The debt discount had a balance at May 31, 2018 of $19,213. The Company recorded debt discount amortization expense of $9,541 during the quarter ended May 31, 2018. The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the conversion price floor and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares and a conversion floor of $0.00009.
PowerUp Lending - Note 3
On January 18, 2018, the Company issued a convertible note to PowerUp Lending Group Ltd. for $53,000 of cash consideration. The note bears interest at 12%, matures on January 18, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $33,164 due to this conversion feature. The note had accrued interest of $2,304 as of May 31, 2018. The debt discount had a balance at May 31, 2018 of $21,608. The Company recorded debt discount amortization expense of $8,471 during the quarter ended May 31, 2018 The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the conversion price floor and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares and a conversion floor of $0.00009.
Crown Bridge - Note 1
On January 30, 2018, the Company issued a convertible note to Crown Bridge Partners, LLC. for $55,000 of cash consideration. The note bears interest at 10%, matures on January 30, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 20 trading days prior to conversion. The Company recorded a debt discount equal to $33,246 due to this conversion feature. The Company also recorded a $3,000 debt discount due to issuance fees. The note had accrued interest of $1,812 as of May 31, 2018. The debt discount had a balance at May 31, 2018 of $24,305. The Company recorded debt discount amortization expense of $9,062 during the quarter ended May 31, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Promissory Note Payable - Third Party
On July 20, 2017, the Company signed a promissory note of $100,000 with Donovan Olson. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Donovan Olson in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature.
On May 9, 2018, the Company converted the $100,000 promissory note with Donovan Olson, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
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Note 16. Transactions with Former Officer and Current Shareholder
The Company was founded in 1982 and managed by Richard Pomije since at least 1987. On May 17, 2015, Mr. Pomije resigned as CEO of the Company and on June 1, 2015, he resigned as the CFO and Chairman. At that time of his resignation, the Company and the Board of Directors were not aware of any continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with his closing of the Burnsville, MN office.
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of February 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. During the quarter ending May 31, 2018, $10,910 was paid to Mr. Richard Pomije. As at May 31, 2018, $542,066 has been accrued as payable to Mr. Pomije. The Company is in the process of filing an appeal.
Note 17. Intangible Assets and Goodwill
Goodwill
The carrying value of goodwill at May 31, 2018 and February 28, 2018 was $0. During the fiscal 2018, the Company made an acquisition which resulted in $549,667 of goodwill being recorded and subsequently impaired.
Intangible assets
The carrying value of intangible assets at May 31, 2018 and February 28, 2018 was $0. During fiscal 2018, the Company acquired $1,237,000 of intangible assets, including $432,000 of code base and databases, $420,000 of platform and code base, $250,000 of app portfolios, and $135,000 of app handles. During fiscal 2018, the Company recorded $64,907 of amortization expense related to intangible assets.
Impairments
We evaluate our goodwill and intangible assets for an impairment on an annual basis each fiscal year end. Based upon our review and analysis, we deemed all of the goodwill and intangible assets acquired in fiscal 2018 as fully impaired as of February 28, 2018. Accordingly, we recognized an impairment expense of $1,721,760 in fiscal 2018. This reflects the full amount of goodwill and the unamortized balance of the intangible assets.
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Note 18. Digital Currencies
The Company has entered into stock purchase agreements with investors, and has accepted digital currencies as a form of payment from these investors, in exchange for shares of the Company’s common stock.
On May 15, 2018, the Company issued 11,385,590 shares of stock to Catena Fund One, LP for 1,050,000 RHOC (RChain Coins). The market price of RHOC on May 15, 2018 was $1.58 per RHOC, resulting in a value of $1,659,000.
On May 16, 2018, the Company sold 63,291.13924 RHOCs at $1.56 for $100,000, resulting in a loss on exchange of $1,282.
On May 31, 2018, market price of RHOC was $1.38, resulting in an unrealized loss on exchange of $196,070, which is represented as Accumulated Other Comprehensive Income in the equity section of the balance sheet.
Our primary market risk exposure with regard to digital currencies is the volatility in trading prices from day to day, which would only impact the gain/loss recognized at time of exchange on such instruments. As of May 31, 2018, the Company held the equivalent of $1,380,156 in digital currencies.
Note 19. Subsequent Events
In June 2018, PowerUp Lending Group converted $50,000 of the principal amount of the November 30, 2017 note into 763,001 shares of the Company’s common stock, leaving a principal balance due of $8,000.
In July 2018, the Company issued 90,000 shares of its common stock to a contractor, with a value of $7,920.
There were no additional significant subsequent events through July 16, 2018, the date the financial statements were issued.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition as of May 31, 2018 and its results of operations of the Company for the three months ended May 31, 2018 and 2017, which should be read in conjunction with, and is qualified in its entirety by, the financial statements and notes thereto included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended February 28, 2018.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q for the quarter ended May 31, 2018, contains forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may," "shall," "could," "expect," "estimate," "anticipate," "predict," "probable," "should," "continue," or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management and are considered by management to be reasonable. Our future operating results, however, may be materially different and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
GENERAL
DigitalTown, Inc. (“The Company”, “We”, “Us”, “Our” and “DigitalTown”) provides turn-key hosted solutions to power a comprehensive platform for government entities, citizens and merchants. Our solutions improve the quality of life for residents and visitors through integrated technology for economic development, civic engagement, digital inclusion and smart tourism for cities around the world. The easy to use platform helps city officials and local merchants manage a feature-rich Smart City for web and mobile devices, and provides residents and visitors with access to Content, Community and Commerce.
The Company’s fiscal year end is the last day in February. Our current fiscal year ends on February 28, 2019 and we refer to it as “fiscal 2019”. Last year, our fiscal year ended on February 28, 2018 and we refer to this year as “fiscal 2018”.
Market Opportunity
We provide an integrated search, community, and commerce platform for both web and mobile devices. DigitalTown powers connected online communities that enable members of a community to find information and acquire the goods and services they need locally when possible. The DigitalTown platform is intended to improve how the local economy consumes and transacts. It does this by helping local community citizens interact with city government, as well as local merchants. Residents and visitors are able to use the DigitalTown powered search engine to access content, community and commerce from an easy search tool. If there are local vendors that can fulfill a product or service that relates to a search term, then those options are presented to the user. Local vendors can also become direct merchants on the platform, effectively allowing the local town to be its own hub for mass commerce.
The Strategic Importance of Local Online Economic Development
The DigitalTown platform elevates local communities to an advanced state of technical capability. To date, most cities have historically taken a hands-off approach towards the Internet. However, we believe city management will further consider the Internet as an integral part of their strategic plan for economic growth.
The continued expansion of big box retailers and steep growth of national eCommerce has created an increased number of challenges for locally owned small businesses. This requires a new approach to online economic development – one that equips local merchants with the means to compete locally and sell nationally. DigitalTown provides a cost-effective solution to help local businesses compete against entities with greater reach, scale and resources.
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Why the DigitalTown solution makes sense now
The DigitalTown platform is a cost-effective solution for enabling a community to become a smart community, which we define as connected to shared content and local commerce. A key enabler for this capability is the continued growth of smartphones that are powered by common frameworks, such as Apple iOS and Android. The use of smartphones has enabled individuals to communicate and transact in real-time anywhere they choose using their smartphone, which serves as a proxy for identity, reputation, preferences and method of payment. In effect, the smartphone has become the Digital Wallet. We believe this opportunity is global and our approach, which emphasizes public-private partnerships, will enable accelerated adoption particularly in rural communities where trust of technology is lower, the need is potentially the greatest, and economic models are at the greatest risk.
How the DigitalTown SmartCity Platform is part of the new SmartWeb
A core component of the DigitalTown approach is to build branded web destinations that are intuitive to discover. Part of what makes this possible is the emergence of new domain extensions that are descriptive. For example, .CITY routes a visitor to a website about a city and .MENU routes a user to a website about restaurants in that city. Due to management’s long-standing relation with domain registry operators, the Company will seek to bring structure to the emerging landscape of domain extensions, while at the same time emphasizing distribution of a unified mobile application to work as a digital companion alongside the growing network of direct navigation brands.
The DigitalTown Platform
The DigitalTown platform supports powerful online and mobile communities. We tap into locally relevant news and content in order to keep community members informed. We provide community tools to keep community members connected. We enable commerce and fulfillment in local communities thereby helping residents to buy locally while equipping merchants to sell locally, nationally and even globally.
Content Search
The DigitalTown search engine serves as the core of the local experience. Whereas most residents may go once or twice per year to the official city site, the DigitalTown-powered search engine is designed for daily use as a preferred homepage for local residents and businesses. This will be accomplished through a combination of marketing and education to residents. In addition, we believe adoption can happen through building a strong level of trust with the residents, since our platform will be endorsed or supported by the local government whom the residents know. This compares to large national companies with limited to no connection to the local residents.
Community
Consumers are already familiar with social networking through applications like Facebook and Twitter. The integrated DigitalTown web service and mobile app make it easy to stay informed, as well as to connect and communicate with other members of a given community. Community members can message, join groups, shop online, and make payments.
Commerce
The DigitalTown platform provides merchants with a turn-key solution for online commerce. Once the approved merchant loads SKU’s and inventory available for sale, the merchants can begin selling without any setup fees or capital investment costs. Transaction processing services are provided by DigitalTown, thereby eliminating the need for each retailer to secure a merchant processing account. The community may also enable a private currency for use within the community.
Courier and Delivery Management
In a growing number of participating cities, an integrated courier and delivery application is included, enabling approved delivery service providers to be notified about items from merchants to be picked up and delivered to the customer, thereby enabling any approved merchant to also offer delivery services to the end-customer. Delivery time is chosen by the customer and can be hours to days.
Administration
The DigitalTown platform provides integrated administrative tools for managing Content, Community and Commerce, making it easy to administer. The administrative tools are designed to be the back end of the smart community. For example, administrators can create Frequently Asked Questions (FAQ) that are then presented through the site search. This FAQ article is then systematically provided as information when a user makes an inquiry that matches the keywords into the search box on the site.
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Intellectual Property
Domain Name Portfolio. The Company is developing a proprietary platform for Smart City Management. As part of this platform rollout, the Company has secured approximately 13,000 of the .CITY domains that map to significant population centers. DigitalTown has methodically secured the .CITY domains through both acquisition from existing registrants, or via direct purchase from the operator of the .CITY registrar.
Software: The Company has developed a proprietary platform for enabling any city to become a Smart City, incorporating advanced features for economic development, community engagement and digital inclusion. In addition, the Company has completed acquisitions of 6 software companies: Cloud.Market, Software Masters, Inc, Rezserve Technologies Ltd, Appointment.com, Comencia Inc, and Congo Ltd., each of which brought significant intellectual property and is in process of being fully integrated into the DigitalTown platform. The Company continues to invest in software with an emphasis on capital efficiency and return on investment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2018 AND 2017
During first quarter of fiscal 2019, the Company recorded revenues of $86,218 and cost of revenues of $525,328 for a gross loss of $439,110 compared to revenues of $80,271 and cost of revenues of $98,608 for a gross loss of $18,337 during the first quarter of fiscal 2018. For the first quarter of fiscal 2019 and 2018, revenues mainly consisted of development fees related to our SmartCity platform and activities from our Rezserve and Appointment.com subsidiaries. Cost of revenues consisted of amortization of prepaid annual domain name renewal fees of $302,989 and $48,531, development expense of $221,209 and $50,077, and merchant processing fees of $746 and $2,162, for the fiscal first quarters 2019 and 2018, respectively.
The Company’s operating expenses are currently all related to selling, general and administrative activity. These expenses were $1,223,618 in the first quarter of fiscal 2019 compared to $1,073,187 in the first quarter of fiscal 2018, an increase of $150,431. A portion of this increase was non-cash related. Our stock-based compensation expense was $436,406 for the first quarter of fiscal 2019 as compared to $346,701 for fiscal 2018, an increase of $90,335. In addition to the non-cash item, our increase in selling, general and administrative expenses was due to an increase in contractor expense of $151,028, an increase of $35,460 in hosting and server expenses, and an increase of $69,953 in accounting and advisory fees.
The Company’s overall net loss for the current first quarter increased by $1,154,894 to $2,256,142. The increase was mainly due to an increase in stock compensation expense, an increase in debt and warrant discount amortization, an increase in prepaid annual domain name renewal fees, and the increase in general and administrative items as detailed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash position at May 31, 2018 was $20,506, a decrease of $38,206 from $58,712 at February 28, 2018. During the first quarter of fiscal 2019, net cash used in operating activities was $662,436 compared to cash used of $635,925 for the first quarter of fiscal 2018. When comparing the two periods, the increase in cash used in operating activities of $26,511 for the first quarter of fiscal 2019 is primarily due to an increase of cash operating expenses.
Net cash received used in investing activities was $98,656 for the first quarter of fiscal 2019, compared to net cash used of $26,423 for the first quarter of fiscal 2018. In the first quarter of fiscal 2019, the Company received cash from the sale of certain digital currencies.
Net cash provided by financing activities for the first quarter of fiscal 2019 was $526,950, compared to $162,500 in the first quarter of fiscal 2018, which consisted mainly of proceeds from the sale of common stock.
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Monthly cash operating expenses for the first quarter of fiscal 2019, were approximately $325,000 per month. Based on current projections, the Company’s monthly cash operating expenses going forward should be approximately $375,000 per month, which includes the monthly cost for the renewal of the existing domain names. In the period from June 1, 2018 through July 16, 2018, the Company did not enter into stock purchase agreements of restricted common shares.
We believe our current cash reserves, the amounts we expect from future proceeds from the issuance of our common stock and the sale of existing domain names should be sufficient to enable us to operate for the next 12 months. In the event that we are unable to operate profitably, raise additional capital through the sale of our common stock or sell existing domain names on acceptable terms, we would be forced to further reduce operating expenses or cease operations altogether.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
The discussion and analysis of DigitalTown, Inc.’s financial condition and results of operations are based on our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an ongoing basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While DigitalTown Inc.’s significant accounting policies are described in more detail in Note 1 to its financial statements, management believes the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements:
Prepaid Domain Names
The annual domain name renewal fees are currently amortized over one year and the purchase of any new domain names are the only amounts capitalized. See Note 5 for further information.
Stock-Based Compensation
The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.
Recently Issued Accounting Pronouncements
Information regarding recently issued accounting pronouncements is included in Note 1 to the consolidated financial statements in “Item 8. Financial Statements and Supplemental Data” in this Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has entered into stock purchase agreements with investors, and has accepted digital currencies as a form of payment from these investors, in exchange for shares of the Company’s common stock. Our primary market risk exposure with regard to digital currencies is the volatility in trading prices from day to day, which would only impact the gain/loss recognized at time of exchange on such instruments. As of May 31, 2018, the Company held the equivalent of $1,380,156 in digital currencies.
The Company has not entered into, and does not expect to enter into, financial instruments for trading or hedging purposes. The Company does not currently anticipate entering into interest rate swap and/or similar instruments. Our primary market risk exposure with regard to financial instruments is to changes in interest rates, which would only impact interest income earned on such instruments. As of May 31, 2018, the Company did not have any material currency exchange or interest rate risk exposure.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13.OTHER13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONDISTRIBUTION.
The estimatedfollowing table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securities being registered hereunder. The selling stockholders will bear no expenses associated with this Offering are as follows:
Expenses(1) |
| Amount US ($) |
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SEC Registration Fee |
| $ | 598 |
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Transfer Agent Fees |
| $ |
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Accounting Fees and Expenses |
| $ | 4,000 |
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Legal Fees and Expenses |
| $ | 10,000 |
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Miscellaneous |
| $ | 0 |
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Total |
| $ | 14,598 |
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(1) All amounts are estimates, other than the SEC's registration fee,offering except for any broker discounts and have been rounded to the nearest whole dollar.
We are paying allcommissions or equivalent expenses and expenses of the Offering listed above. No portionselling stockholders’ legal counsel applicable to the sale of these expenses will be paid byits shares. All of the Selling Stockholders. The Selling Stockholders, however, will pay any other expenses incurred in selling their common stock, including any brokerage commissions or costs of sale.amounts shown are estimates, except for the Securities and Exchange Commission registration fees.
Item |
| Amount to be paid |
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SEC registration fee |
| $ | 24.90 |
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Legal fees and expenses |
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| 15,000.00 |
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Accounting fees and expenses |
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| 2,000.00 |
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Total |
| $ | 17,024.90 |
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ITEM 14.INDEMNIFICATION OF DIRECTORS AND OFFICERSOFFICERS.
Our Articles of Incorporation provide for indemnification to the full extent permitted by the laws of the State of Minnesota for each person who becomes a party to any civil or criminal action or proceeding by reason of the fact that he, or his testator, or intestate, is or was a director or officer of the corporation or served any other corporation of any type or kind, domestic or foreign in any capacity at the request of the corporation. We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel, submit the question of whether such indemnification is against public policy to a court of appropriate jurisdiction.
We have no other indemnification provisions in our Certificate of Incorporation, Bylaws or otherwise specifically providing for indemnification of directors, officers and controlling persons against liability under the Securities Act.
ITEM 15.RECENT SALES OF UNREGISTERED SECURITIES
Interim Period from September 1, 2010 through December 16, 2010
On December 1, 2010, the Company entered into a stock purchase agreement and issued 5,000 units (each unit consisting of one share of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $4.00 per share) at a unit price of $1.00, for total cash proceeds of $5,000.
During the quarter ended November 30, 2010, the Company entered into stock purchase agreements and issued 107,000 units (each unit consisting of one share of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $4.00 per share) at a unit price of $1.00, for total cash proceeds of $107,000.
On November 15, 2010, the Company issued 6,000 restricted common shares at $1.25 per share, valued at $7,500, to five directors of the Company for payment of director fees.
These shares are unregistered with no underwriter used for the sale of common stock. The shares of stock were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D promulgated thereunder.
ITEM 16. EXHIBITSNone.
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Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit Number |
| Description of Exhibits |
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3.1 |
| Articles of Incorporation of as amended(1) |
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3.2 |
| Bylaws(1) |
4.1 |
| Form of Common Stock Certificate |
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5.1 |
| Legal Opinion |
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| (1) | Incorporated by reference to exhibit filed as a part of Registration Statement on Form 10-SB (Commission File No. 000-27225) |
| (2) | Incorporated by reference to exhibit filed as a part of Current Report on form 8K filed June 9, 2009. |
| (3) | Incorporated by reference to exhibits filed as a part of our Annual Report on Form 10K filed April 16, 2009. |
| (4) | Incorporated herein by reference to the Annual Report on Form 10K filed May 28, 2010 |
| (5) | Incorporated herein by reference to the Current Report on Form 8K filed December 7, 2010 |
ITEM 17. UNDERTAKINGS
The Registrant undertakes:
(6) | Incorporated herein by reference to Exhibit 5.1 of form S-1 filed June 5, 2018 | |
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The Registrant is registering securities under Rule 415 of the Securities Act and hereby undertakes:
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| Incorporated herein by reference to Exhibit 10.3 of form S-1 filed June 5, 2018 |
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ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1.) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
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(ii.) | To reflect in the |
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(iii.) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
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| That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering |
thereof; | ||
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(3.) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the |
offering; and | ||
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(4.) | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the | |
(5.) | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser in the initial distribution of the |
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(ii.) | Any free writing |
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(iii.) | The portion of any other free writing | |
| Any other communication that is an offer in the |
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“Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, above, or otherwise, we havethe registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.”
In the event that a claim for indemnification against such liabilities other(other than the payment by usthe registrant of expenses incurred or paid by one of our directors, officers,a director, officer or controlling personsperson of the registrant in the successful defense of any action, suit or proceeding,proceeding) is asserted by one of our directors, officers,such director, officer or controlling personsperson in connection with the securities being registered, wethe registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and we will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Burnsville, Minnesota,Bellevue, Washington, on December 21, 2010.September 12, 2018.
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DIGITALTOWN, INC. |
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| /s/ Robert Monster | |
Robert Monster | |||
Chief Executive Officer/Director (Principal Executive Officer) | |||
By: | /s/ David Carter | ||
David Carter | |||
| Chief Financial Officer | ||
(Principal Accounting Officer) | |||
By: | /s/ Jeff Mills | ||
Secretary |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated.
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/s/ |
| Chief Executive Officer, (Principal Executive |
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/s/ Jeff Mills | Director, Secretary | September 12, 2018 | ||
Jeff Mills | ||||
/s/ Kenwei Chong | Director | September 12, 2018 | ||
Kenwei Chong | ||||
/s/ Darvin Habben | Director | September 12, 2018 | ||
Darvin Habben | ||||
/s/ Derek Schumann | Director | September 12, 2018 | ||
Derek Schumann | ||||
/s/ Lawrence Lerner | Director | September 12, 2018 | ||
Lawrence Lerner | ||||
/s/ George Nagy | Director | September 12, 2018 | ||
George Nagy |
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/s/ David Carter |
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