DigitalTown, Inc. - Quarter Report: 2007 May (Form 10-Q)

digitaltown10q053107.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

| X |

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

For the quarterly period ended: May 31, 2007

|__|

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-27225

DigitalTown, Inc.

(formerly BDC Capital, Inc.)

(Name of small business issuer in its charter)

Minnesota	41-1427445
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

11974 Portland Avenue, Burnsville, Minnesota	55337
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number: (952) 890-2362

Securities registered under Section 12(g) of the Exchange Act:

Title of Each Class

Common Stock

Par Value $0.01 per share

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No ___

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

Large Accelerated Filer [ ]

Accelerated Filer [ ]

Non-Accelerated Filer [X]

There were 25,723,750 shares of the registrant’s common stock outstanding as of July 12, 2007.

TABLE OF CONTENTS

PART I

Item 1.	Financial Statements	1-12

Item 2.	Management’s Discussion and Analysis and Plan of Operation	13-16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17

Item 4.	Controls and Procedures	17

PART II

Item 1.	Legal Proceedings	18

Item 1A	Risk Factors	18

Item 2.	Unregistered sales of Equity Securities and Use of Proceeds	18

Item 3.	Defaults Upon Senior Securities	18

Item 4.	Submission of Matters to a Vote of Security Holders	18

Item 5.	Other Information	18

Item 6.	Exhibits	18

iii

PART I

ITEM 1. FINANCIAL STATEMENTS

	Page

Financial Statements:
Balance Sheets	1
Statements of Operations	2
Statements of Cash Flows	3
Notes to Financial Statements	4-12

DigitalTown, Inc.

(formerly BDC Capital, Inc.)

CONSOLIDATED BALANCE SHEETS

ASSETS
	May 31,			February 28,
	2007			2007
	(unaudited)			(audited)

Current assets:
Cash	$	15,390		$	8,933
Other receivable		28			999
Total current assets		15,418			9,932
Property and equipment, net		5,154			1,579
Intangible assets – domain names		656,727			441,558
Total assets	$	677,299		$	453,069

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	392,406		$	137,144
Advances from stockholders		5,704			16,354
Accrued expenses:
Accrued payroll		20,152			32,169
Accrued interest		10,876			9,476
Deferred officer compensation		30,807			18,865
Notes payable - stockholder		70,000			70,000
Total current liabilities		529,945			284,008

Commitments and contingencies

Stockholders’ equity:
Common stock, $.01 par value, 2,000,000,000 shares authorized, 25,723,750 and 25,701,500 shares issued and outstanding at May 31, 2007 and February 28, 2007, respectively		257,233			257,010
Additional paid-in-capital		14,579,475			14,521,673
Subscription receivable		(2,795,501	)		(2,947,470	)
Accumulated deficit		(11,893,853	)		(11,662,152	)
Total stockholders’ equity		147,354			169,061
Total liabilities and stockholders’ equity	$	677,299		$	453,069

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

DigitalTown, Inc

(formerly BDC Capital, Inc.)

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months
	Ended
	May 31, 2007 (unaudited)

Operating expenses:
Selling, general and administrative expenses	$	233,275
Loss from operations		(233,275	)

Other income (expense)
Interest expense		(1,400	)
Other income		2,974
Total other income (expense)		1,574

Net loss	$	(231,701	)



Loss per common share – basic and diluted	$	(0.01	)

Weighted average common shares outstanding – basic and diluted		25,711,658

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

DigitalTown, Inc.

(formerly BDC Capital, Inc.)

CONSOLIDATED STATEMENT OF CASH FLOWS

	Three months ended May 31, 2007
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(231,701	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation		381
Stock based compensation expense		7,962
Non cash stock payment		50,063
Changes in operating assets and liabilities:
Other receivables		971
Prepaid expenses		-
Accounts payable		59,022
Accrued expenses:
Accrued payroll		(12,017	)
Accrued interest		1,400
Deferred officer compensation		11,942

Net cash used in operating activities		(111,977	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets		(3,956	)
Purchases and renewal of intangible assets – domain names		(18,929	)

Net cash used in investing activities		(22,885	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to officer/stockholder		(10,650	)
Payments received on stockholder subscription receivables net of $20,000 in transaction costs for the subscription offering initiated in fiscal 2006		151,969

Net cash provided by financing activities		141,319


Net change in cash and cash equivalents		6,457

Cash and cash equivalents, beginning of period		8,933

Cash and cash equivalents, end of period	$	15,390

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest	$	-
Non-cash investing and financing activities:
Intangible assets-domain name renewals incurred with accounts payable	$	196,240

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

DigitalTown, Inc.

(formerly BDC Capital, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Nature of Business and Summary of Significant Accounting Policies:

Nature of Business

DigitalTown, Inc. (formerly known as BDC Capital, Inc.) (“The Company”) was formed as a Minnesota corporation on April 7, 1982. It was incorporated under the name Command Small Computer Learning Center, Inc., a computer training company. In 1987, the Company changed its name to Command Electronics, Inc. In February 1995, the Company acquired CyberStar Computer Systems, a manufacturer and marketer of microcomputers and servers, and in 1997 changed its name to CyberStar Computer Corporation. In 2000, the Company changed its name to eNetpc, Inc. In November 2004, the Company changed its name to BDC Capital, Inc. BDC Capital, Inc. has engaged in the sale of computer components, development of software and resell of major computer brands. The names "BDC Capital, Inc." "we", "our" and "us" used in this report refer to BDC Capital, Inc.

On December 10, 2004, the Company’s Board of Directors elected to be regulated as a business development company (BDC) as outlined in the Investment Company Act of 1940 by filing a Form NT-54A. As a BDC, the Company planned to focus on current opportunities available to this attractive business model in the somewhat uncertain economic times.

On August 31, 2006, the Company filed with the SEC to withdraw their “business development company” status. The Company has changed its business plan to become a multiple-site online social-networking community portal through the internet. As part of that plan, the Company changed its name to DigitalTown, Inc. effective March 1, 2007. The Company is currently developing the DigitalTown portal. This portal, when complete, will include features such as email, alumni communication and reunion tools, chat, a wide range of high school activities such as music, drama and athletics, personal profiles, photo, video and music sharing and timely community news. The Company is currently developing a revenue model associated with the use of the DigitalTown portal.

The company has sustained losses and negative cash flows from operations and expects these conditions to continue into the foreseeable future. At May 31, 2007, the company had an accumulated deficit of $11,893,853. Subsequent to May 31, 2007, the company has received cash proceeds totaling approximately $255,000 from its stock subscription receivable. The company anticipates existing cash, proceeds received to-date as well as expected future proceeds from its stock subscription receivable and any additional financing needed through the sale of its common stock or other equity based securities, will be sufficient to meet its working capital and capital expenditures needs through at least May 31, 2008.

Principles of Consolidation

As a result of the Company’s Business Development Company withdrawal, the Company now files consolidated financial statements that include its controlled Subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

The election to withdraw the Company’s election as a Business Development Company under the 1940 Act has resulted in a significant change in the Company's required method of accounting. Business Development Company financial statement presentation and accounting utilizes the fair value method of accounting used by investment companies, which allows Business Development Company’s to recognize income and value their investments at market value as opposed to historical cost.

In addition, majority-owned subsidiaries are not consolidated and instead, investments in those subsidiaries are reflected on the balance sheet as an investment in and advances to affiliates, at fair value. As an operating company, the required financial statement presentation and accounting for securities held by the Company utilize either fair value or historical cost methods of accounting, depending on the classification of the investment and the Company's intent with respect to the period of time it intends to hold the investment, and the Company and its subsidiaries are reflected for financial accounting purposes as a consolidated entity. The change in accounting due to the conversion to an operating company from a Business Development Company is considered a change in accounting principle.

Management has retroactively applied this change in accounting principle in accordance with Statement of Financial Accounting Standards No. 154, “Accounting for Changes and Error Corrections” for the Company’s balance sheet as of February 28, 2006. As a business development company, the Company’s investment in BDC Partners, Inc. was not previously audited prior to February 28, 2006. Management has determined that it is impractible and not cost effective to retroactively apply this change in accounting to the previously reported interim financial statements of BDC Capital, Inc. for the three months ended May 31, 2006, per SFAS 154 par. 11. Therefore, the statements of operations and cash flows for the three months ended May 31, 2006 will not be comparative. However, these prior period financial statements are included in Note 9 as originally filed for informational purposes.

Use of Estimates

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

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, other receivables, accounts payable, accrued expenses and notes payable. Pursuant to SFAS No. 107 “Disclosures About Fair Value of Financial Instruments,” the Company is required to estimate the fair value of all financial instruments at the balance sheet date. The company considers the carrying value of its financial instruments in the financial statements to approximate fair value.

Revenue Recognition

The Company does not currently generate revenue from its operations.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents.

Intangible Assets – Domain Names

The Company is still in the development stage of its web site portal and accordingly, all costs, including license renewals, associated with domain names expected to be utilized in its website portal have been capitalized. Since the Company is still in the development stage of its web site portal and the ownership of these domain names can be renewed at a nominal fee prior to their expiration date, the useful life of the domain names are deemed to be indefinite and no amortization will be recorded.

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives, ranging from two to five years. Leasehold improvements are amortized over the shorter of the useful life or the term of the related lease. Repairs and maintenance costs are expensed 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.

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment and intangible assets – domain names are reviewed 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.

Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating losses and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment.

Stock-Based Compensation

Effective March 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment,” applying the modified prospective method. This standard requires the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the income statement based on their grant date fair values unless a fair value is not reasonably estimable. Prior to the Company’s adoption of SFAS No. 123(R), the company followed the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” The fair value of the Company’s stock options issued prior to and after the adoption of SFAS No. 123(R) has been estimated using a Black-Scholes pricing model, which assumes no expected dividends and estimates the option expected life, volatility and risk-free interest rate at the time of the grant.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and items defined as other comprehensive income (loss). Items defined as other comprehensive income (loss) include such items as foreign currency translation adjustments and unrealized gains (losses) on certain marketable securities. For the three months ended May 31, 2007, the Company had no items defined as other comprehensive income (loss).

Net Loss Per Common Share

Basic loss per share is computed using the weighted average number of shares outstanding for the period. Diluted loss per share is computed using the weighted average number of shares outstanding per share adjusted for the incremental shares attributed to outstanding stock options under the Company's stock option plans, convertible debt and convertible preferred stock. Incremental shares attributable to the assumed exercise of stock options and conversion of debt and preferred stock for the three months ended May 31, 2007 and May 31, 2006 were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS No. 157"). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a material impact on our consolidated financial position or results of operations.

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. The balances are insured by the Federal Deposit Insurance Company up to $100,000. Account balances in excess of federally insured limits were $0 at May 31, 2007 and February 28, 2007. The Company has not experienced any losses in such accounts.

Note 2. Property and Equipment

Property and equipment are as follows:

	May 31, 2007			February 28, 2007
Office equipment and furniture	$	477,176		$	473,220
Less accumulated depreciation		(457,384	)		(457,003	)
Less impairment of equipment		(14,638	)		(14,638	)
	$	5,154		$	1,579

Depreciation expense for the three months ended May 31, 2007 was $ 381.

Note 3. Notes Payable – Stockholder

As of May 31, 2007, the Company had interest bearing advances from a stockholder in the amount of $70,000. The unsecured notes are due at various dates from June 21, 2007 to August 1, 2007 with an interest rate of 8%. Accrued interest at May 31, 2007 and February 28, 2007 totaled $10,876 and $9,476, respectively.

Note 4. Stockholders Equity

On October 4, 2006, the Company initiated a reverse stock split of 75 to 1. Accordingly, all per share amounts reported in the financial statements for all periods have been retroactively restated to reflect the reverse stock split.

On April 20, 2007, the Company issued 22,250 restricted common shares, valued at $50,063, to a Minneapolis area high school for their assistance in initially developing the portal revenue model.

Note 5. Stock Options

The Company has one stock option plan called The 2006 Employee Stock and Option Plan. As of May 31, 2007, an aggregate of 5,000,000 shares of common stock may be granted under these plans determined by the board of directors. The stock options may be granted to directors, officers, employees, consultants and advisors of the Company. Options granted under this plan are non-qualified stock options and have exercise prices and vesting terms established by the Board of Directors at the time of each grant. Vesting terms of outstanding options range from immediate to two years of employment anniversary. All options expire five years from the date of grant.

Effective March 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment,” which requires the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the income statement based on their grant date fair values unless a fair value is not reasonably estimable. Prior to the Company’s adoption of SFAS No. 123(R), the Company followed the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” The fair value of the Company’s stock options issued prior to and after the adoption of SFAS No. 123(R) has been estimated using a Black-Scholes pricing model, which assumes no expected dividends and estimates the option expected life, volatility and risk-free interest rate at the time of grant.

The Company elected to adopt the modified prospective transition method, under which prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). The valuation provisions of SFAS No. 123(R) apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. The Company had no remaining estimated compensation for grants that were outstanding as of the effective date that would need to be recognized over the remaining service period using the compensation cost estimated for the SFAS No. 123 pro forma disclosures. The Company’s consolidated financial statements as of and for the three months ended May 31, 2007, reflect the impact of SFAS 123(R). No options were granted for the three month periods ended May 31, 2007 and 2006. For the three months ended May 31, 2007, the Company recorded related compensation expense of $7,962. This expense is included in selling, general and administrative expense. There was no tax benefit from recording this non-cash expense due to the Company having a full valuation allowance against its deferred tax assets. The compensation expense impacted the May 31, 2007 basic loss per common share by 0.00. There remains $208,990 of total unrecognized compensation expense, which is expected to be recognized over future periods.

SFAS 123 (R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The Company uses the Black-Sholes-Merton (“Black Sholes”) option-pricing model as a method for determining the estimated fair market value for employee stock awards. Compensation expense for employee stock awards is recognized on a straight-line basis over the vesting period of the award. The adoption of SFAS 123 (R) also requires certain changes to the accounting for income taxes and the method used in determining diluted shares, as well as additional disclosure related to the cash flow effects resulting from share-based compensation. The relevant interpretive guidance of Staff Accounting Bulletin 107 was applied in connection with its implementation and adoption of SFAS 123 (R).

The following table summarizes information about the Company’s stock options:

	Number of Options			Weighted Average Exercise Price			Weighted Average Remaining Contract Life		Aggregate Intrinsic Value (1)
Options outstanding February 28, 2007		3,125,000		$	1.725			4.50		-
Granted		-			-			-		-
Canceled or expired		(270,000	)		(1.725	)		-		-
Exercised		-			-			-		-
Options outstanding - May 31, 2007		2,855,000		$	1.725			4.25	$	1,070,625
Exercisable at May 31, 2007		2,730,000		$	1.725			4.25	$	1,023,750

(1) The intrinsic of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

Note 6. Related Party Transactions

The Company entered into a 5 year lease with a director of the Company for approximately 1,000 square feet of space used for offices and operations equipment storage at 11974 Portland Avenue, Burnsville, Minnesota. The lease commenced on December 16, 2006 at a monthly rent of $2,650 for the 5 year term of the lease and contains an option to renew for an additional term of 1 year at a monthly rent of $2,650. The Company previously sub-leased from a director of the Company the same space at a monthly rent of $750 renewable monthly. The Company incurred rent expense to the director for the three months ended May 31, 2007 totaling $7,950. The Company currently owes $14,575 to the director for rent payments due through May 31, 2007. This amount is included in accounts payable.

Future payments for fiscal years ending:

2008	$	31,800
2009		31,800
2010		31,800
2011		31,800
2012		25,175
	$	152,375

Note 7. Commitments and Contingencies

The Company is exposed to asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.

Note 8. Common Stock Subscriptions Receivable

During fiscal year ended February 28, 2006, the Company received subscriptions for 4,811,709 restricted common shares at $0.75 per share. Significant terms of the subscription agreement 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.

As of May 31, 2007 and February 28, 2007, the company has outstanding subscription receivables of $2,795,501 and $2,947,470 respectively. For the three months ended May 31, 2007, the company collected $151,969 of outstanding subscription receivables. No interest has been charged on these subscription agreements. The Company has collected approximately $255,000 of additional outstanding subscription receivables subsequent to May 31, 2007.

Note 9. Prior Period Financial Statement Presentation

For informational purposes, the following financial statements prepared using the accounting principles for a “business development company”, have been provided:

Statement of Operations for the three months ended May 31, 2006

Statement of Cash Flows for the three months ended May 31, 2006

DigitalTown, Inc.

(formerly BDC Capital, Inc.)

STATEMENT OF OPERATIONS

(unaudited)

	As a Business Development Company
	Three months ended May 31, 2006
Investment income	$	2

Operating Expenses:
Professional fees		26,775
Administrative expenses		47,019
Rent		1,125
Other		2,333
Interest expense		1,400

Total Operating expenses		78,652

Net investment loss		(78,650	)

Net change in unrealized appreciation on investment		-

Net decrease in net assets resulting from operation	$	(78,650	)

Loss per common share – basic and diluted	$	(0.01	)
Weighted average shares outstanding – basic and diluted as restated for the 1 for 75 reverse stock split on October 4, 2006		5,700,962

DigitalTown, Inc.

(formerly BDC Capital, Inc.)

STATEMENT OF CASH FLOWS

(Unaudited)

	As a Business Development Company
	Three months ended May 31, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations as a Business development company	$	(78,650	)
Adjustments to reconcile net assets resulting from operations and net loss to net cash used by operating activities:
Prepaid expenses		759
Accounts payable		12,448
Accrued liabilities		1,400
Investment in BDC Partners, Inc.		(217,000	)

Net cash used in operating and investing activities		(281,043	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net advance from stockholder		5,202
Payments received on stockholder subscription receivable net of $20,000 in transaction costs		381,063

Net cash provided by financing activities		386,265

Net change in cash and cash equivalents for the period		105,222

Cash and cash equivalents at beginning of period		15,346

Cash and cash equivalents at end of period	$	120,568

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of operations of the Company for the three months ended May 31, 2007, 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.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Form 10-Q for the quarter ended May 31, 2007 contains forward-looking statements within the meaning of Section 27A of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). 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, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

Withdrawal as a Business Development Company

The reader of this management discussion, the related financial statements and notes thereto, and other recent Company filings should understand that the portfolio company (BDC Partners), a company in which the Company invests, and the Company’s method of accounting upon its withdrawal of its election to be treated as a business development company (“BDC”) under the investment Company Act of 1940 (“1940 Act”), have materially changed the Company’s financial reporting.

REASONS FOR CEASING TO BE A BUSINESS DEVELOPMENT COMPANY

We determined that many of the regulatory, financial reporting and other requirements imposed by the 1940 Act were too restrictive and prevented the Company from operating in the manner in which it desired. Among these restrictions are the following:

BDCs are subject to restrictions in the 1940 Act on the type and amount of securities, other than common stock, that they can issue. We believe that the Company would be better served by greater flexibility in our capital structure.

The closely regulated nature of BDCs causes them to be subject to greater legal and accounting expenses.

The Company’s Board of Directors agreed with our assessment and determined that it was no longer feasible for the Company to operate as a BDC. The appropriate course of action was to withdraw the Company’s election to be regulated as a BDC by filing a Form N-54C with the SEC. Following the withdrawal of the election, the Company continues to be a reporting company under the Exchange Act, but is managed so that it will not be subject to the provisions of the 1940 Act.

EFFECT ON FINANCIAL STATEMENTS AND TAX STATUS

We do not believe that the withdrawal of the Company’s election to be treated as a BDC will have any impact on its federal income tax status, since we never elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code. (Electing treatment as a regulated investment company under Subchapter M generally allows a qualified investment company to avoid paying corporate level federal income tax on income it distributes to its shareholders.) Instead, we have always been subject to corporate level federal income tax on our income (without regard to any distributions we make to our shareholders) as a “regular” corporation under Subchapter C of the Code.

CHANGE IN ACCOUNTING PRINCIPLE

Management has retroactively applied this change in accounting principle in accordance with Statement of Financial Accounting Standards No. 154, “Accounting for Changes and Error Corrections” for the Company’s balance sheet as of February 28, 2006. The net effect, as of February 28, 2006, of the Company’s election to withdrawl its business development company status pursuant to the Investment Company Act of 1940 was ($797,056) net loss. As a business development company, the Company’s investment in BDC Partners was not previously audited prior to February 28, 2006. Management has determined that it is impractical and not cost effective to retroactively apply this change in accounting to the financial statements of BDC Partners prior to February 28, 2006, or to the three interim quarterly financial statements ended May 31, 2006, August 31, 2006 and November 30, 2006, respectively, as allowed per FAS 154 par. 11. Therefore, the statements of operations and cash flows for the three months ended May 31, 2006 will not be comparative. However, these prior period financial statements are included in Note 9 to the Company’s financial statements, as originally filed for informational purposes.

Company Overview

The Company legally dissolved BDC Partners, Inc., a wholly owned subsidiary of DigitalTown, Inc. and all remaining assets were transferred to and liabilities assumed by DigitalTown, Inc. Additionally, the Company formed Tiger Media, a new wholly owned subsidiary of DigitalTown, Inc. for the sole purpose of registering all future renewals and purchases of domain names. For the three months ended May 31, 2007, there was limited activity in this subsidiary.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MAY 31, 2007

For the three months ended May 31, 2007, the Company incurred a net operating loss of $233,275. The Company incurred $33,500 of administrative fees for the management of the Company and total salary and payroll expense of $59,729 of which $11,942 was deferred salary expense and stock option expense of $7,962. The Company also incurred $41,507 of professional fees which included $20,000 paid for April and May retainer fees as part of an agreement signed with Stifel Nicolaus to act as the Company’s financial advisor and exclusive financing agent. The Company also made a non-cash stock payment of $50,063. The company’s overall net loss for the three months ended May 31, 2007 was $231,701.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash position at May 31, 2007 was $15,390, an increase of $6,457 from $8,933 at February 28, 2007. During the three months ended May 31, 2007, net cash used in operating activities was $111,977 which was primarily due to losses from operations, offset by increases in accounts payable, a non cash stock payment and deferred officer compensation. Net cash used in investing activities was $22,885 of which $18,929 was used for the renewal of existing and the purchase of additional domain names and $3,956 was used for fixed asset purchases. The Company entered into an installment agreement with an online services vendor for the renewal of existing domain names and assistance in purchasing additional domain names. The total amount of the non-interest bearing installment agreement was $214,080. For the three months ended May 31, 2007, the Company made cash payments of $17,840 on the installment agreement. The balance of $196,240 will be paid in 11 monthly payments of $17,840 for the period of June 2007 to March 2008 and is included in accounts payable on the balance sheet. Net cash provided by financing activities was $141,319 which consisted primarily of payments received on stockholder subscription receivables of $151,969 less $10,650 of advances paid to officer/stockholder.

Our current monthly operating expenses are approximately $60,000 per month. We believe our current cash reserves and amounts we expect to collect on our outstanding stock subscription receivable should be sufficient to enable us to operate for the next 12 months. The Company signed an agreement with Stifel Nicolaus on April 1, 2007 to act as the Company’s financial advisor and exclusive financing agent for a 12 month period. The payment terms of the agreement include a monthly fee of $10,000 per month (the “Monthly Fee”), a contingent placement fee (the “Placement Fee”) equal to 7.0% (700 basis points) of the amount of the equity committed as part of the proposed Financing, plus 5.5% (550 basis points) of the subordinated debt committed as part of the proposed Financing, plus 2.0% (200 basis points) of the senior debt committed as part of the proposed Financing, provided that the Placement Fee will not be less than $700,000. In addition, warrants to purchase a number of shares of the same security of the Company as is issued in the Financing (or a security with substantially identical terms) such that the aggregate fair market value, as determined in the Financing, of the securities purchasable under the warrants equals 50% of the Placement Fee (the “Warrants”). The Warrants shall be earned as of, and shall be issued to Stifel Nicolaus or its designated affiliates on, the date of the first closing of the Financing and shall be exercisable at a price of 100% of the price per share as established in the Financing. We anticipate that any additional financing would be through the sale of our common stock or other equity-based securities.

Critical Accounting Policies

The discussion and analysis of DigitalTown, Inc.’s financial condition and results of operations are based on our 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:

Intangible Assets- Domain Names

The Company is still in the development stage of its web site portal and accordingly, all costs, including license renewals, associated with domain names expected to be utilized in its web site portal have been capitalized. Since the Company is still in the development stage of its web site portal and the ownership of these domain names can be renewed at a nominal fee prior to their expiration date, the useful life of the domain names are deemed to be indefinite and no amortization will be recorded.

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, and intangibles are reviewed for impairment whenever events or 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 a 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 by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Recently issued accounting pronouncements:

FORWARD-LOOKING INFORMATION

Any statements contained herein related to future events are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on forward-looking statements. BDC Capital, Inc. undertakes no obligation to update any such statements to reflect actual events.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to market risk for the effect of interest rate changes. Information relating to quantitative and qualitative disclosure about market risk is set forth below and in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.

As of May 31, 2007, the Company did not have any off-balance sheet investments or hedging investments.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation made at the end of the period covered by this report was performed under the supervision and with the participation of the Company's president, chief executive officer ("CEO") and the chief financial officer ("CFO") of the effectiveness of the design and operation of the Company's disclosure controls and procedures to insure that the Company records, processes, summarizes and reports in a timely and effective manner the information required to be disclosed in reports filed with or submitted to the Securities and Exchange Commission. Based on that evaluation and in taking into account the limited number of employees noted in the following paragraph, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective in timely bringing to their attention material information related to the Company required to be included in the Company's periodic Securities and Exchange Commission filings. Since the date of this evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls.

Due to the limited number of Company employees engaged in the authorization, recording, processing and reporting of transactions, there is inherently a lack of segregation of duties. The Company periodically assesses the cost versus benefit of adding the resources that would remedy or mitigate this situation, and currently does not consider the benefits to outweigh the costs of adding additional staff in light of the limited number of transactions related to the Company's operations.

(b) Changes in Internal Controls over Financial Reporting.

There have been no significant changes in internal control over financial reporting that occurred during the fiscal period covered by this report that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

DigitalTown, Inc. is, from time to time, a party to litigation arising in the normal course of its business. The Company believes that none of these actions will have a material adverse effect on its financial condition or results of operations.

ITEM 1A. RISK FACTORS

We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your investment.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On April 20, 2007, the Company issued 22,250 restricted common shares, valued at $50,063, to a Minneapolis based high school for their assistance in initially developing the portal revenue model.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

(a)

All information required to be disclosed on a report on Form 8-K during the period ended May 31, 2007 has previously been reported.

(b)

There have been no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

3.1	Articles of Incorporation, as amended (1)	Previously Filed
3.2	Bylaws (1)	Previously Filed
31	Certifications of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(a)/15d-14(a)	Included
32	Certifications under Section 1350	Included

(1) Incorporated by reference to exhibit filed as a part of Registration Statement on Form 10-SB (Commission File No. 000-27225).

SIGNATURES

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

	DigitalTown, INC.
	(formerly BDC Capitl, Inc.)


	/s/ Richard A. Pomije
	Richard A. Pomije, CEO and CFO