DigitalTown, Inc. - Quarter Report: 2008 November (Form 10-Q)
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
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| X
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended: November 30, 2008
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number: 000-27225
DigitalTown, Inc.
(Name of
small business issuer in its charter)
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Minnesota
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41-1427445
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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11974 Portland Avenue,
Burnsville, Minnesota
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55337
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number: (952)
890-2362
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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.
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Yes
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X
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No
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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):
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Large
Accelerated Filer [ ]
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Accelerated
Filer [ ]
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Non-Accelerated
Filer [ ]
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Smaller
reporting company [X]
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There
were 27,163,862 shares of the registrant’s common stock outstanding as of
January 13, 2009.
ii
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PART
I
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Item
1.
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1-12
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Item
2.
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13-17
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Item
3.
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17
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Item
4.
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17
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PART
II
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Item
1.
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18
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Item
1A
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18
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Item
2.
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18
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Item
3.
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18
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Item
4.
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18
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Item
5.
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19
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Item
6.
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19-24
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iii
PART
I
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Page
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Financial
Statements:
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1
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2
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3
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4-12
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CONSOLIDATED
BALANCE SHEETS
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ASSETS
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||||||||
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November
30,
2008
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February
29,
2008
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|||||||
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(unaudited)
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(audited)
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|||||||
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Current
assets:
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||||||||
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Cash
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$ | 75,580 | $ | 67,161 | ||||
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Other
receivables
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- | 70,528 | ||||||
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Total
current assets
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75,580 | 137,689 | ||||||
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Property
and equipment, net
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4,599 | 6,737 | ||||||
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Intangible
assets, net
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809,316 | 602,194 | ||||||
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Total
assets
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$ | 889,495 | $ | 746,620 | ||||
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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||||||||
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Current
liabilities:
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||||||||
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Accounts
payable
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$ | 78,434 | $ | 100,683 | ||||
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Loan
from director/stockholder
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105,463 | - | ||||||
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Accrued
expenses:
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||||||||
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Accrued
payroll
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4,698 | 14,301 | ||||||
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Accrued
interest
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- | 11,156 | ||||||
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Total
current liabilities
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188,595 | 126,140 | ||||||
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Commitments
and contingencies
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||||||||
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Stockholders’
equity:
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||||||||
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Common
stock, $.01 par value, 2,000,000,000 shares authorized, 27,163,862 and
27,081,750 shares issued and outstanding at November 30, 2008
and February 29, 2008, respectively
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271,668 | 270,812 | ||||||
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Additional
paid-in-capital
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21,621,917 | 19,737,494 | ||||||
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Subscription
receivable
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(4,616,963 | ) | (5,030,795 | ) | ||||
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Accumulated
deficit
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(16,575,722 | ) | (14,357,031 | ) | ||||
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Total
stockholders’ equity
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700,900 | 620,480 | ||||||
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Total
liabilities and stockholders’ equity
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$ | 889,495 | $ | 746,620 | ||||
The accompanying notes are an integral
part of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
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For
the Three Months Ended
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For
the Nine Months Ended
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|||||||||||||||
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November
30,
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November
30,
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|||||||||||||||
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2008
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2007
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2008
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2007
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(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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Operating
expenses:
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Selling,
general and administrative expenses
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$ | 688,833 | $ | 598,182 | $ | 2,211,229 | $ | 2,375,648 | ||||||||
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Loss
from operations
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(688,833 | ) | (598,182 | ) | (2,211,229 | ) | (2,375,648 | ) | ||||||||
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Other
income (expense):
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||||||||||||||||
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Interest
expense
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(2,783 | ) | 0 | (7,865 | ) | (1,680 | ) | |||||||||
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Other
income
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54 | 1,014 | 403 | 5,208 | ||||||||||||
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Total
other income (expense)
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(2,729 | ) | 1,014 | (7,462 | ) | 3,528 | ||||||||||
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Net
loss before income taxes
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(691,562 | ) | (597,168 | ) | (2,218,691 | ) | (2,372,120 | ) | ||||||||
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Income
tax provision
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- | - | - | - | ||||||||||||
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Net
loss
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$ | (691,562 | ) | $ | (597,168 | ) | $ | (2,218,691 | ) | $ | (2,372,120 | ) | ||||
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Loss
per common share – basic and diluted
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$ | (0.03 | ) | $ | (0.02 | ) | $ | (0.08 | ) | $ | (0.09 | ) | ||||
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Weighted
average common shares outstanding – basic and diluted
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27,158,196 | 26,546,335 | 27,114,973 | 25,992,965 | ||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
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Nine
months ended November 30,
2008
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Nine
months ended November 30,
2007
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(unaudited)
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(unaudited)
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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||||||||
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Net
loss
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$ | (2,218,691 | ) | $ | (2,372,120 | ) | ||
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Adjustments
to reconcile net loss to net cash flows used in operating
activities:
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Depreciation
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1,916 | 1,195 | ||||||
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Stock
based compensation expense
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1,679,066 | 1,645,040 | ||||||
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Non-cash
stock issued for services
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16,000 | 50,063 | ||||||
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Gain
on sale of asset
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(55 | ) | - | |||||
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Changes
in operating assets and liabilities:
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Other
receivables
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70,528 | 971 | ||||||
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Accounts
payable
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(53,249 | ) | 90,895 | |||||
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Accrued
expenses:
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Accrued payroll
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(9,603 | ) | (13,438 | ) | ||||
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Accrued interest
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(11,156 | ) | 1,680 | |||||
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Deferred
officer compensation
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- | (18,865 | ) | |||||
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Net
cash used in operating activities
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(525,244 | ) | (614,579 | ) | ||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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||||||||
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Purchases
of fixed assets
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(123 | ) | (3,956 | ) | ||||
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Proceeds
from sale of asset
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400 | - | ||||||
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Purchase
of intangible asset-website development
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- | (72,540 | ) | |||||
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Purchases
and renewal of intangible assets – domain
names
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(207,122 | ) | (145,298 | ) | ||||
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Net
cash used in investing activities
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(206,845 | ) | (221,794 | ) | ||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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||||||||
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Advances
from officer/stockholder
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- | (16,354 | ) | |||||
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Proceeds
from loan – director/stockholder
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145,000 | - | ||||||
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Payments
on loan – director/stockholder
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(39,537 | ) | - | |||||
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Note
payable-shareholder
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- | (70,000 | ) | |||||
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Payments
received on stockholder subscription receivables
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413,832 | 1,067,250 | ||||||
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Proceeds
from issuance of stock
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107,141 | - | ||||||
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Proceeds
from exercise of stock options
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114,072 | - | ||||||
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Net
cash provided by financing activities
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740,508 | 980,896 | ||||||
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Net
change in cash and cash equivalents
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8,419 | 144,523 | ||||||
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Cash
and cash equivalents, beginning of period
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67,161 | 8,933 | ||||||
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Cash
and cash equivalents, end of period
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$ | 75,580 | $ | 153,456 | ||||
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SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
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Non-cash
flow information:
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Cash
payments for interest
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$ | 19,021 | $ | - | ||||
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Intangible
assets-domain name renewals incurred with accounts payable
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$ | - | $ | 71,360 | ||||
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Common
stock issued in lieu of rent payments owed a director of the
Company
included
in Accounts Payable
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$ | - | $ | (33,125 | ) | |||
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Accounts
payable added back that were previously paid with stock and
subsequently
cancelled
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$ | 31,000 | $ | - | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Nature of Business and
Summary of Significant Accounting Policies:
Nature of
Business
DigitalTown,
Inc (the “Company”) formed an advisory board in August 2008 to lead the next
stages of development for the Company as it constructs and integrates
approximately 27,000 online communities into a social “civic and school spirit”
network serving students, alumni, schools, local towns and their
citizens. The advisory board is made up of innovative leaders in the
technology, entertainment, sports and content fields who are affiliated with
companies deeply rooted in interactive media. The advisory board
members are based in the greater Los Angeles area where the strategic planning
and creative development will generally take place. This network,
when complete, will connect approximately 27,000 local online spirit sites
formed around a town and its high school and will include easy-to-use and free
features such as email, alumni communication and reunion tools, calendar and
organizing tools for boosters, personal profiles, photo, video and music sharing
and timely community news. The Company owns the Internet domain names
associated with all of these high school communities.
The
Company has sustained losses and negative cash flows from operations and expects
these conditions to continue into the foreseeable future. At November
30, 2008, the Company had an accumulated deficit of
$16,575,722. Subsequent to November 30, 2008, the Company has
received no additional proceeds from its stock subscription
receivable. The Company anticipates that existing cash, stock
subscription proceeds received to date, 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 will be sufficient to meet its
working capital and capital expenditures needs through at least November 30,
2009. In the event the Company is unable to obtain additional capital
in the future, we would be forced to reduce operating expenses and/or cease
operations altogether.
Basis of
Presentation
The accompanying unaudited consolidated
financial information has been prepared by the Company in accordance with
accounting principles generally accepted in the United States of America 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). Accordingly, it does not include all of the information and notes
required by accounting principles generally accepted in the United States of
America 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 nine-month period ended November 30, 2008 are not
necessarily indicative of the results that may be expected for the year
ending February 28, 2009. The February 29, 2008 consolidated balance
sheet was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. This financial information should be read in conjunction with
the consolidated financial statements and notes included in the company’s Annual
Report on Form 10-K for the year ended February 29, 2008.
Principles of
Consolidation
The
Company files consolidated financial statements that include its controlled
Subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
DigitalTown,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
Revenue
Recognition
The
Company does not currently generate revenue from its operations.
Intangible Assets – Domain
Names
The
Company is in the development stage of its social-networking portal, and
accordingly, all costs including license renewals, associated with domain names
expected to be utilized in its portal have been capitalized and any future costs
to get the portal operational will be capitalized or expensed. Since
the ownership of these domain names can be renewed at a nominal fee each year
prior to their expiration date, the useful lives of the domain names are deemed
to be indefinite and no amortization of the capitalized costs for the domain
names will be recorded. Amortization for any capitalized portal costs
will start once a revenue generating site is in service.
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
costs 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.
DigitalTown,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
FIN
No. 48 requires 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
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
The
Company follows the Financial Accounting Standards Board (“FASB”) Statement No.
123(R), “Share-Based Payment,” in accounting for its stock-based
compensation. 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. The fair value of the Company’s stock options issued under the
requirements of SFAS No. 123(R) have 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.
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 adjusted for the incremental
shares attributed to outstanding stock options. Incremental shares attributable
to the assumed exercise of stock options for the three and nine months ended
November 30, 2008 and 2007 were excluded from the computation of diluted loss
per share as their effect would be anti-dilutive.
As of
November 30, 2008 and 2007, the Company had stock options outstanding of
4,088,000 and 3,427,000 respectively.
Recently Issued Accounting
Pronouncements
In
February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) “
Effective Date of FASB Statement No. 157” which delays the effective date
of SFAS No. 157 for non-financial assets and non-financial liabilities that
are recognized or disclosed in the financial statements on a nonrecurring basis
to fiscal years beginning after November 15, 2008. These
non-financial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and non-financial assets
acquired and non-financial liabilities assumed in a business combination. The
Company has not applied the provisions of SFAS No. 157 to its non-financial
assets and non-financial liabilities in accordance with FSP FAS
157-2.
DigitalTown,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the fundamental
requirements in Statement 141 that the acquisition method of accounting (which
Statement 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. In general,
the statement 1) broadens the guidance of SFAS No. 141, extending its
applicability to all events where one entity obtains control over one or more
other businesses, 2) broadens the use of fair value measurements used to
recognize the assets acquired and liabilities assumed, 3) changes the accounting
for acquisition related fees and restructuring costs incurred in connection with
an acquisition, and 4) increases required disclosures. We are required to apply
SFAS No. 141(R) prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. Earlier application is not
permitted.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”). SFAS No. 160 will change the accounting and
reporting for minority interests, which will be re-characterized as
non-controlling interests and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions
with minority interest holders. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by us in the first
quarter 2009. SFAS No. 160 is currently not expected to have a
material effect on the Company’s results of operations, cash flows or financial
position.
In
June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. This guidance states that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and should be included in the computation of earnings
per share using the two-class method outlined in SFAS No. 128, Earnings per
Share. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock and participating security
according to dividends declared and participation rights in undistributed
earnings. The adoption of this new guidance on January 1, 2009 should not
have an effect on our reported earnings per share.
In
April 2008, the FASB issued FASB Staff Position (FSP) No. FAS
142-3, Determination of the Useful Life of Intangible Assets. This guidance
addresses the determination of the useful life of intangible assets which have
legal, regulatory or contractual provisions that potentially limit a company’s
use of an asset. Under the new guidance, a company should consider its own
historical experience in renewing or extending similar arrangements. We are
required to apply the new guidance to intangible assets acquired after
December 31, 2008.
DigitalTown,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
2. Intangible Assets
Intangible
assets are as follows:
|
November
30,
|
February
28,
|
|||||||
|
2008
|
2008
|
|||||||
|
Domain
names
|
$ | 809,316 | $ | 654,333 | ||||
|
Website
development and portal costs
|
- | 72,540 | ||||||
|
Less
accumulated amortization
|
- | - | ||||||
|
Less
impairment of domain names
|
- | (52,139 | ) | |||||
|
Less
impairment of website development costs
|
- | (72,540 | ) | |||||
| $ | 809,316 | $ | 602,194 | |||||
Since the
useful life of the domain names are deemed to be indefinite, no amortization has
been recorded.
During
the nine months ended November 30, 2008, the Company incurred $203,344 for
license renewals and $3,778 in additional domain name purchases.
At
February 29, 2008, due to legal constraints on the use of our college domain
names, the Company concluded that the carrying amount of their college domain
names would not be recoverable and the Company recorded an impairment loss of
$52,139.
During
the year ended February 29, 2008, the Company capitalized $72,540 of website
development costs. As of February 29, 2008, due to changes in the
Company’s website development plan, the Company concluded that the carrying
amount of their website development costs would not be recoverable and the
Company recorded an impairment loss of $72,540 for the entire website
development costs incurred during the year.
Note
3. Stockholders Equity
Stock
Transactions
During
the quarter ended November 30, 2008, the Company issued 7,375 common shares at
an average price of $1.72 per share for the exercise of stock options and
received cash proceeds of $12,685.
On
November 15, 2008, the Company issued 3,000 restricted common shares at $2.00
per share, valued at $6,000, to four directors of the Company for payment of
director fees.
During
the quarter ended August 31, 2008, the Company entered into stock purchase
agreements and issued 29,285 restricted common shares at a price of $2.60 per
share, for total cash proceeds of $76,141.
DigitalTown,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During
the quarter ended August 31, 2008, the Company issued 39,500 common shares at an
average price of $2.57 per share for the exercise of stock options and received
cash proceeds of $101,387.
On August
28, 2008, the Company cancelled 10,690 common shares that were previously issued
for payment of accounts payable for services. The agreement with the
vendor was cancelled and the shares were put back into treasury
stock. The accounts payable to this vendor was recorded back into the
accounts payable aging. That same day, the Company re-issued and sold
the 10,690 common shares at $2.90 per share, valued at $31,000 to a current
shareholder and received cash proceeds of $31,000.
On August
15, 2008, the Company issued 1,412 restricted common shares at $4.25 per share,
valued at $6,000, to four directors of the Company for payment of director
fees.
On May
16, 2008, the Company issued 1,540 restricted common shares at $2.60 per share,
valued at $4,000, to four directors of the Company for payment of director
fees.
Other
During
the period from May 2007 to September 2007, holders of previously subscribed
shares sold a portion of their shares to other subscription holders of the
Company in order to pay the Company the remaining balance due on their
subscription agreements. A total of 827,092 shares had been sold and
transferred to the new purchaser for a total purchase price of $1,842,108 which
is due to the original subscription holder. The underlying original subscription
receivable due the Company for these transferred shares totaled
$620,319. As of November 30, 2008, the entire $620,319 has been paid
to the Company and has reduced the original investor’s stock subscription
receivable accordingly. Additionally, due to these shares being
re-sold at prices in excess of the original face amount of the shares purchased,
a portion of the proceeds is due back to the Company. Per the 2006
stock subscription agreements, the seller of the subscribed shares is entitled
to up to 200% of the face amount of each share sold and the Company is entitled
to 50% of any additional proceeds of the stock in excess of that
200%. Therefore, the Company is owed $300,735 for their share of the
additional proceeds for those sales. As of January 14, 2009, no payments have
been received and the Company has not recorded the $300,735 in the stock
subscription receivable balance at November 30, 2008. The Company
will record those future cash receipts to Additional Paid in Capital when
received.
Note
4. Stock Options
The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of November 30, 2008, an aggregate of 5,000,000 shares of common stock
may be granted under this plan 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 from the grant date anniversary. The terms of the options
vary from one year to five years from the date of grant.
DigitalTown,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
Company’s consolidated financial statements as of and for the three and nine
months ended November 30, 2008 and 2007, reflect the impact of SFAS
123(R). For the three months ended November 30, 2008, the Company
granted stock options to three consultants allowing for the purchase of up to an
aggregate of 210,000 shares of common stock, with a weighted-average-grant-date
fair value of $2.67. Total stock compensation expense for all option grants was
$507,326 and $336,314 for the three months ended November 30, 2008 and 2007,
respectively. For the nine months ended November 30, 2008 and 2007,
the Company has recorded $1,679,066 and $1,645,040 in stock compensation
expense, respectively. This expense is included in selling, general
and administrative expense. As of November 30, 2008, 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
three and nine months ended November 30, 2008 basic loss per common share by
$0.02 and $0.06, respectively. There remains $733,377 of
total unrecognized compensation expense, which is expected to be recognized over
future periods through August 31, 2010.
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
|
- | - | |||||||||||
|
Granted
|
622,000 | 3.019 | - | - | ||||||||||||
|
Canceled
or expired
|
(299,500 | ) | (1.936 | ) | - | - | ||||||||||
|
Exercised
|
(25,000 | ) | (1.725 | ) | - | - | ||||||||||
|
Options
outstanding - February 29,
2008
|
3,422,500 | $ | 1.942 | - | ||||||||||||
|
Granted
|
975,000 | 4.919 | ||||||||||||||
|
Canceled
or expired
|
(262,625 | ) | 2.083 | |||||||||||||
|
Exercised
|
(46,875 | ) | 2.163 | |||||||||||||
|
Options
outstanding – November 30,
2008
|
4,088,000 | $ | 2.640 | 3.28 | $ | - | ||||||||||
|
Exercisable
at November 30,
2008
|
3,801,250 | $ | 2.593 | 3.22 | $ | - | ||||||||||
|
(1)
|
The
intrinsic value of an option is the amount by which the fair value of the
underlying stock exceeds its exercise
price.
|
Note
5. Related Party Transactions
The
Company entered into a five year lease with a director of the Company for
approximately 2,650 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 five year term of 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 made to the director for the three months ended
November 30, 2008 and 2007 totaled $7,950 and $7,950,
respectively. The Company’s total lease payments made to the director
for the nine months ended November 30, 2008 and 2007 was $23,850 and $23,850,
respectively.
DigitalTown,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Minimum
lease payments at November 30, 2008 are as follows:
|
FY
2009-remainder
|
$ | 7,950 | ||
|
FY
2010
|
31,800 | |||
|
FY
2011
|
31,800 | |||
|
FY
2012
|
25,175 | |||
| $ | 96,725 |
Loan from
Director/Stockholder
As of
November 30, 2008, the Company had an outstanding working capital loan of
$105,463 from a director/stockholder. The loan is due on demand and
bears annual interest at 6.5%. The Company made principal payments of
$39,537 during the three months ended November 30, 2008. Interest
expense incurred on this loan for the three and nine months ended November 30,
2008 was $2,783 and $7,865, respectively.
Note
6. 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
7. Common Stock Subscriptions Receivable
During
the 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.
|
|
·
|
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
October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share. Significant terms of the
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.
|
DigitalTown,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
following tables summarize information about the stock subscription
receivable:
|
Receivable
balance at February 28, 2007
|
$ | 2,947,470 | ||
|
Cash
collected
|
(1,166,675 | ) | ||
|
New
subscriptions received October 5, 2007
|
3,250,000 | |||
|
Receivable
balance at February 29, 2008
|
5,030,795 | |||
|
Cash
collected
|
(413,832 | ) | ||
|
Receivable
balance at November 30, 2008
|
$ | 4,616,963 | ||
|
Summary
of outstanding subscriptions:
|
||||
|
2006
subscriptions
|
$ | 1,366,963 | ||
|
October
5, 2007 subscriptions
|
3,250,000 | |||
| $ | 4,616,963 |
No
interest has been charged on these subscription agreements. The
Company has collected no additional outstanding subscription receivables for the
period from December 1, 2008 to January 14, 2009.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following is a discussion of the financial condition of the Company as of
November 30, 2008 and its results of operations for the three and nine months
ended November 30, 2008 and 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 November 30, 2008, 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.
Company
Overview
DigitalTown,
Inc (the “Company”) formed an advisory board in August 2008 to lead the next
stages of development for the Company as it constructs and integrates
approximately 27,000 online communities into a social “civic and school spirit”
network serving students, alumni, schools, local towns and their
citizens. The advisory board is made up of innovative leaders in the
technology, entertainment, sports and content fields who are affiliated with
companies deeply rooted in interactive media. The advisory board
members are based in the greater Los Angeles area where the strategic planning
and creative development will generally take place. This network,
when complete, will connect approximately 27,000 local online spirit sites
formed around a town and its high school and will include easy-to-use and free
features such as email, alumni communication and reunion tools, calendar and
organizing tools for boosters, personal profiles, photo, video and music sharing
and timely community news. The Company owns the Internet domain names
associated with all of these high school communities.
It is the
Company’s intent to have its stock listed on a major stock exchange at a future
date when the Company’s financial condition and demand for its stock warrants
such a change.
In
September 2008, the Company named John A. Witham to the new position of
Executive Vice President and Chief Financial Officer. Mr. Witham has
over 20 years of experience in effective corporate financial leadership and
raising capital.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED NOVEMBER 30, 2008 and 2007
Selling,
general and administrative expenses for the most current three months increased
by $90,651 to $688,833 compared to a year ago due to an increase in stock option
expense of $171,012 for the most current three months. Excluding
stock compensation expense, selling, general, and administrative expenses were
$181,506 for the three months ended November 30, 2008 compared to $261,868 for
the three months ended November 30, 2007. The decrease in selling,
general, and administrative expenses of $80,362 for the two comparable quarters
was primarily due to a decrease in filing fees of $70,549, compensation expense
of $26,680 due to lower headcount, and investor relations expense of
$26,114. The decreases were offset by an increase in professional
fees of $46,958. The Company’s overall net loss for the current three
months increased by $94,394 to $691,562.
NINE
MONTHS ENDED NOVEMBER 30, 2008 and 2007
Selling,
general and administrative expenses for the current nine months decreased by
$164,419 to $2,211,229 compared to a year ago. Excluding stock
compensation expense, selling, general, and administrative expenses were
$532,163 for the nine months ended November 30, 2008 compared to $730,607 for
the nine months ended November 30, 2007. The decrease in selling,
general, and administrative expenses of $198,444 for the two comparable periods
was primarily due to a decrease in filing fees of $71,473, compensation expense
of $55,828 due to lower headcount, investor relations of $42,062, professional
fees of $14,685 and automobile expense of $13,489. The Company’s
overall net loss for the current nine months decreased by $153,429 to
$2,218,691.
LIQUIDITY
AND CAPITAL RESOURCES
NINE
MONTHS ENDED NOVEMBER 30, 2008
The
Company’s cash position at November 30, 2008 was $75,580, an increase of $8,419
from $67,161 at February 29, 2008. During the nine months ended
November 30, 2008, net cash used in operating activities was $525,244 compared
to cash used of $614,579 for the comparable period. The current cash
used in operations was primarily due to losses from operations, and decreases in
accounts payable, accrued payroll and accrued interest offset by stock based
compensation expense, a non-cash stock payment offset by a decrease in other
receivables. Net cash used in investing activities for the nine
months ended November 30, 2008 was $206,845 compared to cash used of $221,794
for the comparable period. For the nine months ended November 30,
2008, $203,344 was used for the renewal of existing domain names and $3,778 was
used for the purchase of additional domain names and $123 for purchase of fixed
assets offset by $400 received from the sale of an asset. Net cash
provided by financing activities for the nine months ended November 30, 2008 was
$740,508 compared to cash provided of $980,896 for the comparable
period. The 2008 activity consisted of a $105,463
net working capital loan from a director/stockholder of the Company
and payments received on stockholder subscription receivables of $413,832,
exercise of stock options of $114,072 and proceeds from issuance of stock
pertaining to stock purchase agreements of $107,141.
Our current average monthly operating
expenses for the nine months ended November 30, 2008, adjusted for non-cash
stock based compensation of $1,679,066 and non-cash stock issued for director
fees of $16,000, was approximately $58,000 per month. We believe our current cash reserves
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 anticipate that
any additional financing could be through the sale of our common stock, other
equity-based securities or issuance of debt instruments. In the event
that we are unable to obtain additional capital in the future, we would be
forced to reduce operating expenses and/or cease operations
altogether.
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 and year-end 10-K
filed for February 29, 2008, 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 in the development stage of its social-networking portal, and
accordingly, all costs including license renewals, associated with domain names
expected to be utilized in its portal have been capitalized and any future costs
to get the portal operational will be capitalized or expensed. Since
the ownership of these domain names can be renewed at a nominal fee each year
prior to their expiration date, the useful lives of the domain names are deemed
to be indefinite and no amortization of the capitalized costs for the domain
names will be recorded. Amortization for any capitalized portal costs
will start once a revenue generating site is in service.
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.
Recently
issued accounting pronouncements:
In
February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) “
Effective Date of FASB Statement No. 157” which delays the effective date
of SFAS No. 157 for non-financial assets and non-financial liabilities that
are recognized or disclosed in the financial statements on a nonrecurring basis
to fiscal years beginning after November 15, 2008. These
non-financial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and non-financial assets
acquired and non-financial liabilities assumed in a business combination. The
Company has not applied the provisions of SFAS No. 157 to its non-financial
assets and non-financial liabilities in accordance with FSP FAS
157-2.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the fundamental
requirements in Statement 141 that the acquisition method of accounting (which
Statement 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. In general,
the statement 1) broadens the guidance of SFAS No. 141, extending its
applicability to all events where one entity obtains control over one or more
other businesses, 2) broadens the use of fair value measurements used to
recognize the assets acquired and liabilities assumed, 3) changes the accounting
for acquisition related fees and restructuring costs incurred in connection with
an acquisition, and 4) increases required disclosures. We are required to apply
SFAS No. 141(R) prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. Earlier application is not
permitted.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”). SFAS No. 160 will change the accounting and
reporting for minority interests, which will be re-characterized as
non-controlling interests and classified as a component of equity. This new
consolidation method will significantly
change the accounting for transactions with minority interest holders. SFAS No.
160 is effective for fiscal years beginning after December 15, 2008, and will be
adopted by us in the first quarter 2009. SFAS No. 160 is currently
not expected to have a material effect on the Company’s results of operations,
cash flows or financial position.
In
June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. This guidance states that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and should be included in the computation of earnings
per share using the two-class method outlined in SFAS No. 128, Earnings per
Share. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock and participating security
according to dividends declared and participation rights in undistributed
earnings. The adoption of this new guidance on January 1, 2009 should not
have an effect on our reported earnings per share.
In
April 2008, the FASB issued FASB Staff Position (FSP) No. FAS
142-3, Determination of the Useful Life of Intangible Assets. This guidance
addresses the determination of the useful life of intangible assets which have
legal, regulatory or contractual provisions that potentially limit a company’s
use of an asset. Under the new guidance, a company should consider its own
historical experience in renewing or extending similar arrangements. We are
required to apply the new guidance to intangible assets acquired after
December 31, 2008.
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. DigitalTown, 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 November 30, 2008, 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.
Under the
supervision and with the participation of our management, including our
Company's chief executive officer ("CEO") and the chief financial officer
("CFO") we evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934 (“the Exchange Act”) 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
The most
significant risk factors applicable to the Company are described in Part I, Item
1A “Risk Factors” of our Annual Report on Form 10-K for the year ended February
29, 2008. There have been no material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
During
the quarter ended November 30, 2008, the Company issued 7,375 common shares at
an average price of $1.72 per share for the exercise of stock options and
received cash proceeds of $12,685.
On
November 15, 2008, the Company issued 3,000 restricted common shares at $2.00
per share, valued at $6,000, to four directors of the Company for payment of
director fees.
During
the quarter ended August 31, 2008, the Company entered into stock purchase
agreements and issued 29,285 restricted common shares at a price of $2.60 per
share, valued at $76,141.
During
the quarter ended August 31, 2008, the Company issued 39,500 common shares at an
average price of $2.57 per share for the exercise of stock options and received
cash proceeds of $101,387.
On August
28, 2008, the Company cancelled 10,690 common shares that were previously issued
for payment of accounts payable for services. The agreement with the
vendor was cancelled and the shares were put back into treasury
stock. The accounts payable to this vendor was recorded back into the
accounts payable aging. The Company re-issued and sold the 10,690
common shares at $2.90 per share, valued at $31,000 to a current shareholder and
received cash proceeds of $31,000.
On August
15, 2008, the Company issued 1,412 restricted common shares at $4.25 per share,
valued at $6,000, to four directors of the Company for payment of director
fees.
On May
16, 2008, the Company issued 1,540 restricted common shares at $2.60 per share,
valued at $4,000, to four directors of the Company for payment of director
fees.
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 November 30, 2008 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
|
Included
|
||
|
32
|
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.
|
||
|
Dated:
January 14, 2009
|
||
|
Richard
A. Pomije, CEO
|
||
|
John
A. Witham, CFO
|