DigitalTown, Inc. - Quarter Report: 2017 May (Form 10-Q)

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, 2017


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

Commission file number: 000-27225

DigitalTown, Inc.

(Exact name of registrant as specified in its charter)


Minnesota	41-1427445
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10655 NE 4^th Street, Suite 801 Bellevue, Washington	98004
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number: (425) 295-4564

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 registrant (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. [X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. [X] Yes [ ] No

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

Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No

There were 57,856,000 shares of the registrant’s common stock outstanding as of July 14, 2017.

TABLE OF CONTENTS


PART I

Item 1.	Financial Statements	2-21

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23-25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25


PART II

Item 1.	Legal Proceedings	26

Item 1A	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6.	Exhibits	27

Signatures		27-28

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA


	Page
Consolidated Financial Statements:
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	5-21

DigitalTown, Inc.

CONSOLIDATED BALANCE SHEETS



	May 31,		February 28,
	2017		2017
ASSETS	(Unaudited)
Current assets:
Cash	$ 42,923		$ 539,243
Accounts receivable, net	7,917		25,609
Prepaid domain name renewal fees	138,946		105,775
Other Prepaid expenses	15,040		21,198
Total current assets	204,826		691,825
Property and equipment, net	26,935		1,812
Total assets	$ 231,761		$ 693,637

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$ 148,921	$ 166,847
Accounts payable – related parties (Note 9)	9,847	10,612
Deferred revenue	345,613	190,000
Accrued expenses (Notes 6,16)	260,900	280,900
Convertible note payable – related party (Note 9, 15)	400,000	400,000
Total current liabilities	1,165,281	1,048,359
Commitments and contingencies
Stockholders’ equity (deficit):
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 57,856,000 and 52,606,000 shares issued and outstanding at May 31, 2017 and February 28, 2017, respectively	578,560	526,060
Additional paid-in-capital	35,797,580	34,333,479
Stock payable	2,428,692	3,426,371
Accumulated other comprehensive income	5,396	1,868
Accumulated deficit	(39,743,748)	(38,642,500)
Total stockholders’ equity (deficit)	(933,520)	(354,722)
Total liabilities and stockholders’ equity (deficit)	$ 231,761	$ 693,637

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

DigitalTown, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Three Months Ended May 31,
	2017	2016
	(Unaudited)	(Unaudited)

Revenues	$ 80,271	$ 30
Cost of revenues	98,608	104,678
Gross loss	(18,337)	(104,648)

Operating expenses:
Selling, general and administrative expenses	1,073,187	510,418

Loss from operations	(1,091,524)	(615,066)

Other income (expense):
Interest expense	9,724	-
Total other income (expense)	9,724	-

Loss before income taxes	(1,101,248)	(615,066)
Income tax provision	-	-
Net loss	$ (1,101,248)	$ (615,066)

Net loss per common share – basic and diluted	$ (0.02)	$ (0.01)

Weighted average common shares outstanding – basic and diluted	55,059,804	41,461,543

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

DigitalTown, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Three Months Ended May 31,
	2017	2016
CASH FLOWS FROM OPERATING ACTIVITIES	(Unaudited)	(Unaudited)

Net loss	$ (1,101,248)	$ (615,066)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization	1,300	885
Imputed interest	10,350	-
Stock based compensation	346,071	312,171
Changes in operating assets and liabilities:
Accounts receivable	17,692	(10,000)
Prepaid expenses	(27,013)	6,203
Accounts payable	(17,925)	10,289
Accounts payable – related parties	(765)	-
Accrued expenses	(20,000)	-
Deferred revenue	155,613	70,000
Net cash used in operating activities	(635,925)	(225,518)

CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for equipment	(26,423)	-
Cash paid for Cloud.Market	-	(7,500)
Net cash used in investing activities	(26,423)	(7,500)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock	162,500	539,500
Net cash provided by financing activities	162,500	539,500

Foreign currency translation adjustment	3,528	-

Net change in cash and cash equivalents	(496,320)	306,482
Cash and cash equivalents, beginning of year	539,243	134,469
Cash and cash equivalents, end of year	42,923	440,951

Non-Cash Transactions:
Issuance of common stock for stock payable	$ 1,506,250	-

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

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial information has been prepared by DigitalTown, Inc. (the "Company") in accordance with accounting principles generally accepted in the United States of America ("U.S.") ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC"). Accordingly, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim period presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period. This financial information should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended February 28, 2017.

The Company’s fiscal year end is the last day in February. Our current fiscal year ends on February 28, 2018 and we refer to it as “fiscal 2018”. Last year, our fiscal year ended on February 28, 2017 and we refer to this year as “fiscal 2017”.

Note 2. Nature of Business and Summary of Significant Accounting Policies:

Nature of Business

The Company was founded in 1982 under the laws of the State of Minnesota as Command Small Computer Learning Center, Inc., a computer training company and operated under several different names in the computer hardware and training sector. In 2005, the Company began acquiring domain names. On March 1, 2007, the Company changed its name to DigitalTown, Inc. and began developing a business plan to develop a platform to monetize their domain names. DigitalTown currently provides turn-key hosted solutions to power a comprehensive platform for government entities, citizens and merchants. The easy to use platform helps city officials and local merchants manage a feature-rich Smart City for web and mobile devices and provides residents and visitors with access to content, community and commerce. The Company’s headquarters are located in Bellevue, WA. The Company’s common stock is traded on the OTC Markets under the ticker symbol of DGTW.

The Company’s consolidated financial statements have been prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

At May 31, 2017, the Company had an accumulated deficit of $39,743,748. The Company anticipates that growth from its operations, expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least May 31, 2018. In the event that the Company is unable to obtain additional capital in the future, the Company would reduce operating expenses or cease operations altogether.

Principles of Consolidation

The consolidated financial statements include the accounts of DigitalTown, Inc. and its wholly-owned subsidiaries and have been prepared by the Company in United States (U.S.) dollars and in accordance with accounting principles generally accepted in the United States, or GAAP. All material intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain prior period amounts in the consolidated statement of cash flows have been reclassified to conform to the current period presentation. Proceeds from related party notes payable received in the prior period have been reclassified from the prior period classification. These reclassifications had no impact on previously reported net income or accumulated deficit for any year.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Use of Estimates

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

Accounts Receivable

Accounts receivable arise from the sale of and commission earned from display advertising. The Company evaluates collectability of accounts receivable based on a combination of factors including the age of the receivable or a specific customer’s inability to meet its financial conditions. In these circumstances, the Company records an allowance to reduce the receivable to an amount it deems collectible. The Company has recorded an allowance for doubtful accounts as of May 31, 2017 and February 28, 2017 of $18,532 and $23,219, respectively.

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net tangible and identifiable intangible assets related to completed acquisitions. Goodwill has an indefinite life and is not amortized but instead tested for impairment annually, or more frequently if necessary.

Intangible assets are recorded at fair value and are comprised of amounts assigned to acquisition-related items, such as trade names, customer lists, non-compete agreements and intellectual property/technology. Intangible assets are considered either definite or indefinite lived assets. Definite lived intangible assets are amortized on a straight-line basis over their useful lives. Certain intangible assets may have an indefinite life and are not amortized, but rather evaluated for impairment annually.

We evaluate any goodwill and intangible assets for an impairment on an annual basis each fiscal year end. We also evaluate goodwill and intangible assets for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the goodwill and intangible assets below the carrying amounts. Based upon our review and analysis in the fourth quarter of fiscal 2017, we deemed all of the goodwill and intangible assets acquired in fiscal 2017 as fully impaired. Accordingly, we recognized an impairment expense of $1,725,009 in fiscal 2017.

Revenue Recognition

The Company recognizes revenue when the following four criteria have been met:

Persuasive evidence that a business relationship exists

Delivery has occurred

The price is fixed and determinable

Collectability is reasonably assured

The Company primarily recognizes revenue from sale of software licenses and related development services. Software licensing and development revenue is recognized as invoiced and over the course of the applicable agreements. In the event projects have multiple project milestones, revenue is recognized as milestones are achieved and invoices are submitted for payment.

The Company may also be merchant of record for merchant transactions processed on the DigitalTown platform. When this happens, revenue is recognized on the date of the transaction. The Company has experience in merchant transaction fraud mitigation. To the extent chargebacks become material, the Company will implement a formal practice for allowance for doubtful accounts.

The Company recognizes revenue from the sale of display advertising appearing on specific pages of individual sites within DigitalTown’s network platform. Display advertising is sold by the Company directly to local merchants and placed by the Company on specific pages of individual sites targeted by the local merchant. The terms of these sales are either for a fixed monthly amount for a period ranging from three months to one year or variable based on a percentage of the per click or per-impression revenue generated by these ads.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Fair Value of Financial Instruments

Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under U.S. GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

As of May 31, 2017 and February 28, 2017, the Company does not have any financial instruments that must be measured under the fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability.

There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs during the first quarter of fiscal 2018 or the fiscal year 2017.

Cash Equivalents

The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. As of May 31, 2017, and February 28, 2017, the Company had no cash equivalents.

Cash Deposits in Excess of Federally Insured Limits

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are insured by the Federal Deposit Insurance Company and currently have insurance coverage up to $250,000. At February 28, 2017, the Company had one bank deposit account in excess of federally insured limits.

Prepaid Domain Names

The annual domain name renewal fees are currently capitalized in the period of renewal then amortized over one year. Only the purchase of new domain names is capitalized. See Note 5 for further information.

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives, ranging from three to five years. Leasehold improvements are amortized over the shorter of the useful life or the term of the related lease. The Company recorded $1,300and $885 of depreciation expense for first quarters of fiscal years 2018 and 2017, respectively. 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. See Note 4 for further information.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Income Taxes

Deferred tax assets (net of any valuation allowance) and liabilities resulting from temporary differences, net operating loss carryforwards and tax credit carryforwards are recorded using an asset-and-liability method. Deferred taxes relating to temporary differences and loss carryforwards are measured using the tax rate expected to be in effect when they are reversed or are realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be ultimately realized. The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related future benefits.

The Company accounts for income taxes pursuant to FASB guidance. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves or related accruals for interest and penalties have been recorded at May 31, 2017 or February 28, 2017. In accordance with the FASB guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of operations. The Company has three open years of tax returns subject to examination.

Stock-Based Compensation, Including Options and Warrants

Use of equity for compensation is a material part of the Company’s near-term strategy. The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.

The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.

Advertising

It is the Company’s policy to expense advertising costs in the period related to the advertising. The Company did not incur any advertising expense during the first quarters of fiscal years 2018 or 2017.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company does not expect the adoption to have a material impact on its consolidated financial statements upon adoption.

The Company believes there are no other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Note 3. Going Concern

The Company’s consolidated financial statements have been prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

At May 31, 2017, the Company had an accumulated deficit of $39,743,748. The Company anticipates growth from its operations, expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least May 31, 2018. In the event that the Company is unable to obtain additional capital in the future, the Company would further reduce expenses or cease operations altogether.

Note 4. Property and Equipment

Property and equipment are as follows:


	May 31,	February 28,
	2017	2017
Office equipment and furniture	$ 554,766	$ 528,034
Less accumulated depreciation	(527,831)	(526,222)
Property and equipment, net	$ 26,935	$ 1,812

Depreciation expense for the first quarter of fiscal years 2018 and 2017 was $1,300 and $885, respectively.

Note 5. Prepaid Domain Names

During the first quarters of fiscal years 2018 and 2017, the Company incurred $81,702 and $15,000, respectively, of annual domain name renewal fees, which range between $0.25 and $7.85 per domain name. These amounts were recorded as prepaid domain name renewal fees, and are then amortized over one year on a straight-lined basis. During the first quarters of fiscal years 2018 and 2017, the Company recognized $108,328 and $21,203 of expense as cost of revenues related to this amortization. As of May 31, 2017, and February 28, 2017, the Company has $138,946 and $105,775, respectively, of remaining prepaid domain name renewal fees recorded on the balance sheet. See Note 9 for information on Related Party activity within Prepaid Domain Names.

Note 6. Accrued Expenses and Deferred Revenue

Accrued Expenses

On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 shares of the Company’s stock and 1,292,310 stock options with an exercise price of $0.15 and a vesting period of 12 months. The shares and options were valued on the conversion date in the amounts of $109,846 and $19,385, respectively. As the aggregate value of the shares and warrants were equal to the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction. As of May 31, 2017, and February 28, 2017, the accrued salary owed to Robert Monster was $0 and $20,000, respectively.

See Note 16 for information related to the Accrued Compensation of $260,899 related to a former officer of the company.

Deferred Revenue

During the first quarter of fiscal 2018, the Company signed three customer agreements to perform digital support and construction services for three third party companies. During fiscal 2017, the Company signed three customer agreements to perform digital support and construction services for three third party companies. Each customer agreement consists of milestones and completion metrics to ensure that the requested services have been performed satisfactorily and to the customers' full expectations. During the quarter ended May 31, 2017, and year ended February 28, 2017, the Company has collected $315,613 and $140,000 in cash and

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

recorded $0 and $50,000 in accounts receivable related to these contracts. As the services requested by the customers have not yet been completed, a total of $345,613 and $190,000 has been recorded as deferred revenue as of May 31, 2017, and February 28, 2017, respectively.

Note 7. Stockholders’ Equity

The Company’s primary means of generating operating capital and completing acquisitions has been through the use of issuing common stock.

Fiscal 2018 Stock Transactions

During the first quarter of fiscal 2018, the Company issued 1,506,250 shares of stock related to stock payable as of February 28/2017, leaving an outstanding balance for stock payable of $2,435,711 as of May 31, 2017.

During the first quarter of fiscal 2018, the Company sold 356,250 shares of its common stock for $142,500. These shares have not been issued and are recorded as stock payable as of May 31, 2017.

During the first quarter of fiscal 2018, $346,071 of vesting related to restricted stock grants was recorded as stock payable. This includes one new grant to an employee during the first quarter of fiscal 2018.

Fiscal 2017 Stock Transactions

During fiscal 2017, the Company issued 6,999,707 shares of stock to various investors and accrued $800,500 of stock payable for cash of $2,377,950.

Included in the above, are an aggregate of 435,000 shares which were sold to the Company’s chairman and a related party investor at terms below the market price and share prices available other investors at the time of the sales. As a result, the Company recorded additional stock compensation expense of $30,450 to additional paid in capital to account for the preferential common share pricing.

During fiscal 2017, the Company issued 775,000 shares and recorded a stock payable of $845,600 to directors and consultants for services provided to the Company. The value of the shares issued was $1,217,600 based on the fair market value of the common stock on the date of grant.

During fiscal 2017, the Company entered into agreements to purchase domain name rights with three individuals. In exchange for the domain name rights, the Company issued 369,750 common shares and paid $46,500 in cash. The total fair value of the shares was $154,740 based on the respective domain name purchase agreements date and the closing market price on that date.

On September 14, 2016, the Company closed on a Stock Purchase Agreement for 100% of Rezserve Technologies, Ltd. (Rezserve), a company based in Vancouver, British Columbia. Pursuant to the agreement, the Company purchased all of the issued and outstanding stock of Rezserve in consideration for an aggregate of $1,480,000, of which 3,000,000 shares of stock were paid at the closing and $400,000 was a secured convertible note payable to Rezserve’s founder Clint Skidmore. The stock had a value of $1,080,000 at the closing date. The terms of the note include interest at 0% per annum. Principal is due and payable within one year of September 13, 2016. The Company imputed interest expense of $19,040 related to the convertible note payable – related party as an increase in additional paid in capital during fiscal 2017. In addition, the Company recorded $1,868 of foreign currency translation loss during fiscal 2017 which was reflected as accumulated other comprehensive loss. See Note 14 for additional information on this acquisition.

On December 1, 2016, the Company acquired all of the assets of Appointment.com. The purchase price pursuant to an asset purchase agreement was 1,625,000 shares. The value of the stock of $731,250 is included as a stock payable as of February 28, 2017. See Note 14 for additional information on this acquisition.

On May 18, 2016, the Company granted 8,292,309 common shares to Robert W. Monster, CEO, in accordance with his employment agreement dated May 18, 2016, which vest monthly over the new employment agreement period which ends on May 18, 2018, a period of two years. The shares were valued based on the employment agreement date. During fiscal year 2017, $812,912 was expensed related to these shares.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

During fiscal 2017, the Company signed employment agreements with four members of senior management, three of which are still active. All employment agreements were for a period of approximately 12 months, however, in one case there is no end date but can be terminated by either party. Included in the employment agreements were common stock grants of 250,000 to 1,000,000 shares which vest over a period of 12 to 48 months. A total of 2,220,000 shares were granted for the four employment agreements. During fiscal 2017, $154,921 was expensed related to these agreements.

During fiscal 2017, the Company granted 495,000 shares of stock to four advisors and employees. The shares vest over a period of 24 months. The shares were valued based on the grant date. During fiscal year 2017, $44,508 was expensed related to these shares.

On March 5, 2016, the Company acquired all of the assembled workforce, patents, intellectual property, technology, trademarks, trade names, copyrights, mask works and registrations, computer software, trade secrets and non-compete agreements related to the Cloud.Market business, pursuant to an agreement among the Company and the owner of Cloud.Market. The purchase price paid included issuance of 750,000 shares of our common stock and $7,500 of cash. The stock had a value of $60,000 at the closing date and was transferred on that date from common stock held in escrow to additional paid-in capital for that amount. See Note 13 for more information.

Stock Warrants

The Company has regularly used warrants as a tool to attract and compensate advisors and directors of the board rather than to use cash. The Company feels this is an appropriate way to conserve cash and to incentivize its board of directors, advisors and consultants.

As of May 31, 2017, the Company had 4,660,000 warrants outstanding with an average exercise price of $0.14. The warrants expire between one and ten years from the date of issuance and have a weighted average remaining exercise period as of May 31, 2017 of 3.90 years.

No new warrants have been issued in fiscal 2018.

During fiscal 2017, the Company issued an aggregate of 150,000 warrants to 3 consultants to purchase shares of the Company’s common stock at prices which ranged from $0.10 to $0.30. All warrants vested immediately at the date of issuance and are exercisable through 2026. The total estimated value using the Black-Scholes Model, based on a volatility rate of 180% and a call option value of $0.0797, was $11,948.

During fiscal 2016, the Company issued an aggregate of 4,510,000 warrants to 3 board members and 3 consultants to purchase shares of the Company’s common stock at prices which ranged from $0.10 to $0.30. All warrants vested immediately and are exercisable through 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate between 121% and 125% and a call option value between $0.13 and $0.285 was $440,470. In addition, Stockholders purchasing stock during the fourth quarter of fiscal 2016 were granted a one warrant for each share of stock purchased. The $0.15 warrants vested immediately and expired January 1, 2017.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

The Company utilized the following key assumptions in computing the fair value of the warrant grants using the Black-Scholes pricing model for fiscal year 2017:


	Fiscal 2017
Weighted-average volatility	180%
Expected dividends	None
Expected term (in years)	10.00
Weighted-average risk-free interest rate	2.19%
Weighted-average fair value of warrants granted	$0.08

The following table summarizes information about the Company’s stock warrant activity during the first quarter of fiscal 2018 and fiscal year 2017:


	Number of Warrants
Outstanding - February 29, 2016	4,510,000
Granted	150,000
Canceled or expired	-
Outstanding - February 28, 2017	4,660,000
Granted	-
Cancelled or expired	-
Outstanding – May 31, 2017	4,660,000
Exercisable at May 31, 2017	4,660,000

The following table summarizes information about stock warrants outstanding as of May 31, 2017:


Exercise Price	Number Outstanding	Weighted Average Remaining Life (years)	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercisable Price
$0.10	550,000	9.75	$0.13	550,000	$0.13
$0.15	2,460,000	0.83	$0.07	2,460,000	$0.07
$0.25	300,000	9.08	$0.24	300,000	$0.24
$0.25	850,000	9.17	$0.24	850,000	$0.24
$0.30	500,000	9.50	$0.28	500,000	$0.28
$0.10 - $0.30	4,660,000	3.90	$0.14	4,660,000	$0.14

The Company recorded stock-based compensation expense of $0 and $11,948 for all outstanding stock warrants for the first quarter of fiscal years 2018 and 2017, respectively. This expense is included in stock-based compensation expense.

Note 8. Stock Options

The Company has one stock option plan called The 2006 Employee Stock and Option Plan (the “2006 Plan”), which has reserved 5,000,000 shares of our common stock for issuance. The types of awards that could be granted under the 2006 Plan include incentive and non-qualified options to purchase shares of common stock, stock appreciation rights, restricted shares, restricted share units, performance awards and other types of stock-based awards. All grants are determined and approved by the Board of Directors. Through May 31, 2017, the Company has only granted non-qualified stock options under the 2006 Plan. The stock options may be granted to officers and employees of the Company. Options granted under the 2006 Plan have exercise prices and vesting terms approved by the Board of Directors at the time of each grant. Vesting terms of the outstanding options range from immediate to four years from the date of grant. The exercise period of the options range from five to ten years from the date of grant.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

The Company records its stock-based compensation arrangements calculating the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the consolidated statements of operations based on their grant date fair values. The fair value of the Company’s stock options ha been estimated using the Black-Scholes pricing model, which requires assumptions as to expected dividends, the options expected life, volatility and risk-free interest rate at the time of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite vesting periods in the Company’s consolidated statements of operations.

No stock options were granted during the first quarter of fiscal 2018. One board member exercised 200,000 stock options at $0.10 per share during the first quarter for $20,000 cash received by the Company and recorded to common stock payable.

The Company utilized the following key assumptions in computing the fair value of the option grants using the Black-Scholes pricing model for fiscal 2017:


	Fiscal 2017
Weighted-average volatility	121%
Expected dividends	None
Expected term (in years)	10.00
Weighted-average risk-free interest rate	2.23%

The Company recorded stock-based compensation expense of $0 for all outstanding options for both of the first quarters of fiscal years 2018 and 2017.

The following table summarizes information about the Company’s stock options as of May 31, 2017 and activity during the first quarter of fiscal 2018 and fiscal years 2017:


	Number of Options	Weighted Average Exercise Price
Outstanding - February 29, 2016	2,592,310	$ 0.10
Granted	-	-
Exercised	-	-
Canceled or expired	-	-
Outstanding - February 28, 2017	2,592,310	$ 0.10
Granted	-	-
Exercised	(200,000)	$0.10
Cancelled or expired	-	-
Outstanding – May 31, 2017	2,392,310	$ 0.10
Exercisable at May 31, 2017	2,392,310	$ 0.10

The following table summarizes information about stock options outstanding as of May 31, 2017:


Exercise Price	Number Outstanding	Weighted Average Remaining Life (years)	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercisable Price
$0.10	400,000	8.50	$0.12	400,000	$0.12
$0.15	1,292,310	0.92	$0.02	1,292,310	$0.02
$0.25	500,000	7.92	$0.21	500,000	$0.21
$0.30	200,000	8.25	$0.25	200,000	$0.25
$0.10 - $0.30	2,392,310	3.94	$0.10	2,392,310	$0.10

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Note 9. Related Party Transactions

Accounts Payable – Related Parties

The Company owes $9,847 and $10,612 due to advances made to an employee which is included within accounts payable – related parties as of May 31, 2017 and February 28, 2017, respectively.

Prepaid Domain Names

During the first quarter of fiscal years 2018 and 2017, the Company paid $81,702 and $15,000, respectively, for annual domain name renewal fees. The amounts paid for the annual domain name renewal fees are paid directly to Epik, LLC (“Epik”), a company which is controlled by Robert Monster, the Company’s Chief Executive Officer. Epik, then uses those funds to directly pay Verisign and ICANN companies for the annual domain renewal costs, which range between $0.25 and $7.85, respectively, per domain name. The costs paid to Epik are at terms similar or better than what Epik charges its other clients, which reflects the market rates of $0.25 to $7.85 for domain names.

Convertible Note Payable – Related Party

Appointment.com Acquisition

On December 1, 2016, the Company acquired all assets related to Appointment.com, Inc. (“Appointment”), an online scheduling software system based in Seattle, Washington. This transaction is considered related party since the Company’s CEO, Rob Monster, owned a controlling interest in Appointment through a company owned 100% by Mr. Monster. The purchase price pursuant to an asset purchase agreement was 1,625,000 shares of common stock. This amount was paid with the issuance of 1,625,000 shares of our common stock, of which 536,364 shares were issued to Mr. Monster’s company. Due to the related party nature of the transaction, the Company did not record any goodwill related to the transaction and assets and liabilities acquired were recorded at cost. The difference between the cost of the assets received and the purchase price is recognized as compensation expense on the Company’s consolidated statement of operations. The agreement included customary representations, warranties, and covenants by us and Appointment. See Note 14 for additional information.

Sales of Common Stock

During fiscal 2017, the Company sold an aggregate of 435,000 shares which were sold to the Company’s chairman and a related party investor at terms below the market price and share prices available other investors at the time of the sales. As a result, the Company recorded additional stock compensation expense of $30,450 to additional paid in capital to account for the preferential common share pricing. There were no such sales in the first quarter of fiscal 2018.

Employment Agreements

CEO Employment Agreement Share Issuance

On February 10, 2016, the Company issued 3,312,811 shares of common stock to Robert Monster, CEO, in accordance with his employment agreement dated May 18, 2015. The shares were valued based on the employment agreement date using the Black-Scholes model. See Note 7 for more information about this share issuance.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

On May 18, 2016, the Company granted 8,292,309 common shares to Robert W. Monster, CEO, in accordance with his employment agreement dated May 18, 2016, which vest monthly over the new employment agreement period which ends on May 18, 2018, a period of two years. The shares were valued based on the employment agreement date. See Note 7 for more information about this share issuance.

CEO Accrued Salary Conversion

On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 shares of common stock and 1,292,310 stock options with an exercise price of $0.15 and a vesting period of 12 months. The shares and options were valued on the conversion date in the amounts of $109,846 and $19,385, respectively. See Note 7 for more information about this accrued salary conversion.

Transactions with Former Officer and Current Shareholder

The Company has had several transactions with Richard Pomije, its former CEO, CFO and Chairman, including notes payable – related party, common stock subscription receivable and deferred compensation. See Note 16 for more information about these transactions.

Note 10. Income Taxes

The Company accounts for income taxes under standards issued by the FASB. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.

No provision for federal income taxes has been recorded due to the net operating loss carry forwards totaling $12,372,359 as of May 31, 2017 that will offset future taxable income. The available net operating loss carry forwards will expire in various years through 2036. Future tax benefits which may arise as a result of these losses have not been recognized in these consolidated financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carry forwards.

The actual income tax provisions differ from the expected amounts calculated by applying the statutory income tax rate to the Company’s loss before income taxes. The components of these differences are as follows at May 31, 2017 and February 28, 2017:


		May 31, 2017		February 28, 2017
Net tax loss carry-forwards	$	12,372,359	$	11,627,532
Statutory rate		34%		34%
Expected tax recovery		4,206,602		3,953,361
Change in valuation allowance		(4,206,602)		(3,953,361)
Income tax provision	$	-	$	-

Components of deferred tax asset:
Non capital tax loss carry forwards	$	4,206,602	$	3,953,361
Less: valuation allowance		(4,206,602)		(3,953,361)
Net deferred tax asset	$	-	$	-

Note 11. Commitments and Contingencies

Litigation

The Company, in the normal course of business, is a party to various ordinary course claims and legal proceedings. In the opinion of management, the ultimate resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the Company's financial position or results of operations.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which has been fully accrued for by the Company. See Note 16 for additional information about transactions between the Company and its former officer.

Lease Commitments

As of May 31, 2017, we have three outstanding operating leases. The leases are for an aggregate of 2,700 square feet of office space. Two of the leases are month-to-month with either party able to terminate the lease with 30 days of notice. The other lease is for period of one year and ends in March 2018. Gross rent is approximately $4,070 per month plus $95 for HVAC expenses and applicable taxes. In addition, for one of the leases, we are responsible for various operating costs, such as telephone and utilities. Our total rent commitment is $20,940. Rent expense for the first quarter of fiscal years 2018 and 2017 was $5,352 and $0, respectively.

Strategic Partnership Agreement

The Company entered into a five-year strategic partnership agreement with the National Interscholastic Athletic Administrators Association (“NIAAA”), which expired in December 2015. The Company entered into this agreement prior to commencing its current Smart City business strategy and with the intent of launching specific software to support various websites. The Company believes it has satisfied all terms of the agreement, however formal documentation of termination has not been obtained to date. The Company has included an amount in accounts payable for any potential obligations related to this agreement.

Note 12. Common Stock Subscriptions Receivable

From time to time, the Company has had various stock subscription agreements outstanding all of which were due from a related party. As of February 29, 2016, the Company was owed $5,000 for stock issued and had accrued an additional $7,150 for stock which is payable during the 2017 fiscal year under the employment agreement with Robert Monster. The total amount of $12,150 was satisfied in full in fiscal 2017.

Note 13. Earnings (Loss) Per Share

The Company computes earnings per share using two different methods, basic and diluted, and presents per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding.

Due to the recent net losses generated by the Company, there are no dilutive elements. Therefore, basic and diluted EPS are the same.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the first quarter of fiscal years 2018 and 2017:


	Fiscal 2018	Fiscal 2017
Basic earnings (loss) per share calculation:
Net loss to common shareholders	$ (1,101,248)	$ (615,066)
Weighted average number of common shares outstanding	55,059,804	41,461,543
Basic net loss per share	$ (0.02)	$ (0.01)

Diluted earnings (loss) per share calculation:
Net loss to common shareholders	$ (1,101,248)	$ (615,066)
Weighted average number of common shares outstanding	55,059,804	41,461,543
Stock options (1)	-	-
Warrants (2)	-	-
Diluted weighted average common shares outstanding	55,059,804	41,461,543
Diluted net loss per share	$ (0.02)	$ (0.01)


(1)	At May 31, 2017 and May 31, 2016, there were 2,392,310 and 2,592,310, respectively, of stock options equivalent to common shares outstanding. The stock options are anti-dilutive at May 31, 2017 and May 31, 2016 and therefore, have been excluded from diluted earnings (loss) per share.

(2)	At May 31, 2017 and May 31, 2016, there were outstanding warrants equivalent to 4,660,000 and 4,510,000 common shares, respectively. The warrants are anti-dilutive at May 31, 2017 and May 31, 2016 and therefore, have been excluded from diluted earnings (loss) per share.

Note 14. Acquisitions

Appointment.com Acquisition

On December 1, 2016, the Company acquired all assets related to Appointment.com, Inc. (“Appointment”), an online scheduling software system based in Seattle, Washington. This transaction is considered related party since Epik LLC is a controlling owner of Appointment and the Company’s CEO, Rob Monster, is the controlling owner of Epik LLC. The purchase price pursuant to an asset purchase agreement was 1,625,000 common shares. Due to the related party nature of the transaction, the Company did not record any goodwill related to the transaction. The sum of $122,705, which reflects the cost basis of the liabilities assumed, and the stock value of $731,500 is $853,955 and is recognized as expense on the Company’s consolidated statement of operations. The agreement included customary representations, warranties, and covenants by us and Appointment.

The allocation of the purchase price to assets based upon fair value determinations was as follows:


Cash	$	2,240
Related Party Payable		(42,380)
Accrued Salary		(82,565)
Total Net Liabilities Assumed	$	(122,705)

The purchase price consisted of the following:


Total Net Liabilities Assumed	$	122,705
Common Stock		731,250
Total Compensation Expense and Purchase Price	$	853,955

The unaudited supplemental pro forma results of operations of the combined entities are not included in this disclosure as the acquisition of Appointment does not materially affect the Company's results from operations.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Rezserve Technologies Ltd. Acquisition

On September 14, 2016, the Company entered into a Stock Purchase Agreement for 100% of Rezserve Technologies, Ltd. (Rezserve), a travel industry software company based in Vancouver, British Columbia. Pursuant to the terms of the agreement, the Company purchased all of the issued and outstanding stock of Rezserve in consideration for a total purchase price of $1,480,000. This price was paid with 3,000,000 shares of the Company’s common stock and a $400,000 secured convertible note payable to Rezserve’s founder Clint Skidmore. The terms of the note include interest at 0% per annum. Principal is due and payable within one year of September 13, 2016. The Company imputed interest expense of $19,040 related to the $400,000 convertible note payable – related party as an increase in additional paid in capital during fiscal 2017. See Note 14 for more information about the convertible note payable – related party.

This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of Rezserve’s assets and ongoing operations were acquired. The purchase resulted in $1,445,292 of impairment expense. This was due to the use of common stock by the Company to pay for the acquisition and the corresponding the value of the stock was in excess of the fair value of the assets received. The agreement included customary representations, warranties, and covenants by us and the Rezserve owner.

According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:


Assets, net	$	34,708
Customer Lists		77,295
Intellectual Property		30,842
Trademarks		19,475
Goodwill		1,317,680
Total Assets Acquired	$	1,480,000

The purchase price consisted of the following:


Convertible note payable – related party	$	400,000
Common Stock		1,080,000
Total Purchase Price	$	1,480,000

The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $1,445,292 related to this acquisition in fiscal 2017.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

The unaudited supplemental pro forma results of operations of the combined entities had the date of the acquisition been March 1, 2016 are as follows:


	Combined Pro Forma
	For First Quarter
	Fiscal 2017
Revenues	$	56,222

Cost of revenues		109,765

Gross profit (loss)		(53,543)

Operating expenses:
Selling, general and administrative expenses		579,999

Loss from operations		(633,542)

Other income (expense)		-

Net loss	$	(633,542)

Weighted average number of common shares
Outstanding – basic and fully diluted		41,461,543

Net loss per share – basic and fully diluted	$	(0.01)

Cloud.Market Acquisition

On March 5, 2016, the Company acquired all of the assembled workforce, patents, intellectual property, technology, trademarks, trade names, copyrights, mask works and registrations, computer software, trade secrets and non-compete agreements related to the Cloud.Market business, pursuant to an agreement among the Company and the owner of Cloud.Market. The purchase price paid included issuance of 750,000 shares of our common stock and $7,500 of cash. The agreement included customary representations, warranties, and covenants by us and the Cloud.Market owner.

The allocation of the purchase price to assets based upon fair value determinations was as follows:


Non-compete agreements	$	700
Customer Lists		66,800
Total Assets Acquired	$	67,500

The purchase price consisted of the following:


Cash	$	7,500
Common Stock		60,000
Total Purchase Price	$	67,500

The unaudited supplemental pro forma results of operations of the combined entities are not included in this disclosure as the acquisition of Cloud.Market does not materially affect the Company's results from operations.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Note 15. Convertible Note Payable – Related Party

On September 14, 2016, subject to a stock purchase agreement, the Company signed a secured convertible note of $400,000 with Clint Skidmore, founder of Rezserve Technology Ltd (“Rezserve”). The interest free note is due and payable within one year, at which time it can be converted into up to 1,000,000 shares of the Company’s common stock at a conversion price of $0.40 per share. The Company evaluated the note and determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present. The imputed interest expense of $10,350 related to the $400,000 note payable was recorded as an increase in additional paid in capital during the first quarter of fiscal 2018.

The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.

Note 16. Transactions with Former Officer and Current Shareholder

The Company was founded in 1982 by Richard Pomije. On May 17, 2015, Mr. Pomije resigned as CEO of the Company and on June 1, 2015, he resigned as the CFO and Chairman. At that time of his resignation, the Company and the Board of Directors were not aware of any continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with his closing of the Burnsville, MN office. However, Mr. Pomije is now asserting an employment agreement did indeed exist and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which has been fully accrued for by the Company. Mr. Pomije filed a lawsuit against the Company on December 5, 2016.

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended May 31, 2017 and 2016

Note 17. Intangible Assets and Goodwill

Goodwill

The carrying value of goodwill at May 31, 2017 and February 28, 2017 was $0. During the fiscal 2017, the Company made an acquisition which resulted in $1,384,480 of goodwill being recorded.

Intangible assets

The carrying value of intangible assets at May 31, 2017 and February 28, 2017 was $0. During fiscal 2017, the Company acquired $352,552 of intangible assets, including $224,240 of domain name rights, $77,295 of customer base, $30,842 of IP/Technology, $19,475 of trade-name and marks, and $700 of non-compete agreements. During fiscal 2017, the Company recorded $12,023 of amortization expense related to intangible assets.

During fiscal 2017, the Company entered into agreements to purchase domain name rights with five individuals. In exchange for the domain name rights, the Company issued 369,750 common shares and paid $69,500 in cash. The total fair value of the shares was $154,740 based on the respective domain name purchase agreements date and the closing market price on that date.

2017 Impairment

We evaluate our goodwill and intangible assets for an impairment on an annual basis each fiscal year end. Based upon our review and analysis, we deemed all of the goodwill and intangible assets acquired in fiscal 2017 as fully impaired as of February 28, 2017. Accordingly, we recognized an impairment expense of $1,725,009 in the fourth quarter of fiscal 2017. This reflects the full amount of goodwill and the unamortized balance of the intangible assets.

Note 18. Subsequent Events

On June 28, 2017, the Company entered into a stock purchase agreement to acquire Comencia, Inc. (“Comencia”) a Bellevue, WA based company which supports a cloud-based software platform for travel-related services. The purchase price was $1,055,000, which will be paid by $55,000 in cash plus 2,500,000 shares of the Company’s common stock. In conjunction with this acquisition, the Company issued a promissory note on June 30, 2017 for the amount of $55,000. The promissory note is due upon demand and is subject to an annual interest rate of 3.0%. The promissory note was paid in full on July 13, 2017.

On June 30, 2017, the Company entered into an employment agreement with one of the former owners of Comencia for a period of 2 years. Included in the terms of the employment agreement was a restricted stock grant of 1,025,000 shares, which vest monthly over the term of the agreement.

Between June 9, 2017 and July 13, 2017, the Company received an aggregate of $600,000 in cash payments related to three unsecured convertible notes with its chairman, another director, and a shareholder. The interest free notes are due and payable within one year, at which time all can be converted into shares of the Company’s common stock at a conversion price of $0.25 to $0.40 per share.

There were no additional significant subsequent events through July 14, 2017, the date the financial statements were issued.

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

The following is a discussion of the financial condition as of May 31, 2017 and its results of operations of the Company for the three months ended May 31, 2017 and 2016, which should be read in conjunction with, and is qualified in its entirety by, the financial statements and notes thereto included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended February 28, 2017.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Form 10-Q for the quarter ended May 31, 2017, contains forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may," "shall," "could," "expect," "estimate," "anticipate," "predict," "probable," "should," "continue," or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management and are considered by management to be reasonable. Our future operating results, however, may be materially different and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

GENERAL

DigitalTown, Inc. (“The Company”, “We”, “Us”, “Our” and “DigitalTown”) provides turn-key hosted solutions to power a comprehensive platform for government entities, citizens and merchants. Our solutions improve the quality of life for residents and visitors through integrated technology for economic development, civic engagement, digital inclusion and smart tourism for cities around the world. The easy to use platform helps city officials and local merchants manage a feature-rich Smart City for web and mobile devices, and provides residents and visitors with access to Content, Community and Commerce.

Market Opportunity

We provide an integrated search, community, and commerce platform for both web and mobile devices. DigitalTown powers connected online communities that enable members of a community to find information and acquire the goods and services they need locally when possible. The DigitalTown platform is intended to improve how the local economy consumes and transacts. It does this by helping local community citizens interact with city government, as well as local merchants. Residents and visitors are able to use the DigitalTown powered search engine to access content, community and commerce from an easy search tool. If there are local vendors that can fulfill a product or service that relates to a search term, then those options are presented to the user. Local vendors can also become direct merchants on the platform, effectively allowing the local town to be its own hub for mass commerce.

The Strategic Importance of Local Online Economic Development

The DigitalTown platform elevates local communities to an advanced state of technical capability. To date, most cities have historically taken a hands-off approach towards the Internet. However, we believe city management will further consider the Internet as an integral part of their strategic plan for economic growth.

The continued expansion of big box retailers and steep growth of national eCommerce has created an increased number of challenges for locally owned small businesses. This requires a new approach to online economic development – one that equips local merchants with the means to compete locally and sell nationally. DigitalTown provides a cost-effective solution to help local businesses compete against entities with greater reach, scale and resources.

Why the DigitalTown Solution Makes Sense

The DigitalTown platform is a cost-effective solution for enabling a community to become a smart community, which we define as connected to shared content and local commerce. A key enabler for this capability is the continued growth of smartphones that are powered by common frameworks, such as Apple iOS and Android. The use of smartphones has enabled individuals to communicate and transact in real-time anywhere they choose using their smartphone, which serves as a proxy for identity, reputation, preferences and method of payment. In effect, the smartphone has become the digital wallet. We believe this opportunity is global and our approach, which emphasizes public-private partnerships, will enable accelerated adoption particularly in rural communities where trust of technology is lower, the need is potentially the greatest, and economic models are at the greatest risk.

How the DigitalTown SmartCity Platform Is Part of the New SmartWeb

A core component of the DigitalTown approach is to build branded web destinations that are intuitive to discover. Part of what makes this possible is the emergence of new domain extensions that are descriptive. For example, .CITY routes a visitor to a website about a city and .MENU routes a user to a website about restaurants in that city. Due to management’s long-standing relation with domain registry operators, the Company will seek to bring structure to the emerging landscape of domain extensions, while at the same time emphasizing distribution of a unified mobile application to work as a digital companion alongside the growing network of direct navigation brands.

The DigitalTown Platform

The DigitalTown platform supports powerful online and mobile communities. We tap into locally relevant news and content in order to keep community members informed. We provide community tools to keep community members connected. We enable commerce and fulfillment in local communities, thereby helping residents to buy locally while equipping merchants to sell locally, nationally and even globally.

Content Search

The DigitalTown search engine serves as the core of the local experience. Whereas most residents may go once or twice per year to the official city site, the DigitalTown-powered search engine is designed for daily use as a preferred homepage for local residents and businesses. This will be accomplished through a combination of marketing and education to residents. In addition, we believe adoption can happen through building a strong level of trust with the residents since our platform will be endorsed or supported by the local government whom the residents know. This compares to large national companies with limited to no connection to the local residents.

Community

Consumers are already familiar with social networking through applications like Facebook and Twitter. The integrated DigitalTown web service and mobile app make it easy to stay informed, as well as to connect and communicate with other members of a given community. Community members can message, join groups, shop online, and make payments.

Commerce

The DigitalTown platform provides merchants with a turn-key solution for online commerce. Once the approved merchant loads SKU’s and inventory available for sale, the merchants can begin selling without any setup fees or capital investment costs. Transaction processing services are provided by DigitalTown, thereby eliminating the need for each retailer to secure a merchant processing account. The community may also enable a private currency for use within the community.

Courier and Delivery Management

In a growing number of participating cities, an integrated courier and delivery application is included, enabling approved delivery service providers to be notified about items from merchants to be picked up and delivered to the customer, thereby enabling any approved merchant to also offer delivery services to the end-customer. Delivery time is chosen by the customer and can be hours to days.

Administration

The DigitalTown platform provides integrated administrative tools for managing content, community and commerce, making it easy to administer. The administrative tools are designed to be the back-end of the smart community. For example, administrators can create Frequently Asked Questions (FAQ) that are then presented through the site search. This FAQ article is then systematically provided as information when a user makes an inquiry that matches the keywords into the search box on the site.

Intellectual Property

Domain Name Portfolio. The Company is developing a proprietary platform for Smart City Management. As part of this platform rollout, the Company has secured approximately 23,000 of the .CITY domains that map to significant population centers. DigitalTown has methodically secured the .CITY domains through both acquisition from existing registrants, or via direct purchase from the operator of the .CITY registrar.

Software: The Company has developed a proprietary platform for enabling any city to become a Smart City, incorporating advanced features for economic development, community engagement and digital inclusion. In addition, the Company has completed acquisitions of 4 software companies: Cloud.Market, Software Masters, Inc, Rezserve Technologies Ltd, and Appointment.com, each of which brought significant intellectual property and is in process of being fully integrated into the

DigitalTown platform. The Company continues to invest in software with an emphasis on capital efficiency and return on investment.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MAY 31, 2017 AND 2016

During first quarter of fiscal 2018, the Company recorded revenues of $80,271 and cost of revenues of $98,608 for a gross loss of $18,337 compared to revenues of $30 and cost of revenues of $104,678 for a gross loss of $104,648 during the first quarter of fiscal 2017. For the first quarter of fiscal 2018, revenues mainly consisted of development fees related to our SmartCity platform, commissions generated from advertising on our websites, and activities from our Rezserve subsidiary. For the first quarter of fiscal 2017 period revenues mainly consisted of commissions generated from advertising on our websites. Cost of revenues consisted of amortization of prepaid annual domain name renewal fees of $48,531 and $24,138, development expense of $50,077 and $79,937, and merchant processing fees of $2,162 and $603, for the fiscal first quarters 2018 and 2017, respectively.

The Company’s operating expenses are currently all related to selling, general and administrative activity. These expenses were $1,073,187 in the first quarter of fiscal 2018 compared to $510,418 in the first quarter of fiscal 2017, an increase of $562,769. A portion of this increase was non-cash related. Our stock-based compensation expense was $346,701 for the first quarter of fiscal 2018 as compared to $312,171 for fiscal 2017, an increase of $34,530. In addition to the non-cash item, our increase in selling, general and administrative expenses was due to an increase in contractor expense of $96,236, an increase of $35,946 in legal and professional fees, an increase in travel and conference-related costs of $97,144, an increase in employee compensation and benefits of $280,765, an increase in office services and supplies of $7,006, an increase in rent and utilities of $5,993, and an increase in insurance expense of $5,171.

The Company’s overall net loss for the current first quarter increased by $486,182 to $1,101,248. The increase was mainly due to the increase in stock compensation expense and the increase in general and administrative items as detailed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash position at May 31, 2017 was $42,923, a decrease of $496,320 from $539,243 at February 28, 2017. During the first quarter of fiscal 2018, net cash used in operating activities was $635,925 compared to cash used of $225,518 for the first quarter of fiscal 2017. When comparing the two periods, the increase in cash used in operating activities of $410,407 for the first quarter of fiscal 2018 is primarily due to an increase of cash operating expenses.

Net cash used in investing activities was $26,423 and $7,500 for first quarters of fiscal years 2018 and 2017, respectively. In the first quarter of fiscal 2018, the Company invested in certain equipment.

Net cash provided by financing activities for the first quarter of fiscal 2018, was $162,500, which consisted of proceeds from the sale of common stock. For the first quarter of fiscal 2017, the Company received net cash provided by financing activities of $539,500, which consisted of proceeds from a stockholders’ subscriptions receivable.

Monthly cash operating expenses for the first quarter of fiscal 2018, were approximately $237,000 per month. Based on current projections, the Company’s monthly cash operating expenses going forward should be approximately $250,000 per month, which includes the monthly cost for the renewal of the existing domain names of approximately $30,500. In addition to its normal monthly operating expenses, the Company’s committed cash requirements for the 12 months ending February 28, 2018 include the balance due of $30,000 for expenses pertaining to the Company’s Strategic Partnership Agreement with the NIAAA, which is associated with the Company’s previous business plan and expired in 2015 and $31,700 pertaining to software development agreements. In the period from June 1, 2017 through July 14, 2017, the Company did not enter into stock purchase agreements of restricted common shares. Between June 9, 2017 and July 13, 2017, the Company received an aggregate of $600,000 in cash payments related to three unsecured convertible notes with its chairman, another director, and a shareholder. The interest free notes are due and payable within one year, at which time all can be converted into shares of the Company’s common stock at a conversion price of $0.25 to $0.40 per share.

We believe our current cash reserves, the amounts we expect from future proceeds from the issuance of our common stock and the sale of existing domain names should be sufficient to enable us to operate for the next 12 months. In the event that we are unable to operate profitably, raise additional capital through the sale of our common stock or sell existing domain names on acceptable terms, we would be forced to further reduce operating expenses or cease operations altogether.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

The discussion and analysis of DigitalTown, Inc.’s financial condition and results of operations are based on our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an ongoing basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While DigitalTown Inc.’s significant accounting policies are described in more detail in Note 1 to its financial statements, management believes the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements:

Prepaid Domain Names

The annual domain name renewal fees are currently amortized over one year and the purchase of any new domain names are the only amounts capitalized. See Note 5 for further information.

Stock-Based Compensation

The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.

Recently Issued Accounting Pronouncements

Information regarding recently issued accounting pronouncements is included in Note 1 to the consolidated financial statements in “Item 8. Financial Statements and Supplemental Data” in this Annual Report on Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company has not entered into, and does not expect to enter into, financial instruments for trading or hedging purposes. The Company does not currently anticipate entering into interest rate swap and/or similar instruments. Our primary market risk exposure with regard to financial instruments is to changes in interest rates, which would only impact interest income earned on such instruments. As of May 31, 2017, the Company did not have any material currency exchange or interest rate risk exposure.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness, as of May 31, 2017, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the Securities and Exchange Commission (“SEC”), under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our management has concluded, as discussed below, that material weaknesses existed in our internal control over financial reporting as of May 31, 2017 and as a result, our disclosures controls and procedures were not effective. Notwithstanding the material weaknesses that existed as of May 31, 2017, our chief executive officer and chief financial officer has concluded that the financial

statements included in this Annual Report on Form 10-K present fairly, in all material aspects, the financial position, results of operations and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Changes in Internal Controls over Financial Reporting

Management continues to evaluate the Company's internal controls over financial reporting to ensure that the design and implementation of corrective procedures are adequate to remediate the previously identified material weaknesses from our Form 10-K at February 28, 2017. Due to the small number of employees dealing with general administrative and financial matters and the expenses associated with increases to remediate the disclosure controls and procedures that have been identified, the Company continued to operate without changes to its internal controls over financial reporting for the period covered by this Quarterly Report on Form 10-Q while continuing to evaluate and improve to remediate the material weaknesses at an appropriate cost benefit basis.

During the fiscal quarter ended May 31, 2017, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our 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 28, 2017. 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 first quarter of fiscal 2018, the Company entered into stock purchase agreements for total cash proceeds of $142,500.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION


	(a)	All information required to be disclosed on a report on Form 8-K during the period ended May 31, 2017, 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


3.1	Articles of Incorporation, as amended *	Previously Filed
3.2	Bylaws*	Previously Filed
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Included
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Included
101.INS**	XBRL Instance	Included
101.SCH**	XBRL Taxonomy Extension Schema	Included
101.CAL**	XBRL Taxonomy Extension Calculation	Included
101.DEF**	XBRL Taxonomy Extension Definition	Included
101.LAB**	XBRL Taxonomy Extension Labels	Included
101.PRE**	XBRL Taxonomy Extension Presentation	Included

_____________

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

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	DigitalTown, Inc.

Dated: July 14, 2017	By: /s/ Robert W. Monster
	Robert W. Monster
	Chief Executive Officer and Director
	(Principal Executive Officer and Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.


Dated: July 14, 2017	By: /s/ Robert W. Monster
	Robert W. Monster
	Chief Executive Officer and Director
	(Principal Executive Officer and Principal Financial Officer)

Dated: July 14, 2017	By: */s/ Darvin R. Haben*
	Darvin R. Habben
	Chairman

Dated: July 14, 2017	By: */s/ Maury Blackman*
	Maury Blackman, Director

Dated: July 14, 2017	By: */s/ Kenwei Chong*
	Kenwei Chong, Director

Dated: July 14, 2017	By: */s/ Jeffrey L. Mills*
	Jeffrey L. Mills, Director

Dated: July 14, 2017	By: */s/ James B. Parsons*


	James B. Parsons, Director

Dated: July 14, 2017	By: */s/ Derek R. Schumann*
	Derek R. Schumann, Director

Dated: July 14, 2017	By: */s/ Mark A. Schwartz*
	Mark A. Schwartz, Director