VERUS INTERNATIONAL, INC. - Annual Report: 2009 (Form 10-K)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended October 31, 2009
or
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from _______________________ to
___________________
Commission
File Number 001-34106
WEBDIGS,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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11-3820796
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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3433
West Broadway St, NE, Suite 501
Minneapolis,
MN
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55413
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (888) 932-3447
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common stock, $.001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o
Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
x
Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
o
Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act:
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule12b-2
of the Act).
o
Yes x No
The
aggregate market value of the voting stock held by persons other than officers,
directors and more than 5% stockholders of the registrant (non-affiliates) was
approximately $5.3 million as of the last day of the Company’s most recently
completed second fiscal quarter of April 30, 2009 when the last reported sales
price was $0.47 per share. As of January 29, 2010, 33,396,719 shares of
common stock were outstanding.
Webdigs,
Inc.
Form
10-K
Table
of Contents
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Page
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PART
I
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Item
1.
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Business
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3 | |||
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Item
1A.
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Risk
Factors
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11 | |||
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Item
2.
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Properties
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16 | |||
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Item
3.
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Legal
Proceedings
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17 | |||
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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17 | |||
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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18 | |||
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Item
6.
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Selected
Financial Data
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21 | |||
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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22 | |||
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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Item
8.
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Financial
Statements and Supplementary Data
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30 | |||
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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31 | |||
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Item
9A.
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Controls
and Procedures
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31 | |||
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Item
9B.
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Other
Information
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33 | |||
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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33 | |||
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Item
11.
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Executive
Compensation
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35 | |||
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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37 | |||
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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38 | |||
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Item
14.
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Principal
Accountant Fees and Services
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39 | |||
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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39 | |||
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Signatures
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41 | ||||
2
PART
I
ITEM
1. BUSINESS
Overview
of our Business and its History
We are a
web-assisted, full service real estate company that offers innovative services
to home buyers and sellers via two primary brands: Webdigs.com and
IggysHouse.com. With Webdigs.com we share with each buyer up to one-half (50%)
of the commission we receive from the seller or listing broker, with a minimum
fee of $3,000 per transaction to the Company. We also offer
discounted listing services to customers wishing to sell their homes. We provide
our sellers a rate as low as 3.9%, compared to a real estate industry full
service standard commission of 6% (our estimate is based on informal data
collections in Minnesota and Florida). Since according to the 2008
National Association of REALTORS® Profile
of Home Buyers and Sellers more than 87% of home buyers today use the internet
in their home buying process, we primarily target those home
buyers. As part of our website interface and personal service, we
also provide home buyers tools to manage their purchase transactions from
initial search to the closing of their purchase.
In
January 2010, we launched IggysHouse.com, a unique online website that offers
consumers an opportunity to have their home listed on the real estate multiple
listing service (MLS) in their area and on the IggysHouse.com website completely
free for 30 days. If the consumer has not sold their home within the
initial 30 day period, IggysHouse.com offers them the option to continue their
listing on a month to month basis for a low flat monthly fee. In
addition to the basic monthly fee, there are opportunities to generate
additional revenues for Webdigs through extra services such as yard signs,
enhanced virtual photo tours and assistance with negotiation.
We have
been operating since July 2007 in the Twin-Cities (Minneapolis-St. Paul and
western Wisconsin) metropolitan area and since November 2007 in south
Florida. Our plans include expansion into additional medium to large
metropolitan areas throughout the United States as market conditions and
financial resources permit. We expect our near term
expansion will include metropolitan areas of the upper Midwest and states in the
eastern, southeastern and southwestern regions of the United
States.
Background
and Industry Trends
We
believe that the real estate market is undergoing a dramatic change not
dissimilar to that previously experienced by traditional stock
brokerages. We believe that the most critical aspect driving this
change is the advent of the Internet as a tool for searching for and researching
real estate, eliminating the commitments of time and expense involved with
visiting multiple properties in person. According to the National
Association of Realtors’ 2006 “Profile of Home Buyers and
Sellers,” the percentage of home buyers using the Internet to search for
homes increased from approximately 2% in 1995 to 80% in 2006. In addition,
home sellers can use the Internet to check home valuations, track the housing
market and research comparable sales information.
The
increased use of technology throughout the entire process of a typical
residential real estate transaction is an important development in the real
estate market. For instance, electronic communication and electronic
data storage permits a real estate brokerage to quickly reproduce standard real
estate transaction documents, store such documents and store other important
information about customers and properties, and communicate quickly with other
parties involved in real estate transactions (e.g., title companies, insurers,
surveyors, inspectors and governmental agencies), all of which permits increased
efficiencies in the process of buying and selling a home. The technological
changes and developments generally make it possible to effect a greater volume
of transactions with less effort and expense.
We
believe the technological developments in the real estate market and the
increased amount of information available to and used by ordinary consumers
appear to be circumstances that are similar to those developments that
eventually gave rise to the non-traditional stock brokerages which have intruded
upon the market dominance of traditional stock brokerages over the past two
decades. For example, we note that the non-traditional stock brokerages
developed their services and products to compete primarily on the bases of
price, consumer effort and technology. Their websites, such as TD Ameritrade or
e-Trade, provide not only trading capacity for the average consumer, but also a
tremendous amount of information about companies. In this regard, we note that
there has recently been a proliferation of various Internet-related real estate
businesses that seek to provide either specific and limited services or
information relating to residential real estate transactions (e.g.,
ForSaleByOwner.com, BuyOwner.com and Zillow.com). Like the
non-traditional stock brokerages, these businesses typically rely on consumer
effort, technology and price as the basis for competition. This is the model
Webdigs has based its business practices on.
3
Our
Business Model, Products and Services
General
We are a
web-assisted real estate brokerage primarily for residential home buyers and
sellers. We utilize the Internet, proprietary technology and efficient business
processes to attempt to deliver significant savings to our home sellers and
rewards to our home buyers over the traditional “full commission” brokerage
model. We attempt to emphasize client service, when and as needed or
requested by our clients, to separate us from other discount brokerage
models; and we attempt to provide efficiency and cost savings that
will differentiate us from traditional brokerage models.
We
operate under two brands. Webdigs.com, our first brand, is our discounted, near
full-service real estate brokerage. Webdigs offers its customers up to a 50%
rebate to its clients who are buying homes and offers listing services starting
as low as 3.9% (compared to traditional brokerages which typically charge 6-7%
for listing service).
Our
second brand, IggysHouse.com, which launched in January 2010, is a
month-to-month listing service that allows home sellers to list their home on
their local MLS and on the IggysHouse.com website completely free for 30 days.
After 30 days, the seller has to option to continue to list their home for a
flat fee of $49.99 per month, with various other ala carte services available
for purchase. Currently, we market to potential customers principally through
internet ad campaigns, limited but highly targeted e-mail, direct mail, and
print advertising. Our most consistent source of business, however,
has been referrals from previous satisfied customers of our
business.
Services
for Home Buyers
We
provide home buyers with a number of services. Through our website at
Webdigs.com, home buyers can search our database of MLS listings, view open
house schedules, schedule home visits, make offers and monitor the offer and
counteroffer process. Our licensed real estate agents assist buyers by preparing
offers, counteroffers and other real estate documents, negotiating purchase
contracts, setting up inspections, arranging for financing, and preparing for
closings. Our agents support the buyer at each step of this process,
until the transaction has closed.
After a
closing, we pay our clients their rebate check within 14 days for their portion
of the buy-side commission. Our rebate payments are generally one-half of the
commission we receive from a transaction.
Using a
generally accepted industry average fee of 2.7% (our estimate using informal
data collected by our agents in Minnesota and Florida) for buyer representation,
any customer purchasing a home for a price exceeding $111,000 may benefit
financially from using Webdigs.com as the brokerage. A customer purchasing a
home for a price exceeding $222,000 will receive a commission rebate of
approximately 1.35% of purchase price (or one-half of the 2.7% buyer’s brokers
fee). A buyer purchasing a home with a sales price between $111,000 and $222,000
will pay Webdigs a flat $3,000 broker fee with the remainder of the commission
being returned to them as a non-taxable rebate. We believe this gives buyers a
financial incentive to use our services.
Since our
inception in July 2007 and as of December 31, 2009, our home buying clients
have:
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¨
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closed
175 purchase or sales of
properties.
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¨
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collectively
received $631,000 in cash rebates for their purchases (an average of
$3,606 per transaction).
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4
Services
for Home Sellers
In our
Minnesota and Wisconsin markets, Webdigs.com provides our home sellers with a
full service listing, including a listing on the Northstar MLS, for a fee of
3.9% of the final sale price at closing; 1.2% is paid to Webdigs, and the
standard 2.7% goes to the buyer’s broker. This represents more than a
33% savings compared to the average real estate fee of 6% of sales
price. Assuming a sales price of $300,000, a Webdigs listing customer
may save 2.1% of the sales price ($6,300) by using Webdigs as their listing
brokerage. To ensure that our customers receive the same attention from
non-Webdigs agents representing potential buyers of a home listed by Webdigs, we
typically offer the standard 2.7% of sales price commission to non-Webdigs
brokers who represent buyers purchasing a home listed by Webdigs. The
Northstar MLS contains listings from Minnesota, portions of western Wisconsin,
northern Iowa, and eastern North and South Dakota. Our listings also appear on
Realtor.com and 14 other national home-listing websites. In addition to
providing home sellers with a home listing, Webdigs arranges for virtual home
tours of our sellers’ homes so that the resulting virtual tour may become a part
of the listing on our website. To assist with the pricing of a seller’s home, we
provide a comparative market analysis to the seller and individual consultation
on pricing strategies. Finally, we also provide a range of individual strategies
for readying a seller’s home for sale. We support these services with
marketing and advertising campaigns designed to drive traffic to our
website. As of December 31, 2009, our home selling clients have sold
over 70 homes with us since inception.
Our
second brand, IggysHouse.com opens a new chapter for our business. We
believe that our “pay as you go model” is unique to the consumer real estate
market. It provides the value conscious consumer the ability to
tightly control their expenditures and avoid the traditional percentage fee
costs charged to sellers (based upon our observations the fee typically is 3.3%
to seller + 2.7% for buyers broker = 6.0%
total). IggysHouse.com offers its customers the chance to pay
for the exact services they want on a fixed monthly fee
basis. For a basic MLS listing, IggysHouse.com provides a free
30 day listing through the Webdigs system of affiliated brokers, which can
be continued at the election of the consumer on a month to month basis for
$49.99 per month. If the customer chooses, they may still offer the
buyer’s agent a commission (usually 2.7%). As noted
above, IggysHouse.com offers a full menu of add-on services which a customer can
choose to purchase on an ala carte basis. These menu selections
include yard signs, enhanced photo tours, negotiating assistance, market and
price analysis, favored listing placements on selected national realtor websites
and several additional options which allow the consumer to be a more informed
seller of his home.
The
IggysHouse.com business is only possible because of the high powered integrated
website. We delegate virtually all paperwork and administration to
the sellers through the IggysHouse.com website. The website contains
all of the customized legal documents and forms that each customer will need to
use and complete for the state in which their home is
located. The IggysHouse.com agent merely reviews the
documents once everything has passed the integrated online filters that are part
of the IggysHouse.com website.
For
Webdigs, the IggysHouse.com pricing model allows us to generate steady monthly
revenue from each of our IggysHouse.com listing customers. We
believe that the basic price of $49.99 per month for a MLS listing is low enough
to encourage consumers to patiently maintain their listings over time while at
the same time offering a reasonable cash flow to Webdigs. Unlike the
traditional closing based real estate fee model (the brokerage only earns
income if the home is sold) the IggysHouse.com business model does not depend on
the sale of the home for its revenue. As noted
above, the ala carte portion of the IggysHouse.com product offering provides
consumers great advantages: low monthly fee plus a large selection of
individually purchased services. An IggysHouse.com customer who ends
up selling their home through IggysHouse.com may save thousands of dollars
versus the average full service full priced model. Using a
$300,000 sale price as an example, a full service brokerage might typically
charge 6% to the seller for a successful listing. The cost to the
seller would be $18,000 paid at the closing of the
transaction. The same seller could keep his home listed on
IggysHouse.com for 12 months for a total cost of $549.89. The same
$300,000 sale held on IggysHouse.com for 12 months could end up saving the
seller $17,450 (97%) of the fees paid to the traditional
brokerage. We believe that certain savvy confident consumers will
quickly see the value in the IggysHouse.com product offering and enjoy the power
and control our IggysHouse.com website offers and choose to list their homes
with us. A secondary benefit to Webdigs of the IggysHouse.com business model is
the chance for Webdigs agents and affiliated brokers to speak with
IggysHouse.com customers and offer them a full service but still
discounted Webdigs listing. Later on after the sale of their home is
complete, the consumer will have the chance to buy their next home under the
Webdigs 50% cash rebate buyers program.
5
Our third
brand for selling homes is the MLSDirect.com website. The
MLSDirect.com website fills a void between our Webdigs and IggysHouse.com
listing programs. It offers a flat fee MLS listing for prices
starting as low as $299. Like IggysHouse.com, there is also a full menu of
add-on services on the website that the customer can choose to
purchase.
Additional
Services
We also
work with preferred partners in the mortgage brokerage industry who help
support marketing beneficial in helping to attract customers to
Webdigs.
Our
Strategy
Our
long-term goal is to become the leader in comprehensive web-assisted real estate
brokerage services for buyers and sellers of residential real estate in the
United States and Canada. Initially, however, we are focused on pursuing the
following broad strategic initiatives:
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·
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Invest in our website
interface and technology. Our goal is to make the interfaces of all
our websites (primarily Webdigs.com and IggysHouse.com) more easy to use,
more intuitive, more enjoyable and distinguishable from the other websites
and Internet tools that buyers and sellers of homes are accustomed to. We
believe that continuing to update and enhance our website and technology
will be a key element in increasing traffic and use of our
services. The acquisition of the assets of Iggys
House, Inc. and the subsequent enhancement and re-launch of IggysHouse.com
represent the current focus of our website
investment.
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·
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Focus on finding buyers and
sellers for Webdigs. We have narrowed our marketing focus to lead
generation. We are engaged in marketing to find consumers who
could potentially benefit from the services we offer. Our own
research indicates to us that our consumers have found the Webdigs product
offering to their liking. As indicated previously, we generate
a large proportion of our revenue from referrals of previously satisfied
customers. Therefore, we are marketing specifically to
individuals who are or will be in the market to buy or sell their homes in
the very near future using internet advertising, targeted direct mail and
print media.
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Develop a larger agent
base. To grow, we will need more
agents. We believe that the positive consumer
experience that Webdigs’ past customers report will assist in bringing
additional real estate agents into our
Company. Furthermore, under a new compensation plan
recently enacted, we offer a very competitive compensation package to our
agents, and Company supplied leads that should be compelling for certain
energetic agents.
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Develop an efficient
transaction-processing and back-office operation. We believe that
one important factor in our overall success, especially given our
discounted commissions, will be our ability to process high transaction
volumes efficiently. Accordingly, we have begun developing and intend to
utilize transaction processes and computer systems more commonly found in
high-volume industries such as banking and insurance. The
IggysHouse.com website is a prime example of the type of technology that
results in efficient back-office
processing.
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Attain profitability in our
current markets. There are a number of Internet-based real estate
brokerages presently attempting to capitalize on perceived market,
demographic, trade/industry and economic changes. To our knowledge, none
of these businesses have reached the sustained profitability needed to
validate the discounted Internet-based real estate brokerage model.
Therefore, we believe that an initial critical strategic goal is for
Webdigs to attain overall profitability across its current markets in
Minnesota, Wisconsin, and Florida. We believe that
profitability—especially sustained profitability—will buoy consumer
confidence in our services and lead to further
successes.
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6
If we can
attain profitability, we believe that our business model, being predicated on
greater efficiency and volume than the traditional model but with an emphasis on
expertise and extensive client service, will facilitate our expansion into
additional markets and the growth of our business.
Industry
Segments
We
currently operate in one primary operating segment: (1) web-assisted real estate
brokerage. In prior years, we had reported mortgage brokerage as a
second strategic operating segment. Due to the divestiture of
Marquest Financial, Inc. and the dissolution of Marketplace Home Mortgage –
Webdigs, LLC in 2009 we no longer own any mortgage brokerage operations, and
therefore, we now report as one operating segment.
Competition
The
residential real estate market is highly fragmented and we have numerous
competitors, many of which have greater name recognition, longer operating
histories, larger client bases, and significantly greater financial, technical
and marketing resources than we do. We anticipate that the most critical
competitive factors in our business and industry include price, service and the
ease of using website tools.
Some of
our competitors in the residential real estate brokerage market are traditional
brokerage firms, including large national brokerage firms or franchisors, such
as Prudential Financial, Inc., and RE/MAX International Inc. We
compete with these brokerages primarily on price, service and the ease of use of
our website interfaces. Although our commissions are generally lower than other
brokerages, consumers may be attracted to other brokerages because they offer or
are perceived to offer higher levels of individual attention and
service.
We also
compete with non-traditional real estate brokerage firms including Zip
Realty, Inc., iNest Realty, Inc. (a subsidiary of IAC/Interactive
Corp) and Redfin Corporation, each of which pays cash rebates to clients and
relies to a large extent on the efficiencies of the Internet. We believe that
these competitors generally have greater financial resources than we do, and
also have a longer operating history in the realm of online discount real estate
brokerage. Here too, we compete with these non-traditional brokerages primarily
on price, service and on the ease of use of our website interface. Our
commissions are generally equal to or lower than these non-traditional
brokerages. For example, ZipRealty and Redfin respectively rebate approximately
20% and 50% of their commissions to home buyers. iNest rebates 1% of the actual
home sale price to buyers. We generally rebate up to 50% of our
commission to home buyers with a minimum fee for Webdigs of $3,000.
To our
knowledge, nobody has developed an automated monthly pay as you go listing
service comparable to IggysHouse.com, but we do compete with multiple flat fee
discount real estate listing services across a broad spectrum of pricing models,
such as ForSaleByOwner.com and BuyOwner.com. We compete with these discount
service providers primarily on level of service. Although with Webdigs, we offer
traditional services to our clients at a discounted price, highly self-motivated
consumers may be attracted to IggysHouse.com or other discount listing services
because they are less expensive than our Webdigs branded services. Although we
believe our value proposition is better than our competitors, we believe that a
consumer can obtain an MLS listing through ForSaleByOwner.com for anywhere from
$90 per month to a $900 flat fee.
7
We
compete or may in the future compete with various online services, including
Move, Inc., Zillow.com, HouseValues, Inc., HomeGain.com,
Yahoo!, Inc., Google Inc. and Trulia, Inc. that also look to
attract and monetize home buyers and sellers using the Internet. For instance,
Move, Inc. operates the www.Realtor.com website. Move,
Inc. is affiliated with the National Association of Realtors, the National
Association of Home Builders, the Manufactured Housing Institute and hundreds of
MLSs, which may provide Move, Inc. with preferred access to listing
information and other competitive advantages. We compete with these service
providers primarily on the basis of service and the ease of use of our website
interface. We do not provide home valuation data, and some other sites (such as
Realtor.com) have more listings and more data about the community. Many of these
currently limited competitors and future competitors have significantly more
resources than we do.
Environmental
Regulation
We are
not subject to environmental regulations that have a material effect upon our
capital expenditures or otherwise.
Other
Regulation
We are
subject to governmental regulation by federal, state and local regulatory
authorities with respect to our real estate operations.
Federal Regulation. Federal
laws and regulations govern the real estate brokerage business. These include
the Real Estate Settlement Procedures Act of 1974, or RESPA, and federal fair
housing laws. RESPA requires disclosures to home buyers and sellers of
settlement costs and restricts the payment of kickback or referral fees for
settlement services. RESPA does not prohibit referral fees paid by one real
estate broker to another broker. Federal fair housing laws generally make it
illegal to discriminate against protected classes of individuals in housing or
brokerage services. Other federal regulations protect the privacy rights of
consumers and affect our opportunities to solicit new clients.
Like real
estate brokerage, mortgage brokerage is subject to RESPA and federal fair
housing laws. Mortgage brokerage is also regulated by other federal laws such as
the Truth in Lending Act, Regulation Z and the Equal Credit Opportunity
Act. The provision of title insurance is also highly regulated.
State Regulation. Real estate
licensing laws vary from state to state, but generally all individuals and
entities acting as real estate brokers or salespersons must be licensed in the
state in which they conduct business. A person licensed as a broker may either
work independently or may work for another broker in the role of an associate
broker, conducting business on behalf of the sponsoring broker. A person
licensed as a salesperson must be affiliated with a broker in order to engage in
licensed real estate brokerage activities. Generally, a corporation engaged in
the real estate brokerage business must obtain a corporate real estate broker
license. In order to obtain this license, most jurisdictions require that an
officer of the corporation be licensed individually as a real estate broker in
that jurisdiction. If applicable, this officer-broker is responsible for
supervising the licensees and the corporation’s real estate brokerage activities
within the state.
Real
estate licensees, whether they are brokers, salespersons, individuals or
entities, must follow the state’s real estate licensing laws and regulations.
These laws and regulations generally prescribe minimum duties and obligations of
these licensees to their clients and the public, as well as standards for the
conduct of business, including contract and disclosure requirements, record
keeping requirements, requirements for local offices, trust fund handling,
agency representation, advertising regulations and fair housing requirements.
Although payment of rebates or credits to real estate purchasers of the type we
offer are permitted in most states, some states either do not permit these
rebates or credits or do not permit them in the form that we currently provide
them. Eight states have “minimum service laws” that require realtors to provide
a level of service that purely web-assisted real estate businesses typically do
not provide (Delaware, Florida, Nevada, New Mexico, Ohio, Pennsylvania,
Tennessee and Wisconsin). We presently operate in the State of Florida and we
believe the services we offer to residential real estate consumers comply with
Florida’s minimum service law because: (i) for our clients buying homes, we show
them homes, draw up the related offer paperwork, negotiate the purchase, answer
all questions, and close the purchase transaction; and (ii) for our clients
selling homes, we help the seller price the home (through a competitive market
analysis or otherwise), draw up the listing agreement, negotiate the sale, and
coordinate a closing of the sale. Nevertheless, we have not obtained any
independent or governmental opinion relating to our compliance with Florida
minimum-service laws. Eleven states prohibit rebates of real estate commissions
(Alabama, Alaska, Iowa, Kansas, Louisiana, Mississippi, Missouri, New Jersey,
Oklahoma and Tennessee).
8
Governmental
bodies may change the regulatory framework within which we intend to operate,
without providing any recourse for adverse effects that the change may have on
our business. In Minnesota, Wisconsin, and Florida (i.e., the states where we
currently have operations), we have designated one of our employees as the
individually licensed lead broker and we hold a corporate real estate broker’s
license where required by law. In addition to state laws regarding real estate
brokerage, we must comply with state laws regarding mortgage brokerage,
including laws that regulate the timing and content of disclosures.
Local Regulation. Local
regulations also govern the conduct of our business. Local regulations generally
require additional disclosures by the parties to a real estate transaction or
their agents, or the receipt of reports or certifications, often from the local
governmental authority, prior to the closing or settlement of a real estate
transaction.
Trade Regulation. In addition
to governmental regulations, we are subject to rules and regulations established
by private real estate trade organizations, including, among others, local MLSs,
the National Association of Realtors, and state and local associations of
realtors. The rules and regulations of the various MLSs to which we belong vary,
and specify, among other things, how we as a broker-member can use MLS listing
data, including the use and display of such data on our website.
In 2008,
the United States Department of Justice agreed to settle claims it had brought
against the National Association of Realtors relating to the ability to access
MLS listings. The settlement decree addressed two areas of particular concern to
non-traditional real estate brokerage firms such as Webdigs. First, the decree
prohibits “selective opt-outs,” which enable a broker involved in a MLS to
selectively prohibit certain MLS participants from displaying that broker’s MLS
listings on the participants’ website. Second, the decree prohibits “blanket
opt-outs,” which enable a broker involved in a MLS to prohibit all other MLS
participants from displaying that broker’s MLS listings, even though traditional
real estate brokerage firms could easily display or otherwise convey these same
listings in other manners. Presently, we are optimistic that the settlement will
prohibit conduct that is unfair and potentially harmful to our
business.
The
National Association of Realtors, as well as the state and local associations of
realtors, also have codes of ethics, rules and regulations governing the actions
of members in dealings with other members, clients and the public. We are
required to comply with these codes of ethics, rules and regulations by virtue
of our membership in these organizations.
Intellectual
Property
Our
success depends significantly upon our ability to protect our core technology
and intellectual property. To accomplish this, we rely on a combination of
intellectual property rights, including trade secrets, copyrights and
trademarks, as well as customary contractual protections.
We
possess the rights to over 50 website domain names and numerous trademarks and
tradenames. Some of the most prominent include:
|
·
|
domain
name rights to www.Webdigs.com
|
|
|
·
|
domain
name rights to www.IggysHouse.com
|
|
·
|
domain
name rights to www.buysiderealty.com
|
|
|
·
|
domain
name rights to www.MLSDirect.com
|
|
|
·
|
trademark
and trade name for “Webdigs”
|
|
|
·
|
trademark
and trade name for
“IggysHouse.com”
|
9
|
·
|
trademark
and trade name for “buysiderealty.com”
|
|
|
·
|
trademark
and trade name for
“theMLSdirect.com”
|
|
·
|
trademark
for: “The New Way to do Real
Estate”
|
Our
ability to enforce our intellectual-property rights is subject to general
litigation risks. Typically, when a party seeks to enforce its
intellectual-property rights, it is often subjected to claims that the
intellectual-property right is invalid, or is licensed to the party against whom
the claim is being asserted. We cannot be certain that our intellectual-property
rights will not be infringed upon, that others will not develop products in
violation of our intellectual-property rights, or that others may assert,
rightly or wrongly, that our intellectual-property rights are invalid or
unenforceable. In instances where we will rely on trade secrets for the
protection of our confidential and proprietary business information, we cannot
be certain that we would have adequate remedies for any such breach or that our
trade secrets will not otherwise become discovered or independently developed by
competitors. In general, defending intellectual-property rights is expensive and
consumes considerable time and attention of management. Our involvement in
intellectual-property litigation would likely have a materially adverse effect
on our business, even if we were ultimately successful in defending our
intellectual-property rights.
Employees
The
Company (including its subsidiaries) currently has six employees, five of whom
are full-time and over 5 real estate agents that are contractors.
Corporate
Structure and Information
Webdigs,
Inc. operates through direct and indirect subsidiaries. The principal operating
subsidiary is Webdigs, LLC, a Minnesota limited liability company. Webdigs, LLC
was originally organized as a limited liability company in May 2007 under the
laws of the State of Minnesota. In October 2007, Webdigs, LLC engaged in a
merger transaction with Select Video, Inc., a Delaware corporation incorporated
in May 1994. Until the October 2007 merger, Select Video had only
nominal assets (consisting of cash) and no meaningful business operations of its
own. Following the merger transaction, Select Video, Inc. changed its name to
Webdigs, Inc. (which we refer to throughout this document as the “Company”).
Webdigs, LLC continues to exist as a wholly owned operating subsidiary of the
Company.
Webdigs,
LLC determined to engage in the merger transaction with Select Video primarily
to obtain a shareholder base sufficiently diversified to enable an application
for listing on an automated securities market (Pink Sheets or OTC Bulletin
Board).
Webdigs,
LLC itself also owns 100% of the ownership interests of Home Equity Advisors,
LLC, a currently dormant Minnesota limited liability company.
During
the year ended October 31, 2009, we sold Marquest Financial, Inc (a company
originally acquired to act as Webdigs’ wholly owned consumer mortgage brokerage)
back to its original founder and previous owner Mr. Edward
Graca. Additionally, we, along with Marketplace Home Mortgage, LLC
dissolved our joint venture Marketplace Home Mortgage - Webdigs, LLC in an
effort to focus on our core expertise as a real estate brokerage over the near
term.
Our
principal offices are located at 3433 Broadway Street NE, Suite 501,
Minneapolis, Minnesota 55413, and our telephone number at that office is (888)
932-3447. Our website address is www.Webdigs.com. The
information contained on our website or that can be accessed through our website
does not constitute part of this document.
10
Recent
Developments
As
mentioned above, we launched our new “pay as you go” website www.IggysHouse.com on January 6,
2010.
Risk
Factors
Investment
in our common stock involves a high degree of risk and should be regarded as
speculative. As a result, you should only consider an investment in Webdigs if
you can reasonably afford to lose your entire investment.
ITEM
1A. RISK FACTORS
An
investment in our common stock involves significant risks. Before deciding to
invest in our common stock, you should carefully consider each of the following
risk factors and all of the other information set forth in this document. The
following risks could materially harm our business, financial condition or
future results. If any such risks materialize, the value of our common stock
could decline, and you could lose all or part of your investment.
We
are a newly organized start-up company with little history of operations and we
expect to incur losses for the foreseeable future.
We began
operations in July 2007 and to date have not generated meaningful revenues. As a
recently organized start-up company, we are subject to all of the risks
associated with a new business enterprise. Our prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stages of development, especially in challenging and
competitive industries such as residential real estate and mortgage brokerage
and particularly in light of current general economic, real estate and credit
market conditions.
We do not
have a significant operating history which would provide you with meaningful
information about our past or future operations. We anticipate incurring losses
that will result from costs incurred in organizing our company, research and
development, website development, protecting our technology, raising capital,
market research and generally poor real estate market conditions. We anticipate
incurring operating losses for the foreseeable future. Moreover, we may not be
able to generate material revenues in the future, and it is possible that any
revenues that we generate will be either insufficient for us to achieve
profitability or even continue operations.
We
will require additional financing in the future, but such financing may not be
available to us.
We will
require significant additional capital to continue our operations. To date, our
revenues from operations have not generated cash flow sufficient to finance our
operations and growth. As a result, we have periodically since our inception
sought financing and we will likely continue to require additional financing in
the foreseeable future. Since August, 1, 2009 our Chairman and Chief
Executive Officer has invested $100,000 in private equity placement and loaned
the company $373,000. We expect that we will need approximately
$400,000 in additional financing prior to the end of October 2010 to cover
salaries, contracted website maintenance and development and other basic working
capital needs.
Additional
financing could be sought from a number of sources, including but not limited to
additional sales of equity or debt securities, or loans from banks, other
financial institutions or our affiliates. If additional funds are raised by the
issuance of our equity securities, such as through the issuance of stock,
convertible securities, or the issuance and exercise of warrants, then the
ownership interest of our existing stockholders will be diluted. If additional
funds are raised by the issuance of debt or other equity instruments, we may
become subject to certain operational limitations (e.g., negative operating
covenants), and such securities may have rights senior to those of the existing
holders of common stock.
If
adequate funds are not available on acceptable terms, we may be unable to fund
the operation of our business. As a result, we would likely be forced to
dramatically alter or cease operations.
11
We
critically rely on our executive management, and the loss of certain members of
management would materially and negatively affect us.
Our
success materially depends upon the efforts of our management and other key
personnel, including but not limited to Robert A. Buntz, Jr., our Chief
Executive Officer. If we lose the services of Mr. Buntz or any other executive
managers or significant employees, our business would be materially and
adversely affected. We have entered into a formal services and non-competition
agreement with Mr. Buntz in the form of a Member Services
Agreement. Nevertheless, agreements do not ensure the continued
availability to us of Mr. Buntz or any other manager or employee. Furthermore,
we do not have “key person” life insurance insuring the life of Mr. Buntz, and
we do not presently intend to purchase such insurance.
Our
future success also depends upon our ability to attract and retain highly
qualified management personnel and other employees. Any difficulties in
obtaining, retaining and training qualified employees could have a material
adverse effect on our results of operation or financial condition. The process
of identifying such personnel with the combination of skills and attributes
required to carry out our strategy is often lengthy. Any difficulties in
obtaining and retaining qualified managers and employees could have a material
adverse effect on our results of operation or financial condition.
There
is substantial doubt about our ability to continue as a going
concern.
Although
we have improved our net loss by nearly 50% from 2008 to 2009, we have had net
losses attributed to common shareholders for the years ended October 31, 2009
and 2008 of $1,084,815 and $2,090,232, respectively. Furthermore, we had a
working capital deficit as of October 31, 2009 of $1,103,503. Since
the financial statements were prepared assuming that we would continue as a
going concern, these conditions coupled with our current liquidity position
raise substantial doubt about our ability to continue as a going concern.
Furthermore, since we are pursuing new business, this diminishes our ability to
accurately forecast our revenues and expenses. We expect that our ability to
continue as a going concern depends, in large part, on our ability to generate
sufficient revenues, limit our expenses without sacrificing customer service,
and obtain necessary financing. If we are unable to raise additional capital, we
may be forced to discontinue our business.
We
may be unable to obtain market acceptance of our services.
The
market for residential real estate sales is
well-established. However, the market for non-traditional residential
real estate sales is relatively new, developing and even more
uncertain. As is typical in the case of a new and rapidly evolving
industry, demand and market acceptance for products and services are subject to
tremendous uncertainty. Our future growth and financial performance will almost
entirely depend upon consumers’ acceptance of our “Webdigs solution” to purchase
and sell homes at discounted rates. In this regard, the failure of purchasers
and sellers of residential property to accept our model or the inability of our
services to satisfy consumer expectations, would have a material adverse effect
on our business, and could cause us to cease operations.
Our
officers and directors, together with certain affiliates, possess controlling
voting power with respect to our common stock, which could limit your influence
on corporate matters.
Our
officers and directors collectively possess beneficial ownership of 12,644,233
shares representing approximately 37.9% of our common stock. In
addition, one other significant stockholder, Iggys House, Inc., identified on
the beneficial ownership table in this filing (see Item 12, “Security Ownership
of Certain Beneficial Owners and Management”) holds beneficial ownership
of 2,077,500 shares representing an additional 6.2% of our common stock. As
a result, our directors and officers, together with the other significant
stockholder, will have the ability to greatly influence, if not outrightly
control, our management and affairs through the election and removal of our
directors, and all other matters requiring stockholder approval, including the
future merger, consolidation or sale of all or substantially all of our
assets.
12
This
concentrated control could discourage others from initiating any potential
merger, takeover or other change-of-control transaction that may otherwise be
beneficial to our stockholders. Furthermore, this concentrated control will
limit the practical effect of your participation in our corporate matters,
through stockholder votes and otherwise. As a result, the return on your
investment in our common stock through the sale of your shares or our business
could be adversely affected.
We
rely on third parties for key aspects of the process of providing services to
our customers, and any failure or interruption in the services provided by these
third parties could harm our ability to operate our business and damage our
reputation.
We rely
on third-party vendors, including data center and bandwidth providers. Any
disruption in the network access or co-location services provided by these
third-party providers or any failure of these third-party providers to handle
current or higher volumes of use could significantly harm our business. Any
financial or other difficulties our providers face may have negative effects on
our business, the nature and extent of which we cannot predict. We exercise
little or no control over all of these third-party vendors, which increases our
vulnerability to problems with the services they provide.
In
addition, we license technology and related databases from third parties to
facilitate aspects of our data center and connectivity operations, including,
among other things, Internet traffic-management services. Any errors, failures,
interruptions or delays experienced in connection with these third-party
technologies and information services could materially and negatively impact our
relationship with our customers and adversely affect our brand and our business.
It is possible that such errors, failures, interruptions or delays could even
expose us to liabilities to our customers or other third parties.
Interruption
or failure of our information technology and communications systems would impair
our ability to effectively provide our services, which could in turn damage our
reputation and harm our business.
Our
ability to provide our services critically depends on the continuing operation
of our information technology and communications systems. Any damage to or
failure of our systems would likely result in interruptions in our service to
customers and the closings of real estate transactions from which we principally
derive revenue. Accordingly, interruptions in our service would likely reduce
our revenues and profits, and our brand could be damaged, perhaps irreparably,
if people believe our system and services are unreliable.
To our
knowledge, our systems are vulnerable to damage or interruption from terrorist
or malicious attacks, floods, tornados, fires, power loss, telecommunications
failures, computer viruses and other attempts to harm our systems, and similar
types of events. Our data centers are subject to break-ins, sabotage and
intentional acts of vandalism, and to other potential disruptions. Some of our
systems are not fully redundant (i.e., backed up), and our disaster recovery
planning cannot account for all eventualities. The occurrence of a natural
disaster, or a decision to close a facility we are using without adequate notice
for financial reasons or other unanticipated problems at our data centers, could
result in lengthy interruptions in our service. Any unscheduled interruption in
our service would likely place a burden on our entire organization and result in
an immediate loss of revenue. The steps we have taken to increase the
reliability and redundancy of our systems are expensive, reduce our operating
margin and even then may not be successful in reducing the frequency or duration
of unscheduled downtime.
We
will continue to depend on intellectual property rights to protect our
proprietary technologies, although we may not be able to successfully protect
these rights.
We rely
on our proprietary technology to enhance some of our service offerings. To
protect this technology, we employ and rely on trademark, trade secret, and
copyright law in addition to contractual restrictions and protections.
While we
have copywritten our trademarks, it is entirely possible that one or more third
parties may independently develop technology that is similar to our technology,
or offer or sell products or services that utilize our technology. The
development by others of technology that is similar to our technology, or the
sale of products or services that incorporate our technology, would likely harm
our competitive position and have a material adverse effect on our
business.
13
Finally,
we may determine, or a legal proceeding may result in a determination, that our
intellectual property infringes the intellectual property rights of others. If
our technology infringes the intellectual property rights of others, we may be
subject to lawsuits and incur significant liabilities.
Our
certificate of incorporation grants our Board of Directors, without any action
or approval by our stockholders, the power to issue additional shares of capital
stock, including the power to designate additional classes of common and
preferred stock.
Our
authorized capital consists of 250,000,000 shares of capital stock. Pursuant to
authority granted by our certificate of incorporation and applicable state law,
our Board of Directors, without any action or approval by our stockholders, may
designate and issue shares in such classes or series (including other classes or
series of preferred stock) as it deems appropriate and establish the rights,
preferences and privileges of such shares, including dividends, liquidation and
voting rights. The rights of holders of other classes or series of capital
stock, including preferred stock that may be issued could be superior to the
rights of the shares of common stock offered hereby. The designation and
issuance of shares of capital stock having preferential rights could adversely
affect other rights appurtenant to the shares of our common stock. Finally, any
issuances of additional capital stock (common or preferred) will dilute the
percentage of ownership interest of our stockholders and may dilute the
per-share book value of the Company.
There
is limited public market for our common stock.
We
commenced trading on the OTC Bulletin Board on December 19,
2008. To date, however, our stock has been thinly traded with
some days having no shares sold.
We
are required to comply with governmental regulations, which will increase our
costs and could prohibit us from conducting business in certain
jurisdictions.
We are
subject to governmental regulation by federal, state and local regulatory
authorities with respect to our real estate brokerage and mortgage lending
operations. As is standard in the residential real estate brokerage industry,
our real estate agents must be licensed. In some states, our proposed business
activities are prohibited and we may not operate in those states. Eight states
have “minimum service laws” that require realtors to provide a level of service
that web-assisted real estate businesses typically do not provide. Eleven states
outrightly prohibit rebates of real estate commissions. Governmental bodies may
change the regulatory framework within which we intend to operate, without
providing any recourse for adverse effects that the change may have on our
business.
We can
give no assurance that we will be able to comply with existing laws and
regulations, that additional regulations that harm our business will not be
adopted, or that we will continue to maintain our licenses, approvals or
authorizations. Our failure to comply with applicable laws and regulations, or
the adoption of new laws and regulations restricting our intended operations,
could have a material adverse effect on our business and could cause us to cease
operations.
The
efforts of the National Association of Realtors or other organizations could
prevent us from operating our business, and could lead to the imposition of
significant restrictions on our operations.
The
online residential real estate sales model generally, and the Webdigs business
model specifically, is based on the assertion that full-commission real estate
brokers and agents do not provide an acceptable level of value to consumers and
that consumers are willing to engage in online home search activities via the
internet if they can reduce the dollar amount of commissions paid on home sales
and purchases. This model is a direct and significant threat to traditional
residential real estate brokers and agents.
14
In
response to previous and ongoing efforts by discount web-assisted real estate
companies, the National Association of Realtors, which represents real estate
brokerages, has issued rules that attempt to block access of web-assisted real
estate companies to the Multiple Listing System (MLS) and may adopt additional
rules intended to reduce or eliminate competition from online discount real
estate businesses such as Webdigs. Our business is dependent upon the ability to
access the MLS to be competitive. We can give no assurance that the National
Association of Realtors will not be successful in preventing our access to the
MLS, or that it or another organization will not be successful in adopting rules
or imposing other restrictions on web-assisted real estate businesses such as
Webdigs. Such adoption or imposition of regulations or restrictions would have a
material adverse effect on our business.
Competition
in the traditional and online residential real estate industry is
intense.
The
residential real estate industry is highly competitive. We believe that
important competitive factors in this industry include (but are not limited to)
price, service, and ease of use. We presently face competition from numerous
companies engaged in traditional residential real estate brokerage services and
several online residential real estate sales companies, and we expect online
competition to increase in the future from existing and new competitors. Most of
our current and potential competitors have substantially greater financial,
marketing and technical resources than us, as well as significant operating
histories. Accordingly, we may not be able to compete successfully against new
or existing competitors. Furthermore, competition may reduce the prices we are
able to charge for our services, thereby potentially lowering revenues and
margins, which would likely have a material adverse effect on our results of
operation and financial condition.
The
online residential real estate industry is subject to significant and rapid
technological change.
The
online residential real estate industry is subject to rapid innovation and
technological change, shifting customer preferences, new service introductions
and competition from traditional real estate brokerage firms. Competitors in
this market have frequently taken different strategic approaches and have
launched substantially different products or services in order to exploit the
same perceived market opportunity. Although we believe that we are offering a
unique solution, there can be no assurance that our services will be competitive
technologically or otherwise, or that any other services developed by us will be
competitive.
Our
ability to compete in this industry will depend upon, among other things, broad
acceptance of our services and on our ability to continually improve current and
future services we may develop to meet changing customer requirements. There can
be no assurance that we will successfully identify new service or product
opportunities and develop and bring to the market new and enhanced solutions in
a timely manner, that such products or services will be commercially successful,
that we will benefit from such development, or that products and services
developed by others will not render our products and services noncompetitive or
obsolete. If we are unable to penetrate markets in a timely manner in response
to changing market conditions or customer requirements, or if new or enhanced
products or services do not achieve a significant degree of market acceptance,
our business would be materially and adversely affected.
Consumer
access to mortgage financing has been affordable and widely available by
historic standards and any tightening in the availability of credit will have
the potential to negatively impact our operating results.
The
affordability and availability of mortgage financing is influenced by a number
of factors, including interest rates, lender underwriting criteria, loan product
availability and the performance of mortgage backed securities in the secondary
market. While the federal government has supported programs to make
loans easier to obtain in recent months, we believe that the mortgage market
still remains tight despite these efforts and near record low interest
rates. While home sales have increased in the latter half
of 2009, transaction volume remains significantly below levels of the market’s
peak in 2006.
15
We
may be impacted by general economic conditions within the United States
residential real estate market.
The
residential real estate market has experienced vast fluctuations in recent
times. In some years, real estate home sales are brisk, while in other years the
residential real estate market has been stagnant. Our ability to attract home
sellers and buyers to use our website will, in part, depend upon consumers’
willingness in general to buy or sell a home. When consumers sense that the
overall economy is not doing well, they are less likely to make an expensive
purchase such as a home. We are encouraged by recent data in consumer
confidence, but again recognize that unemployment remains at the highest levels
in the last 25 years. The high level of unemployment and the fact
that current home sales have been propped up by the government’s $8,000 first
time home buyers credit and the more recently approved $6,500 for repeat home
buyers makes the current improvement in the market tenuous.
The
growth and expansion of our business could have a negative effect on our
Company.
We
believe that in order to be successful, we must grow and expand our operations.
To grow, we believe we must expand, train and manage our employee base,
particularly our marketing, management and skilled technical personnel, within a
short time period. Rapid growth will also require an increase in the level of
responsibility for both existing and new management and will require us to
implement and improve operational, financial and management information
procedures and controls. We compete with many companies in seeking to attract
qualified personnel. We can give no assurance that the management skills and
systems currently in place will be adequate, be able to effectively manage any
significant growth we experience, or be able to hire or assimilate new personnel
necessary to pursue our growth strategy. Our inability to adequately manage
growth could have a material adverse effect on us.
Failure to achieve and maintain
effective internal controls could limit our ability to detect and prevent fraud
and thereby adversely affect our business and stock price.
Effective
internal controls are necessary for us to provide reliable financial reports.
All internal control systems, no matter how well designed, have inherent
limitations. Even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation. Our most recent evaluation of our internal controls resulted in
our conclusion that our disclosure controls and procedures were not effective
due to a lack of segregation of duties in our accounting and financial
functions, including financial reporting and our quarterly closing process. In
our case, our failure to achieve and maintain an effective internal control
environment could cause us to be unable to produce reliable financial reports or
prevent fraud. This may cause investors to lose confidence in our reported
financial information, which could in turn have a material adverse effect on our
stock price.
Important
Note: The foregoing risks are not a complete list of all risks that do or
may affect the results of operation, financial condition or business prospects
of Webdigs, but do represent management’s understanding and belief of the
material risks associated with the Company, its business and any investment in
securities of the Company. In addition to the above risks, businesses are often
subject to risks not foreseen or fully appreciated by management. In reviewing
this document, potential investors should keep in mind other possible risks that
could be important. In sum, investors are urged to make their own evaluation of
Webdigs.
ITEM
2. PROPERTIES
We lease
approximately 3,000 square feet of space at 3433 Broadway Street NE, Suite 501,
Minneapolis, Minnesota 55413, on a month-to-month basis and at a per-month cost
of approximately $3,500. The landlord for this office space is MoCo, Inc. which
is a minority shareholder of the Company. Other than our agreement
respecting our month-to-month lease, we do not have any written agreements with
MoCo, Inc. The Company does rely on MoCo, Inc. to provide website development
and support services to the Company. This arrangement, however, is not set forth
in a written contract. Instead, MoCo, Inc. generally provides website
development and support services at hourly rates that depend on the nature of
the services provided. MoCo, Inc. typically bills the Company within 10-20 days
after the end of each calendar month. At October 31,
2009, the Company owed Moco $562,858.
We
conduct our IggysHouse.com operations in a leased facility at 1121 East
Commercial Boulevard, Suite 47, Oakland Park, Florida 33334, under an operating
lease on a month-to-month basis. Monthly base rent expense for this
lease is $300 per month.
16
ITEM
3. LEGAL PROCEEDINGS
We are
not currently a party to any material litigation and are not aware of any
threatened litigation that would have a material effect on our
business.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During
our fiscal years ended October 31, 2009 and 2008, no matters were submitted to
our stockholders for approval.
17
PART II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
General
Our
common stock is listed on the OTC Bulletin Board and began trading under the
symbol “WBDG” on December 19, 2008. The following table shows our
high and low closing prices of our common stock at the end of each quarter for
the fiscal year 2009.
|
Year Ended October 31, 2009
|
High
|
Low
|
||||||
|
First
quarter
|
$ | 0.55 | $ | 0.10 | ||||
|
Second
quarter
|
$ | 0.55 | $ | 0.10 | ||||
|
Third
quarter
|
$ | 0.75 | $ | 0.10 | ||||
|
Fourth
quarter
|
$ | 0.16 | $ | 0.09 | ||||
Our
closing stock price on January 27, 2010 was $0.21. As of the date of
this filing, we had approximately 269 holders of record of our common
stock.
Dividends
We have
not paid any dividends on our common stock and do not anticipate paying any such
dividends in the near future. Instead, we intend to use any earnings for future
acquisitions and expanding our business. Nevertheless, at this time there are
not any restrictions on our ability to pay dividends on our common
stock.
Securities
Authorized for Issuance Under Equity Compensation Plans
The table
below sets forth certain information, as of the close of business on October 31,
2009, regarding equity compensation plans (including individual compensation
arrangements) under which our securities were then authorized for
issuance.
|
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
|
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
Number of Securities
Remaining Available for
Issuance Under Equity
Compensation Plans
(excluding securities reflected
in column a)
|
|||||||
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity
compensation plans approved by shareholders
|
0
|
N/A
|
0
|
||||||
|
Restricted
Stock Plan and Stock Option equity compensation plans not
approved by shareholders (1) (2)
|
1,000,000
|
$0.25
|
None
|
||||||
|
(1)
|
In
May 2008, the Board of Directors approved the issuance of incentive stock
options totaling 600,000 shares to three of its non-employee directors,
expiring in May 2013. An additional 200,000 options were granted to a new
director on October 31, 2009, expiring in October
2011. An employee was also granted 200,000 options on
October 31, 2009 expiring October 31,
2014.
|
|
(2)
|
(see
Note 11 of the financial statements for more information on restricted
stock grants).
|
18
Presently, we
are not required by applicable state law or the listing standards of any
self-regulatory agency (e.g., the OTC Bulletin Board, NASD, AMEX or NYSE) to
obtain the approval of our security holders prior to issuing any such
compensatory options, warrants or other rights to purchase our
securities.
Potential
Anti-Takeover Effects
Certain
provisions set forth in our Amended and Restated Certificate of Incorporation,
as amended, in our bylaws and in Delaware law, which are summarized below, may
be deemed to have an anti-takeover effect and may delay, deter or prevent a
tender offer or takeover attempt that a stockholder might consider to be in its
best interests, including attempts that might result in a premium being paid
over the market price for the shares held by stockholders.
Blank Check Preferred Stock.
Our Certificate of Incorporation and bylaws contain provisions that permit us to
issue, without any further vote or action by the stockholders, up to 125,000,000
shares of preferred stock in one or more series and, with respect to each such
series, to fix the number of shares constituting the series and the designation
of the series, the voting powers, if any, of the shares of the series, and the
preferences and relative, participating, optional and other special rights, if
any, and any qualifications, limitations or restrictions, of the shares of such
series.
Special Meetings of
Stockholders. Our bylaws provide that special meetings of stockholders
may be called only by the chairman or by our board. Stockholders are not
permitted to call a special meeting of stockholders, to require that the board
call such a special meeting, or to require that our board request the calling of
a special meeting of stockholders.
While the
foregoing provisions of our certificate of incorporation, bylaws and Delaware
law may have an anti-takeover effect, these provisions are intended to enhance
the likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control. In that regard, these provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal. The provisions
also are intended to discourage certain tactics that may be used in proxy
fights. However, such provisions could have the effect of discouraging others
from making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of our common stock that could result
from actual or rumored takeover attempts. Such provisions also may have the
effect of preventing changes in our management.
Delaware
Takeover Statute
In
general, Section 203 of the Delaware General Corporation Law prohibits a
Delaware corporation that is a public company from engaging in any “business
combination” (as defined below) with any “interested stockholder” (defined
generally as an entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with such entity or person) for a period of three years following the date that
such stockholder became an interested stockholder, unless: (1) prior to such
date, the Board of Directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (2) on consummation of the transaction that resulted in
the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned (x) by persons who are directors and
also officers and (y) by employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or (3) on or subsequent
to such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
19
Section
203 of the Delaware General Corporation Law defines “business combination” to
include: (1) any merger or consolidation involving the corporation and the
interested stockholder; (2) any sale, transfer, pledge or other disposition of
ten percent or more of the assets of the corporation involving the interested
stockholder; (3) subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder; (4) any transaction involving the corporation that
has the effect of increasing the proportionate share of the stock of any class
or series of the corporation beneficially owned by the interested stockholder;
or (5) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.
Transfer
Agent and Registrar
Our transfer
agent is Florida Atlantic Stock Transfer, Inc., located at 7130 Nob Hill Road,
Tamarac, Florida 33321. The transfer agent’s telephone number is (954) 726-4954.
The transfer agent is registered under the Securities and Exchange Act of
1934.
Listing
Our
common stock is currently traded on the OTC bulletin board under the symbol
WBDG.OB.
Sales
of Unregistered Securities
During
the year ended October 31, 2009, we sold 3,136,091 shares (which include 909,091
of shares purchased via conversion of a portion of convertible note proceeds
received from our CEO) in a series of private placements for aggregate proceeds
of $435,500 at effective prices ranging between $0.10 and $0.40 per
share. We also issued additional shares as follows: 7,262,500 to
acquire selected assets of Iggys House, Inc., 273,244 to vendors for services,
200,000 shares to Lantern Advisors, LLC as part of the cost to Webdigs of
entering into a promissory note agreement, 100,000 to acquire assets of the
MLSDirect.com, 157,143 to officers of the company in lieu of cash compensation,
50,000 shares to a new employee as an incentive to join our company , and
150,000 shares to Webdigs’ CEO as compensation to him for the personal guarantee
he offered to Lantern Advisors, LLC to repay the $250,000 convertible promissory
note. In total, we issued 11,328,978 new shares during the 12 months
ended October 31, 2009. In summary:
Private
placements
|
|
·
|
In
September 2009, Webdigs’ CEO converted $100,000 in principal of a
convertible note payable he had with the Company to 909,091 shares ($0.11
per share).
|
|
|
·
|
In
June 2009, in connection with the Iggys House asset purchase, the
Company sold 375,000 shares of stock to 11 accredited investors for
$150,000 ($0.40 per share). To reduce the investor’s net
purchase price to $0.125 per share, 2.2 shares of Webdigs stock received
by Iggys House in the acquisition were transferred by Iggys House to these
investors. Included in the 375,000 shares are purchases from
the Company’s Chairman and CEO of 43,750 shares and an outside director of
an additional 43,750
shares.
|
|
|
·
|
During
May-July 2009, four accredited investors purchased an aggregate of
1,850,000 shares of stock for $185,000 ($0.10 per
share).
|
|
|
·
|
In
January 2009, one accredited investor acquired 2,000 shares for $500
($0.25 per share).
|
Vendor
Services
|
|
·
|
In
October 2009, we issued 44,444 shares to a vendor for
services. The 44,444 shares satisfied a $4,889 payable
($0.11 per share) to the
vendor.
|
20
|
|
·
|
In
January 2009, we issued 200,000 shares (100,000 each) to two separate
vendors for consulting services. The 200,000 shares were valued
at $0.40 per share ($80,000 total) based upon the trading price of the
Company’s shares at the time of
issuance.
|
|
|
·
|
In
November 2008, we issued 28,800 shares to a vendor for
services. The 28,800 shares satisfied a $7,000 contracted
fee we owed the vendor ($0.24 per
share).
|
Acquisition of Assets
of Iggys House
|
|
·
|
In
June 2009, the Company also issued 7,102,500 shares to Iggys House Inc.
for the acquisition of all of its assets for a value of $1,775,625 ($0.25
per share). The Company also issued 160,000 shares to a securities
brokerage for services provided in connection with the Iggys House asset
acquisition for a value of $40,000 ($0.25 per
share).
|
Promissory
Note
|
|
·
|
In
December 2008, we issued 200,000 shares to Lantern Advisors, LLC as part
of the promissory note agreement we signed with them. The
200,000 shares were assigned a value of $20,000 ($0.10 per
share).
|
Acquisition of the
MLSDirect.com
|
|
·
|
In
May 2009, the Company issued 100,000 shares to a third-party accredited
investor at a value of $47,000 ($0.47 per share). These shares
were issued in connection with the acquisition of
theMLSDirect.com.
|
Shares in Lieu of Cash
Compensation
|
|
·
|
In
May 2009, the Company’s CEO converted $50,000 of his accrued but unpaid
compensation owed to him by the Company into shares at a per-share price
of $0.35, receiving 142,857 shares. The Company’s CFO also converted
$5,000 of his accrued but unpaid compensation into shares at the same
price, receiving 14,286 shares.
|
Employee
Award
|
|
·
|
In
June 2009, the Company issued 50,000 shares to an employee of the Company
at a value of $12,500 or $0.25 per
share.
|
CEO
Compensation
|
|
·
|
In
September 2009, the Company’s CEO was granted 150,000 shares at a per
share price of $0.11 as compensation for the personal guarantee he
provided for Webdigs for the $250,000 convertible/promissory note
agreement the Company entered into on December 12,
2008.
|
For these
issuances of common stock in the private placement offering, we relied on the
exemption from federal registration under Section 4(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder. We relied on this exemption and the
safe harbor thereunder based on the fact that the investors who purchased these
securities qualified as an “accredited investors” under Rule 501 of the
Securities Act of 1933 and who had knowledge and experience in financial and
business matters such that it was capable of evaluating the risks of the
investment. The securities offered and sold in the transactions were not
registered under the Securities Act of 1933 and therefore may not be offered or
sold in the United States absent registration or an applicable exemption from
registration requirements. The disclosure about the private placement offering
contained in this information statement is not an offer to sell or a
solicitation of an offer to buy any securities of the Company.
ITEM 6. SELECTED FINANICAL
DATA
As a
smaller reporting company, we are not required to provide the information
required by this item.
21
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with our audited consolidated
financial statements and related notes that appear elsewhere in this
filing.
Cautionary
Note Regarding Forward-Looking Statements
Some of
the statements made in this section of our report are forward-looking
statements. These forward-looking statements generally relate to and are based
upon our current plans, expectations, assumptions and projections about future
events. Our management currently believes that the various plans, expectations,
and assumptions reflected in or suggested by these forward-looking statements
are reasonable. Nevertheless, all forward-looking statements involve risks and
uncertainties and our actual future results may be materially different from the
plans, objectives or expectations, or our assumptions and projections underlying
our present plans, objectives and expectations, which are expressed in this
section.
In light
of the foregoing, prospective investors are cautioned that the forward-looking
statements included in this filing may ultimately prove to be inaccurate—even
materially inaccurate. Because of the significant uncertainties inherent in such
forward-looking statements, the inclusion of such information should not be
regarded as a representation or warranty by Webdigs, Inc. or any other person
that our objectives, plans, expectations or projections that are contained in
this filing will be achieved in any specified time frame, if ever. We undertake
no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this document.
The risks discussed in the Item 1A of this filing should be considered in
evaluating our prospects and future performance.
General
Overview
General
Overview
Our
business as a web-assisted full service real estate company has been operational
for slightly greater than 2 years. We launched our services for
buyers and sellers via Webdigs.com in October 2007. In January 2010,
we added a second brand to our portfolio via the launch of
IggysHouse.com. For the years ended October 31, 2009 and 2008, over
99% of our real estate revenue was produced by our Webdigs brand in our
Minnesota and Florida markets.
Significant
Trends and Uncertainties
Given our
relatively low cash position, our near term focus for the current fiscal year
ending October 31, 2010 continues to be creating positive operating cash flow
from our web-assisted real estate brokerage operations in our core markets of
Minnesota, Wisconsin, and Florida. We will also continue to expand
into additional metropolitan areas as the year progresses and as funding
permits.
We
believe that our year over year revenue growth will remain strong for the
current fiscal year provided we have sufficient operating capital to fund
operations. Supporting us in our efforts will be the
addition of our IggysHouse.com operation, a revised compensation plan
which we expect will attract more agents to our Company and support
from the Federal Government in terms of extending the first time home owner tax
credit and creating a new repeat buyer tax credit of $6,500 which will be in
effect for homes purchased and closed prior to June 30, 2010.
We
believe we will require an additional $5 to $6 million to fund
expansion. If we succeed in raising such amount, we believe
that we would have sufficient capital to fund our operations and expansion plans
indefinitely. To achieve a more accelerated growth strategy, however, we would
likely require additional financing to fund acquisitions and development of
related business opportunities.
22
If our
efforts to raise additional capital take longer than we expect or we are
unsuccessful in securing capital, we expect to decrease our advertising,
identify other areas to reduce current costs, while continuing to build
market share and real estate revenue in our markets. Due to the difficult
markets for obtaining equity and debt financing, we are exploring a wide variety
of potential financing sources and arrangements.
The
continued economic softness facing the United States and the difficulties which
remain in obtaining equity capital could continue to present us with uncertainty
for our business in the year ahead. Despite the
incentives offered by the federal government, obtaining a home mortgage is not
as easy or realizable as it was 2-3 years ago. Home prices still are
not showing stable long term uptrend. Our business and our viability
may be threatened if any of these conditions persist or any other global
economic upheaval should arise in the first half of calendar year
2010.
Results
of Operation
The
following information should be read in conjunction with the audited financial
statements and notes thereto appearing elsewhere in this Annual
Report.
From October 31, 2008 to
October 31, 2009:
Historically,
the Company has reported two strategic operating segments; (1) web-assisted real
estate brokerage and (2) mortgage brokerage. Due to the divestiture
of Marquest Financial, Inc. and the dissolution of our joint venture Marketplace
Home Mortgage – Webdigs, LLC (MHMW) in 2009, the Company has determined that the
mortgage segment is no longer significant to its operations and therefore, now
reports and operates as one strategic reporting segment. Primarily
all activity for the years ended October 31, 2009 and 2008 related to the
mortgage segment is reported separately as 1) Equity in income (loss) from MHMW,
2) Income (loss) from discontinued operations and 3) Net assets of discontinued
operations in the table below.
Selected
financial information about our operations for the fiscal years ended October
31, 2009 and 2008:
|
Change
|
||||||||||||
|
2009
|
2008
|
2009 vs 2008
|
||||||||||
|
Net
revenues
|
$ | 503,777 | $ | 401,778 | 25 | % | ||||||
|
Operating
expenses
|
1,491,233 | 2,294,733 | -35 | % | ||||||||
|
Operating
loss
|
(987,456 | ) | (1,892,955 | ) | -48 | % | ||||||
|
Equity
in income (loss) from MHMW
|
13,279 | (9,064 | ) | -247 | % | |||||||
|
Interest
expense
|
(332,139 | ) | (285 | ) | 116440 | % | ||||||
|
Depreciation
& amortization
|
236,716 | 213,767 | 11 | % | ||||||||
|
Loss
on change in fair value of
|
||||||||||||
|
derivatives
and warrants
|
(63,708 | ) | - | |||||||||
|
Income
(loss) from discontinued operations
|
284,409 | (187,928 | ) | -251 | % | |||||||
|
Identifiable
assets - real estate brokerage
|
2,200,524 | 362,184 | 508 | % | ||||||||
|
Net
assets discontinued operations -
|
||||||||||||
|
mortgage
brokerage
|
- | 92,035 | -100 | % | ||||||||
|
Capital
expenditures
|
187,085 | 18,216 | 927 | % | ||||||||
Consolidated
net revenues for the year ended October 31, 2009 totaled $503,777, representing
a 25% increase over the $401,778 in net revenues for the year ended October 31,
2008. During fiscal 2009, we closed 131 transactions in
representation of 85 buyers and 46 transactions representing sellers, in
comparison to having closed 99 transactions during the fiscal year ended October
31, 2008. Looked at on a percentage basis, our net real estate
brokerage transactions grew by 33% for the fiscal year ended October 31,
2009.
23
As we
look ahead for fiscal year 2010, we expect continued double digit net revenue
growth in our core Webdigs real estate operation and are hopeful that our
recently launched “pay as you go” IggysHouse.com listing website will establish
itself as a viable alternative for consumers who currently try to sell their
homes themselves with no support from a real estate professional.
We
incurred total operating expenses for fiscal 2009 of $1,491,233 compared to
$2,294,733 for fiscal 2008, a 35% year to year decrease. General and
administrative expenses, amortization and selling expenses together comprise our
operating expenses.
Selling
expenses consisted of advertising and promotion, information technology,
selling-related compensation expense, depreciation expense, and other general
selling expenses, all of which aggregated to $666,025 for fiscal 2009 compared
to $1,453,551 for fiscal 2008. In the year ended October 31, 2009, we
significantly reduced our advertising and promotion expense from $523,342 to
$88,312 as we eliminated TV, billboard and magazine advertising from our
marketing expenditures. The good news to us is that we
still grew transactions volume by 33% despite the 83% reduction in advertising
and promotion expense. To achieve growth, we managed to
market to a more targeted group of consumers on a smaller scale through focused
newspaper and web advertising, and purchases of leads. Our real
estate agents also saw a strong increase in the quantity of referrals they
received from our previous satisfied customers, lessening the need for more
expensive means of advertising. We also drastically reduced our
information technology expenses by 83% from $403,975 in the fiscal year ended
October 31, 2008 to $70,141 in the fiscal year ended October 31, 2009. This
decrease can be attributed to the shift from large website modification expenses
of our Webdigs.com website in the fiscal year 2008 to smaller web maintenance
expenses in fiscal 2009.
In
addition to advertising, promotion and information technology expenses, we
incurred selling-related compensation expenses of $393,619 for the year ended
October 31, 2009 compared to $372,405 for the year ended October 31,
2008. These compensation costs include wages, commissions, bonuses,
and payroll fringe benefits. Our depreciation expense was
$17,172 for the year ended October 31, 2009 compared to $10,448 for fiscal
2008.
We
incurred $632,198 in general and administrative (G&A) expenses for the year
ended October 31, 2009 compared to $693,066 for the year ended October 31, 2008,
representing a $60,868 period-to-period decrease. The largest component of our
fiscal 2009 and 2008 G&A expense was share-based compensation expense
related to the vesting of restricted shares to founding members in July and
October 2007 and our May 2008 award of stock options to our non-employee
directors. Together, these non-cash expenses totaled $209,005 for fiscal 2009
compared to $213,145 for fiscal 2008. Other significant items of expense during
fiscal 2009 and 2008 included rent of $43,254, and $46,000, respectively.
Professional fees of $223,800 and cash compensation of $111,604 were the other
major items of G&A expense during fiscal 2009. These amounts were comparable
during fiscal 2008, with professional fees of $245,421 and cash compensation of
$147,641.
Amortization
expense was $193,010 for the year ended October 31, 2009 compared to $148,116
for fiscal 2008. Amortization expense increased due primarily to the fact that
during the fiscal year ended October 31, 2009, we began amortizing a portion of
the $1,957,982 in intangible assets acquired from Iggys House Inc. in June
2009.
For the
year ended October 31, 2009, we recorded interest expense of
$332,139. For the fiscal year ended October 31, 2008 we
incurred only $285 of interest expense. In large part, interest
expense reflects the cost of borrowing $250,000 from Lantern Advisors,
LLC. Approximately $311,000 of the $332,139 total is derived from the
Convertible Promissory Note with Lantern. Fortunately, we have fully
repaid the entire $250,000 of the Lantern Note and do not expect such high
interest expenses in the current fiscal year. The remainder of
interest costs, not related to the Lantern Promissory Note, came from interest
on officer loans, capital lease, and vendor interest charges.
In
addition to the above mentioned interest costs related to the Convertible
Promissory Note with Lantern Advisors, LLC, we also recorded a loss on the
change in fair value of derivatives and warrants related to the convertible debt
of $63,708 for the year ended October 31, 2009 (see Note 8 of the financial
statements for more details).
24
We also
recorded income of $13,279 from our discontinued joint venture Marketplace Home
Mortgage – Webdigs, LLC for the year ended October 31, 2009 compared to a loss
of $9,064 for the year ended October 31, 2008. We believe that
mortgage brokerage still represents an opportunity for us sometime in the
future. Consumers who use our Webdigs buyer services often need
mortgages. We will likely revisit this segment within the next 12 to
18 months.
With the
sale of our Marquest Financial, Inc. (Marquest) subsidiary, we recorded a gain
of $297,412 in the year ended October 31, 2009 which was partially offset by
operating expenses of $13,003. In total, we had income from discontinued
operations of $284,409 for our most recent fiscal year. In our prior
year ended October 31, 2008, Marquest recorded a net loss of $187,928 from their
operations.
Assets
and Employees; Research and Development
Our
primary assets are our websites and intellectual-property rights and the unique
way in which we believe we offer our services, which are the foundation for our
business. While we sold a small non-operating subsidiary in June 2009, we do not
anticipate purchasing or selling any significant equipment or other assets in
the near term. We anticipate small increases in staffing in the
information technology area and expect to add large numbers of non-employee
independent real estate agents to represent our Webdigs and IggysHouse.com
brands in the year ahead. We expect
that we will invest time, effort and expense in the continued enhancements of
our two core websites (Webdigs.com and IggysHouse.com). For our most
recent fiscal year ended October 31, 2009, cash used in maintaining and
developing our two main websites was under $100,000. We will most
likely significantly increase our cash outlay for web improvements in the
upcoming fiscal year.
Liquidity
and Capital Resources; Anticipated Financing Needs
For the
year ended October 31, 2009, we cut our net operating loss from
continuing operations by nearly 50% to $987,456. These losses funded
technology development, marketing and advertising, business development and
other activities, as discussed above. For the year ended October 31,
2008, our operating losses from continuing operations were
$1,892,955. In the most recent year ended October 31, 2009, we funded
operating losses primarily through cash of $335,500 received from sales of our
Webdigs common stock through private placements, cash proceeds of $226,000
through the issuance of convertible debentures, and $273,000 from a loan from
our Chairman and CEO. As of October 31, 2009, we had $36,023 of cash
and cash equivalents, and current liabilities of $1,170,106.
On an
aggregate level, we cut cash used in operations by 58% to $431,758
for the year ended October 31, 2009 as compared to $1,019,515 for the same
period last year. Offsetting the operating loss for the year ended
October 31, 2009 were various non-cash expenses for depreciation, amortization,
share-based compensation, debt discount, debt issuance cost amortization,
unrealized losses on derivatives, and shares issued for vendor
payment. These non-cash items totaled $810,911. For the
year ended October 31, 2009, we were able to make progress on reducing balances
owed to key vendors, thereby using $71,780 of cash for a reduction in accounts
payable. This amount was offset by an increase in accrued expenses and other
liabilities of $ 89,942.
Cash
outflows from investing activities were $182,021 in the year ended October 31,
2009 compared to $18,216 for the same period last year. Investments
in the year ended October 31, 2009 included payments of $160,005 in connection
with the purchase of Iggys House Inc. intangible assets, $22,080 used for web
development of the Iggys House intangible assets, $5,000 used for the business
acquisition of the MLSDirect.com, and proceeds of $5,064 from the dissolution of
the Marketplace Home Mortgage – Webdigs joint venture. For the year
ended October 31, 2008, we invested $18,216 in computer and office
equipment.
Financing
activities provided $612,000 and $962,253 for the years ended October 31, 2009
and 2008, respectively. During the current fiscal year, we generated $335,500
from common stock issuances, compared to $960,159 for the same period last
year. The promissory note we issued in December 2008 resulted in net
cash proceeds of $226,000 (after paying $4,000 in issuance costs and $20,000 in
accrued legal fees). A loan from our CEO provided $273,000 in cash
during the fiscal year ended October 31, 2009. In addition, an
increase in officer payables provided $31,329 in cash compared to $9,676
provided in the year ended October 31, 2008.
25
Given our
low cash position, our near term focus in fiscal 2010 continues to be to create
positive operating cash flow from our web-assisted real estate
brokerage as well as our IggysHouse.com
operations. We strive in the current year to add revenues
while holding expenses relatively flat. We believe that our 25% year
over year revenue growth is a positive sign and that the current fiscal year
will produce more revenue as we add agents. We
acknowledge that our start-up of the IggysHouse.com website will not produce
significant immediate cash flows and we will need additional financing to fund
our operations in the current fiscal year ending October 31, 2010. We
believe that we will need to raise $300,000 to $500,000 in short term funding to
cover our needs through October 31, 2010. Coincident with our short
term funding, we will start seeking an additional $5 to $6 million to fund
expansion in the years ahead. If we succeed in raising such
amount, we believe that we would have sufficient capital to fund our operations
and expansion plans indefinitely.
Certain
vendors have been asking for past due payments in the past 12
months. In those cases where we do not have an express agreement with
vendors, it is possible that a vendor may demand payment or refuse to provide
services that are critical to the ability of the Company to either continue to
operate or to timely file required reports with the
SEC. If any such risk materializes, it would likely decrease our
likelihood of obtaining financing on terms acceptable to us, if at
all. In addition, if we fail to reach sales revenue objectives (for
any reason, including due to continued poor real estate and credit market
conditions beyond our control), additional financing may not be available on
terms favorable to us, if at all.
If
additional funds are raised by the issuance of our equity securities, such as
through the issuance and exercise of common stock, then existing stockholders
will experience dilution of their ownership interest. If additional funds are
raised by the issuance of debt or other types of (typically preferred) equity
instruments, then we may be subject to certain limitations in our
operations. Issuance of such securities may have rights senior to
those of the then existing holders of our common stock. If adequate funds are
not available or not available on acceptable terms, we may be unable to fund
expansion, develop or enhance products or respond to competitive
pressures.
26
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures. We evaluate these estimates on an on-going
basis. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. Our significant estimates are 1) determining the
life of our website and customer list intangible assets, 2) determining some of
the inputs for our stock option fair value calculation and 3) assessing the
valuation allowance for income taxes.
We
consider the following accounting policies to be those most important to the
portrayal of our results of operations and financial condition:
Revenue Recognition.
Our web-assisted real estate brokerage business recognizes revenue at the
closing of a real estate transaction. Commissions and rebates due to third party
real estate agents or consumers are accrued at the time of closing and
treated as an offset to gross revenues. There is no judgment or
estimating in our revenue recognition model.
Income Taxes. We
account for income taxes using an asset and liability approach to financial
accounting and reporting for income taxes. Accordingly, deferred tax
assets and liabilities arise from the difference between the tax basis of an
asset or liability and its reported amount in the consolidated financial
statements. Deferred tax amounts are determined using the tax rates
expected to be in effect when the taxes will actually be paid or refunds
received, as provided under currently enacted tax law. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense or benefit is the
tax payable or refundable, respectively, for the period plus or minus the change
in deferred tax assets and liabilities during the period. We have
recorded a full valuation allowance for our net deferred tax assets as of
October 31, 2009 and 2008 because realization of those assets is not reasonably
assured.
27
We will
recognize 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.
Share-Based
Compensation. We account for stock incentive plans by measurement and
recognition of compensation expense for all stock-based awards based on fair
values, net of estimated forfeitures. Share-based compensation
expense includes compensation cost for restricted stock awards and stock
options. We use the Black-Scholes option-pricing model to determine
the fair value of options granted as of the grant date.
Intangible
Assets. We have five types of intangible assets:
Website
Development
The primary interface with the customer
in our web-assisted real estate brokerage operation is the Webdigs.com
website. Certain costs incurred in development of this website have
been capitalized. Amortization is on a straight-line method over the
estimated three year useful life of the website. We also have
incurred costs for the IggysHouse.com website and those costs will be amortized
over 2 years once development of the website is complete which was January
2010.
Customer
Lists
We
capitalize the fair value of pre-existing customer relationships acquired as
part of business combinations and asset acquisitions. Amortization
expense is calculated using the straight-line method (which approximates the
anticipated revenue stream back to the Company) over an estimated useful life of
2 to 3 years.
Non-Compete
Agreements
The
Company capitalizes the fair value of non-compete agreements at the inception of
the agreement. Amortization expense is calculated using the straight-line method
(which approximates the anticipated revenue stream back to the Company) over the
agreement’s estimated 2 year life.
Other
The
Company capitalizes the fair value of website domain names and contractual
relationships acquired through business combinations or asset
acquisitions. The Company purchased 17 domain names and 17
contractual broker relationships in 17 states in May 2009 from theMLSDirect.com
and expect to amortize the fair value of these names over a 2 year estimated
useful life.
The
Company last assessed impairment of intangible assets at October 31, 2009 and
determined that there was no impairment. The Company will retest for
impairment again on October 31, 2010 or earlier if circumstances change in the
future.
Commissions and
Fees Receivable. Commissions and fees receivable are recorded
at the amount the Company expects to collect on real estate transactions
closed. These receivables represent broker commission balances due
the Company from investors/lenders or listing real estate brokers and usually
are settled within 10-15 days after closing.
Office
Equipment and Fixtures. Office equipment and fixtures are recorded
at cost. Maintenance and repairs are charged to expense as incurred;
major renewals and betterments are capitalized. When items of property or
equipment are sold or retired, the related costs and accumulated depreciation
are removed from the accounts and any gain or loss is included in operating
income.
28
Depreciation
is provided on the straight-line method over the estimated useful lives of the
respective assets as follows:
|
Office
equipment
|
2
to 5 years
|
|
Furniture
and fixtures
|
3
to 7 years
|
Segment
Information
Historically,
we have reported two strategic operating segments; (1) web-assisted real estate
brokerage and (2) mortgage brokerage. Due to the divestiture of
Marquest Financial, Inc. and the dissolution of Marketplace Home
Mortgage – Webdigs, LLC in 2009, we have determined that the mortgage segment is
no longer significant to our operations and therefore, we now report and operate
our business as one strategic reporting segment.
Recently Issued Accounting
Pronouncements
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued the
Accounting Standards Codification (“ASC”) Subtopic 105 “Generally Accepted
Accounting Principles,” which establishes the Accounting Standards Codification
as the single source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive releases of the
Securities and Exchange Commission under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. The subsequent
issuances of new standards will be in the form of Accounting Standards Updates
that will be included in the codification. This guidance is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Company updated its historical U.S. GAAP references
to comply with the codification effective at the beginning of its fiscal quarter
ending October 31, 2009. The adoption of this guidance did not have a
material effect on the Company’s consolidated financial position, results of
operations or cash flows, since the codification is not intended to change U.S.
GAAP.
In
May 2009, the FASB issued authoritative guidance included in ASC Subtopic
855 “Subsequent Events,” which establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. Specifically,
this guidance provides (i) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements; (ii) the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements; and (iii) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. This guidance
is effective for interim or annual financial periods ending after June 15,
2009, and is to be applied prospectively. The Company adopted this
guidance as of July 31, 2009. The adoption of this guidance did not have a
material effect on the Company’s consolidated financial position, results of
operations or cash flows.
Seasonality
of Business
The
residential real estate market has traditionally experienced seasonality, with a
peak in the spring and summer seasons and a decrease in activity during the fall
and winter seasons. We expect revenues in each quarter to be significantly
affected by activity during the prior quarter, given the time lag between
contract execution and closing. A typical real estate
transaction has a 30 day lag between contract signing and closing of the
transaction.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
29
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WEBDIGS,
INC.
TABLE
OF CONTENTS
|
PAGE
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Financial Statements:
|
||
|
Consolidated
Balance Sheets
|
F-2
|
|
|
Consolidated
Statements of Operations
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit)
|
F-5
|
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
30
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Audit Committee, Stockholders and Board of Directors
Webdigs,
Inc.
Minneapolis,
Minnesota
We have
audited the accompanying balance sheets of Webdigs, Inc. as of October 31, 2009
and 2008, and the related statements of operations, stockholders’ equity
(deficit) and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Webdigs, Inc. as of October 31,
2009 and 2008, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered losses from operations since its inception
on May 1, 2007. This factor raises substantial doubt about its
ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
|
/s/
Moquist Thorvilson Kaufmann Kennedy & Pieper LLC
|
|
Edina,
Minnesota
|
|
January
29, 2010
|
F-1
CONSOLIDATED
BALANCE SHEETS
|
October 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 36,023 | $ | 37,802 | ||||
|
Commissions
and fees receivable
|
9,449 | 12,467 | ||||||
|
Prepaid
expenses and deposits
|
10,847 | 14,011 | ||||||
|
Other
current assets
|
10,284 | 6,125 | ||||||
|
Total
current assets
|
66,603 | 70,405 | ||||||
|
Investment
in Marketplace Home Mortgage Webdigs, LLC
|
- | 2,182 | ||||||
|
Office
equipment and fixtures, net
|
30,678 | 30,202 | ||||||
|
Intangible
assets, net
|
2,103,243 | 351,430 | ||||||
|
Total
assets
|
$ | 2,200,524 | $ | 454,219 | ||||
The accompanying notes are an integral part
of these financial statements.
F-2
WEBDIGS,
INC.
CONSOLIDATED
BALANCE SHEETS (continued)
|
October 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of capital lease obligations
|
$ | 4,197 | $ | 3,828 | ||||
|
Accounts
payable
|
259,064 | 377,538 | ||||||
|
Accounts
payable - minority stockholder
|
562,858 | 550,206 | ||||||
|
Due
to officers
|
58,606 | 27,277 | ||||||
|
Convertible
notes payable to officer/stockholder
|
173,000 | - | ||||||
|
Accrued
expenses:
|
||||||||
|
Professional
fees
|
39,000 | 50,000 | ||||||
|
Payroll
and commissions
|
53,207 | 32,269 | ||||||
|
Lease
expense for vacated office space
|
- | 55,913 | ||||||
|
Other
|
20,174 | 15,170 | ||||||
|
Total
current liabilities
|
1,170,106 | 1,112,201 | ||||||
|
Long
term liabilities:
|
||||||||
|
Capital
lease obligation, less current portion
|
6,233 | 10,431 | ||||||
|
Total
liabilities
|
1,176,339 | 1,122,632 | ||||||
|
Stockholders'
equity (deficit):
|
||||||||
|
Common
stock - $.001 par value; 125,000,000 shares authorized as common stock and
an additional 125,000,000 shares designated as common or preferred stock;
33,396,719 and 22,308,711 common shares issued and outstanding at October
31, 2009 and 2008, respectively.
|
33,397 | 22,309 | ||||||
|
Treasury
stock - $.001 par value: 1,063,628 shares and 0 shares held in treasury as
of October 31, 2009 and 2008, respectively
|
(265,907 | ) | - | |||||
|
Additional
paid-in capital
|
5,034,458 | 2,002,226 | ||||||
|
Accumulated
deficit
|
(3,777,763 | ) | (2,692,948 | ) | ||||
|
Total
stockholders' equity (deficit)
|
1,024,185 | (668,413 | ) | |||||
|
Total
liabilities and stockholders' equity (deficit)
|
$ | 2,200,524 | $ | 454,219 | ||||
The accompanying notes are an
integral part of these financial statements.
F-3
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Years
Ended
|
||||||||
|
October 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenue:
|
||||||||
|
Gross
revenues
|
$ | 863,505 | $ | 739,031 | ||||
|
Less:
customer rebates and third-party agent commissions
|
(359,728 | ) | (337,253 | ) | ||||
|
Net
revenues
|
503,777 | 401,778 | ||||||
|
Operating
expenses:
|
||||||||
|
Selling
|
666,025 | 1,453,551 | ||||||
|
General
and administrative
|
632,198 | 693,066 | ||||||
|
Amortization
of intangible assets
|
193,010 | 148,116 | ||||||
|
Total
operating expenses
|
1,491,233 | 2,294,733 | ||||||
|
Operating
loss from continuing operations
|
(987,456 | ) | (1,892,955 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Equity
in income (loss) from Marketplace Home Mortgage Webdigs,
LLC
|
13,279 | (9,064 | ) | |||||
|
Interest
expense
|
(332,139 | ) | (285 | ) | ||||
|
Loss
on change in fair value of derivatives and warrants
|
(63,708 | ) | - | |||||
|
Other
income (expense)
|
800 | - | ||||||
|
Total
other income (expense)
|
(381,768 | ) | (9,349 | ) | ||||
|
Loss
from continuing operations before income taxes
|
(1,369,224 | ) | (1,902,304 | ) | ||||
|
Income
tax provision
|
- | - | ||||||
|
Loss
from continuing operations
|
(1,369,224 | ) | (1,902,304 | ) | ||||
|
Income
(loss) from discontinued operations of Marquest Financial, Inc. (including
gain on disposal of $297,412 in 2009) net of applicable taxes of
zero
|
284,409 | (187,928 | ) | |||||
|
Net
loss
|
$ | (1,084,815 | ) | $ | (2,090,232 | ) | ||
|
Net
loss per common share - basic and diluted
|
||||||||
|
Loss
from continuing operations
|
(0.05 | ) | (0.09 | ) | ||||
|
Income
(loss) from discontinued operations
|
0.01 | (0.01 | ) | |||||
|
Net
loss
|
$ | (0.04 | ) | $ | (0.10 | ) | ||
|
Weighted
average common shares outstanding - basic and diluted
|
26,584,547 | 21,071,802 | ||||||
The accompanying notes are an
integral part of these financial statements.
F-4
WEBDIGS,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For
the Years Ended October 31, 2009 and 2008
|
Total
|
||||||||||||||||||||||||
|
Common Stock
|
Additional
|
Stockholders'
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Treasury
Stock
|
Paid-in
Capital
|
Accumulated
Deficit
|
Equity
(Deficit)
|
|||||||||||||||||||
| 18,442,840 | $ | 18,443 | $ | - | $ | 832,488 | $ | (602,716 | ) | $ | 248,215 | |||||||||||||
|
Directors
stock option compensation
|
- | - | - | 46,237 | - | 46,237 | ||||||||||||||||||
|
Common
stock issued for services
|
1,200 | 1 | - | 299 | - | 300 | ||||||||||||||||||
|
Shares
issued in private placement offering, net of $1,141 for issuance
costs
|
4,218,000 | 4,218 | - | 955,941 | - | 960,159 | ||||||||||||||||||
|
Compensation
related to vesting of restricted common stock awards, net of
forfeitures
|
(353,329 | ) | (353 | ) | - | 167,261 | - | 166,908 | ||||||||||||||||
|
Net
loss
|
- | - | - | - | (2,090,232 | ) | (2,090,232 | ) | ||||||||||||||||
|
Balances,
October 31, 2008
|
22,308,711 | 22,309 | - | 2,002,226 | (2,692,948 | ) | (668,413 | ) | ||||||||||||||||
|
Directors
stock option compensation
|
- | - | - | 25,738 | - | 25,738 | ||||||||||||||||||
|
Common
stock issued for services
|
273,244 | 273 | - | 91,616 | - | 91,889 | ||||||||||||||||||
|
Restricted
shares issued as part of convertible promissory note with Lantern
Advisors, LLC
|
200,000 | 200 | - | 19,800 | - | 20,000 | ||||||||||||||||||
|
Warrants
issued as part of the amendment and extension of the convertible
promissory note with Lantern Advisors
|
- | - | - | 138,010 | - | 138,010 | ||||||||||||||||||
|
Conversion
of derivative and warrant liability to additional paid in capital due to
the amendment of the convertible promissory note with Lantern
Advisors
|
- | - | - | 191,291 | - | 191,291 | ||||||||||||||||||
|
Shares
transferred from minority shareholder to consultant for
services
|
- | - | - | 40,000 | - | 40,000 | ||||||||||||||||||
|
Shares
issued in private placement offerings
|
2,227,000 | 2,227 | - | 333,273 | - | 335,500 | ||||||||||||||||||
|
Partial
conversion of note payable to officer/stockholder
|
909,091 | 909 | - | 99,091 | - | 100,000 | ||||||||||||||||||
|
Webdigs'
common stock (1,063,628 shares) received in connection with the Marquest
Financial, Inc. disposition
|
- | - | (265,907 | ) | - | - | (265,907 | ) | ||||||||||||||||
|
Shares
issued to acquire Iggys House assets, (including 160,000 shares issued to
Northland Securities for services in connection with the
acquisition)
|
7,262,500 | 7,263 | - | 1,808,362 | - | 1,815,625 | ||||||||||||||||||
|
Shares
issued to acquire theMLSDirect.com
|
100,000 | 100 | - | 46,900 | - | 47,000 | ||||||||||||||||||
|
Shares
issued to officers (CEO and CFO) for accrued salary
|
157,143 | 157 | - | 54,843 | - | 55,000 | ||||||||||||||||||
|
Restricted
shares issued to employee in lieu of cash compensation
|
50,000 | 50 | - | 12,450 | - | 12,500 | ||||||||||||||||||
|
Restricted
shares issued to CEO as compensation for his personal guarantee of
convertible promissory note
|
150,000 | 150 | - | 16,350 | - | 16,500 | ||||||||||||||||||
|
Compensation
related to vesting of restricted common stock awards, net of
forfeitures
|
(240,970 | ) | (241 | ) | - | 154,508 | - | 154,267 | ||||||||||||||||
|
Net
loss
|
- | - | - | (1,084,815 | ) | (1,084,815 | ) | |||||||||||||||||
|
Balances,
October 31, 2009
|
33,396,719 | $ | 33,397 | $ | (265,907 | ) | $ | 5,034,458 | $ | (3,777,763 | ) | $ | 1,024,185 | |||||||||||
The accompanying notes are an
integral part of these financial statements.
F-5
WEBDIGS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
Ended
|
||||||||
|
October 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (1,084,815 | ) | $ | (2,090,232 | ) | ||
|
Adjustments
to reconcile net loss to net cash flows used in operating
activities:
|
||||||||
|
Depreciation
|
17,172 | 22,031 | ||||||
|
Issuance
of stock warrants in connection with convertible debt agreement
modification
|
138,010 | - | ||||||
|
Amortization
of intangible assets
|
219,544 | 191,736 | ||||||
|
Amortization
of convertible note payable discounts
|
147,583 | - | ||||||
|
Amortization
of debt issuance costs
|
4,000 | - | ||||||
|
Loss
on change in fair value of derivatives and warrants
|
63,708 | - | ||||||
|
Loss
on disposal of fixed assets
|
- | 580 | ||||||
|
Equity
in the (income) loss of Marketplace Home Mortgage - Webdigs,
LLC
|
(13,279 | ) | 9,064 | |||||
|
Share-based
compensation
|
209,005 | 213,145 | ||||||
|
Gain
on sale of subsidiary (Marquest Financial, Inc.)
|
(297,412 | ) | - | |||||
|
Common
stock issued for services
|
11,889 | 300 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Commissions
and fees receivable
|
3,018 | (212 | ) | |||||
|
Prepaid
expenses and deposits
|
123,164 | 5,181 | ||||||
|
Other
current assets
|
(4,159 | ) | (6,125 | ) | ||||
|
Accounts
payable
|
(71,780 | ) | 278,957 | |||||
|
Accounts
payable - minority stockholder
|
12,652 | 275,793 | ||||||
|
Accrued
expenses and other liabilities
|
89,942 | 80,267 | ||||||
|
Net
cash flows used in operating activities
|
(431,758 | ) | (1,019,515 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of equipment and intangible assets
|
(182,085 | ) | (18,216 | ) | ||||
|
Cash
paid for business acquisition of theMLSDirect.com
|
(5,000 | ) | - | |||||
|
Cash
received upon dissolving the Marketplace Home Mortgage - Webdigs,
LLC joint venture
|
5,064 | - | ||||||
|
Net
cash flows used in investing activities
|
(182,021 | ) | (18,216 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of common stock
|
335,500 | 960,159 | ||||||
|
Proceeds
from issuance of convertible debentures, net of debt issuance costs of
$4,000 and unrelated accrued legal fees of $20,000
|
226,000 | - | ||||||
|
Principal
payments on convertible note payable
|
(250,000 | ) | - | |||||
|
Proceeds
from issuance of convertible notes payable to
officer/stockholder
|
273,000 | - | ||||||
|
Increase
in due to officers
|
31,329 | 9,676 | ||||||
|
Principal
payments on capital lease obligations
|
(3,829 | ) | (7,582 | ) | ||||
|
Net
cash flows provided by financing activities
|
612,000 | 962,253 | ||||||
|
Net
change in cash and cash equivalents
|
(1,779 | ) | (75,478 | ) | ||||
|
Cash
and cash equivalents, beginning of period
|
37,802 | 113,280 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 36,023 | $ | 37,802 | ||||
The accompanying notes are an
integral part of these financial statements.
F-6
WEBDIGS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
Years
Ended
|
||||||||
|
October 31,
|
||||||||
|
Supplemental Cash Flow
information
|
||||||||
|
Cash
paid for interest
|
$ | 22,152 | $ | 7,261 | ||||
|
Supplemental Schedule of Non-cash Financing and
Investing Activitires
|
||||||||
|
Issuance
of common stock to convertible debt holder as a discount on the
debt
|
$ | 20,000 | $ | - | ||||
|
Conversion
of note payable officer/stockholder
|
$ | 100,000 | $ | - | ||||
|
Discount
on convertible debt due to detachable warrant and embedded conversion
option
|
$ | 127,583 | $ | - | ||||
|
Accrued
legal fees paid from convertible debenture proceeds
|
$ | 20,000 | $ | - | ||||
|
Related
party contribution of Webdigs common stock to consultant for prepaid
consulting fees
|
$ | 40,000 | $ | - | ||||
|
Common
stock issued for prepaid consulting fees
|
$ | 80,000 | $ | - | ||||
|
Webdigs
common stock received in connection with the divestiture of Marquest
Financial, Inc.
|
$ | 265,907 | $ | - | ||||
|
Issuance
of common stock to acquire Iggy's assets ($17,648 for computer hardware
and $1,797,977 for intangible assets)
|
$ | 1,815,625 | $ | - | ||||
|
Issuance
of common stock to acquire theMLSDirect.com
|
$ | 47,000 | $ | - | ||||
|
Conversion
of accrued officer salary to common stock
|
$ | 55,000 | $ | - | ||||
|
Conversion
of derivative and warrant liability to additonal paid in capital due to
amendment of convertible promissory note with Lanter
Advisors
|
$ | 191,291 | $ | - | ||||
The accompanying notes are an integral part of these financial
statements.
F-7
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
|
1
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of
Business
Webdigs,
Inc. (“the Company”) was incorporated on May 25, 1994 under the name of Select
Video, Inc. The Company changed to its current name on October 23,
2007. Select Video, Inc. was an inactive shell from February 29, 2000
to October 24, 2007 when they entered into an Agreement and Plan of Merger and
Reorganization whereby it agreed to issue 15,818,251 shares of its common stock
to its subsidiary Select Video Acquisition, LLC which in-turn used those shares
to acquire all of the outstanding units of Webdigs, LLC, a private company
organized in the state of Minnesota resulting in Webdigs, LLC as the surviving
entity. Webdigs, LLC, based in Minneapolis, MN, was organized on May
1, 2007.
All of
the Company’s real estate brokerage operations are operated under Webdigs, LLC.
Our two main real estate brokerage brands are Webdigs and Iggys
House. Webdigs.com is a web-assisted real estate website and
brokerage, offering a similar customer experience as a full service brokerage
utilizing a discounted percentage fee structure for listing services to their
selling customers and a graduated fee structure for their buying customers by
rebating up to one-half of its broker commissions. IggysHouse.com is a
web-assisted real-estate listing service which enables the customer to pay a
monthly discounted fee to list their homes on their local real estate multiple
listing service.
Basis of
Consolidation
The
consolidated financial statements for the years ended October 31, 2009 and 2008
include the accounts of Webdigs, Inc. and its wholly-owned subsidiary, Webdigs,
LLC, which includes wholly owned subsidiaries of Marquest Financial, Inc.
(Marquest), Home Equity Advisors, LLC, and Credit Garage, LLC. All
significant intercompany accounts and transactions have been eliminated in the
consolidation. The investment of Marketplace Home Mortgage – Webdigs,
LLC (49% ownership) is recorded on the equity method. This
unconsolidated joint venture was dissolved on October 26, 2009 (see Note
6). In addition, the Company divested one of its subsidiaries,
Marquest, on June 4, 2009 (see Note 5). The net results from Marquest
have been segregated for all periods presented in the statement of
operations.
Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles 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 consolidated financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-8
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Debt Issuance
Costs
The
Company accounts for debt issuance costs and other debt discounts by amortizing
the amounts using the effective interest method over the term of the related
debt instrument.
Fair Value of Financial
Instruments
The
Company’s financial instruments consist of cash and cash equivalents,
commissions and fees receivable, accounts payable, accrued expenses, notes
payable and capital lease obligations. The carrying amounts of such
financial instruments approximate their respective estimated fair value due to
the short-term maturities and approximate market interest rates of these
instruments.
Cash and Cash
Equivalents
For
purposes of balance sheet presentation and reporting of cash flows, the Company
considers all unrestricted demand deposits, money market funds and highly liquid
debt instruments with an original maturity of less than 90 days to be cash and
cash equivalents.
Commissions and Fees
Receivable
Real
estate commissions and fees receivable are recorded at the amount the Company
expects to collect from real estate transactions closed. These
receivables represent broker commission balances due the Company
from clients or listing real estate brokerages and usually are
settled within 10 to 15 days after closing.
The
Company reviews the outstanding receivables on a monthly basis and receivables
are considered past due when payment has not been received 30 days after a
transaction closes. Management provides for probable uncollectible
amounts through a charge to earnings and a credit to a valuation allowance based
on its assessment of the current status of individual
accounts. Balances that are still outstanding after management has
used reasonable collection efforts are written off through a charge to the
allowance for doubtful accounts and a credit to
receivables. Historically, the Company has not experienced
significant losses related to receivables from individual
customers. At October 31, 2009 and 2008, the Company considers its
accounts receivable to be fully collectible and therefore, has not recorded an
allowance for doubtful accounts.
Intangible
Assets
The
Company has five types of intangible assets:
Website
Development
The
primary interface with the customer in our web-assisted real estate brokerage
operation is the Webdigs.com website. Certain costs incurred in
development of this website
have been capitalized. Amortization is on a straight-line method over
the estimated three year useful life of the website. The
Company also has incurred costs for the IggysHouse.com website and those costs
will be amortized over 2 years once development of the website is
complete.
F-9
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Customer
Lists
The
Company capitalizes the fair value of pre-existing customer relationships
acquired as part of business combinations and asset
acquisitions. Amortization expense is calculated using the
straight-line method (which approximates the anticipated revenue stream back to
the Company) over an estimated useful life of 2 to 3 years.
Non-Compete
Agreements
The
Company capitalizes the fair value of non-compete agreements at the inception of
the agreement. Amortization expense is calculated using the straight-line method
(which approximates the anticipated revenue stream back to the Company) over the
agreement’s estimated 2 year life.
Other
The
Company capitalizes the fair value of website domain names and contractual
relationships acquired through business combinations or asset
acquisitions. The Company has purchased 17 domain names
and 17 contractual broker relationships in 17 states in May 2009 from
theMLSDirect.com and expect to amortize the fair value of these names over a 2
year estimated useful life.
Office Equipment and
Fixtures
Office
equipment and fixtures are recorded at cost. Maintenance and repairs
are charged to expense as incurred; major renewals and betterments are
capitalized. When items of property or equipment are sold or retired,
the related costs and accumulated depreciation are removed from the accounts and
any gain or loss is included in operating income.
Depreciation
is provided on the straight-line method over the estimated useful lives of the
respective assets as follows:
|
Office
equipment
|
2
to 5 years
|
||
|
Furniture
and fixtures
|
3
to 7 years
|
Investment in Marketplace
Home Mortgage – Webdigs, LLC
On August
1, 2008, the Company contributed non-cash assets into a joint venture created
with Marketplace Home Mortgage, LLC for a 49% ownership interest (see Note 6).
The Company accounts for its investment in the joint venture using the equity
method. Accordingly, the Company records an increase in its investment for
contributions to the joint venture and for its 49% share of any income of the
joint venture, and a reduction in its investment
for its 49% share of any losses of the joint venture or disbursements of profits
from the joint venture. On October 26, 2009, the Company and
Marketplace Home Mortgage, LLC agreed to dissolve Marketplace Home Mortgage –
Webdigs, LLC. All remaining assets were distributed upon
dissolution.
F-10
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Segments
Historically,
the Company has reported two strategic operating segments; (1) web-assisted real
estate brokerage and (2) mortgage brokerage. Due to the divestiture
of Marquest Financial, Inc. and the dissolution of Marketplace Home
Mortgage – Webdigs, LLC in 2009, the Company has determined that the mortgage
segment is no longer significant to its operations and therefore, now reports as
one strategic reporting segment.
Impairment of Long-Lived
Assets
The
Company accounts for the impairment or disposal of long-lived assets,
such as website development costs, customer lists, non-compete agreements,
website domain names, contractual agreements, furniture and equipment by
reviewing for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
The
Company has assessed impairment of its long-lived assets, including intangible
assets, at October 31, 2009 and has determined that there was no
impairment. The Company will retest for impairment again on October
31, 2010 or sooner if circumstances change.
Revenue
Recognition
Real
estate brokerage revenues are recognized at the closing of a real estate
transaction. Commissions and rebates due to third party real estate
agents or clients are accrued at the time of closing and treated as an offset to
gross revenues.
Comprehensive Income
(Loss)
Comprehensive
income (loss) includes net income (loss) and items defined as other
comprehensive income (loss). Items defined as other comprehensive
income (loss) include items such as foreign currency translation adjustments and
unrealized gains and losses on certain marketable securities. For the
years ended October 31, 2009 and 2008 , there were no adjustments to net loss to
arrive at comprehensive loss.
F-11
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Accounting for Convertible
Debentures, Warrants and Derivative Instruments
The
Company does not enter into derivative contracts for purposes of risk management
or speculation. However, from time to time, the Company enters into contracts
that are not considered derivative financial instruments in their entirety but
that include embedded derivative features.
The
Company accounts for its embedded conversion features and freestanding
warrants that are settled in a company’s own stock to be designated
as an equity instrument, asset, or a liability. A contract designated
as an asset or a liability is carried at fair value on a Company’s
balance sheet, with any changes in fair value recorded in the results of
operations.
The
Company accounts for certain warrants to purchase common stock and
embedded conversion options as liabilities at fair value and the unrealized
changes in the values of these derivatives are recorded in the statement of
operations as “gain or loss on warrants and derivatives. Contingent
conversion features that reduce the conversion price of warrants and conversion
features are included in the valuation of the warrants and the conversion
features. The recognition of the fair value of derivative liabilities (i.e.
warrants and embedded conversion options) at the date of issuance is applied
first to the debt proceeds. The excess fair value, if any, over the
proceeds from a debt instrument, is recognized immediately in the statement
of operations as interest expense. The value of warrants or derivatives
associated with a debt instrument is recognized at inception as a discount to
the debt instrument. This discount is amortized over the life of the
debt instrument using the effective interest method. A determination
is made upon settlement, exchange, or modification of the debt instruments to
determine if a gain or loss on the extinguishment has been incurred based on the
terms of the settlement, exchange, or modification and on the value allocated to
the debt instrument at such date.
The
Company uses the Black-Scholes pricing model to determine fair values of its
derivatives. Valuations derived from this model are subject to ongoing internal
verification and review. The model uses market-sourced inputs such as interest
rates, exchange rates, and option
volatilities. Selection of these inputs involves management’s judgment and may
impact net income (loss). The fair value of the derivative liabilities are
subject to the changes in the trading value of the Company’s common stock. As a
result, the Company’s financial statements may fluctuate from quarter-to-quarter
based on factors, such as the bid price of the Company’s stock at the balance
sheet date, the amount of shares converted by note holders and/or
exercised by warrant holders, and changes in the determination of market-sourced
inputs. Consequently, the Company’s financial position and results of operations
may vary materially from quarter-to-quarter based on conditions other than its
operating revenues and expenses.
F-12
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Income
Taxes
The
Company accounts for income taxes using an asset and liability approach to
financial accounting and reporting for income taxes. Accordingly,
deferred tax assets and liabilities arise from the difference between the tax
basis of an asset or liability and its reported amount in the consolidated
financial statements. Deferred tax amounts are determined using the
tax rates expected to be in effect when the taxes will actually be paid or
refunds received, as provided under currently enacted tax
law. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense or benefit is the tax payable or refundable, respectively, for the
period plus or minus the change in deferred tax assets and liabilities during
the period. The Company has recorded a full valuation allowance for
its net deferred tax assets as of October 31, 2009 and 2008 because realization
of those assets is not reasonably assured.
The
Company will recognize 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.
Share-Based
Compensation
The
Company accounts for stock incentive plans by measurement and recognition of
compensation expense for all stock-based awards based on estimated fair values,
net of estimated forfeitures. Share-based compensation expense
recognized for the years ended October 31, 2009 and 2008 includes
compensation cost for restricted stock awards and stock options. The
Company uses the Black- Scholes option-pricing model to determine the fair value
of options granted as of the grant date.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense
amounted to $88,312 and $523,572 for the years ended October 31, 2009 and 2008,
respectively.
Concentrations, Risks and
Uncertainties
Instability
of the Housing Sector in the Company’s Regional Markets:
The
Company’s operations are concentrated within the real estate brokerage industry
in Minnesota and Florida and its prospects for success are tied indirectly to
interest rates and the general housing and business climates in these
regions.
F-13
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Cash
Deposits in Excess of Federally Insured Limits:
The
Company maintains cash balances at two financial
institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$250,000. At times, the cash balances in these accounts may exceed
federally insured limits. The Company has not experienced any losses
in such accounts and believes they are not exposed to any significant credit
risk on cash and cash equivalents.
Recently Issued Accounting
Pronouncements
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued the
Accounting Standards Codification (“ASC”) Subtopic 105 “Generally Accepted
Accounting Principles,” which establishes the Accounting Standards Codification
as the single source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive releases of the
Securities and Exchange Commission under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. The subsequent
issuances of new standards will be in the form of Accounting Standards Updates
that will be included in the codification. This guidance is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Company updated its historical U.S. GAAP references
to comply with the codification effective at the beginning of its fiscal quarter
ending October 31, 2009. The adoption of this guidance did not have a
material effect on the Company’s consolidated financial position, results of
operations or cash flows, since the codification is not intended to change U.S.
GAAP.
In
May 2009, the FASB issued authoritative guidance included in ASC Subtopic
855 “Subsequent Events,” which establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. Specifically,
this guidance provides (i) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements; (ii) the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements; and (iii) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. This guidance
is effective for interim or annual financial periods ending after June 15,
2009, and is to be applied prospectively. The Company adopted this guidance as
of July 31, 2009. The adoption of this guidance did not have a
material effect on the Company’s consolidated financial position, results of
operations or cash flows.
|
2
|
GOING
CONCERN
|
The
Company has incurred significant operating losses for the years ended October
31, 2009 and 2008. At October 31, 2009, the Company reports a
negative working capital position of $1,103,503, and an accumulated deficit of
$3,777,763. It is management’s opinion that these facts
raise substantial doubt about the Company’s ability to continue as a going
concern without additional debt or equity financing.
F-14
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
In order
to meet its working capital needs through the next twelve months, the Company
plans to raise additional funds through the issuance of additional shares of
common stock and debt through private placements. Although we intend
to obtain additional financing to meet our cash needs, we may be unable to
secure any additional financing on terms that are favorable or acceptable to us,
if at all. The Company began reducing operating expenditures during
the year ended October 31, 2008 and continued with further expense reductions in
the year ended October 31, 2009. The Company expects to increase
revenues through its existing Webdigs.com customer base and the addition of
potential revenue from its Iggyshouse.com website in the upcoming fiscal
year.
|
3
|
FIXED
ASSETS AND INTANGIBLE ASSETS
|
On June
12, 2009, the Company entered into an Asset Purchase Agreement with Iggys House,
Inc. (Iggys House) to acquire selected assets of Iggys House in consideration of
$150,000 in cash and the issuance of 7,262,500 shares of Webdigs common stock to
the former owners of Iggys House. Iggys House is a dormant entity
that previously had operated as a web-assisted real estate brokerage in 38
states. The transaction was determined not to be a business
combination and therefore was accounted for as an asset purchase. In
connection with this transaction, the Company incurred legal costs of
$10,005.
The
Company calculated total consideration given for the asset purchase at
$1,975,630 using a per share fair value of $0.25 for the 7,262,500 ($1,815,625)
issued as part of the transaction, the $150,000 in cash paid, and legal costs of
$10,005. The Company allocated the fair
value of the purchase consistent with Accounting Standards Codification (ASC)
820, Fair Value Measurements and Disclosures. The fair values of the
assets acquired were valued internally by the Company based upon numerous
methods including discounted cash flows, annualized revenues and original costs.
The allocated fair values for the asset purchase are as follows:
F-15
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
|
Asset Allocation
|
Fair Value
|
|||
|
Fixed
Assets:
|
||||
|
Computer
hardware
|
$ | 17,648 | ||
|
Intangible
Assets:
|
||||
|
Website
Software
|
1,336,041 | |||
|
Customer
lists
|
355,922 | |||
|
Non-compete
agreements
|
266,019 | |||
|
Subtotal
intangible assets
|
1,957,982 | |||
|
Total
asset purchase allocation
|
$ | 1,975,630 | ||
At
October 31, 2009 and 2008, the Company’s fixed assets are as
follows:
|
October
31, 2009
|
October
31, 2008
|
|||||||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Depreciation
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Depreciation
|
Net
Carrying
Amount
|
|||||||||||||||||||
|
Fixed
Assets
|
||||||||||||||||||||||||
|
Furniture
and Fixtures
|
$ | 9,981 | $ | (4,791 | ) | $ | 5,190 | $ | 9,981 | $ | (475 | ) | $ | 9,506 | ||||||||||
|
Computer
hardware
|
50,972 | (25,484 | ) | 25,488 | 33,324 | (12,628 | ) | 20,696 | ||||||||||||||||
|
Total
Fixed Assets
|
$ | 60,953 | $ | (30,275 | ) | $ | 30,678 | $ | 43,305 | $ | (13,103 | ) | $ | 30,202 | ||||||||||
Depreciation
expense amounted to $17,172 and $22,031 for the years ended October 31, 2009 and
2008, respectively.
F-16
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
At
October 31, 2009 and 2008, the Company’s intangible assets are as
follows:
|
October 31, 2009
|
October 31, 2008
|
|||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
|||||||||||||||||||
|
Identifiable assets with
determinable lives:
|
||||||||||||||||||||||||
|
Website
Software
|
$ | 1,771,637 | $ | (287,164 | ) | $ | 1,484,473 | $ | 413,516 | $ | (149,325 | ) | $ | 264,191 | ||||||||||
|
Customer
lists
|
355,922 | - | 355,922 | 130,859 | (43,620 | ) | 87,239 | |||||||||||||||||
|
Non-compete
agreements
|
266,019 | (44,336 | ) | 221,683 | - | - | - | |||||||||||||||||
|
Other
|
52,000 | (10,835 | ) | 41,165 | - | - | - | |||||||||||||||||
|
Total
Intangible Assets
|
$ | 2,445,578 | $ | (342,335 | ) | $ | 2,103,243 | $ | 544,375 | $ | (192,945 | ) | $ | 351,430 | ||||||||||
Amortization
expense amounted to $219,544 and $191,736 for the years ended October 31,
2009 and
2008, respectively. Except for the non-compete agreements, intangible
assets acquired from Iggys House will begin to amortize once the website is
launched in January 2010.
The
estimated remaining amortization expense is as follows:
|
Years ending October 31,
|
|
|||
|
2010
|
$ | 999,540 | ||
|
2011
|
960,856 | |||
|
2012
|
142,847 | |||
|
|
$ | 2,103,243 | ||
The
future amortization expense is an estimate. Actual amounts may change
from such estimated amounts due to additional intangible asset acquisitions,
potential impairments, accelerated amortization or other
events.
|
4
|
ACQUISITION
|
The
following acquisition was accounted for as a business combination. The purchase
price was allocated to the assets acquired based on the estimated fair values
determined by the Company’s management based upon information currently
available and on current assumptions as to future operations.
F-17
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
The
Company acquired the intangible assets, including a series of exclusive website
domain names and operations from the owners of theMLSDirect.com on May 13,
2009. The Company gave consideration consisting of $5,000 in cash and
100,000 shares of restricted common stock to complete the
transaction. The share issuance was valued at $0.47 per common share
based upon the quoted OTC Bulletin Board price on the date of closing for a
total share value of $47,000. The business operations of theMLSDirect.com have
been integrated into the existing Webdigs, LLC operating entity.
The total
purchase consideration of $52,000 was allocated to the acquired identifiable
intangible assets, based on their estimated fair values at the acquisition date.
The Company used internally estimated replacement costs to determine the fair
values of the assets acquired. The estimated allocation of the
purchase consideration was as follows:
|
Allocation of Consideration
|
Value
|
|||
|
Network
of affiliate real estate brokers in 17 states
|
$ | 27,000 | ||
|
Website
domain names
|
25,000 | |||
|
Total
consideration paid
|
$ | 52,000 | ||
|
5
|
DISCONTINUED
OPERATIONS
|
On June
4, 2009, the Company sold its 100% equity interest in Marquest Financial, Inc.,
a non-operating entity which, until August 2008, had been the Company’s
principal mortgage brokerage operation, back to its former owner and
founder. In August 2008, the Company had entered into a joint venture
with Marketplace Home Mortgage, LLC forming Marketplace Home Mortgage – Webdigs,
LLC, and thus, there has been limited current activity within Marquest
Financial, Inc.
Marquest
was sold back to its founder, Mr. Edward Graca for 1,063,628 shares of the
Company’s common stock which was fair valued at $0.25 per share which took into
account the large number of shares involved compared to the average trading
volume. The shares had a total value of $265,907 and the net carrying
value of the Marquest entity was a negative $31,505 at the date of
closing. Accordingly, the transaction resulted in a gain of
$297,412. The shares received by the Company were the shares provided
to Mr. Graca back when it was originally purchased from him in October 2007 and
included shares earned through a stock compensation arrangement. As
of the closing date, there were 240,970 shares of unvested common stock
remaining under this compensation arrangement and those were forfeited as part
of this transaction. The shares returned in this divestiture were
retained by the Company as treasury stock.
F-18
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
A
summarized statement of operations for the discontinued operations
follows:
|
Discontinued
Operations
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
revenue
|
$ | - | $ | 481,010 | ||||
|
Operating
expenses
|
(13,003 | ) | (661,657 | ) | ||||
|
Other
income (expense)
|
(7,281 | ) | ||||||
|
Operating
loss
|
(13,003 | ) | (187,928 | ) | ||||
|
Income
taxes
|
- | - | ||||||
|
Net
operating loss
|
(13,003 | ) | (187,928 | ) | ||||
|
Gain
on divestiture
|
297,412 | - | ||||||
|
Total
income (loss) related to Marquest
|
$ | 284,409 | $ | (187,928 | ) | |||
Assets and liabilities of the
discontinued operations as assumed by the buyer are as follows:
|
October
31,
|
||||||||
|
Marquest Financial, Inc.
|
June 4, 2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Intangible
assets, customer list, net
|
$ | 60,704 | $ | 87,239 | ||||
|
Other
assets
|
- | 4,796 | ||||||
|
Total
assets
|
$ | 60,704 | $ | 92,035 | ||||
|
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 30,996 | $ | 54,958 | ||||
|
Accrued
expenses
|
55,913 | 58,050 | ||||||
|
Taxes
payable
|
5,300 | 5,300 | ||||||
|
Total
liabilities
|
$ | 92,209 | $ | 118,308 | ||||
|
Net
carrying value
|
$ | (31,505 | ) | $ | (26,273 | ) | ||
F-19
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
|
6
|
INVESTMENT
IN MARKETPLACE HOME MORTGAGE – WEBDIGS,
LLC
|
On August
1, 2008, the Company entered into a joint venture arrangement with Marketplace
Home Mortgage, LLC whereby they created a new joint venture entity called
Marketplace Home Mortgage – Webdigs, LLC. The Company contributed
assets with a net book value totaling $34,804 less transferred liabilities of
$23,558 for a 49% ownership stake in the joint venture, and Marketplace Home
Mortgage, LLC contributed cash totaling $23,039 for 51%
ownership. The assets and liabilities contributed came entirely from
the Company’s mortgage brokerage subsidiaries; Marquest Financial, Inc. and Home
Equity Advisors, LLC. The joint venture ceased operations on July 31,
2009 and on October 26, 2009, the Company and Marketplace Home Mortgage, LLC
dissolved their joint venture. At dissolution on October 26, 2009,
the Company’s total investment in Marketplace Home Mortgage Webdigs – LLC was
$21,084. Upon dissolution, the Company received cash proceeds of
$5,064 and was relieved of $10,397 in payables due to Marketplace Home Mortgage,
LLC resulting in a dissolution loss on investment in Marketplace Home Mortgage –
Webdigs, LLC of $5,623.
Net non-cash assets and liabilities
contributed by the Company to the joint venture were as follows:
|
Original
Book
Value
|
||||
|
Fixed
assets
|
$ | 21,102 | ||
|
Customer
list
|
13,702 | |||
|
Capital
lease obligations
|
(23,558 | ) | ||
|
Net
investment in joint venture
|
$ | 11,246 | ||
Summarized
financial information for this joint venture at October 31, 2009 and 2008 and
for the period from November 1, 2008 to termination (October 26, 2009) and
period from inception (August 1, 2008) to October 31, 2008 is as
follows:
F-20
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Summary Balance
Sheet
|
2009
(1)
|
2008
|
|||||||
|
Current
assets
|
$ | - | $ | 18,850 | ||||
|
Other
assets
|
- | 22,136 | ||||||
|
Current
liabilities
|
- | (15,859 | ) | |||||
|
Net
equity
|
$ | - | $ | 25,127 | ||||
|
The
Company's share in the equity in Marketplace Home Mortgage - Webdigs, LLC
(49%)
|
$ | - | $ | 12,312 | ||||
|
Less:
Deferred gain on excess of fair value received over net book value of
assets contributed to Marketplace Home Mortgage - Webdigs, LLC
(2)
|
- | (10,130 | ) | |||||
|
Investment
in Marketplace Home Mortgage - Webdigs, LLC at October 31, 2009 and 2008,
respectively
|
$ | - | $ | 2,182 | ||||
|
|
(1)
|
At
October 26, 2009, the Company and Marketplace Home Mortgage, LLC agreed to
dissolve Marketplace Home Mortgage – Webdigs, LLC. All
remaining assets were distributed upon
dissolution.
|
|
|
(2)
|
At
October 31, 2008, the Company’s share of the underlying net assets of
Marketplace Home Mortgage – Webdigs, LLC exceeded its investment by
$10,130. The excess, which relates to office
equipment, was being amortized into income over the estimated remaining
life of the respective asset.
|
F-21
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Summary Statement of
Operations
|
2009
|
2008
|
|||||||
|
Revenue
|
$ | 246,413 | $ | 102,768 | ||||
|
Operating
expenses
|
(212,491 | ) | (121,933 | ) | ||||
|
Operating
income
|
33,922 | (19,165 | ) | |||||
|
Other
expense
|
- | (883 | ) | |||||
|
Net
income (loss)
|
$ | 33,922 | $ | (20,048 | ) | |||
|
The
Company's share in the income (loss) of Marketplace Home Mortgage Webdigs,
LLC (49%)
|
$ | 16,622 | $ | (9,824 | ) | |||
|
Amortization
of deferred gain on transfer of non-cash assets at book
value
|
2,280 | 760 | ||||||
|
Loss
on dissolution of equity in Marketplace Home Mortgage - Webdigs,
LLC
|
(5,623 | ) | - | |||||
|
Net
equity in the income (loss) of Marketplace Home Mortgage - Webdigs,
LLC
|
$ | 13,279 | $ | (9,064 | ) | |||
|
7
|
CAPITAL
LEASE OBLIGATION
|
The
Company is obligated under a capital lease covering office equipment that
expires in February, 2012. Future minimum lease payments including
interest required under this lease are as follows:
|
Years ending October 31,
|
||||
|
2010
|
$ | 4,987 | ||
|
2011
|
4,987 | |||
|
2012
|
1,663 | |||
|
Total
|
11,637 | |||
|
Less: amount
representing interest
|
(1,207 | ) | ||
|
Net
capital lease obligation
|
10,430 | |||
|
Less: current
portion
|
(4,197 | ) | ||
|
Long-term
obligations under capital lease
|
$ | 6,233 | ||
F-22
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
|
8
|
CONVERTIBLE
NOTE PAYABLE – THIRD PARTY
|
On
December 12, 2008, the Company entered into a $250,000 convertible/promissory
note (the Note) with Lantern Advisers, LLC (“Lantern”). The Note contained a
simple interest rate of 12% per annum with $2,500 (1%) payable to the lender on
a monthly basis. The Note proceeds were reduced by issuance and legal
costs of $24,000 to arrive at net proceeds of $226,000. The Note
terms required repayment on or before September 30, 2009. Company executive
officers and managers pledged as collateral 4,510,910 shares of the Company’s
common stock which would have been awarded to Lantern in the event of
non-fulfillment of the terms of the Note. The Company’s Chairman and
CEO also provided a personal guaranty for the entire amount of the
Note. The Company’s board of directors awarded the CEO 150,000 shares
of restricted common stock valued at $16,500 as compensation for his personal
guaranty.
In
connection with the Note, the Company issued Lantern 200,000 shares of common
stock valued at $0.10 per share. The share price of $.10 per share was
based on the most recent share price at which the Company had sold shares for
cash to accredited investors (prior to the listing of the Company’s stock on the
OTC bulletin board on December 19, 2008). The issuance of these
shares was recorded as a discount to the Note and was recognized over the term
of the Note using the effective interest method.
As
additional consideration for the Note, the Company issued Lantern a three-year
detachable warrant expiring December 11, 2011 to purchase up to 200,000 shares
of its common stock at an exercise price of $0.30 per share (the “Warrant”)
which was calculated to have a fair market value of $1,651 at the time of
issuance. The Company used the Black-Scholes-Merton pricing model as a method
for determining the estimated fair value of the warrants issued. The following
assumptions were used to estimate the fair market value of the warrant: risk
free interest rate of 1.1%; expected life of 1.5 years; no expected dividends,
and volatility of 74%. The expected life of the Warrant was
determined using management’s estimate. The risk-free interest rate
is based on the Federal Reserve Board’s constant maturities of U.S. Treasury
bond obligations with terms comparable to the expected life of the warrants
valued. The Company’s volatility is based on the historical volatility of
publicly traded companies with similar business and risk characteristics of the
Company. The expense for the warrant was recorded as a discount to
the Note and was recognized over the term of the Note using the effective
interest method.
In
addition to the above conditions, under the original agreement date of December
12, 2008, the Note would have been convertible at the option of Lantern at any
time into shares of the Company's common stock at a price equal to 75% of the
lowest bid price of the 5 days preceding conversion of the Note. On
December 12, 2008, this conversion feature would have converted into 3,333,333
common shares of the Company’s stock at a conversion price of $.075 per
share. Due to a lack of a floor price for the conversion option, the
conversion feature and warrant of the Note are considered embedded derivatives
requiring bifurcation from the debt host and they are included in the balance
sheet as liabilities at fair value. The embedded derivatives are
revalued at each balance sheet date and marked to fair value with the
corresponding adjustment recognized as “gain or loss on warrants and
derivatives” in the statement of operations. The fair value of
the derivatives embedded in the note on December 12, 2008 was
$125,932.
F-23
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
On May
14, 2009, the Note was amended. The revisions to the promissory note
eliminated the optional conversion feature. As consideration for the elimination
of the conversion feature, the Company issued Lantern Advisers a warrant to
purchase up to 300,000 shares of Webdigs common stock at $0.01 per share on or
before December 12, 2009. Using the Black-Scholes pricing model,
these warrants had a fair value of $138,010 which was immediately recorded as
interest expense. Other than as described above, there were no other
changes to the terms of the promissory note.
In
connection with the above-described revision to the promissory note, the Company
paid Lantern Advisers $100,000 in principal under the promissory note on May 14,
2009, thereby reducing the outstanding principal amount to $150,000. This
remaining $150,000 in principal was repaid to Lantern Advisers on September 30,
2009.
Because
the optional conversion feature was eliminated from the promissory note as part
of the May 14, 2009 loan modification, the derivative elements of this debt
transaction are no longer considered to be a financial
derivative. Therefore, the fair value of the conversion feature and
embedded warrant as of May 14, 2009, which had a total liability value of
$191,291, was reclassified to additional paid in capital during the three month
period ended July 31, 2009.
In total,
the Company recorded $311,340 in interest expense and $63,708 in loss on the
change in fair value of derivatives from the note for the year ended October 31,
2009.
The
following table summarizes the convertible note for the year ended October 31,
2009:
|
Original
gross proceeds received December 12, 2008
|
$ | 250,000 | ||
|
Less:
Debt discount arising from issuance of common stock
|
(20,000 | ) | ||
|
Net
proceeds prior to paying transaction costs
|
230,000 | |||
|
Less:
Fair value assigned to conversion feature and detachable
warrants
|
(127,583 | ) | ||
|
Net
balance on December 12, 2008
|
102,417 | |||
|
Amortization
of debt discount for warrants, common stock, and conversion
feature
|
147,583 | |||
|
Principal
payment in May 2009
|
(100,000 | ) | ||
|
Principal
payment in September 2009
|
(150,000 | ) | ||
|
Balance
on October 31, 2009
|
$ | - |
F-24
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
|
9
|
FAIR
VALUE MEASUREMENT
|
Effective
November 1, 2008, the Company adopted the methods of measuring fair value
described in ASC 820, Fair Value Measurements and Disclosures. As
defined in ASC 820, value is based on the prices 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. In order to increase consistency
and comparability in fair value measurements, ASC 820 establishes a three-tier
fair value hierarchy that prioritizes the inputs used to measure fair
value. These tiers include: Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined as inputs other than
quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs for which little or no
market data exists, therefore requiring an entity to develop its own
assumptions.
For the
year ended October 31, 2009, using level 2 inputs, the Company adjusted its
derivative liabilities throughout the fiscal year and recorded a loss of $63,708
for changes in fair value to the derivatives and warrants in the consolidated
statement of operations. There were no outstanding derivatives
balances at October 31, 2009.
|
10
|
INCOME
TAXES
|
The
Company accounts for income taxes taking into account deferred tax assets
and liabilities which represent the future tax consequences of the
differences between financial statement carrying amounts of assets and
liabilities versus the tax basis of assets and liabilities. Under
this method, deferred tax assets are recognized for deductible temporary
differences, and operating loss and tax credit carryforwards. Deferred
liabilities are recognized for taxable temporary differences. 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. The impact of tax rate changes on deferred tax assets and
liabilities is recognized in the year the change is enacted.
F-25
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
The
provision (benefit) for income taxes consists of the following for the years
ended October 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Current
|
$ | - | $ | - | ||||
|
Deferred
|
(370,000 | ) | (755,000 | ) | ||||
|
Subtotal
|
(370,000 | ) | (755,000 | ) | ||||
|
Valuation
allowance
|
370,000 | 755,000 | ||||||
|
Provision
for Income taxes
|
$ | - | $ | - | ||||
The
provision for income taxes varies from the statutory rate applied to the total
loss as follows
for the years ended October 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Federal
income tax benefit at statutory rate (34%)
|
$ | (369,000 | ) | $ | (710,000 | ) | ||
|
State
tax benefit, net of federal
|
(65,000 | ) | (125,000 | ) | ||||
|
Nondeductible
expenses
|
64,000 | 80,000 | ||||||
|
Current
valuation allowance
|
370,000 | 755,000 | ||||||
|
Provision
for income taxes
|
$ | - | $ | - | ||||
F-26
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Significant
components of the Company’s estimated deferred tax balances consist of the
following at October 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Deferred
tax assets (liabilities)
|
||||||||
|
Net
operating loss carryforwards
|
$ | 1,076,000 | 755,000 | |||||
|
Accrued
expenses
|
35,000 | 56,000 | ||||||
|
Share-based
compensation
|
33,000 | 18,000 | ||||||
|
Other
|
- | 1,000 | ||||||
|
Depreciation
|
2,000 | (1,000 | ) | |||||
|
Amortization
|
19,000 | (34,000 | ) | |||||
|
Net
deferred tax assets
|
1,165,000 | 795,000 | ||||||
|
Valuation
allowance
|
(1,165,000 | ) | (795,000 | ) | ||||
|
Net
deferred tax assets
|
$ | - | $ | - | ||||
Valuation
allowances of $1,165,000 and $755,000 have been provided for deferred income tax
assets for which realization is uncertain as of October 31, 2009 and
2008.
The
Company has a total net operating loss carryforward of approximately $2,690,000
which expires beginning in 2028 through 2029. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences will become deductible. The Company
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this
assessment. The Company has recorded a full valuation allowance
against its net deferred tax assets because it is not currently able to conclude
that it is more likely than not that these assets will be
realized. The amount of deferred tax assets considered to be
realizable could be increased in the near term if estimates of future taxable
income during the carryforward period are increased.
Under the
Internal Revenue Code Section 382 (IRC 382), certain stock transactions which
significantly change ownership, including the sale of stock to new investors,
the exercise of options to purchase stock, or other transactions between
shareholders could limit the amount
of net
operating loss carryforwards that may be utilized on an annual basis to offset
taxable income in future periods.
The
Company had no uncertain tax positions as of October 31, 2009 and
2008.
F-27
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
The
Company did not have any material unrecognized tax benefits as of October
31, 2009 and 2008. The Company recognizes potential accrued interest and
penalties related to unrecognized
tax benefits as a component of income tax expense. To the extent interest and
penalties are not assessed with respect to uncertain tax positions, amounts
accrued will be reduced and reflected as a reduction of the overall income tax
provision. The Company recorded no interest and penalties during the years
ended October 31, 2009 and 2008 and had no accrued interest and
penalties as of October 31, 2009 and 2008. The Company is subject to U.S.
federal tax examinations by tax authorities for all tax years since
inception (May 1, 2007). The Company is open to state tax audits until the
applicable statute of limitations expires.
|
11
|
SHARE-BASED
COMPENSATION
|
Stock
Options
In May
2008, the Board of Directors approved the issuance of incentive stock
options totaling 600,000 shares to its non-employee directors.
The exercise price of the options to purchase common stock was at
the fair market value of such shares on the date of the grant. Options
generally become exercisable ratably on the anniversary of the date of the grant
over a period of up to 2 years. There are no vesting provisions
tied to performance conditions for any outstanding options. Vesting
for all outstanding options is based solely on continued service as a
director of the Company and vest one-half on the grant date and one-quarter on
each of the next two yearly anniversaries of the grant. Options to
purchase shares expire not later than five years after the grant of the
option. An additional 200,000 options were granted to a new director
on October 31, 2009 under the same 2 year vesting period.
In
October 2009, the Board of Directors approved the issuance of 200,000
non-qualified stock options to an employee of the Company. The
options were issued on October 31, 2009 and shall vest annually (50,000 options
each) on each of the four anniversary dates of the granting of the
options. The exercise price of the shares purchased under these
options shall be $0.25 per share. The options will expire five years
after the original grant date.
The
Company recognizes compensation expense for the stock options over the requisite
service period for vesting of the award. Total stock-option based
compensation expense included in the Company's consolidated statements of
operations for the years ended October 31, 2009 and 2008 was $25,738 and $46,237
respectively. This expense is included in general and
administrative expense. The compensation expense had less than a
$0.01 per share impact on the basic loss per common share for the year
ended October 31, 2009. As of October 31, 2009,
the Company has $20,271 of unrecognized compensation expense related to the
outstanding stock options, which will be recognized over a weighted average
period of 1.35 years.
F-28
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
The fair
value of each option grant was estimated as of the date of the grant using the
Black-Scholes pricing model. The resulting compensation expense is
amortized on a straight line basis over the vesting period of the
grant. The expected term of the options granted is determined
utilizing an average of public company proxies with similar grants as the
Company
does not have sufficient option exercise history from its employees/directors.
Likewise, as the Company has only limited public trading history, the expected
volatility rate used is also determined from an average of public company
proxies in the same industry and business operations as the
Company. The risk-free interest rate is based on US Treasury yield
curve in effect at the time of the grant.
Expected
pre-vesting option forfeitures are estimated to be zero based on the small
population of the individuals who have options, and the nature of the positions
held by those individuals.
The
assumptions used in the Black-Scholes-Merton model and the weighted average fair
value of options granted during the years ended October 31, 2009 and 2008 are
set forth in the table below:
|
2009
|
2008
|
|||||||
|
Expected
term
|
2.8
- 3.6 years
|
2.9
years
|
||||||
|
Expected
volatility
|
74.0 | % | 74.0 | % | ||||
|
Risk-free
interest rate
|
2.4 - 3.1 | % | 3.1 | % | ||||
|
Dividend
yield
|
- | - | ||||||
|
Weighted-average
fair value of options granted
|
$ | 0.05 | $ | 0.12 | ||||
The
following is a summary of stock option activity for the year ended October 31,
2009:
|
|
Number of
options
|
Weighted
average
exercise
price
|
Aggregate
intrinsic
value
|
Weighted
average
remaining
contractual
term (years)
|
||||||||||||
|
Outstanding
at October 31, 2008
|
600,000 | $ | 0.25 | $ | — | 3.5 | ||||||||||
|
Granted
|
400,000 | 0.25 | — | 5.0 | ||||||||||||
|
Exercised
|
— | — | — | — | ||||||||||||
|
Forfeited
or expired
|
— | — | — | — | ||||||||||||
|
Outstanding
at October 31, 2009
|
1,000,000 | $ | 0.25 | $ | 0.00 | 4.1 | ||||||||||
|
Exercisable
at October 31, 2009
|
600,000 | $ | 0.25 | $ | 0.00 | 3.75 | ||||||||||
F-29
WEBDIGS,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
The
aggregate intrinsic value in the table above represents the difference between
the closing stock price on October 31, 2009 and the exercise price, multiplied
by the number of in-the-money options that would have been received by the
option holders had all option holders exercised their options on October 31,
2009. There were no options exercised during the year ended October
31, 2009.
Restricted Stock
Compensation
For the
period from inception (May 1, 2007) to October 31, 2007, the Company awarded
8,610,347 of time-based restricted common stock (non-vested shares),
respectively, to certain officers and employees of the Company. As a
condition of the award, the officers and employees must be employed with the
Company in order to continue to vest in their shares over a two year
period. The fair value of the non-vested shares is equal to the fair
market value on the date of grant and is amortized ratably over the vesting
period. No additional awards were made during the year ended October
31, 2008.
In June
2009, the Company granted a new employee 50,000 shares of time-based restricted
common stock. As a condition of the award, the employee must be
employed with the Company throughout the six month vesting period ending in
December, 2009. The total award was valued at $12,500 (or $0.25 per
share).
The
Company recorded $166,767 and $166,908 of stock compensation expense in the
consolidated statement of operations related to vested shares (restricted stock)
for the years ended October 31, 2009 and 2008, respectively.
A summary
of the status of non-vested shares and changes as of October 31, 2009 is set
forth below:
F-30
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
|
Restricted
|
Unearned
|
|||||||
|
Shares
|
Compensation
|
|||||||
|
Outstanding,
October 31, 2007
|
4,686,904 | $ | 365,398 | |||||
|
Granted
|
- | - | ||||||
|
Vested
|
(2,392,762 | ) | (166,908 | ) | ||||
|
Forfeited/canceled
|
(353,329 | ) | - | |||||
|
Outstanding,
October 31, 2008
|
1,940,813 | 198,490 | ||||||
|
Granted
|
50,000 | 12,500 | ||||||
|
Vested
|
(1,737,343 | ) | (166,767 | ) | ||||
|
Forfeited/canceled
|
(240,970 | ) | (41,098 | ) | ||||
|
Outstanding,
October 31, 2009
|
12,500 | $ | 3,125 | |||||
The
remaining 12,500 shares and associated unearned compensation of $3,125 will all
vest in the first quarter fiscal 2010.
F-31
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Stock
Warrants
The
Company issued 300,000 warrants to a third party as consideration for the
elimination of the conversion feature in the promissory note agreement entered
into on December 12, 2008 (see Note 8). The warrant holders have the right to
purchase up to 300,000 shares of Webdigs common stock at $0.01 per share on or
before December 12, 2009.
The
following is a summary of stock warrant activity for the year ended October 31,
2009.
|
Weighted
|
||||||||||||||||
|
Average
|
||||||||||||||||
|
Weighted
|
Aggregate
|
Remaining
|
||||||||||||||
|
Number of
|
Average
|
Intrinsic
|
Contractual
|
|||||||||||||
|
Warrants
|
Exercise Price
|
Value
|
Term (years)
|
|||||||||||||
|
Outstanding
at October 31, 2008
|
- | - | ||||||||||||||
|
Granted
|
500,000 | $ | 0.13 | |||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeited
or expired
|
- | - | ||||||||||||||
|
Outstanding
at October 31, 2009
|
500,000 | $ | 0.13 | $ | 36,000 | 0.925 | ||||||||||
|
Exercisable
at October 31, 2009
|
500,000 | $ | 0.13 | $ | 36,000 | 0.925 | ||||||||||
|
12
|
SHAREHOLDERS
EQUITY
|
2009
Activity
On
September 30, 2009, the Company issued 44,444 of common shares to a third party
for $4,889 or $0.11 per share, the trading price of the Company’s stock at that
time, for advertising services performed for the Company.
F-32
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
On
September 29, 2009, the Company’s Chairman and CEO converted $100,000 of a loan
he previously made to the Company for 909,091 common shares valued at $0.11 per
share per the terms of the note agreement. He was also granted 150,000 common
shares at a per share price of $0.11 for a total value of $16,500 as
compensation for the personal guarantee he provided for Webdigs on the $250,000
convertible note agreement the Company entered into on December 12, 2008 (see
Note 8).
On July
7, 2009, the Company sold 100,000 common shares to a third-party accredited
investor for $10,000 ($0.10 per share) in cash proceeds.
On June
12, 2009, the Company issued 50,000 restricted common shares to an employee of
the Company at a value of $12,500 or $0.25 per share, the trading value of the
Company’s stock at that time, as part of their employment agreement. These
shares have a 6 month vesting term (see Note 11).
On June
12, 2009, the Company also issued 7,102,500 shares to Iggys House Inc. for the
acquisition of all of its assets for a total value of $1,775,625 ($0.25 per
share). The Company also issued 160,000 shares to a securities brokerage for
services provided in connection with the Iggys House asset acquisition for a
value of $40,000 ($0.25 per share).
On June
12, 2009, in connection with the Iggy’s asset purchase, the Company sold 375,000
common shares of stock to accredited 3rd party
and affiliated investors for $150,000 ($0.40 per share). For every share of
stock issued, 2.2 shares of Webdigs stock received by Iggys House were
transferred to these investors for a net private placement price of $0.125 per
share. Included in the 375,000 shares purchased, the Company’s Chairman and CEO
purchased 43,750 shares and an outside director an additional 43,750
shares.
On May
18, 2009, the Company’s CEO converted $50,000 of his accrued but unpaid
compensation owed to him by the Company into shares of common stock at a
per-share price of $0.35, receiving 142,857 shares. The Company’s CFO also
converted $5,000 of his accrued but unpaid compensation into shares of common
stock at the same price, receiving 14,286 shares.
On May
14, 2009, the Company issued 1,750,000 common shares in a private placement
transaction all at a per-share price of $0.10. Of these shares, the CEO
purchased 500,000 shares for $50,000 in cash proceeds. Two other unrelated third
party accredited investors participated in the transaction and together received
the remaining 1,250,000 shares sold in
the
transaction for cash proceeds of $125,000.
On May
13, 2009, the Company issued 100,000 common shares to a third-party accredited
investor at a value of $47,000 ($0.47 per share). These shares were issued in
connection with the acquisition of the MLSDirect.com business.
On
January 12, 2009, the Company sold 2,000 common shares to a third-party
accredited investor for $500 ($0.25 per share) in cash proceeds.
F-33
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
On
January 2, 2009, the Company issued 200,000 common shares to two consultants at
a value of $80,000 ($0.40 per share), the trading value of the Company’s stock
at that time, for prepaid consulting services.
On
December 12, 2008, the Company issued 200,000 common shares to an investment
company as issuance costs in connection with the $250,000 convertible note
payable at a value of $20,000 or $0.10 per share. The $0.10 represents the most
recent price received for cash sales of shares which occurred prior to December
12, 2008.
On
November 15, 2008, the Company issued 28,800 common shares to a consultant for a
total value of $7,000 ($0.243 per share), for consulting services performed for
the Company.
2008
Activity
During
October 2008, the Company issued 1,200 common shares for $300 ($0.25 per share,
fair value of the Company’s common stock at that time) in consulting services
performed for the Company.
On August
18, 2008, the Company sold 260,000 common shares to a third-party accredited
investor for $46,800 ($0.18 per share) in cash proceeds.
During
the period from August 1, 2008 to October 31, 2008, the Company sold 92,000
common shares to accredited investors for $23,000 ($0.25 per share) in cash
proceeds. During that same period, the Company sold 500,000 common shares to a
third-party accredited investor for $48,859 net of legal costs ($0.10 per share)
in cash proceeds.
During
the period from May 1, 2008 to July 31, 2008, the Company sold 60,000 common
shares of common stock to accredited investors for $15,000 ($0.25 per share) in
cash proceeds.
During
the period from February 1, 2008 to April 30, 2008, the Company sold 2,230,000
shares of common stock to accredited investors for $557,500 ($0.25 per share) in
cash proceeds.
During
the period from November 1, 2007 to January 31, 2008, the Company sold 1,076,000
shares of common stock to accredited investors for $269,000 ($0.25 per share) in
cash proceeds.
|
13
|
RELATED
PARTY TRANSACTIONS
|
Accounts Payable – Minority
Stockholder
The
Company’s principal advertising agency/website developer was owed $562,858 and
$550,206 at October 31, 2009 and 2008, respectively. The two principals of this
advertising company are also minority stockholders in the Company – holding
approximately 1.6% of the Company’s outstanding shares at October 31, 2009. For
the years ended October 31, 2009 and 2008, the Company incurred $152,652 and
$606,674 in services and rent from this related party,
respectively.
F-34
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
Included
in the $152,652 and $606,674 are $42,000 and $36,000, respectively, in office
rent expense for the Company for the years ended October 31, 2009 and 2008. The
Company informally rents office space for its headquarters and real estate
operation in Minneapolis from the related party on a month to month
basis.
Due to
Officers
As of
October 31, 2009 and 2008, the Company was indebted to its officers for amounts
totaling $58,606 and $27,277, respectively, for business expenses and consulting
services. All of the indebtedness represents non-interest bearing payables due
on demand.
Convertible Note Payable –
Officer/Stockholder
During
the fiscal year ended October 31, 2009, the Company borrowed a total of $273,000
from its CEO at an annual interest rate of 12%. The note is convertible into the
Company’s common stock at $0.11 per share at any time. There was no beneficial
conversion feature because the Company’s stock price was trading at $0.11 at the
time. The CEO converted $100,000 of the note prior to year end and thus the
remaining balance was $173,000 at October 31, 2009. For the fiscal year ended
October 31, 2009, the Company incurred $1,416 of interest expense in connection
with this note.
|
14
|
BASIC
AND DILUTED EARNINGS PER SHARE
|
The
Company computes earnings per share under 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 by the weighted average number of shares of common stock outstanding.
Diluted earnings per share are computed by dividing net income by the weighted
average number of common stock and common stock equivalents
outstanding.
The
following table provides a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings per share for the years ended
October 31, 2009 and 2008, respectively.
F-35
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
|
|
2009
|
2008
|
||||||
|
Basic
earnings per share calculation:
|
||||||||
|
Net
loss from continuing operations
|
$ | (1,369,224 | ) | $ | (1,902,304 | ) | ||
|
Net
income (loss) from discontinued operations
|
284,409 | (187,928 | ) | |||||
|
Net
loss
|
$ | (1,084,815 | ) | $ | (2,090,232 | ) | ||
|
Weighted
average of common shares outstanding
|
26,584,547 | 21,071,802 | ||||||
|
Net
loss per share - basic
|
||||||||
|
Loss
from continuing operations
|
$ | (0.05 | ) | $ | (0.09 | ) | ||
|
Income
(loss) from discontinued operations
|
0.01 | (0.01 | ) | |||||
|
Net
loss per basic share
|
$ | (0.04 | ) | $ | (0.10 | ) | ||
|
Diluted
earnings per share calculation:
|
||||||||
|
Net
loss from continuing operations
|
$ | (1,369,224 | ) | $ | (1,902,304 | ) | ||
|
Net
income (loss) from discontinued operations
|
284,409 | (187,928 | ) | |||||
|
Net
loss
|
$ | (1,084,815 | ) | $ | (2,090,232 | ) | ||
|
Weighted
average of common shares outstanding
|
26,584,547 | 21,071,802 | ||||||
|
Stock
options (1)
|
- | - | ||||||
|
Stock
warrants (2)
|
- | - | ||||||
|
Convertible
notes payable - officer/stockholder (3)
|
- | - | ||||||
|
Diluted
weighted average common shares outstanding
|
26,584,547 | 21,071,802 | ||||||
|
Net
loss per common share - diluted
|
||||||||
|
Loss
from continuing operations
|
$ | (0.05 | ) | $ | (0.09 | ) | ||
|
Income
(loss) from discontinued operations
|
0.01 | (0.01 | ) | |||||
|
Net
loss per diluted share
|
$ | (0.04 | ) | $ | (0.10 | ) | ||
|
|
(1)
|
The
dilutive effect of stock options in the above table excludes 1,000,000 and
600,000 of underlying options for the years ended October 31, 2009 and
2008, respectively, as they would be anti-dilutive to our net loss for
those years.
|
|
|
(2)
|
The
dilutive effect of stock warrants in the above table excludes 500,000 and
zero of underlying warrants for the years ended October 31, 2009 and
2008, respectively, as they would be anti-dilutive to our net loss for
those years.
|
F-36
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2009 and 2008
|
|
(3)
|
The
dilutive effect of potential convertible notes equivalent to 1,572,727
shares for the year ended October 31, 2009 have been excluded as they
would be anti-dilutive to our net loss for the
year.
|
|
15
|
OPERATING
LEASE COMMITMENTS
|
The
Company conducts its Iggys House operations in a leased facility at 1121 East
Commercial Boulevard, Suite 47, Oakland Park, Florida, under an operating lease
on a month-to-month basis. Monthly base rent expense for this lease is $300 per
month. The Company maintains no other operating lease
commitments.
|
16
|
SUBSEQUENT
EVENTS
|
Loan from Related
Party
During
the period from November 1, 2009 to January 29, 2009 the Company’s Chairman and
Chief Executive Officer loaned the Company an additional $200,000, bringing the
total principal amount due him to $373,000. Interest on the loan is being
accrued at a simple interest at a rate of 1% per month. The CEO receives no
additional consideration for the loan.
The
Company has evaluated all subsequent events through January 29, 2010, the date
the financial statements were available to be issued.
F-37
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A. 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
design and operation of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities and
Exchange Act of 1934, as amended (the “Exchange Act”))) as of October 31, 2009
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer as
appropriate to allow timely decisions regarding required
disclosure.
Management’s Annual Report On Internal Control
Over Financial Reporting
Based on
this evaluation and taking into account that certain material weaknesses existed
as of October 31, 2009, our Chief Executive Officer and Chief Financial Officer
have each concluded that our disclosure controls and procedures were not
effective. As a result of this conclusion, the financial statements
for the period covered by this Annual Report on Form 10-K were prepared with
particular attention to the material weaknesses previously disclosed.
Notwithstanding the material weaknesses in internal controls that continue to
exist as of October 31, 2009, we have concluded that the financial statements
included in this Annual Report on Form 10-K present fairly, 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
(GAAP).
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
the supervision of, our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
|
•
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
|
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use of disposition of our assets that could have
a material effect on the financial
statements.
|
31
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Our
management assessed the effectiveness of our internal control over financial
reporting as of October 31, 2009. In making this assessment, our management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework.
A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of annual or interim financial statements will not be prevented or
detected. In connection with the assessment described above,
management has re-evaluated the control deficiencies identified in the prior
fiscal year.
Here is
an update to the control deficiencies identified last year.
|
(1)
|
Last
year, we identified the lack of an audit committee as a control
weakness. During the 12 months ended October 31, 2009, we
have created an audit committee comprised of two directors with prior
experience as Chief Financial Officers. One of the directors led the
finance team in an SEC Reporting entity; the other was CFO and Vice
Chairman in a privately held multi-national company with annual revenues
in excess of $70 billion. Our audit committee chair has been
involved in the annual year-end audit and reporting process. We
will further increase the role of the audit committee in our upcoming
fiscal year in 2010.
|
|
(2)
|
Last
year we recognized our small size and single person financial department
as a weakness that prohibited segregation of duties. In
September 2009, we added a second full-time professional accountant to the
accounting team. She has an undergraduate college degree and
prior experience in SEC reporting with a NYSE listed
company.
|
|
(3)
|
Last
year, there were numerous GAAP adjustments made to our year-end financial
statements. While we have improved this year, we have had some
adjustments made to our interim financials, particularly related to
accounting for financial derivatives and discontinued
operations. We have not had significant adjustments made at the
year-end for the fiscal year ended October 31, 2009 and will continue to
strive towards further improvements in the current
year.
|
Despite
the significant improvements in our control deficiencies as compared to last
year, we still conclude that, as of October 31, 2009, our internal control over
financial reporting was not effective based on the criteria in “Internal
Control-Integrated Framework” issued by COSO. We intend to further
improve our internal controls in our current fiscal year and add additional
measures to further mitigate our material internal control weaknesses as the
Company grows. Our audit committee will become more engaged in the
financial reporting process in the current fiscal year, and our new staff
accountant will help support the implementation of stronger internal
controls.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation
by the company’s registered public accounting firm pursuant to temporary rules
of the SEC to provide only management’s report in this annual
report.
Changes in Internal Control Over
Financial Reporting
Other
than the steps we have taken mentioned above, there were no additional changes
in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that occurred during the quarter ended October 31, 2009,
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. Management has concluded that the
material weaknesses in internal control as described in Item 9A of the Company’s
Form 10-K for the year ended October 31, 2009 have not been fully remediated.
32
ITEM
9B. OTHER INFORMATION
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors,
Executive Officers and Other Key Employees
Our Board
of Directors and management team includes:
|
Name
|
Age
|
Position(s)
|
Independent
Director
|
|||
|
Robert
A. Buntz, Jr.
|
58
|
Director
(Chairman), Chief Executive Officer and President
|
No
|
|||
|
Joseph
Fox
|
43
|
Director
|
No
|
|||
|
Robert
L. Lumpkins
|
65
|
Director
|
Yes
|
|||
|
Thomas
Meckey
|
33
|
Director,
Vice President of Operations
|
No
|
|||
|
Donald
Miller
|
69
|
Director
|
Yes
|
|||
|
Steven
Sjoblad
|
59
|
Director
|
Yes
|
|||
|
Edward
Wicker
|
50
|
Chief
Financial Officer
|
N/A
|
|||
Biographies
for the members of our Board of Directors and our management team are set forth
below:
Robert A. Buntz, Jr., has
served as a director of the Company, including Webdigs, LLC, since inception in
May 2007. Mr. Buntz has been an entrepreneur for more than 30 years and a real
estate broker for more than 25. In 1981, Mr. Buntz developed the award-winning
Bluefin Bay on Lake Superior, Tofte, Minnesota, and operated that resort until
2007. Among his achievements, Mr. Buntz’s development company donated the land,
time and funding to help create the North Shore Commercial Fishing Museum, and
Mr. Buntz created and developed one of the first rural affordable housing
projects, Tofte Homestead. From 1984 through 2006, and while he was
simultaneously operating Bluefin Bay, Mr. Buntz was the owner and operator of
Tofte Land Co., Inc., a real estate holding and brokerage firm. He now has more
than 25 years of hospitality experience as an owner-operator of destination
properties.
Mr. Buntz
has served on the board of directors of the Explore Minnesota Tourism Council
and the (Minnesota) Governor’s Tourism Advisory Committee for more than 15
years. Currently, Mr. Buntz is a board member and past-chair of the
board of the American Museum of Asmat Art. Mr. Buntz received the
(Minnesota) Governor’s Entrepreneurship Award from Governor Rudy Perpich and the
Outstanding Individual in Tourism Award from Governor Jesse
Ventura. He is a graduate of Grinnell College.
Joseph Fox was appointed as a
director of the Company on July 7, 2009. Back in the mid 1990s, Mr.
Fox identified the internet as a tool that would level the playing field for
consumers in the stock brokerage industry. He, along with brother
Avi, created Web Street Securities, a highly successful on-line investment
brokerage company. Web Street became a publicly traded company in
1999 before merging with E*Trade Financial Group in 2001. In 2005,
Mr. Fox’s desire to leverage the internet to empower consumers in their
financial decision making process resulted in the forming of Iggys House Realty,
Inc. (Iggys House and Buyside Realty), where he served as Chairman and Chief
Executive Officer. Iggy's goal was to capture the power of the
internet to facilitate consumers to manage their own real estate sales and
purchases, thereby saving themselves thousands of dollars on commissions on
their transactions. Iggys’ web-assisted real estate brokerage
operated in 38 states within 2 years of its startup.
33
Robert L. Lumpkins was
appointed as a director of the Company on October 25, 2007. Mr.
Lumpkins is currently the Chairman of the Board of The Mosaic Company, a
NYSE-listed crop nutrition business with revenues of $7 billion. Mr. Lumpkins
retired in the fall of 2006 as an executive and board member of Cargill
Incorporated, a global commodity trading and processing company with over $70
billion in revenues and 150,000 employees. He served in a variety of
financial and general management assignments during his 38 years with Cargill,
including Chief Financial Officer (1989-2005) and Vice Chairman
(1995-2006). He also serves as a director of Ecolab Inc., and as the
chairman of Black River Asset Management LLC (a $10 billion
fixed-income-oriented asset management company). He is a trustee of
Howard University in Washington, D.C. Mr. Lumpkins is a graduate of the
University of Notre Dame and the Stanford Graduate School of
Business.
Thomas Meckey was appointed
as a director of the Company on October 24, 2007. Mr. Meckey also
currently serves as the Vice President of Operations and was a co-founder of
Webdigs, LLC. Mr. Meckey has five years of experience in residential
real estate and finance. Mr. Meckey’s real estate and finance career
includes his founding of Home Equity Advisors, LLC in 2006, serving as a realtor
with Re/Max Results from 2004 to 2007, and serving as a loan officer with Wealth
Spring Mortgage from 2004 to 2006. Prior to that, Mr. Meckey worked
as a software consultant to Ben Nevis, Inc. (2002-2003), an account executive at
Adytum Software Co. (2000-2002), and as a consultant with JD Edwards ERP
Business Unit, which is a division of Ernst & Young, LLP
(1998-2000). Mr. Meckey is a graduate of the University of Pittsburgh
and holds a degree in Information Sciences.
Donald Miller was appointed
as a director of the Company on July 7, 2009. Mr. Miller worked
almost forty years at Schwan's Inc, primarily as CFO. During his
tenure, Schwan's grew from a small local home-delivery dairy service to a
multi-billion dollar consumer packaged goods giant. Throughout his
employment, he was involved in all of the acquisitions and divestitures of the
company. He currently serves as chairman of the finance
committee at Schwan's, as well as serving on the audit and risk
committees. He is also Chairman of the Board of Multiband Corp. In 2008,
Mr. Miller was appointed to the Board of Directors of FoodShacks,
Inc.
Steven Sjoblad was appointed
as a director of the Company on October 25, 2007. Steve Sjoblad has
more than 35 years of corporate strategy and marketing expertise. Mr.
Sjoblad spent 19 years building Fallon McElligott, one of the world’s preeminent
advertising agencies, where he guided global strategy and marketing programs for
industry leaders and has worked in virtually every consumer and
business-to-business category (1981-1999). From 2001 through 2003,
Mr. Sjoblad ran Global Consumer Services for Fair Isaac Corporation (NYSE: FIC),
originated the myFICO.com business and ran the Fair Isaac Marketing Services
business, transforming it into a “precision marketing
unit.” Additionally, he was a member of the Fair Isaac Executive
Committee and held the position of Chief Marketing Officer. From 2003
through 2006, Mr. Sjoblad worked as an independent business consultant. Since
2006, Mr. Sjoblad has served as the Chairman and Chief Executive Officer of
Captira Analytical, a software, data and analytics firm serving the criminal
justice vertical market based in Albany, NY. Mr. Sjoblad is also
Chairman of uBid.com (UBHI.OB), an online retailer, a board member of Schwan’s
Foods, a $3.6 billion international food concern, and a founder and board member
of Fluxion, LLC, a marketing automation concern.
Edward Wicker has served as
the Chief Financial Officer of the Company, including Webdigs, LLC, since
September 2007. Mr. Wicker provides a combination of large and small
company finance executive experience. Most recently, Mr. Wicker has
served as CFO of several start-up companies in the Twin Cities, including Talor
Building Systems (2005-2007), Michelina’s Inc. (2002), and Wireless Ronin
Technologies (2001-2002). Mr. Wicker also founded KMR Designs in
2002, which was a niche supplier of ultra high performance custom winter
accessories supplying people who worked and played outdoors for long periods at
below-zero temperatures. Prior to these positions, Mr. Wicker had a
long career at personal care products maker Coty, Inc., where he served in
several senior finance executive positions. His final ten years with
Coty were spent in Europe, where he served as VP of Finance at Spanish and UK
subsidiaries, as well as controller of Coty’s global operations
division. Prior to Europe, Mr. Wicker served as finance director of
Coty’s then sister company—Reckitt Benckiser US Consumer Products
Division. Prior to working at Reckitt, he began his career at Ecolab,
where he worked in internal audit and financial analyst
positions. Mr. Wicker holds undergraduate and MBA degrees from the
University of Minnesota’s Carlson school of management. Mr. Wicker is
a CPA.
34
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table sets forth the cash and non-cash compensation for the years
ended October 31, 2009 and 2008 which was awarded to or earned by (i) our Chief
Executive Officer during fiscal year 2009 and (ii) our other executive officers
(other than the Chief Executive Officer) who served the Company and who received
in excess of $100,000 in total compensation for a year (collectively, the “named
executive officers”).
|
All Other
|
||||||||||||||||||||||
|
Name and
|
Bonus
|
Stock
|
Comp-
|
|||||||||||||||||||
|
Principal Position
|
Year
|
Salary ($)
|
($)
|
Awards ($)
|
ensation ($)
|
Total ($)
|
||||||||||||||||
|
Robert
A. Buntz, Jr.,
|
2009
|
$ | 120,000 | (3) | - | $ | 16,500 | (4) | 1,775 | (7) | $ | 138,275 | ||||||||||
|
Chief
Executive
|
||||||||||||||||||||||
|
Officer
and President
|
||||||||||||||||||||||
|
(1)
|
2008
|
120,000 | - | - | 120,000 | |||||||||||||||||
|
Edward
P Wicker
|
2009
|
60,000 | (5) | - | 89,910 | (6) | - | 149,910 | ||||||||||||||
|
Chief
Financial
|
||||||||||||||||||||||
|
Officer
(2)
|
2008
|
58,000 | - | 99,090 | (6) | - | 157,090 | |||||||||||||||
|
(1)
|
Mr.
Buntz became our President and Chief Executive Officer on October 24,
2007. Prior to the merger, Mr. Buntz was
Managing Partner of Webdigs, LLC. Mr. Buntz is also the
Chairman of our Board of Directors.
|
|
|
|
(2)
|
Mr.
Wicker became Chief Financial Officer on October 24,
2007. Prior to the merger, Mr. Wicker acted as Chief Financial
Officer of Webdigs, LLC. Mr. Wicker also serves as Corporate
Secretary.
|
|
|
|
(3)
|
$50,000
of this amount was paid in the form of stock in lieu of cash
compensation, $52,000 was accrued for accounting purposes but not
paid, and $18,000 was paid in cash for a total of
$120,000.
|
|
(4)
|
Reflects
value of grant of 150,000 shares to Mr. Buntz in September 2009 as
compensation for his personal guarantee of repayment on $250,000
convertible promissory note.
|
|
(5)
|
$5,000
of this amount was paid in the form of stock in lieu of cash compensation,
$26,000 was accrued for accounting purposes but unpaid, and $29,000 was
paid as cash compensation for a total of $60,000.
|
|
(6)
|
Amounts
listed reflect the estimated fair value of the vested shares of a
restricted stock award of 1,304,598 shares granted on October 22,
2007. As of October 31, 2009, all 1,304,598 shares were
fully vested.
|
| (7) |
Mr. Buntz received a
commision of $1,775 for a real estate transaction of which he acted as the
principal agent.
|
Employment
Agreements with Executives and Key Personnel
We do not
currently have an employment agreement with Mr. Buntz. Nevertheless,
our wholly owned operating subsidiary, Webdigs, LLC, is party to a Members
Services Agreement with Mr. Buntz. In that agreement, Mr. Buntz has
agreed not to compete against Webdigs for a period of one year following any
termination of service, regardless of the reason for such termination, and has
also agreed to customary confidentiality and invention-assignment
provisions. The Member Services Agreement with Mr. Buntz provides
that Mr. Buntz be paid an annual salary of $120,000 for the year ended October
31, 2009. We anticipate no change in compensation for the current
fiscal year 2010 which began on November 1, 2009.
35
We have
also entered into a Member Services Agreements with Mr. Edward Wicker, our Chief
Financial Officer and Mr. Thomas Meckey, our Vice President of Operations
through our wholly owned operating subsidiary, Webdigs, LLC. In the
Member Services Agreements with Messrs. Wicker and Meckey, we agreed to pay each
of them an annual salary of $60,000, and each of Messrs. Wicker and Meckey
agreed not to compete against Webdigs for a period of one year following any
termination of service, regardless of the reason for such termination, and have
also agreed to customary confidentiality and invention-assignment
provisions. As of March, 2009, Mr. Meckey’s compensation was modified
from a salaried based pay to a commission based pay. Starting in
March 2009, he began receiving a percentage of the net revenue he generates for
the business as a real estate sales agent. We anticipate no change in
compensation for Mr. Meckey or Mr. Wicker for fiscal year 2010.
Currently,
the Company does not offer any executive bonus or incentive compensation plan
and there are no plans to put one in place for fiscal year 2010.
Outstanding
Equity Awards at Fiscal Year End
There
were no outstanding equity awards for the executives as of October 31,
2009.
Director
Compensation
Our
non-employee directors have elected to forego any cash compensation for
participating in Board of Directors and committee meetings telephonically until
such time as we become profitable over the course of an entire fiscal year, at
which time the Board of Directors may reconsider the structure of its director
compensation. In general, director compensation will be subject to review and
adjustment from time to time at the discretion of our Board of
Directors.
In May
2008, we granted options to our three non-employee directors (Messrs. Larson,
Sjoblad and Lumpkins) in connection with inducing them to join, and as a means
of inducing them to remain on our Board of Directors. Each of the
three directors received 200,000 stock options with an exercise price of $0.25
per share. The aggregate estimated fair value of these options was
$73,978. Each of the director’s options were vested 50% at the date the options
were granted (May 7, 2008) with the remaining rights scheduled to vest in two
equal annual installments on May 7, 2009 and 2010. The options will expire on
May 7, 2013.
In
October 2009, we granted options to another non-employee director; Donald
Miller. Mr. Miller was appointed as a director of the Company in July 2009, and
as a means to induce him to join our Board of Directors, he was granted 200,000
stock options with an exercise price of $0.25 per share. The estimated fair
value of these options was $8,321. 50% of the options were vested at
the date the options were granted (October 30, 2009), with the remaining rights
scheduled to vest in two equal installments on July 07, 2010 and
2011. The options will expire on October 30, 2013.
36
The
following table sets forth the compensation of our non-employee directors for
fiscal year 2009:
|
Fees
|
||||||||||||||||||||||||||||
|
Earned
|
Non-Equity
|
Nonqualified
|
||||||||||||||||||||||||||
|
or
Paid
|
Stock
|
Option
|
Incentive
Plan
|
Deferred
|
All
Other
|
|||||||||||||||||||||||
|
in
Cash
|
Awards
|
Awards
|
Compensation
|
Compensation
|
Compensation
|
Total
|
||||||||||||||||||||||
|
Name
|
($)
|
($)
|
($)(1)
|
($)
|
Earnings
|
($)
|
($)
|
|||||||||||||||||||||
|
Joseph
Fox
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Christopher
Larson
|
-
|
|
-
|
$ |
9,247
|
-
|
-
|
-
|
$ |
9,247
|
||||||||||||||||||
|
Robert
L. Lumpkins
|
-
|
-
|
$ |
6,165
|
-
|
-
|
-
|
$ |
6,165
|
|||||||||||||||||||
|
Donald
Miller
|
-
|
-
|
$ |
4,160
|
-
|
-
|
-
|
$ |
4,160
|
|||||||||||||||||||
|
Steven
Sjoblad
|
-
|
-
|
$ |
6,165
|
-
|
-
|
-
|
$ |
6,165
|
|||||||||||||||||||
|
(1)
|
Represents
the amount recognized for financial reporting purposes with respect to
2009 for stock options in accordance with
FAS 123R.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To our
knowledge, the table below identifies the beneficial ownership of:
|
|
·
|
each
Company director
|
|
|
·
|
each
executive officer of the Company
|
|
|
·
|
all
executive officers and directors of the Company as a group,
and
|
|
|
·
|
each
other beneficial holder (or group of holders) of five percent or more of
our common stock.
|
Each
person or entity included in the table below has sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them, except as indicated by footnote and subject to community property laws
where applicable. Percentage ownership is based on 33,396,719 shares of
common stock outstanding as of January 7, 2010.
|
Name
|
Shares Beneficially
Owned (1)
|
Percentage of
Outstanding
Shares (%)
|
||||
|
Robert A. Buntz,
Jr.
(2)
|
5,838,658
|
17.5
|
% | |||
|
Joseph Fox (3)
|
3,243,750
|
9.7
|
% | |||
|
Robert L.
Lumpkins
(4)
|
453,843
|
1.4
|
% | |||
|
Thomas Meckey
(5)
|
1,302,348
|
3.9
|
% | |||
|
Donald Miller (6)
|
300,000
|
*
|
||||
|
Steven Sjoblad
(7)
|
150,000
|
*
|
||||
|
Edward
Wicker (8)
|
1,355,634
|
4.1
|
% | |||
|
All
current executive officers and directors
as a group
(seven persons) (9)
|
12,644,233
|
37.9
|
% | |||
|
Iggys House
Inc.(10)
|
2,077,500
|
6.2
|
% | |||
|
*
|
Less than
1%
|
|
(1)
|
Beneficial ownership
is determined in accordance with the applicable rules of the SEC. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to
options or warrants (or similar purchase rights) held by that person that
are presently exercisable, or will become exercisable within 60 days
hereafter, are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other
person.
|
37
|
(2)
|
Mr.
Buntz is a director of the Company and the Company’s Chief Executive
Officer and President.
|
|
(3)
|
Mr.
Fox is a non-employee director of the Company. Of those shares
set forth in the table, 3,200,000 were issued in the name of Iggys House
Inc but are beneficially owned by Mr. Fox and his brother Mr. Avi
Fox.
|
|
(4)
|
Mr.
Lumpkins is a non-employee director of the Company. Of those shares set
forth on the table, 150,000 shares are issuable upon exercise of vested
options to purchase common stock. In addition, 303,843 outstanding common
shares are held jointly with Mr. Lumpkins’
spouse.
|
|
(5)
|
Mr.
Meckey is a director of the Company, and also serves as Vice President of
Operations.
|
|
(6)
|
Mr.
Miller is a non-employee director of the Company. Of those
shares set forth on the table, 100,000 shares are issuable upon exercise
of vested options to purchase common
stock.
|
|
(7)
|
Mr.
Sjoblad is a non-employee director of the Company. Of those shares set
forth on the table, 150,000 shares are issuable upon exercise of vested
options to purchase common stock.
|
|
(8)
|
Mr.
Wicker is the Company’s Chief Financial
Officer.
|
|
(9)
|
Includes
Messrs. Buntz, Fox, Lumpkins, Meckey, Miller, Sjoblad and
Wicker.
|
|
(10)
|
The
Company issued 7,102,500 shares on June 12, 2009 to acquire substantially
all assets of Iggys House Inc. Of the 7,102,500 shares issued, 3,200,000
are beneficially owned by Mr. Fox.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; DIRECTOR
INDEPENDENCE
Transactions
with Related Persons
Convertible
Note Payable – Officer/Stockholder
The
Company’s CEO has agreed to loan the Company money to fund working capital.
Under terms of the agreement, the Company pays interest on funds borrowed at 12%
annual rate. The note is convertible into the Company’s common stock at $0.11
per share, the Company’s stock price at the time the terms of the note were
agreed with the board of Directors. In total, the CEO has loaned $473,000 to the
Company under this agreement of which he has converted $100,000 into shares of
the Company’s common stock. As of January 29, 2009 the principal amount due the
CEO is $373,000.
Transactions
with Promoters
None.
Director
Independence
The Board
of Directors is comprised of one-half “independent” directors as
defined in Rule 4200(a)(15) of the NASDAQ Stock Market. The independent
directors are identified by name in the chart that appears in the “Management
and Board of Directors” section of this filing.
Our Board
of Directors has an Audit Committee consisting solely of members who are
independent as defined in Rule 4200(a)(15) of the Marketplace Rules of the
NASDAQ Stock Market. In addition, each member of the Audit Committee is
independent as defined in Exchange Act Rule 10A-3, a non-employee director under
the rules of the SEC, and an outside director under the rules of the Internal
Revenue Service. During the fiscal year ended October 31, 2009, the Board of
Directors created a governance structure consisting of three board committees
and the naming of a lead director. The three board committees are governance,
audit and compensation. The lead director is Mr. Steven Sjoblad. Mr.
Sjoblad convenes conversations amongst independent directors at a minimum on a
quarterly basis.
38
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Aggregate
fees billed by our principal independent registered public accounting firm for
audits of the financial statements for the fiscal years indicated:
|
2009
|
2008
|
|||||||
|
Audit
fees
|
$ | 39,117 | $ | 59,230 | ||||
|
Audit
related fees
|
28,590 | 19,870 | ||||||
|
Tax
fees
|
16,115 | 18,985 | ||||||
|
All
other fees
|
- | - | ||||||
|
Total
|
$ | 83,822 | $ | 98,085 | ||||
Audit
Fees. The fees identified under this caption were for
professional services rendered by Moquist Thorvilson Kaufmann Kennedy &
Pieper LLC (MTK) for fiscal years 2009 and 2008 in connection with the audit of
our annual financial statements. The amounts also include fees for
services that are normally provided by the independent public registered
accounting firm in connection with statutory and regulatory filings and
engagements for the years identified.
Audit-Related
Fees. The fees identified under this caption were for
assurance and related services that were related to the review of our financial
statements included in our quarterly reports on Form 10-Q and were not reported
under the caption “Audit Fees.” This category may include fees related to the
performance of audits and attestation services not required by statute or
regulations, and accounting consultations about the application of generally
accepted accounting principles to proposed transactions.
Tax Fees. The fees
identified under this caption were for tax compliance, tax planning, tax advice
and corporate tax services. Corporate tax services encompass a
variety of permissible services, including technical tax advice related to tax
matters; assistance with withholding-tax matters; assistance with state and
local taxes; preparation of reports to comply with local tax authority transfer
pricing documentation requirements; and assistance with tax audits.
Approval
Policy. Our entire Board of Directors, acting as the Audit
Committee, approves in advance all services provided by our independent
registered public accounting firm. All engagements of our independent
registered public accounting firm in fiscal years 2009 and 2008 were
pre-approved by the Board of Directors.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial
Statements (Financial Statements are included in ITEM 8, Financial Statements
and Supplementary Data).
|
Description
|
Page
|
|||
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|||
|
Consolidated
Balance Sheets
|
F-2
|
|||
|
Consolidated
Statements of Operations
|
F-4
|
|||
|
Consolidated
Statement of Stockholders’
Equity (Deficit)
|
F-5
|
|||
|
Consolidated
Statements of Cash Flows
|
F-6
|
|||
|
Notes
to Consolidated Financial Statements
|
F-8
|
|||
39
|
3.1
|
Amended
and Restated Certificate of Incorporation of Webdigs, Inc.
(originally
submitted and filed under the Company’s prior name, “Select Video, Inc.”)
(1)
|
|
|
3.2
|
Amendment
to Amended and Restated Certificate of Incorporation of Webdigs, Inc.
(originally submitted and filed under the Company’s prior name, “Select
Video, Inc.”) (filed with the Minnesota Secretary of State on October 23,
2007) (1)
|
|
|
3.3
|
Bylaws
of Webdigs, Inc. (1)
|
|
|
4
|
Form
of Specimen Stock Certificate (1)
|
|
|
10.1
|
Webdigs,
Inc. 2007 Restricted Stock Plan (1)
|
|
|
10.2
|
Form
of Webdigs, LLC Member Services Agreements (1)
|
|
|
10.3
|
Member
Services Agreement with Robert A. Buntz, Jr., dated May 1, 2007
(2)
|
|
|
10.4
|
Member
Services Agreement with Thomas Meckey, dated October 22, 2007
(2)
|
|
|
10.5
|
Member
Services Agreement with Edward Wicker, dated October 22, 2007
(2)
|
|
|
10.6
|
Term
Promissory Note dated December 12, 2008 (in principal amount of $250,000,
issued in favor of Lantern Advisers, LLC) (3)
|
|
|
10.7
|
Pledge
Agreement dated December 12, 2008 (entered into in connection with Term
Promissory Note dated December 12, 2008) (3)
|
|
|
10.8
|
Marketplace
Home Mortgage-Webdigs, LLC Member Control Agreement dated August 1, 2008
(3)
|
|
|
10.9
|
Amendment
to Term Promissory Note with Lantern Advisers, LLC, dated May 14, 2009
*
|
|
|
10.10
|
Warrant
to Purchase Shares of Common Stock issued to Lantern Advisers, LLC, dated
May 14, 2009 *
|
|
|
10.11
|
Asset
Purchase Agreement with Iggy’s House dated June 12, 2009
*
|
|
|
10.12
|
Loan Agreement between Webdigs, Inc. and Robert Buntz, Jr. dated October 9, 2009 | |
|
21
|
Subsidiaries
of Webdigs, Inc. *
|
|
|
31.1
|
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*
|
|
|
31.2
|
Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*
|
|
|
32
|
Certification
of CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
|
(1) Exhibits
are incorporated by reference to the corresponding exhibit number filed as part
of the registrant’s original registration statement on Form 10, filed on June
20, 2008.
(2) Exhibits
are incorporated by reference to the corresponding exhibit number filed as part
of Amendment No. 1 to the registrant’s registration statement on Form 10, filed
on July 31, 2008.
(3) Exhibits
are incorporated by reference to the corresponding exhibit filed as part of the
registrant’s Annual Report on Form 10-K for the period ended October 31, 2008,
filed on February 13, 2009.
*
Filed
electronically herewith.
40