VERUS INTERNATIONAL, INC. - Quarter Report: 2010 April (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended April 30, 2010
OR
¨ TRANSITION
REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _______ to _______
Commission
File Number 0-53359
WEBDIGS,
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
11-3820796
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification
No.)
|
3433 West
Broadway St, NE, Suite 501, Minneapolis, MN
(Address
of Principal Executive Offices)
(612)
767-3854
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed from last
report)
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 such filing requirements for the past 90
days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 ¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
June 14, 2010 there were 33,396,719 shares of the issuer’s common stock, $0.001
par value, outstanding.
Table of
Contents
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Page
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PART
I – FINANCIAL INFORMATION
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Item
1.
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Consolidated
Financial Statements
|
1
|
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
2
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|
Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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10
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Item
4.
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Controls
and Procedures
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10
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PART
II – OTHER INFORMATION
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11
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Item
1.
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Legal
Proceedings
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11
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Item
1A.
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Risk
Factors
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11
|
|
Item
2.
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Unregistered
Sales of Equity Securities
|
11
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|
Item
3.
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Defaults
Upon Senior Securities
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11
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Item
4.
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Submission
of matters to a Vote of Security Holders
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11
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Item
5.
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Other
Information
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11
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Item
6.
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Exhibits
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12
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SIGNATURES
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12
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EXHIBIT
INDEX
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13
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PART
I – FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements.
WEBDIGS,
INC.
CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
FOR
THE THREE AND SIX MONTH
PERIODS
ENDED APRIL 30, 2010 AND 2009
1
WEBDIGS,
INC.
TABLE
OF CONTENTS
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PAGE
|
|
|
Consolidated
Financial Statements:
|
|
|
Consolidated
Balance Sheets
|
F-2
|
|
Consolidated
Statements of Operations
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F-4
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Consolidated
Statements of Cash Flows
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F-5
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Notes
to Consolidated Financial Statements
|
F-7
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F –
1
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
April 30, 2010
(Unaudited)
|
October 31, 2009
(Audited)
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 30,377 | $ | 36,023 | ||||
|
Commissons
and fees receivable
|
16,949 | 9,449 | ||||||
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Prepaid
expenses and deposits
|
8,516 | 10,847 | ||||||
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Other
current assets
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20,984 | 10,284 | ||||||
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Total
current assets
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76,826 | 66,603 | ||||||
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Office
equipment and fixtures, net
|
19,513 | 30,678 | ||||||
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Intangible
assets, net
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1,687,278 | 2,103,243 | ||||||
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Total
assets
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$ | 1,783,617 | $ | 2,200,524 | ||||
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
F
--2
WEBDIGS,
INC.
CONSOLIDATED
BALANCE SHEETS (continued)
(Unaudited)
|
April 30, 2010
(Unaudited)
|
October 31, 2009
(Audited)
|
|||||||
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
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Current
liabilities:
|
||||||||
|
Current
portion of capital lease obligations
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$ | 4,395 | $ | 4,197 | ||||
|
Accounts
payable
|
162,189 | 259,064 | ||||||
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Accounts
payable - minority stockholder
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555,871 | 562,858 | ||||||
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Due
to officers
|
10,610 | 58,606 | ||||||
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Convertible
notes payable - officer/stockholder
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477,000 | 173,000 | ||||||
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Accrued
expenses:
|
||||||||
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Professional
fees
|
19,500 | 39,000 | ||||||
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Payroll
and commissions
|
174,688 | 53,207 | ||||||
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Other
liabilities
|
51,529 | 20,174 | ||||||
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Total
current liabilities
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1,455,782 | 1,170,106 | ||||||
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Long
term liabilities:
|
||||||||
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Capital
lease obligation, less current portion
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3,985 | 6,233 | ||||||
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Total
liabilities
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1,459,767 | 1,176,339 | ||||||
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Stockholders'
equity:
|
||||||||
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Common
stock - $.001 par value; 125,000,000 shares authorized as
common
|
||||||||
|
stock
and an additional 125,000,000 shares designated as common
or
|
||||||||
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preferred
stock; 33,396,719 common shares issued and
|
||||||||
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outstanding
at April 30, 2010 and October 31, 2009
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33,397 | 33,397 | ||||||
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Treasury
stock - $.001 par value; 1,063,628 shares held in
|
||||||||
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treasury
as of April 30, 2010 and October 31, 2009
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(265,907 | ) | (265,907 | ) | ||||
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Additional
paid-in-capital
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5,046,377 | 5,034,458 | ||||||
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Accumulated
deficit
|
(4,490,017 | ) | (3,777,763 | ) | ||||
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Total
stockholders' equity
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323,850 | 1,024,185 | ||||||
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Total
liabilities and stockholders' equity
|
$ | 1,783,617 | $ | 2,200,524 | ||||
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
F
--3
WEBDIGS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
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April 30,
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April 30,
|
|||||||||||||||
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2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
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Revenue:
|
||||||||||||||||
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Gross
revenues
|
$ | 260,043 | $ | 91,166 | $ | 416,772 | $ | 179,192 | ||||||||
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Less:
customer rebates and third-party agent commissions
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(97,766 | ) | (31,925 | ) | (162,978 | ) | (81,324 | ) | ||||||||
|
Net
revenues
|
162,277 | 59,241 | 253,794 | 97,868 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
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Selling
|
103,352 | 132,993 | 243,113 | 250,900 | ||||||||||||
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General
and administrative
|
142,804 | 192,208 | 252,928 | 347,653 | ||||||||||||
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Amortization
of intangible assets
|
291,187 | 34,459 | 437,725 | 68,919 | ||||||||||||
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Total
operating expenses
|
537,343 | 359,660 | 933,766 | 667,472 | ||||||||||||
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Operating
loss from continuing operations
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(375,066 | ) | (300,419 | ) | (679,972 | ) | (569,604 | ) | ||||||||
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Other
income (expense):
|
||||||||||||||||
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Equity
in income from Marketplace Home Mortgage
|
||||||||||||||||
|
Webdigs,
LLC
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- | (68 | ) | - | 18,785 | |||||||||||
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Interest
expense
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(17,520 | ) | (55,812 | ) | (32,282 | ) | (92,854 | ) | ||||||||
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Loss
on change in fair value of derivatives and warrants
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- | (38,154 | ) | - | (63,708 | ) | ||||||||||
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Total
other income (expense)
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(17,520 | ) | (94,034 | ) | (32,282 | ) | (137,777 | ) | ||||||||
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|
||||||||||||||||
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Loss
from continuing operations before income taxes
|
(392,586 | ) | (394,453 | ) | (712,254 | ) | (707,381 | ) | ||||||||
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Income
tax provision
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- | - | - | - | ||||||||||||
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Net
loss from continuing operations
|
(392,586 | ) | (394,453 | ) | (712,254 | ) | (707,381 | ) | ||||||||
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Income
(loss) from discontinued operations of Marquest
|
||||||||||||||||
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Financial
Inc. net of applicable taxes of zero
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- | 5,008 | - | (8,277 | ) | |||||||||||
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Net
loss
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$ | (392,586 | ) | $ | (389,445 | ) | $ | (712,254 | ) | $ | (715,658 | ) | ||||
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Net
loss per common share - basic and diluted:
|
||||||||||||||||
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Loss
from continuing operations
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$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
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Loss
from discontinued operations
|
- | - | - | - | ||||||||||||
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Net
loss
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
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Weighted
average common shares outstanding -
|
||||||||||||||||
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basic
and diluted
|
33,396,719 | 22,739,511 | 33,396,719 | 22,622,239 | ||||||||||||
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
F
--4
WEBDIGS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
Six
Months Ended
|
||||||||
|
April 30,
|
||||||||
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2010
|
2009
|
|||||||
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(unaudited)
|
(unaudited)
|
|||||||
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Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (712,254 | ) | $ | (715,658 | ) | ||
|
Adjustments
to reconcile net loss to net cash flows used in operating
activities:
|
||||||||
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Depreciation
|
11,165 | 6,689 | ||||||
|
Amortization
of intangible assets
|
437,725 | 90,730 | ||||||
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Amortization
of convertible note payable discounts
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- | 73,790 | ||||||
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Amortization
or debt issuance costs
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- | 2,000 | ||||||
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Loss
on change in fair value of derivatives and warrants
|
- | 63,708 | ||||||
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Equity
in the income of Marketplace Home Mortgage - Webdigs, LLC
|
- | (18,785 | ) | |||||
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Share-based
compensation
|
11,919 | 130,970 | ||||||
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Common
stock issued for services
|
- | 7,000 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
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Commissions
and fees receivable
|
(7,500 | ) | (5,527 | ) | ||||
|
Prepaid
expenses and deposits
|
2,331 | 70,155 | ||||||
|
Other
current assets
|
(10,700 | ) | 45 | |||||
|
Accounts
payable
|
(96,875 | ) | (70,552 | ) | ||||
|
Accounts
payable - minority stockholder
|
(6,987 | ) | 81,679 | |||||
|
Accrued
expenses
|
68,706 | 4,281 | ||||||
|
Other
liabilities
|
31,355 | (2,133 | ) | |||||
|
Net
cash flows used in operating activities
|
(271,115 | ) | (281,608 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of intangible assets
|
(21,760 | ) | - | |||||
|
Net
cash flows used in investing activities
|
(21,760 | ) | - | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of common stock
|
- | 500 | ||||||
|
Proceeds
from issuance of convertible debentures, net of debt
issuance
|
||||||||
|
costs
of $4,000 and unrelated accrued legal fees of $20,000
|
- | 226,000 | ||||||
|
Proceeds
from issuance of convertible notes payable to
officer/stockholder
|
304,000 | - | ||||||
|
Increase
(decrease) in due to officers
|
(14,721 | ) | 25,730 | |||||
|
Principal
payments on capital lease obligations
|
(2,050 | ) | (1,871 | ) | ||||
|
Net
cash flows provided by financing activities
|
287,229 | 250,359 | ||||||
|
Net
change in cash and cash equivalents
|
(5,646 | ) | (31,249 | ) | ||||
|
Cash
and cash equivalents, beginning of period
|
36,023 | 37,802 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 30,377 | $ | 6,553 | ||||
F
--5
WEBDIGS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
|
Supplemental cash flow
information
|
||||||||
|
Cash
paid for interest
|
$ | - | $ | 11,497 | ||||
|
Supplemental disclosure of non-cash investing and
financing activities
|
||||||||
|
Issuance
of common stock to convertible debt holder as a discount on the
debt
|
$ | - | $ | 20,000 | ||||
|
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 | ||||
|
Reclassification
of amounts due to officers as accrued expenses
|
$ | 33,275 | $ | - |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
F
--6
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
1
BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial information has been prepared by
Webdigs, Inc. (the “Company”) in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities
and Exchange Commission (SEC). Accordingly, it does not include all of the
information and notes required by accounting principles generally accepted in
the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair statement of this financial
information have been included. Financial results for the interim period
presented are not necessarily indicative of the results that may be expected for
the fiscal year as a whole or any other interim period. This financial
information should be read in conjunction with the audited consolidated
financial statements and notes included in the Company’s Annual Report on Form
10K for the year ended October 31, 2009.
2
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of
Business
Webdigs,
Inc. (“the Company”), a Delaware corporation, became a public company in October
2007 after a reverse shell transaction with Select Video, Inc. which was
incorporated in Delaware in 1994. Our business is dedicated to
web-assisted residential real estate brokerage services. This is done through
our wholly-owned subsidiary Webdigs, LLC.
All of
the Company’s real estate brokerage operations are operated under Webdigs, LLC.
Our three main real estate brokerage brands are Webdigs, Iggys House and
theMLSDirect.com. 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.
Our third brand, theMLSDirect.com, offers consumers a flat-fee MLS listing for
$299. Similar to IggysHouse.com, there is a full menu of add-on services
available for customers to purchase.
Basis of
Consolidation
The
consolidated financial statements for the three and six month periods ended
April 30, 2010 and 2009 include the accounts of Webdigs, Inc. and its
wholly-owned subsidiary, Webdigs, LLC, which includes wholly-owned subsidiaries
of Home Equity Advisors, LLC, and Credit Garage, LLC. The consolidated
financial statements for Webdigs, Inc. for the three and six month periods ended
April 30, 2009 also includes its former wholly-owned subsidiary
of Marquest Financial Inc. (Marquest). The Company divested 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. The investment
of Marketplace Home Mortgage – Webdigs, LLC (49% ownership) was recorded on the
equity method. This unconsolidated joint venture was dissolved on October
26, 2009 (see Note 7). All significant intercompany accounts and transactions
have been eliminated in the consolidation.
F
--7
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
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.
Intangible
Assets
The
Company has five types of intangible assets:
Website
Development
The
primary interface with the customer in our web-assisted real estate broker
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. Those costs are being amortized on a straight-line method over the
estimated two year useful life of the website.
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.
F
--8
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
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 are amortizing the fair value of
these names over a 2 year estimated useful life.
The
Company last assessed impairment of the intangible assets at October 31, 2009
and determined that there was no impairment. During the three and six months
ended April 30, 2010 and 2009, the Company did not record an impairment charge
related to its intangible assets.
The
Company has been experiencing limited revenue from the IggysHouse.com website
since it went live on January 6, 2010. A continued lack of growth
from this website over the next quarter or two may result in impairment to
our related intangible assets and could result in changes to the Company’s
expectations with respect to future financial results and cash flows. These
changes could indicate an unfavorable change in management’s estimates of the
fair value of the Company’s operating brands and could result in a review of
our intangible assets, which could indicate potential impairment to the
carrying value of the Company’s assets.
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 7).
The Company accounted for its investment in the joint venture using the equity
method. Accordingly, the Company recorded 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.
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.
F
--9
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
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 against its net deferred tax assets as of
April 30, 2010 and 2009 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.
The
Company believes its income tax filing positions and deductions will be
sustained upon examination and, accordingly, no reserves, or related accruals
for interest and penalties has been recorded at April 30, 2010.
Recently Issued Accounting
Pronouncements
In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820). ASU 2010-06 provides additional disclosure
requirements related to fair value measurements. ASU 2010-06 is effective
for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value measurements.
Disclosure requirements applicable to Level 3 transactions are effective for
fiscal years beginning after December 15, 2010 and for interim periods
within those fiscal years, with early adoption permitted. The portion of
ASU 2010-06 that was effective beginning after December 15, 2009 did not
have a material effect on the financial position, results of operations or cash
flows of the Company. Additionally, the Company does not anticipate that
the disclosure requirements applicable to Level 3 transactions that are
effective for fiscal years beginning after December 15, 2010 will have a
material effect on the financial position, results of operations or cash flows
of the Company.
F
--10
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
3
GOING CONCERN
The
Company has incurred significant operating losses for the three and six month
periods ended April 30, 2010 and 2009. At April 30, 2010, the Company
reports a negative working capital position of $1,378,956, and an accumulated
deficit of $4,490,017. 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.
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. The Company is also
working with some of its current vendors (including the Company’s principal
website developer/minority stockholder) to potentially negotiate a payout
settlement that could be less than the April 30, 2010 balances owed. Although
the Company intends 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 significantly reduced operating
expenditures during the year ended October 31, 2009 and has continued reducing
operating expenses during the six months ended April 30, 2010. Management
of the Company anticipates that further expense reductions could occur during
the current fiscal year. The Company expects to increase revenues through
its existing Webdigs.com customer base, increased website traffic (driven
largely by internet advertising) and the addition of real estate agents joining
the Webdigs team in the months ahead.
4
RELATED PARTY TRANSACTIONS
Accounts Payable – Minority
Stockholder
The
Company’s principal advertising agency/website developer was owed $555,871 at
April 30, 2010 and $562,858 at October 31, 2009. 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 April 30, 2010.
For the six month periods ended April 30, 2010 and 2009, the Company incurred
$43,013 and $81,679 in services and rent from this related party, respectively.
Included in these amounts is office rent expense for the Company of $21,000 for
each of the six month periods ended April 30, 2010 and 2009. 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. The Company
is currently in negotiations with the website developer to settle this debt with
cash and some form of the Company’s equity.
F
--11
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
Due to
Officers
As of
April 30, 2010 and October 31, 2009, the Company was indebted to its officers
for amounts totaling $10,610 and $58,606 respectively, for business
expenses. All of the indebtedness represents non-interest bearing payables
due on demand.
Convertible Note Payable –
Officer/Stockholder
During
the six months ended April 30, 2010, the Company borrowed $304,000 from its CEO
under a convertible promissory note accruing interest at an annual rate of
12%. At April 30, 2010 and October 31, 2009, the balances due under
this note were $477,000 and $173,000, respectively. The board of
directors has approved conversion of up to $300,000 of the note into the
Company’s common stock at $0.11 per share at any time. An additional
$166,000 of the note has been approved for conversion into the Company’s common
stock at a price
equal to the price of shares to
potentially be sold to current shareholders under a resolution passed by
the Company’s board of directors on April 23, 2010. Under the April
23, 2010 resolution, the Company is authorized to sell up to 15 million shares
of the Company’s common stock to existing shareholders at a price as low as
$0.03 per share. There was no beneficial conversion feature for the
first conversion element because the Company’s stock price was trading at $0.11
at the time the Board of Directors approved the first conversion feature
(allowing the CEO to convert shares at $0.11 per share). The second
conversion feature is a contingent conversion feature and will need to be
reviewed for a beneficial conversion feature if and when the conversion
occurs. For the three and six month periods ended April 30, 2010, the
Company incurred $12,784 and $20,556 of interest expense in connection with this
note, respectively. Accrued interest due under the note as of April
30, 2010 was $21,972.
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. from that date
forward.
F
--12
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
As of
April 30, 2010 and for the three and six month period ended April 30, 2010,
there were no assets or liabilities related to the discontinued operations and
there were no revenues and expenses. All of the assets and liabilities were sold
back to its former owner as of June 4, 2009.
A
summarized statement of operations for the discontinued operations for the
comparable three and six month periods ended April 30, 2009 is as
follows:
|
Discontinued
Operations of
|
Three
months ended
|
Six
months ended
|
||||||
|
Marquest Financial, Inc.
|
April 30, 2009
|
April 30, 2009
|
||||||
|
Net
revenue
|
$ | - | $ | - | ||||
|
Operating
income (expenses)
|
5,008 | (8,277 | ) | |||||
|
Other
income (expense)
|
- | - | ||||||
|
Operating
income (loss)
|
5,008 | (8,277 | ) | |||||
|
Income
taxes
|
- | - | ||||||
|
Net
operating income (loss)
|
$ | 5,008 | $ | (8,277 | ) | |||
6
FIXED ASSETS AND INTANGIBLE
ASSETS
At April
30, 2010 and October 31, 2009, the Company’s fixed assets are as
follows:
|
April 30, 2010
|
October 31, 2009
|
|||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||
|
Amount
|
Depreciation
|
Amount
|
Amount
|
Depreciation
|
Amount
|
|||||||||||||||||||
|
Fixed
Assets
|
||||||||||||||||||||||||
|
Furniture
and Fixtures
|
$ | 9,981 | $ | (5,989 | ) | $ | 3,992 | $ | 9,981 | $ | (4,791 | ) | $ | 5,190 | ||||||||||
|
Computer
hardware
|
50,972 | (35,451 | ) | 15,521 | 50,972 | (25,484 | ) | 25,488 | ||||||||||||||||
|
Total
Fixed Assets
|
$ | 60,953 | $ | (41,440 | ) | $ | 19,513 | $ | 60,953 | $ | (30,275 | ) | $ | 30,678 | ||||||||||
Depreciation
expense amounted to $5,583 and $3,290 for the three month periods
ended
F
--13
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
April 30,
2010 and 2009, respectively. For the six month periods ended April 30,
2010 and 2010, depreciation expense was $11,165 and $6,689,
respectively.
At April
30, 2010 and October 31, 2009, the Company’s intangible assets are as
follows:
|
April 30, 2010
|
October 31, 2009
|
|||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
|||||||||||||||||||
|
Identifiable
assets with
|
||||||||||||||||||||||||
|
determinable
lives:
|
||||||||||||||||||||||||
|
Website
Software
|
$ | 1,793,397 | $ | (586,063 | ) | $ | 1,207,334 | $ | 1,771,637 | $ | (287,164 | ) | $ | 1,484,473 | ||||||||||
|
Customer
lists
|
355,922 | (59,320 | ) | 296,602 | 355,922 | - | 355,922 | |||||||||||||||||
|
Non-compete
agreements
|
266,019 | (110,840 | ) | 155,179 | 266,019 | (44,336 | ) | 221,683 | ||||||||||||||||
|
Other
|
52,000 | (23,837 | ) | 28,163 | 52,000 | (10,835 | ) | 41,165 | ||||||||||||||||
|
Total
Fixed Assets
|
$ | 2,467,338 | $ | (780,060 | ) | $ | 1,687,278 | $ | 2,445,578 | $ | (342,335 | ) | $ | 2,103,243 | ||||||||||
Amortization
expense of intangible assets amounted to $291,187 and $45,365 for the three
month periods ended April 30, 2010 and 2009, respectively. For the six month
periods ended April 30, 2010 and 2009, amortization expense of intangible assets
was $437,725 and $90,730, respectively.
7
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
October 31, 2009 and April 30, 2010, there were no assets or liabilities related
to the investment in Marketplace Home Mortgage – Webdigs, LLC and there were no
operational activities for the three and six month periods ended April 30, 2010.
See the table below for a summarized statement of operations for this joint
venture for the three and six month periods ended April 30, 2009:
F
--14
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
|
Three
months ended
|
Six
months ended
|
|||||||
|
April 30, 2009
|
April 30, 2009
|
|||||||
|
Revenue
|
$ | 77,293 | $ | 246,413 | ||||
|
Operating
expenses
|
(78,982 | ) | (211,177 | ) | ||||
|
Operating
income (loss)
|
(1,689 | ) | 35,236 | |||||
|
Other
expense
|
- | - | ||||||
|
Net
income (loss)
|
$ | (1,689 | ) | $ | 35,236 | |||
|
The
Company's share in the income of Marketplace Home
|
||||||||
|
Mortgage
Webdigs, LLC (49%)
|
$ | (828 | ) | $ | 17,265 | |||
|
Amortization
of deferred gain on transfer of non-cash assets
|
760 | 1,520 | ||||||
|
Net
equity in the income of Marketplace Home Mortgage -
|
||||||||
|
Webdigs,
LLC
|
$ | (68 | ) | $ | 18,785 | |||
8
SHARE-BASED
COMPENSATION
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 six months ended April 30, 2010 and 2009 was $8,794 and
$9,249, respectively. Total stock compensation for the three months
ended April 30, 2010 and 2009 was $4,397 and $4,624, 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 three and six month periods ended April 30, 2010 and
2009. As of April 30, 2010, the Company had $11,477 of
unrecognized compensation expense related to the outstanding stock options,
which will be recognized over a weighted average period of 11
months.
F
--15
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
The
following is a summary of stock option activity for the six month period ended
April 30, 2010:
|
Weighted
average
|
||||||||||||||||
|
Weighted
|
Aggregate
|
remaining
|
||||||||||||||
|
Number
of
|
average
|
intrinsic
|
contractual
term
|
|||||||||||||
|
options
|
exercise price
|
value
|
(years)
|
|||||||||||||
|
Outstanding
at October 31, 2009
|
1,000,000 | $ | 0.25 | $ | - | |||||||||||
|
Granted
|
- | - | - | |||||||||||||
|
Exercised
|
- | - | - | |||||||||||||
|
Forfeited
or expired
|
- | - | - | |||||||||||||
|
Outstanding
at April 30, 2010
|
1,000,000 | $ | 0.25 | $ | - | 3.62 | ||||||||||
|
Exercisable
at April 30, 2010
|
600,000 | $ | 0.25 | $ | - | 3.25 | ||||||||||
The
aggregate intrinsic value in the table above represents the difference between
the closing stock price on April 30, 2010 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 April 30,
2010. There were no options exercised during the six months ended
April 30, 2010.
Restricted Stock
Compensation
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 had to have
been employed with the Company throughout the six month vesting period ended
December 2009. The total award was valued at $12,500 (or $0.25 per
share). The 12,500 shares and associated unearned compensation of
$3,125 at October 31, 2009 were vested in full as of January 31,
2010.
The
Company recorded $0 and $60,861 of stock compensation expense in the
consolidated statement of operations related to vested shares (restricted stock)
for the three month periods ended April 30, 2010 and 2009, respectively. For the
six month periods ended April 30, 2010 and 2009, stock compensation expense
related to vested shares was $3,125 and $121,721, respectively.
F
--16
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
A summary
of the status of non-vested shares and changes as of April 30, 2010 is set forth
below:
|
Restricted
|
Unearned
|
|||||||
|
Shares
|
Compensation
|
|||||||
|
Outstanding,
October 31, 2008
|
1,940,813 | $ | 198,490 | |||||
|
Granted
|
- | - | ||||||
|
Vested
|
(652,311 | ) | (60,860 | ) | ||||
|
Forfeited/canceled
|
- | |||||||
|
Outstanding,
January 31, 2009
|
1,288,502 | 137,630 | ||||||
|
Granted
|
- | - | ||||||
|
Vested
|
(652,309 | ) | (60,861 | ) | ||||
|
Forfeited/canceled
|
- | - | ||||||
|
Outstanding,
April 30, 2009
|
636,193 | 76,769 | ||||||
|
Granted
|
50,000 | 12,500 | ||||||
|
Vested
|
(407,999 | ) | (38,865 | ) | ||||
|
Forfeited/canceled
|
(240,970 | ) | (41,098 | ) | ||||
|
Outstanding,
July 31, 2009
|
37,224 | 9,306 | ||||||
|
Granted
|
- | |||||||
|
Vested
|
(24,724 | ) | (6,181 | ) | ||||
|
Forfeited/canceled
|
- | |||||||
|
Outstanding,
October 31, 2009
|
12,500 | 3,125 | ||||||
|
Granted
|
- | - | ||||||
|
Vested
|
(12,500 | ) | (3,125 | ) | ||||
|
Forfeited/canceled
|
- | - | ||||||
|
Outstanding,
January 31, 2010
|
- | - | ||||||
|
Granted
|
- | - | ||||||
|
Vested
|
- | - | ||||||
|
Forfeited/canceled
|
- | - | ||||||
|
Outstanding,
April 30, 2010
|
- | $ | - | |||||
F
--17
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
Stock
Warrants
The
following is a summary of stock warrant activity for the six month period ended
April 30, 2010:
|
Weighted
|
||||||||||||||||
|
average
|
||||||||||||||||
|
Weighted
|
Aggregate
|
remaining
|
||||||||||||||
|
Number
of
|
average
|
intrinsic
|
contractual
term
|
|||||||||||||
|
warrants
|
exercise price
|
value
|
(years)
|
|||||||||||||
|
Outstanding
at October 31, 2009
|
500,000 | $ | 0.13 | $ | - | |||||||||||
|
Granted
|
- | - | - | |||||||||||||
|
Exercised
|
- | - | - | |||||||||||||
|
Forfeited
or expired
|
(300,000 | ) | 0.01 | - | ||||||||||||
|
Outstanding
at April 30, 2010
|
200,000 | $ | 0.30 | $ | - | 1.62 | ||||||||||
|
Exercisable
at April 30, 2010
|
200,000 | $ | 0.30 | $ | - | 1.62 | ||||||||||
9
SHAREHOLDERS EQUITY
There
were no equity issuances for the six month period ended April 30,
2010.
10 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 three and six
month periods ended April 30, 2010 and 2009, respectively.
F
--18
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Month Periods Ended April 30, 2010 and 2009
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
April 30
|
April 30
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Basic
earnings per share calculation:
|
||||||||||||||||
|
Net
loss from continuing operations
|
$ | (392,586 | ) | $ | (394,453 | ) | $ | (712,254 | ) | $ | (707,381 | ) | ||||
|
Net
income (loss) from discontinued operations
|
- | 5,008 | - | (8,277 | ) | |||||||||||
|
Net
loss
|
$ | (392,586 | ) | $ | (389,445 | ) | $ | (712,254 | ) | $ | (715,658 | ) | ||||
|
Weighted
average of common shares outstanding
|
33,396,719 | 22,739,511 | 33,396,719 | 22,622,239 | ||||||||||||
|
Net
loss per share - basic
|
||||||||||||||||
|
Loss
from continuing operations
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
|
Loss
from discontinued operations
|
- | - | - | - | ||||||||||||
|
Net
loss per basic share
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
|
Diluted
earnings per share calculation:
|
||||||||||||||||
|
Net
loss from continuing operations
|
$ | (392,586 | ) | $ | (394,453 | ) | $ | (712,254 | ) | $ | (707,381 | ) | ||||
|
Net
income (loss) from discontinued operations
|
- | 5,008 | - | (8,277 | ) | |||||||||||
|
Net
loss
|
$ | (392,586 | ) | $ | (389,445 | ) | $ | (712,254 | ) | $ | (715,658 | ) | ||||
|
Weighted
average of common shares outstanding
|
33,396,719 | 22,739,511 | 33,396,719 | 22,622,239 | ||||||||||||
|
Stock
options (1)
|
- | - | - | - | ||||||||||||
|
Stock
warrants (2)
|
- | - | - | - | ||||||||||||
|
Convertible
notes payable (3)
|
- | - | - | - | ||||||||||||
|
Diluted
weighted average common shares outstanding
|
33,396,719 | 22,739,511 | 33,396,719 | 22,622,239 | ||||||||||||
|
Net
loss per common share - diluted
|
||||||||||||||||
|
Loss
from continuing operations
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
|
Loss
from discontinued operations
|
- | - | - | - | ||||||||||||
|
Net
loss per diluted share
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
|
|
(1)
|
The
dilutive effect of stock options in the above table excludes 1,000,000 and
600,000 of underlying stock options for the three and six month periods
ended April 30, 2010 and 2009, respectively as they would be anti-dilutive
to our net loss for those periods.
|
|
|
(2)
|
The
dilutive effect of stock warrants in the above table excludes 200,000 and
200,000 of underlying
stock warrants for the three and six month periods ended April 30,
2010 and 2009, respectively, as they would be anti-dilutive to our net
loss for those periods.
|
| (3) | The dilutive effect of potential convertible notes equivalent to 2,727,273 shares related to the loan from our CEO and 1,666,667 shares related to a third-party convertible debt promissory note as of April 30, 2010 and 2009, respectively, have been excluded as they would be anti-dilutive to our net loss for those periods. |
F
--19
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operation set forth below should be read in conjunction with our audited
consolidated financial statement contained in our Form 10K filed with the SEC on
January 29, 2010 relating to our fiscal year ended October 31,
2009.
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 10K filed with the SEC on January 29, 2010 should be
considered in evaluating our prospects and future performance.
General
Overview
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 three brands. Webdigs.com, our first brand, is our full-service
discounted 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 3.99% (compared to a traditional full-service brokerage which we
believe most often charge 5-7% for listing service).
We have
recently changed our rebate policy for Webdigs.com. Starting in June, 2010, we
now offer a consumer rebate of 1% of the purchase price of the home to our
buyers.
2
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 IggysHouse.com completely free for 30 days. After 30
days, the seller has the 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.
We also
operate a smaller third brand; theMLSDirect.com, which offers a $299 fixed price
six month MLS listing to consumers not wishing to engage the services of a
listing real estate agent. TheMLSDirect.com appeals to consumers who otherwise
might choose to sell their home themselves without a realtor (commonly referred
to as For Sale by Owner).
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 Webdigs.com business.
Recent
industry data available for April 2010 is highly positive. On a
regional level, according to data provided by the National
Association of Realtors sales in the Midwest region of the country for April
2010 were running ahead of 2009 by 29.1% with a median sales price increase of
5.8%.
Overall,
the real estate industry remains volatile. The government sponsored
home buyer tax credit had a significant positive impact in bringing sales into
March and April of this year. Early trends for May however cause some
concern. The Minneapolis Star Tribune reports “pending sales for the
week ending May 15 in the Twin Cities real estate market were one-third lower
than they were at this time last year (2009), as buyers who might have purchased
in May decided to speed up the process and take advantage of the $8,000
incentive that expired April 30, 2010”. For the same time period, new
Twin Cities listings have dropped by 20 percent.
Results
of Operation
For
the three month periods ended April 30, 2010 and 2009
We are
pleased with the results of the quarter ended April 30, 2010. Our net revenue
grew a robust 174% to $162,277 for the three months ended April 30, 2010 as
compared to $59,241 for the three month period ended April 30, 2009. Excluding
amortization, our operating loss from continuing operations declined by 69% -
from $265,960 to $83,879. On a GAAP basis, our operating loss from continuing
operations for the quarter ended April 30, 2010 was $375,066 compared to
$300,419 for the same prior last year.
In
addition to strong sales growth, we also achieved expense reductions for the
quarter ended April 30, 2010 versus the same period last year. We reduced
general and administrative spending by $49,404 ($142,804 for the quarter ended
April 30, 2010 versus $192,208 for the same period last year). The primary
factors in our general and administrative expense decreasing for the three
months ended April 30, 2010 versus April 30, 2009 were declines in non-cash
compensation (from $65,485 to $4,397), investor relations expense (from $40,000
to $0), legal fees (from $7,749 to $135) and audit fees (from $23,500 to
$15,950) for three months ended April 30, 2010. These decreases were offset
partially by an increase of $72,532 in salary expense, of which $56,127 results
from reclassification of CEO compensation expense from selling to general and
administrative expenses.
Selling
expenses decreased by 22% from $132,993 for the quarter ended April 30, 2009 to
$103,352 for the same period this year. The most significant factor in the
$29,641 decrease was the reclassification of $56,127 in CEO compensation
expenses from selling to G&A. We cut additional spending in advertising and
promotion as we continued to focus our efforts on low-cost personal referral
strategies to generate sales leads. Advertising expenses were reduced by
$18,208. We also received a $30,000 credit from an advertising vendor in partial
settlement of a past due payable balance. Offsetting the large decrease in
advertising and promotion expenses and the reclassification of CEO compensation
was an increase in sales commissions paid of $70,753. The commission increase is
due two significant factors: the first factor was a shift in the way we pay
sales agents. For the first two months of the quarter ended April 30, 2009, our
sales agents were paid a fixed compensation. For the entire quarter ended April
30, 2010, all of our agents received sales commissions. The second cause of
increased commissions was the 174% increase in sales mentioned above. As sales
continue to increase, we expect sales compensation costs will continue to
increase as well.
3
Driving
the 174% revenue growth was an 80% increase in closed transactions from 15 for
the three months ended April 30, 2009 to 34 for three months ended April 30,
2010. An additional factor in our sales growth was a change in our rebate
structure. In March 2009, we reduced the rebate we offer to our buyers from 66%
of our commission to 50%. In addition, the average sales price of homes sold via
our agents increased in the most recent fiscal year. For the three months ended
April 30, 2010, the average price of homes sold via Webdigs.com increased to
$257,000 from $207,000 for the comparable prior year period.
As
mentioned above, we are very satisfied with the results of our Webdigs.com
brokerage results for the quarter ended April 30, 2010. On the other hand, the
results of our “pay as you go” IggysHouse.com brand have been disappointing. We
launched Iggyshouse.com in January 2010 with the expectation that our
IggysHouse.com “pay as you go model” would be unique to the consumer real estate
market. It provides the value conscious consumer the ability to tightly control
their expenditures. IggysHouse.com offers its customers the chance to pay for
the exact services they want on a fixed monthly fee of $49.99, which can be
continued at the election of the consumer on a month-to-month basis for $49.99
per month. Despite high expectations, sales to date have been very low. We
recorded only $459 in sales for the three months ended April 30, 2010. If sales
do not improve soon for the Iggys brand, we will have to assess whether the
intangible assets related to this brand may be impaired.
We
incurred interest costs of $17,520 in the quarter ended April 30, 2010 compared
to $55,812 for the period ended April 30, 2009. Of the current quarter’s
interest expense, $12,784 is for accrued interest on a loan from our CEO with an
additional $4,736 resulting from interest charges passed on from vendors. For
the three months ended April 30, 2009, we incurred $52,974 in interest expense
for our convertible promissory note with Lantern Advisors. An additional $2,838
in interest was billed to us from vendors bringing total interest for the
quarter ended April 30, 2009 to $55,812.
Our joint
venture was dissolved on October 26, 2009 so there is no joint venture income
for the three months ended April 30, 2010. The loss on change in fair value of
derivatives and warrants of $38,154 for the three months ended April 30, 2009
relates to the convertible promissory note mentioned above. There will be no
future charges for this note.
For
the six month periods ended April 30, 2010 and 2009
The
Company incurred operating losses of $679,972 for the six month periods ended
April 30, 2010 compared to a loss of $569,604 for the same period last year. Net
revenues increased 159% from $97,868 for the six months ended April 30, 2009 to
$253,794 for the six months ended April 30, 2010. Real estate transactions
closed increased 108% from 25 to 52 for the six month periods ended April 30,
2009 and 2010, respectively. We achieved this growth largely on the basis of
person to person referrals, call-ins from “For Sale” signs in customers’ yards
and limited internet advertising. We are highly satisfied with the performance
of our Webdigs.com brands for the six months ended April 30, 2010. Highlighting
our satisfaction is the fact that if we exclude amortization costs from our
comparative six month period to period operating results, our operating loss
decreased by 52% from $500,685 for the six months ended April 30, 2009 to
$242,247 for the six months ended April 30, 2010.
4
For the
six month period ended April 30, 2010, we reduced general and administrative
expenses by $94,725, from $347,653 for the six months ended April 30, 2009 to
$252,928 for the same period this year. Two main items comprised the decrease:
First, non-cash compensation, which relates primarily to accounting for share
grants made to company founders, was reduced by $119,051 from $130,970 for the
six months ended April 30, 2009 to $11,919 for the six months ended April 30,
2010. The second significant general and administrative expense decrease comes
from reductions in investor relations expenses of $32,930. Additionally, an
aggressive focus on cost cutting produced expense reductions of $6,055 in audit
fees and $7,883 in legal fees. Partially offsetting the above mentioned
decreases was an increase of $75,610 for wages and salaries versus the prior
year (of which $56,127 can be attributed to re-classifying CEO compensation
expense from selling to general and administrative and $19,483 can be attributed
to one additional finance and accounting employee on staff in the current year.
We have
identified recruitment of agents to be a key component in the growth of our
Webdigs.com real estate brokerage. Our selling expenses for the six months ended
April 30, 2010 reflects a re-prioritization of our efforts towards lower
advertising expenses and incurring more sales agent related costs. Total selling
expenses were relatively flat for the six months ended April 30, 2010 and 2009,
respectively. We incurred $243,113 in selling expenses for the six months ended
April 30, 2010 compared to $250,900 for the same period in fiscal year 2009. As
mentioned above, we changed our sales compensation plan in April 2009. Beginning
in April 2009, we started paying commissions to our sales agents based upon the
real estate transactions they closed. As a result of this change in compensation
policy, commission expenses of $128,296 are $105,575 greater for the six months
ended April 30, 2010 than they were for the same period last year. In addition,
we contracted a part-time consultant to manage theMLSDirect.com website for us.
This increased consulting expenses by $15,000 for the six months ended April 30,
2010. Offsetting the increases in commission and consulting fees were decreases
of $80,994 in wage and salary expense, of which $56,127 is due to a shift in
classification of CEO compensation costs from selling to general and
administrative. The remaining difference of $24,867 results from the above
mentioned shift from fixed salaries to variable commissions for our sales
agents. In addition to wage and salary decreases, we cut advertising and
promotion expense by $43,419 for the current year.
For the
six months ended April 30, 2010, we incurred $32,282 in interest costs compared
to $92,854 for the six months ended April 30, 2009. Interest expense for the six
months ended April 30, 2010 includes $20,556 of accrued interest on a loan from
our CEO and $11,726 interest charges passed on from vendors. For the six months
ended April 30, 2009, we incurred $87,288 in interest expense for our
convertible promissory note with Lantern Advisors. In our prior fiscal year, we
also were invoiced $5,566 in interest expense from one of our main vendors
bringing the total interest for the six months ended April 30, 2009 to
$92,854.
The loss
on change in fair value of derivatives and warrants of $63,708 for the six
months ended April 30, 2009 relates to the convertible promissory note mentioned
above. We settled this note on September 30, 2009.
Assets
and Employees; Research and Development
Aside
from our dedicated team of agents and employees, our primary assets are cash and
intellectual-property rights, which are the foundation for our services. Over
90% of our intangible assets were acquired in our June 2009 purchase of the
assets of IggysHouse.com. As mentioned above, we re-launched our IggysHouse.com
service in January 2010 and believed that the assets we acquired from Iggys,
Inc. would be critical to our success. IggysHouse.com was formerly a web-based
online real estate brokerage that had operations in 38 states. As mentioned
above, results thus far have not been satisfactory with only $459 in revenues
for the six months ended April 30, 2010.
5
Our
lackluster results for IggysHouse.com have caused us to re-evaluate our
Iggyshoue.com business model. We are currently studying various alternatives to
energize the brand through an improved and easier to understand website and
refocused marketing. We will not allow IggysHouse.com to be a cash drain for our
business, however, and if results continue to disappoint, we will be forced to
consider asset impairment in the current fiscal year ending October 31,
2010.
We expect
that we will invest time, effort and expense in the continued refinement of our
Webdigs.com website. Currently, we expect to spend approximately $20,000 in such
improvement activities over the remaining two quarters of fiscal 2010. As of
April 30, 2010, we have spent approximately $27,500 on maintenance and
improvements of our websites.
Liquidity
and Capital Resources; Anticipated Financing Needs
As of
April 30, 2010, we had $30,377 of cash and cash equivalents and current
liabilities of $1,455,782. The most significant change in liabilities versus
October 31, 2009 has been the increase in the balance due our CEO on the
convertible note payable he has with us. This balance increased by $304,000 to
$477,000 as of April 30, 2010.
We used
$271,115 of cash in operating activities during the six months ended April 30,
2010 compared to $281,608 for the six months ended April 30, 2009. Cash used in
operations for the six months ended April 30, 2010 included a net loss of
$712,254 which was partially offset by $460,809 of various non-cash expenses for
depreciation, amortization and share-based compensation. For the six months
ended April 30, 2009, these non-cash items plus some additional non-cash items
generated by our convertible promissory note and our joint venture totaled
$356,102. For the six months ended April 30, 2010, we were able to make progress
on reducing balances owed to some of our main vendors through a combination of
cash payments by Webdigs and vendor forgiveness of a portion of payables.
Offsetting the payables decrease was an increase of $67,134 in accrued expenses.
The entire increase in accrued expenses as of April 30, 2010 is due to increases
in accrued payroll - primarily due to officers of the company.
For the
six months ended April 30, 2010, cash flows used in investing activities
included payments of $21,760 for the purchase of website development for the
IggysHouse.com website. For the same period last year, we had no
investments.
In total,
financing activities provided $287,229 and $250,359 for the six month periods
ended April 30, 2010 and 2009, respectively. As mentioned above, an increase in
the balance due our CEO accounted for financing cash proceeds of $304,000. A
decrease in the payable to our group of officers (for commissions and business
expenses) accounted for a use of $14,721 for the six months ended April 30,
2010. In the prior year, proceeds from the convertible/promissory note we issued
in December 2008 with Lantern Advisors provided net cash proceeds of $226,000.
An additional $25,730 was provided by an increase in balances due company
officers.
6
Given our
relatively low cash position, our near term focus for the remaining six months
of fiscal 2010 continues to be to create positive operating cash flow from our
web-assisted real estate brokerage operations. While we believe that our year
over year revenue growth will remain strong, we recognize that we will need to
raise additional capital to fund our operations beyond the upcoming spring and
summer of 2010. We are presently expanding our efforts to recruit agents and
believe that these efforts will be successful. We have also received approval
from our board of directors to issue up to 15 million new shares of common stock
at a price as low as $.03 per share. We believe that this could provide us with
up to $450,000 in new operating capital. We also retain our expectation that the
growth of our core Webdigs.com brand will provide us with a solid base from
which we will be able to raise additional funding in the future. We will also be
vigilant in our spending for IggysHouse.com. If IggysHouse.com performance does
not improve, we will stop spending money on this brand and may have to impair
the related assets.
If we
succeed in raising any additional capital, we believe that we will have
sufficient capital to fund our operations and expansion for the remainder of the
current fiscal year although additional funding will be required thereafter to
continue our efforts to expand.
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 against our net deferred
tax assets as of April 30, 2010 and 2009 because realization of those assets is
not reasonably assured.
7
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 costs 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. Those costs are being amortized on a
straight-line method over the estimated two year useful life of the
website.
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
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.
Commissions and Fees
Receivable. 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.
8
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
|
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
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820). ASU 2010-06 provides additional disclosure requirements
related to fair value measurements. ASU 2010-06 is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Disclosure requirements
applicable to Level 3 transactions are effective for fiscal years beginning
after December 15, 2010 and for interim periods within those fiscal years, with
early adoption permitted. The portion of ASU 2010-06 that was effective
beginning after December 15, 2009 did not have a material effect on the
financial position, results of operations or cash flows of the Company.
Additionally, the Company does not anticipate that the disclosure requirements
applicable to Level 3 transactions that are effective for fiscal years beginning
after December 15, 2010 will have a material effect on the financial position,
results of operations or cash flows of the Company.
9
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. We expect our
current quarter and third quarter to show exceptional growth due to seasonality
of the business.
Going
Concern
The
Company incurred significant operating losses for the six months ended April 30,
2010. At April 30, 2010, the Company reports a negative working capital position
of $1,378,956 and accumulated deficit of $4,490,017. It is management’s opinion
that these facts raise substantial doubts about the Company’s ability to
continue as a going concern without additional debt or equity
financing.
Our
consolidated financial statements included do not include any adjustments
related to recoverability and classification of asset carrying amounts, or the
amount and classification of liabilities that might result, should we be unable
to continue as a going concern. Our ability to continue as a going concern
ultimately depends on achieving profitability, producing revenues or raising
additional capital to sustain operations. 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.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable.
Item
4. Controls and Procedures.
Management’s
Report On Internal Control Over Financial Reporting
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation 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 the end of the period covered by this Quarterly Report
on Form 10-Q 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 as appropriate to allow timely decisions regarding required
disclosure.
10
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 Quarterly Report on Form 10-Q were prepared with
particular attention to the material weaknesses previously disclosed.
Notwithstanding the material weaknesses in internal controls that continue to
exist as of April 30, 2010, we have concluded that the financial statements
included in this Quarterly Report on Form 10-Q present fairly, the financial
position, results of operations and cash flows of the Company as required for
interim financial statements.
Changes
in Internal Control Over Financial Reporting
During
the fiscal quarter ended April 30, 2010, there was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 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
remediated. Due to the small number of employees dealing with general
administrative and financial matters and the expenses associated with increasing
the number of employees to remediate the disclosure control and procedure
material weaknesses that have been identified, the Company continued to operate
without changes to its internal controls over financial reporting for the period
covered by this Quarterly Report on Form 10-Q while continuing to seek the
expertise its needs to remediate the material weaknesses.
PART
II – OTHER INFORMATION
Item
1. 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
1A. Risk Factors.
None.
Item
2. Unregistered Sales of Equity Securities
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4 Submission of Matters to a Vote of Shareholders
None.
Item
5. Other Information
There
have been no material changes to the procedures by which security holders may
recommend nominees to the registrant’s board of directors.
11
Item
6. Exhibits.
|
Exhibit No.
|
Description
|
|
|
31.1
|
Certification
of Chief Executive Officer
|
|
|
31.2
|
Certification
of Chief Financial Officer
|
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
WEBDIGS,
INC.
|
|
|
/s/ Robert A. Buntz, Jr.
|
|
|
Robert
A. Buntz, Jr.
|
|
|
Chief
Executive Officer
|
|
|
Dated: June
14, 2010
|
|
|
/s/ Edward Wicker
|
|
|
Edward
Wicker
|
|
|
Chief
Financial Officer
|
|
|
Dated: June
14, 2010
|
12
INDEX
TO EXHIBITS FILED WITH THIS REPORT
|
Exhibit No.
|
Description
|
|
|
31.1
|
Certification
of Chief Executive Officer
|
|
|
31.2
|
Certification
of Chief Financial Officer
|
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
13