The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial information has been prepared by DigitalTown, Inc. (the "Company") in accordance with accounting principles generally accepted in the United States of America ("U.S.") ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC"). Accordingly, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim period presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period. This financial information should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended February 29, 2016.
Note 2. Nature of Business and Summary of Significant Accounting Policies
:
Nature of Business
The Company was founded in 1982 under the laws of the State of Minnesota as Command Small Computer Learning Center, Inc., a computer training company and operated under several different names in the computer hardware and training sector. In 2005, the Company began acquiring domain names. On March 1, 2007, the Company changed its name to DigitalTown, Inc. and began developing a business plan to develop a platform to monetize their domain names. The Company's headquarters are located at 10655 NE 4
th
Street, Suite 801, Bellevue, WA 98004, and its telephone and facsimile numbers are (425) 295-4564 and (425) 651-2889, respectively. The Company's Internet address is www.digitaltown.com. The Company's common stock is traded in the over-the-counter market under the ticker DGTW.
The Company's consolidated financial statements have been prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
At November 30, 2016 the Company had an accumulated deficit of $34,080,329. The Company anticipates that expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least November 30, 2017. In the event that the Company is unable to obtain additional capital in the future, the Company would be forced to further reduce operating expenses and/or cease operations altogether.
Principles of Consolidation
The Company files consolidated financial statements that include its wholly-owned subsidiaries Tiger Media and The School Network, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.
7
Reclassifications
Certain prior period amounts in the consolidated statement of cash flows have been reclassified to conform to the current period presentation. Proceeds from related party notes payable received in the prior period have been reclassified from the prior period classification.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S.") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable arose from the sale of and commission earned from display advertising and development services. The Company evaluates collectability of accounts receivable based on a combination of factors including the age of the receivable or a specific customer's inability to meet its financial conditions. In these circumstances, the Company records an allowance to reduce the receivable to an amount it deems collectible. The Company has has an allowance for doubtful accounts of $102,001 and $0 as of November 30, 2016 and February 29, 2016, respectively.
Revenue Recognition
The Company recognizes revenue when the following four criteria have been met:
|
|
|
|
·
|
Persuasive evidence that an agreement exists
|
|
|
|
|
·
|
Delivery has occurred
|
|
|
|
|
·
|
The price is fixed and determinable
|
|
|
|
|
·
|
Collectability is reasonably assured
|
The Company primarily recognizes revenue from sale of software licenses and related development services. Software licensing and development revenue is recognized as it is earned. In the event of projects with multiple project milestones, revenue is recognized as milestones are achieved on a relative fair value basis.
The Company may also be the merchant of record for merchant transactions processed on the DigitalTown platform. In this case, revenue is recognized on the date of the transaction. The Company has experience in merchant transaction fraud mitigation. To the extent that chargebacks become material, the Company will implement a formal practice for allowance for doubtful accounts.
The Company also recognizes revenue from the sale of display advertising appearing on specific pages of individual sites within DigitalTown's network. Display advertising is sold by the Company directly to local merchants and placed by the Company on specific pages of individual sites targeted by the local merchant. The terms of these sales are for a fixed monthly amount for a period ranging from three months to one year.
The Company has also entered into certain third party agreements which allow display advertising to be placed on individual sites within DigitalTown's network. Per these agreements, the Company receives commissions based on a percentage of the per click or per-impression revenue generated by these ads. The Company recognizes these commissions received as revenue in the period they are earned.
8
Fair Value of Financial Instruments
Under Financial Accounting Standards Board ("FASB") Accounting Standards Codification (ASC) 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under accounting principles generally accepted in the U.S. ("U.S. GAAP"), certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
As of November 30, 2016 and February 29, 2016, the Company does not have any financial instruments that must be measured under the new fair value standard. The Company's financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect the Company's assumptions about the assumptions that market participants would use in pricing the asset or liability.
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the nine months ended November 30, 2016 or the year ended February 29, 2016.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. As of November 30, 2016 and February 29, 2016, the Company had no cash equivalents.
Cash Deposits in Excess of Federally Insured Limits
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are insured by the Federal Deposit Insurance Company and currently have insurance coverage up to $250,000.
Prepaid Domain Names
The annual domain name renewal fees are currently amortized over one year and the purchase of any new domain names are the only amounts being capitalized. See Note 5 for further information.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives, ranging from three to five years. Leasehold improvements are amortized over the shorter of the useful life or the term of the related lease. The Company recorded $2,784 and $2,702 of depreciation expense for the nine months ended November 30, 2016 and November 30, 2015, respectively. Repairs and maintenance costs are expensed as incurred; major renewals and improvements are capitalized. As items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operating income. See Note 4 for further information.
9
Income Taxes
Deferred tax assets (net of any valuation allowance) and liabilities resulting from temporary differences, net operating loss carryforwards and tax credit carryforwards are recorded using an asset-and-liability method. Deferred taxes relating to temporary differences and loss carryforwards are measured using the tax rate expected to be in effect when they are reversed or are realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be ultimately realized. The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related future benefits.
The Company accounts for income taxes pursuant to FASB guidance. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company's adoption on March 1, 2009 of the provisions specifically related to uncertain tax positions resulted in no cumulative effect adjustment. The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves or related accruals for interest and penalties have been recorded at November 30, 2016 or February 29, 2016. In accordance with the guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of operations. The Company has three open years of tax returns subject to examination.
Stock-Based Compensation, Including Options and Warrants
The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.
Advertising
Advertising costs are charged to operations when incurred. The Company did not incur any advertising expense during the nine months ended November 30, 2016 or November 30, 2015.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard will have on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires that inventory be measured within the scope of the Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of
10
completion, disposal, and transportation. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this Update are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This ASU conforms with the Company's current protocol for evaluating inventory and the Company will prospectively implement adoption of this ASU. The Company does not expect the adoption of the ASU to have a significant impact on our consolidated financial statements.
On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The ASU requires retrospective application to all prior periods presented in the financial statements. The Company has elected not to early adopt ASU 2015-03.
Management does not anticipate that the adoption of these standards will have a material impact on the financial statements.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Note 3. Going Concern
The Company's consolidated financial statements have been prepared using accounting principles generally accepted in the U.S. applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
At November 30, 2016 the Company had an accumulated deficit of $34,080,329. The Company anticipates that expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least November 30, 2017. In the event that the Company is unable to obtain additional capital in the future, the Company would be forced to further reduce operating expenses and/or cease operations altogether.
Note 4. Property and Equipment
Property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
February 29,
|
|
|
2016
|
|
|
2016
|
Office equipment and furniture
|
|
$
|
527,893
|
|
|
$
|
512,156
|
Less accumulated depreciation
|
|
|
(523,409
|
)
|
|
|
(509,927)
|
Property and equipment, net
|
|
$
|
4,484
|
|
|
$
|
2,229
|
Depreciation expense for the nine months ended November 30, 2016 and 2015 was $2,784 and $2,702, respectively.
Note 5. Prepaid Domain Names
During the nine months ended November 30, 2016 and 2015, the Company incurred $75,230 and $127,005, respectively, of annual domain name renewal fees and has expensed $48,218 and $129,855, respectively, to cost of revenues on a straight-line basis. The amounts paid for the annual domain name renewal fees were paid directly to
11
Epik Holdings Inc., a company which is controlled by Robert Monster, the Company's Chief Executive Officer. Epik Holdings Inc., then uses those funds to directly pay Verisign and ICANN companies for the annual domain renewal costs of $7.85 and $0.25, respectively, per domain name.
Note 6. Accrued Expenses and Accounts Payable Related Party
Deferred Compensation to Former officer
From time to time, Richard Pomije, the former CEO, CFO and Chairman of the Company elected to forego a portion of his salary due to the Company's limited operating funds. On May 11, 2015, Mr. Pomije agreed to accept a stock subscription receivable in lieu of his deferred officer accrued compensation. The total balance recorded as deferred officer compensation at May 11, 2015 was $331,849. As a result of the difference between the amount recorded for stock subscriptions receivable and deferred officer compensation, the Company recorded a loss on conversion of deferred officer compensation into equity of $293,633 in May 2015. See Notes 9 and 15 for further information.
Accounts Payable Related Parties
On May 18, 2015, Richard Pomije resigned from the Company. At that time, the Board of Directors was aware of no continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with closing of the Burnsville, MN office. However, Mr. Pomije is asserting a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 is due in addition to the stock subscription receivable. The Company has accrued a liability, included in accounts payable - related parties, of $100,067 as of February 29, 2016 and November 30, 2016.
As of November 30, 2016, the Company owes $7,911 due to advances made to Rezserve Technologies, Ltd. by the prior owner which is within accounts payable related parties.
Accrued Salary
On February 10, 2016, Robert W. Monster, CEO converted $129,231 of his accrued salary into 1,292,310 common shares and 1 year stock options with an exercise price of $0.15. The shares and warrants were valued on the conversion date in the amounts of $109,846 and $19,385, respectively. As the value of the shares and warrants equaled the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction. As of November 30, 2016 and February 29, 2016, the accrued salary owed to Robert Monster was $30,000 and $0, respectively.
Deferred Revenue
During the nine months ended November 30, 2016, the Company signed three customer agreements to perform digital support and construction services for three separate un-related companies. Each customer agreement consists of milestones and completion metrics to ensure that the requested services have been performed satisfactorily and to the customers' full expectations. As of November 30, 2016, the Company has collected $140,000 in cash and recorded $50,000 in accounts receivable, and $50,000 in allowance for doubtful accounts from these three companies in order to fund the completion of each contract; however, as the services requested by the customers have not yet been completed, the revenue has been recorded as deferred revenue as of November 30, 2016.
Note 7. Stockholders' Equity
Fiscal 2017 Stock Transaction
During the year ended February 29, 2016, the Company issued 3,312,811 common shares to Robert W. Monster, CEO, in accordance with his employment agreement date May 18, 2015. The shares were valued based on the employment agreement date. During the year ended February 29, 2016, $779,325 was expensed related to these shares. During the nine months ended November 30, 2016, $214,518 was expensed related to these shares.
12
On May 18, 2016, the Company granted 8,292,309 common shares to Robert W. Monster, CEO, in accordance with his employment agreement date May 18, 2016, which vest monthly over the new employment agreement which ends on May 18, 2018, a period of two years. The shares were valued based on the employment agreement date. During the nine months ended November 30, 2016, $556,607 was expensed related to these shares.
On March 9, 2016, the Company signed an employment agreement with Kenneth Holloway for the period from March 9, 2016 through March 31, 2017. Included in the employment agreement is a common stock grant of 350,000 shares which vests monthly over the term of the employment agreement. During the nine months ended November 30, 2016, $21,651 was expensed related to this agreement.
Also March 9, 2016, the Company signed an employment agreement with Christopher T. Maxwell for the period from March 9, 2016 through March 31, 2017. Included in the employment agreement is a common stock grant of 600,000 shares which vests monthly over the term of the employment agreement. During the nine months ended November 30, 2016, $37,116 was expensed related to this agreement.
On July 9, 2016, the Company signed an employment agreement with Adee K.I. Wada for the period from July 9, 2016 through July 9, 2017. Included in the employment agreement is a common stock grant of 1,000,000 shares which vests monthly over 48 months. During the nine months ended November 30, 2016, $30,788 was expensed related to this agreement.
On October 1, 2016, the Company signed an employment agreement with Faris Oweis for the period from October 1, 2016 until terminated. Included in the employment agreement is a common stock grant of 250,000 shares which vests monthly over 48 months. During the nine months ended November 30, 2016, $10,654 was expensed related to this agreement.
During the nine months ended November 30, 2016, the Company received cash of $1,542,500 for 2,699,707 shares of common stock issued and $983,000 in stock payables due to various investors.
During the nine months ended November 30, 2016, the Company sold shares to two related party investors at terms below the market price and share prices available other investors. As a result, the Company recorded additional stock compensation expense of $30,450 to additional paid in capital to account for the preferential common share pricing.
During the nine months ended November 30, 2016, the Company entered into agreements to purchase domain name rights with three individuals for common stock. The Company issued 275,000 common shares and recorded additional stock payable of $45,990 for another 84,750 shares. The total fair value of the shares was $154,740 based on the respective domain name purchase agreements date and the closing market price on that date. The assets were recorded as intangible assets with an indefinite life; which will be evaluated for impairment on an annual basis.
During the nine months ended November 30, 2016, the Company issued 775,000 shares to three directors and one consultant for services provided to the company. The value of the shares issued was $372,000 based on the fair market value of the common stock on the date of grant.
On September 14, 2016, the Company closed on a Stock Purchase Agreement for 100% of the Canadian corporation, Rezserve Technologies, Ltd. Pursuant to the agreement, the Company purchased all of the issued and outstanding stock of Rezserve Technologies, Ltd. in consideration for an aggregate of $1,480,000, of which 3,000,000 shares of stock (valued at $1,080,000 as a stock payable as of November 30, 2016) were accrued and due at the closing, and $400,000 was financed by way of a secured convertible note. The terms of the note include interest at 0% per annum. Principal will be due and payable within one year of September 13, 2016.
The Company imputed
interest expense of $8,548 related to the $400,000 convertible note payable related party as an increase in additional paid in capital during the three months ended November 30, 2016.
13
Fiscal 2016 Stock Transaction
During the year ended February 29, 2016, the Company entered into stock purchase agreements and issued 4,927,000 restricted common shares at $0.10 per share, for total cash proceeds of $895,250. The restricted common shares were valued based at the cash sales price of $0.10. Each of these shares included 1 year warrants with an exercise price of $0.15. The fair market value of the warrants issued during the year ended February 29, 2016 was $152,628. The relative fair market value of the shares and warrants to the cash received were $179,906 and $98,594, respectively.
On March 5, 2016, we acquired all of the assembled workforce, patents, intellectual property, technology, trademarks, trade names, copyrights, mask works and registrations, computer software, trade secrets and non-compete agreements related to the Cloud.Market business, pursuant to an agreement dated March 5, 2016 among the Company and the owner of Cloud.Maket in consideration for our issuance of 750,000 shares of our common stock and $7,500 of cash consideration payable to the owner of Cloud.Market. The agreement included customary representations, warranties, and covenants by us and the Cloud.Market owner. See further details in Note 16.
On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 common shares and 1 year stock options with an exercise price of $0.15. The shares and warrants were valued on the conversion date in the amounts of $109,846 and $19,385, respectively. As the value of the shares and warrants equaled the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction.
During the year ended February 29, 2016, 41,000 common shares were issued for stock payables from the 2015 fiscal year which amounted to $11,500 which was previously recorded as a stock payable as of February 28, 2015.
Stock Warrants
As of November 30, 2016, the Company had 4,660,000 warrants outstanding with an average exercise price of $0.14. These warrants expire between one and ten years from their date of issue and have a weighted average remaining exercise period of 4.15 years.
As of February 29, 2016, the Company had 4,510,000 warrants outstanding with an average exercise price of $0.14. The warrants expire one-ten years from their date of issue and have a weighted average remaining exercise period as of February 29, 2016 of 4.70 years.
Stockholders purchasing stock during the fourth quarter of fiscal year 2016 were granted a one year warrant for each share of stock purchased. The $0.15 warrants vested immediately and expire January 1, 2017.
On March 4, 2016, as compensation for services rendered three individuals were issued 30,000 warrants to purchase shares of the Company stock at $0.10 per share. The warrants vested immediately and expire March 4, 2026. The total estimated value using the Black-Scholes Model, based on a volatility rate of 180% and a call option value of $0.08 was $11,948.
On December 4, 2015, as compensation one board member was issued 200,000 warrants purchase shares of the Company stock at $0.10 per share. The warrants vested immediately and expire December 3, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.13 was $25,994.
On December 4, 2015, as payment for services rendered one consultant was issued 200,000 warrants to purchase shares of the Company stock at $0.10 per share. The warrants vested immediately and expire December 3, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.13 was $25,944.
On September 10, 2015, as payment for services rendered one consultant was issued 200,000 warrants to purchase shares of the Company stock at the closing price as of September 9, 2015 of $0.30 per share. The warrants vested
14
immediately and expire on September 10, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 121% and a call option value of $0.285 was $57,001.
On September 10, 2015, as payment for services rendered one consultant was issued 200,000 warrants as compensation to purchase shares of the Company stock at the price of $0.30 per share. The warrants vested immediately and expire on September 10, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 121% and a call option value of $0.285 was $57,001.
On September 10, 2015, as payment for services rendered one consultant was issued 100,000 warrants as compensation to purchase shares of the Company stock at the price of $0.30 per share. The warrants vested immediately and expire on September 10, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 121% and a call option value of $0.285 was $28,500.
On May 5, 2015, Jeffrey Mills, a Director, was issued 200,000 warrants to purchase shares of the Company stock at the price as of May 4, 2015 of $0.25 per share. The warrants vested immediately and are exercisable until May 5, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.24 was $47,817.
On May 5, 2015, as payment for services rendered one consultant was issued 200,000 warrants to purchase shares of the Company stock at the price of $0.25 per share. The warrants vested immediately and are exercisable until May 5, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.24 was $47,817.
On May 5, 2015, as payment for services rendered one consultant was issued 50,000 warrants to purchase shares of the Company stock at the price of $0.25 per share. The warrants vested immediately and are exercisable until May 5, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.24 was $11,954.
On May 5, 2015, Darvin Habben, Chairman of the Board, was issued 400,000 warrants to purchase shares of the Company stock at the price of $0.25 per share. The warrants vested immediately and are exercisable until May 5, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.24 was $95,634.
On April 3, 2015, as payment for services rendered one consultant was issued 300,000 warrants to purchase shares of the Company stock at the price of $0.15 per share. The warrants vested immediately and are exercisable until April 3, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 122% and a call option value of $0.14 was $42,808.
The Company utilized the following key assumptions in computing the fair value of the warrants using the Black-Scholes pricing model:
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|
|
|
|
|
|
|
|
|
|
|
|
|
April 3,
|
|
|
May 5,
|
|
|
September 10,
|
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
Weighted-average volatility
|
|
|
122
|
%
|
|
|
125
|
%
|
|
|
121
|
%
|
Expected dividends
|
|
None
|
|
|
None
|
|
|
None
|
|
Expected term (in years)
|
|
|
10.00
|
|
|
|
10.00
|
|
|
|
10.00
|
|
Weighted-average risk-free interest rate
|
|
|
1.92
|
%
|
|
|
2.19
|
%
|
|
|
2.23
|
%
|
Weighted-average fair value of warrants granted
|
|
$
|
0.14
|
|
|
$
|
0.21
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 4,
|
|
|
January 1,
|
|
|
March 4,
|
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
Weighted-average volatility
|
|
|
122
|
%
|
|
|
126
|
%
|
|
|
180
|
%
|
Expected dividends
|
|
None
|
|
|
None
|
|
|
None
|
|
Expected term (in years)
|
|
|
10.00
|
|
|
|
1.00
|
|
|
|
10.00
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average risk-free interest rate
|
|
|
1.92
|
%
|
|
|
0.66
|
%
|
|
|
2.19
|
%
|
Weighted-average fair value of warrants granted
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
|
$
|
0.08
|
|
The following table summarizes information about the Company's stock warrant changes during the nine months ended November 30, 2016 and the year ended February 29, 2016:
|
|
|
|
|
|
Number of Warrants
|
Outstanding - February 28, 2015
|
|
|
700,000
|
Granted
|
|
|
4,510,000
|
Canceled or expired
|
|
|
(700,000)
|
Outstanding - February 28, 2016
|
|
|
4,510,000
|
Granted
|
|
|
30,000
|
Canceled or expired
|
|
|
-
|
Outstanding - November 30, 2016
|
|
|
4,540,000
|
Exercisable at November 30, 2016
|
|
|
4,540,000
|
The following table summarizes information about stock warrants outstanding as of November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Life (years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average Exercisable
Price
|
|
$
|
0.25
|
|
|
|
300,000
|
|
|
|
9.08
|
|
|
$
|
0.24
|
|
|
|
300,000
|
|
|
$
|
0.24
|
|
$
|
0.25
|
|
|
|
850,000
|
|
|
|
9.17
|
|
|
$
|
0.24
|
|
|
|
850,000
|
|
|
$
|
0.24
|
|
$
|
0.30
|
|
|
|
500,000
|
|
|
|
9.50
|
|
|
$
|
0.28
|
|
|
|
500,000
|
|
|
$
|
0.28
|
|
$
|
0.10
|
|
|
|
400,000
|
|
|
|
9.75
|
|
|
$
|
0.13
|
|
|
|
400,000
|
|
|
$
|
0.13
|
|
$
|
0.15
|
|
|
|
2,490,000
|
|
|
|
0.83
|
|
|
$
|
0.07
|
|
|
|
2,490,000
|
|
|
$
|
0.07
|
|
$
|
0.15 - $0.30
|
|
|
|
4,540,000
|
|
|
|
4.70
|
|
|
$
|
0.14
|
|
|
|
4,540,000
|
|
|
$
|
0.14
|
|
The Company recorded stock-based compensation expense of $11,948 and $388,532 for all outstanding stock warrants for the nine months ended November 30, 2016 and 2015, respectively. This expense is included in selling, general and administrative expense.
Note 8. Stock Options
The Company has one stock option plan called The 2006 Employee Stock and Option Plan. As of November 30, 2016, an aggregate of 5,000,000 shares of common stock may be granted under this plan and must be approved by the Board of Directors. The stock options may be granted to officers and employees of the Company. Options granted under this plan are non-qualified stock options and have exercise prices and vesting terms established by the Board of Directors at the time of each grant. Vesting terms of the outstanding options range from immediate to four years from the date of grant. The terms of the options range from five to ten years from the date of grant.
The Company records its stock-based compensation arrangements by calculating the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the consolidated statements of operations based on their grant date fair values. The fair value of the Company's stock options have been estimated using the Black-Scholes pricing model, which requires assumptions as to expected dividends, the options expected life, volatility and risk-free interest rate at the time of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite vesting periods in the Company's consolidated statements of operations.
No stock options were granted during the nine months ended November 30, 2016.
16
For the year ended February 29, 2016 the Company granted 1,292,310 options to Robert Monster, CEO with a term of 10 years and the options vested on the grant date of February 10, 2016.
In addition, during the year ended February 29, 2016 the Company granted: (1) 200,000 options to Robert Monster and 400,000 options to two officers with a term of 10 years and the options vested on the grant date of December 4, 2015: (2) 200,000 options to two employees with a term of 10 years and the options vested on the grant date of September 10, 2015: (3) and 500,000 options to three employees with a term of 10 years and the options vested on the grant date of May 5, 2015.
In May 2015, Richard Pomije resigned as CEO, President, CFO and Chairman of the Board. Due to his resignation, Mr. Pomije forfeited 2,750,000 options that were granted in October 2011.
The fair value of the Company's stock options have been estimated using the Black-Scholes pricing model, which requires assumptions as to expected dividends, the option's expected life, volatility and risk-free interest rate at the time of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite vesting periods in the Company's consolidated statements of operations.
The Company utilized the following key assumptions in computing the fair value of the options using the Black-Scholes pricing model:
|
|
|
|
|
|
|
|
|
|
|
February 10,
|
|
|
December 4,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted-average volatility
|
|
|
126
|
%
|
|
|
125
|
%
|
Expected dividends
|
|
None
|
|
|
None
|
|
Expected term (in years)
|
|
|
1.00
|
|
|
|
10.00
|
|
Weighted-average risk-free interest rate
|
|
|
0.42
|
%
|
|
|
1.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
September 10,
|
|
|
May 5,
|
|
|
|
2015
|
|
|
2015
|
|
Weighted-average volatility
|
|
|
121
|
%
|
|
|
125
|
%
|
Expected dividends
|
|
None
|
|
|
None
|
|
Expected term (in years)
|
|
|
10.00
|
|
|
|
10.00
|
|
Weighted-average risk-free interest rate
|
|
|
2.23
|
%
|
|
|
1.54
|
%
|
The Company recorded stock-based compensation expense of $0 and $155,334 for all outstanding options for the nine months ended November 30, 2016 and 2015, respectively. This expense is included in selling, general and administrative expense. As of November 30, 2016, the Company has not recorded any tax benefit from this non-cash expense due to the Company having a full valuation allowance against its deferred tax assets. The compensation expense impacted the basic (loss) per common share for the nine months ended November 30, 2016 and 2015 by $(0.000) and $(0.003), respectively. As of November 30, 2016, there was no remaining unrecognized compensation expense to be recognized over future periods.
The following table summarizes information about the Company's stock options as of November 30, 2016 and changes during the years ended February 29, 2016.
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted Average Exercise Price
|
|
Outstanding - February 28, 2015
|
|
|
3,450,000
|
|
|
$
|
0.96
|
|
Granted
|
|
|
2,592,310
|
|
|
|
0.10
|
|
Canceled or expired
|
|
|
(3,450,000
|
)
|
|
|
0.86
|
|
Outstanding - February 29, 2016
|
|
|
2,592,310
|
|
|
$
|
0.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
17
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding November 30, 2016
|
|
|
2,592,310
|
|
|
$
|
0.10
|
|
Exercisable at November 30, 2016
|
|
|
2,592,310
|
|
|
$
|
0.10
|
|
The following table summarizes information about stock options outstanding as of November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Life (years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average Exercisable Price
|
|
$
|
0.25
|
|
|
|
500,000
|
|
|
|
8.92
|
|
|
$
|
0.21
|
|
|
|
500,000
|
|
|
$
|
0.21
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
9.25
|
|
|
$
|
0.25
|
|
|
|
200,000
|
|
|
$
|
0.25
|
|
$
|
0.10
|
|
|
|
600,000
|
|
|
|
9.50
|
|
|
$
|
0.12
|
|
|
|
600,000
|
|
|
$
|
0.12
|
|
$
|
0.15
|
|
|
|
1,292,310
|
|
|
|
0.67
|
|
|
$
|
0.02
|
|
|
|
1,292,310
|
|
|
$
|
0.02
|
|
$
|
0.10 - $0.30
|
|
|
|
2,592,310
|
|
|
|
4.96
|
|
|
$
|
0.09
|
|
|
|
2,592,310
|
|
|
$
|
0.09
|
|
Note 9. Related Party Transactions
Lease with Director/Stockholder
Since September 1, 2014 the Company has had a month-to-month agreement requiring rental payments of $1,050 per month. Mr. Mills invoiced the Company $0 and $3,150 for the nine months ended November 30, 2016 and 2015, respectively. No amounts were owed by the Company to Mr. Mills at November 30, 2016 or February 29, 2016, pertaining to the lease.
Accounts Payable Related Parties
On May 18, 2015, Richard Pomije resigned from the Company. At that time, the Board of Directors was aware of no continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with closing of the Burnsville, MN office. However, Mr. Pomije is asserting a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 is due in addition to the stock subscription receivable. The Company has accrued a liability, included in accounts payable - related parties, of $100,067 as of February 29, 2016 and November 30, 2016.
As of November 30, 2016, the Company owes $7,911 due to advances made to Rezserve Technologies, Ltd. by the prior owner which is within accounts payable related parties.
Accrued Salary Conversion
On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 common shares and 1 year stock options with an exercise price of $0.15. The shares and warrants were valued on the conversion date in the amounts of $109,846 and $19,385, respectively. As the value of the shares and warrants equaled the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction. As of November 30, 2016 and February 29, 2016, the accrued salary owed to Robert Monster was $30,000 and $0, respectively.
Employment Agreement Share Issuance
During the year ended February 29, 2016, the Company issued 3,312,811 common shares to Robert Monster, CEO, in accordance with his employment agreement date May 18, 2015. The shares were valued based on the employment agreement date. During the year ended February 29, 2016, $779,325 was expensed related to these shares. During the nine months ended November 30, 2016, $214,518 was expensed related to these shares.
On May 18, 2016, the Company granted 8,292,309 common shares to Robert Monster, CEO, in accordance with his employment agreement date May 18, 2016 which are earned monthly over the new employment agreement which
18
ends on May 18, 2018, a period of two years. The shares were valued based on the employment agreement date. During the nine months ended November 30, 2016, $556,607 was expensed related to these shares.
On March 9, 2016, the Company signed an employment agreement with Kenny Holloway for the period from March 9, 2016 through March 31, 2017. Included in the employment agreement is a common stock grant of 350,000 which vests monthly over the term of the employment agreement. During the nine months ended November 30, 2016, $21,651 was expensed related to this agreement.
On March 9, 2016, the Company signed an employment agreement with Chris Maxwell for the period from March 9, 2016 through March 31, 2017. Included in the employment agreement is a common stock grant of 600,000 which vests monthly over the term of the employment agreement. During the nine months ended November 30, 2016, $37,116 was expensed related to this agreement.
On July 9, 2016, the Company signed an employment agreement with Adee Wada for the period from July 9, 2016 through July 9, 2017. Included in the employment agreement is a common stock grant of 1,000,000 which vests monthly over 48 months. During the nine months ended November 30, 2016, $30,788 was expensed related to this agreement.
On October 1, 2016, the Company signed an employment agreement with Faris Oweis for the period from October 1, 2016 until terminated. Included in the employment agreement is a common stock grant of 250,000 shares which vests monthly over 48 months. During the nine months ended November 30, 2016, $10,654 was expensed related to this agreement.
Prepaid Domain Names
During the nine months ended November 30, 2016 and 2015, the Company incurred $75,230 and $127,005, respectively, of annual domain name renewal fees and has expensed $48,218 and $129,855, respectively, to cost of revenues on a straight-line basis. The amounts paid for the annual domain name renewal fees were paid directly to Epik Holdings Inc., a company which is controlled by Robert Monster, the Company's Chief Executive Officer. Epik Holdings Inc., then uses those funds to directly pay Verisign and ICANN companies for the annual domain renewal costs of $7.85 and $0.25, respectively, per domain name.
Notes Payable Related Party
On April 22, 2014, the Company signed an unsecured promissory note with Richard Pomije,the Companys former CEO, CFO and Chairman for a working capital loan of $75,000, due in one year at an annual interest rate of 5%. On December 1, 2014, the Company signed an additional unsecured promissory note with Richard Pomije for a working capital loan of $10,000 due in one year at an annual interest rate of 4%. On August 14, 2014, the Company made a $10,000 principal payment on the $75,000 note payable leaving a remaining principal balance of $75,000 on the two notes payable as of February 28, 2015. On April 3, 2015, the Company signed an additional unsecured promissory note with Richard Pomije for a working capital loan of $15,000 due in one year at an annual interest rate of 4%. In May 2015, the Company paid off all three notes payable resulting in no notes payable owed as of May 31, 2015. Accrued interest of $0 and $3,657 related to the $75,000 note payable is included in accounts payable related party as of November 30, 2016 and February 29, 2016, respectively, and accrued interest of $0 and $266 related to the $0 and $10,000 notes payable is included in accounts payable related parties as of November 30, 2016 and February 29, 2016, respectively. All accrued interest was paid as of November 30, 2016.
Convertible Note Payable Related Party
On September 14, 2016, the Company signed a secured convertible note of $400,000 with Clint Skidmore as part of the stock purchase agreement of Rezserve Technology Ltd. See Note 16. The interest free note is due and payable within one year and is
convertible into up to 1,000,000 shares of Company Common Stock at a conversion price of $0.40 per share. The Company evaluated the note to determine whether a beneficial conversion feature should be recorded, but determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present. The imputed
interest expense of $8,548 related to the
19
$400,000 note payable was recorded as an increase in additional paid in capital during the three months ended November 30, 2016.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Note 10. Income Taxes
The Company accounts for income taxes under standards issued by the FASB. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.
No provision for federal income taxes has been recorded due to the net operating loss carry forwards totaling approximately $10,890,587 as of November 30, 2016 that will be offset against future taxable income. The available net operating loss carry forwards will expire in various years through 2036. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carry forwards.
The actual income tax provisions differ from the expected amounts calculated by applying the statutory income tax rate to the Company's loss before income taxes. The components of these differences are as follows at November 30, 2016 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
11/30/16
|
|
|
2/29/16
|
|
Net tax loss carry-forwards
|
|
$
|
10,890,587
|
|
|
$
|
9,591,131
|
|
Statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Expected tax recovery
|
|
|
3,702,800
|
|
|
|
3,260,985
|
|
Change in valuation allowance
|
|
|
(3,702,800
|
)
|
|
|
(3,260,985
|
)
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Components of deferred tax asset:
|
|
|
|
|
|
|
|
|
Non capital tax loss carry forwards
|
|
$
|
3,702,800
|
|
|
$
|
3,260,985
|
|
Less: valuation allowance
|
|
|
(3,702,800
|
)
|
|
|
(3,260,985
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 11. Commitments and Contingencies
The Company is exposed to asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.
On December 8, 2010, the Company entered into a five-year strategic partnership agreement with the National Interscholastic Athletic Administrators Association ("NIAAA"). The NIAAA and DigitalTown will work together to establish a national, standardized system for recording schedules, scores, rosters and statistics for interscholastic sports teams and individual students. Pursuant to the agreement, the Company has committed to pay the expenses related to this strategic partnership; however, any expenses in excess of $5,000 must be preapproved by the Company. The Company has committed to deposit $50,000 for such expenses for the first fiscal year of the contract which the Company has paid as of February 29, 2012. In addition, as of May 31, 2016, the Company has paid $20,000 of the $50,000 due for the second fiscal year of the contract and the balance due of $30,000 is included in accounts payable. In addition, the Company has committed to donate 25% of the annual net sponsorship revenue in
20
the scheduling and stats areas of its websites, with a total annual donation cap of $3,000,000, to yet to be named program funds that promote youth activities and the NIAAA. Lastly, the Company has committed to a minimal revenue share of $100,000 per year with the future launch of its beta 3 software. As of November 30, 2016, the Company has not yet launched its beta 3 software nor has it generated any net sponsorship revenue.
Note 12. Common Stock Subscriptions Receivable
Prior to May 11, 2015, the Company had the 2007 and 2011 stock subscription agreements outstanding all of which were due from a related party: (See Notes 3 and 5 for further information).
Summary
As of November 30, 2016, and February 29, 2016, the Company is owed $0 and $12,500 for stock.
The Company did not have any stock receivables remaining related to the 2007 and 2010 agreements.
The following tables summarize information about the 2007 and 2010 agreements for stock subscriptions receivable with Richard Pomije, former CEO, CFO and Chairman.
|
|
|
|
|
|
|
|
|
Receivable balance at February 29, 2008
|
|
$
|
5,030,795
|
|
Cash collected
|
|
|
(523,832
|
)
|
Receivable balance at February 28, 2009
|
|
|
4,506,963
|
|
Cash collected
|
|
|
(337,500
|
)
|
2007 Subscription agreement pricing revised (1)
|
|
|
(2,275,000
|
)
|
Receivable balance at February 28, 2010
|
|
|
1,894,463
|
|
New subscription agreement (2)
|
|
|
300,000
|
|
Cash collected
|
|
|
(771,809
|
)
|
Receivable balance at February 28, 2011
|
|
|
1,422,654
|
|
Cash collected
|
|
|
(123,000
|
)
|
Receivable balance at February 29, 2012
|
|
|
1,299,654
|
|
Cash collected
|
|
|
(320,800
|
)
|
Receivable balance at February 28, 2013
|
|
|
978,854
|
|
Cash collected
|
|
|
(337,459
|
)
|
Receivable balance at February 28, 2014
|
|
|
641,395
|
|
Cash collected
|
|
|
(15,913
|
)
|
Receivable balance at February 28, 2015
|
|
|
625,482
|
|
Cash collected
|
|
|
-
|
|
Settlement with former CEO (see Note 11)
|
|
|
(625,482
|
)
|
Receivable balance at February 29, 2016
|
|
$
|
-
|
|
Receivable balance at November 30, 2016
|
|
$
|
-
|
|
_________________
|
|
(1)
|
Amendment to the terms of the subscription agreements received by the Company on October 5, 2007 for 1,300,000 restricted common shares reducing the price paid per share from $2.50 to $0.75.
|
(2)
|
New subscription agreement received on June 22, 2010.
|
Note 13. Earnings (Loss) Per Share
The Company computes earnings per share using two different methods, basic and diluted, and presents per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding.
21
The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the nine months ended November 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
November 30, 2016
|
|
|
November 30, 2015
|
|
Basic earnings (loss) per share calculation:
|
|
|
|
|
|
|
Net loss to common shareholders
|
|
$
|
(2,657,455)
|
|
|
$
|
(1,366,673)
|
|
Weighted average number of common shares outstanding
|
|
|
42,729,626
|
|
|
|
32,980,677
|
|
Basic net loss per share
|
|
$
|
(0.06)
|
|
|
$
|
(0.04)
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
Net loss to common shareholders
|
|
$
|
(2,657,455)
|
|
|
$
|
(1,366,673)
|
|
Weighted average number of common shares outstanding
|
|
|
42,729,626
|
|
|
|
32,980,677
|
|
Stock options (1)
|
|
|
-
|
|
|
|
-
|
|
Warrants (2)
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average common shares outstanding
|
|
|
42,729,626
|
|
|
|
32,980,677
|
|
Diluted net loss per share
|
|
$
|
(0.06)
|
|
|
$
|
(0.04)
|
|
_______________
|
|
(1)
|
At November 30, 2016 and 2015, there were outstanding stock options equivalent to 2,592,310 and 1,400,000 common shares, respectively. The stock options are anti-dilutive at November 30, 2016 and 2015 and therefore, have been excluded from diluted earnings (loss) per share.
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|
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(2)
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At November 30, 2016 and 2015, there were outstanding warrants equivalent to 4,540,000 and 2,725,000 common shares, respectively. The warrants are anti-dilutive at November 30, 2016 and 2015 and therefore, have been excluded from diluted earnings (loss) per share.
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Note 14. Gain on Settlement of Accounts Payable
During the nine months ended November 30, 2015, the Company settled an accounts payable amount owed to a vendor with a balance of $44,899 as of February 28, 2015, for $18,000 resulting in a gain on settlement of accounts payable of $26,899. One other accounts payable item was settled during the nine months ended November 30, 2015 which resulted in an additional gain of $1,120.
Note 15. Loss on Conversion of Deferred Officer Compensation into Equity
On May 11, 2015, Richard Pomije, the former CEO, CFO and Chairman of the Company agreed to accept the stock subscriptions receivable in lieu of his deferred officer accrued compensation. As of May 11, 2015, (date of agreement), the balance recorded as deferred officer compensation was $331,849 and the balance recorded as stock subscriptions receivable was $625,482. The agreement resulted in a loss on conversion of deferred officer compensation of $293,633.
Note 16. Acquisitions
Rezserve Technologies Ltd. Acquisition
On September 14, 2016, the Company closed on a Stock Purchase Agreement for 100% of the Canadian corporation, Rezserve Technologies, Ltd. Pursuant to the agreement, the Company purchased all of the issued and outstanding stock of Rezserve Technologies, Ltd. in consideration for an aggregate of $1,480,000, of which 3,000,000 shares of stock were accrued and due at the closing, and $400,000 was financed by way of a secured convertible note. The terms of the note include interest at 0% per annum. Principal will be due and payable within one year of September 13, 2016.
22
This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Companys assets and ongoing operations were acquired. The purchase resulted in $1,317,680 of goodwill.
According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
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|
|
|
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Assets, net of liabilities
|
|
$
|
34,708
|
|
IP/Technology
|
|
|
30,842
|
|
Customer Base
|
|
|
77,295
|
|
Trade-Name/Marks
|
|
|
19,475
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|
Goodwill
|
|
|
1,317,680
|
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Total assets acquired
|
|
$
|
1,480,000
|
|
The purchase price consists of the following:
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|
|
|
|
Convertible note payable related party
|
|
$
|
400,000
|
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Common stock
|
|
|
1,080,000
|
|
Total purchase price
|
|
$
|
1,480,000
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The unaudited supplemental pro forma results of operations of the combined entities had the dates of the acquisitions been March 1, 2016 or March 1, 2015 are as follows:
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|
|
|
|
|
|
|
|
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Combined Pro Forma:
|
|
|
|
For the 9 months ended
|
|
|
|
November 30,
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|
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2016
|
|
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2015
|
|
Revenues
|
|
$
|
262,971
|
|
|
$
|
265,260
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(355,124)
|
|
|
|
(171,968)
|
|
|
|
|
|
|
|
|
|
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Gross profit (loss)
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|
|
(92,153)
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|
|
|
93,292
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|
|
|
|
|
|
|
|
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Operating expenses:
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|
|
|
|
|
|
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Selling, general and administrative expenses
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|
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(2,566,716)
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|
|
|
(1,131,781)
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|
|
|
|
|
|
|
|
|
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Loss from operations
|
|
|
(2,658,869)
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|
|
|
(1,038,489)
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|
|
|
|
|
|
|
|
|
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Other income (expense)
|
|
|
(8,548)
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|
|
|
(265,614)
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|
|
|
|
|
|
|
|
|
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Net loss
|
|
$
|
(2,667,417)
|
|
|
$
|
(1,304,103)
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|
|
|
|
|
|
|
|
|
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Weighted average number of common shares
|
|
|
|
|
|
|
|
|
Outstanding basic and fully diluted
|
|
|
42,729,626
|
|
|
|
32,980,677
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and fully diluted
|
|
$
|
(0.06)
|
|
|
$
|
(0.04)
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|
Cloud.Market Acquisition
On March 5, 2016, The Company acquired all of the assembled workforce, patents, intellectual property, technology, trademarks, trade names, copyrights, mask works and registrations, computer software, trade secrets
23
and non-compete agreements related to the Cloud.Market business, pursuant to an agreement dated March 5, 2016 among the Company and the owner of Cloud.Market in consideration for our issuance of 750,000 shares of our common stock and $7,500 of cash consideration payable to the owner of Cloud.Market. The agreement included customary representations, warranties, and covenants by us and the Cloud.Market owner.
The allocation of the purchase price to assets based upon fair value determinations was as follows:
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|
|
|
|
Non-compete agreements
|
|
$
|
700
|
|
Goodwill
|
|
|
66,800
|
|
Total assets acquired
|
|
$
|
67,500
|
|
The purchase price consists of the following:
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|
|
|
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Cash
|
|
$
|
7,500
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Common stock
|
|
|
60,000
|
|
Total purchase price
|
|
$
|
67,500
|
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The unaudited supplemental pro forma results of operations of the combined entities are not included in this disclosure as the acquisition of Cloud.Market does not significantly affect the Company's results from operations.
Note 17. Intangible Assets and Goodwill
Goodwill
The carrying value of goodwill at November 30, 2016, and February 29, 2016, was $1,384,480 and $0, respectively. See Note 16 for details related to the goodwill balances acquired during the nine months ended November 30, 2016.
Intangible assets
The following table presents details of our purchased intangible assets as of November 30, 2016 and February 29, 2016:
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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Balance at
February 29, 2016
|
|
|
Additions
|
|
|
Amortization
|
Balance at
November 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
-
|
|
|
$
|
700
|
|
|
$ (259)
|
$
|
441
|
|
IP/Technology
|
|
|
-
|
|
|
|
30,842
|
|
|
(3,253)
|
|
27,589
|
|
Customer Base
|
|
|
-
|
|
|
|
77,295
|
|
|
(8,153)
|
|
69,142
|
|
Trade-Name/Marks
|
|
|
-
|
|
|
|
19,475
|
|
|
(2,054)
|
|
17,421
|
|
Domain name rights
|
|
|
-
|
|
|
|
201,240
|
|
|
-
|
|
201,240
|
|
Total
|
|
$
|
-
|
|
|
$
|
329,552
|
|
|
$ (13,719)
|
$
|
315,833
|
|
During the nine months ended November 30, 2016, the Company issued 275,000 common shares, recorded additional stock payable for 84,750 shares, and paid $46,500 in cash, for a total consideration given of $201,240 to three individuals in order to purchase domain name rights. The fair value of the shares issued and recorded was $154,740 based on the respective domain name purchase agreements date and the closing market price on that date. The assets were recorded as intangible assets with an indefinite life; which will be evaluated for impairment on an annual basis.
The intangible assets, except for the domain name rights which are indefinite lived, are being amortized on a straight line basis over their estimated useful lives of two to five years.
24
Amortization expense for intangible assets was $13,719 and $0 for the nine months ended November 30, 2016 and 2015, respectively.
The estimated future amortization expense of our intangible assets as of November 30, 2016 is as follows:
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|
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|
|
Year ending November 30,
|
|
Amount
|
|
2017
|
|
|
25,662
|
|
2018
|
|
|
25,641
|
|
2019
|
|
|
25,522
|
|
2020
|
|
|
25,522
|
|
2021
|
|
|
12,062
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
114,410
|
|
Note 18. Convertible Note Payable Related Party
On September 14, 2015, the Company signed a secured convertible note of $400,000 with Clint Skidmore as part of the stock purchase agreement of Rezserve Technology Ltd. See Note 16. The interest free note is due and payable within one year and is
convertible into up to 1,000,000 shares of Company Common Stock at a conversion price of $0.40 per share. The Company evaluated the note to determine whether a beneficial conversion feature should be recorded, but determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present. The imputed
interest expense of $8,548 related to the $400,000 note payable was recorded as an increase in additional paid in capital during the three months ended November 30, 2016.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Note 19. Subsequent Events
On December 1, 2016, The Company entered into an asset purchase agreement with the owners of Appointment.com LLC. The Company acquired all software source code and customer and system data of Appointment.com for 1,625,000 shares of stock.
During the period from December 1 through January 10, 2017, the Company issued 7,394,750 shares to investors and directors for amounts that were accrued in common stock payable as of November 30, 2016.
There were no additional significant subsequent events through January 11, 2017, the date the financial statements were issued.
25