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 CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended November 30, 2018 and 2017
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial information has been prepared by DigitalTown, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim period presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period. This financial information should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2018.
The Company’s fiscal year end is the last day in February. Our current fiscal year ends on February 28, 2019 and we refer to it as “fiscal 2019”. Last year, our fiscal year ended on February 28, 2018 and we refer to this year as “fiscal 2018”.
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 build a Platform as a Service (PaaS) that places people at the heart of Smart Cities. DigitalTown leverages Blockchain to harness the real power of a secure distributed internet in order to deliver a localized commerce platform capable of transacting in a multi-currency world. The Company’s headquarters are located in Bellevue, WA. The Company’s common stock is traded on the OTC Markets under the ticker symbol of DGTW.
The Company’s consolidated financial statements have been prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
At November 30, 2018, the Company had an accumulated deficit of $55,660,394. The Company anticipates that growth from its operations, expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least February 28, 2019. In the event that the Company is unable to obtain additional capital in the future, the Company would reduce operating expenses or cease operations altogether.
Principles of Consolidation
The consolidated financial statements include the accounts of DigitalTown, Inc. and its wholly-owned subsidiaries and have been prepared by the Company in United States (U.S.) dollars and in accordance with accounting principles generally accepted in the United States, or GAAP. All material intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period amounts in the consolidated statement of cash flows have been reclassified to conform to the current period presentation. Proceeds from related party notes payable received in the prior period have been reclassified from the prior period classification. These reclassifications had no impact on previously reported net income or accumulated deficit for any year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable arise from the software licensing of our Rezserve subsidiary. The Company evaluates collectability of accounts receivable based on a combination of factors including the age of the receivable or a specific customer’s inability to meet its financial conditions. In these circumstances, the Company records an allowance to reduce the receivable to an amount it deems collectible. The Company has recorded an allowance for doubtful accounts as of November 30, 2018 and February 28, 2018 of $5,260 and $5,456, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net tangible and identifiable intangible assets related to completed acquisitions. Goodwill has an indefinite life and is not amortized but instead tested for impairment annually, or more frequently if necessary.
Intangible assets are recorded at fair value and are comprised of amounts assigned to acquisition-related items, such as trade names, customer lists, non-compete agreements and intellectual property/technology. Intangible assets are considered either definite or indefinite lived assets. Definite lived intangible assets are amortized on a straight-line basis over their useful lives. Certain intangible assets may have an indefinite life and are not amortized, but rather evaluated for impairment annually.
We evaluate any goodwill and intangible assets for an impairment on an annual basis each fiscal year end. We also evaluate goodwill and intangible assets for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the goodwill and intangible assets below the carrying amounts. Based upon our review and analysis, we deemed all of the goodwill and intangible assets acquired in fiscal 2018 as fully impaired. Accordingly, we recognized an impairment expense of $1,721,760.
Revenue Recognition
Effective March 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the nine months ended November 30, 2018 and the twelve months ended February 28, 2018.
The Company recognizes revenue when the following four criteria have been met:
|
·
|
Persuasive evidence that a business relationship exists
|
|
·
|
Delivery has occurred
|
|
·
|
The price is fixed and determinable
|
|
·
|
Collectibility is reasonably assured
|
The Company primarily recognizes revenue from sale of software licenses and related development services. Software licensing and development revenue is recognized as invoiced and over the course of the applicable agreements. In the event projects have multiple project milestones, revenue is recognized as milestones are achieved and invoices are submitted for payment.
The Company may also be merchant of record for merchant transactions processed on the DigitalTown platform. When this happens, revenue is recognized on the date of the transaction. The Company has experience in merchant transaction fraud mitigation. To the extent chargebacks become material, the Company will implement a formal practice for allowance for doubtful accounts.
Fair Value of Financial Instruments
Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under U.S. GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
As of November 30, 2018 and February 28, 2018, the Company does not have any financial instruments that must be measured under the fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability.
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs during the third quarter of fiscal 2019 or the fiscal year 2018.
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, 2018 and February 28, 2018, the Company had no cash equivalents.
Cash Deposits in Excess of Federally Insured Limits
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are insured by the Federal Deposit Insurance Company and currently have insurance coverage up to $250,000. At November 30, 2018 and February 28, 2018, the Company did not have any deposit accounts in excess of federally insured limits.
Prepaid Domain Names
The annual domain name renewal fees are currently capitalized in the period of renewal then amortized over one year. Only the purchase of new domain names is capitalized. See Note 5 for further information.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives, ranging from three to five years. Leasehold improvements are amortized over the shorter of the useful life or the term of the related lease. The Company recorded $5,854 and $3,970 of depreciation expense for the first nine months of fiscal years 2019 and 2018, 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.
Income Taxes
Deferred tax assets (net of any valuation allowance) and liabilities resulting from temporary differences, net operating loss carryforwards and tax credit carryforwards are recorded using an asset-and-liability method. Deferred taxes relating to temporary differences and loss carryforwards are measured using the tax rate expected to be in effect when they are reversed or are realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be ultimately realized. The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related future benefits.
The Company accounts for income taxes pursuant to FASB guidance. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves or related accruals for interest and penalties have been recorded at November 30, 2018 or February 28, 2018. In accordance with the FASB guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of operations. The Company has three open years of tax returns subject to examination.
Stock-Based Compensation, Including Options and Warrants
Use of equity for compensation is a material part of the Company’s near-term strategy. The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company’s stock-based payments is based on estimated fair values at the time of the grant.
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company’s common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification 606 (“ASC 606”)). ASU No. 2014-09 provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract and estimating the amount of variable consideration to include in the transaction price attributable to each separate performance obligation. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific revenue recognition topics. This guidance will be effective for the Company for its fiscal year 2019.
The Company will adopt using the modified retrospective approach to initially apply the update and recognize the remaining contract value at the date of application. The Company does not expect the adoption of ASU 2014-09 to have any impact on its total cash flows from operating, investing or financing activities.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the second step of the two-step goodwill impairment test. Under ASU 2017-04, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not elected early adoption of this standard and is currently in the process of evaluating the impact of adopting ASU 2017-04 and cannot currently estimate the financial statement impact of adoption.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, ”Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company does not expect the adoption to have a material impact on its consolidated financial statements upon adoption.
The Company believes there are no other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Note 3. Going Concern
The Company’s consolidated financial statements have been prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
At November 30, 2018, the Company had an accumulated deficit of $55,660,394. The Company anticipates growth from its operations, expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least November 30, 2018. In the event that the Company is unable to obtain additional capital in the future, the Company would further reduce expenses or cease operations altogether.
Note 4. Property and Equipment
Property and equipment are as follows:
|
|
November 30,
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2018
|
|
Office equipment and furniture
|
|
$
|
47,617
|
|
|
$
|
43,088
|
|
Less accumulated depreciation
|
|
|
(25,794
|
)
|
|
|
(20,655
|
)
|
Property and equipment, net
|
|
$
|
21,823
|
|
|
$
|
22,433
|
|
Depreciation expense for the first nine months of fiscal years 2019 and 2018 was $5,854 and $3,970, respectively.
Note 5. Prepaid Domain Names
During the first nine months of fiscal years 2019 and 2018, the Company incurred $30,656 and $24,120, respectively, of annual domain name renewal fees, specifically related to .CITY registrations. These amounts were recorded as prepaid domain name renewal fees, and are then amortized over one year on a straight-line basis. During the first nine months of fiscal years 2019 and 2018, the Company recognized $59,764 and $89,026 of expense as cost of revenues related to this amortization. As of November 30, 2018, and February 28, 2018, the Company has $19,541 and $77,977, respectively, of remaining prepaid domain name renewal fees recorded on the balance sheet. See Note 9 for information on Related Party activity within Prepaid Domain Names.
Note 6. Accrued Expenses and Deferred Revenue
Accrued Expenses
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company at February 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2018, $552,976 had been accrued as payable to Mr. Pomije. During the quarter ending August 31, 2018, $10,910 was paid to Mr. Richard Pomije. As at November 30, 2018, $542,066 has been accrued as payable to Mr. Pomije. The Company has filed an appeal. See Note 16 for additional information about transactions between the Company and its former officer.
During the second quarter of fiscal 2019, Robert Monster deferred his salary payments to assist with cash conservation. As at November 30, $70,000 has been accrued as payable to Robert Monster.
Deferred Revenue
During fiscal 2017, the Company signed three customer agreements to perform digital support and development services for three third party companies. During fiscal 2019, the Company signed one customer agreement to perform digital support and development services for one third party company. 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 the services requested by the customers have not yet been completed, the total of $170,000 has been recorded as deferred revenue as of February 28, 2018, and $186,305 has been recorded as deferred revenue as of November 30, 2018.
Domain Marketing Development Obligation
During fiscal 2018, the Company signed top-level domain marketing development fund agreements with owners of 13 top level domains whereby the Company markets and purchases domain names on behalf of the owners. The owner pays us an upfront deposit to be used to purchase a predefined number of domains based on a set schedule. As of November 30, 2018 and February 28, 2018, the Company has collected $101,600 and $930,556 in cash related to these contracts. As some of the services requested by the owners have not yet been completed, a total of $168,174 and $145,906 has been recorded as domain marketing development obligation as of November 30, 2018, and February 28, 2018, respectively.
Note 7. Stockholders’ Equity
The Company’s primary means of generating operating capital and completing acquisitions has been through the use of issuing common stock.
Fiscal 2019 Stock Transactions
During the first nine months of fiscal 2019, the Company issued 36,266,251 shares of stock to various investors for stock payable of $1,828,200, cash of $1,070,545 and digital currencies of $1,659,000.
During the first nine months of fiscal 2019, the Company issued 6,716,932 shares to consultants and employees for services provided to the Company. During the first nine months of fiscal 2019, $1,104,832 was expensed related to these shares.
On May 9, 2018, the Company converted the $500,000 convertible note with Darvin Habben, Chairman, along with accrued and unpaid interest of $38,028, to 5,380,274 shares of its common stock, fully extinguishing this note. The issuance had no gain or loss as the value of the shares issued equalled the debt converted.
On May 9, 2018, the Company converted the $150,000 convertible note with Darvin Habben, Chairman, to 1,500,000 shares of its common stock, fully extinguishing this note. The issuance had no gain or loss as the value of the shares issued equalled the debt converted.
On May 9, 2018, the Company converted the $100,000 promissory note with Derek Schumann, Director, to 1,000,000 shares of its common stock, fully extinguishing this note. The issuance had no gain or loss as the value of the shares issued equalled the debt converted.
On May 9, 2018, the Company converted the $100,000 promissory note with Greg Foss, Director, to 1,000,000 shares of its common stock, fully extinguishing this note. The issuance had no gain or loss as the value of the shares issued equalled the debt converted.
On May 9, 2018, the Company converted the $100,000 promissory note with Donovan, to 1,000,000 shares of its common stock, fully extinguishing this note. The issuance had no gain or loss as the value of the shares issued equalled the debt converted.
During May 2018, PowerUp Lending Group Ltd. converted $75,000 of the principal amount, plus $4,500 in accrued and unpaid interest, of the October 30, 2017 note into 1,277,498 shares of the Company’s common stock, fully extinguishing this note. There was no gain or loss due to the conversion within the terms of the note.
During the first quarter of fiscal 2019, the Company sold 2 domains valued at $3,000 to one of the Company’s shareholders in exchange for 15,000 shares, which were returned to treasury.
During June and July 2018, PowerUp Lending Group Ltd. converted $58,000 of the principal amount, plus $3,480 in accrued and unpaid interest, of the November 30, 2017 note into 1,139,394 shares of the Company’s common stock, fully extinguishing this note. There was no gain or loss due to the conversion within the terms of the note.
On July 10, 2018, the Company issued 90,000 shares of its common stock, valued at $8,010 based on the closing market price on the date of the note agreement, to FirstFire Global Opportunities Fund LLC as consideration for improved terms and conditions on their July 10, 2018 convertible note. The Company recorded a beneficial conversion feature of $143,325 with this note. See Note 15 for more information related to the convertible note.
Fiscal 2018 Stock Transactions
During fiscal 2018, the Company issued 14,857,715 shares of stock to various investors for stock payable of $2,559,061 and cash of $1,662,732.
During fiscal 2018, a Director exercised one of his stock options for 200,000 shares of stock for cash of $20,000.
During fiscal 2018, the Company issued 8,512,776 shares and recorded a stock payable of $521,792 to consultants and employees for services provided to the Company. During fiscal 2018, $1,763,168 was expensed related to these shares.
During fiscal 2018, various contractors and employees converted an aggregate of $124,996 of their expenses to stock payable of the Company’s common stock, based on a conversion rate of $0.10 per share. The stock value on the conversion date was $0.23, resulting in a loss on conversion of $316,526. At February 28, 2018, the stock payable for these conversions is $276,769.
On May 18, 2016, the Company granted 9,042,250 common shares to Robert Monster, CEO, in accordance with his employment agreement dated May 18, 2016, which vest monthly over the new employment agreement period which ends on May 18, 2018, a period of two years. The shares were valued based on the employment agreement date. During fiscal year 2018, $1,191,349 was expensed related to these shares. 6,799,361 shares were issued on February 8, 2018, and 2,130,500 shares were issued on May 31, 2018.
During fiscal 2018, the Company signed employment agreements with three members of senior management, all of which are still active. All employment agreements were for a period of approximately 6 to 24 months. Included in the employment agreements were common stock grants of 120,000 to 1,025,000 shares which vest over a period of 6 to 24 months. A total of 1,585,000 shares were granted for the three employment agreements. During fiscal 2018, $165,436 was expensed related to these agreements.
On July 1, 2017, the Company closed on an agreement and plan of share exchange and acquired Comencia, a related party Company, which was partly owned by an officer of the Company. The Company granted 2,500,000 shares of its common stock to the existing owners of Comencia, Inc. The closing price of the Company’s common stock on the acquisition date was $0.30 per share, therefore, the fair value of common stock issued was $750,000.
On October 27, 2017, the Company closed on an asset purchase agreement for the acquisition of CityInformation. CityInformation, based in Amsterdam (Netherlands), develops and operates mobile apps for cities and towns worldwide. The Company granted 2,833,333 shares of its common stock to the existing owners of CityInformation. The closing price of the Company’s common stock on the acquisition date was $0.29 per share, therefore, the fair value of common stock issued was $821,667. The stock was issued in November 2017.
On December 7, 2017, the Company closed on an asset purchase agreement for the acquisition of Congo Ltd. (Congo). Congo, based in Houston, TX, owns and operates a web-based platform offering; a portal connecting attorneys to prospective clients through a marketplace setting; a software-as-a-service (SaaS) subscription, selling web features to attorneys for their use on their respective law firm websites, and; the creation of customized online directories. The Company granted 3,000,000 shares of its common stock to the existing owners of Congo. The closing price of the Company’s common stock on the acquisition date was $0.28 per share, therefore, the fair value of common stock issued was $840,000. The stock was issued in February 2018.
Stock Warrants
The Company has regularly used warrants as a tool to attract and compensate advisors and directors of the board rather than to use cash. The Company feels this is an appropriate way to conserve cash and to incentivize its board of directors, advisors and consultants.
As of November 30, 2018, the Company had 9,044,740 warrants outstanding with an average exercise price of $0.13. The warrants expire between one and ten years from the date of issuance and have a weighted average remaining exercise period as of November 30, 2018 of 5.42 years.
The Company did not issue any warrants during the first nine months of fiscal 2019.
During fiscal 2018, the Company issued an aggregate of 6,694,740 warrants to various investors, consultants and employees to purchase shares of the Company’s common stock at $0.10. All warrants vested immediately at the date of issuance. 4,000,000 warrants are exercisable through 2027. 30,000 warrants are exercisable through 2026. 2,964,740 warrants are exercisable through February 2019. The total estimated value using the Black-Scholes Model, based on a volatility rate between 153% and 263% and a call option value of $0.10 was $1,340,175.
The Company utilized the following key assumptions in computing the fair value of the warrants using the Black-Scholes pricing model:
|
|
July 20,
|
|
|
July 27,
|
|
|
February 6,
|
|
|
February 15,
|
|
|
February 16,
|
|
|
|
2017
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
Weighted-average volatility
|
|
|
263
|
%
|
|
|
263
|
%
|
|
|
157
|
%
|
|
|
153
|
%
|
|
|
158
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Expected term (in years)
|
|
|
10.00
|
|
|
|
10.00
|
|
|
|
1.00
|
|
|
|
1.00
|
|
|
|
1.00
|
|
Weighted-average risk-free interest rate
|
|
|
1.17
|
%
|
|
|
1.16
|
%
|
|
|
2.00
|
%
|
|
|
1.99
|
%
|
|
|
2.00
|
%
|
Weighted-average fair value of warrants granted
|
|
$
|
0.20
|
|
|
$
|
0.27
|
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
The following table summarizes information about the Company’s stock warrant activity during the fiscal years 2019 and 2018:
|
|
Number of
Warrants
|
|
Outstanding - February 28, 2017
|
|
|
4,480,000
|
|
Granted
|
|
|
6,944,740
|
|
Canceled or expired
|
|
|
(2,430,000
|
)
|
Outstanding - February 28, 2018
|
|
|
9,044,740
|
|
Granted
|
|
|
-
|
|
Canceled or expired
|
|
|
-
|
|
Outstanding - November 30, 2018
|
|
|
9,044,740
|
|
Exercisable at November 30, 2018
|
|
|
9,044,740
|
|
The following table summarizes information about stock warrants outstanding as of November 30, 2018:
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Life (years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Exercisable Price
|
|
$
|
0.10
|
|
|
|
7,394,740
|
|
|
|
5.17
|
|
|
$
|
0.10
|
|
|
|
7,394,740
|
|
|
$
|
0.10
|
|
$
|
0.15
|
|
|
|
300,000
|
|
|
|
6.35
|
|
|
$
|
0.15
|
|
|
|
300,000
|
|
|
$
|
0.15
|
|
$
|
0.25
|
|
|
|
850,000
|
|
|
|
6.43
|
|
|
$
|
0.25
|
|
|
|
850,000
|
|
|
$
|
0.25
|
|
$
|
0.30
|
|
|
|
500,000
|
|
|
|
6.78
|
|
|
$
|
0.30
|
|
|
|
500,000
|
|
|
$
|
0.30
|
|
$
|
0.10 - $0.30
|
|
|
|
9,044,740
|
|
|
|
5.42
|
|
|
$
|
0.13
|
|
|
|
9,044,740
|
|
|
$
|
0.13
|
|
The Company recorded stock-based compensation expense of $0 and $0 for all outstanding stock warrants for the first nine months of fiscals 2019 and 2018, respectively.
Note 8. Stock Options
The Company has one stock option plan called The 2006 Employee Stock and Option Plan (the “2006 Plan”), which has reserved 5,000,000 shares of our common stock for issuance. The types of awards that could be granted under the 2006 Plan include incentive and non-qualified options to purchase shares of common stock, stock appreciation rights, restricted shares, restricted share units, performance awards and other types of stock-based awards. All grants are determined and approved by the Board of Directors. Through February 28, 2018, the Company has only granted non-qualified stock options under the 2006 Plan. The stock options may be granted to officers and employees of the Company. Options granted under the 2006 Plan have exercise prices and vesting terms approved by the Board of Directors at the time of each grant. Vesting terms of the outstanding options range from immediate to four years from the date of grant. The exercise period of the options range from five to ten years from the date of grant.
The Company records its stock-based compensation arrangements calculating the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the consolidated statements of operations based on their grant date fair values. The fair value of the Company’s stock options 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.
On October 1, 2018, the Company issued 2,468,750 stock options with a fair value of $188,740 to three contractors to purchase shares of the Company’s common stock at a price of $0.05. These options vest immediately and are exercisable for five years.
On November 21, 2018, the Company issued 3,500,000 stock options with a fair value of $120,421 to three contractors to purchase shares of the Company’s common stock at a price of $0.05. These options vest immediately and are exercisable for five years.
On June 1, 2018, the Company issued 3,555,212 stock options with a fair value of $436,131 to one employee to purchase shares of the Company’s common stock at a price of $0.10. 3,000,000 options vest immediately and are exercisable for five years. 555,212 options vest over 12 months, and are exercisable for five years. In the third quarter of fiscal 2019, the Company expensed an additional $19,621 related to the proportioned vesting of the 555,212 options.
During the first quarter of fiscal 2018, the Company issued an aggregate of 1,035,159 stock options with a fair value of $151,627 to 1 officer, 6 employees and 2 contractors to purchase shares of the Company’s common stock at prices of $0.10. All options vested immediately and are exercisable for one year.
During fiscal 2018, 1,292,310 of previously issued stock options to 1 officer expired, and 200,000 stock options previously issued to another officer were exercised for $20,000 cash.
The Company utilized the following key assumptions in computing the fair value of the options using the Black-Scholes pricing model:
|
|
February 16,
|
|
|
June 1
|
|
|
June 1
|
|
|
October 1
|
|
|
November 21
|
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
Weighted-average volatility
|
|
|
153
|
%
|
|
|
223
|
%
|
|
|
223
|
%
|
|
|
208
|
%
|
|
|
192
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Expected term (in years)
|
|
|
1.00
|
|
|
|
2.50
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
Weighted-average risk-free interest rate
|
|
|
2.00
|
%
|
|
|
2.61
|
%
|
|
|
2.61
|
%
|
|
|
2.96
|
%
|
|
|
2.89
|
%
|
The Company recorded stock-based compensation expense of $764,913 and $164,742 for all outstanding options for the first nine months of fiscals 2019 and 2018, respectively. This expense is included in stock-based compensation.
The following table summarizes information about the Company’s stock options as of November 30, 2018:
|
|
Number of
Options
|
|
|
Weighted Average Exercise Price
|
|
Outstanding - February 28, 2017
|
|
|
6,692,310
|
|
|
$
|
0.16
|
|
Granted
|
|
|
1,035,159
|
|
|
$
|
0.10
|
|
Canceled or expired
|
|
|
(1,492,310
|
)
|
|
$
|
0.14
|
|
Outstanding - February 28, 2018
|
|
|
6,235,159
|
|
|
$
|
0.16
|
|
Granted
|
|
|
9,523,962
|
|
|
$
|
0.07
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding - November 30, 2018
|
|
|
15,759,121
|
|
|
$
|
0.10
|
|
Exercisable at November 30, 2018
|
|
|
15,759,121
|
|
|
$
|
0.10
|
|
The following table summarizes information about stock options outstanding as of November 30, 2018:
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Life (years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Exercisable Price
|
|
$
|
0.05
|
|
|
|
5,968,750
|
|
|
|
4.92
|
|
|
$
|
0.05
|
|
|
|
5,968,750
|
|
|
$
|
0.05
|
|
$
|
0.10
|
|
|
|
8,440,371
|
|
|
|
4.60
|
|
|
$
|
0.10
|
|
|
|
8,440,371
|
|
|
$
|
0.10
|
|
$
|
0.15
|
|
|
|
200,000
|
|
|
|
7.02
|
|
|
$
|
0.15
|
|
|
|
200,000
|
|
|
$
|
0.15
|
|
$
|
0.30
|
|
|
|
700,000
|
|
|
|
6.67
|
|
|
$
|
0.30
|
|
|
|
700,000
|
|
|
$
|
0.30
|
|
$
|
0.54
|
|
|
|
375,000
|
|
|
|
5.18
|
|
|
$
|
0.54
|
|
|
|
375,000
|
|
|
$
|
0.54
|
|
$
|
1.00
|
|
|
|
75,000
|
|
|
|
2.86
|
|
|
$
|
1.00
|
|
|
|
75,000
|
|
|
$
|
1.00
|
|
$
|
0.05 - $1.00
|
|
|
|
15,759,121
|
|
|
|
4.85
|
|
|
$
|
0.14
|
|
|
|
9,790,371
|
|
|
$
|
0.14
|
|
Note 9. Related Party Transactions
Accounts Payable – Related Parties
The Company owes $0 and $7,625 to a former employee which is included within accounts payable – related parties as of November 30, 2018 and February 28, 2018, respectively.
As of November 30, 2018 and February 28, 2018, the Company owes $0 and $450,500, respectively, to Epik Holdings, Inc. related to annual domain name renewal fees to satisfy Domain marketing development obligations. Epik Holdings Inc. is a company controller by Robert Monster, the Company’s former Chief Executive Officer. All amounts owing to Epik Holdings, Inc. were converted to a promissory note. See Note 14 for more information.
Prepaid Domain Names
During the first nine months of fiscal 2019 and fiscal year 2018, the Company incurred $315,545 and $600,407, respectively, of annual domain name renewal fees. The amounts paid for the annual domain name renewal fees are paid directly to Epik Holdings Inc., a company which is controlled by Robert Monster, the Company’s former Chief Executive Officer. Epik, then uses those funds to directly to pay Verisign and ICANN companies for the annual domain renewal costs. The costs paid to Epik are at terms similar or better than what Epik charges its other clients.
Convertible Notes Payable – Related Party
On September 14, 2016, subject to a stock purchase agreement, the Company signed a secured convertible note of $400,000 with Clint Skidmore, founder of Rezserve Technology Ltd (“Rezserve”). The interest free note is due and payable within one year, at which time it can be converted into up to 1,000,000 shares of the Company’s common stock at a conversion price of $0.40 per share. The Company evaluated the note and determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present.
On December 22, 2017, the Company formalized its agreement to extend and convert the original convertible note of $400,000 for Clint Skidmore to October 31, 2018, original founder of Rezserve Technologies Ltd. The Company has repaid $80,000 to Clint Skidmore, and converted $210,000 of the note to 1,100,000 shares of the Company’s common stock, resulting in a loss on conversion of $13,000. At November 30, 2018, the Company owes $110,000 to Clint Skidmore, bearing no interest. This note had imputed interest expense of $38,000 in fiscal 2018, and imputed interest of $8,250 in the first three quarters of fiscal 2019.
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.
On June 9, 2017, the Company signed a convertible note of $500,000 with Darvin Habben, Chairman. This note is due and payable within one year, bears interest of 8%, and can be converted into up to 2,000,000 shares of the Company’s common stock at a conversion price of $0.25 per share. The Company recorded a debt discount equal to $300,000 due to this conversion feature. The note had accrued interest of $28,932 as of February 28, 2018. The debt discount had a balance at February 28, 2018 of $191,507. The Company recorded debt discount amortization expense of $108,493 during the year ended February 28, 2018.
On May 9, 2018, the Company converted the $500,000 convertible note with Darvin Habben, Chairman, along with accrued and unpaid interest of $38,027.40, to 5,380,274 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $191,507 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception.
Promissory Notes Payable - Related Party
On July 20, 2017, the Company signed a promissory note of $100,000 with Derek Schumann, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Derek Schumann in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature.
On May 9, 2018, the Company converted the $100,000 promissory note with Derek Schumann, Director, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
On July 20, 2017, the Company signed a promissory note of $100,000 with Greg Foss, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Greg Foss in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature.
On May 9, 2018, the Company converted the $100,000 promissory note with Greg Foss, Director, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
On July 27, 2017, the Company signed a promissory note of $150,000 with Darvin Habben, Chairman. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Darvin Habben in connection with this note, with an exercise price of $0.10, and expiry date of July 27, 2027. The Company recorded a warrant discount equal to $150,000 due to this warrant feature.
On May 9, 2018, the Company converted the $150,000 promissory note with Darvin Habben, Chairman, to 1,500,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $105,616 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $2,875 during the quarter ended May 31, 2018.
On September 12, 2018, the Company issued a promissory note to Epik Holding, Inc. for $765,200 for conversion of accounts payable - related party. The note bears interest at 4%, and matures on September 12, 2019. The note had accrued interest of $3,522 as of November 30, 2018.
On November 15, 2018, the Company issued a promissory note to Robert Monster for $150,000 for conversion of outstanding severance owed. The note bears interest at 15%, and matures on November 15, 2019. The note had accrued interest of $925 as of November 30, 2018.
Sales of Common Stock
During the first nine months of fiscal 2019, the Company sold an aggregate of 5,050,000 shares to five of the Company’s board members at the price of $545,000.
Cryptocurrency Sales - Related Parties
On May 16, 2018, the Company sold 63,291.13924 RHOCs at $1.56 for $100,000 to Greg Foss, resulting in a loss on exchange of $1,282.
On May 18, 2018, the Company sold 63,291.13924 RHOCs at $1.58 for $100,000 to Darvin Habben, resulting in no gain or loss on exchange.
Employment Agreements
During fiscal 2018, the Company signed employment agreements with three members of senior management, none of which are still active. All employment agreements were for a period of approximately 6 to 24 months.
During fiscal 2019, the Company signed employment agreements with two member of senior management, neither of which are still active. All employment agreements were for a period of approximately 12 to 24 months.
Directors and Officers
In December 2017, all non-executive directors received a stock grant of 600,000 shares. Mr. Parsons and Mr. Mills received an additional 200,000 shares each, as recognition for completing tasks outside their director responsibilities. This resulted in a stock-based compensation expense of $956,800 in fiscal 2018.
On June 1, 2018, the Company issued 3,555,212 stock options with a fair value of $436,131 to one employee, whom was also a director, to purchase shares of the Company’s common stock at a price of $0.10. 3,000,000 options vest immediately and are exercisable for five years. 555,212 options vest over 12 months, and are exercisable for five years.
In the third quarter of fiscal 2019, three newly appointed Directors received a prorated stock grant based on 600,000 annualized shares. This resulted in a stock-based compensation expense of $68,379 in fiscal 2019.
CEO Employment Agreement Share Issuance
The Company expensed $160,000 in annual salary and $476,534 in stock-based compensation in the first nine months of fiscal 2019, and $240,000 in annual salary and $1,026,710 in stock-based compensation in fiscal 2018, related to the employment agreement with Robert Monster, CEO. Robert Monster’s employment with the Company was terminated on September 13, 2018, and his stock-based compensation will continue vesting until June 1, 2019.
CEO Accrued Salary Conversion
On February 16, 2018, Robert Monster, CEO converted $70,000 of his accrued salary into 700,000 shares of common stock and 700,000 stock options with an exercise price of $0.10 and a vesting period of 12 months. The shares and options were valued on the conversion date in the amounts of $161,000 and $92,507, respectively.
Accrued Expenses - Related Parties
The Company was founded in 1982 and managed by Richard Pomije since at least 1987. On May 17, 2015, Mr. Pomije resigned as CEO of the Company and on June 1, 2015, he resigned as the CFO and Chairman. At that time of his resignation, the Company and the Board of Directors were not aware of any continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with his closing of the Burnsville, MN office.
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of February 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at November 30, 2018, $552,976 has been accrued as payable to Mr. Pomije. The Company has filed an appeal. See Note 15 for additional information about transactions between the Company and its former officer.
During the second quarter of 2019, Robert Monster deferred his salary payments to assist with cash conservation. As at November 30, 2018, $70,000 has been accrued as payable to Robert Monster.
On November 15, 2018, the Company issued a promissory note to Robert Monster for $150,000 for conversion of outstanding severance owed. The note bears interest at 15%, and matures on November 15, 2019. The note had accrued interest of $925 as of November 30, 2018.
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 $20,035,205 as of November 30, 2018 that will offset future taxable income. The available net operating loss carry forwards will expire in various years through 2037. Future tax benefits which may arise as a result of these losses have not been recognized in these consolidated financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carry forwards.
The actual income tax provisions differ from the expected amounts calculated by applying the statutory income tax rate to the Company’s loss before income taxes. The components of these differences are as follows at November 30, 2018 and February 28, 2018:
|
|
November 30,
2018
|
|
|
February 28,
2018
|
|
Net tax loss carry-forwards
|
|
$
|
20,035,205
|
|
|
$
|
15,888,098
|
|
Statutory rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Expected tax recovery
|
|
|
4,207,393
|
|
|
|
3,336,501
|
|
Change in valuation allowance
|
|
|
(4,207,393
|
)
|
|
|
(3,336,501
|
)
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Components of deferred tax asset:
|
|
|
|
|
|
|
|
|
Non capital tax loss carry forwards
|
|
$
|
4,207,393
|
|
|
$
|
3,336,501
|
|
Less: valuation allowance
|
|
|
(4,207,393
|
)
|
|
|
(3,336,501
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 11. Commitments and Contingencies
Litigation
The Company, in the normal course of business, is a party to various ordinary course claims and legal proceedings. In the opinion of management, the ultimate resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations.
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of February 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. As at February 28, 2018, $552,976 has been accrued as payable to Mr. Pomije. During the quarter ending May 31, 2018, $10,910 was paid to Mr. Richard Pomije. As at November 30, 2018, $542,066 has been accrued as payable to Mr. Pomije. The Company has filed an appeal. See Note 16 for additional information about transactions between the Company and its former officer.
Lease Commitments
As of November 30, 2018, we have one outstanding operating lease. The lease is for 700 square feet of office space in Vancouver, British Columbia for our Rezserve subsidiary. The lease is month-to-month with either party able to terminate the lease with one month of notice. Gross rent is approximately $1,160 per month. On November 30, 2018, the Company provided one month’s notice to terminate the lease, and the office will be vacated by December 31, 2018.
Note 12. Earnings (Loss) Per Share
The Company computes earnings per share using two different methods, basic and diluted, and presents per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding.
Due to the recent net losses generated by the Company, there are no dilutive elements. Therefore, basic and diluted EPS are the same.
The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the second quarter of fiscal years 2019 and 2018:
|
|
November 30,
2018
|
|
|
November 30,
2017
|
|
Basic earnings (loss) per share calculation:
|
|
|
|
|
|
|
Net loss to common shareholders
|
|
$
|
(6,774,498
|
)
|
|
$
|
(4,870,787
|
)
|
Weighted average number of common shares outstanding
|
|
|
114,708,907
|
|
|
|
58,622,658
|
|
Basic net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
Net loss to common shareholders
|
|
$
|
(6,774,498
|
)
|
|
$
|
(4,870,787
|
)
|
Weighted average number of common shares outstanding
|
|
|
114,708,907
|
|
|
|
58,622,658
|
|
Stock options (1)
|
|
|
|
|
|
|
-
|
|
Warrants (2)
|
|
|
|
|
|
|
-
|
|
Diluted weighted average common shares outstanding
|
|
|
114,708,907
|
|
|
|
58,622,658
|
|
Diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
(1)
|
At November 30, 2018 and November 30, 2017, there were 15,759,121 and 2,392,310, respectively, of stock options equivalent to common shares outstanding. The stock options are anti-dilutive at November 30, 2018 and November 30, 2017 and therefore, have been excluded from diluted earnings (loss) per share.
|
|
|
(2)
|
At November 30, 2018 and November 30, 2017, there were outstanding warrants equivalent to 9,044,740 and 8,660,000 common shares, respectively. The warrants are anti-dilutive at November 30, 2018 and November 30, 2017 and therefore, have been excluded from diluted earnings (loss) per share.
|
Note 13. Acquisitions
Congo Ltd. Acquisition
On December 7, 2017, the Company closed on an asset purchase agreement for the acquisition of Congo Ltd. (Congo). Congo, based in Houston, TX, owns and operates a web-based platform offering; a portal connecting attorneys to prospective clients through a marketplace setting; a software-as-a-service (SaaS) subscription, selling web features to attorneys for their use on their respective law firm websites, and; the creation of customized online directories. The Company granted 3,000,000 shares of its common stock to the existing owners of Congo. The closing price of the Company’s common stock on the acquisition date was $0.28 per share, therefore, the fair value of common stock issued was $840,000. The stock was issued in February 2018.
This acquisition was accounted for using the replacement cost method, where the cost to replace or recreate the subject asset is estimated. The agreement included customary representations, warranties, and covenants by us and Congo.
According to the replacement cost method of accounting, the Company recognized the identifiable assets acquired as follows:
Developed Technology, Platform and code base
|
|
|
420,000
|
|
Developed Technology, New code base and databases
|
|
|
432,000
|
|
Assembled Workforce
|
|
|
35,000
|
|
Goodwill
|
|
|
78,000
|
|
Total intangibles and goodwill
|
|
|
965,000
|
|
|
|
|
|
|
Total assets acquired, net
|
|
|
965,000
|
|
The purchase price consisted of the following:
Common stock
|
|
|
840,000
|
|
Cash consideration
|
|
|
75,000
|
|
Earnest money
|
|
|
50,000
|
|
Total purchase price
|
|
|
965,000
|
|
The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $926,252 related to this acquisition in fiscal 2018.
As the company is not using the assets in the same manner as the predecessor company, no proforma financials are presented.
CityInformation, B.V. Acquisition
On October 27, 2017, the Company closed on an asset purchase agreement for the acquisition of CityInformation. CityInformation, based in Amsterdam (Netherlands), develops and operates mobile apps for cities and towns worldwide. The Company granted 2,833,333 shares of its common stock to the existing owners of CityInformation. The closing price of the Company’s common stock on the acquisition date was $0.29 per share, therefore, the fair value of common stock issued was $821,667. The stock was issued in November 2017.
This acquisition was accounted for using the replacement cost method, where the cost to replace or recreate the subject asset is estimated. The agreement included customary representations, warranties, and covenants by us and CityInformation.
According to the replacement cost method of accounting, the Company recognized the identifiable assets acquired as follows:
Developed Technology, App Portfolio
|
|
|
250,000
|
|
Developed Technology, App Handles
|
|
|
135,000
|
|
Assembled Workforce
|
|
|
40,000
|
|
Goodwill
|
|
|
396,667
|
|
Total intangibles and goodwill
|
|
|
821,667
|
|
|
|
|
|
|
Total assets acquired, net
|
|
|
821,667
|
|
The purchase price consisted of the following:
Common stock
|
|
|
821,667
|
|
Total purchase price
|
|
|
821,667
|
|
The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $795,508 related to this acquisition in fiscal 2018.
As the company is not using the assets in the same manner as the predecessor company, no proforma financials are presented.
Comencia, Inc. Acquisition
On July 1, 2017, the Company closed on an agreement and plan of share exchange and acquired Comencia, a related party Company, which was partly owned by an officer of the Company. The Company granted 2,500,000 shares of its common stock to the existing owners of Comencia, Inc. The closing price of the Company’s common stock on the acquisition date was $0.30 per share, therefore, the fair value of common stock issued was $750,000. As part of the closing of this agreement, the Company made a cash payment and issued a note receivable from Comencia for $55,000. The terms of the note include payable on demand within 30 days of notice and a 3.0% annual interest rate. This note has not yet been repaid.
This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of Comencia’s assets and ongoing operations were acquired. The agreement included customary representations, warranties, and covenants by us and Comencia.
According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
Cash
|
|
|
11,989
|
|
Other assets
|
|
|
13,115
|
|
Total assets
|
|
|
25,104
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(12,741
|
)
|
Long-term payables
|
|
|
(52,422
|
)
|
Total liabilities
|
|
|
(65,163
|
)
|
|
|
|
|
|
Customer Lists
|
|
|
33,000
|
|
Intellectual Property
|
|
|
48,800
|
|
Trademarks
|
|
|
7,000
|
|
Total intangibles
|
|
|
88,800
|
|
|
|
|
|
|
Total assets acquired, net
|
|
|
48,741
|
|
Additional consideration given as compensation expense
|
|
|
701,259
|
|
Total consideration
|
|
|
750,000
|
|
The purchase price consisted of the following:
Common stock
|
|
|
750,000
|
|
Total purchase price
|
|
|
750,000
|
|
This transaction was a non-arms length transaction, as one of Comencia’s owners was a Director of Digitaltown. As such, $750,000 was recorded as a stock-based compensation in fiscal 2018.
The unaudited supplemental pro forma results of operations of the combined entities had the date of the acquisition been March 1, 2017 is as follows:
|
|
Combined Pro Forma:
|
|
|
|
For Nine Months Ended
|
|
|
|
November 30,
2017
|
|
Revenues
|
|
$
|
322,135
|
|
|
|
|
|
|
Cost of revenues
|
|
|
622,012
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(299,877
|
)
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
4,006,775
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,306,652
|
)
|
|
|
|
|
|
Other income (expense)
|
|
|
(156,355
|
)
|
|
|
|
|
|
Net loss
|
|
$
|
(4,463,007
|
)
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
|
|
Outstanding – basic and fully diluted
|
|
|
58,622,658
|
|
|
|
|
|
|
Net loss per share – basic and fully diluted
|
|
$
|
(0.08
|
)
|
Note 1
4. Debt
Convertible Note Payable - Related Party
Clint Skidmore - Note
On September 14, 2016, subject to a stock purchase agreement, the Company signed a secured convertible note of $400,000 with Clint Skidmore, founder of Rezserve Technology Ltd (“Rezserve”). The interest free note is due and payable within one year, at which time it can be converted into up to 1,000,000 shares of the Company’s common stock at a conversion price of $0.40 per share. The Company evaluated the note and determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present.
On December 22, 2017, the Company formalized its agreement to extend and convert the original convertible note of $400,000 for Clint Skidmore to October 31, 2018, original founder of Rezserve Technologies Ltd. The Company has repaid $80,000 to Clint Skidmore, and converted $210,000 of the note to 1,100,000 shares of the Company’s common stock, resulting in a loss on conversion of $13,000. At November 30, 2018, the Company owes $110,000 to Clint Skidmore, bearing no interest. This note had imputed interest expense of $38,000 in fiscal 2018, and imputed interest of $8,750 in the first three quarters of fiscal 2019.
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.
Darvin Habben - Note
On June 9, 2017, the Company signed a convertible note of $500,000 with Darvin Habben, Chairman. This note is due and payable within one year, bears interest of 8%, and can be converted into up to 2,000,000 shares of the Company’s common stock at a conversion price of $0.25 per share. The Company recorded a debt discount equal to $300,000 due to this conversion feature. The note had accrued interest of $28,932 as of February 28, 2018. The debt discount had a balance at February 28, 2018 of $191,507. The Company recorded debt discount amortization expense of $108,493 during the year ended February 28, 2018.
On May 9, 2018, the Company converted the $500,000 convertible note with Darvin Habben, Chairman, along with accrued and unpaid interest of $38,028, to 5,380,274 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $191,507 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception.
Promissory Note Payable - Related Party
Derek Schumann - Note
On July 20, 2017, the Company signed a promissory note of $100,000 with Derek Schumann, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Derek Schumann in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $69,452. The Company recorded warrant discount amortization expense of $30,548 during the year ended February 28, 2018.
On May 9, 2018, the Company converted the $100,000 promissory note with Derek Schumann, Director, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
Greg Foss - Note
On July 20, 2017, the Company signed a promissory note of $100,000 with Greg Foss, Director. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Greg Foss in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature. The note had imputed interest of $6,110 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $69,452. The Company recorded warrant discount amortization expense of $30,548 during the year ended February 28, 2018.
On May 9, 2018, the Company converted the $100,000 promissory note with Greg Foss, Director, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
Darvin Habben - Note
On July 27, 2017, the Company signed a promissory note of $150,000 with Darvin Habben, Chairman. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Darvin Habben in connection with this note, with an exercise price of $0.10, and expiry date of July 27, 2027. The Company recorded a warrant discount equal to $150,000 due to this warrant feature. The note had imputed interest of $8,877 as of February 28, 2018. The warrant discount had a balance at February 28, 2018 of $105,616. The Company recorded warrant discount amortization expense of $44,384 during the year ended February 28, 2018.
On May 9, 2018, the Company converted the $150,000 promissory note with Darvin Habben, Chairman, to 1,500,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $105,616 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $2,875 during the quarter ended May 31, 2018.
Epik Holdings - Note
On September 12, 2018, the Company issued a promissory note to Epik Holding, Inc. for $765,200 for conversion of accounts payable - related party. The note bears interest at 4%, and matures on September 12, 2019. The note had accrued interest of $3,522 as of November 30, 2018.
Robert Monster - Note
On November 15, 2018, the Company issued a promissory note to Robert Monster for $150,000 for conversion of outstanding severance owed. The note bears interest at 15%, and matures on November 15, 2019. The note had accrued interest of $925 as of November 30, 2018.
Convertible Note Payable - Third Party
PowerUp Lending - Note 1
On October 30, 2017, the Company issued a convertible note to PowerUp Lending Group Ltd. for $75,000 of cash consideration. The note bears interest at 12%, matures on October 30, 2018, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $47,951 due to this conversion feature.
On May 3, 2018, PowerUp Lending Group Ltd. converted $12,000 of the principal amount of the October 30, 2017 note into 170,940 shares of the Company’s common stock, leaving a principal balance due of $63,000.
On May 7, 2018, PowerUp Lending Group Ltd. converted $13,000 of the principal amount of the October 30, 2017 note into 213,115 shares of the Company’s common stock, leaving a principal balance due of $50,000.
On May 10, 2018, PowerUp Lending Group Ltd. converted $15,000 of the principal amount of the October 30, 2017 note into 245,902 shares of the Company’s common stock, leaving a principal balance due of $35,000.
On May 15, 2018, PowerUp Lending Group Ltd. converted $20,000 of the principal amount of the October 30, 2017 note into 327,869 shares of the Company’s common stock, leaving a principal balance due of $15,000.
On May 16, 2018, PowerUp Lending Group Ltd. converted $15,000 of the principal amount, plus $4,500 in accrued and unpaid interest, of the October 30, 2017 note into 319,672 shares of the Company’s common stock, fully extinguishing this note.
The Company recorded debt discount amortization expenses of $32,055 related to this note during the first quarter of fiscal 2019.
PowerUp Lending - Note 2
On November 30, 2017, the Company issued a convertible note to PowerUp Lending Group Ltd. for $58,000 of cash consideration. The note bears interest at 12%, matures on November 30, 2018, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $28,754 due to this conversion feature. The note had accrued interest of $3,456 as of May 31, 2018. The debt discount had a balance at May 31, 2018 of $19,213. The Company recorded debt discount amortization expense of $9,541 during the quarter ended May 31, 2018. On June 14, 2018, PowerUp Lending Group Ltd. converted $20,000 of the principal amount of the November 30, 2017 note into 309,119 shares of the Company’s common stock, leaving a principal balance due of $38,000.
On June 20, 2018, PowerUp Lending Group Ltd. converted $15,000 of the principal amount of the November 30, 2017 note into 196,592 shares of the Company’s common stock, leaving a principal balance due of $23,000.
On June 29, 2018, PowerUp Lending Group Ltd. converted $15,000 of the principal amount of the November 30, 2017 note into 257,290 shares of the Company’s common stock, leaving a principal balance due of $8,000.
On July 20, 2018, PowerUp Lending Group Ltd. converted $8,000 of the principal amount, plus $3,480 in accrued and unpaid interest, of the November 30, 2017 note into 376,393 shares of the Company’s common stock, fully extinguishing this note.
During the second quarter of fiscal 2019, the Company recorded debt discount amortization expenses of $19,213, representing the debt discount balance, due to the extinguishment of this note.
PowerUp Lending - Note 3
On January 18, 2018, the Company issued a convertible note to PowerUp Lending Group Ltd. for $53,000 of cash consideration. The note bears interest at 12%, matures on January 18, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $33,164 due to this conversion feature. The note had accrued interest of $2,304 as of May 31, 2018. The debt discount had a balance at May 31, 2018 of $21,608. The Company recorded debt discount amortization expense of $8,471 during the quarter ended May 31, 2018.
On July 11, 2018, the Company paid $78,323 to PowerUp Lending Group Ltd., representing $53,000 for the principal of the January 18, 2018 note, $3,099 in accrued and unpaid interest, and $22,224 in losses on settlement of debt. The Company recorded debt discount amortization expense of $21,608, representing the debt discount balance, due to the extinguishment of this note.
PowerUp Lending - Note 4
On September 17, 2018, the Company issued a convertible note to PowerUp Lending Group Ltd. for $85,000 of cash consideration. The note bears interest at 12%, matures on September 17, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $85,000 due to this conversion feature. The note had accrued interest of $2,068 as of November 30, 2018. The debt discount had a balance at November 30, 2018 of $67,767. The Company recorded debt discount amortization expense of $17,233 during the quarter ended November 30, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
PowerUp Lending - Note 5
On October 23, 2018, the Company issued a convertible note to PowerUp Lending Group Ltd. for $53,000 of cash consideration. The note bears interest at 12%, matures on October 23, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $49,926 due to this conversion feature. The note had accrued interest of $662 as of November 30, 2018. The debt discount had a balance at November 30, 2018 of $44,728. The Company recorded debt discount amortization expense of $5,198 during the quarter ended November 30, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Crown Bridge - Note 1
On January 30, 2018, the Company issued a convertible note to Crown Bridge Partners, LLC. for $55,000 of cash consideration. The note bears interest at 10%, matures on January 30, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 20 trading days prior to conversion. The Company recorded a debt discount equal to $33,246 due to this conversion feature. The Company also recorded a $3,000 debt discount due to issuance fees. The note had accrued interest of $1,812 as of May 31, 2018. The debt discount had a balance at May 31, 2018 of $24,305. The Company recorded debt discount amortization expense of $9,062 during the quarter ended May 31, 2018.
On July 25, 2018, the Company paid $83,312 to Crown Bridge Partners, LLC., representing $55,000 for the principal of the January 30, 2018 note, $2,499 in accrued and unpaid interest, and $25,813 in losses on settlement of debt. The Company recorded debt discount amortization expense of $24,305, representing the debt discount balance, due to the extinguishment of this note.
Crown Bridge - Note 2
On September 29, 2018, the Company issued a convertible note to Crown Bridge Partners, LLC. for $55,000 of cash consideration. The note bears interest at 10%, matures on September 29, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 20 trading days prior to conversion. The Company recorded a debt discount equal to $52,000 due to this conversion feature. The Company also recorded a $3,000 debt discount due to issuance fees. The note had accrued interest of $964 as of November 30, 2018. The debt discount had a balance at November 30, 2018 of $45,356. The Company recorded debt discount amortization expense of $9,644 during the quarter ended November 30, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
FirstFire Global Opportunities - Note 1
On July 10, 2018, the Company issued a convertible note and 90,000 shares of its common stock to FirstFire Global Opportunities Fund LLC for $183,750 of cash consideration. The note bears interest at 10%, matures on July 10, 2019, and is convertible after 180 days into common stock at the lower of $0.20 per share or 75% of the lowest closing market prices of the previous 10 trading days prior to conversion. The Company recorded a debt discount equal to $143,325 due to a ratchet triggering event also on July 10, 2018, which lowered the conversion price to $0.05 per share. The Company recorded a $8,750 debt discount representing the original issue discount. The Company also recorded a $8,010 debt discount due to the 90,000 shares issued. The note had accrued interest of $7,199 as of November 30, 2018. The debt discount had a balance at November 30, 2018 of $97,367. The Company recorded debt discount amortization expense of $22,807 during the quarter ended August 31, 2018, and $39,911 during the quarter ended November 30, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
EMA Financial - Note 1
On October 22, 2018, the Company issued a convertible note to EMA Financial, LLC for $53,000 of cash consideration. The note bears interest at 10%, matures on October 22, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 15 trading days prior to conversion. The Company recorded a debt discount equal to $53,000 due to this conversion feature. The note had accrued interest of $566 as of November 30, 2018. The debt discount had a balance at November 30, 2018 of $47,337. The Company recorded debt discount amortization expense of $5,663 during the quarter ended November 30, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
JSJ Investments - Note 1
On October 22, 2018, the Company issued a convertible note to JSJ Investments Inc. for $59,500 of cash consideration. The note bears interest at 12%, matures on October 22, 2019, and is convertible after 180 days into common stock at 61% of the lowest 3 closing market prices of the previous 20 trading days prior to conversion. The Company recorded a debt discount equal to $57,000 due to this conversion feature. The Company also recorded a $2,500 debt discount due to issuance fees. The note had accrued interest of $763 as of November 30, 2018. The debt discount had a balance at November 30, 2018 of $53,142. The Company recorded debt discount amortization expense of $6,358 during the quarter ended November 30, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Auctus Fund - Note 1
On November 14, 2018, the Company issued a convertible note to Auctus Fund, LLC for $85,000 of cash consideration. The note bears interest at 12%, matures on November 14, 2019, and is convertible after 180 days into common stock at 61% of the lowest trading price of the previous 25 trading days prior to conversion. The Company recorded a debt discount equal to $77,750 due to this conversion feature. The Company also recorded a $7,250 debt discount due to issuance fees. The note had accrued interest of $447 as of November 30, 2018. The debt discount had a balance at November 30, 2018 of $81,274. The Company recorded debt discount amortization expense of $3,726 during the quarter ended November 30, 2018.
The Company evaluated the convertible note and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Promissory Note Payable - Third Party
On July 20, 2017, the Company signed a promissory note of $100,000 with Donovan Olson. This interest free note is due and payable within one year and bears no interest. The Company issued 1,000,000 warrants to Donovan Olson in connection with this note, with an exercise price of $0.10, and expiry date of July 20, 2027. The Company recorded a warrant discount equal to $100,000 due to this warrant feature.
On May 9, 2018, the Company converted the $100,000 promissory note with Donovan Olson, to 1,000,000 shares of its common stock at a conversion price of $0.10 per share. The company recorded debt discount amortization expense of $69,452 during the quarter ended May 31, 2018, related to this debt’s conversion recorded at inception. The note had imputed interest of $1,917 during the quarter ended May 31, 2018.
Note 1
5. Transactions with Former Officer and Current Shareholder
The Company was founded in 1982 and managed by Richard Pomije since at least 1987. On May 17, 2015, Mr. Pomije resigned as CEO of the Company and on June 1, 2015, he resigned as the CFO and Chairman. At that time of his resignation, the Company and the Board of Directors were not aware of any continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with his closing of the Burnsville, MN office.
On December 5, 2016, Richard Pomije filed a lawsuit against the Company. Mr. Pomije asserts an employment agreement existed and a continuing obligation of the Company in the form of a monthly salary for a 1 year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable. Mr. Pomije claims the Company owes him $260,900, which had been fully accrued for by the Company as of February 28, 2017.
On April 18, 2018, Mr. Richard Pomije was granted a judgement for the lawsuit he filed against the Company on December 5, 2016. Mr. Pomije was awarded $256,488 as damages, and $296,488 as attorney’s fees and costs, for a total award of $552,976. During the quarter ending May 31, 2018, $10,910 was paid to Mr. Richard Pomije. As at November 30, 2018, $542,066 has been accrued as payable to Mr. Pomije. The Company has filed an appeal.
During the second quarter of 2019, Robert Monster deferred his salary payments to assist with cash conservation. As at November 30, 2018, $70,000 has been accrued as payable to Robert Monster.
On November 15, 2018, the Company issued a promissory note to Robert Monster for $150,000 for conversion of outstanding severance owed. The note bears interest at 15%, and matures on November 15, 2019. The note had accrued interest of $925 as of November 30, 2018.
Note 1
6. Intangible Assets and Goodwill
Goodwill
The carrying value of goodwill at November 30, 2018, 2018 and February 28, 2018 was $0. During the fiscal 2018, the Company made an acquisition which resulted in $549,667 of goodwill being recorded and subsequently impaired.
Intangible assets
The carrying value of intangible assets at November 30, 2018 and February 28, 2018 was $0. During fiscal 2018, the Company acquired $1,237,000 of intangible assets, including $432,000 of code base and databases, $420,000 of platform and code base, $250,000 of app portfolios, and $135,000 of app handles. During fiscal 2018, the Company recorded $64,907 of amortization expense related to intangible assets.
Impairments
We evaluate our goodwill and intangible assets for an impairment on an annual basis each fiscal year end. Based upon our review and analysis, we deemed all of the goodwill and intangible assets acquired in fiscal 2018 as fully impaired as of February 28, 2018. Accordingly, we recognized an impairment expense of $1,721,760 in fiscal 2018. This reflects the full amount of goodwill and the unamortized balance of the intangible assets.
Note 17. Digital Currencies
The Company has entered into stock purchase agreements with investors, and has accepted digital currencies as a form of payment from these investors, in exchange for shares of the Company’s common stock.
On May 15, 2018, the Company issued 11,385,590 shares of stock to Catena Fund One, LP for 1,050,000 RHOC (RChain Coins). The market price of RHOC on May 15, 2018 was $1.58 per RHOC, resulting in a value of $1,659,000.
On May 16, 2018, the Company sold 63,291.13924 RHOCs at $1.56 for $100,000, resulting in a loss on exchange of $1,282.
On May 18, 2018, the Company sold 63,291.13924 RHOCs at $1.58 for $100,000, resulting in no gain or loss on exchange.
On June 1, 2018, the Company transferred 200,000 RHOCs at $1.58, with a value of $316,000, as a bonus to an employee as a condition of his employment agreement. There was no gain or loss on exchange related to this transaction.
On June 13, 2018, the Company paid a vendor invoice with a face value of $6,452 with 5,377 RHOCs, resulting in a loss on exchange of $2,043.
On June 18, 2018, the Company paid a vendor invoice with a face value of $5,000 with 4,167 RHOCs, resulting in a loss on exchange of $1,583.
During the second quarter of fiscal 2019, the Company sold the balance of RHOC for cash consideration of $518,181, resulting in a loss on exchange of $570,435.
In August 2018, the Company received 172,413 RHOC (RChain Coins) from Catena Fund One, LP, which were immediately liquidated for cash consideration of $59,237. The Company will issue 1,184,738 shares in exchange for this cash consideration in the subsequent quarter.
Our primary market risk exposure with regard to digital currencies is the volatility in trading prices from day to day, which would only impact the gain/loss recognized at time of exchange on such instruments. As of November 30, 2018, the Company did not hold any digital currencies.
Note 1
8. Subsequent Events
On December 10, 2018, Lawrence Lerner resigned as a Director.
On December 11, 2018, the Company sold its got.law division to a related party.
On December 20, 2018, George Nagy resigned as a Director.
On January 11, 2019, FirstFire Global Opportunities converted $10,000 of the principal amount of the July 10, 2018 note into 1,086,065 shares of the Company’s common stock, leaving a principal balance due of $173,750.
On January 24, 2019, Derek Schumann and Kenwei Chong resigned as Directors.
There were no additional significant subsequent events through January 30, 2019, the date the financial statements were issued.