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
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial information has been prepared by DigitalTown, Inc. (the "Company") in accordance with accounting principles generally accepted in the United States of America ("U.S.") ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC"). Accordingly, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim period presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period. This financial information should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended February 28, 2017.
The Company’s fiscal year end is the last day in February. Our current fiscal year ends on February 28, 2018 and we refer to it as “fiscal 2018”. Last year, our fiscal year ended on February 28, 2017 and we refer to this year as “fiscal 2017”.
Note 2. Nature of Business and Summary of Significant Accounting Policies
:
Nature of Business
The Company was founded in 1982 under the laws of the State of Minnesota as Command Small Computer Learning Center, Inc., a computer training company and operated under several different names in the computer hardware and training sector. In 2005, the Company began acquiring domain names. On March 1, 2007, the Company changed its name to DigitalTown, Inc. and developed a platform to monetize their domain names. DigitalTown currently provides turn-key hosted solutions to power a comprehensive platform for government entities, citizens and merchants. The easy to use platform helps city officials and local merchants manage a feature-rich Smart City for web and mobile devices and provides residents and visitors with access to content, community and commerce. The Company’s headquarters are located in Bellevue, Washington. The Company’s common stock is traded on the OTC Markets under the ticker symbol of DGTW.
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 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. See Note 3 for further information.
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.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable arise from the sale of and commission earned from display advertising. The Company evaluates collectability of accounts receivable based on a combination of factors including the age of the receivable or a specific customer’s inability to meet its financial conditions. In these circumstances, the Company records an allowance to reduce the receivable to an amount it deems collectible. The Company has recorded an allowance for doubtful accounts as of August 31, 2017 and February 28, 2017 of $11,240 and $23,219, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net tangible and identifiable intangible assets related to completed acquisitions. Goodwill has an indefinite life and is not amortized but instead tested for impairment annually, or more frequently if necessary.
Intangible assets are recorded at fair value and are comprised of amounts assigned to acquisition-related items, such as trade names, customer lists, non-compete agreements and intellectual property/technology. Intangible assets are considered either definite or indefinite lived assets. Definite lived intangible assets are amortized on a straight-line basis over their useful lives. Certain intangible assets may have an indefinite life and are not amortized, but rather evaluated for impairment annually.
We evaluate any goodwill and intangible assets for an impairment on an annual basis each fiscal year end. We also evaluate goodwill and intangible assets for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the goodwill and intangible assets below the carrying amounts. Based upon our review and analysis in the fourth quarter of fiscal 2017, we deemed all of the goodwill and intangible assets acquired in fiscal 2017 as fully impaired. Accordingly, we recognized an impairment expense of $1,725,009 in fiscal 2017.
Revenue Recognition
The Company recognizes revenue when the following four criteria have been met:
|
·
|
Persuasive evidence that a business relationship exists
|
|
·
|
Delivery has occurred
|
|
·
|
The price is fixed and determinable
|
|
·
|
Collectability is reasonably assured
|
The Company primarily recognizes revenue from sale of software licenses and related development services. Software licensing and development revenue is recognized as invoiced and over the course of the applicable agreements. In the event projects have multiple project milestones, revenue is recognized as milestones are achieved and invoices are submitted for payment.
The Company may also be merchant of record for merchant transactions processed on the DigitalTown platform. When this happens, revenue is recognized on the date of the transaction. The Company has experience in merchant transaction fraud mitigation. To the extent chargebacks become material, the Company will implement a formal practice for allowance for doubtful accounts.
The Company recognizes revenue from the sale of display advertising appearing on specific pages of individual sites within the DigitalTown network platform. Display advertising is sold by the Company directly to local merchants and placed by the Company on specific pages of individual sites targeted by the local merchant. The terms of these sales are either for a fixed monthly amount for a period ranging from three months to one year or variable based on a percentage of the per click or per-impression revenue generated by these ads.
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.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of August 31, 2017, and February 28, 2017, the Company does not have any financial instruments that must be measured under the fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability.
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs during the first six months of fiscal 2018 or the fiscal year 2017.
Cash Equivalents
The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. As of August 31, 2017, and February 28, 2017, the Company had no cash equivalents.
Cash Deposits in Excess of Federally Insured Limits
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are insured by the Federal Deposit Insurance Company and currently have insurance coverage up to $250,000. At August 31, 2017, the Company had no bank deposit accounts in excess of federally insured limits. At February 28, 2017, the Company had one bank deposit account in excess of federally insured limits.
Prepaid Domain Names
The annual domain name renewal fees are currently capitalized in the period of renewal then amortized over one year. Only the purchase of new domain names is capitalized. See Note 5 for further information.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives, ranging from three to five years. Leasehold improvements are amortized over the shorter of the useful life or the term of the related lease. 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.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 August 31, 2017 or February 28, 2017. In accordance with the FASB guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of operations. The Company has three open years of tax returns subject to examination.
Stock-Based Compensation
Use of equity for compensation, including restricted stock, stock options and stock warrants, is a material part of the Company’s near-term compensation strategy. The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.
Advertising
The Company expenses advertising costs in the period related to the advertising. The Company did not incur any advertising expense during the first six months of fiscal 2018 or for the fiscal 2017 year.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company does not expect 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 August 31, 2017, the Company had an accumulated deficit of $41,986,509. 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 August 31, 2018. In the event that the Company is unable to obtain additional capital in the future, the Company would further reduce expenses or cease operations altogether.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Property and Equipment
Property and equipment are as follows:
|
|
August 31,
|
|
|
February 28,
|
|
|
|
2017
|
|
|
2017
|
|
Office equipment and furniture
|
|
$
|
42,554
|
|
|
$
|
528,034
|
|
Less accumulated depreciation
|
|
|
(16,673
|
)
|
|
|
(526,222
|
)
|
Property and equipment, net
|
|
$
|
25,881
|
|
|
$
|
1,812
|
|
During the second quarter of fiscal 2018, the Company retired $512,212 of fully depreciated equipment and furniture. Depreciation expense for the first six months of fiscal years 2018 and 2017 was $2,086 and $1,770, respectively.
Note 5. Prepaid Domain Names
During the first six months of fiscal years 2018 and 2017, the Company incurred $343,113 and $57,500, respectively, of annual domain name renewal fees, which range between $0.25 and $7.85 per domain name. These amounts were recorded as prepaid domain name renewal fees, and are then amortized over a period of one year on a straight-lined basis. During the first six months of fiscal years 2018 and 2017, the Company recognized $74,938 and $36,036 of expense as cost of revenues related to this amortization. As of August 31, 2017, and February 28, 2017, the Company has $301,426 and $44,705, 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, Deferred Revenue and Domain Marketing Development Obligation
Accrued Expenses
On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 shares of the Company’s stock and 1,292,310 stock options with an exercise price of $0.15 and a vesting period of 12 months. The shares and options were valued on the conversion date in the amounts of $109,846 and $19,385, respectively. As the aggregate value of the shares and warrants were equal to the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction. As of August 31, 2017, and February 28, 2017, the accrued salary owed to Robert Monster was $0 and $20,000, respectively.
See Note 16 for information related to the Accrued Compensation of $260,899 related to a former officer of the company.
Deferred Revenue
During fiscal 2017, the Company signed three customer agreements to perform digital support and development services for three third party companies. Each customer agreement consists of milestones and completion metrics to ensure that the requested services have been performed satisfactorily. As of August 31, 2017, and February 28, 2017, the Company has collected $190,000 and $180,000 in cash and recorded $0 and $10,000 in accounts receivable related to these contracts. As the services requested by the customers have not yet been completed, a total of $170,000 and $190,000 has been recorded as deferred revenue as of August 31, 2017, and February 28, 2017, respectively.
Domain Marketing Development Obligation
During the first six months of fiscal 2018, the Company signed top-level domain marketing development fund agreements with owners of 13 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 August 31, 2017, and February 28, 2017, the Company has collected $401,519 and $0 in cash related to these contracts. As some of the services requested by the owners have not yet been completed, a total of $329,644 and $0 has been recorded as domain marketing development obligation as of August 31, 2017, and February 28, 2017, respectively.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Stockholders’ Equity
The Company’s primary means of generating operating capital and completing acquisitions has been through the use of issuing common stock.
Fiscal 2018 Stock Transactions
During the first six months of fiscal 2018, $794,112 of vesting related to restricted stock grants was recorded as stock payable. This includes seven new grants to employees during the first six months of fiscal 2018.
On July 19, 2017, the Company sold 100,000 shares of its common stock for $15,000. These shares have not been issued and are recorded as stock payable as of August 31, 2017.
On July 1, 2017, the Company closed on an agreement and plan of share exchange for the acquisition of Comencia, Inc., 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 of August 31, 2017, the stock was not issued, therefore, it is included in stock payable as of August 31, 2017.
During the first quarter of fiscal 2018, the Company issued 1,506,250 shares of stock related to stock payable as of February 28, 2017. There was no stock issued in the second quarter of fiscal 2018.
During the first quarter of fiscal 2018, the Company sold 356,250 shares of its common stock for $142,500. These shares have not been issued and are recorded as stock payable as of August 31, 2017.
Fiscal 2017 Stock Transactions
During fiscal 2017, the Company issued 6,999,707 shares of stock to various investors and accrued $800,500 of stock payable for cash of $2,377,950.
Included in the above, are an aggregate of 435,000 shares which were sold to the Company’s chairman and a related party investor at terms below the market price and share prices available other investors at the time of the sales. As a result, the Company recorded additional stock compensation expense of $30,450 to additional paid in capital to account for the preferential common share pricing.
During fiscal 2017, the Company issued 775,000 shares and recorded a stock payable of $845,600 to directors and consultants for services provided to the Company. The value of the shares issued was $1,217,600 based on the fair market value of the common stock on the date of grant.
During fiscal 2017, the Company entered into agreements to purchase domain name rights with three individuals. In exchange for the domain name rights, the Company issued 369,750 common shares and paid $46,500 in cash. The total fair value of the shares was $154,740 based on the respective domain name purchase agreements date and the closing market price on that date.
On September 14, 2016, the Company closed on a Stock Purchase Agreement for 100% of Rezserve Technologies, Ltd. (Rezserve), a company based in Vancouver, British Columbia. Pursuant to the agreement, the Company purchased all of the issued and outstanding stock of Rezserve in consideration for an aggregate of $1,480,000, of which 3,000,000 shares of stock were paid at the closing and $400,000 was a secured convertible note payable to Rezserve’s founder Clint Skidmore. The stock had a value of $1,080,000 at the closing date. The terms of the note include interest at 0% per annum. Principal is due and payable within one year of September 13, 2016. The Company imputed interest expense of $19,040 related to the convertible note payable – related party as an increase in additional paid in capital during fiscal 2017. In addition, the Company recorded $1,868 of foreign currency translation loss during fiscal 2017 which was reflected as accumulated other comprehensive loss. See Note 14 for additional information on this acquisition.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 1, 2016, the Company acquired all of the assets of Appointment.com. The purchase price pursuant to an asset purchase agreement was 1,625,000 shares. The value of the stock of $731,250 is included as a stock payable as of February 28, 2017. See Note 14 for additional information on this acquisition.
On May 18, 2016, the Company granted 8,292,309 common shares to Robert W. Monster, CEO, in accordance with his employment agreement dated May 18, 2016, which vest monthly over the new employment agreement period which ends on May 18, 2018, a period of two years. The shares were valued based on the employment agreement date. During fiscal year 2017, $812,912 was expensed related to these shares.
During fiscal 2017, the Company signed employment agreements with four members of senior management, three of which are still active. All employment agreements were for a period of approximately 12 months, however, in one case there is no end date but can be terminated by either party. Included in the employment agreements were common stock grants of 250,000 to 1,000,000 shares which vest over a period of 12 to 48 months. A total of 2,220,000 shares were granted for the four employment agreements. During fiscal 2017, $154,921 was expensed related to these agreements.
During fiscal 2017, the Company granted 495,000 shares of stock to four advisors and employees. The shares vest over a period of 24 months. The shares were valued based on the grant date. During fiscal year 2017, $44,508 was expensed related to these shares.
On March 5, 2016, the Company acquired all of the assembled workforce, patents, intellectual property, technology, trademarks, trade names, copyrights, mask works and registrations, computer software, trade secrets and non-compete agreements related to the Cloud.Market business, pursuant to an agreement among the Company and the owner of Cloud.Market. The purchase price paid included issuance of 750,000 shares of our common stock and $7,500 of cash. The stock had a value of $60,000 at the closing date and was transferred on that date from common stock held in escrow to additional paid-in capital for that amount. See Note 13 for more information.
Stock Warrants
The Company has regularly used warrants as a tool to attract and compensate advisors and directors of the board rather than to use cash. The Company feels this is an appropriate way to conserve cash and to incentivize its board of directors, advisors and consultants.
As of August 31, 2017, the Company had 8,660,000 warrants outstanding with an average exercise price of $0.14. The warrants expire between one and ten years from the date of issuance and have a weighted average remaining exercise period as of August 31, 2017 of 5.90 years.
In July 2017, the Company issued 4,000,000 warrants to four individuals, including the Chairman of the Company and another board member, to purchase shares of the Company’s common stock at prices which ranged from $0.10 to $0.15. All warrants vested immediately at the date of issuance and are exercisable through 2027. The total estimated value using the Black-Scholes Model, based on a volatility rates of 202.10% to 205.35% and a call option values of $0.2040 to $0.2690, was $880,918.
During fiscal 2017, the Company issued an aggregate of 150,000 warrants to 3 consultants to purchase shares of the Company’s common stock at prices which ranged from $0.10 to $0.30. All warrants vested immediately at the date of issuance and are exercisable through 2026. The total estimated value using the Black-Scholes Model, based on a volatility rate of 180% and a call option value of $0.0797, was $11,948.
During fiscal 2016, the Company issued an aggregate of 4,510,000 warrants to 3 board members and 3 consultants to purchase shares of the Company’s common stock at prices which ranged from $0.10 to $0.30. All warrants vested immediately and are exercisable through 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate between 121% and 125% and a call option value between $0.13 and $0.285 was $440,470. In addition, Stockholders purchasing stock during the fourth quarter of fiscal 2016 were granted a one warrant for each share of stock purchased. The $0.15 warrants vested immediately and expired January 1, 2017.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company utilized the following key assumptions in computing the fair value of the warrant grants using the Black-Scholes pricing model for fiscal year 2017:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Weighted-average volatility
|
|
|
203
|
%
|
|
|
180
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
Expected term (in years)
|
|
|
10.00
|
|
|
|
10.00
|
|
Weighted-average risk-free interest rate
|
|
|
1.16
|
%
|
|
|
2.19
|
%
|
Weighted-average fair value of warrants granted
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
The following table summarizes information about the Company’s stock warrant activity during the first two quarters of fiscal 2018 and fiscal year 2017:
|
|
Number of Warrants
|
|
Outstanding - February 29, 2016
|
|
|
4,510,000
|
|
Granted
|
|
|
150,000
|
|
Canceled or expired
|
|
|
-
|
|
Outstanding - February 28, 2017
|
|
|
4,660,000
|
|
Granted
|
|
|
4,000,000
|
|
Cancelled or expired
|
|
|
-
|
|
Outstanding – August 31, 2017
|
|
|
8,660,000
|
|
Exercisable at August 31, 2017
|
|
|
8,660,000
|
|
The following table summarizes information about stock warrants outstanding as of August 31, 2017:
Exercise Price
|
|
|
Number Outstanding
|
|
|
Weighted Average Remaining Life (years)
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercisable Price
|
|
$
|
0.10
|
|
|
|
3,550,000
|
|
|
|
9.75
|
|
|
$
|
0.09
|
|
|
|
3,550,000
|
|
|
$
|
0.09
|
|
$
|
0.15
|
|
|
|
3,460,000
|
|
|
|
4.83
|
|
|
$
|
0.14
|
|
|
|
3,460,000
|
|
|
$
|
0.14
|
|
$
|
0.25
|
|
|
|
300,000
|
|
|
|
9.08
|
|
|
$
|
0.24
|
|
|
|
300,000
|
|
|
$
|
0.24
|
|
$
|
0.25
|
|
|
|
850,000
|
|
|
|
9.17
|
|
|
$
|
0.24
|
|
|
|
850,000
|
|
|
$
|
0.24
|
|
$
|
0.30
|
|
|
|
500,000
|
|
|
|
9.50
|
|
|
$
|
0.28
|
|
|
|
500,000
|
|
|
$
|
0.28
|
|
$
|
0.10 - $0.30
|
|
|
|
8,660,000
|
|
|
|
5.90
|
|
|
$
|
0.14
|
|
|
|
8,660,000
|
|
|
$
|
0.14
|
|
The Company recorded stock-based compensation expense of $0 and $11,948 for all outstanding stock warrants for the first six months of fiscal years 2018 and 2017, respectively. This expense is included in stock-based compensation expense.
Note 8. Stock Options
The Company has one stock option plan called The 2006 Employee Stock and Option Plan (the “2006 Plan”), which has reserved 5,000,000 shares of our common stock for issuance. The types of awards that could be granted under the 2006 Plan include incentive and non-qualified options to purchase shares of common stock, stock appreciation rights, restricted shares, restricted share units, performance awards and other types of stock-based awards. All grants are determined and approved by the Board of Directors. Through August 31, 2017, the Company has only granted non-qualified stock options under the 2006 Plan. The stock options may be granted to officers and employees of the Company. Options granted under the 2006 Plan have exercise prices and vesting terms approved by the Board of Directors at the time of each grant. Vesting terms of the outstanding options range from immediate to four years from the date of grant. The exercise period of the options range from five to ten years from the date of grant.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 has been estimated using the Black-Scholes pricing model, which requires assumptions as to expected dividends, the options expected life, volatility and risk-free interest rate at the time of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite vesting periods in the Company’s consolidated statements of operations.
No stock options were granted during the first two quarters of fiscal 2018. One board member exercised 200,000 stock options at $0.10 per share during the first quarter of fiscal 2018
for $20,000 cash, which was received by the Company and recorded to common stock payable
.
The Company utilized the following key assumptions in computing the fair value of the option grants using the Black-Scholes pricing model for fiscal 2017:
|
|
Fiscal 2017
|
|
Weighted-average volatility
|
|
|
121
|
%
|
Expected dividends
|
|
|
None
|
|
Expected term (in years)
|
|
|
10.00
|
|
Weighted-average risk-free interest rate
|
|
|
2.23
|
%
|
The Company recorded stock-based compensation expense of $0 for all outstanding options for both of the first two quarters of fiscal years 2018 and 2017.
The following table summarizes information about the Company’s stock options as of August 31, 2017 and activity during the first quarter of fiscal 2018 and fiscal years 2017:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
Outstanding - February 29, 2016
|
|
|
2,592,310
|
|
|
$
|
0.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding - February 28, 2017
|
|
|
2,592,310
|
|
|
$
|
0.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(200,000
|
)
|
|
$
|
0.10
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding – August 31, 2017
|
|
|
2,392,310
|
|
|
$
|
0.10
|
|
Exercisable at August 31, 2017
|
|
|
2,392,310
|
|
|
$
|
0.10
|
|
The following table summarizes information about stock options outstanding as of August 31, 2017:
Exercise Price
|
|
|
Number Outstanding
|
|
|
Weighted Average Remaining Life (years)
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercisable Price
|
|
$
|
0.10
|
|
|
|
400,000
|
|
|
|
8.25
|
|
|
$
|
0.12
|
|
|
|
400,000
|
|
|
$
|
0.12
|
|
$
|
0.15
|
|
|
|
1,292,310
|
|
|
|
0.67
|
|
|
$
|
0.02
|
|
|
|
1,292,310
|
|
|
$
|
0.02
|
|
$
|
0.25
|
|
|
|
500,000
|
|
|
|
7.67
|
|
|
$
|
0.21
|
|
|
|
500,000
|
|
|
$
|
0.21
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
8.00
|
|
|
$
|
0.25
|
|
|
|
200,000
|
|
|
$
|
0.25
|
|
$
|
0.10 - $0.30
|
|
|
|
2,392,310
|
|
|
|
3.69
|
|
|
$
|
0.10
|
|
|
|
2,392,310
|
|
|
$
|
0.10
|
|
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Related Party Transactions
Accounts Payable – Related Parties
The Company owes $21,449 and $10,612 due to advances made to an employee which is included within accounts payable – related parties as of August 31, 2017 and February 28, 2017, respectively.
Prepaid Domain Names
During the first two quarters of fiscal years 2018 and 2017, the Company paid $343,113 and $57,500, respectively, for annual domain name renewal fees. The amounts paid for the annual domain name renewal fees are paid directly to Epik, LLC (“Epik”), a company which is controlled by Robert Monster, the Company’s Chief Executive Officer. Epik then uses those funds to directly pay Verisign and ICANN companies for the annual domain renewal costs, which range between $0.25 and $7.85, respectively, per domain name. The costs paid to Epik are at terms similar or better than what Epik charges its other clients, which reflects the market rates of $0.25 to $7.85 for domain names.
Stock Warrants
In July 2017, the Company issued 4,000,000 warrants to four individuals, including the Chairman of the Company and another board member, to purchase shares
of the Company’s common stock at prices which ranged from $0.10 to $0.15
.
All warrants vested immediately at the date of issuance and are exercisable through 2027. The total estimated value using the Black-Scholes Model, based on a volatility rates of 202.10% to 205.35% and a call option values of $0.2040 to $0.2690, was $880,918.
Convertible Notes Payable – Related Party
On June 9, 2017, the Company received $500,000 in cash related to an unsecured convertible note with its chairman. The note has an interest rate of 8.0% and is due and payable in two years, at which time it can be converted into shares of the Company’s common stock at a conversion price of $0.25 per share. The beneficial conversion feature associated with this note was $300,000. The net balance of this note as of August 31, 2017 was $234,110.
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. See Notes 15 and 18 for additional information.
Long-Term Debt – Related Party
Between July 20, 2017 and July 27, 2017, the Company received an aggregate of $450,000 in cash payments related to four unsecured promissory notes with its chairman, another director, and two third party shareholders. The interest free notes are due and payable in two years. In conjunction with these notes, the Company issued 1,000,000 of warrants, the value of which established a discount to the notes. The net balance of these notes as of August 31, 2017 was $24,451.
Comencia Acquisition
On July 1, 2017, the Company closed on an agreement and plan of share exchange and acquired all of the outstanding shares and assets of Comencia, Inc. (“Comencia”), an online travel industry software system based in Bellevue, Washington. This transaction is considered related party since the Company’s Chief Technology Officer, Michael Cartwright, owned a controlling interest in Comencia. See Note 14 for additional information.
Appointment.com Acquisition
On December 1, 2016, the Company acquired all of the assets related to Appointment.com, Inc. (“Appointment”), an online scheduling software system based in Seattle, Washington. This transaction is considered related party since the Company’s CEO, Rob Monster, owned a controlling interest in Appointment through a company owned 100% by Mr. Monster. The purchase price pursuant to an asset purchase agreement was 1,625,000 shares of common stock. This amount was paid with the issuance of 1,625,000 shares of our common stock, of which 536,364 shares were issued to Mr. Monster’s company. Due to the related party nature of the transaction, the Company did not record any goodwill related to the transaction and assets and liabilities acquired were recorded at cost. The difference between the cost of the assets received and the purchase price is recognized as compensation expense on the Company’s consolidated statement of operations. The agreement included customary representations, warranties, and covenants by us and Appointment. See Note 14 for additional information.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales of Common Stock
During fiscal 2017, the Company sold an aggregate of 435,000 shares to the Company’s chairman and a related party investor at terms below the market price and share prices available to other investors at the time of the sales. As a result, the Company recorded additional stock compensation expense of $30,450 to additional paid in capital to account for the preferential common share pricing. There were no such sales in the first two quarters of fiscal 2018.
Employment Agreements
During the first two quarters of fiscal 2018, the Company signed an employment agreement with one member of senior management. The term of this agreement was for 24 months. During fiscal 2017, the Company signed employment agreements with six members of senior management, five of which are still active. All fiscal 2017 employment agreements were for a period of approximately 12 months, however in one case there is no end date but can be terminated by either party. See Note 7 for more information about these employment agreements.
CEO Employment Agreement Share Issuance
On May 18, 2016, the Company granted 8,292,309 common shares to Robert W. Monster, CEO, in accordance with his employment agreement dated May 18, 2016, which vest monthly over the new employment agreement period which ends on May 18, 2018, a period of two years. The shares were valued based on the employment agreement date. See Note 7 for more information about this share issuance.
On February 10, 2016, the Company issued 3,312,811 shares of common stock to Robert Monster, CEO, in accordance with his employment agreement dated May 18, 2015. The shares were valued based on the employment agreement date using the Black-Scholes model. See Note 7 for more information about this share issuance.
CEO Accrued Salary Conversion
On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 shares of common stock and 1,292,310 stock options with an exercise price of $0.15 and a vesting period of 12 months. The shares and options were valued on the conversion date in the amounts of $109,846 and $19,385, respectively. See Note 7 for more information about this accrued salary conversion.
Transactions with Former Officer and Current Shareholder
The Company has had several transactions with Richard Pomije, its former CEO, CFO and Chairman, including notes payable – related party, common stock subscription receivable and deferred compensation. See Note 16 for more information about these transactions.
Note 10. Income Taxes
The Company accounts for income taxes under standards issued by the FASB. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No provision for federal income taxes has been recorded due to the net operating loss carry forwards totaling $13,290,580 as of August 31, 2017 that will offset future taxable income. The available net operating loss carry forwards will expire in various years through 2036. Future tax benefits which may arise as a result of these losses have not been recognized in these consolidated financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carry forwards.
The actual income tax provisions differ from the expected amounts calculated by applying the statutory income tax rate to the Company’s loss before income taxes. The components of these differences are as follows at August 31, 2017 and February 28, 2017:
|
|
August 31,
2017
|
|
|
February 28, 2017
|
|
Net tax loss carry-forwards
|
|
$
|
13,290,580
|
|
|
$
|
11,627,532
|
|
Statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Expected tax recovery
|
|
|
4,518,797
|
|
|
|
3,953,361
|
|
Change in valuation allowance
|
|
|
(4,518,797
|
)
|
|
|
(3,953,361
|
)
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Components of deferred tax asset:
|
|
|
|
|
|
|
|
|
Non capital tax loss carry forwards
|
|
$
|
4,518,797
|
|
|
$
|
3,953,361
|
|
Less: valuation allowance
|
|
|
(4,518,797
|
)
|
|
|
(3,953,361
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 11. Commitments and Contingencies
Litigation
The Company, in the normal course of business, is a party to various ordinary course claims and legal proceedings. In the opinion of management, the ultimate resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the Company's financial position or results of operations.
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 one year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable, and that the failure to provide written notice at end of the one-year obligated the Company to pay for an additional year under the agreement. Mr. Pomije claims the Company owes him $260,900, which has been fully accrued for by the Company. See Note 17 for additional information about transactions between the Company and its former officer.
Lease Commitments
As of August 31, 2017, the Company has three outstanding operating leases. The leases are for an aggregate of 2,700 square feet of office space. Two of the leases are month-to-month with either party able to terminate the lease with 30 days of notice. The other lease is for period of one year and ends in March 2018. Gross rent is approximately $4,070 per month plus $95 for HVAC expenses and applicable taxes. In addition, for one of the leases, we are responsible for various operating costs, such as telephone and utilities. Our total rent commitment is $20,940. Rent expense for the first two quarters of fiscal years 2018 and 2017 was $8,116 and $0, respectively.
Strategic Partnership Agreement
The Company entered into a five-year strategic partnership agreement with the National Interscholastic Athletic Administrators Association (“NIAAA”), which expired in December 2015. The Company entered into this agreement prior to commencing its current Smart City business strategy and with the intent of launching specific software to support various websites. The Company believes it has satisfied all terms of the agreement, however formal documentation of termination has not been obtained to date. The Company has included an amount in accounts payable for any potential obligations related to this agreement.
Note 12. Common Stock Subscriptions Receivable
From time to time, the Company has had various stock subscription agreements outstanding all of which were due from a related party. As of February 29, 2016, the Company was owed $5,000 for stock issued and had accrued an additional $7,150 for stock which was payable during the 2017 fiscal year under the employment agreement with Robert Monster. The total amount of $12,150 was satisfied in full in fiscal 2017.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Earnings (Loss) Per Share
The Company computes earnings per share using two different methods, basic and diluted, and presents per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding.
Due to the recent net losses generated by the Company, there are no dilutive elements. Therefore, basic and diluted EPS are the same.
The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the first six months of fiscal years 2018 and 2017:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Basic earnings (loss) per share calculation:
|
|
|
|
|
|
|
Net loss to common shareholders
|
|
$
|
(3,344,009
|
)
|
|
$
|
(1,661,165
|
)
|
Weighted average number of common shares outstanding
|
|
|
56,457,902
|
|
|
|
41,502,301
|
|
Basic net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
Net loss to common shareholders
|
|
$
|
(3,344,009
|
)
|
|
$
|
(1,661,165
|
)
|
Weighted average number of common shares outstanding
|
|
|
56,457,902
|
|
|
|
41,502,301
|
|
Stock options (1)
|
|
|
-
|
|
|
|
-
|
|
Warrants (2)
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average common shares outstanding
|
|
|
56,457,902
|
|
|
|
41,502,301
|
|
Diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
_____________
(1)
|
At August 31, 2017 and August 31, 2016, there were 2,392,310 and 2,592,310, respectively, of stock options equivalent to common shares outstanding. The stock options are anti-dilutive at August 31, 2017 and August 31, 2016 and therefore, have been excluded from diluted earnings (loss) per share.
|
|
|
(2)
|
At August 31, 2017 and August 31, 2016, there were outstanding warrants equivalent to 8,660,000 and 4,540,000 common shares, respectively. The warrants are anti-dilutive at August 31, 2017 and August 31, 2016 and therefore, have been excluded from diluted earnings (loss) per share.
|
Note 14. Acquisitions
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 was partially repaid in the second quarter and has a remaining balance of $45,000.
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. Due to the related party nature of the transaction, the Company did not record any goodwill related to the transaction. The assets acquired and liabilities assumed were recorded based on their cost basis at the time of the acquisition and the excess of the purchase price over the aggregate cost basis of the net assets acquired was allocated to compensation expense. The agreement included customary representations, warranties, and covenants by us and Comencia.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
|
)
|
|
|
|
|
|
Total liabilities assumed, net
|
|
$
|
40,059
|
|
The purchase price consisted of the following:
Total liabilities assumed, net
|
|
$
|
40,059
|
|
Common stock
|
|
|
750,000
|
|
Total compensation expense and purchase price
|
|
$
|
790,059
|
|
The Company plans to review the fair value of the total assets of the acquisition during the fourth quarter to determine if there is an impairment on the acquired assets.
The unaudited supplemental pro forma results of operations of the combined entities had the date of the acquisition been March 1, 2017 or March 1, 2016 are as follows:
|
|
Combined Pro Forma
|
|
|
|
For Six Months
|
|
|
For Six Months
|
|
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Revenues
|
|
$
|
261,035
|
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
263,229
|
|
|
|
243,521
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(2,194
|
)
|
|
|
(243,282
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,193,578
|
|
|
|
1,465,460
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,195,772
|
)
|
|
|
(1,708,742
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(93,249
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,289,021
|
)
|
|
$
|
(1,708,742
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares Outstanding – basic and fully diluted
|
|
|
56,457,902
|
|
|
|
41,502,301
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and fully diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Appointment.com Acquisition
On December 1, 2016, the Company acquired all assets related to Appointment.com, Inc. (“Appointment”), an online scheduling software system based in Seattle, Washington. This transaction is considered related party since Epik LLC is a controlling owner of Appointment and the Company’s CEO, Rob Monster, is the controlling owner of Epik LLC. The purchase price pursuant to an asset purchase agreement was 1,625,000 common shares. Due to the related party nature of the transaction, the Company did not record any goodwill related to the transaction. The sum of $122,705, which reflects the cost basis of the liabilities assumed, and the stock value of $731,500 is $853,955 and was recognized as expense on the Company’s consolidated statement of operations in fiscal 2017. The agreement included customary representations, warranties, and covenants by us and Appointment.
The allocation of the purchase price to assets based upon fair value determinations was as follows:
Cash
|
|
$
|
2,240
|
|
Related party payable
|
|
|
(42,380
|
)
|
Accrued salary
|
|
|
(82,565
|
)
|
Total liabilities assumed, net
|
|
$
|
(122,705
|
)
|
The purchase price consisted of the following:
Total liabilities assumed, net
|
|
$
|
122,705
|
|
Common stock
|
|
|
731,250
|
|
Total compensation expense and purchase price
|
|
$
|
853,955
|
|
The unaudited supplemental pro forma results of operations of the combined entities are not included in this disclosure as the acquisition of Appointment does not materially affect the Company's results from operations.
Rezserve Technologies Ltd. Acquisition
On September 14, 2016, the Company entered into a Stock Purchase Agreement for 100% of Rezserve Technologies, Ltd. (Rezserve), a travel industry software company based in Vancouver, British Columbia. Pursuant to the terms of the agreement, the Company purchased all of the issued and outstanding stock of Rezserve in consideration for a total purchase price of $1,480,000. This price was paid with 3,000,000 shares of the Company’s common stock and a $400,000 secured convertible note payable to Rezserve’s founder Clint Skidmore. The terms of the note include interest at 0% per annum. Principal is due and payable within one year of September 13, 2016. The Company imputed interest expense of $19,040 related to the $400,000 convertible note payable – related party as an increase in additional paid in capital during fiscal 2017. See Note 14 for more information about the convertible note payable – related party.
This acquisition was accounted for as a business combination under the purchase method of accounting, given that substantially all of Rezserve’s assets and ongoing operations were acquired. The purchase resulted in $1,445,292 of impairment expense. This was due to the use of common stock by the Company to pay for the acquisition and the corresponding the value of the stock was in excess of the fair value of the assets received. The agreement included customary representations, warranties, and covenants by us and the Rezserve owner.
According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:
Assets, net
|
|
$
|
34,708
|
|
Customer Lists
|
|
|
77,295
|
|
Intellectual Property
|
|
|
30,842
|
|
Trademarks
|
|
|
19,475
|
|
Goodwill
|
|
|
1,317,680
|
|
Total Assets Acquired
|
|
$
|
1,480,000
|
|
The purchase price consisted of the following:
Convertible note payable – related party
|
|
$
|
400,000
|
|
Common Stock
|
|
|
1,080,000
|
|
Total Purchase Price
|
|
$
|
1,480,000
|
|
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reviewed the fair value of the total assets of the acquisition and concluded the fair value of the goodwill and intangible assets which were acquired was less than the fair value of the common stock which was used to pay for the business. Accordingly, the Company recorded an impairment expense of $1,445,292 related to this acquisition in fiscal 2017.
The unaudited supplemental pro forma results of operations of the combined entities had the date of the acquisition been March 1, 2016 are as follows:
|
|
Combined Pro Forma
|
|
|
|
For Six Months
|
|
|
|
Fiscal 2017
|
|
Revenues
|
|
$
|
144,735
|
|
|
|
|
|
|
Cost of revenues
|
|
|
212,040
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(67,304
|
)
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,594,592
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,661,896
|
)
|
|
|
|
|
|
Other income (expense)
|
|
|
-
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,661,896
|
)
|
|
|
|
|
|
Weighted average number of common shares Outstanding – basic and fully diluted
|
|
|
41,502,301
|
|
|
|
|
|
|
Net loss per share – basic and fully diluted
|
|
$
|
(0.04
|
)
|
Cloud.Market Acquisition
On March 5, 2016, the Company acquired all of the assembled workforce, patents, intellectual property, technology, trademarks, trade names, copyrights, mask works and registrations, computer software, trade secrets and non-compete agreements related to the Cloud.Market business, pursuant to an agreement among the Company and the owner of Cloud.Market. The purchase price paid included issuance of 750,000 shares of our common stock and $7,500 of cash. The agreement included customary representations, warranties, and covenants by us and the Cloud.Market owner.
The allocation of the purchase price to assets based upon fair value determinations was as follows:
Non-compete agreements
|
|
$
|
700
|
|
Customer Lists
|
|
|
66,800
|
|
Total Assets Acquired
|
|
$
|
67,500
|
|
The purchase price consisted of the following:
Cash
|
|
$
|
7,500
|
|
Common Stock
|
|
|
60,000
|
|
Total Purchase Price
|
|
$
|
67,500
|
|
The 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 $67,500 related to this acquisition in fiscal 2017.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited supplemental pro forma results of operations of the combined entities are not included in this disclosure as the acquisition of Cloud.Market does not materially affect the Company's results from operations.
Note 15. Convertible Notes Payable – Related Party
On June 9, 2017, the Company received $500,000 in cash related to an unsecured convertible note with its chairman. The note has an interest rate of 8.0% and is due and payable in two years, at which time it can be converted into shares of the Company’s common stock at a conversion price of $0.25 per share. The beneficial conversion feature associated with this note was $300,000, which is being amortized over the life of the note. The net balance of the beneficial conversion feature was $265,890 as of August 31, 2017. The net balance of this note was $234,110 as of August 31, 2017.
On September 14, 2016, subject to a stock purchase agreement, the Company signed a secured convertible note of $400,000 with Clint Skidmore, founder of Rezserve Technology Ltd (“Rezserve”). The interest free note is due and payable within one year, at which time it can be converted into up to 1,000,000 shares of the Company’s common stock at a conversion price of $0.40 per share. The Company evaluated the note and determined that as the fixed exercise price exceeded the closing market price on the note issuance date, that no beneficial conversion feature was present. The imputed interest expense of $20,000 related to the $400,000 note payable was recorded as an increase in additional paid in capital during the first two quarters of fiscal 2018.
The Company evaluated the convertible notes and determined that the shares issuable pursuant to the conversion options were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has sufficient authorized shares.
Note 16. Long-Term Debt – Related Party
Between July 20, 2017 and July 27, 2017, the Company received an aggregate of $450,000 in cash payments related to four unsecured promissory notes with its chairman, another director, and two third party shareholders. The interest free notes are due and payable in two years. In conjunction with these notes, the Company issued 4,000,000 of warrants with exercise prices of $0.10 to $0.15 per share. The total value of the stock warrants issued was $450,000 and established a discount to the notes. This discount is being amortized over the life of each note. The net balance of the discount was $425,549 as of August 31, 2017. The net balance of the notes as of August 31, 2017 was $24,451.
The Company has $11,770 of other long-term debt as of August 31, 2017.
Note 17. Transactions with Former Officer and Current Shareholder
The Company was founded in 1982 by Richard Pomije. On May 17, 2015, Mr. Pomije resigned as CEO of the Company and on June 1, 2015, he resigned as the CFO and Chairman. At the time of his resignation, the Company and the Board of Directors were not aware of any continuing employment agreement. The Company released Mr. Pomije on September 11, 2015 concurrent with his closing of the Burnsville, MN office. However, Mr. Pomije is now asserting an employment agreement did indeed exist and a continuing obligation of the Company in the form of a monthly salary for a one year term from May 18, 2015 to May 17, 2016 was due in addition to a stock subscription receivable, and that the failure to provide written notice at end of the one-year obligated the Company to pay for an additional year under the agreement. Mr. Pomije claims the Company owes him $260,900, which has been fully accrued for by the Company. Mr. Pomije filed a lawsuit against the Company on December 5, 2016.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Subsequent Events
On October 9, 2017, the Company entered into an asset purchase agreement to acquire Congo, Ltd. (Congo), a web-based online platform which provides services to law firms and the legal industry and is based in Austin, Texas. Pursuant to the terms of the agreement, the Company purchased all of the assets of Congo in consideration for a total purchase price of $1,275,000. This price is expected to be paid with 3,000,000 shares of the Company’s common stock at $0.40 per share and $75,000 of cash.
On September 14, 2017, the Company received a verbal agreement from Clint Skidmore, founder of Rezserve, to extend the convertible note up to one year. The Company contemplates it will provide an incremental equity grant to Mr. Skidmore when it comes to an agreed-upon extension.
There were no additional significant subsequent events through October --16, 2017, the date the financial statements were issued.