U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10/A-3
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act
of 1934
DIGITILITI, INC.
(Exact name of Registrant as
specified in its charter)
000-53235
(SEC File No.)
|
|
Delaware
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26-1408538
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(State or other jurisdiction of
incorporation)
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(I.R.S. Employer Identification
No.)
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266 East 7
th
Street,
4
th
Floor
St. Paul, Minnesota
55101
(Address of Principal Executive
Office)
Registrant's
Telephone Number, including Area Code: (651) 925-3200
Securities registered pursuant to Section
12(b) of the Act:
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Title of Each Class to be so
Registered
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Name of each Exchange on which
each Class is to be
Registered
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None
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None
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Securities to be registered pursuant to
Section 12(g) of the Act:
|
Title of Class
|
$0.001 par value common
stock
|
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one)
[
]
Large
Accelerated Filer
[
]
Accelerated Filer
[
]
Non-Accelerated
Filer
[X]
Smaller Reporting Company
(Do not check if a smaller reporting
company)
The Exhibit Index is located on page 91.
TABLE OF CONTENTS
Item 1. Business.
3
Item 1A. Risk Factors
19
Item 2. Financial Information
27
Item 3. Properties
35
Item 4. Security Ownership of Certain
Beneficial Owners and Management
36
Item 5. Directors and Executive Officers,
Promoters and Control Persons.
38
Item 6. Executive Compensation
41
Item 7. Certain Relationships and Related
Transactions, and Director Independence
42
Item 8. Legal Proceedings
46
Item 9. Market Price of and Dividends on the
Registrants Common Equity and Related Stockholder
Matters
46
Item 10. Recent Sales of Unregistered
Securities
50
Item 11. Description of Registrants
Securities to be Registered
57
Item 12. Indemnification of Directors and
Officers
57
Item 13. Financial Statements and
Supplementary Data
58
Item 14. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
89
Item 15. Financial Statements and
Exhibits
90
SIGNATURES
91
2
Item 1. Business.
Introduction
Digitiliti, Inc. (Digitiliti, our Company, we,
us, and our or words of similar import) was organized pursuant to the laws
of the State of Delaware on March 31, 2006, under the name Cyclone Holdings,
Inc. We became a holding company under the Delaware General Corporation
Law in 2006; at that time, we had no operations or assets.
Storage Elements, Inc., a Minnesota corporation
(Storage), acquired a controlling interest in us in January, 2007. We effected
a pro rata recapitalization comprised of a reverse split and a dividend in
March, 2007, and we completed a reverse merger with Storage, effective August
17, 2007, by which we became a successor to Storage and its business operations.
For additional information regarding these and other
historical events about us, see the heading Business Development, Item 1,
below.
Business Development
Holding Company Merger
Our predecessor, Themescapes, Inc., a publicly-held
company (Themescapes), was incorporated in the State of Delaware on January 5,
1994, under the name Fidelity Distributing Services, Inc., which changed its
name to Scottys Original Brew on February 4, 1997. Pursuant to an
Agreement and Plan of Merger effective December 14, 1998, involving us and
Digitial Interactive Computerized Education, Inc., a California corporation, the
name was changed to Themescapes, Inc. Pursuant to an Agreement and Plan
of Merger dated as of March 31, 2006, between us, Themescapes and Bulldog
Merger, Inc., a Delaware corporation (Bulldog), we became a holding company
under Section 251 (G) of the Delaware General Corporation Law; Themescapes was
merged with and into Bulldog; and shares of our common stock were exchanged for
outstanding shares of common stock of Themescapes (the Themescapes Merger).
Themescapes had been inactive for over five (5) years and had no business
operations at the time of the closing of the Themescapes Merger. Bulldog
was also formed in the State of Delaware on March 31, 2006, as part of the
process by which we became a holding company. Following the closing of the
Themescapes Merger, our interest in Themescapes was disposed of for nominal
consideration, leaving us as a publicly-held company with no assets or business
operations.
Change in Control
Effective January 5, 2007, Storage acquired a controlling
interest in us for $225,000 under a Stock Purchase Agreement dated December 15,
2006, for the purpose of effecting a reverse reorganization or merger of
Storage, if approved by shareholders, with us and under which Storage would
become a publicly-held company.
Name Change
On February 27, 2007, we filed a Certificate of Amendment
changing our name to Digitiliti, Inc.
Storage Elements, Inc.
Storage was organized in the State of Minnesota on
October 3, 2003, by Brad D. Wenzel, Ronald G. Wenzel and Laura Wenzel, to engage
in the business of providing cost effective data protection solutions to
enterprises and organizations of all sizes. Brad D. Wenzel and Laura
Wenzel are currently directors and executive officers of Digitiliti, and Ronald
G. Wenzel is a former director and executive officer of Storage. For
detailed information about equity and debt financings of Storage that involved
the offer and sale of shares of its common stock, warrants convertible
notes and stock option grants, see the heading Recent Sales of Unregistered
Securities, Item 10.
3
Company
Recapitalization
Effective February 27, 2007, we completed a
recapitalization whereby we effected a 40,000 for one reverse split of our
outstanding common stock, with all fractional shares being rounded up to the
nearest whole share, followed by an immediate 200 for one pro rata stock
dividend that required a mandatory exchange of stock certificates resulting in
the dividend having the same effect as a 200 for one forward stock split, which
became effective on March 5, 2007 (the Recapitalization). Depository
Trust Company (DTC) participants and the beneficial holders of our common
stock held by DTC were deemed to be holders of record for all purposes of the
Recapitalization, provided that we received advice of these respective positions
from DTC participants within 30 days of the effective date of the
Recapitalization; a number of extensions to that date were granted to reasonably
ensure that all shareholders entitled to participate in the Recapitalization and
to receive the dividend were accounted for; these extensions have all passed,
and no further adjustments will be made as a result of the Recapitalization.
All common stock computations regarding our outstanding securities in this
Registration Statement take in account this Recapitalization.
Storage Elements, Inc.
Merger
Effective August 17, 2007, Cyclone Acquisition Corp., a
Minnesota corporation formed by us and our wholly-owned subsidiary (Cyclone
Acquisition), merged with and into Storage (the Storage Merger). The
Storage Merger was approved by persons owning a majority of the outstanding
voting securities of Storage on August 16, 2007; by us as the sole stockholder
of Cyclone Acquisition; and by the respective Boards of Directors of all of the
parties. There were no dissenting stockholders. All outstanding
shares of common stock of Storage were exchanged on a one for one basis for
shares of our common stock; and all outstanding convertible debt and common
stock equivalents of Storage such as options, warrants or convertible notes
remained outstanding and were assumed by us, with our common stock to be issued
on exercise or conversion of these convertible securities. All of these
securities, including our shares of common stock that may be issued on exercise
or conversion of these securities, are restricted securities as defined in
Rule 144 of the Securities and Exchange Commission. Storages name was
also changed to Digitiliti, Inc., and Storage remains our wholly-owned
Minnesota subsidiary. We have used Storage for purposes of clarity,
where deemed necessary, throughout this Registration Statement. For
information about the securities issued and exchanged in the Storage Merger, see
the heading Recent Sales of Unregistered Securities, Item 10. The
following table reflects the outstanding securities of Digitiliti and Storage on
a pre-Merger and combined post-Merger basis:
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|
|
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Digitiliti Pre-Merger
Outstanding Shares
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Storage Pre-Merger
Outstanding Shares (1)
|
Storage Pre-Merger
Outstanding Convertible
Securities (2)
|
Digitiliti Post-Merger Outstanding Shares
(3)
|
Digitiliti Post-Merger Outstanding
Convertible Securities (2)
|
369,211 Shares
|
21,320,216 Shares
|
12,415,014 Shares
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21,439,427 Shares
|
12,415,014 Shares
|
(1)
Includes 10,571 shares issued by us to
Storages Chief Accounting Officer that were required to have been issued before
closing; 4,000 shares issued by us to Storages public relations firm pursuant
to a Letter Agreement executed prior to the closing of the Storage Merger that
were required to have been issued before closing; 20,614 shares issued at $0.35
per share to four stockholders who had pre-emptive rights to acquire additional
shares of common stock of Storage at the closing of the Storage Merger; and
3,051 shares issued pursuant to rounding in connection with the
Recapitalization.
(2)
We assumed (i) 4,118,364 outstanding
Storage warrants to acquire 4,118,364 shares of common stock at $0.35 - $0.50
per share; (ii) $1,618,550 in 12% convertible notes which are convertible into
shares of our common stock at a conversion price of $0.50 per share (3,237,100
shares), and one (1) warrant for each $1.00 invested (1,618,550 warrants), half
at an exercise price of $1.50 per share and half at exercise price $2.25
per share; and (iii) 3,441,000 options to purchase shares of our common stock
for shares underlying stock options granted by Storage pursuant to its 2007
Stock Option Plan, with the latter being subject to vesting requirements of the
respective stock option grants.
(3)
Takes into account the one for one
exchange of our shares of common stock for outstanding
4
shares of common stock of
Storage under the Storage Merger and the cancellation of 250,000
post-Recapitalization shares of our common stock owned and acquired by Storage
on January 5, 2007, which were cancelled under the Storage Merger.
Digitiliti and Successor
References
Under the Storage Merger, Storage became our wholly-owned
subsidiary through which all of our business operations are currently conducted,
and we succeeded to the business operations of Storage. Therefore, unless
specifically stated otherwise, all further references to Digitiliti, we,
our, us and words of similar import refer to Digitiliti, Inc., a Delaware
corporation and the registrant hereunder (the Registrant). Where deemed
appropriate for a clearer understanding of the information presented in this
Registration Statement, information or data is described under certain captions
or headings separately under Digitiliti or Storage and combined under
Digitiliti.
The consolidated financial statements that are filed with
this Registration Statement account for the Storage Merger as a capital
transaction in substance (and not a business combination of two operating
entities) that would be equivalent to Storage issuing securities to Digitiliti
in exchange for the net monetary liabilities of Digitiliti, accompanied by a
recapitalization, and, as a result, no goodwill relating to the Storage Merger
was recorded. See Items 13 and 15.
Recent Events in 2008
Recent
Technology Acquisition
On March 13, 2008, we acquired a
commercially-proven technology from StorageSwitch, LLC, a Colorado limited
liability company (StorageSwitch). This technology compliments our current
business model that is discussed below and also provides a base layer that we
will build upon to develop enhanced storage service offerings. These
offerings will be positioned for the rapidly growing small to medium business,
small to medium enterprise and the software as a service market spaces.
Due to the inherent simplicity of this technology, we believe will be able
to deploy our next digitiliti storage offering through larger, less technical
sales partners, thereby enabling faster growth. See the heading
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or
Labor Contracts, including Duration, Item 1.
On May 13, 2008 (the date of the last signature
received), our Board of Directors and certain persons who owned an aggregate of
50.66% of our outstanding voting securities adopted the following actions by
written consent, as applicable, effective April 17, 2008:
Amended and Restated Certificate of
Incorporation
·
Voted to amend and restate our
Certificate of Incorporation to add the following provisions: (i) a class of
preferred stock consisting of 10,000,000 shares, par value $0.001 per share,
reserving to the Board of Directors the right to set the series, classes,
rights, privileges and preferences of the preferred stock or any class or series
thereof, by amendment to the Certificate of Incorporation, without shareholder
approval; and (ii) allow the Board of Directors to adopt, amend or repeal the
Bylaws of the Company, change the name of the Company under certain
circumstances and to effect recapitalizations of the Company by way of forward
or reverse splits that do not require amendments to the Certificate of
Incorporation. The Amended and Restated Certificate of Incorporation that
contains all provisions of the initial Certificate of Incorporation and all
prior and present amendments was filed with the State of Delaware on May 13,
2008. The preferred stock was added to the authorized shares to other
future funding possibilities, though no current use of the preferred stock for
this or any other purpose has been proposed. The amendments regarding
potential name changes in certain circumstances and certain recapitalizations
were added as a time and cost saving feature for the future, if required or
necessary, as deemed by the Board of Directors; and the amendment regarding
Board Bylaw adoption, amendment or repeal was deemed important for the same
reasons and because it was believed that the Board of Directors should have this
authority since it is its responsibility to manage our affairs; this authority
could not be exercised unless it was specifically contained in the
5
Certificate
of Incorporation, according to Section 109 of the Delaware General Corporation
Law. Regardless, such an amendment does not divest shareholders of the
right to adopt, amend or repeal Bylaws under Section 109.
New Bylaws
The Board of Directors and these
persons also adopted new Bylaws of the Company that set the current number of
members of the Board of Directors at six. Other changes in the new Bylaws
were: (i) allowing 24 hours notice of special meetings by telegraphing,
telexing, facsimile, email or similar electronic transmission; (ii) adding a
Chairman, Chief Executive Officer, Chief Financial Officer and Chief Operating
Officer to the designation of positions of officers; (iii) allowing us by Board
resolution to take action as may be necessary to make our shares eligible for
trading via a direct registration system operation by a securities depository,
including, without limitation, by authorizing uncertificated or electronic
shares, subject to the Delaware General Corporation Law; (iv) allowing
facsimile, emailed or electronic signatures of Board members or officers to be
relied upon whenever provided after authorization of action by the Board of
Directors; (v) indicating that our record books shall not be closed so long as
we are authorized for trading on any National Securities Exchange (as defined in
the Exchange Act); (vi) setting time tables for indemnitee demands for payment
based upon indemnification prior to the institution of any actions against us
for indemnification; (vii) allowing us to maintain insurance for all purposes to
protect us and our directors, officers and agents, among others, where no
provision previously existed; and (viii) allowing our Board determine the
number of directors that will constitute our Board. This summary is
modified in its entirety to the actual copy of our new Bylaws that is filed as
an Exhibit to this Registration Statement. See Item 15.
Increase and
Additional Grants in Shares under 2007 Stock Plan
·
Resolutions were
also adopted that changed the name of our 2007 Stock Plan to the Digitiliti,
Inc. Stock Option Plan and increased the shares available for grant thereunder
from 4,000,000 shares to 9,000,000 shares. In April, 2008, an additional
3,900,000 grants were made at prices between $0.35 (persons who were
non-directors and executive officers) and $0.385 (persons who were directors and
executive officers). Director and executive officer grants included the
following persons with these grants: William McDonald, CFO, 150,000, vesting pro
rata over 36 months; Mark Savage, a director, 250,000, vesting pro rata over 24
months; and 2,850,000, 1,425,000 each to Messrs. Ingwersen (CEO, President and a
director) and Johnson (COO), for services rendered through 5X Partners, vesting
pro rata over 24 months. These option grants were recommended by the
Board of Directors of our wholly-owned subsidiary, Storage, on April 17, 2008,
and as part of our adopting these option grants effective on April 17, 2008, we
required that none of these stock options could be exercised for a period of six
months from April 17, 2008. Also, see the heading Securities Authorized
for Issuance under Equity Compensation Plans, Item 9; the heading Digitiliti,
Inc. Stock Option Plan, Item 10; and note 16 of our consolidated financial
statements that accompany this Registration Statement. See Items 13 and
15. Our Board of Directors considered, at April 17, 2008, and May 13,
2008, the following, among other factors, in valuing the exercise price of these
option grants: (i) since January 1, 2008, approximately 3,500 shares of our
common stock have been publicly traded of the approximate amount of 105,462
shares that are believed to be presently publicly tradable, at prices ranging
from $1.05 to $1.68 per share; (ii) all shares issued, according to the new Rule
144(i) and current Securities and Exchange Commission position set forth in its
adopting Securities Act Release No. 33-8899, effective February 15, 2008, that
amended Rule 144, cannot be sold under Rule 144 until the earliest of 12 months
from the filing of our Registration Statement, assuming it is granted an
effective date; (iii) in a few recent private sales by individuals, including
some principals, shares of our common stock have been sold at $0.35 per share;
(iv) the going concern qualification of our auditors in our consolidated
financial statements; (v) our net stockholders deficit of approximately
$819,630;
(vi)
our need for between $5 to
$7 million for our operations during the next 12 months, and the difficulty we
may have in raising these funds with the current limited trading market for our
shares of common stock and the resale limitations on our shares under Rule
144(i); and (vii) our substantial current liabilities that are far in
excess of our 2007 revenue. Storages Board used these same factors at
April 17, 2008, in recommending the value of these option grants, but about
1,000 less shares of our common stock had traded on that date. Regardless
of this valuation method
6
and
process, we may be required to recognize additional expense for these grants,
based upon the trading prices in the limited market for our shares of common
stock under the Black Scholes method of valuation; that recognition could have a
substantial adverse impact on our income (loss).
Director and Officer
Changes
·
Mark Savage resigned as our
President, retaining his position as a director; Brad D. Wenzel resigned as our
Chief Executive Officer and was elected Chairman of the Board of Directors;
Laura Wenzel resigned as our Chief Financial Officer and Treasurer, retaining
her positions as Vice President, Secretary and a director; Larry D. Ingwersen
was elected our Chief Executive Officer, our President and a director; Roderick
D. Johnson was elected as our Chief Operating Officer; and William McDonald was
elected as our Chief Financial Officer.
Other Information About Us
We were listed in the March 17, 2008, edition of Standard
& Poors Daily News Section of Corporation Records, with our audited
financial statements for the years ended December 31, 2006, and 2005, and our
reviewed financial statements for the nine months ended September 30, 2007,
along with other information about us; and just prior to the filing of this
Registration Statement, we have provided Standard and Poors with our audited
financial statements for the years ended December 31, 2007, and 2006, along with
certain other updated information. All of this information, including our
press releases disseminated since March, 2007, along with the information
required by Rule 15c2-11(a)(5) of the Securities and Exchange Commission, is
also listed in our web site,
www.digitiliti.com
, under Shareholder
Information, and in the web site of the Pink Sheets, that can be accessed by
inserting our trading symbol, DIGI, in the Get Quote box and then clicking
on the Filings link.
Material Business Development
Exhibits
Copies of the following documents are filed as Exhibits
to this Registration Statement. See Item 15:
·
Initial Certificate of Incorporation,
filed March 31, 2006.
·
Bylaws.
·
Certificate of Amendment regarding
our name change to digitiliti, inc. and the Recapitalization, filed February
27, 2007.
·
Certificate Correction regarding our
name change to Digitiliti, Inc., filed March 12, 2007.
·
Stock Purchase Agreement dated
December 15, 2006, between Storage and our former principal shareholders, under
which Storage acquired a controlling interest in us.
·
Agreement and Plan of Merger between
us, Themescapes and Bulldog under which we became a holding company, filed
February 27, 2006.
·
Agreement and Plan of Merger between
us, Cyclone Acquisition and Storage under which Storage became our wholly-owned
subsidiary, filed August 17, 2007.
·
Amended and Restated Certificate of
Incorporation.
·
StorageSwitch Technology Purchase
Agreement.
Issuers Involved in Bankruptcy Proceedings During the
Past Five Years
We have not been involved in any bankruptcy, receivership
or any similar proceeding, and have not had or been party to any material
reclassifications, mergers or consolidations during the previous five years that
are not outlined above under the heading Business Development.
Voluntary Filing of Registration Statement
We are voluntarily filing this Registration Statement so
that we can become a reporting issuer under the Securities Exchange Act of
1934, as amended (the Exchange Act); that will allow us to seek to have our
common stock publicly quoted on the OTC Bulletin Board of the Financial Industry
Regulatory Authority (FINRA). Our
7
common stock is currently
quoted in the Pink OTC Markets Inc. (the Pink Sheets) under the trading symbol
(DIGI). We cannot ensure that we will be successful in obtaining
quotations of our common stock on the OTC Bulletin Board even if this
Registration Statement becomes effective; however, our management believes that
being a reporting issuer will facilitate this process for us. Presently,
FINRA requires companies seeking quotations on the OTC Bulletin Board to be
reporting issuers, and management also believes that in the present corporate
regulatory climate, being a reporting issuer will soon become a requirement for
every nationally recognized medium on which securities of companies are publicly
traded. The information required to be filed by us with the Securities and
Exchange Commission as a reporting issuer may also provide us with additional
credibility that may be advantageous in the conduct of our business operations
and shareholder and customer relations.
Business
Introduction
We presently focus on providing a cost effective data
protection solution to the small to medium business (SMB) and small to medium
enterprise (SME) markets. This data protection solution is geared
specifically to help organizations properly manage and protect their entire
network from one centralized location, with offsite redundancy. Our
solution can backup and restore data on every machine in a network, including
desktops, laptops, file and print servers.
We are dedicated to developing and delivering superior
storage technologies and methodologies that will enable our customers to manage
and protect massive data growth with ease.
We combine a powerful, agent-less backup software with
our remote Fortress Storage Center to deliver to our customers a powerful and
effective online-offsite data backup and restore solution. We provide
storage from a utility based computing philosophy, whereby customers pay only
for the gigabytes of data they store in our Fortress Storage Center.
Our facilities allow us to provide offsite disaster
recovery with an emphasis on intraday protection and restore for all our
customers primary data centers and geographically dispersed offices or campus
settings. Our Fortress Storage Center is located in the base of the former
Minneapolis Federal Reserve Bank. It is a one of a kind facility that
provides our web based on-demand backup/restore service (digitiliti) with all
the benefits of direct fiber access to a Level 5 data center. The
Fortress Storage Center has 24/7 onsite physical security, including security
guards, motion detectors, security cameras, card-key access, separate cages with
individual locking cabinets and ladder racking. It also has battery
generator back up power, temperature and humidity controls and fire suppression
systems. Geographically, we are located at the center point of the
Metropolitan area network. Being centrally located at the focal point of
the Twin Cities Fiber Channel and Gig loop, the pipeline for data and load
capabilities are immense. This allows us to send data back and forth in
real time.
The Fortress Storage Center houses all the hardware and
software needed for the digitiliti solution to work. At the customer site,
digitiliti administrator software is loaded on as many or as few workstations as
desired and will require a valid logon code, ensuring no unauthorized access.
At the customer site, the administrator software console acts as the
interface with digitiliti in the Fortress Storage Center and enables the
configuration of all backups and restores. The digitiliti backup software
is totally agent-less, requiring no additional software to be installed on any
machines. From the customer administration console, the customer sets
retention policies, schedules automatic backups and initiates restores.
The customer decides what files to backup: emails, Windows, Linux, Mac,
Lotus, AS400 or many more. Customers typically start backing up one system
and then add more systems to their backup sets as they continue to see how
easily our digitiliti works.
For large data volumes, the initial data backup may be
downloaded to a portable disk unit at the customer site. When the full
backup of data is complete, the disks are transported to the Fortress Storage
Center where the data is loaded onto the equipment in the Fortress Storage
Center. From then on, all data is backed up in incremental changes over
the Internet. All data is encrypted at all times before it leaves the
customer site and when stored offsite. The encryption key is known only to
the customer. The data can be unencrypted only by the customer, who would
do so upon the need of a restore. If a customer loses data, they simply
enter commands to restore it via the administration
8
console. At that time,
the data would flow from the Fortress Storage Center back to the customer site.
If the customer loses all their data, digitiliti can restore the latest
data to a location of their choosing using a portable disk unit. In
addition to being encrypted, the data is also highly compressed, making it
extremely safe and impenetrable from viruses. We maintain two copies of
the customer data at all times.
We have contracted with XO Communications for our data
center and communications. We lease our Fortress Storage Center space from
them, and they own the Internet lines we use. This relationship helps keep
capital expenditures at a minimum, while maintaining the flexibility to set up a
new data center in any one of 80 geographically dispersed locations throughout
the world, thereby reducing any geographic concerns about our digitiliti.
XO Communications provides voice, data and IP services to businesses and
other telecommunications companies in 75 metropolitan markets across the United
States.
Our operations facilities currently include:
·
14 full time employees.
·
Fortress Storage Center in
Minneapolis, MN, the former home of the Federal Reserve Bank.
·
Leased administration offices in St.
Paul, MN.
·
Various servers, workstations, RAID
systems that protect against data loss, networking gear, operating systems,
storage area networks (SAN) and network attached storage (NAS) hardware.
·
In-house website development.
·
Strategic partnerships with Network
Engines, Inc. (Network Engines), a developer and manufacturer of server and
appliance solutions that deliver software applications on server appliances;
Asigra, Inc. (Asigra), a provider of comprehensive software solutions and IT
expertise to back up data to customers secure vaults; XO Communications,
(XO Communications), a United States telecommunications firm and one of the
largest Competitive Local Exchange Carriers (CLEC) in the country that
provides voice, data and IP services to businesses and other telecommunications
companies in 75 metropolitan markets across the United States; and Exanet, Inc.
(Exanet), a network attached storage (NAS) software company that
addresses the trends that are driving the
future of data centers: virtualization, standardized hardware and applications
demanding the most extreme standards of performance, availability and
scalability. All of these partnerships were made in the ordinary course of
our business; there are no written understandings; and none is a reseller for
us; however, we are a standard licensee reseller for Asigras software product.
When we designed and constructed our Fortress Storage Center vault, we
chose the Exanet/Asigra hardware/software solution to use in our
facilities. We chose to use Exanet because we believed it to be robust and
the best fit with the Asigra software we were licensed to sell. We built
our software/hardware infrastructure around the Exanet product (hardware and
software) and the Asigra product (software). When we fully consume
existing storage capacity, we purchase additional Exanet or Asigra licenses as
needed, using standard purchase orders. The purchase orders usually
list the payment terms or the payment terms are reached in subsequent
correspondence.
Our digitiliti Fortress Storage Center is made up of the
following:
·
XO Communications Level 5 RAID System
Data Center.
·
High performance fiber channel and
iSCSI RAID Systems or Arrays (RAID Systems).
·
Foundry Networks Fast Iron Gigabit
Ethernet Switches.
·
Qlogic fiber channel switches and
iSCSI adapters.
·
Dell Power Edge servers.
·
N+1 Grid Architecture for backup.
·
Diesel powered generators to protect
against power outages.
·
Unlimited bandwidth for digitiliti to
grow into.
·
Exanet Global Files System and IBM
DS4100 RAID Systems.
Products, Software, Services and Related Technologies
Utilized
The following describe various products, services,
software and other amenities utilized at our Fortress Storage Center.
Alternative providers of these products, services, software and other
amenities are reasonably available.
9
ISCSI
or a methodology for computers to
communicate without being in close proximity.
RAID Systems
or a series of disks that hold the
data and are considered fault-tolerant because they are automatically backed up,
short for Redundant Array of Independent (or Inexpensive) Disks, a category of
disk drives that employ two or more drives in combination for fault tolerance
and performance and are configured in such a way that if one disk fails, the
virtual volume that has the data will still remain intact. It is more
reliable than having all of your data on one spinning disk; if that disk fails,
you have lost everything; RAID helps mitigate that loss. RAID disk drives
are used frequently on servers; they are not generally used on personal
computers.
Level 5
or Block Interleaved Distributed
Parity, provides data striping at the byte level and also stripe error
correction information. This results in excellent performance and good fault
tolerance. Level 5 is one of the most popular implementations of RAID.
A
high performance fiber channel
that is presently
one of fastest transport mechanisms to move data from one system to another, or
from a disk to a computer processor. It still relies on a protocol like
SCSI, to communicate with hardware from completely different vendors. A
fiber channel is simply the railroad car in a super fast train.
SCSI
is a common format for the packing slips to
be able to do something meaningful with the payload. iSCSI is a language
that allows the same SCSI protocol to be used over simple copper networks
instead of expensive fiber-optic wires, and it is easier to manage and deploy
and ultimately less expensive to own.
Foundry Networks Fast Iron Gigabit Ethernet Switches
are simple network switches that can run at a gigabit line speed, which are
able to move packets of data at one gigabit per second. Foundry is the
brand name. Gig-E (Gigabit Ethernet) is the fast standardized networking
line speed. There are faster systems available, but the cost of those
systems simply makes them un-usable for our business purposes. The
switches are like traffic cops at a busy intersection. They ensure that
the flow of traffic is clean and consistent and that there are no collisions.
The faster the switch is able to perform this function, the greater/faster
the amount of traffic that can pass through the intersection.
Qlogic fiber channel switches and iSCSI adapters
create network switches that can handle traffic over fiber-optic wires;
iSCSI adapters are used on the computers that need to talk over the network
using the iSCSI protocol. Ologic is a brand name.
Dell Power Edge servers,
one of Dell Computers
brand names, are simply workhorse type computers.
N+1 Grid Architecture for
backup
describes a computing term that is made up of a series of computers.
All of the computers, as a collective, perform a specific task. They
rely on each other to perform this task and need each other around in order to
perform the task. N+1 means that the collective of computers need at least
1/2 + 1 of the computers to be working in order to complete the task. If
the number of computers is less than that amount, the entire collective stops
working on its task. As an example, if 10 computers were needed to perform
a task working in an N+1 setup, four of the computers could crash, and the task
would still be processed. This is used for redundancy and processing
power. It is better than one computer performing the task or a series of
computers performing individual tasks; and it is a very reliable configuration.
In our case, the task is performing backups of other computers.
Bandwidth
is important
because as we continue to add customers on to our service, there is a linear
curve to the amount of networking capacity that the collection of our customers
consume. One customer may only consume a small percentage of our
networking capacity, but if you add 10 or 50 or 100 customers, the network
consumption climbs in a very linear curve. In the case of our digitiliti,
the building and facilities that our digitiliti relies on for our network
capacity is capable of growing at a linear curve as well and its technology
ceiling is very high, which means that we will be able to sustain linear
customer growth for a very long time; and by the time that we hit any style of
ceiling from a technology level, the technology will have also improved, again,
allowing us to grow further.
Exanet Global Files System and
IBM DS4100 RAID Systems
take each computers storage and allows it to be
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accessed
as if it were one large computer, creating a global namespace. Each disk
in a computer has a certain size. A modern computer system is only able to count
so high, and ultimately is only able to use or consume a certain amount of
storage. This means that a single computer has a limit to the amount of
storage that it realistically can use and work with. If you place a number of
computers together, collectively you will have more storage capacity than one
server alone, but each computer can only consume the storage that it is able to
see. Each would not be able to use the storage that other computers are
consuming. In a global file system, a virtual layer is placed on top of
the physical systems and each system is actually responsible for figuring out
where its data is, but the virtual layer placed on top of the file system knows
about each individual computers file system without regard to each of the other
computers.
This allows our digitiliti
to expand past a single computers capacity and allows our digitiliti to grow
almost infinitely.
Principal Products or Services
and their Markets
Markets
The market for storage solutions can be divided into
three basic tiers, Primary, Secondary and Archival. A description of each as
follows.
Primary
-
This is where data is created and
stored. Solutions for primary storage consist of disk drives, disk arrays,
Storage Area Networks (SAN), Network Attached Storage (NAS), Direct Attached
Storage (DAS) and any other product in which primary data is stored and
managed. The best products for primary storage are those that offer the
fastest read and write speed, scalability and fault tolerance. The Primary
is sometimes described as data accessibility, data availability and is the first
part of the data management lifecycle where files are created, reside and
accessed frequently.
Secondary -
Secondary storage consists of
solutions that protect the Primary data stored. These technologies include tape
drives and libraries, backup software, mirroring, replication, snapshot, less
expensive disk arrays and continuous data protection (CDP). This tier of
storage products is to protect the Primary.
Archival
- Archival solutions consist of high
quality tape, Magneto-Optical, CD-R, DVD-R and inexpensive disk technologies
(MAID). The goal for these products is to be durable and have a long
shelf life. More sophisticated solutions, like Hierarchical Storage
Management (HSM), will automatically migrate and archive data to this these
long term inexpensive solutions. Archiving is often confused with backup.
They actually differ in that an archive is the only copy of the data
whereas a backup is not the only copy of data; it is the protection of the
Primary. Eventually, depending on specific retention policies, the data is
destroyed as it is no longer needed.
The remote online backup market is still in its infancy
so we will be aggressively pricing our products to achieve significant market
penetration to attempt to become an industry leader. We will continue to
manage our overhead and leverage our partnerships for software development,
storage infrastructure, data center facilities, connectivity and referrals. Our
goal is to concentrate on business development and refining/improving our sales
methods to attract additional customers more rapidly. In terms of
marketing strategy, we are focusing on No hardware and no software, and on our
data reduction technology, where customers backup less data than ever
before.
The SMB/SME markets were labeled fragmented and
underserved by the storage industry, in December, 2006; and we believe these
labels are applicable to these markets today because they have not reached
critical mass. The regulatory compliance pressures that exist in these
markets is a principal reason why customers and potential customers are
beginning to outsource their data protection requirements more than ever
before.
Products
Our main product is comprised of digitiliti, a web
based online backup/restore service that backs up mission critical data for
companies of any size. We are currently developing the first release of an
advanced storage solution service that will enhance the technological features
and capabilities of our existing digitiliti product. This new release
builds upon the foundation of our existing product by adding functionality we
believe is desirable to the SMB/SME market we serve. The research and
development budget for the first release is currently set at
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approximately $1,500,000, with
these funds anticipated to come from operational cash flow and debt or equity
financing. There is no assurance that adequate funds for this budget will
be available to us from any of these or other sources. We anticipate
having the first release of this product ready by the end of the third quarter
of 2008; however, changes in the scope of work on this product release that were
not anticipated or the loss of key development personnel could delay the timing
of this release. We intend to continue our research and development and
update the functionality of our products on an ongoing basis so they do not
become technologically obsolete. The exact number and budget of all these
releases have not been finalized.
We are also working on positioning Mythos, an
internally developed storage solution for the MAC market. Mythos has not
been brought to market. We are considering several options for Mythos,
including but not limited to outright sale of the software or exclusive
licensing.
Objectives
Our objective is to update the technological capabilities
of our digitiliti product with functionality desirable to the SMB/SME market.
Through on-line research and customer contact, we believe we have
identified the most pressing data management issues the SMB/SME managers
struggle with today. Various ad-hoc collections of single purpose (point)
software/hardware products and employee processes like data de-duplication,
encryption devices or application integration are a few examples of some of the
different data management issues we feel should be addressed. Our product
releases for these issues and others will align with our research and
development budget.
Mythos is intended to capture a significant portion of
the market for Apple related storage products because it is one of the only
iSCSI storage solutions that is administered from an Apple server. In
addition, Mythos is the only end to end solution that provides NAS, SAN and
backup services for Apple users within a single product. Mythos provides
storage consolidation, business continuity, backup and disaster recovery from an
off the shelf Apple computer running OSX Server, Apples premier operating
system. We have developed a unified storage solution for the enterprise
Macintosh user. We are working on positioning Mythos.
We believe that we can become a significant competitor in
the backup and restore market, especially in the SMB/SME market. In order
for us to achieve our forecasts, an aggressive sales model and dealer channel is
planned and will be implemented with branded sales partners with
utility-oriented sales systems. We believe our experience in this area gives us
an edge over the typical storage related companies that are tightly tied to box
sales business models with large up-front revenues, and very different
scalability parameters. Many business plans of companies detail excellent
products, but fall short in the area of sales. This is an area where we
believe we excel. To support this mission, we will:
·
Deliver affordable storage solutions
with enterprise level capabilities.
·
Utilize local and regional reseller
partners and national level channel partners.
·
Align with major storage participants
to cooperatively work together within the same opportunities.
·
Continue to build and deliver our
Fortress Storage Center to support digitilitis growing customer base and
continue to add valuable features to our digitiliti service to keep ahead of our
competitors.
·
Require additional funding to fulfill
our product development and sales and marketing objectives.
We have entered the mature data protection and backup
market with a utility based backup service that has changed the way companies
backup their data. This market has been dominated for 30 years by tape
devices and current software backup suppliers. These suppliers charge for
software and tape hardware to accomplish what digitiliti can do for amore
economical monthly service fee. The cost of locally managing tape backup
systems is a serious concern because of the data explosion rate companies are
experiencing and the complexity of managing it. With digitiliti, customers
no longer have to outlay capital for backup software and hardware. They
simply download the digitiliti data collection agent, install it and begin their
first backup to our Fortress Storage Center in a matter of minutes. If the
data set is too large to transfer the first full backup over the Internet, a
technician will send out a portable disk array where the customer backs up its
data to it. The customer will then send the array back to our Fortress
Storage Center for the data to be loaded onto the system. From there, the
customer backs up only the daily changes to the data made each day. The
customer pays a monthly fee based on the number of compressed
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gigabytes of data they have
stored in our Fortress Storage Center.
Targets
For 2007, we concentrated on our vertical markets and
setting up key resellers of these storage solutions. We will look to
expand our reseller base first in the Midwestern states and then outward in
2008. Our lead registration database will help us with identification of
strong resellers. We are working on partnerships with national level
enterprise sales channel programs that will build revenue in the long run.
We recently began a focused regional level channel partner development
program that will build sales in the short term. In addition, we have
identified 30,000 end-user prospects for our in-house sales team to call.
Our end-user customer base has expanded from approximately 20 in fiscal
2005, to approximately 100 in fiscal 2006, to 508 in fiscal 2007; and currently,
to approximately 656.
Digitiliti Product Operational
Methodology
Our digitiliti online backup and recovery solution
simplifies the entire data backup and restore process into a few easy steps
beginning with our data collection agent. Load our collection agent on a
Windows, Linux or Macintosh server to scan the entire network for all available
data to protect. This data may be a servers operating system state,
files, databases, messaging systems or even email messages. Determine
which data to backup and the number of revisions of each file or backup set.
Schedule and automate the backup. When the backup executes,
digitiliti looks for changed blocks within your files, eliminates common blocks,
encrypts, compresses and transfers your data to the Fortress Storage Center.
Should a customer lose data at their site, the restore process is just as
easy. Determine what data to restore and from which generation.
Restore the data either from your local storage or from the Fortress
Storage Center by entering a few commands. The latest copy of your data
can be stored locally for restoring massive amounts of data in a timely fashion.
The second copy and the third disaster recovery copy is ready and waiting
at our Fortress Storage Center.
Our Fortress Storage Center is a one-of-a-kind facility
that provides our customers with all the benefits of direct fiber access to a
Level 5 data center. The data center delivers the highest speed
telecommunications, data service, satellite and wireless capabilities in the
region. Being centrally located at the focal point of the Twin Cities
Fiber Channel and Gig loop, the pipeline for data and load capabilities are
immense. This allows us to send data back and forth in real time.
Distribution Methods of the Products or
Services
Our products are marketed in all traditional methods,
including the web, trade publications, trade shows, advertising and direct sales
methods. We also use our web site at www.digitiliti.com.
Our customers typically sign a 36 month contract that
provides for easy billing, stable recurring revenue and easy forecasting.
We believe growth can be controlled and managed through customer backup
set retention policies. Our success and size is based upon our ability to
deliver a reliable cost effective storage solution, define our target market and
effectively sell our storage solution over the telephone with ease.
Digitiliti has been sold successfully through resellers. This is
proven by the significant customers we have signed using our resellers.
Currently, approximately 614 of our 656 customers have been signed using
our resellers. Due to the success of our resellers, we plan to
aggressively set up key resellers at local, regional and national levels
throughout the United States, concentrating first in the Midwest. In
addition to our marketing and sales efforts, operations consist of managing our
customers data in our Fortress Storage Center.
Status of any Publicly Announced New Product or
Service
Mythos (formerly MYTHOS) was introduced in January
2007, at Macworld. A major development piece for Mythos was completed in
the summer of 2007. Management may consider exclusive licensing or the
outright sale of this product. There are many important benefits companies
can realize by moving to Mythos from the DAS environment. In a DAS
environment, each server is locally attached, which prohibits other servers to
access it. The result is that if a server has excess capacity, another
server cannot use it. When a potential customer needs more
13
storage, typically another
server is required to be purchased. This adds complexity to the customers
OS software licensing and backup issues. Our goal is server and storage
consolidation for easier and more efficient data provisioning and
protection.
Competitive Business Conditions, Competitive Position
in the Industry and Methods of Competition
We compete with current and potential customers internal
information protection and storage services capabilities. We can provide no
assurance that these organizations will begin or continue to use an outside
company like us for their future information protection and storage
services.
We also compete with multiple information protection and
storage services providers in all geographic areas where we operate. We
believe that competition for customers is based on price, reputation for
reliability, quality of service and scope and scale of technology, and that we
attempt to compete effectively based on these factors.
Some of our competitors may possess greater financial and
other resources than we do. If any such competitor were to devote
additional resources to the information protection and storage services business
and acquisition candidates in these areas or focus their strategy in our
markets, our results of operations could be adversely affected.
The following are know material direct competitors to our
digitiliti, and their products are:
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Competing Enterprise Name
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Competing Product Name
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Live Vault/Iron Mountain, Inc.
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Live Vault Online Backup Service
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EVault
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EVault InControl
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LiveVault /Iron
Mountain Incorporated
Marlborough, MA
LiveVault was recently purchased by Iron Mountain, Inc.
(Iron Mountain). LiveVault is targeted for customers of less than 250GB.
It can backup Windows, Linux and Solaris. We believe that LiveVaults
service is very expensive in relation our digitliti. There is believed to
be no common file elimination and agents are believed to be required on every
single computer you backup.
We believe LiveVault does not scale as elegantly as we do
because they require agents and only offer 30 days worth of backups, while we
offer three years. We are priced more competitively to customers with over
250GB. When customers exceed 100GB, we become even more cost effective.
Iron Mountain has an estimated net worth of over
$1.5 billion, with over $2.73 billion in estimated storage related products and
services income.
EVault
Emeryville, CA
EVault was acquired by Seagate Technology (Seagate) in
January, 2007, for $186 million. Seagates core business is as a disk
drive manufacturer. EVault is a competitor in the small business market,
primarily serving customers having well under 100GB. EVault is believed to
be much more expensive in the small to medium business and the small to medium
enterprise market. We believe that it charges for consulting, setup,
software fees and data stored so this service may end up costing as much as a
tape solution with the benefit of getting data offsite. EVault requires
agents on all servers/workstations and charge for these software agents.
EVault only allows customers to keep some of their data online; the rest
has to be archived or deleted. Our product is so easy to use that it is
possible to engage the customer for no more than a couple hours for a complete
setup, often without a charge.
If our competitive position in this industry is based
solely upon assets, current cash resources and the number of customers we now
have, our present competitive position in this industry would not be deemed to
be significant; however, we believe our business strategy, management, employees
and products will result in us becoming a
14
competitive force in this
industry.
Sources and Availability of Raw Materials and Names of
Principal Suppliers
Our business solutions require software and related
products and suppliers that are readily available.
Dependence on One or a Few Major Customers
We are not dependent upon one or a few major customers,
the loss of which could have an adverse material effect on our business
operations or financial condition.
Patents, Trademarks, Licenses, Franchises,
Concessions, Royalty Agreements or Labor Contracts, including Duration
We have customary software licenses required to conduct
current and intended operations; and we are in the process of filing certain
service mark applications that are deemed to be necessary or beneficial to us.
We have no patents.
We have the following service agreements that are deemed
to be material:
M2 Capital Advisors, Inc.
On May 3, 2006, Storage executed a Consulting Agreement
with M2 Capital Advisers, Inc., a Minnesota corporation (M2), and a related
party of which Mark Savage, our former President and a current director (see
Item 5), is the President and a principal shareholder, to render various
consulting services, including introducing it to various sources of funding and
providing management consulting services. As consideration for these
services, M2 was to be paid $3,000 per month for one year; 10% fee for
introduction of funding sources that actually provided funding; receive
1,050,000 seven year $0.50 warrants, subject to the introduction and receipt of
not less than the sum of $750,000; 1.4 seven year warrants for every additional
$1.00 of funding introduced and received; piggy-back registration and cashless
rights on all warrants; and other fees based upon a sliding scale for the
introduction of a merger or acquisition to which Storage was introduced and that
was actually completed. An Addendum to this Consulting Agreement was
entered into in March, 2007, effective May 6, 2006, that raised the monthly fee
from $3,000 to $5,000, as compensation to Mr. Savage for filling the role as
President of Storage; reduced the warrant exercise price to $0.35, which
coincided with the then current offering price of Storage common stock; and that
indicated that the total warrants issuable under the Consulting Agreement were
3,726,520. This Consulting Agreement was extended by us on February 28,
2008, until May 31, 2008. M2 was paid approximately $350,000 under this
Consulting Agreement for funding introduced and received by Storage in the
approximate amount of $3,500,000 in connection with the offer and sale of
certain shares of Storage common stock that were restricted securities and was
(it and its designees) issued the 3,726,520 warrants to acquire shares of common
stock of Storage as outlined in Item 10. In September and October, 2007,
warrants for 3,643,270 shares were exercised cashless with the issuance of
3,359,397 shares of our common stock in accordance with our assumption of these
warrants under the Storage Merger.
M2 was also paid $319,955 through December 31, 2007, in
connection with the introduction of persons who acquired $3,199,550 in 12%
convertible notes in an aggregate offering of up to $5.5million commenced by
Storage in the first quarter of 2007and extended by us following the closing of
the Storage Merger on August 17, 2007; this 12% convertible note offering
is presently being continued by us.
Effective on or about April 25, 2007, Storage executed
and completed a Consulting Agreement with M2 whereby it agreed to issue 750,000
shares of Storage common stock that were restricted securities to M2 and its
associates for the introduction of us as a potential reverse merger candidate to
Storage. 297,166 of these shares were issued directly to Mr. Savage.
All of these shares were exchanged under the Storage Merger. All of
these securities were restricted securities.
M2 was also paid a 5% introduction fee of $28,550 for a
computer lease executed by us in November, 2006; $15,448 for the introduction of
two additional computer equipment leases executed by us in January and February,
2007; and
15
$13,600 for the introduction
of an additional computer equipment lease we executed in December, 2007.
A Letter Agreement was entered into between M2 and us on
June 19, 2008, to cover compensation for M2 for any additional funding source
introductions made by M2 to us in the completion of our current 12% convertible
note offering, anticipated to be completed by the end of our third quarter.
M2 will be paid a 10% introduction fee on any funds realized from any
introductions; all sales efforts in connection with these introductions will be
conducted by us. A copy of this Letter Agreement is filed as an Exhibit to
this Registration Statement. See Item 15.
These Consulting Agreements contain various provisions
regarding independent contractor status, confidentiality, due performance and
care in performing services and mutual indemnification, among other
provisions.
See the headings Recent Sales of Unregistered
Securities, Item 10, for additional information on securities issued under
these two Consulting Agreements and the 12% convertible note offering by Storage
and us. Copies of these Consulting Agreements are filed as Exhibits to
this Registration Statement. See Item 15.
5X Partners, LLC.
We executed a Corporate Development Services Agreement
(the Agreement) with 5X Partners, LLC, a Minnesota limited liability company
(5X Partners) on August 20, 2007, that was extended by an Addendum on November
15, 2007 (the First Addendum), and by an additional Addendum effective April
17, 2008 (the Second Addendum). This Agreement and the Addendums focus
on services in senior leadership, business development , sales and marketing,
product packaging, infrastructure scaling methods and other key areas of
management, business assessment and strategies. 5X Partners will apply its
implementation skills to fill in needed strengths and improve functional areas
including corporate strategy and revenue generation (sales, marketing, pricing,
positioning, partnering, etc). 5X Partners will add value in business
development by leading M&A or divestiture functions as needed. It is
also anticipated that 5X Partners will assist us in financing, investor
relations and company positioning. Compensation under the initial Agreement was
$16,800, divided between Larry D. Ingwersen (who became our CEO and President on
April 17, 2008 [see Item 5]) and Roderick D. Johnson (who became our Chief
Operating Officer on April 17 [see Item 5]), two of its principals, $8,400 to
each for 25% of the time of each, less 50% shared risk of $8,400; the First
Addendum increased this amount to $30,241, $15,121 to each for 50% of the time
of each, with a provision to discuss deferred compensation in the form of
warrants; and the Second Addendum, a 12 month extension, provides that we will
pay 5X Partners $60,484 consisting of a 50% cash payment and 50% converted into
common stock with a price of $0.35 per share. We will also pay a monthly fee of
$28,000 of which $8,000 will be deferred until reaching a financial funding
goal, and issuance of 2,850,000 shares of stock options at a strike price of
$0.385 per share to the two principals of 5X Partners, which will vest over 24
months. These securities are all restricted securities. These two
principals of 5X Partners were elected as our new CEO/President and COO,
respectively; no additional compensation is presently anticipated for service in
these capacities.
5X Partners was instrumental in the
introduction, negotiation, due diligence process and the closing of the
transactions with StorageSwitch, LLC and the introduction of Vision to Practice,
Inc. to us.
The Agreement and these Addendums contain various
provisions regarding independent contractor status, confidentiality, due
performance and care in performing services, notice of disputes and time for
correction, arbitration of disputes and indemnification by 5X Partners, among
other provisions.
Copies of the initial Agreement and the First and Second
Addendums are filed as Exhibits to this Registration Statement. See Items
13 and 15.
StorageSwitch, LLC
In January 2008, we executed a nonbinding
Letter of Intent (LOI) with StorageSwitch to purchase selective existing
software technology. In addition, this LOI addressed the compensation paid
for any related software product development consulting services and
sales/marketing consulting services. The LOI had a due diligence period to
confirm required compatibility with our present technology base. The due
diligence process was completed in
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March, 2008, and
we signed and completed a Technology Purchase Agreement for a purchase of
certain technology software with a total payment of $250,000 cash and 500,000
shares of our common stock that were restricted securities. We also
entered into a Consulting Service Agreement with a monthly payment of $25,000
and monthly issuance of 24,960 shares of our common stock that were also
restricted securities. 5X Partners was instrumental in the introduction,
negotiation, due diligence process and the closing of this acquisition.
These Agreement contain various provisions regarding
independent contractor status, confidentiality, due performance and care in
performing services, various representations and warranties, notice, venue for
disputes and indemnification, among other provisions.
Copies of the Consulting Services Agreement, the Covenant
Not to Compete Agreement and the Technology Purchase Agreement with
StorageSwitch are filed as Exhibits to this Registration Statement. The
Scope of Work outline referenced in any of these documents is not filed as an
Exhibit as it considered confidential and proprietary information to us and our
storage technology. See Items 13 and 15.
Vision to Practice, Inc.
On February 6, 2008, we entered into a
Consulting Agreement with Vision to Practice, Inc., a Minnesota corporation
(Vision), to assist in bringing our new product initiatives to market
utilizing the technology software purchased from StorageSwitch. We will pay
semi-monthly payments of $7,680 based on full-time service provided to us under
this Consulting Agreement. We will also issue to the consultants
principal 225,000 stock options at $0.35 per share, which vest over 36
months.
Vision is owned by Rodd Johnson; he is not
related to our new COO, Roderick D. Johnson, who is a partner of 5X
Partners.
This Consulting Agreement contains various provisions
regarding independent contractor status, confidentiality, due performance and
care in performing services, notice of disputes and time for correction,
arbitration of disputes and indemnification by Vision, among other provisions.
The Scope of Work outline referenced in the Consulting Agreement is not
filed as an Exhibit as it considered confidential and proprietary information to
us and our storage technology.
A copy of this Consulting Agreement is
filed as an Exhibit to this Registration Statement. See Items 13 and 15.
Need for any Governmental Approval of Principal
Products or Services
None of our products are subject
to prior governmental approvals.
Effect of Existing or Probable Governmental
Regulations on the Business
Once our Registration Statement has been filed and
becomes effective (sixty (60) days after its filing date,) this will allow us to
become a reporting issuer under the Exchange Act, and may allow us to seek to
qualify our shares of common stock for public quotations on the OTC Bulletin
Board of FINRA. Following the effective date of our Registration
Statement, the following will be applicable to us:
Smaller Reporting Company
We will become subject to the reporting requirements of
Section 13 of the Exchange Act, subject to the disclosure requirements of
Regulation S-K of the Securities and Exchange Commission, as a smaller
reporting company. That designation will relieve us of some of the
informational requirements of Regulation S-K.
Sarbanes/Oxley Act
We will also become subject to the Sarbanes-Oxley Act of
2002. The Sarbanes/Oxley Act created a strong and independent accounting
oversight board to oversee the conduct of auditors of public companies and
strengthens
17
auditor independence. It
also requires steps to enhance the direct responsibility of senior members of
management for financial reporting and for the quality of financial disclosures
made by public companies; establishes clear statutory rules to limit, and to
expose to public view, possible conflicts of interest affecting securities
analysts; creates guidelines for audit committee members appointment,
compensation and oversight of the work of public companies auditors; management
assessment of our internal controls; auditor attestation to managements
conclusions about internal controls (anticipated to commence with the December
31, 2009, year end); prohibits certain insider trading during pension fund
blackout periods; requires companies and auditors to evaluate internal controls
and procedures; and establishes a federal crime of securities fraud, among other
provisions. Compliance with the requirements of the Sarbanes/Oxley Act will
substantially increase our legal and accounting costs.
Exchange Act Reporting
Requirements
Section 14(a) of the Exchange Act requires all companies
with securities registered pursuant to Section 12(g) of the Exchange Act to
comply with the rules and regulations of the Securities and Exchange Commission
regarding proxy solicitations, as outlined in Regulation 14A. Matters
submitted to shareholders at a special or annual meeting thereof or pursuant to
a written consent will require us to provide our shareholders with the
information outlined in Schedules 14A (where proxies are solicited) or 14C
(where consents in writing to the action have already been received or
anticipated to be received) of Regulation 14, as applicable; and preliminary
copies of this information must be submitted to the Securities and Exchange
Commission at least 10 days prior to the date that definitive copies of this
information are forwarded to our shareholders.
We will also be required to file annual
reports on Form 10-K and quarterly reports on Form 10-Q with the Securities
Exchange Commission on a regular basis, and will be required to timely disclose
certain material events (e.g., changes in corporate control; acquisitions or
dispositions of a significant amount of assets other than in the ordinary course
of business; and bankruptcy) in a Current Report on Form 8-K.
Research and Development Costs During the Last Two
Fiscal Years
We had the following research and development expenses
during the fiscal years ended December 31, 2007, and 2006: $24,784 and $150,214,
respectively. In fiscal 2006, the CORESX (MYTHOS) product was renamed
Mythos. Research and development was conducted on the Mythos software that
allowed for functionality to be bundled into the software. Mythos has not
been brought to market.
Cost and Effects of Compliance with Environmental
Laws
We do not believe that our current or
intended business operations are subject to any material environmental laws,
rules or regulations that would have an adverse material effect on our business
operations or financial condition or result in a material compliance cost.
Number of Total Employees and Number of Full Time
Employees
We currently have 14 full time employees and no part time
employees.
Reports to Security Holders
We are required to file annual reports on
Form 10-K and quarterly reports on Form 10-Q with the Securities Exchange
Commission on a regular basis, and will be required to timely disclose certain
material events (e.g., changes in corporate control; acquisitions or
dispositions of a significant amount of assets other than in the ordinary course
of business; and bankruptcy) in a Current Report on Form 8-K.
You may read and copy any materials that we file with the
Securities and Exchange Commission at the Securities and Exchange Commissions
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, on official
business days during the hours of 10:00 am to 3:00 pm. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. You may also find all of the reports
that we have filed electronically with the Securities and Exchange Commission at
their Internet site
www.sec.gov
.
18
Item 1A. Risk Factors
An investment in us involves a high degree of risk, and
is suitable only for persons of substantial financial means who have no need for
initial liquidity in their investments. Prospective investors should
carefully consider the following risk factors, which are not all inclusive,
along with all types of risk factors that generally relate to undercapitalized
companies and companies that have limited revenues and that depend upon equity
or debt financing to continue operations:
Risks Related to Our
Business
We have not recorded annual profitable operations
since our inception, and continued losses may require us to curtail or terminate
our business operations.
We have experienced operating losses each year since our
inception. Even though our revenues increased $926,748 to $1,329,386 for
the year ended December 31, 2007, our net loss increased $4,097,008 for the year
ended December 31, 2007, compared to the year ended December 31, 2006, and we
may still incur additional future operating losses. Continued losses on
our operations may require us to curtail or terminate our business
operations.
Our operating results may fluctuate significantly and any
failure to meet financial expectations may disappoint securities analysts or
investors and result in a decline in our common stock price on the Pink Sheets
or any other nationally recognized quotation system upon which our common stock
may be publicly traded in the future.
Our substantial short term debt could adversely affect
our financial condition and our ability to continue our present and planned
business operations.
As of December 31, 2007, and March 31, 2008, we had short
term debt in the form of our 12% convertible notes in the amount of $1,062,631
and $1,760,288, respectively. Though these 12% convertible notes are
convertible into the purchase of shares of our common stock that are restricted
securities at a conversion price of $0.50 per share, with the extremely current
limited public trading market for our shares of common stock, it is highly
unlikely that many of the holders of these debt instruments will convert them to
purchase shares of our common stock. The amendments that have been
approved by the Securities and Exchange Commission to shorten the holding period
for unlimited sales of restricted securities by non-affiliates after a six month
holding period under Rule 144 are not effective for former shell companies
like we are; and for resales under Rule 144(i), holders of shares of shell
companies must satisfy a minimum holding period of one year following the filing
of this Registration Statement, among other conditions. See the heading
Rule 144, Item 9. Our inability to pay these 12% convertible notes and
accruing interest when they become due may require us to curtail or terminate
our business operations. See the heading Known trends, events or
uncertainties that have or are reasonably likely to have a material impact on
the small business issuers short-term or long-term liquidity, Item 2.
We continue to sell units comprised of our 12%
convertible notes and warrants.
If we are unable to pay these notes when due, including
interest, and the holders of these notes do not elect to convert them to
purchase shares of our common stock, our financial condition could worsen
substantially, and we may be required to cease operations entirely.
We also have substantial other current liabilities as of
December 31, 2007, in the form of a note payable ($45,906); capital lease
obligations ($687,159); notes payable to related parties ($241,540); trade
accounts payable ($92,000); accrued expenses ($377,308) and amounts due to a
stockholder ($60,176), for total current liabilities of $2,566,720, which
includes the $1,062,631 in 12% convertible notes.
Our substantial indebtedness could have important
adverse consequences on our ability to carry on our present and planned business
operations.
For example, it could:
19
·
make it more difficult for us to
satisfy our obligations with respect to
the current or new 12% convertible
notes still being offered;
·
make us more sensitive to adverse
economic conditions than some of our
competitors with less debt;
·
limit our ability to fund future
working capital, acquisitions, capital
expenditures and other general
corporate requirements;
·
limit our flexibility in planning
for, or reacting to, changes in our
business and the records and
information management services industry; and
·
make it more difficult for us to
obtain additional financing for future
working capital needs or for possible
future acquisitions or other
purposes, including possible required
payments of the past and new 12% convertible notes.
Despite our current debt position, we may still need
to incur substantial additional debt or we will be unable to continue our
planned operations.
We continue to sell units comprised of our 12%
convertible notes and warrants. See the heading Recent Sales of
Unregistered Securities, Item 10. However, if we are unable to pay the
currently outstanding 12% convertible notes and accrued interest, our financial
condition may be adversely affected to the point that no debt or equity
financing may be available to us. That could require us to cease or
substantially limit our business operations, including termination of employees
and business associations necessary for us to continue in our business.
We have deficiencies in our internal controls that
could adversely affect our financial statements reporting, which could cause our
financial statements to be inaccurate or unauditable.
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our
internal control system is intended to provide reasonable assurance to our
management and board of directors regarding the preparation and fair
presentation of published financial statements and that we have controls and
procedures designed to ensure that the information required to be disclosed by
us in our reports that we will be required to file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and our principal financial officers or persons performing similar
functions, as appropriate to allow timely decisions regarding financial
disclosure. Managements current assessment of the effectiveness of our
internal controls is based principally on our financial reporting as of December
31, 2007, and 2006, and the quarterly period ended March 31, 2008. In
making our assessment of internal control over financial reporting, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control Integrated Framework.
Accordingly, our management, with the participation of
our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2007, and
2006. Based on such evaluation of the above referenced periods, due to the
material weaknesses of our internal controls over financial reporting further
described below, our Chief Financial Officer concluded that such disclosure
controls and procedures were not effective in providing reasonable assurance
that information required to be disclosed by us in the reports we intended to
file under the Exchange Act were recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commissions
rules, regulations and forms.
For the periods referenced above, managements assessment
identified material deficiencies in our internal control over financial
reporting. These deficiencies include lack of segregation of duties,
lack of adequate documentation of our system of internal control, deficiencies
in our information technology systems, limited capability to interpret and apply
United States generally accepted accounting principles and lack of formal
accounting policies and procedures and related documentation.
Managements efforts to resolve these internal control
weaknesses started with the hiring of a full-time Controller on October 1, 2007.
In April 2008, our Board of Directors approved this persons promotion to
Chief Financial Officer.
20
Beginning in October 2007,
management prepared a written review of every facet of our information
processing system, like cash disbursements, sales and billing, cash receipts and
other procedures. We continue to evaluate and address these
weaknesses to ensure adherence to written policy, completeness of reporting,
segregation of incompatible duties and compliance with generally accepted
accounting principles; and we intend to continue to monitor and evaluate these
and other factors affecting our internal controls. The cost of these remediation
efforts were primarily reflected in the compensation package provided our new
Controller who is now our Chief Financial Officer.
It is managements intent to correct all identified
material deficiencies in our internal controls as reported in previous periods.
Until such time, our internal control over financial reporting may be
subject to additional material weaknesses and deficiencies that we have not yet
identified. Management has determined that these significant deficiencies,
in the aggregate, constitute material weaknesses in the design and operation of
our internal controls in effect prior to December 31, 2007, and 2006, and for
the quarterly period ended March 31, 2008. We continue to address and
evaluate these issues.
Our former auditors (see Item 14) advised us of certain
other material weaknesses and significant deficiencies in our internal controls
in connection with auditing our consolidated financial statements for the years
ended December 31, 2007, and 2006, including, in summary: (i) lack of accounting
expertise, with recommended additional training for our CFO; (ii) issues
regarding reimbursement of unsubstantiated expenses; (iii) segregation of
duties of accounting functions among various personnel; (iv) segregation of cash
distribution responsibilities; (v) establishment of initial control over cash
receipts; (vi) material weaknesses on preparation of our consolidated financial
statements; and (vii) the establishment of an audit committee. We
are also addressing these concerns.
Our current costs to remediate our material weaknesses in
internal controls include the increase in salary of a full-time CFO at an annual
cost of approximately $50,000 more than our former part-time chief accounting
officer, together with substantial time and expense of other employees involved
in addressing these issues. Future costs will include fees and costs
associated with attendance at seminars and other programs by our CFO and certain
employees relative to recognizing and resolving these types of issues.
If we fail to develop new products, or if we incur
unexpected expenses or delays in product development, we may lose our
competitive position and incur substantial additional losses on our operations
or may be required to curtail or terminate our present and planned business
operations.
Although we currently have fully developed products
available for sale, we are also developing various products and technologies
that we will rely on to remain competitive. Due to the risks in developing
new products and technologies, limited financing, competition, obsolescence,
loss of key personnel and other factors, we may fail to develop these
technologies and products, or we may experience lengthy and costly delays in
doing so. Although we may be able to license some of our technologies in
their current stage of development, we cannot assure you that we will be able to
do so.
Our business may be adversely affected by downturns in
the economy that may limit the sale of storage solutions and our present and
planned business operations may fail as a result.
We are subject to the capital spending patterns of this
industry. If our customers and potential customers do not increase their
capital spending budgets, we could face a weaker demand for our products;
however, such an event may not be materially adverse to us as our storage
solution products offers a more cost-effective methodology of data backup and
restoring services.
We depend on our key personnel, and the loss of any
would impair our ability to compete and gain any market share in the storage
solutions industry that we presently serve and intend to serve.
We are highly dependent on the principal members of our
management. The loss of services of any of these persons could seriously harm
the growth and success of our current and intended business operations. In
addition, research, product development and commercialization will require
additional skilled personnel in the backup and storage retention services
industry procedures and products. Competition for and retention of
personnel, particularly for
21
employees with technical
expertise, is intense and the turnover rate for these qualified personnel is
high. If we are unable to hire, train and retain a sufficient number of
qualified employees, our ability to conduct and expand our business could be
reduced. The inability to retain and hire qualified personnel could also
hinder the planned expansion of our business.
Our intellectual property rights or contractual
provisions may not protect us and our products and as a result, our business may
fail.
Our storage solution products could infringe on the
intellectual property rights of others, which may involve us in costly
litigation and, if we are not successful in defending such claims, could also
cause us to pay substantial damages and prohibit us from selling our products.
Third parties may assert infringement or other intellectual property
claims against us. Even if these claims are without merit, defending
lawsuits takes significant time, may be expensive and may divert managements
attention from other business concerns. We are not currently aware of any
third-party patents claims against us or other legal proceedings.
We may need to initiate lawsuits to protect or enforce
our proprietary rights in our products, which would also be expensive and, if we
unsuccessful, may cause us to lose some of our intellectual property rights,
which would reduce our ability to compete in the market. In the future, we
may rely on patents to protect our intellectual property and our competitive
position. The rights we rely upon to protect the intellectual property
underlying our products may not be adequate, which could enable third parties to
use this technology and would reduce our ability to compete in our markets.
We presently have no patents. We rely on a
combination of trade secrets, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
Nevertheless, these measures may not be adequate to safeguard the
technology underlying our storage solutions products.
Notwithstanding our efforts to protect our intellectual
property, our competitors may independently develop similar or alternative
technologies or products that are equal or superior to our technology and
storage solutions products without infringing on any of our intellectual
property rights or design around our proprietary technologies.
We need additional capital to continue or expand our
current business operations, and our business operations may prove unsuccessful
without additional funding.
Failure to raise additional capital or generate the
significant capital necessary to continue and expand our operations and launch,
sell or license our Mythos product could reduce our ability to compete and
result in lower revenue. We anticipate that our existing capital resources
will only enable us to maintain currently planned operations at least through
the second quarter of 2008; and we continue to seek funding through the sale of
our units consisting of our 12% convertible notes and warrants. See the
caption Recent Sales of Unregistered Securities, Item 10, for a complete
description of our funding efforts. However, we premise this expectation
on our current operating plans, which may change as a result of many factors.
Consequently, we may need additional funding sooner than anticipated.
Our inability to raise needed capital would harm our business. In
addition, we may choose to raise additional capital due to market conditions or
strategic considerations even if we believe we have sufficient funds for our
current operating plans. To the extent that additional capital is raised
through the sale of equity, debt, convertible debt securities or other
combinations of our securities, including our newly authorized preferred stock,
the issuance of these securities could result in substantial dilution to our
stockholders.
We currently have no credit facility or committed sources
of capital. To the extent operating and capital resources are insufficient
to meet our future funding requirements, we will have to raise additional funds
to continue the commercialization of our products. These funds may not be
available on favorable terms, or at all. If adequate funds are not
available on attractive terms, we may be required to cease or curtail operations
significantly or to obtain funds by entering into financing, supply or
collaboration agreements on unfavorable terms.
22
We face a higher risk of
failure and loss of our entire business because we cannot accurately forecast
our future revenues and operating results.
Our short operating history, lack of adequate internal
controls and the rapidly changing nature of the market in which we compete make
it difficult to accurately forecast our revenues and operating results.
Furthermore, we expect our revenues and operating results to fluctuate in
the future due to a number of factors, including the following:
·
the timing of sales of our products
and services;
·
the timing of product
implementation;
·
unexpected delays in introducing new
products and services;
·
increased expenses, whether related
to sales and marketing, product development or administration;
·
the mix of product license and
services revenue; and
·
costs related to possible
acquisitions of technology or businesses.
Our limited resources may make it harder for us to
manage growth, and the future of our business model may be adversely harmed if
we are unable to adequately manage this growth.
We have a limited basis upon which to evaluate our
Storage Management Solutions systems ability to handle controlled or full
commercial availability of our products and services. We anticipate that
we will expand our operations significantly in the near future, and we will have
to expand further to address the anticipated growth in our user base and market
opportunities. To manage the expected growth of operations and personnel,
we will need to improve existing, and implement new systems, procedures and
internal controls. In addition, we will need to expand, train and manage
an increasing employee base. We will also need to expand our finance,
administrative and operations staff. We may not be able to effectively
manage this growth. Our planned expansion in the near future will place,
and we expect our future expansion to continue to place, a significant strain on
our managerial, operational and financial resources. Our planned
personnel, systems, procedures and controls may be inadequate to support our
future operations. If we can not manage growth effectively or if we
experience disruptions during our expansion, the expansion may not be
cost-effective.
If we do not respond effectively to technological
change, our products and services could become obsolete and our business may
fail.
The development of our products and services and other
technology entails significant technical and business risks. To remain
competitive, we must continue to improve our Storage Management Solutions
products and their responsiveness, functionality and features.
High technology industries are characterized by:
·
rapid technological change;
·
changes in user and customer
requirements and preferences;
·
frequent new product and services
introductions embodying new technologies; and
·
the emergence of new industry
standards and practices.
The evolving nature of the Internet could render our
existing technology and systems obsolete. Our success will depend, in
part, on our ability to:
·
license or acquire leading
technologies useful in our business;
·
develop new services and technologies
that address our users increasingly sophisticated and varied needs; and
·
respond to technological advances and
emerging industry and regulatory standards and practices in a cost-effective and
timely way.
Future advances in technology may not be beneficial to,
or compatible with, our business. Furthermore, we may not use new
technologies effectively or adapt our technology and systems to user
requirements or emerging industry
23
standards in a timely way.
In order to stay technologically competitive, we may have to spend large
amounts of money and time. If we do not adapt to changing market
conditions or user requirements in a timely way, our business, financial
condition and results of operations could be adversely affected.
We face competition for customers that could
effectively keep us from being successful in our planned business
operations.
We compete with our current and potential customers
internal records and information management services capabilities. We can
provide no assurance that these organizations will begin or continue to use an
outside company, such as us, for their future records and information management
services needs or that they will use us to provide these services. We also
compete with multiple records and information management services providers in
all geographic areas where we operate.
Potential competitors with established market share and
greater financial resources may introduce competing products. Thus, there
can be no assurance that we will be able to compete successfully in the future,
or that competition will not have a material adverse affect on our results of
operations.
We also compete with multiple information protection and
storage services providers in all geographic areas where we operate.
Our storage systems may fail, and we may be subject to
substantial liabilities and could lose a substantial portion of our customer
base.
Our disaster
recovery framework to control and address systems risks is not fully redundant,
and we may incur and/or suffer the costs, delays and customer complaints
associated with system failures and may not be able to efficiently and
accurately provision new orders for services on a timely basis to begin to
generate revenue related to those services.
Our operating results could be impaired if we become
subject to burdensome government regulation and legal uncertainties, all of
which would increase our cash requirements and may cause our business to
fail.
We are not currently subject to direct regulation by any
domestic or foreign governmental agency, other than regulations applicable to
businesses generally. However, due to the increasing popularity and use of
the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, relating to:
·
user privacy;
·
pricing;
·
content;
·
copyrights;
·
distribution; and
·
characteristics and quality of
products and services.
The adoption of any additional laws or regulations may
decrease the expansion of the Internet. A decline in the growth of the
Internet could decrease demand for our products and services and increase our
cost of doing business. Moreover, the applicability of existing laws to
the Internet is uncertain with regard to many issues, including property
ownership, export of specialized technology, sales tax, libel and personal
privacy. Our business, financial condition and results of operations could
be seriously harmed by any new legislation or regulation. The application
of laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and other online services could also harm our business.
Our Storage Management Solutions products rely
substantially on the Internet in multiple states. These jurisdictions may claim
that we are required to qualify to do business as a foreign corporation in each
state or foreign country. Our failure to qualify as a foreign corporation
in a jurisdiction where we are required to do so could subject us to taxes and
penalties. Other states and foreign countries may also attempt to regulate
our business or prosecute us for
24
violations of their laws.
Further, we might unintentionally violate the laws of foreign
jurisdictions and those laws may be modified and new laws may be enacted in the
future.
The United States Congress has enacted legislation
limiting the ability of the states to impose taxes on Internet access or to
impose multiple or discriminatory taxes on electronic commerce. This
legislation, known as the Internet Tax Nondiscrimination Act, imposed a
moratorium, which commenced November 1, 2003 and ended on November 1, 2007, on
state and local taxes on electronic commerce, where such taxes are
discriminatory, and Internet access, unless the taxes were generally imposed and
actually enforced prior to October 1, 1998. Though there are various bills
pending in the United States Congress to extend these prohibitions, failure to
renew this legislation beyond November, 2007 or adopt new similar legislation,
will allow various states to impose taxes on Internet-based commerce. The
imposition of these taxes could seriously adversely affect Internet commerce and
hinder our ability to become profitable.
The Internet
may fail or providers of these services may increase their costs for these and
related services, which could increase our costs and make our services less
attractive to customers.
The secure transmission of confidential information over
public networks is a significant barrier to electronic commerce and
communications. Anyone who can circumvent our security measures could
misappropriate confidential information or cause interruptions in our
operations. We may have to spend large amounts of money and other
resources to protect against potential security breaches or to alleviate
problems caused by any breach.
Peering
agreements of our business partners like XO Communications with Internet service
providers, allow access to the Internet and exchange traffic with these
providers. Depending on the relative size of the providers involved, these
exchanges may be made without settlement charges. Recently, many Internet
service providers that previously offered peering have reduced or eliminated
peering relationships or are establishing new, more restrictive criteria for
peering and an increasing number of these providers are seeking to impose
charges for transit. Increases in costs associated with Internet and
exchange transit could have an adverse effect on our revenues for our services,
most of which require Internet access. Our providers may not be able to
renegotiate or maintain peering arrangements on favorable terms, which could
increase our costs and expenses and impair our growth and performance.
Our auditors Going Concern qualification in our
consolidated financial statements might create additional doubt about our
ability to stay in business, which could result in a total loss on investment by
our shareholders.
The following is a quotation from our
auditors report that is filed as a part of this Registration Statement (see
Items 13 and 15): The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a stockholders deficit. These
conditions raise substantial doubt about the Companys ability to continue as a
going concern. Managements plans in regards to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Note 2 of our
consolidated financial statements states: The Company continues to be dependent
on its ability to generate future revenues, positive cash flows and additional
financing. During 2006 and through May 12, 2008, the Company
received net proceeds of approximately $3.2 million from the sale of common
stock, issued debt of $150,000 and issued convertible debt of $4.5 million
towards a total of $5.5 million of convertible debt. Management
acknowledges that its ability to continue executing its current business plan,
even on a short-term basis, is dependent on its ability to obtain additional
debt or equity financing. There can be no guarantee that the Company will
be successful in generating future revenues, in obtaining additional debt or
equity financing, or that such additional debt or equity financing will be
available on terms acceptable to the Company.
Multiple acts of God could result in data loss and
subject us to substantial liabilities and the loss of our business and
customers.
The operation of our business depends on the efficient
and uninterrupted operation of the Internet and our Storage Management Solutions
hardware systems. Our systems and operations will be vulnerable to damage
or interruption from many sources, including fire, flood, power loss,
telecommunications failure, break-ins, earthquakes and similar
25
events. Our servers will
also be vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions. Any substantial interruptions in the future could
result in the loss of data and could destroy our ability to generate revenues
from operations.
Risks Related to Our Common
Stock
Our common stock is penny stock under Securities and
Exchange Commission Rules and Regulations, which means there is a very limited
trading market for our shares.
Our common stock is deemed to be penny stock as that
term is defined in Rule 3a51-1 of the Securities and Exchange Commission.
Penny stocks are stocks (i) with a price of less than five dollars per
share; (ii) that are not traded on a recognized national exchange; (iii) whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed
stocks must still meet requirement (i) above); or (iv) in issuers with net
tangible assets less than $2,000,000 (if the issuer has been in continuous
operation for at least three years); or $5,000,000 (if in continuous operation
for less than three years); or with average revenues of less than $6,000,000 for
the last three years.
Section 15(g) of the Exchange Act and Rule 15g-2 of the
Securities and Exchange Commission require broker dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of
penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investors
account. Potential investors in our common stock are urged to obtain
and read such disclosure carefully before purchasing any shares that are deemed
to be penny stock.
Moreover, Rule 15g-9 of the Securities and Exchange
Commission requires broker dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker dealer to (i) obtain from the
investor information concerning his, her or its financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor,
and that the investor has sufficient knowledge and experience as to be
reasonably capable of evaluating the risks of penny stock transactions;
(iii) provide the investor with a written statement
setting forth the basis on which the broker dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investors financial
situation, investment experience and investment objectives. Compliance
with these requirements may make it more difficult for investors in our common
stock to resell their shares to third parties or to otherwise dispose of them.
Due to the substantial instability in our common stock
price, you may not be able to sell your shares at a profit or at all, and as a
result, any investment in our shares could be totally lost.
The public market for our common stock is very limited
and volatile. As with the market for many other small companies, any market
price for our shares is likely to continue to be very volatile. In
addition, factors such as the following may significantly affect our share
price:
·
Our competitors announcements and
successes or failures;
·
Other evidence about the safety or
efficacy of our products;
·
Announcements of new competitive
products or successes by our competitors;
·
Increased or new governmental
regulation of our products;
·
Our competitors developments of
competing patents or proprietary rights or other technology; and
·
Fluctuations in our operating
results.
Our common stock has a limited trading history, and it
will be difficult to determine any market trends or prices for our shares where
this present limited market is believed to be based primarily on supply and
demand.
Our common stock currently is quoted on the Pink Sheets,
under the symbol DIGI. However, with very little
26
trading history, a trading
market that does not represent an established trading market, a limited
current public float of approximately 105,462 shares, volatility in the bid and
asked prices and the fact that our common stock is very thinly traded, you could
lose all or a substantial portion of your funds if you make an investment in us.
The sale or potential sale of shares of our common
stock that may become publicly tradable under Rule 144 in the future will have a
severe adverse impact on any market that develops for our common stock, and you
may lose your entire investment or be unable to resell any shares in us that you
purchase. We presently have a very limited public float in our shares of
common stock that can adversely affect the market price.
Presently, there are only 105,462 of our outstanding
shares that are freely publicly tradable; however, 12 months from the filing of
this Registration Statement, if it becomes effective in the normal course of
events in 60 days from its filing as anticipated and provided that we are
current in the filing of all of our reports that are then required to have
been filed with the Securities and Exchange Commission, all shares of our common
stock that have been held for at least six months will be available for public
sale under Rule 144. That will substantially increase the shares available
to be freely publicly traded. See the heading Recent Sales of
Unregistered Securities, Item 10, for information about the number of shares
that may become available for resale under Rule 144. Also, see the heading
Rule 144, Item 9, for information about the possibility of certain shares of
common stock that are restricted securities as defined in Rule 144 being
available for public resale under Section 4(1) of the Securities Act of 1933, as
amended (the Securities Act).
Item 2. Financial Information
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements
Statements made in this Registration Statement which are
not purely historical are forward-looking statements with respect to the goals,
plan objectives, intentions, expectations, financial condition, results of
operations, future performance and our business, including, without limitation,
(i) our ability to raise capital, and (ii) statements preceded by, followed by
or that include the words may, would, could, should, expects,
projects, anticipates, believes, estimates, plans, intends,
targets or similar expressions.
Forward-looking statements involve inherent risks and
uncertainties, and important factors (many of which are beyond our control) that
could cause actual results to differ materially from those set forth in the
forward-looking statements, including the following, general economic or
industry conditions, nationally and/or in the communities in which we may
conduct business, changes in the interest rate environment, legislation or
regulatory requirements, conditions of the securities markets, our ability to
raise capital, changes in accounting principles, policies or guidelines,
financial or political instability, acts of war or terrorism, other economic,
competitive, governmental, regulatory and technical factors affecting our
operations, products, services and prices.
Accordingly, results actually achieved may differ
materially from expected results in these statements. Forward-looking
statements speak only as of the date they are made. We do not undertake,
and specifically disclaim, any obligation to update any forward-looking
statements to reflect events or circumstances occurring after the date of such
statements.
Plan of Operation
Our primary focus for fiscal 2008 is increasing the
number of customers using our digitiliti services. We will aggressively
promote the benefits of secure, online data storage and highlight the
discernible differences between digitiliti and other solutions available in the
marketplace. We will expand our digitiliti product offering by developing
leading edge software. We will strive to become a technology leader in the
data storage marketplace. This will require us to refine our digitiliti
products, our sales and marketing systems, our product packaging, our
infrastructure scaling methods and revenue generation offerings. We will
focus on technology, pricing, product positioning and building solid
partnerships with a goal of reducing our cost of goods sold percentage.
27
We will be seeking other
distribution channels of our services, in addition to our in-house sales group.
We will be targeting resellers that have extensive data storage knowledge
and expertise and an established customer base. Our sales plan for 2008
focuses on establishing strong reseller and OEM and channel partnerships at the
regional and national level that possess utility-oriented sales systems.
Regional and national level partners will become our sales force. We
will define and attack vertical markets specifically in the SMB/SME market. Our
ability to provide outstanding training and support utilizing teleconferencing
will allow us to develop a national distribution network without incurring
significant support and travel costs. We will also provide our sales
partners with marketing and technical material to assist their sales efforts.
These marketing efforts will include development of brochures,
testimonials, white papers, trade journal advertising and enhancements to our
website, as well as attending a number of trade shows and speaking engagements,
both locally and nationally, which will also assist in building the digitiliti
brand. Finally, our sales and technical staff will be available to assist
with sales opportunities as appropriate.
As a result of our sales and marketing efforts, our
customer base has expanded from approximately 20 in fiscal 2005; to
approximately 100 in fiscal 2006; to 508 in 2007; and currently to approximately
656.
Operationally, we will be adding experienced technical
personnel and expanding our vault system infrastructure to accommodate the
expected growth in storage capacity required as new customers are added.
We will need to raise additional capital in order to
execute our Plan of Operation. We estimate the funds required through 2008
will be in the range of $5 million to $7 million and will be a combination of
equity, bank debt and equipment leases. The capital will cover the
acquisition of computer hardware and software, as well as covering operating
losses until we reach the breakeven point.
We may launch the marketing of our Mythos Storage
Management Solutions or consider granting an exclusive license or negotiating an
outright sale of this technology, depending upon our cash requirements. In
terms of Mythos development, a significant amount of servers, workstations,
networking and storage hardware is required for testing and development.
Results of Operations
For the three month periods ended March 31, 2008, and
2007
Our sales for the first quarter of 2008 increased
$352,905 to $563,206 compared to $210,301 for the quarter ended March 31, 2007.
The increase in revenue is a direct result of an increase in
customers under contract and the resulting terabytes of data added to our
Fortress Storage Center, combined with the growth in existing customer data.
Consistent with the pattern of growth as detailed above, our customer base grew
from 154 as of March 31, 2007, to 572 as of March 31, 2008. The growth of
customer contracts is a direct result of the heavy emphasis we placed on
marketing our digitiliti
service. Our efforts included
attending industry tradeshows throughout the country as well as revamping our
website. We also concentrated significant resources refining our product
presentation, product positioning and pricing models. Finally, we
continued to enhance our network of resellers throughout the country by
providing strong dealer support services and offering a compelling pricing
program.
Our quarterly gross margin reflects an increase of
$264,233 with a gross margin of $135,585 through March 31, 2008, versus a
negative margin of ($128,648) through March 31, 2007. Factors contributing to
this increase in our gross margin are our deliberate targeting of a larger
profile customer, which resulted in (1) more efficient customer pricing; (2) a
significant increase or growth in customer base; and (3) an increase in organic
growth of our customers data. In short, we have learned that our sales
and marketing efforts are better expended targeting larger customers in the SMB
and SME markets. We have learned how to sell our digitiliti service to
this larger profile customer, which has increased our revenue, proportionately
reduced our costs of revenue and has allowed us to leverage our infrastructure
and efficiently bill for our customers data growth in our Fortress Storage
Center vault.
Research and development expenses increased $669,295 to
$670,079 for the first quarter of 2008 compared to $784 in the first quarter of
2007. This increase is primarily due to the purchase of certain software
that was classified as research and development. On March 13, 2008, Digitiliti
executed a Technology Purchase Agreement (TPA) with
28
StorageSwitch, LLC, a Colorado
limited liability company (StorageSwitch), to acquire a commercially-proven
technology software. This technology software compliments Digitilitis current
business model and also provides a base layer that Digitiliti will build upon to
develop enhanced storage service offerings.
In connection with the purchase, we made initial cash
payment of $10,000 upon execution of the Letter of Intent in January 2008, and a
cash payment of $200,000 on the date of closing. In addition, we will make a
$40,000 cash payment payable when the software is fully developed and in
production. We also issued 250,000 shares of common stock in connection with the
purchase, valued at $375,000 based upon the quoted market price of our stock on
the date of the purchase. We will issue an additional 250,000 shares when the
software is fully developed and in production. These shares will be valued based
on the quoted market price of our stock on the date of issuance.
The software was not technologically feasible on the date
of the acquisition. As a result, this transaction was accounted for as purchased
research and development costs and was expensed as research and development
expense in accordance with SFAS No. 2.
In conjunction with the execution of the TPA, Digitiliti
and StorageSwitch also signed the following agreements; (1) a Non-Compete
Agreement, (2) a Non-Disclosure Agreement, (3) a Statement of Work Agreement and
(4) a Consulting Services Agreement. Under the Consulting Service Agreement, we
will make the following payments to 2 principals of StorageSwitch: (1)
semi-monthly cash payments of $6,250 (totaling $25,000 per month) and (2) the
issuance of 12,480 shares of Digitiliti common stock (totaling 24,960 share of
common stock per month). Stock issued under this arrangement is accounted for in
accordance with EITF 96-18 and valued using the quoted market price of our
common stock at the end of each month.
This purchase reflects our efforts in new product
development as we learn from the successes of our digitiliti service. As
outlined under the heading Recent Events in 2008, Item 1, we are in the
process of developing enhanced storage service offerings that we can deploy
through larger, more economical sales channels, thereby enabling faster growth.
Selling and marketing expenses decreased $118,318 to
$161,690 for the first quarter of 2008 compared to $280,008 in the first quarter
of 2007. This decrease principally reflects our success in learning to market
our service to resellers who have the requisite expertise to produce immediate
results. Again, we have not only learned to market our digitiliti service
to larger profile customers, but also to larger profile and more technically
proficient resellers, thereby resulting in increased sales with fewer (or more
efficient) marketing expenditures.
General and administrative expenses increased
$395,565 to $769,864 for the first quarter of 2008 compared to $374,299 in the
first quarter of 2007. This increase is attributable to consulting fees,
stock-based compensation, legal and accounting expense associated with
completing the Storage Merger, upgrading the financial information in
preparation for Securities and Exchange Commission anticipated filings and the
issuance of convertible debt with associated warrants.
Interest expense increased $289,590 to $331,833 for the
first quarter of 2008 compared to $42,243 in the first quarter of 2007.
The increase is primarily due to the issuance of $4,000,050 of convertible
debt and the amortization of the related deferred financing costs and the debt
discount associated with the warrants issues along with the convertible debt.
For the 12 month periods ended December 31, 2007 and
2006
Our sales for 2007 increased $926,748 to $1,329,386
compared to $402,638 in 2006. The increase in revenue is a direct
result of an increase in customers under contract and the resulting terabytes of
data added to our Fortress Storage Center combined with the growth in existing
customer data. At the end of 2007, we had 508 customers with
digitiliti service contracts compared to 100 at the end of 2006. The
dramatic growth of customer contracts is a direct result of the heavy emphasis
we placed on marketing our digitiliti
service. Our efforts
included attending industry tradeshows throughout the country as well as
revamping our website. We also concentrated significant resources refining
our product presentation, product positioning and pricing models. Finally,
we continued to enhance our
29
network of resellers
throughout the country by providing strong dealer support services and offering
a compelling pricing program.
Gross margin for 2007 was ($125,143) compared to
($182,755) in 2006. Our negative margin as a percentage of sales has
improved as compared to prior years. This improvement reflects the
beginning of our ability to leverage the infrastructure we have invested in
during the past few years as the amount of data on the Fortress Storage Center
continues to grow. At the same time at our current level of revenues we do
not have a positive gross margin.
Research and development expenses for 2007 were $24,784
compared to $150,214 in 2006. The significant decrease is a result of the
completion of currently planned development of the Mythos software. The
Mythos software product facilitates more cost effective back ups on Apple
networks. The software development was performed by a third party
development firm in India. We are evaluating the market potential
and analyzing various distribution channels for the Mythos product.
Selling and marketing expenses increased by
$473,980 to $794,431 in 2007 compared to $320,451 in 2006. The
increase is related to additional sales commissions, increased advertising and
promotion expenses and additional sales/marketing payroll costs.
General and administrative expenses increased by
$1,302,437 to $2,606,977 in 2007 compared to $1,304,504 in 2006. The
increase is attributable to consulting fees, stock-based compensation,
legal and accounting expenses associated with completing the merger between
Storage and Digitiliti, upgrading the financial information in preparation for
Securities and Exchange Commission anticipated filings and the issuance of
convertible debt with associated warrants.
Interest expense for 2007 increased by $464,999 to
$545,673 compared to $80,674 for 2006. The increase reflects interest
expense associated with the convertible debt issued during 2007 and the related
amortization of the deferred financing costs and discount of the associated
warrants.
Liquidity
In order to fund the 2007 net loss of $4,097,008, as well
as the need to continue investing in property and equipment and software
licenses to expand the capacity of the Fortress Storage Center, we relied on a
combination of the proceeds of the issuance of convertible debt of $3,149,550,
the receipt of $755,393 from the sale of our common stock and entering into
capital leases for equipment and software licenses totaling $607,153. In
2006, the net loss of $2,038,634 and capital expenditure requirements were met
by issuing $2,499,929 of common stock and obtaining debt from a bank and related
parties of $180,000. At December 31, 2007, our cash balance was $241,333
compared to $188,670 at December 31, 2006.
For the three month periods ended March 31, 2008, and
2007
In order to fund the first quarter of 2008 net loss of
$1,797,882, as well as the need to continue investing in property and equipment
and software licenses to expand the capacity of the Fortress Storage Center and
our efforts to leverage our new product developments, we relied on a combination
of the proceeds of the issuance of convertible debt of $808,500 and the
financing of capital leases for equipment and software licenses totaling
$291,174.
Net cash used by operating activities during the first
quarter of 2008 was $505,342 compared to $662,663 during the first quarter of
2007. Net cash used by operating activities during the first quarter of
2008 was primarily impacted by:
·
Net loss of ($1,797,881).
·
Depreciation and amortization of
$254,032.
·
Amortization of discount on
convertible debt issued of $112,459.
·
Decrease in accounts receivable of
$90,064.
·
Reduction in accounts payable and
accrued expenses of $505,821.
30
Net cash used by operating activities during the first
quarter of 2007 was primarily impacted by:
·
Net loss of ($825,982).
·
Depreciation and amortization of
$144,847.
·
Increase in other current assets of
$99,758.
·
Increase in trade accounts payable
and accrued expenses of $131,516.
Net cash used by investing activities during the first
quarter of 2008 was $276,357, primarily related to the purchase of software
licenses totaling $211,000 and equipment of $65,357. Net cash used by
investing activities during the first quarter of 2007 was $807,901 and was
comprised of $300,405 for equipment purchases, $332,496 for the purchase of
software licenses and for a $175,000 investment in Cyclone Holdings, Inc.
Net cash provided by financing activities during the
first quarter of 2008 was $594,408, primarily comprised of $808,500 from the
issuance of convertible debt. Offsetting these items were $80,850 in
payments of financing costs and $156,207 in principal payments on capital
leases. Net cash provided by financing activities during the first quarter
of 2007 was $1,322,609, primarily comprised of $748,179 from the sale of common
stock, $401,500 from the sale of convertible securities and $322,782 in proceeds
from equipment financing. Offsetting these items were $35,018 in principal
payments on capital leases, $40,150 in payments of financing costs and $105,000
stock rescission payable.
At March 31, 2008, our cash balance was $54,042 compared
to $40,295 at March 31, 2007.
See Item 10 for additional information about our
financings for the quarterly period ended March 31, 2008.
For the 12 month periods ended December 31, 2007, and
2006
In order to fund the 2007 net loss of $4,097,008, as well
as the need to continue investing in property and equipment and software
licenses to expand the capacity of the Fortress Storage Center, we relied on a
combination of the proceeds of the issuance of convertible debt of $3,149,550,
the receipt of $755,393 from the sale of our common stock and entering into
capital leases for equipment and software licenses totaling $607,153. In
2006, the operating loss of $2,038,634 and capital expenditure requirements were
met by issuing $2,499,929 of common stock and obtaining debt from a bank and
related parties of $966,276. At December 31, 2007, our cash balance was
$241,333 compared to $188,670 at December 31, 2006.
Net cash used by operating activities in 2007 was
($2,266,486) compared to ($1,595,555) in 2006. Net cash used by operating
activities for 2007 was primarily impacted by:
·
Net loss of ($4,097,008).
·
Depreciation and amortization of
$709,831.
·
Amortization of discount on
convertible debt issued of $177,783.
·
Stock issued for professional
services of $525,000.
·
Employee stock option compensation
expense of $359,194.
·
Increase in accounts receivable of
$190,588.
·
Reduction in accounts payable of
$220,376.
·
Increase in accrued expenses of
$311,935.
Net cash used by operating activities in 2006 was
primarily impacted by:
·
Net loss of ($2,038,634).
·
Depreciation and amortization of
$201,218.
·
Increase in other current assets of
$149,739.
·
Increase in trade accounts payable of
$306,339.
31
Net cash used by investing
activities in 2007 was $656,284, primarily related to the purchase of software
licenses totaling $436,655 and the investment of $175,000 in Cyclone Holdings,
Inc. Net cash used by investing activities in 2006 was $650,881 and was
comprised of $234,304 for equipment purchases, $366,577 for the purchase of
software licenses and $50,000 for a deposit on the investment in Cyclone
Holdings, Inc.
Net cash provided by financing activities in 2007 was
$2,975,433, primarily comprised of $3,149,550 from the issuance of convertible
debt and $755,393 from the sale of common stock. Offsetting these items
were $319,955 in payments of financing costs and $448,419 in principal payments
on capital leases. Net cash provided by financing activities in 2006 was
$2,347,126, primarily comprised of $2,499,929 from the sale of common stock and
$180,000 in proceeds from bank and related party debt. Offsetting the 2006
proceeds were $209,970 in payments on long term debt and bank note, $59,689 in
principal payments on capital leases and $63,144 in principal payments on
related party debt.
See Item 10 for additional information about our
financings through December 31, 2007.
Known trends, events or
uncertainties that have or are reasonably likely to have a material impact on
the small business issuer's short-term or long-term liquidity
We have a limited public trading market for the shares of
our common stock. See Item 9. As a result, we have been primarily
limited to debt financing during the year ended December 31, 2007, and the
quarterly period ended March 31, 2008, to fund our present and planned business
operations. We anticipate that trend to continue at least until there is
an established trading market in our shares of common stock that may result in
prospective investors in us having an interest in purchasing our equity
securities rather than our debt securities. If we are unable to pay our
debt securities and accrued interest when these obligations become due, the
prospects of selling debt securities will also be minimal, if at all. The
following table reflects certain material information about our current
convertible debt that we have outstanding, on a quarter by quarter basis,
beginning on January 1, 2007, and through the quarterly period ended March 31,
2008:
|
|
|
|
|
|
|
|
|
Total
|
Total
|
Due Date
|
|
|
|
Accrued
|
Accrued
|
For Accrued
|
|
|
Total of
|
Interest on
|
Interest &
|
Interest &
|
|
|
Convertible
|
Convertible
|
Convertible
|
Convertible
|
Periods
|
|
Notes Sold
|
Notes
|
Notes
|
Notes
|
1st Qtr 2007
|
|
$ 401,050.00
|
$ 51,688.10
|
$ 452,738.10
|
Sep-08
|
2nd Qtr 2007
|
|
$ 707,500.00
|
$ 72,915.00
|
$ 780,415.00
|
Dec-08
|
3rd Qtr 2007
|
|
$1,165,000.00
|
$ 87,061.67
|
$ 1,252,061.67
|
Mar-09
|
4th Qtr 2007
|
|
$ 926,000.00
|
$ 48,922.67
|
$ 974,922.67
|
Jun-09
|
1st Qtr 2008
|
|
$ 808,500.00
|
$ 5,925.33
|
$ 814,425.33
|
Sep-09
|
Totals:
|
|
$4,008,050.00
|
$266,512.77
|
$ 4,274,562.77
|
|
The headings For the three month periods ended March 31,
2008, and 2007 and For the 12 month periods ended December 31, 2007, and
2006, of this Liquidity heading of Item 2, details substantial debt
expenditures for capital leases for equipment and software licenses, a process
that is also expected to continue in the financing of our business
operations.
Internal and external sources of
liquidity
During the 12 month periods ended December 31, 2007, and
2006, we had no sources of internal liquidity.
32
Critical Account
Policies
Warrants Issued with Convertible
Debt
In 2007, we initiated a private placement of 12%
convertible debt with a maturity date of 18 months. For each $1.00 of
convertible debt issued, the debt holder receives one half warrant with an
exercise price of $1.50 and one half warrant with an exercise price of $2.25.
See Item 10 for additional information about this offering. The
proceeds of the debt are allocated to the relative fair value of the debt and
warrants. The value assigned to the warrants is accounted for as a
discount to the debt with a corresponding increase in
additional-paid-in-capital. During 2007, the fair value of the warrants was
determined using the Black-Scholes option pricing model with the following
weighted-average assumptions: (1) expected volatility - 65.6 %; (2) expected
term (years) five years; (3) risk-free interest rate - 5.0%; and (4) expected
dividend yield 0. A significant change in any of these assumptions could
significantly impact the fair value calculation.
As of December 31, 2007, we had issued $3,199,550 in
convertible debt and 1,599,775 warrants at $1.50 and 1,599,775 warrants at
$2.25. We recorded $1,260,412 as a discount to the convertible debt
related to the issuance of the warrants, which is also being amortized over the
term of the convertible debt.
Effective January 1, 2008, we reevaluated the assumptions
used in the Black-Scholes model in light of new information obtained after the
year end. Based on this new information, we used an expected volatility
assumption of 113% in computing the fair value of warrants issued with
convertible debt in the first quarter of 2008. We are accounting for this
change in volatility as a change in accounting estimate under SFAS No. 154,
which requires us to apply this change prospectively. Consequently, we are
not restating or retrospectively adjusting amounts reported in our prior
financial statements.
During the three months ended March 31, 2008, we issued $808,500
in convertible debt, along with 404,250 warrants with an exercise price of $1.50
and 404,250 warrants with an exercise price of $2.25. We recorded $125,108 as a
discount to the convertible debt related to the issuance of the warrants, which
is being amortized using the effective interest rate over the term of the
convertible debt.
Beneficial Conversion Feature
Associated with our Convertible Debt
Our 12% convertible notes, as described above, are
convertible at $0.50 per share, subject to an effective registration statement
to register the underlying common stock. During 2007, as these convertible
instruments were issued, our common stock price ranged from $1.40 per share to
$6.00 per share. EITF 98-5 requires the beneficial conversion feature to
be measured separately at issuance and recognized by allocating a portion of the
proceeds equal to the intrinsic value of that feature to additional paid-in
capital. That amount should be calculated at the commitment date as the
difference between the conversion price and the fair value of the common stock
or other securities into which the security is convertible, multiplied by the
number of shares into which the security is convertible. Under EITF 00-27,
a contingent beneficial conversion feature is measured using the commitment date
fair value of the underlying common stock but does not require it to be
recognized unless the triggering event occurs and the contingency is resolved.
At December 31, 2007, the additional debt discount attributable to the
beneficial conversion feature was $579,000, which will be recognized upon a
successful registration of the underlying shares. This discount will be
amortized, using the effective interest method, over the remaining term of the
debt.
Factors Considered by Board of
Directors in Common Stock Valuations
Prior to the Storage Merger that was effective on August
17, 2007, our Board of Directors based its determination that $0.35 per share
reflected the fair market value of our common stock, based upon our completion
of a capital funding initiated in the mid-summer of 2006 that ran through
January, 2007. As reflected in Item 10, this capital funding resulted in
the sale of 10,011,455 shares of our common stock at a price of $0.35 per share,
generating aggregate proceeds of $3,504,010. Other factors considered were
limited private resales of our common stock by a few shareholders in privately
negotiated prices at $0.35 per share; and that there was no public market for
the Storage shares. Since our Boards fair market valuation of our common
stock at $0.35 did not exceed the conversion
33
prices associated with the
warrants or the 12% convertible notes, no beneficial conversion feature existed.
Subsequent to the Storage Merger on August 17, 2007, our
Board of Directors based the fair market value of our common stock on the public
trading prices of our common stock in the Pink Sheets; and, as referenced above,
the fair market value of our common stock, traded, on average, at a price above
the exercisable warrant prices of $1.50 and $2.25, and the conversion price of
the 12% convertible notes of $0.50 per share, thereby reflecting a beneficial
conversion feature requiring the accounting treatment detailed above.
Adjustments regarding the 12% convertible notes have been deferred until
we file a registration statement with the Securities and Exchange Commission
covering the underlying shares that are subject to such conversion and it is
declared effective, because these 12% convertible notes cannot be converted
until there is an effective registration statement, unless this condition is
waived by us.
Revenue Recognition
Generally, we realize revenue from the design,
installation and support of data storage solutions, which may include hardware,
software and services. Relative to our digitiliti service we recognize
revenue upon invoicing our customers for the data storage services we provided
the preceding month. With respect to revenue recognition guidance provided
through SAB Topic 13(A)(3)(f) and our recognition of set-up fees charged during
2006 and 2007, given the lack of any set-up fees charged in 2006 and very modest
set-up fees charged in 2007 of $16,125, these totals were considered immaterial
to gross revenues for these periods. For the quarter ended March 31, 2007,
set-up fees were $2,325. Yet, as Digitiliti continues its growth in
revenues (including the more aggressive charging of set-up fees during 2008, as
shown by set-up fees of $8,300 for the quarter ended March 31, 2008), revenue
recognition procedures in 2008 will be consistent with the guidance provided
through SAB Topic 13(A)(3)(f).
Valuation of Long-Lived Assets,
Including Finite-Lived Intangibles
We evaluate long-lived assets and intangible assets with
finite lives for impairment, as well as the related amortization periods, to
determine whether adjustments to these amounts or useful lives are required
based on current events and circumstances. We base the evaluation on our
projection of the undiscounted future operating cash flows of the underlying
assets. To the extent such projections indicate that future undiscounted
cash flows are not sufficient to recover the carrying amounts of related assets,
we record a charge to reduce the carrying amount to its estimated fair value.
The test for impairment requires us to make several estimates about fair
value, most of which are based on projected future cash flows. We consider
the estimates associated with the asset impairment tests critical due to the
judgments required in determining fair value amounts, including projected future
cash flows. Changes in these estimates may result in the recognition of an
impairment loss.
Stock-Based
Compensation
SFAS 123(R) requires us to measure and recognize in
our statements of operations the expense associated with all share-based payment
awards made to employees and directors based on estimated fair values.
SFAS 123(R) requires the use of an option pricing model to determine
the fair value of share-based payment awards. Our common stock price, as
well as assumptions regarding a number of highly complex and subjective
variables, will affect our determination of fair value. During 2007, the
fair value of our employee stock options was determined using the Black-Scholes
option pricing model with the following weighted-average assumptions: (1)
expected volatility - 65.6%; (2) expected term (years) five years; (3)
risk-free interest rate -5.0 %; and (4) expected dividend yield 0. A
significant change in any of these assumptions could significantly impact the
fair value calculation. We account for non-employee share-based awards in
accordance with EITF No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquisition, or in Conjunction with Selling,
Goods or Services.
Effective January 1, 2008, we reevaluated, in light of
new information obtained after the year end, the assumptions used in the
Black-Scholes model for valuing employee stock options and non-employee stock
warrants issued in connection with share-based compensation. Although no
such employee stock option or non-employee stock warrants were issued during the
first quarter of 2008, with the exception for warrants issued in conjunction
with the convertible debt, we anticpate that the expected volatility assumption
will range from 100% to 125% for future issuances.
We are accounting for
this change in volatility as a change in accounting estimate under SFAS No. 154,
34
which requires us to apply
this change prospectively. Consequently, we are not restating or retrospectively
adjusting amounts reported in our prior financial statements.
New Accounting
Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value
Measurements, as amended, in February 2008 by FASB Staff Position (FSP) FAS
157-2,
Effective Date of FASB Statement No. 157.
SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements.
FSP FAS 157-2 defers the
effective date of SFAS 157 for all nonfinancial assets and liabilities, except
those items recognized or disclosed at fair value on an annual or more
frequently recurring basis, until January 1, 2009.
As such, we
partially adopted the provisions of SFAS 157 effective January 1, 2008.
The partial adoption of this statement did not have a material impact on our
financial statements.
We expect to adopt the remaining provisions
of SFAS 157 beginning in 2009.
We do not expect this adoption to
have a material impact on our financial statements.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilitiesincluding an
Amendment of FASB Statement No. 115.
This standard permits an
entity to choose to measure many financial instruments and certain other items
at fair value.
Most of the provisions in SFAS 159 are elective;
however, the amendment to SFAS 115,
Accounting for Certain Investments in
Debt and Equity Securities, applies to all entities with available-for-sale
securities.
The fair value option established by SFAS 159 permits
all entities to choose to measure eligible items at fair value at specified
election dates.
A business entity will report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date.
The fair value option: (a) may be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and not to
portions of instruments.
We have adopted this statement as of January 1,
2008.
The adoption created no impact to our financial statements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements during the years
ended December 31, 2007, and 2006.
Item 3. Properties
Our Fortress Storage Center is located at 250 Marquette
Plaza, Minneapolis, MN 55401, and we have contracted with XO Communications for
data center space and communications (the XO Communications Contract); XO
Communications is a vendor that provides cabinet space, power and Internet
connectivity. This arrangement ensures capital expenditures are at a
minimum, while maintaining the flexibility to set up a new data center in any
one of the 80 geographically dispersed locations throughout the world. Our
digitiliti service is not limited by geographic concerns. As new customers
are added, we will also add capacity to our Fortress Storage Center that has
virtually unlimited scalability. Our Fortress Storage Center occupies
approximately 1,500 square feet of this facility, at a cost of $3,300 per month,
and houses our equipment and software.
Also located at 250 Marquette Plaza, we lease office
space comprised of approximately 3,093 rentable square feet, at a monthly
base rent of $2,576.67 and $2,834.33 in 2006 and 2007, respectively (the FRM
Associates Lease). With monthly operating expenses and monthly real
estate tax assessments added to these base monthly rental amounts, the overall
monthly lease cost on this space approximates to $4,726.00 and $5,153.00 for
2006 and 2007, respectively. We vacated these premises in August, 2007.
This office space lease has been sublet to a local company effective May,
2008, throughout the duration of the lease period. Sublease income is
$3,607.33 for June 1, 2008 April 30, 2009, and $3,865 for May 1, 2009
September 30, 2010 (the EBC Minneapolis, Inc. Sublease Agreement). The
landlord under the FRM Associates Lease consented to this sublease, subject to
the guarantee of Brad D. Wenzel, our current Chairman of the Board, and Ronald
G. Wenzel, a former officer and director of Storage.
On April 23, 2007, we leased approximately 8,736 square
feet, consisting of floors three and four of the building located at 266 East
7
th
Street, St. Paul, MN 55101 (the Upper Corner Lease), for
a term of four years and seven months, ending on December 31, 2011, for $4,450
per month from June 1, 2007, to December 31, 2007; $6,450
35
from January 1, 2008, to
December 31, 2008; and at a lease rate to be determined in line with other
commercial properties in the downtown area, including yearly increases, from
January 1, 2009, until December 31, 2011.
For additional information about our facilities, see the
heading Introduction of the heading Business, Item 1.
Copies of the XO Communications Contract, the FRM
Associates Lease, as amended, the EBC Minneapolis, Inc. Sublease Agreement and
the Upper Corner Lease are filed as Exhibits to this Registration Statement.
See Items 13 and 15.
Item 4. Security Ownership of Certain
Beneficial Owners and Management
Security Ownership of Certain Beneficial
Owners
The following table sets forth the share holdings of
those persons who own more than five percent (5%) of our common stock as of the
date of this Registration Statement, respectively based upon 25,081,444 shares
being outstanding as of May 13, 2008:
Ownership of Principal
Shareholders
|
|
|
|
Title of Class
|
Name and Address of Beneficial Owner
|
Amount and Nature of Beneficial Owner(1)
|
Percent of Class (2)
|
Common Stock
|
Pamela J. and Jonathan S. Miner (3)
600 Queensland Lane N.
Plymouth, MN 55447
|
2,015,635 (2)
|
8.04%
|
Common Stock
|
Michael S. Kelly
13911 Ridgedale Drive, Suite 375
Minnetonka, MN 55305
|
1,723,419
|
6.87%
|
Common Stock
|
Brad D. Wenzel (4)
266 East 7th Street,
Floor 4
St. Paul, MN 55101
|
4,604,302 (3)
|
17.32%
|
Common Stock
|
Ronald G. and Laura Wenzel(5)
5064 Stewart Avenue
White Bear Lake, MN 55110
|
2,024,729 (4)
|
8.07%
|
(1) Includes shares that any beneficial owner has the right to
acquire within 60 days, from options, warrants, rights, conversion privilege or
similar obligations.
(2) Excludes
shares of our common stock underlying outstanding convertible securities;
assumes that all Storage shareholders have exchanged their respective shares
under the Storage Merger and that there are currently 25,081,444 outstanding
shares of our common stock, except in the case of the computations reflecting
the percentage of beneficial ownership of Brad D. Wenzel, which computations
include the 1,500,000 shares underlying his employee stock option grant in his
ownership and in the total number of outstanding shares. See Note
(3) below. For information about shares of our common stock underlying
outstanding convertible securities, see our consolidated financial statements
and related notes that are filed as a part of this Registration Statement, in
Item 13 and 15, and the caption Recent Sales of Unregistered Securities,
Item 10.
(3) 1,801,349 of
these shares of common stock are owned of record by Pamela J. Miner; and 214,286
of these shares of common stock are owned jointly by these two persons.
(4) These
computations include the 1,500,000 shares underlying the 1,500,000 $0.385 five
year employee
36
stock options granted to Mr. Wenzel, in his holdings and in the
outstanding shares utilized for computation of his holdings. That
outstanding figure is the sum of 25,081,444 and 1,500,000 or
26,581,444.
(5)
2,024,729 of these shares of common stock are jointly owned by these
persons.
Security Ownership of Management
The following table sets forth the share holdings of
management as of the date of this Registration Statement, based upon 25,081,444
shares being outstanding as of May 13, 2008:
Ownership of Officers and
Directors
|
|
|
|
Title of Class
|
Name and Address of Beneficial Owner
|
Amount and Nature of Beneficial Owner(1)
|
Percent of Class (2)
|
Common Stock
|
Pamela J. and Jonathan S. Miner (3)
600 Queensland Lane N.
Plymouth, MN 55447
|
2,015,635 (2)
|
8.04%
|
Common Stock
|
Mark Savage
13911 Ridgedale Drive, Suite 375
Minnetonka, MN 55305
|
783,419
|
3.12%
|
Common Stock
|
Brad D. Wenzel (4)
266 East 7th Street,
Floor 4
St. Paul, MN 55101
|
4,604,302 (3)
|
17.32%
|
Common Stock
|
Ronald G. and Laura Wenzel(5)
5064 Stewart Avenue
White Bear Lake, MN 55110
|
2,024,729 (4)
|
8.07%
|
All Directors and Officers as a group (5)
|
|
9,428,084 (5)
|
35.47%
|
(1) Includes shares that any beneficial owner has the right to
acquire within 60 days, from options, warrants, rights, conversion privilege or
similar obligations.
(2) Excludes
shares of our common stock underlying outstanding convertible securities;
assumes that all Storage shareholders have exchanged their respective shares
under the Storage Merger and that there are currently 25,081,444 outstanding
shares of our common stock, except in the case of the computations reflecting
the percentage of beneficial ownership of Brad D. Wenzel, which computations
include the 1,500,000 shares underlying his employee stock option grant in his
ownership and in the total number of outstanding shares. See Note (3)
below. For information about shares of our common stock underlying
outstanding convertible securities, see our consolidated financial statements
and related notes that are filed as a part of this Registration Statement, in
Items 13 and 15, and the caption Recent Sales of Unregistered Securities, Item
10.
(3) 1,801,349 of
these shares of common stock are owned of record by Pamela J. Miner; and 214,286
of these shares of common stock are owned jointly by these two persons.
(4) These
computations include the 1,500,000 shares underlying the 1,500,000 $0.385 five
year employee stock options granted to Mr. Wenzel, in his holdings and in the
outstanding shares utilized for computation of his holdings. That
outstanding figure is the sum of 25,081,444 and 1,500,000 or 26,581,444.
(5) 2,024,729 of
these shares of common stock are jointly owned by these persons. Ronald G.
Wenzel is not currently an executive officer or director.
37
(6) The total
percentage of the five management members includes the 1,500,000 shares
underlying the 1,500,000 $0.385 five year employee stock options granted to Mr.
Wenzel, in total holdings and in the outstanding shares utilized for
computation of these five persons holdings.
Changes in Control
There are no present arrangements or pledges of our
securities which may result in a change in control.
Item 5. Directors and Executive Officers,
Promoters and Control Persons.
Identification of Directors and Executive
Officers
The following table sets forth the names of
all of our current directors and executive officers. These persons will serve
until the next annual meeting of the stockholders or until their successors are
elected or appointed and qualified, or their prior resignation or termination.
|
|
|
|
Name
|
Positions Held
|
Date of Election or Designation
Storage/Digitiliti
|
Date of Termination or Resignation
|
Larry D. Ingwersen
|
President,
CEO
a Director
|
04/08
04/08
04/08
|
*
*
*
|
Mark Savage
|
President
Director
|
12/06 08/07
10/06 08/07
|
04/08
*
|
Brad D. Wenzel
|
President
CEO
Chairman
Director
|
10/03
10/03 08/07
04/08
10/03 08/07
|
12/06
04/08
*
*
|
Laura Wenzel
|
Director
Vice President
CFO
Treasurer
Secretary
|
04/06 08/07
10/06 08/07
10/06 08/07
10/03 08/07
10/03 08/07
|
*
*
04/08
04/08
*
|
Pamela J. Miner
|
Director
|
4/06 08/07
|
*
|
Jonathan S. Miner
|
Director
|
11/05 08/07
|
*
|
|
CFO
|
10/03
|
10/06
|
|
Vice President
|
10/03
|
10/06
|
|
Treasurer
|
10/03
|
10/06
|
William McDonald
|
CFO
|
04/08
|
*
|
Roderick D. Johnson
|
COO
|
04/08
|
*
|
*
These persons presently serve in the
capacities indicated. Each previously served during the dates and in the
capacities indicated at Storage; and those continuing, with the exception of
Larry D. Ingwersen, William McDonald and Roderick D. Johnson, were elected after
the effective date of the Storage Merger on August 17, 2007.
Business Experience
Larry D. Ingwersen.
Mr. Ingwersen has a
40-year career focused on growth initiatives. He joined Digitiliti in 2008
as its President and CEO. Since the early 1990s, Mr. Ingwersen has been a
self-employed consultant, utilizing his entrepreneurial experience to assist
young technology companies in planning, financing and implementing
growth-related corporate development initiatives. By 2003, Mr. Ingwersen
was forming teams of senior consultants into limited partnerships that fit the
specific needs of each major corporate development client. In 2006, he
became a
38
founding partner in 5X
Partners, LLC, a business development firm that built five new corporations from
start-up to IPO. Mr. Ingwersen has worked on more than 45 corporate
development programs. As needed by these programs, he has been an active
board member (in 10 companies), or elected CEO (in six companies). Mr.
Ingwersen attended the University of Nebraska and South Dakota School of Mines
and Technology, graduating with a Degree in Electrical Engineering. He has
also completed post-graduate work in Engineering and Management. Mr.
Ingwersen is 63 years of age.
Brad D. Wenzel
. Mr. Wenzel is the founder of
Storage. Mr. Wenzel founded Storage in 2003 and is currently Chairman of
the Board. Prior to Storage, Mr. Wenzel was a founding partner in Wenzel
Data, Inc. (WDI), which he started in 1997. For over 17 years, Mr.
Wenzel has been involved at virtually every level in the storage market from
manufacturer to OEM to reseller. He has acted in many roles including
sales, engineer, developer and owner/President/CEO of both Storage and WDI.
He has architected and installed some of the largest Storage Area Networks
in the country. Mr. Wenzel earned a B.A. in Business Administration from
the University of St. Thomas and is 41 years old.
Mark Savage
. Mr. Savage has over 20 years
experience in investments, mergers and acquisitions. He is currently the
President and principal owner of M2 Capital Advisers, Inc., a financial
consulting firm he started in 2005 (M2). Prior to M2, Mr. Savage was
sole owner of Corporate Capital Management, a financial consulting firm he
started in 2001. Since starting Corporate Capital Management, he has been
involved in over 60 transactions with a total value of approximately $500
million in the software, technology and telecommunication industry.
Mr. Savage has worked for IDS Financial Services, Shearson Lehman
Brothers, Craig Hallum, Inc. and Hayne, Miller Financial at different points in
his career. Mr. Savage has been a director of Digitiliti since 2006.
Mr. Savage is 41 years old.
Laura Wenzel
. Ms. Wenzel has been an officer
of Storage since its inception and a board member since 2006. She
has been the CFO and Secretary of Just 4 Fun Corporation, a kids and family
marketing firm, since 2001. She has served as the Secretary and a board
member of the Chateauguet Condominium Association since in 2006. Ms.
Wenzel is 55 years of age.
Pamela J. Miner
. Ms. Miner was a founding
shareholder of Storage and has been a director of Storage since 2006.
Since 2004, she has been an officer and director of Just 4 Fun Corporation
and a 60% owner in that firm since 2003. From 2000 to 2004, she was
Special Projects Coordinator for The Miner Group, Limited, a marketing company.
Ms. Miner is 55 years of age.
Jonathan S. Miner
. Mr. Miner has served as a
director of Storage beginning in 2005. From 1980 to 2004, he was the
President/Owner/Founder of The Miner Group, Limited, a marketing company, which
included various businesses such as Advanced Web, Mello Smello and North Print
Intl. All divisions of this enterprise were sold as of 2004.
Since 2001, Mr. Miner has been Chairman of the Board of Just 4 Fun
Corporation. Mr. Miner is 67 years of age.
William McDonald.
Mr. McDonald joined
Digitiliti in July of 2007as its Controller. In 2008, he became our CFO
and Treasurer. He has over 20 years experience in the public accounting
and finance arena. Prior to joining Digitiliti, Mr. McDonald was a Vice
President of Commercial Loans for North Star Bank for approximately 18 months
and Vice President of Special Asset Group for US Bank for six months. He
holds a J.D. from William Mitchell College of Law and is a licensed attorney in
the State of Minnesota. He spent 2003 clerking at Henretta, Cross, Ness
and Dolan law firm. He holds a CPA certificate (currently inactive) and
graduated from Augsburg College with a B.A. Degree in Accounting and Finance.
Mr. McDonald is 44 years old.
Roderick D. Johnson.
Mr. Johnson joined
Digitiliti as its COO in 2008. Mr. Johnson has over 33 years of business
experience focused on revenue and business development. In 2006, he became
a founding partner of 5X Partners, LLC, a business development firm that
facilitates rapid growth of technology clients. In early 2003, Mr. Johnson
operated as a solo consultant providing marketing, sales and operational
assistance to technology businesses including data centers, telecommunications
companies, electric coops and utilities. In 2004, he started and continues
to operate 2
nd
Perspective, LLC, to accommodate the need to acquire
senior level talent for these types of projects. Mr. Johnson spent a
combined 12 years at Minnesota Power as Director of Business Development and
Sales and as
39
a Marketing Principal for
Business Development. Mr. Johnson attended the University of Minnesota and
received his Degree in Mechanical Engineering. He is 55 years old.
Directorships held in other reporting issuers under
the Exchange Act
None of our directors or executive officers is currently
a director of any other reporting issuer under the Exchange Act.
Significant Employees
Jeffrey Ringer, Consultant and Principal Accounting
Officer.
Mr. Ringer founded Bent Tree Financial Consulting in 2005 and
joined Storage in June, 2006, as a consultant. He has over 17 years of
financial management experience serving primarily in positions of CFO and COO.
He served as COO and CFO of Arthur Shuster Inc. from July, 2004 to July,
2005; and as CFO at Twin City Fan Companies, Ltd from March, 2001, to July,
2004. He held VP and CFO positions at Game Financial Services from
September, 1995 to July, 2000. Mr. Ringer was a senior auditor with Arthur
Andersen & Co. for over three years. He is a CPA (inactive status) and
graduated from the University of Minnesota, Carlson School of Management with a
B.S. Degree in Accounting. Mr. Ringer is 44 years old.
Kris Caulfield, VP Corporate Relations.
Ms.
Caulfield has been with Storage since its incorporation in 2003. Prior to
her position at Storage, she spent six years as Operations Director at Wenzel
Data, Inc. Ms. Caulfield has 18 years of analyst experience at the
Minnesota Department of Revenue, where she supervised expenditures of $1 billion
biennial budgets in state property tax relief to governmental units and
determined the impact of legislative property tax law proposals. She holds
a Bachelor of Science Degree from the University of Minnesota. Ms.
Caulfield is 51 years old.
Chris Miller, VP Customer Operations
. Mr.
Miller joined the Digitiliti team in 2006 as its CTO, where he managed the
Digitiliti vaults and supervised the engineering staff. He has 12 years
experience in the data storage sector, where he held a variety of technical and
management roles. Beginning in 2005 until joining Digitiliti, he worked in
the Special Projects office of the CTO at Apparent Networks, performing network
diagnostics and analysis. From 1996 to 2005, he was a Principal
Engineer at Veritas Software, where he architected key aspects of their data
protection suite of products and helped develop support processes for their
top-tier customers. Mr. Miller is 32 years old.
Ken Peters, Exec VP Sales.
Mr. Peters joined
Digitiliti in May 2008. He has been in the technology sector for the past
twenty years with expertise in the Security, Network Management, Business
Intelligence and Storage Management markets. Prior to joining Digitiliti,
Mr. Peters was Vice President of Sales at New Boundary Technologies for five
years. In his career, he built sales organizations for two high-growth
companies that achieved IPO status: ShowCase Corporation (SPSS, Inc.) and
LaserMaster Technologies. Mr. Peters earned a Bachelor of Arts Degree from
the University of Wisconsin. He is 42 years old.
Family Relationships
There are no family relationships between our directors
and executive officers except that Ronald G. Wenzel is the father and Laura
Wenzel is the stepmother of Brad D. Wenzel; and Jonathan S. and Pamela J. Miner
are husband and wife.
Involvement in Certain Legal Proceedings
During the past five years, no present or former
director, executive officer or person nominated to become a director or an
executive officer of ours:
(1) was a general partner or executive officer of any
business against which any bankruptcy petition was filed, either at the time of
the bankruptcy or two years prior to that time;
40
(2) was convicted in a
criminal proceeding or named subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses);
(3) was subject to any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities; or
(4) was found by a court of competent jurisdiction (in a
civil action), the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended or vacated.
Item 6. Executive Compensation
Compensation
The following table sets forth the aggregate compensation
paid by us for services rendered during the periods and in the capacities
indicated:
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
(a)
|
Year or
Period
(b)
|
Salary
($)
(c)
|
Bonus
($)
(d)
|
Stock Awards
($)
(e)
|
Option Awards
(f)
|
Non-Equity Incentive Plan Compensation
($)
(g)
|
Nonqualified Deferred Compensation
($)
(h)
|
All Other Compensation
($)
(i)
|
Total
Earnings
($)
(j)
|
Mark Savage, President & Director
|
123107
123106
123105
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
18,000*
0
0
|
18,000
0
0
|
Laura Wenzel, VP, CFO/
Treasurer, Secretary & Director
|
123107
123106
123105
|
6,625
47,167
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
6,625
47,167
0
|
Ronald G. Wenzel, Director
|
123107
123106
123105
|
6,000
32,000
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
6,000
32,000
0
|
Pamela J. Miner, Director
|
123107
123106
123105
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
Jonathan S. Miner,
Director
|
123107
123106
123105
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
Brad D.
Wenzel
CEO &
Director
|
123107
123106
123105
|
231,230
189,578
30,683
|
0
0
0
|
0
0
0
|
1,500,000
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
231,230
189,578
30,683
|
*
$18,000 was paid to M2
Capital Advisors, Inc., that is principally owned by Mark Savage and of which he
is the President, for the services of Mr. Savage as our President.
41
Outstanding
Equity Awards
Outstanding Equity Awards Table At Fiscal
Year-End
|
|
|
|
|
|
|
|
|
|
Option Awards
|
Stock Awards
|
Name
|
Number of Securities Underlying Unexercised Options
(#) Exercisable
|
Number of Securities underlying Unexercised Options
(#) Unexercisable
|
Equity Incentive Plan Awards Number of Securities
Underlying Unexercised Unearned Options (#)
|
Option Exercise Price
($)
|
Option Expiration Date
|
Number of Shares or Units of Stock That Have Not
Vested (#)
|
Market Value of Shares or Units of Stock That Have
Not Vested
($)
|
Equity Incentive Plan Awards: Number of Unearned
Shares, Vested Units or Other Rights That Have Not Vested (#)
|
Equity Incentive Plan Awards: Market or Payout
Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
Brad D. Wenzel
|
1,500,000 (fully vested)
|
0
|
0
|
$0.385
|
7/23/2012
|
0
|
0
|
0
|
0
|
Compensation of Directors
Director
Compensation
|
|
|
|
|
|
|
|
All Directors
|
Fees Earned or Paid in Cash ($)
|
Stock Awards ($)
|
Option Awards ($)
|
Non-Equity Incentive Plan Compensation ($)
|
Nonqualified Deferred Compensation Earnings
($)
|
All Other Compensation ($)
|
Total ($)
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
Item 7. Certain Relationships and Related
Transactions, and Director Independence
Transactions with Related Persons
T
here were no material transactions
or series of similar transactions during the years ended December 31, 2007, or
2006, or to the date hereof, or any currently proposed transactions, or series
of similar transactions, to which we or any of our subsidiaries was or is to be
a party, in which the amount involved exceeded the lesser of $120,000 or one
percent of the average of our total assets at year-end for the last two
completed fiscal years and in which any director, executive officer or any
security holder who is known to us to own of record or beneficially more than
five percent of any class of our common stock, or any member of the immediate
family of any of the foregoing persons, had an interest, except:
42
Management
and Founders Share Issuances
The following shares have been issued to our management
and founders:
|
|
|
Name
|
No. of Shares
|
Consideration
|
Brad D. Wenzel
|
5,397,302
|
Nominal Consideration
|
Ronald G. & Laura Wenzel
|
1,801,349
|
Nominal Consideration
|
Pamela J. Miner
|
1,801,349
|
$250,000
|
Ronald G. & Laura Wenzel
|
536,237
|
$0.35 - $187,683
|
Jonathan S. & Pamela J. Miner
|
214,286
|
$0.35 - $75,000
|
For further information, see the Common Stock Table and
Note 1 to the table of the heading Storage Elements, Inc., Item 10.
For information regarding the current ownership of these
persons, see the table Ownership of Officers and Directors, Item 4.
For information regarding Mark Savage, one of our
directors and our former President, and Larry D. Ingwersen (our CEO and
President) and Roderick D. Johnson (our Chief Operating Officer), see the
heading Management and Founders Agreements of this Item below.
Management and Founders
Agreements
M2 Capital
Advisors, Inc.
On May 3, 2006, Storage executed a Consulting Agreement
with M2, a related party of which Mark Savage, our former President and a
current director (see Item 5), is the President and a principal shareholder, to
render various consulting services, including introducing it to various sources
of funding and providing management consulting services. As consideration
for these services, M2 was to be paid $3,000 per month for one year; 10% fee for
introduction of funding sources that actually provided funding; receive
1,050,000 seven year $0.50 warrants, subject to the introduction and receipt of
not less than the sum of $750,000; 1.4 seven year warrants for every additional
$1.00 of funding introduced and received; piggy-back registration and cashless
rights on all warrants; and other fees based upon a sliding scale for the
introduction of a merger or acquisition to which Storage was introduced and that
was actually completed. An Addendum to this Consulting Agreement was
entered into in March, 2007, effective May 6, 2006, that raised the monthly fee
from $3,000 to $5,000, as compensation to Mr. Savage for filling the role as
President of Storage; reduced the warrant exercise price to $0.35, which
coincided with the then current offering price of Storage common stock; and that
indicated that the total warrants issuable under the Consulting Agreement were
3,726,520. This Consulting Agreement was extended by us on February 28,
2008, until May 31, 2008. M2 was paid approximately $350,000 under this
Consulting Agreement for funding introduced and received by Storage in the
approximate amount of $3,500,000 in connection with the offer and sale of
certain shares of Storage common stock that were restricted securities and was
(it and its designees) issued the 3,726,520 warrants to acquire shares of common
stock of Storage as outlined in Item 10. In September and October, 2007,
warrants for 3,643,270 shares were exercised cashless with the issuance of
3,359,397 shares of our common stock in accordance with our assumption of these
warrants under the Storage Merger.
M2 was also paid $319,955 through December 31, 2007, in
connection with the introduction of persons who acquired $3,199,550 in 12%
convertible notes in an aggregate offering of up to $5.5million commenced by
Storage in the first quarter of 2007and extended by us following the closing of
the Storage Merger on August 17, 2007; this 12% convertible note offering is
presently being continued by us.
Effective on or about April 25, 2007, Storage executed
and completed a Consulting Agreement with M2 whereby it agreed to issue 750,000
shares of Storage common stock that were restricted securities to M2 and its
associates for the introduction of us as a potential reverse merger candidate to
Storage. 297,166 of these shares were issued directly to Mr. Savage.
All of these shares were exchanged under the Storage Merger. All of
these securities were
restricted securities.
43
M2 was also paid a 5%
introduction fee of $28,550 for a computer lease executed by us in November,
2006; $15,448.50 for the introduction of two additional computer equipment
leases executed by us in January and February, 2007; and $13,600 for the
introduction of an additional computer equipment lease we executed in December,
2007.
A Letter Agreement was entered into between M2 and us on
June 19, 2008, to cover compensation for M2 for any additional funding source
introductions made by M2 to us in completion with our current 12% convertible
note offering, anticipated to be completed by the end of our third quarter.
M2 will be paid a 10% introduction fee on any funds realized from any
introductions; all sales efforts in connection with these introductions will be
conducted by us. See Item 15 for reference to a copy of this Letter
Agreement.
These Consulting Agreements contain various provisions
regarding independent contractor status, confidentiality, due performance and
care in performing services and mutual indemnification, among other
provisions.
See the headings Recent Sales of Unregistered
Securities, Item 10, for additional information on securities issued under
these two Consulting Agreements and the 12% convertible note offering by Storage
and us. Copies of these Consulting Agreements are filed as Exhibits to
this Registration Statement. See Item 15.
5X Partners,
LLC.
We executed a Corporate Development Services Agreement
(the Agreement) with 5X Partners on August 20, 2007, that was extended by an
Addendum on November 15, 2007 (the First Addendum), and by an additional
Addendum effective April 17, 2008 (the Second Addendum). This Agreement
and the Addendums focus on services in senior leadership, business development ,
sales and marketing, product packaging, infrastructure scaling methods and other
key areas of management, business assessment and strategies. 5X Partners
will apply its implementation skills to fill in needed strengths and improve
functional areas including corporate strategy and revenue generation (sales,
marketing, pricing, positioning, partnering, etc). 5X Partners will add
value in business development by leading M&A or divestiture functions as
needed. It is also anticipated that 5X Partners will assist us in
financing, investor relations and company positioning. Compensation under the
initial Agreement was $16,800, divided between Larry D. Ingwersen (who became
our CEO and President on April 17, 2008 [see Item 5]) and Roderick D. Johnson
(who became our Chief Operating Officer on April 17 [see Item 5]), two of its
principals, $8,400 to each for 25% of the time of each; the First Addendum
increased this amount to $30,241, $15,121 to each for 50% of the time of each,
with a provision to discuss deferred compensation in the form of warrants; and
the Second Addendum, a 12 month extension, provides that we will pay 5X Partners
$60,484 consisting of a 50% cash payment and 50% converted into common stock
with a price of $0.35 per share. We will also pay a monthly fee of $28,000 of
which $8,000 will be deferred until reaching a financial funding goal, and
issuance of 2,850,000 shares of stock options at a strike price of $0.385 per
share, which will vest over 24 months. These securities are all restricted
securities. These two principals of 5X Partners were elected as our new
CEO/President and COO, respectively; no additional compensation is presently
anticipated for service in these capacities.
5X Partners was instrumental in the
introduction, negotiation, due diligence process and the closing of the
transactions with StorageSwitch, LLC and the introduction of Vision to Practice,
Inc. to us.
The Agreement and these Addendums contain various
provisions regarding independent contractor status, confidentiality, due
performance and care in performing services, notice of disputes and time for
correction, arbitration of disputes and indemnification by 5X Partners, among
other provisions.
Copies of the initial Agreement and the First and Second
Addendums are filed as Exhibits to this Registration Statement. See Items
13 and 15.
In April 2008, the Board of Directors approved a 24-month
extension of a consulting agreement with 5X Partners. 5X Partners has
provided market assessment, product positioning, pricing and sales channel
assessment, financial modeling and shareholder enhancement to us. 5X
Partners assisted with the negotiation of our purchase of the
44
StorageSwitch technology
software and will assist us in developing differentiated product initiatives to
bring to the marketplace. During this product development phase, 5X
Partners will assist us in securing our required financing.
Stock Option Grants
The following members of management have been issued
options under the Digitiliti Stock Option Plan:
|
|
|
Name
|
No. of Options
|
Date of Grant
|
Brad D. Wenzel
|
1,500,000
|
7/23/2007
|
Mark Savage
|
250,000
|
4/17/2008
|
William McDonald
|
150,000
|
7/23/2007
|
William McDonald
|
150,000
|
4/17/2008
|
Larry D. Ingwersen
|
1,425,000
|
4/17/2008
|
Roderick D. Johnson
|
1,425,000
|
4/17/2008
|
For further information, see the heading Increase and
Additional Grants in Shares under 2007 Stock Plan of the heading Recent Events
in 2008 under Business Development, Item 1; and the heading Securities
Authorized for Issuance under Equity Compensation Plans, Item 9.
Other Management and Founder
Transactions
In January 2006, we entered into two leases for computer
equipment, one of which expired in 2007 and one of which will expire in 2008.
One of the leasing companies, Wenzel Data, Inc., is owned by Ronald G.
Wenzel, a former officer and director of Storage and a current stockholder of
ours, and Brad D. Wenzel, our current Chairman of the Board of Directors.
The lease payments are guaranteed by Messrs. Wenzel and Wenzel. The
amount outstanding for the capital lease obligation to Messrs. Wenzel and Wenzel
was $121,877 and $71,686 at December 31, 2007, and 2006, respectively. See
Note 7 of our consolidated financial statements that accompany this Registration
Statement, in Items 13 and 15.
We have a $250,000 promissory note with Jonathan S.
Miner, one of our directors, dated December 15, 2005. The note mirrors a
promissory note between him and his bank, which matured on December 15, 2007,
and had an interest rate .5% above the banks index rate (8.00% and 8.75% at
December 31, 2007, and 2006, respectively). In December 2007, the note was
renewed to December 31, 2008. The balance of the note was $241,540 and
$248,276 at December 31, 2007, and 2006, respectively. Interest expense
was $22,656 and $19,542 for 2007 and 2006, respectively.
During February, 2006, we entered into a promissory note
for $150,000 with Mr. Miner bearing interest at 12.25% and due in monthly
payments of $5,000. In January 2007, he converted $75,000 of the debt into
214,286 shares of our common stock. The remaining balance of the note was
paid in full in November 2007. Interest expense was $3,863 and $16,278 for
2007 and 2006, respectively.
We and two stockholders, Ronald G. and Laura Wenzel (Ms.
Wenzel is our Vice President, Secretary and a director), were guarantors on a
bank promissory note of a stockholder (Pamela J. Miner, a current director)
totaling $250,000 plus interest. The proceeds from the promissory note
were used by these stockholders to purchase 1,801,349 additional shares of our
common stock. If these stockholders defaulted on any part of the note and
we had to pay a portion of the note, then the parties would have calculated the
amount of such payment as a percentage of the original note. These
stockholders shares previously received would be reduced by that percentage,
but not below 94,453 common shares. The note and accrued interest were
approximately $230,000 at December 31, 2006. In March 2007, the bank
released us as a guarantor on the note.
In March 2006, we entered into an office space lease with
Ronald G. Wenzel and Laura Wenzel. The lease term was for five years with a
monthly charge of $4,000. We also agreed to pay all operating expenses
with respect to the lease. Rent expense was $40,000 during 2006. The
lease was terminated effective December, 2006.
45
The Company made lease
payments on a building and computer equipment that was leased by Wenzel Data,
Inc. which is owned by Brad D. Wenzel, our Chairman of the Board of Directors,
and used by us. The building lease expired in 2006 and the equipment lease
expired in 2007. Related party rent expense for 2007 and 2006 was $3,851
and $4,517, respectively.
In May 2007, we were named as a defendant in a lawsuit
along with Wenzel Data, Inc. A vendor is seeking to enforce its rights to
obtain payment of a 2005 promissory note signed by WDI and us. The note
was also guaranteed by Brad D. Wenzel. In June, 2007, the parties agreed
to a settlement amount of approximately $26,000, which was paid by the Mr.
Wenzel.
Transactions with Founders and Control
Persons
Except as indicated under the heading
Transactions with Related Persons, above, in this Item 7, there were no other
material transactions involving persons in these categories.
Parents of the Issuer
We have no parents.
Item 8. Legal Proceedings
We are not a party to any pending legal
proceeding. To the knowledge of our management, no federal, state or local
governmental agency is presently contemplating any proceeding against us.
To the knowledge of our management, no director, executive officer or
affiliate of ours or owner of record or beneficially of more than five percent
of our common stock is a party adverse to us or has a material interest adverse
to us in any proceeding.
Item 9. Market Price of and Dividends on the
Registrants Common Equity and Related Stockholder Matters
Market Information
The following table sets forth, for
the periods indicated, the high and low bid information for our common stock on
the Pink Sheets for the quarterly periods commencing January 1, 2006, and ending
March 31, 2008.
These quotations do not
reflect actual transactions or retail mark-ups, mark-downs or commissions.
Our Pink Sheets trading symbol is DIGI. There has never been a
public market for shares of common stock of Storage.
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing Bid
|
|
Closing Ask
|
Quarter Ended
|
High
|
|
Low
|
|
High
|
|
Low
|
March 31, 2006
|
$
|
.005
|
|
$
|
.005
|
|
$
|
.02
|
|
$
|
.02
|
June 30, 2006
|
$
|
.02
|
|
$
|
.05
|
|
$
|
.04
|
|
$
|
.02
|
September 30, 2006
|
$
|
.01
|
|
$
|
.01
|
|
$
|
.02
|
|
$
|
.02
|
December 31, 2006
|
$
|
.01
|
|
$
|
.01
|
|
$
|
.02
|
|
$
|
.015
|
March 31, 2007*
|
$
|
1.75
|
|
$
|
1.05
|
|
$
|
11.00
|
|
$
|
6.00
|
June 30, 2007*
|
$
|
4.05
|
|
$
|
1.25
|
|
$
|
11.00
|
|
$
|
2.69
|
September 30, 2007*
|
$
|
3.00
|
|
$
|
2.50
|
|
$
|
10.01
|
|
$
|
5.00
|
December 31, 2007*
|
$
|
2.50
|
|
$
|
1.25
|
|
$
|
6.00
|
|
$
|
3.00
|
March 31, 2008*
|
$
|
1.50
|
|
$
|
1.05
|
|
$
|
3.00
|
|
$
|
1.50
|
*
Reflects the Recapitalization that was
comprised first of the 40,000 for one reverse split with rounding up to the
nearest whole share, and second the 200 for one dividend. See the heading
Company Recapitalization of the heading Business Development, Item 1.
Presently, there are only 105,462 of our outstanding
shares that are freely publicly tradable; however, 12 months from the filing of
this Registration Statement, if it becomes effective in the normal course of
events in 60 days from its filing as anticipated and provided that we are
current in the filing of all of our reports that are then required to have
been filed with the Securities and Exchange Commission, all shares of our common
stock that have been held
46
for at least six months will
be available for public sale under Rule 144. That will substantially
increase the shares available to be freely publicly traded. See the
heading Recent Sales of Unregistered Securities, Item 10, for information about
the number of shares that may become available for resale under Rule 144.
Also, see the heading Rule 144, of this Item 9, directly below, for
information about the possibility of certain shares of common stock that are
restricted securities as defined in Rule 144 being available for public resale
under Section 4(1) of the Securities Act
Rule 144
The following is a summary of the current requirements of
Rule 144:
|
|
|
|
Affiliate or Person Selling on Behalf of an
Affiliate
|
Non-Affiliate (and has not been an Affiliate During
the Prior Three Months)
|
Restricted Securities of Reporting Issuers
|
During six-month holding period
no resales
under Rule 144 Permitted.
After Six-month holding period
may resell
in accordance with all Rule 144 requirements including:
·
Current public information,
·
Volume limitations,
·
Manner of sale requirements for
equity securities, and
·
Filing of Form 144.
|
During six- month holding period
no
resales under Rule 144 permitted.
After six-month holding period but before one
year
unlimited public resales under Rule 144 except that the current
public information requirement still applies.
After one-year holding period
unlimited
public resales under Rule 144; need not comply with any other Rule 144
requirements.
|
Restricted Securities of Non-Reporting
Issuers
|
During one-year holding period
no resales
under Rule 144 permitted.
After one-year holding period
may resell
in accordance with all Rule 144 requirements including:
·
Current public information,
·
Volume limitations,
·
Manner of sale requirements for
equity securities, and
·
Filing of Form 144.
|
During one-year holding period
no resales
under Rule 144 permitted.
After one-year holding period
unlimited
public resales under Rule 144; need not comply with any other Rule 144
requirements.
|
Shell Companies
The following is an excerpt from Rule 144(i) regarding
resales of securities of shell companies:
(i)
Unavailability to securities of
issuers with no or nominal operations and no or nominal non-cash assets
.
(1)
This section is not available for the
resale of securities initially issued by an issuer defined below:
(i)
An issuer, other than a business
combination related shell company, as defined in §230.405, or an asset-backed
issuer, as defined in Item 1101(b) of Regulation AB (§229.1101(b) of this
chapter), that has:
47
(A)
No or nominal operations; and
(B)
Either:
(1)
No or nominal assets;
(2)
Assets consisting solely of cash and
cash equivalents; or
(3)
Assets consisting of any amount of
cash and cash equivalents and nominal other assets; or
(ii)
An issuer that has been at any time
previously an issuer described in paragraph (i)(1)(i).
(2)
Notwithstanding paragraph (i)(1), if
the issuer of the securities previously had been an issuer described in
paragraph (i)(1)(i) but has ceased to be an issuer described in paragraph
(i)(1)(i); is subject to the reporting requirements of section 13 or 15(d) of
the Exchange Act; has filed all reports and other materials required to be filed
by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding
12 months (or for such shorter period that the issue was required to file such
reports and materials), other than Form 8-K reports (§249.308 of this chapter);
and has filed current Form 10 information with the Commission reflecting its
status as an entity that is no longer an issuer described in paragraph
(i)(1)(i), then those securities may be sold subject to the requirements of this
section after one year has elapsed from the date that the issuer filed Form 10
information with the Commission.
(3)
The term Form 10 information means
the information that is required by Form 10 or Form 20-F (§249.220f of this
chapter), as applicable to the issuer of the securities, to register under the
Exchange Act each class of securities being sold under this rule. The
issuer may provide the Form 10 information in any filing of the issuer with the
Commission. The Form 10 information is deemed filed when the initial
filing is made with the Commission.
Securities of a shell company cannot be publicly sold
under Rule 144 in the absence of compliance with this subparagraph.
Section 4(1) of the Securities
Act
Since we are a former shell company as defined in
subparagraph (i) of Rule 144, our shares of common stock that were issued while
or after we became a shell company cannot be publicly resold under Rule 144
until we comply with the requirements outlined above under the heading Shell
Companies. Until those requirements have been satisfied, any resales of
our shares of common stock must be made in compliance with the provisions of the
exemption from registration under the Securities Act provided in Section 4(1)
thereof, applicable to persons other than an issuer, underwriter or a dealer.
That will require that such shares of common stock be sold in routine
trading transactions, which would include compliance with substantially all of
the requirements of Rule 144, including the availability of current public
information about us as required by subparagraph c(2) of Rule 144, regardless
of its availability; and such resales may be limited to our non-affiliates.
It has been the position of the Securities and Exchange Commission that
the Section 4(1) exemption is not available for the resale of any securities of
an issuer that is or was a shell company, by directors, executive officers,
promoters or founders or their transferees. See
NASD Regulation,
Inc.
, CCH Federal Securities Law Reporter, 1990-2000 Decisions, Paragraph
No. 77,681, the so-called Worm-Wulff Letter. The current position of the
Securities and Exchange Commission that is contained in Securities Act Release
No. 33-8899, effective February 15, 2008, and that codified the position of the
Securities and Exchange Commission set forth in the Worm-Wulff Letter and
revised Rule 144 as outlined above, is that Rule 144 now defines what resales
can be made under Section 4(1) of the Securities Act, and with limited
exceptions, which are set forth in footnote 172 of that Release, shares of shell
companies must be sold in compliance with Rule 144(i) that is quoted above.
48
Holders
The number of record holders of our common stock as of
the date of this Registration Statement is approximately 319.
Dividends
We have not declared any cash dividends with respect to
our common stock, and do not intend to declare dividends in the foreseeable
future. Our future dividend policy cannot be ascertained with any
certainty, because we are presently involved in funding our business operations
and our intended Plan of Operations. See Item 2. There are no
material restrictions limiting, or that are likely to limit, our ability to pay
dividends on our securities.
Securities Authorized for Issuance under Equity
Compensation Plans
|
|
|
|
Plan Category
|
Number of Securities to be issued upon exercise of
outstanding options, warrants and rights
|
Weighted-average exercise price of outstanding
options, warrants and rights
|
Number of securities remaining available for future
issuance under equity compensation plans excluding securities reflected in
column (a)
|
|
(a)
|
(b)
|
(c)
|
Equity compensation plans approved by security
holders
|
6,816,000*
|
$0.374
|
2,184,000
|
Equity compensation plans not approved by security
holders
|
None
|
None
|
None
|
Total
|
6,816,000(1)
|
$0.374
|
2,184,000(2)
|
(1)
Reflects 2,916,000 outstanding five year options that vest over various
periods, the cancellation, effective April 17, 2008, of an option to purchase
525,000 shares granted to an employee who is no longer employed by us and the
grant of 3,900,000 additional five year options on that date, that vest over pro
rata periods of between 24 and 36 months, along with an increase in the number
of shares allowed for grants under the Digitiliti, Inc. Stock Option Plan from
4,000,000 shares to 9,000,000 shares. See the heading Recent Events in
2008, of the heading Business Development, Item 1. Also see note 19 of
our consolidated financial statements that accompany this Registration
Statement. See Items 13 and 15.
(2) Based upon 9,000,000 shares
being authorized for issuance.
Purchases of Equity Securities by Us and
Affiliated Purchasers
There were no purchases of our equity
securities by us during the years ended December 31, 2007, and 2006.
Further, except as outlined under the caption Recent Sales of
Unregistered Securities, Item 10, none of our affiliates purchased any of our
equity securities during the periods indicated.
49
Item 10. Recent
Sales of Unregistered Securities
Quarterly Period ended March 31, 2008
The following restricted securities were sold by us
during the quarter ended March 31, 2008:
We sold $808,500 of our 12% convertible notes through
March 31, 2008 (see the heading Digitiliti Bridge Loan below under this Item
10). Additionally, we issued the following shares of our common stock that
are restricted securities as defined by Rule 144:
|
|
|
Name
|
Date
|
No. of Shares Issued
|
Jeffrey Ringer (1)
|
3/3/2008
|
10,571
|
Martin Janis & Co. (2)
|
4/29/2008
|
70,000
|
Storage Switch , LLC (3)
|
4/29/2008
|
299,920
|
(1)
Prior to the completion of the Storage Merger, Storage had
authorized the issuance of 10,571 shares of its common stock to be issued to Mr.
Ringer for services provided to Storage. Such shares were not issued to
Mr. Ringer prior to the completion of the Storage Merger and were authorized to
be issued by us on March 26, 2008, and issued on March 3, 2008.
(2)
On April 17, 2008, our Board of Directors authorized the issuance of
70,000 shares of our common stock to Martin Janis & Company, Inc. that are a
portion of an aggregate total of 94,000 shares reserved for issuance to this
party under its Letter Agreement as described below in Note 2 of the Common
Stock Table under the heading Storage Elements, Inc. in this Item 10.
(3)
On February 1, 2008, we executed a Consulting Services Agreement
with StorageSwitch, LLC, of Lyons, Colorado. The Consulting Services
Agreement has a term of six months and provides for compensation of 250,000
shares of our common stock on execution and up to an additional 24,960 shares of
our common stock per month for the term of the Consulting Agreement for an
aggregate total of up to 149,760 shares. On April 17, 2008, our Board of
Directors authorized the issuance of the 250,000 shares and 49,920 shares
representing two months of the six month term.
Inception to December 31, 2007
During the last three years, we or our predecessor,
Storage, issued the following unregistered securities. The information
provided below is as of December 31, 2007, unless indicated otherwise. It
is presented to reflect our sales of unregistered securities from our inception
to the effective date of the Storage Merger and the sales of unregistered
securities by Storage since from its inception. The consolidated financial
statements that are filed with this Registration Statement account for the
Storage Merger as a capital transaction in substance (and not a business
combination of two operating entities) that would be equivalent to Storage
issuing securities to us in exchange for our net monetary liabilities,
accompanied by a recapitalization, and, as a result, no goodwill relating to the
Storage Merger was recorded. For additional information about our sales of
securities for the years ended December 31, 2007, and 2006, see our consolidated
statement of stockholders equity (deficit) in our consolidated financial
statements. See Items 13 and 15.
Digitiliti
Miscellaneous
|
|
|
Name or Group
|
No. of Shares
|
Consideration
|
Themescapes Merger Outstanding at Court Ordered
Meeting 11/16/05 (1)
|
104,638
|
Previously outstanding
|
Issued to Erik S. Nelson (Nelson) and SEC
Consulting LLC (SEC) 1/13/06 (1)
|
150,000
|
Services (1)
|
50
|
|
|
Issued to Alan Shelton & Edgar Thomas 3/17/06
(2)
|
14,573
|
Payment of a liability (2)
|
Issued to Nelson & SEC Consulting Group
LLC 5/31/06 (3)
|
100,000
|
Services (3)
|
Total:
|
369,211
|
|
( 1) At a court ordered
meeting of Themescapes held November 16, 2005, there were 36,097 shares
outstanding. At that meeting, an aggregate of 75,000 shares were approved
for issuance to Erik S. Nelson under an Engagement for Employment &
Consulting Services Agreement and 75,000 shares to SEC Consulting Group LLC
under an Engagement Agreement. These shares were not issued until January
13, 2006.
(2) On March 17, 2006,
6,784 shares were issued to Alan Shelton and 7,789 shares were issued to Edgar
Thomas in payment of our liabilities in the amount of $14,250.
(3) On May 31, 2006, we
issued 50,000 shares to Erik S. Nelson and 50,000 shares to SEC Consulting Group
LLC for services rendered in addition to and outside of the scope of the
services rendered under their respective agreements with us.
From mid-summer 2006 through January, 2007, we (Storage)
offered and sold 10,011,455 shares of our common stock that are restricted
securities as defined in Rule 144 of the Securities and Exchange Commission at
a price of $0.35 per share, for total aggregate proceeds of $3,504,010 to
certain accredited investors as that term is defined in Rule 501 of Regulation
D,
We assumed an agreement for public relations/marketing
services of Storage with JPR Communications (JPR) dated March 27, 2007, and
amended on January 7, 2008, partial consideration of which was the issuance of
certain warrants to JPR. The warrants are exercisable on issuance at $0.50
per share and have a five year term. JPR has been issued the following
warrants by us after the Storage Merger:
September
30, 2007
8,000
December 31,
2007
12,000
Total:
20,000
We assumed an agreement with Jeffrey Ringer, Storages
Chief Accounting Officer, pursuant to which we agreed to issue certain warrants
to Mr. Ringer for services rendered. Mr. Ringer has been issued the
following warrants by us after the Storage Merger:
September
30, 2007
4,300
December 31,
2007
8,944
Total:
13,244
On December 19, 2007, our Board of Directors authorized
the issuance of 136,250 warrants to purchase 136,250 shares of our common stock
to Data Sales Co., Inc. which are exercisable at $0.75 per share and have a
seven year term and piggy-back registration rights.
On February 1, 2008, we executed a Consulting Services
Agreement with StorageSwitch, LLC, of Lyons, Colorado. The Consulting
Services Agreement has a term of six (6) months and provides for compensation of
250,000 shares of our common stock that are restricted securities on execution
and up to an additional 24,960 shares of our common stock that are restricted
securities per month for the term of the Consulting Agreement for an aggregate
total of up to 149,760 shares. On April 17, 2008, our Board of Directors
authorized the issuance of the 250,000 shares and 49,920 shares representing two
months of the six month term.
51
On April 17, 2008, our Board
of Directors also authorized the issuance of 70,000 shares of our common stock
that are restricted securities to Martin Janis & Company, Inc. that are a
portion of an aggregate total of 80,000 shares reserved for issuance to this
party under its Letter Agreement as described below under in this Item 10 under
the heading Storage Elements, Inc.
Storage Merger
Pursuant to the Storage Merger, we agreed to issue the
following shares and outstanding convertible securities in exchange for the
outstanding shares and convertible securities of Storage:
|
|
|
|
|
Digitiliti Pre-Merger
Outstanding Shares
|
Storage Pre-Merger
Outstanding Shares (1)
|
Storage Pre-Merger
Outstanding Convertible
Securities (2)
|
Digitiliti Post-Merger Outstanding Shares
(3)
|
Digitiliti Post-Merger Outstanding
Convertible Securities (2)
|
369,211 Shares
|
21,320,216 Shares
|
12,415,014 Shares
|
21,439,427 Shares
|
12,415,014 Shares
|
(1) Includes 10,571 shares
issued by us to Storages Chief Accounting Officer that were required to have
been issued before closing; 4,000 shares issued by us to Storages public
relations firm pursuant to a Letter Agreement executed prior to the closing of
the Storage Merger that were required to have been issued before closing; 20,614
shares issued at $0.35 per share to four stockholders who had pre-emptive rights
to acquire additional shares of common stock of Storage at the closing of the
Storage Merger; and 3,051 shares issued pursuant to rounding in connection with
the Recapitalization.
(2) We assumed (i) 4,118,364
outstanding Storage warrants to acquire 4,118,364 shares of common stock at
$0.35 - $0.50 per share; (ii) $1,618,550 in 12% convertible notes which are
convertible into shares of our common stock at a conversion price of $0.50 per
share (3,237,100 shares), and one (1) warrant for each $1.00 invested (1,618,550
warrants), half at an exercise price of $1.50 per share and half at
exercise price $2.25 per share; and (iii) 3,441,000 options to purchase shares
of our common stock for shares underlying stock options granted by Storage
pursuant to its 2007 Stock Option Plan, with the latter being subject to vesting
requirements of the respective stock option grants.
(3) Takes into account the one
for one exchange of our shares of common stock for outstanding shares of common
stock of Storage under the Storage Merger and the cancellation of 250,000
post-Recapitalization shares of our common stock owned and acquired by Storage
on January 5, 2007, which were cancelled under the Storage Merger.
Digitiliti Bridge Loan
12% Convertible
Note Offering
From the effective date of the Storage Merger to December
31, 2007, we sold $1,531,000 of our 12% Convertible Notes (Storage had sold
$1,618,550 of its identical 12% Convertible Notes to the effective date of the
Storage Merger, for a combined total of $3,149,550 [see the heading Storage
Bridge Loan below under this Item 10]). The 12% Convertible Notes (the
Convertible Notes) were restricted securities as defined in Rule 144 of the
Securities and Exchange Commission and are convertible into shares of our common
stock at $0.50 per each share, subject to there being an effective registration
statement covering the underlying shares that has been filed with the Securities
and Exchange Commission. The unit (the Unit) was comprised of the
Convertible Note, one-half warrant to acquire one-half share of our common stock
for each $1.00 invested, with a five year term and exercisable at $1.50 per
share of common stock, and with no exercise during the first six months and one
day following issuance, unless there is an effective registration statement
covering the underlying common stock that has been filed with the Securities and
Exchange Commission (callable at $0.01 per warrant, if our common stock trades
for 20 consecutive days on its principal market above $2.25 per share, also
provided there is an effective registration statement covering the underlying
shares that has been filed with the Securities and Exchange Commission); and
one-half warrant to acquire one-half share of our common stock for each $1.00
invested, with a five year term and exercisable at $2.25 per share under the
same terms and conditions, but callable at $0.01 per warrant if our common stock
trades for 20
52
consecutive days on its
principal market above $3.00 per share. The Convertible Notes have a
maturity date that is 18 months from the date of issuance. Convertible
Note holders are not considered shareholders until the notes are converted; and
are not entitled to vote on any matter submitted to shareholders by us.
The current offering, to a maximum of $5.5 million is continuing.
We also issued additional $50,000 in Convertible Notes to
a vendor for an account payable on October 1, 2007.
Exemptions from Registration for Sales of Restricted
Securities.
We issued all of these securities to persons who were
accredited investors as those terms are defined in Rule 501 of Regulation D of
the Securities and Exchange Commission; and each such person had prior access to
all material information about us. We believe that the offer and sale of these
securities were exempt from the registration requirements of the Securities Act,
pursuant to Sections 4(2) and 4(6) thereof, and Rule 506 of Regulation D of the
Securities and Exchange Commission. Registration of sales to accredited
investors are preempted from state regulation, though states may require the
filing of notices, a fee and other administrative documentation like
consents to service of process and the like.
Some of these securities that we assumed under the
Storage 2007 Stock Option Plan were issued pursuant to Rule 701 of the
Securities and Exchange Commission, and the issuance of these securities were
registered with the State of Minnesota pursuant to Minn. Stat. §80A.15 Subd.
2(s).
Storage Elements, Inc.
Common Stock Table
|
|
|
Name or Group
|
No. of Shares
|
Consideration
|
Founders (1)
|
9,000,000
|
(1)
|
Private Offering Investors
|
10,011,455
|
$0.35 - $3,504,010
|
Ronald G. & Laura Wenzel
|
536,237
|
$0.35 - $187,683
|
Jonathan S. & Pamela J. Miner
|
214,286
|
$0.35 - $75,000
|
Martin Janis & Co., Inc. (2)
|
24,000
|
Services (2)
|
Consultants (3)
|
1,500,000
|
Services (3)
|
Total
|
21,285,980
|
|
(1) Brad D. Wenzel and Ronald G. and Laura Wenzel, his father and step
mother, respectively, founders of Storage, acquired 5,397,302 and 1,801,349
shares of Storage at inception for nominal consideration; Pamela J. Miner
acquired 1,801,349 shares of at or near inception of Storage for the sum
of $250,000 or approximately $0.14 per share, by executing a bank loan in that
amount that is still outstanding and that was guaranteed by Storage, with the
understanding that if Storage had to repay any of the loan, a proportionate
share of these shares would be returned to Storage, subject to a floor of 94,453
shares. For example, if Storage was required to pay $125,000 of this loan,
50% of Ms. Miners shares would be returned. See note 12 to our
consolidated financial statements that accompany this Registration Statement.
See Items 13 and 15. In March, 2007, the bank released Storage as a
guarantor of the note.
(2) Martin Janis & Company, Inc., a public relations firm, agreed to
provide public relations services to Storage for the period from September 1,
2006, to and including August 31, 2007, in consideration of these shares;
subject to full performance of these services, 20,000 of these shares were
issued on July 3, 2007, and 4,000 of these shares were issued on October 31,
2007 (authorized for issuance in April, 2007), of an aggregate total of 24,000
shares reserved for these services. These shares are valued at $1.00 under
the Letter Agreement with this party.
(3) Storage agreed to cause to be issued for services rendered in
connection with the acquisition of its controlling interest in us and for other
consulting services, an amount of shares of Storage that would represent not
less than 1,500,000 post-Storage Merger shares of our common stock. These
services
53
were
valued at $0.35 per share. 500,000 of these shares were issued for non-capital
raising consulting services under Rule 701 of the Securities and Exchange
Commission, for services related to the merger structure of Storage and other
corporate matters of Storage. An aggregate of 716,667 of these shares was issued
to the employees of M2, including 135,916 701 shares and 161,250 non-701 shares
(an aggregate total of 297,166 shares) to Mark Savage, our current President.
M2 is 50% owned by Mr. Savage. With the adoption of the new
amendments to Rule 144, effective February 15, 2008, some of the benefits of
Rule 701 are no longer applicable, though this registration exemption can still
be claimed. See the headings Rule 144, Item 9, and Certain
Relationships and Related Transactions, and Director Independence, Item 7, for
further information on the Consulting Agreements respecting the issuance of
these 1,500,000 shares of Storage common stock. The following persons were
issued these 1,500,000 shares:
M2 Consulting Agreement Share
Issuances totaling 750,000 shares under its Consulting Agreement:
701 Shares
:
Mark
Savage, 135,916 shares; Michael Kelly 135,916 shares; Dan Ryweck, 59,835 shares;
Lou Reid, 33,333 shares; and Jim Braseth, 10,000 shares.
Other Restricted
Securities
:
Mark Savage, 161,250 shares; Michael Kelly, 161,250
shares; Dan Ryweck, 42,500 shares; and Jim Braseth, 10,000 shares.
Travis T. Jenson Consulting
Agreement Share Issuances totaling 750,000 shares under his Consulting
Agreement:
701 Shares
: Travis T. Jenson,
62,500 shares; and Thomas J. Howells, 62,500 shares.
Other Restricted Securities
:
Leonard W. Burningham, Esq., special counsel to Storage and now our legal
counsel, 150,000 shares; Kelly Trimble, 150,000 shares; Jeff VanOs, 150,000
shares; Thomas J. Howells, 87,500 shares; and Travis T. Jenson, 87,500
shares.
Warrant Table
|
|
|
|
|
Name or Group
|
No. of Warrants
|
Consideration
|
Exercise Price
|
Expiration Date
|
M2 & Assoc. (1)
|
3,726,520
|
Services
|
$0.35 (1)
|
2013
|
Data Sales (2)
|
307,990
|
Financing
|
$0.35 (2)
|
2014
|
J. Ringer, CPA (3)
|
67,854
|
Services
|
$0.35 (3)
|
2012
|
JPR Communications (4)
|
16,000
|
Services
|
$0.50 (4)
|
2012
|
Note Offering (5)
|
1,618,550
|
12% Notes (5)
|
(5)
|
2012
|
(1) These warrants were
issued to M2 or its associates for services rendered in raising approximately
$3,500,000. They had a seven year term; piggy-back registration rights to
be included in any registration statement filed by us at no cost; and they had a
cashless feature meaning, for example, that so long as our common stock is not
traded on a nationally recognized exchange, that the Fair Market Value for
purposes of a cashless exercise is determined from the average of closing bid
and asked prices of the shares. For example, if the average of the bid and
asked prices of our common stock was $1.05, one-third of the warrants could be
exchanged as full payment of two-thirds of the shares issuable under such
warrants. The warrant holder gets the value of our common stock in the
public market, if any. 1,391,635 of these warrants were issued to Mark
Savage, and 100,000 to M2. See the heading Certain Relationships and
Related Transactions, Item 7, for further information on the Consulting
Agreement respecting the issuance of these warrants. Currently, the holders of
3,643,270 of these warrants have elected to use their right to a cashless
exercise and have been issued 3,359,397 shares of our common stock in exchange
therefor.
(2) These warrants were
issued under an agreement by which Data Sales Company, Inc.
54
(Data
Sales) provided financing services regarding certain leased equipment for
Storage. All other provisions of these warrants are the same as those
described in Note (1). Data Sales has elected to use its right to a
cashless exercise and has received 282,625 shares of our common stock in
exchange therefor.
(3) Issued for
consulting services, primarily accounting services. All other provisions
of these warrants are the same as those described in Note (1), except the term
is five years.
(4) Issued for pubic
relations and marketing services. These warrants are callable, have
piggy-back registration rights on the underlying shares, have a five year term
and can be exercised at $0.50 per share.
(5) The 12% Convertible Notes were restricted
securities as defined in Rule 144 of the Securities and Exchange Commission and
are convertible into shares of our common stock under the Storage Merger at
$0.50 per each share, subject to there being an effective registration statement
covering the underlying shares that has been filed with the Securities and
Exchange Commission. The Unit was comprised of the Convertible Note,
one-half warrant to acquire one-half share of Storage common stock for each
$1.00 invested, with a five year term and exercisable at $1.50 per share of
common stock, and with no exercise during the first six months and one day
following issuance, unless there is an effective registration statement covering
the underlying common stock that has been filed with the Securities and Exchange
Commission (callable at $0.01 per warrant, if the Storage common stock traded
for 20 consecutive days on its principal market above $2.25 per share, also
provided there is an effective registration statement covering the underlying
shares that had been filed with the Securities and Exchange Commission); and
one-half warrant to acquire one-half share of Storage common stock for each
$1.00 invested, with a five year term and exercisable at $2.25 per share under
the same terms and conditions, but callable at $0.01 per warrant if the Storage
common stock trades for 20 consecutive days on its principal market above $3.00
per share. The Convertible Notes have a maturity date that is 18 months from the
date of issuance. Convertible Note holders are not considered shareholders until
the notes are converted; and are not entitled to vote on any matter submitted to
shareholders. We agreed to issue our common stock in conversion or
exercise of the Convertible Notes and warrants under the Storage Merger.
Warrants Description
Seven Year $0.35 Warrants
These warrants have an exercise price of $0.35; a seven
(7) year term; piggy-back registration rights to be included in any registration
statement filed by us at no cost; and they have a cashless feature meaning, for
example, that so long as our common stock is not traded on a nationally
recognized exchange, that the Fair Market Value for purposes of a cashless
exercise is determined from the average of closing bid and asked prices of the
shares. For example, if the average of the bid and asked prices of the
common stock was $1.05, one-third of the warrants could be exchanged as full
payment of two-thirds of the shares issuable under such warrants. The
warrant holder gets the value of the common stock in the public market, if any.
Also, if warrants are exercised with the cashless feature, the holding
period for sales under Rule 144 could tack back to the date of the warrant
issuance, because these warrants were not exchanged for new warrants under the
Storage Merger, but remained outstanding and have been assumed by us.
Warrant holders are not considered shareholders until the warrants are
exercised; and are not entitled to vote on any matter submitted to shareholders
by us. Recently, the holders of 3,951,260 of these warrants have elected
to use their right to a cashless exercise and have been issued 3,642,022 shares
of our common stock in exchange therefor.
Five Year $1.50 Warrants
These warrants have a five year term and are exercisable
at $1.50 per share with no exercise during the first six
55
months and one day following
issuance, unless there is an effective registration statement covering the
underlying common stock that has been filed with the Securities and Exchange
Commission. The warrants are callable at $0.01 per warrant, if the our common
stock trades for 20 consecutive days on its principal market above $2.25 per
share, provided there is an effective registration statement covering the
underlying common stock that has been filed with the Securities and Exchange
Commission. Warrant holders are not considered shareholders until the
warrants are exercised; and are not entitled to vote on any matter submitted to
shareholders by us.
Five Year $2.25 Warrants
These warrants have a five year term and are exercisable
at $2.25 per share with no exercise during the first six months and one day
following issuance, unless there is an effective registration statement covering
the underlying common stock that has been filed with the Securities and Exchange
Commission. The warrants are callable at $0.01 per warrant, if the common stock
of the Company trades for 20 consecutive days on its principal market above
$3.00 per share, provided there is an effective registration statement covering
the underlying common stock that has been filed with the Securities and Exchange
Commission. Warrant holders are not considered shareholders until the
warrants are exercised; and are not entitled to vote on any matter submitted to
shareholders by us.
Storage Bridge Loan
12% Convertible
Note Offering
See the heading
Digitiliti Bridge Loan, of this Item 10, above.
Exemptions from Registration for Sales of Restricted
Securities.
Storage issued all of these securities to persons who
were accredited investors as those terms are defined in Rule 501 of Regulation
D of the Securities and Exchange Commission; and each such person had prior
access to all material information about Storage. Storage believed that the
offer and sale of these securities were exempt from the registration
requirements of the Securities Act, pursuant to Sections 4(2) and 4(6) thereof,
and Rule 506 of Regulation D of the Securities and Exchange Commission.
Registration of sales to accredited investors are preempted from state
regulation, though states may require the filing of notices, a fee and
other administrative documentation like consents to service of process and the
like.
Some of these securities that Storage issued under the
Storage 2007 Stock Option Plan were issued pursuant to Rule 701 of the
Securities and Exchange Commission, and the issuance of these securities were
registered with the State of Minnesota pursuant to Minn. Stat. §80A.15 Subd.
2(s).
Digitiliti, Inc. Stock Option Plan
On July 23, 2007, the Board of Directors of Storage
adopted the 2007 Stock Option Plan that reserved 4,000,000 shares of its common
stock for issuance or grant to employees, directors and consultants.
3,441,000 stock option grants had been made as of the effective date
of the Storage Merger. Effective April 17, 2008, a grant for 525,000
shares was cancelled because the employee to whom the grant had been made was no
longer an employee and the options had not vested. All of these stock
options have an exercise price of $0.35 per share, with the exception of the
stock options granted to Brad D. Wenzel, our current Chairman of the Board,
whose stock options have a price of 110% of the Board determined Fair Market
Value of $0.35 on the date of grant, or $0.385 per share, and all are for a term
of five years. 1,500,000 stock options were granted to Mr. Wenzel.
Effective April 17, 2008, the Board of Directors and persons owning a
majority of our outstanding voting securities increased the shares available for
grant from 4,000,000 shares to 9,000,000 shares and changed the name of the 2007
Stock Option Plan to the Digitiliti, Inc. Stock Option Plan. See the
headings Recent Events in 2008, of the heading Business Development, Item 1,
and the heading Securities Authorized for Issuance under Equity Compensation
Plans, Item 9.
Use of Proceeds of Registered Securities
Neither we nor Storage have offered or sold any
registered securities, with the exception of options granted under
56
the 2007 Stock Option Plan by
Storage, that were registered by notification with the State of Minnesota.
No proceeds were received in connections with the grant of these stock
options.
Item 11. Description of Registrants
Securities to be Registered
We are registering our common stock under this
Registration Statement.
Common Stock
We are authorized to issue 100,000,000 shares of common
stock
,
$0.001 par value per share. The holders of our common stock
are entitled to one vote per share on each matter submitted to a vote at a
meeting of our shareholders. There are no rights to cumulative voting in the
election of directors or otherwise.
Our shareholders have no pre-emptive rights to acquire
additional shares of our common stock or other securities. Our common
stock is not subject to redemption rights and carries no subscription or
conversion rights. In the event of our liquidation, the holders of our
shares of common stock are entitled to share equally in corporate assets after
satisfaction of all liabilities. All shares of our common stock now
outstanding are fully paid and non-assessable.
For additional information regarding our common stock,
see our Amended and Restated Certificate of Incorporation, a copy of which is
filed as an Exhibit to this Registration Statement. See Item 15.
Item 12. Indemnification of Directors and
Officers
State Law
Under the Delaware General Corporation Law, a corporation
has the power to indemnify any person who is made a party to any civil,
criminal, administrative or investigative proceeding, other than an action by or
in the right of the corporation, by reason of the fact that such person was a
director, officer, employee or agent of the corporation, against expenses,
including reasonable attorneys fees, judgments, fines and amounts paid in
settlement of any such actions; provided, however, in any criminal proceeding,
the indemnified person shall have had no reason to believe the conduct committed
was unlawful.
Amended and Restated Certificate of
Incorporation
Article Sixth of our Amended and Restated Certificate of
Incorporation states: Directors of the corporation shall not be liable to
either the corporation or its shareholders for monetary damages for a breach of
fiduciary duties unless the breach involves (1) a directors duty of loyalty to t
he corporation or its shareholders; (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (3)
liability for unlawful payments of dividends or unlawful stock purchases or
redemption by the corporation; or (4) a transaction from which the director
derived an improper personal benefit.
Bylaws
Article VIII of our Bylaws states:
Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a proceeding), by reason of the fact that he or she is or was a
director or an officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an indemnitee), whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to
57
such amendment),
against all expense, liability and loss (including attorneys fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith;
provided, however, that, except as provided in Section 3 of this ARTICLE VIII
with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
Article VIII also includes provisions for the advancement of expenses by
us; the right of the indemnitee to bring suit against us in the event a claim
has been made and we have not responded within specific time periods; that the
indemnification granted in not exclusive; a provision for insurance, at our
election; and a provision for indemnification of our employees and agents, in
the discretion of our Board of Directors.
Item 13. Financial Statements and
Supplementary Data
DIGITILITI, INC.
CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2007 AND
2006
58
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1.
Summary of Significant
Accounting Policies
The Company and Nature of Operations
Digitiliti,
Inc. (the Company or Digitiliti (f/k/a Cyclone Holdings, Inc.) provides cost
effective data protection solutions to the small to medium businesses and
markets in the United States. The Company is also developing software products
to offer data storage solutions for Apple networks.
In December 2006,
Storage Elements, Inc. (Storage) agreed to acquire a controlling interest in
Cyclone Holdings, Inc. for $225,000 and made an initial payment of $50,000
toward the purchase. On January 5, 2007, Storage paid the remaining balance of
$175,000. Digitiliti is publicly traded on the pink sheets though it is not
currently filing with the Securities and Exchange Commission. The purpose
of acquiring a controlling interest was to effect a reverse merger of Storage
with Digitiliti under which Storage would become a publicly traded company. On
August 16, 2007, Storage held a special meeting of its stockholders and approved
an Agreement and Plan of Merger among Storage, a Minnesota corporation; Cyclone
Acquisition Corp., a wholly-owned subsidiary of Digitiliti, Inc., a Minnesota
corporation (Subsidiary); and Digitiliti, Inc., a Delaware corporation formerly
known as Cyclone Holdings, Inc. (Digitiliti).
The consolidated
financial statements account for the merger as a capital transaction in
substance (and not a business combination of two operating entities) that would
be equivalent to Storage issuing securities to Digitiliti in exchange for the
net monetary liabilities of Digitiliti, accompanied by a recapitalization and,
as a result, no goodwill relating to the merger was recorded. Additionally, the
merger entities retained the Digitiliti name.
Principles of
Consolidation
The consolidated
financial statements included the accounts of Storage prior to the merger and
Digitiliti, Inc., a Delaware corporation and its wholly owned subsidiary,
Cyclone Acquisition Corp., a Minnesota corporation since the merger. All
significant intercompany balances and transactions were eliminated.
Use of
Estimates
The preparation of
these consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that may affect certain reported amounts and
disclosures in the consolidated financial statements and accompanying notes. The
significant estimates relate to the collectability of accounts receivable,
useful lives of software licenses, valuation of beneficial conversion feature on
convertible debts, valuation of warrants and stock options, and valuation
allowance for deferred income taxes. Actual results could differ from
those estimates.
Credit Risk
Cash is maintained in
bank accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts and does not believe it
is exposed to any significant credit risk on cash.
(continued)
65
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1.
Summary of Significant
Accounting Policies (continued)
Allowance for
Doubtful Accounts
The allowance for
doubtful accounts is based on the aging, historical experience and managements
judgment of the individual accounts receivable. Accounts receivable are
written off against the allowance when management determines a balance is
uncollectible and no longer actively pursues collection. Accounts
receivable is presented net of the allowance for doubtful accounts of $1,990 and
$0 at December 31, 2007 and 2006, respectively. No accounts receivable were
written off as uncollectible during 2007 and 2006.
Property and
Equipment
Property and equipment
are recorded at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets. Computer equipment and furniture and fixtures are
depreciated over three to five years. Maintenance and repairs are charged
to operations when incurred.
Software
Licenses
Certain software is
licensed from two vendors to facilitate the secure online data storage solution.
The licenses are nonexclusive. The term of the licenses is for three years after
which the agreements automatically renew for additional one year periods. Either
party may terminate the agreements if notice is received sixty days prior to the
renewal date. The license fees are amortized over five years.
Long-Lived
Assets
All long-lived assets
are reviewed when events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable. An impairment loss is
recognized when estimated undiscounted cash flows that can be generated by those
assets are less than the carrying value of the assets. When an impairment
loss is recognized, the carrying amount is reduced to its estimated fair value
based on appraisals or other reasonable methods to estimate fair value.
Revenue
Recognition
Data storage revenue is
recognized in the month the service is provided. Customers are invoiced based on
the amount of data stored on the Company's secure vault system. Service
agreements with customers are typically 36-months and allow for termination upon
30 days written notice.
Research and
Development Costs
Research and
development costs are expensed as incurred. The Company expensed third party
development costs totaling $24,784 and $150,214 in 2007 and 2006,
respectively.
(continued)
66
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1.
Summary of Significant
Accounting Policies (continued)
Income Taxes
Storage was organized
as an S corporation for income tax purposes. Effective April 2006, Storage
terminated its S corporation election and became a C corporation.
Deferred income tax
assets and liabilities are recognized for the expected future income tax
consequences of events that have been included in the consolidated financial
statements or income tax returns. Deferred income tax assets and
liabilities are determined based on differences between the financial statement
and tax bases of assets and liabilities using tax rates in effect for the years
in which the differences are expected to reverse.
In evaluating the
ultimate realization of deferred income tax assets, management considers whether
it is more likely than not that the deferred income tax assets will be realized.
Management establishes a valuation allowance if it is more likely than not that
all or a portion of the deferred income tax assets will not be utilized. The
ultimate realization of deferred income tax assets is dependent on the
generation of future taxable income, which must occur prior to the expiration of
the net operating loss carryforwards.
In June 2006, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN)
48, Accounting for Uncertainty in Income Taxes (as amended), which clarifies
the accounting for uncertainty in income taxes recognized in the financial
statements in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Any change in the net assets or liabilities recognized as a result of
adopting the provisions of FIN 48 would be recorded as an adjustment to the
opening balance of retained earnings. FIN 48 is effective for the Company as of
January 1, 2007. The adoption of FIN 48 did not have a significant impact
on the Company's consolidated financial statements.
It is the Company's practice to
recognize penalties and/or interest related to income tax matters in interest
and penalties expense.
The Company is subject to income
taxes in the U.S. federal jurisdiction and various states and local
jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant
judgment to apply. The Company is not currently under examination by any taxing
jurisdiction
Share-Based
Payment
Effective January 1,
2006, the Company adopted the provisions of SFAS No. 123 (R), Share-Based
Payment (as amended), which establishes the accounting treatment for
transactions in which an entity exchanges its equity instruments for goods or
services. Under the provisions of SFAS No. 123 (R), share-based payment
compensation is measured at the grant date, based on the fair value of the
award, and is recognized as an expense over the requisite service period
(generally the vesting period).
Net Loss Per
Share
Basic net loss per
share is computed by dividing the net loss by the weighted-average number of
common shares outstanding. Diluted net loss per share is computed based on
the weighted-average number of common shares outstanding increased by dilutive
common stock equivalents. Due to the net loss for the years ended December
31, 2007 and 2006, all common stock equivalents were excluded from diluted net
loss per share. For the year ended December 31, 2007, diluted net loss per
share excluded potentially dilutive vested and unvested common stock equivalents
totaling 6,399,100 convertible debt, 3,536,148 warrants and 3,441,000 employee
stock options and for the year ended December 31, 2006, warrants totaling
4,025,484 were excluded.
(continued)
67
DIGITILITI, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1.
Summary of Significant
Accounting Policies (continued)
New Accounting
Pronouncements
In September 2006, the
FASB issued SFAS No. 157, "Fair Value Measurements (as amended), which defines
fair value, establishes a framework for measuring fair value and expands the
related disclosure requirements.
Adoption is required as
of the beginning of the first fiscal year that begins after November 15, 2007.
SFAS No. 157 applies under other accounting pronouncements that require or
permit fair value measurements and does not require any new fair value
measurements. Management is evaluating the impact the adoption of SFAS No. 157
will have on the Company's consolidated financial statements. On November
14, 2007, the FASB provided a one year deferral for the implementation of SFAS
No. 157 for nonfinancial assets and liabilities.
In February 2007, the
FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities (as amended)." SFAS No. 159 permits entities to choose to
measure eligible items at fair value at specified election dates and to report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of the provisions of SFAS No. 159 on its
consolidated financial statements.
Reclassification
Certain
reclassifications were made to the 2006 consolidated financial statements in
order to conform to the presentation of the 2007 consolidated financial
statements. The reclassifications did not have any effect on previously reported
stockholders equity, net loss or net cash flows.
2.
Going Concern
The Company continues
to be dependent on its ability to generate future revenues, positive cash flows
and additional financing. During 2006 and through May 12, 2008, the
Company received net proceeds of approximately $3.2 million from the sale of
common stock, issued debt of $150,000 and issued convertible debt of $4.5
million towards raising a total of $5.5 million of convertible debt.
Management acknowledges that its ability to continue executing its current
business plan, even on a short-term basis, is dependent on its ability to obtain
additional debt or equity financing. There can be no guarantee that the
Company will be successful in generating future revenues, in obtaining
additional debt or equity financing, or that such additional debt or equity
financing will be available on terms acceptable to the Company.
3.
Note Receivable
During August 2006, the
Company entered into a promissory note formalizing the payment terms related to
$25,000 owed to the Company. The payments were not made in accordance with
the original promissory note. During September 2007, the Company entered
into a promissory note with another party to repay the entire $25,000 in
periodic installments of $4,000 beginning November 1, 2007, with a final payment
of $5,000 due on April 1, 2008. No interest will be charged. The
Company has fully reserved the balance of the note.
68
DIGITILITI, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
4.
Property and Equipment
Property and equipment
consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
$
|
2,126,479
|
|
|
$
|
1,107,445
|
|
Furniture and fixtures
|
|
14,511
|
|
|
|
14,511
|
|
Total cost
|
|
2,140,990
|
|
|
|
1,121,956
|
|
Less accumulated depreciation
|
|
707,508
|
|
|
|
164,870
|
|
|
|
|
|
|
|
|
|
Property and Equipment
|
$
|
1,433,482
|
|
|
$
|
957,086
|
|
5.
Software Licenses
Software licenses
consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Software licenses
|
$
|
1,387,110
|
|
|
$
|
465,455
|
|
Less accumulated amortization
|
|
233,111
|
|
|
|
65,918
|
|
|
|
|
|
|
|
|
|
Software Licenses
|
$
|
1,153,999
|
|
|
$
|
399,537
|
|
Future amortization
expense is estimated to be $277,400, $277,400, $264,900, $223,800 and $39,600
for 2008, 2009, 2010, 2011 and 2012, respectively.
6.
Note Payable
In
December 2007, the Company entered into a Software Purchase Agreement (SPA) with
Exanet, Inc. The terms of the SPA reflect the financing of $485,000 of software
over 36-months at 12% interest. Commencing on January 15, 2008, the Company is
obligated to make minimum monthly interest only payments of $4,850 that increase
to $20,000 effective October 15, 2008. The terms of the SPA include a possible
$2,500 increase to the minimum monthly interest only payments predicated on
performance goals. The Company has the right to prepay the outstanding balance
without penalty throughout the term of the agreement.
Future principal
payments on the note are as follows:
|
|
|
|
|
|
Year
|
|
|
|
Amount
|
|
|
|
|
|
|
|
2008
|
|
|
$
|
45,906
|
|
2009
|
|
|
|
197,962
|
|
2010
|
|
|
|
241,132
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
485,000
|
|
69
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
7.
Capital Leases
Obligations
In January 2006, the
Company entered into two leases for computer equipment that expire in 2007 and
2008. One of the leasing companies is owned by related parties. The lease
payments are guaranteed by the CEO and stockholder. The present value of
the monthly lease payments was capitalized using an imputed interest rate of
10%. The amount outstanding for the capital lease obligation to related
parties was $121,877 and $71,686 at December 31, 2007 and 2006, respectively.
In November 2006, the
Company entered into a lease for computer equipment that expires in 2008. The
present value of the monthly lease payments was capitalized using an imputed
interest rate of 10%. In addition, the Company issued warrants to purchase
262,500 shares of common stock at $0.35 per warrant to the lessor. The
warrants have a seven-year term and include a cashless exercise provision. The
fair value of the warrants was $63,000 and was capitalized in the cost of assets
under capital leases. The warrants were exercised cashless in September 2007
with the issuance of 240,882 shares of common stock.
During January and
February 2007, the Company entered into two leases for computer equipment. The
present value of the monthly lease payments was capitalized using an imputed
interest rate of 10%. In addition, the Company issued warrants to purchase
45,490 shares of common stock at $0.35 per warrant. The warrants have a
seven-year term and include a cashless exercise provision. The fair value of the
warrants was $10,918 and was capitalized in the cost of assets under capital
leases. The warrants were exercised cashless in September 2007 with the
issuance of 41,743 shares of common stock.
In December 2007, the
Company entered into a 24-month lease for computer equipment. The present value
of the monthly lease payments was capitalized using an imputed interest rate of
10%. The lease payments are guaranteed by the CEO and stockholder. In
addition, the Company issued warrants to purchase 136,250 shares of common stock
at $0.75 per warrant. The warrants have a seven-year term. The fair value
of the warrants was $356,335 and was capitalized in the cost of assets under
capital leases.
M2 Capital Advisors,
Inc. (M2), a related party as the CEO of M2 was also the Companys president in
2006 and 2007, charged the Company a finders fee equal to 5% of the computer
equipment leases.
Amortization of capital
lease property is included in depreciation expense and was $453,932 and $100,717
in 2007 and 2006, respectively.
Assets under capital
leases, included in property and equipment, consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
$
|
1,826,150
|
|
|
$
|
849,276
|
|
Less accumulated depreciation
|
|
554,649
|
|
|
|
100,717
|
|
|
|
|
|
|
|
|
|
Assets under Capital Leases
|
$
|
1,271,501
|
|
|
$
|
748,559
|
|
(continued)
70
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
7.
Capital Leases
(continued)
The following are the
minimum future lease payments for the capital leases:
|
|
|
|
|
Year
|
|
Amount
|
|
|
|
|
|
2008
|
|
$
|
742,318
|
|
2009
|
|
|
207,991
|
|
Minimum lease payments under capital leases
|
|
|
950,309
|
|
Less amount representing interest
|
|
|
(64,988
|
)
|
Less current maturities
|
|
|
(687,159
|
)
|
|
|
|
|
|
Capital Lease Obligations, net of current
maturities
|
|
$
|
198,162
|
|
8.
Notes Payable Related
Parties
The Company has a
$250,000 promissory note with a stockholder dated December 15, 2005. The
note mirrors a promissory note between the stockholder and his bank, which
matured on December 15, 2007 and had an interest rate .5% above the banks index
rate (8.00% and 8.75% at December 31, 2007 and 2006, respectively). In
December 2007, the note was renewed to December 31, 2008. The balance of the
note was $241,540 and $248,276 at December 31, 2007 and 2006, respectively.
Interest expense was $22,656 and $19,542 for 2007 and 2006, respectively.
During February 2006,
the Company entered into a promissory note for $150,000 with a stockholder,
bearing interest at 12.25% and due in monthly payments of $5,000. In
January 2007, the stockholder converted $75,000 of the debt into 214,286 shares
of Company common stock. The remaining balance of the note was paid in full in
November 2007. Interest expense was $3,863 and $16,278 for 2007 and 2006,
respectively.
9.
Convertible Debt
In March 2007, the
Company engaged M2, a related party, to raise up to $5.5 million from the sale
of 12% convertible notes and warrants. The notes can be converted into the
Company's common stock at $0.50 per share, subject to an effective registration
statement covering the underlying common stock that has been filed with the
Securities and Exchange Commission. For each $1 invested, the investor
receives one half warrant to acquire one half of a share of common stock with a
five year term at $1.50 per share. In addition, the investor receives one
half warrant to acquire one half share of common stock with a five year term at
$2.25 per share. Each warrant cannot be exercised during the first
6-months and one day following issuance, unless there is an effective
registration statement covering the underlying common stock that has been filed
with the Securities and Exchange Commission. The warrants are callable at
$0.01 per warrant, if the common stock of the Company trades for 20 consecutive
days on its principal market above $2.25 for the first one half warrant and
$3.00 for the second one half warrant, provided there is an effective
registration statement covering the underlying common stock that has been filed
with the Securities and Exchange Commission.
(continued)
71
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
9.
Convertible Debt
(continued)
The Company will pay M2
a 10% introductory fee pursuant to a Consulting Agreement entered into between
the Company and M2. As of December 31, 2007, the Company had issued
$3,199,550 in convertible debt and 1,599,775 warrants at $1.50 and 1,599,775
warrants at $2.25. Included in this issuance of convertible debt is a $50,000
conversion of an account payable to a vendor into convertible debt on October 1,
2007. The Company paid a 10% introductory fee of $319,955, which was
recorded under deferred financing cost and is being amortized over the term of
the convertible debt. The Company recorded $1,260,412 as a discount to the
convertible debt related to the issuance of the warrants, which is also being
amortized over the term of the convertible debt.
As of August 17, 2007,
the effective merger date, the fair value of the stock was based on the closing
price of Digitiliti stock as traded on the pink sheets. Between the
merger date and December 31, 2007, the closing price fluctuated between $1.40
and $6.00. As a result of the market price exceeding the conversion price
associated with the convertible debt issued, the Company identified and
calculated additional discount related to a beneficial conversion feature in
accordance with Emerging Issues Task Force (EITF) 98-1 and 00-27. The
amount of the discount associated with the beneficial conversion feature for
debt issued prior to December 31, 2007, was approximately $579,000. Additional
discount of approximately $889,000 is associated with debt issued subsequent to
December 31, 2007 and through May 12, 2008
.
In accordance with EITF 00-27, this discount will be recognized upon an
effective registration statement being filed with the Securities and Exchange
Commission.
During 2007, the
Company recorded $177,783 in interest expense related to the amortization of the
discount related to the warrants.
As of May 12, 2008, the
Company had cumulatively issued $4,508,550 of convertible debt and issued
2,254,275 warrants at $1.50 and 2,254,275 warrants at $2.25.
10.
Income Taxes
The Company did not
have income tax expense during the 9-months ended December 31, 2006, as it was
an S corporation and did not have taxable income during that period.
Income tax computed at
the U.S. federal statutory rate reconciled to the effective tax rate consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax benefit at statutory rate
|
|
$
|
(1,393,000
|
)
|
|
|
(34.0
|
)%
|
|
$
|
(627,500
|
)
|
|
|
(34.0
|
)%
|
Merger related costs
|
|
|
227,500
|
|
|
|
5.6
|
|
|
|
-
|
|
|
|
-
|
|
Stock options
|
|
|
40,500
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
State income taxes, net of federal tax
benefit
|
|
|
(200,200
|
)
|
|
|
(4.9
|
)
|
|
|
(103,800
|
)
|
|
|
(5.6
|
)
|
Valuation allowance for deferred tax assets
|
|
|
1,303,100
|
|
|
|
31.8
|
|
|
|
709,500
|
|
|
|
38.4
|
|
Other
|
|
|
22,100
|
|
|
|
0.5
|
|
|
|
21,800
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
(continued)
72
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
10.
Income Taxes
(continued)
The components of
deferred income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
|
2006
|
|
Current Deferred Income Tax Assets
|
|
|
|
|
|
|
|
Vacation accrual
|
$
|
13,300
|
|
|
$
|
5,800
|
|
Allowance for uncollectible
accounts
|
|
10,500
|
|
|
|
9,900
|
|
Stock options and
warrants
|
|
143,300
|
|
|
|
-
|
|
Accrued expenses
|
|
-
|
|
|
|
10,300
|
|
Total
|
|
167,100
|
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
Noncurrent Deferred Income Tax Assets
|
|
|
|
|
|
|
|
Net operating loss
carryforward
|
|
2,005,500
|
|
|
|
775,400
|
|
|
|
|
|
|
|
|
|
Noncurrent Deferred Income Tax Liabilities
|
|
|
|
|
|
|
|
Depreciation
|
|
(150,800
|
)
|
|
|
(90,800
|
)
|
Deferred rent
|
|
(3,300
|
)
|
|
|
(1,100
|
)
|
Deferred revenue
|
|
(5,900
|
)
|
|
|
-
|
|
Total
|
|
(160,000
|
)
|
|
|
(91,900
|
)
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
(2,012,600
|
)
|
|
|
(709,500
|
)
|
|
|
|
|
|
|
|
|
Net Deferred Income Tax
|
$
|
-
|
|
|
$
|
-
|
|
The Company established
a valuation allowance to fully offset the net deferred income tax assets due to
the uncertainty of the Companys ability to generate the future taxable income
necessary to realize those net deferred income tax assets, considering the
Companys history of significant operating losses. In addition, future
utilization of the available net operating loss carryforward may be limited
under Internal Revenue Code Section 382 as a result of changes in ownership that
have or may result from the issuance of common stock, and from options and
warrants for the purchase of common stock.
The Companys federal
net operating loss carryforward of approximately $5,100,000 and state net
operating loss carryforward of approximately $4,100,000 begin to expire in
2026.
The Company has not
filed its federal and state corporate income tax returns for 2007 and 2006.
11.
Stockholders' Equity
(Deficit)
On February
7, 2005, the Board of Directors of Storage amended the Articles of Incorporation
to increase the authorized shares to 50,000. On April 25, 2006, the Board of
Directors again amended the Articles of Incorporation to increase the authorized
shares from 50,000 to 50,000,000. The accompanying consolidated financial
statements and related notes give retroactive effect to this increase in
authorized shares.
Effective
April 25, 2006, the Board of Directors approved a stock split for 6,745.626
shares of common stock for every share owned by the stockholders. The
accompanying consolidated financial statements and related notes give
retroactive effect to this stock split.
(continued)
73
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
11.
Stockholders' Equity
(Deficit) (continued)
On January 3,
2007, the Board of Directors amended the Articles of Incorporation to change the
par value per share to $.0001. The par value designation was made retroactive to
the inception of the Company. The accompanying consolidated financial
statements and related notes give retroactive effect to this change.
During 2006,
the Company initiated a private placement to raise capital by offering common
stock at approximately $0.35 per share. As of December 31, 2006, the
Company had raised $2,405,430 by issuing 7,636,284 shares of common stock,
including 724,713 shares subscribed and paid for in 2006, but issued in March
2007. The private placement was completed in January 2007 with a total of
$3,504,010 received through the sale of 10,011,455 shares of common stock and
the issuance of 3,726,520 warrants to M2 (Note 15). The Company also paid M2 a
fee of $350,401 related to the private placement.
At December 31, 2006,
the Board of Directors approved rescission of 300,000 shares of common stock at
$0.35 per share. The Company recorded a stock rescission payable of $105,000 as
of December 31, 2006. The rescission payable was paid in February
2007.
In April 2007, the
Company issued 750,000 restricted shares to M2 for additional consulting
services for the introduction of Digitiliti as a reverse merger candidate for
Storage. The shares are restricted as to when they can be sold.
In April 2007, the
Company issued 750,000 restricted shares to a consultant to assist the Company
in achieving several corporate and financial goals and activities. The shares
are restricted as to when they can be sold.
During September 2007,
certain shareholders exercised their preemptive rights and acquired 20,612
shares of common stock at $0.35 per share.
Effective August 17,
2007, pursuant to the Agreement and Plan of Merger, Digitiliti, just prior to
the merger, completed a reverse split of its then outstanding common stock on
the basis of one share for 40,000 shares with an immediate 200 for one dividend
to all shareholders of record. Digitiliti issued a total of 122,262 shares just
prior to the merger. Storage then had a one for one exchange of its common stock
at a par value of $.0001 per share for the Digitiliti common stock at a par
value of $.001 per share.
12.
Related Parties
Transactions
The Company
and two stockholders were guarantors on a bank promissory note of a stockholder
totaling $250,000 plus interest. The proceeds from the promissory note were used
by the stockholder to purchase 1,801,082 additional shares of common stock of
the Company. If the stockholder defaulted on any part of the note and the
Company had to pay a portion of the note, then the parties would have calculated
the amount of such payment as a percentage of the original note. The
stockholder's shares previously received would be reduced by that percentage,
but not below 94,439 common shares. The note and accrued interest were
approximately $230,000 at December 31, 2006. In March 2007, the bank
released the Company as a guarantor on the note.
(continued)
74
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
12.
Related Parties
Transactions (continued)
In March
2006, the Company entered into an office space lease with a related party and
stockholder. The lease term was for five years with a monthly charge of $4,000.
The Company also agreed to pay all operating expenses with respect to the
lease. Rent expense was $40,000 during 2006. The lease was
terminated effective December 2006.
Due to stockholder of
$60,176 and $54,473 at December 31, 2007 and 2006, respectively, bears interest
at 2% above the prime rate and is due on demand. Interest expense on this debt
was $5,704 and $5,237 for 2007 and 2006, respectively.
13.
Operating Leases
The Company leases
office space in Minneapolis that expires in October 2010 with monthly base
rentals plus common area maintenance and operating charges. The monthly base
rentals increase over the term of the lease. The Company is recording deferred
rent to equalize the monthly payments during the lease term. This lease was
guaranteed by certain officers and stockholders of the Company. This office
space was vacated in August 2007. In March 2008, the Company entered into a
sublease agreement which expires in October 2010 with monthly rental income that
range from $3,607 to $3,865 including all common area maintenance and operating
charges.
In addition, the
Company made lease payments on a building and computer equipment that was leased
by Wenzel Data, Inc., a related party, and used by the Company. The building
lease expired in 2006 and the equipment lease expired in 2007. Related
party rent expense for 2007 and 2006 was $3,851 and $4,517, respectively.
In April 2007, the
Company entered into a lease for office space. The lease expires December 2011
and requires monthly payments that range from $4,450 to $6,450 through December
2008. Thereafter the rent will be determined consistent with other similar
commercial properties. The Company is recording deferred rent to equalize the
monthly payments during the lease term.
Rent expense for 2007
and 2006 was $126,040 and $135,289, respectively.
Approximate future
minimum lease payments are as follows:
|
|
|
|
|
Year
|
|
|
Amount
|
|
|
|
|
|
|
2008
|
|
$
|
114,504
|
|
2009
|
|
|
37,104
|
*
|
2010
|
|
|
33,497
|
*
|
2011
|
|
|
-
|
*
|
|
|
|
|
|
Total
|
|
|
185,105
|
|
Less sublease income
|
|
|
105,386
|
|
Net
|
|
$
|
79,719
|
|
* The future minimum
lease payments will be determined consistent with other similar commercial
properties.
75
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
14.
Legal Costs
In June 2006, the
Company was included as one of the defendants in a patent infringement lawsuit
related to software it licensed to facilitate its secure online data storage
solution. In October 2006, the parties settled the lawsuit. The settlement
grants the Company and the other defendants immunity from suit and a covenant
not to sue under the covered patent in exchange for an agreement to settle.
The Company contributed approximately $122,000 to the payment of the
settlement and related defense costs in 2006.
In May 2007, the
Company was named as a defendant in a lawsuit along with Wenzel Data, Inc. (an
affiliated entity). A vendor is seeking to enforce its rights to obtain
payment of a 2005 promissory note signed by Wenzel Data and the Company. The
note was also guaranteed by the Company's CEO. In June 2007, the parties agreed
to a settlement amount of approximately $26,000, which was paid by the CEO and
stockholder of the Company.
15.
Professional Services
During May 2006, the
Company hired M2 as a consultant. The duties of M2 include introducing the
Company to the financial community; researching and identifying potential
business partners, executives, consultants and Board of Director candidates;
assisting with securing leases or equipment financing; and other general
business consulting services. This agreement was amended March 2007, effective
May 6, 2006. The monthly fee was increased from $3,000 to $5,000, the warrant
exercise price was reduced from $0.50 to $0.35 per share and M2 or their
assignee were issued a warrant to purchase 3,726,520 shares of the Company's
common stock with a standard cashless exercise conversion feature and a term of
seven years from the date of issuance. In September and October 2007, warrants
for 3,643,270 shares were exercised cashless with the issuance of 3,359,397
shares of common stock. The Company recorded warrant cost of $894,365 in 2006,
which was offset against additional paid-in capital.
The agreement also
provide that if M2 introduces the Company to a lender or equity purchaser with
whom the Company ultimately secures funding, the Company agreed to compensate M2
with a 10% finders fee of the total gross proceeds received by the Company from
the sale of such securities. If M2 introduces the Company to an
acquisition/merger candidate, which candidate ultimately merges with or acquires
the Company or substantially all of the Company's assets, the Company agreed to
compensate M2 with a 5% finders fee of total gross consideration provided by
such transaction for the first $1,000,000, 4% for the next $1,000,000, 3% for
the third $1,000,000, 2% for the fourth $1,000,000, and 1% of the consideration
above $4,000,000. This amended agreement was renewed for another 12-months
ending May 2008. In connection with the amended agreement, if the Company enters
into an equipment and/or software agreement or a straight loan transaction, as
defined, and the Company was introduced to the lessor or lender by M2, the
Company will pay M2 a finders fee equal to 5% of the acquisition cost of such
equipment and/or software or the loan amount funded.
During June 2006, the
Company hired a financial consultant to act as the temporary controller.
The consultant's duties include assisting the Company with preparation of
financial statements, financial analysis, budget preparation and other financial
matters. The Company issued the consultant warrants to purchase shares of common
stock at a price of $0.35 per share. The number of warrants to be issued
is based on the work performed. The warrants have a five-year term and include a
cashless exercise provision. For 2007 and 2006, the Company recorded warrant
cost of $51,511 for 44,634 warrants and warrant cost of $8,751 for 36,464
warrants, respectively. In January 2007, a $3,700 payable to the consultant was
converted into 10,571 shares of common stock.
(continued)
76
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
15.
Professional Services
(continued)
During September 2006,
the Company hired a public relations consultant whose duties include assisting
the Company in planning and executing a public relations/publicity strategy.
The Company will pay a $3,000 monthly fee, issue 24,000 shares of
restricted stock for services rendered and issue an additional 70,000 shares of
restricted stock upon completion of certain specified events. During 2006,
the consultant earned 8,000 shares that were subsequently issued to the
consultant on July 31, 2007. During 2007, the consultant earned an additional
24,000 shares, of which 16,000 shares were issued in 2007. In April 2008,
the Board of Directors approved the issuance of 70,000 shares of restricted
stock to the consultant as a publicity media fee.
During July 2006, the
Company entered into a Manufacturers Representative Agreement with MarketLink
Technologies, LLC (MarketLink). The agreement required the Company to make
minimum monthly payments of $30,000. However, the Company terminated the
agreement in February 2007. In June 2007, the Company was named as a
defendant in a lawsuit filed by MarketLink alleging breach of contract. The
Company recorded a settlement in principal for $60,000 as an agreement has been
partially executed by delivery of a payment.
During March 2007, the
Company entered into a Public Relations/Marketing Services Agreement with JPR
Communications, Inc. (JPR). JPRs duties include development and maintenance of
editorial and special interests mailing lists, editorial discussions and
meetings, and ongoing publication of news releases. The agreement requires the
Company to make monthly payments of $6,000 through July 2007 followed by monthly
payments of $9,000. In addition, the Company will issue 4,000 warrants each
month throughout the first 12-months of the agreement at $0.50 per share. The
warrants have a five-year term. The agreement will be reviewed for renewal in
May 2008. The Company recorded warrant cost of $62,085 in 2007.
In June 2007, the
Company entered into a Service Order Agreement with XO Communication Services,
Inc. for data storage space and communications. The agreement is for three years
with monthly payments of $3,915.
16.
Stock Option Plans
On December 29, 2006,
the Company adopted the 2006 Stock Option Plan which reserved 2,000,000 shares
for issuance under this plan. No options were issued under the Plan during
2006.
On July 23, 2007, the
Company adopted the 2007 Stock Option Plan to replace the 2006 Stock Option
Plan. The 2007 plan is substantially identical to the 2006 Plan except
that 4,000,000 shares of common stock were reserved for issuance. On April 17,
2008, the Company increased the shares reserved to 9,000,000 shares.
The term of the options
is five years and the options vest over various periods. As of December 31,
2007, the Company had granted 3,441,000 options with a weighted-average exercise
price of $0.37. All options granted to date have an exercise price of
$0.35 per share except for those granted to the CEO and director, whose options
have a price of 110% of the Board determined fair value of $0.35 or $0.385 per
share. Stock option expense for 2007 was $359,194. As of December 31, 2007,
there was approximately $160,444 of unrecognized cost which is expected to be
recorded through July 2010.
(continued)
77
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16.
Stock Option Plans
(continued)
All options issued in
2007 were outstanding at December 31, 2007. Options totaling 2,345,333, with a
weighted-average exercise price of $0.37 and a remaining contractual life of
4.57 years, were exercisable at December 31, 2007.
The weighted-average
remaining contractual life of all options outstanding at December 31, 2007, was
4.55 years. The weighted-average grant date fair value of options granted in
2007 was $0.15.
The weighted-average
fair value of options granted in 2007 was estimated at grant date using the
Black-Scholes-Merton option pricing model with the following weighted-average
assumptions:
|
|
|
Weighted-average expected life
|
|
2.96 years
|
Risk free interest rate
|
|
5.0%
|
Volatility
|
|
65.6%
|
Dividend yield
|
|
0.0%
|
A summary of nonvested
stock options was as follows:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted-Average Grant Date Fair
Value
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
3,441,000
|
|
|
|
0.15
|
|
Vested
|
|
|
(2,345,333
|
)
|
|
|
0.14
|
|
Outstanding at December 31,
2007
|
|
|
1,095,667
|
|
|
|
0.17
|
|
In April 2008, the
Board of Directors approved the cancellation of 525,000 shares of unvested stock
options due to termination of an employee in March 2008.
In April 2008, the
Company granted 3,900,000 options to various employees and consultants with
exercise prices ranging from $0.35 to $0.385 per share and vesting over various
periods. Included in the total 3,900,000 shares of options were the 2,850,000
stock options issued to 5X Partners, LLC and 225,000 stock options issued to
Vision to Practice, Inc. (Note 19).
17.
Warrants
A summary of warrant
activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Weighted-Average Exercise
Price
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
4,025,484
|
|
|
|
0.35
|
|
Outstanding at December 31, 2006
|
|
|
4,025,484
|
|
|
|
0.35
|
|
Granted
|
|
|
3,461,924
|
|
|
|
1.78
|
|
Exercised
|
|
|
(3,951,260
|
)
|
|
|
0.35
|
|
Outstanding at December 31, 2007
|
|
|
3,536,148
|
|
|
|
1.75
|
|
(continued)
78
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
17.
Warrants
(continued)
All warrants were fully
vested and exercisable at December 31, 2007.
The weighted-average
remaining contractual life of warrants outstanding at December 31, 2007, was
5.12 years. The weighted-average grant date fair value of warrants granted in
2007 and 2006 was $0.51 and $0.24, respectively.
The weighted-average
fair value of warrants granted was estimated at grant date using the
Black-Scholes-Merton option pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31,
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Weighted-average expected life
|
|
|
5.10 years
|
|
|
|
6.99 years
|
|
Risk free interest rate
|
|
|
5.0%
|
|
|
|
5.0%
|
|
Volatility
|
|
|
65.6%
|
|
|
|
65.6%
|
|
Dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
18.
Supplementary
Disclosures of Cash Flow Information
Additional cash flow
information consisted of the following:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
113,946
|
|
|
$
|
73,124
|
|
|
|
|
|
|
|
|
|
Noncash financial and investing activities:
|
|
|
|
|
|
|
|
Equipment acquired under capital
lease, including issuance
of warrants
for capital lease of $367,252 and $63,000
|
|
974,405
|
|
|
|
849,276
|
|
Conversion of debt and accounts
payable to equity
|
|
78,700
|
|
|
|
187,683
|
|
Warrants exercised
cashless
|
|
3,642
|
|
|
|
-
|
|
Issuance of common stock through
accrued expense
|
|
24,000
|
|
|
|
-
|
|
Issuance of warrants for
convertible debt
|
|
1,260,412
|
|
|
|
-
|
|
Merger of investment in Cyclone
Holdings, Inc.
|
|
225,000
|
|
|
|
-
|
|
Software licenses purchased with
note payable
|
|
485,000
|
|
|
|
-
|
|
Reclassification of common stock
and additional
paid-in-capital
due to change in par value from merger
|
|
15,456
|
|
|
|
-
|
|
Conversion of payables to
convertible debt
|
|
50,000
|
|
|
|
-
|
|
Settlement of amount due from/to
related party
|
|
-
|
|
|
|
43,818
|
|
Stock rescission payable
|
|
-
|
|
|
|
105,000
|
|
Issuance of warrants for
professional services
|
|
-
|
|
|
|
894,365
|
|
79
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
19.
Subsequent Events
In January 2008, the
Company executed a nonbinding Letter of Intent (LOI) with StorageSwitch, LLC
(StorageSwitch) to purchase selective existing software technology. In
addition, this LOI addresses the compensation paid for any related software
product development consulting services and sales/marketing consulting services.
The LOI has a due diligence period to confirm required compatibility with
the Companys present technology base. The due diligence process was
completed in March 2008 and the Company signed a Technology Purchase Agreement
for a purchase of technology software with a total payment of $250,000 cash and
500,000 shares of restricted stock. The Company also entered into a 6-month
Consulting Service Agreement with a monthly payment of $25,000 and monthly
issuance of 24,960 shares of the Companys restricted stock.
In February 2008, the
Company entered into a consulting agreement with Vision to Practice, Inc. to
assist in bringing new product initiatives to market utilizing the technology
software purchased from StorageSwitch. The Company will pay semi-monthly
payments of $7,680 based on full-time service provided to the Company. The
Company will also issue to the consultant 225,000 stock options at $0.35 per
share, which vest over 36-months.
In April 2008, the
Board of Directors approved a 24-month extension of a consulting agreement with
5X Partners, LLC (5X). 5X has provided market assessment, product positioning,
pricing and sales channel assessment, financial modeling and shareholder
enhancement to the Company. 5X assisted with the negotiation of the Companys
purchase of the StorageSwitch technology software and will assist the Company in
developing differentiated product initiatives to bring to the marketplace.
During this product development phase, 5X will assist the Company in securing
the required financing. The Company will pay 5X $60,484 consisting of a 50% cash
payment and 50% converted into restricted common stock at $0.35 per share.
The Company will also pay a monthly fee of $28,000 of which $8,000 will be
deferred until reaching a financial funding goal. The Company will also
issue to two principals of 5X 2,850,000 stock options at $0.385 per share, which
vest over 24-months. No options can be exercised for 6-months from April 17,
2008. Two principals of 5X were appointed as the new CEO/President and COO of
the Company.
In April 2008, the
Company amended and restated its Certificate of Incorporation to add a class of
preferred stock with 10,000,000 shares authorized at a par value of $0.001 per
share.
80
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
82
Condensed Consolidated Statements of Operations
83
Condensed Consolidated Statements of Cash Flows
84
Notes to Condensed Consolidated Financial Statements
85 - 88
81
DIGITILITI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
March 31,
2008
|
|
|
|
December 31, 2007
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
54,042
|
|
|
|
$
|
241,333
|
|
Accounts receivable
|
|
|
382,606
|
|
|
|
|
292,542
|
|
Other current assets
|
|
|
158,159
|
|
|
|
|
95,527
|
|
TOTAL CURRENT ASSETS
|
|
|
594,807
|
|
|
|
|
629,402
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
1,318,228
|
|
|
|
|
1,433,482
|
|
|
|
|
|
|
|
|
|
|
|
SOFTWARE LICENSES
|
|
|
1,291,578
|
|
|
|
|
1,153,999
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED FINANCING COST
|
|
|
274,536
|
|
|
|
|
242,906
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
3,479,149
|
|
|
|
$
|
3,459,789
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current maturities of note
payable
|
|
$
|
93,203
|
|
|
|
$
|
45,906
|
|
Current maturities of capital
lease obligations
|
|
|
640,134
|
|
|
|
|
687,159
|
|
Current maturities of notes
payable related parties
|
|
|
231,540
|
|
|
|
|
241,540
|
|
Current maturities of
convertible debt
|
|
|
1,760,288
|
|
|
|
|
1,062,631
|
|
Trade accounts payable
|
|
|
329,712
|
|
|
|
|
92,000
|
|
Accrued expenses
|
|
|
606,207
|
|
|
|
|
377,308
|
|
Due to stockholder
|
|
|
75,693
|
|
|
|
|
60,176
|
|
TOTAL CURRENT LIABILITIES
|
|
|
3,736,777
|
|
|
|
|
2,566,720
|
|
|
|
|
|
|
|
|
|
|
|
NOTE PAYABLE, net of current maturities
|
|
|
391,797
|
|
|
|
|
439,094
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL LEASE OBLIGATIONS, net of current
maturities
|
|
|
107,945
|
|
|
|
|
198,162
|
|
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE DEBT, net of current maturities
|
|
|
905,641
|
|
|
|
|
1,054,290
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED RENT
|
|
|
24,132
|
|
|
|
|
21,153
|
|
TOTAL LIABILITIES
|
|
|
5,166,292
|
|
|
|
|
4,279,419
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value;
100,000,000 shares authorized,
25,439,448 and 17,172,520
shares issued and outstanding
|
|
|
25,439
|
|
|
|
|
25,081
|
|
Additional paid-in
capital
|
|
|
7,136,506
|
|
|
|
|
6,206,496
|
|
Accumulated deficit
|
|
|
(8,849,088
|
)
|
|
|
|
(7,051,207
|
)
|
TOTAL STOCKHOLDERS
DEFICIT
|
|
|
(1,687,143
|
)
|
|
|
|
(819,630
|
)
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIT
|
|
$
|
3,479,149
|
|
|
|
$
|
3,459,789
|
|
See accompanying notes to condensed consolidated
financial statements
82
DIGITILITI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
563,206
|
|
|
$
|
210,301
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
(427,621)
|
|
|
|
(338,949)
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
135,585
|
|
|
|
(128,648)
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
161,690
|
|
|
|
280,008
|
|
General and
administrative
|
|
|
769,864
|
|
|
|
374,299
|
|
Research and development
|
|
|
670,079
|
|
|
|
784
|
|
Total Operating Expenses
|
|
|
1,601,633
|
|
|
|
655,091
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(1,466,048
|
)
|
|
|
(783,739)
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
331,833
|
|
|
|
42,243
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,797,881
|
)
|
|
$
|
(825,982)
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE BASIC AND DILUTED
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04)
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED
|
|
|
25,149,884
|
|
|
|
19,343,972
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated
financial statements
83
DIGITILITI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,797,881
|
)
|
|
$
|
(825,982
|
)
|
Adjustments to reconcile net
loss to net cash used by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
254,032
|
|
|
|
144,847
|
|
Amortization of deferred
financing costs
|
|
|
49,220
|
|
|
|
1,283
|
|
Amortization of discount on
convertible debt
|
|
|
112,459
|
|
|
|
1,642
|
|
Common stock issued for
services
|
|
|
124,312
|
|
|
|
6,000
|
|
Employee stock option
compensation expense
|
|
|
21,412
|
|
|
|
-
|
|
Common
stock issued for purchased research and development
|
|
|
375,000
|
|
|
|
-
|
|
Warrants issued for services
|
|
|
-
|
|
|
|
4,706
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(90,064
|
)
|
|
|
(28,710
|
)
|
Other current assets
|
|
|
(62,632
|
)
|
|
|
(99,758
|
)
|
Accounts payable and accrued
expenses
|
|
|
505,821
|
|
|
|
131,516
|
|
Deferred rent
|
|
|
2,979
|
|
|
|
-
|
|
Net cash used by operating
activities
|
|
|
(505,342
|
)
|
|
|
(662,633
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property, equipment
and software
|
|
|
(276,357
|
)
|
|
|
(632,901
|
)
|
Investment in Cyclone Holdings,
Inc.
|
|
|
-
|
|
|
|
(175,000
|
)
|
Net cash used by investing
activities
|
|
|
(276,357
|
)
|
|
|
(807,901
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
convertible debt
|
|
|
808,500
|
|
|
|
401,500
|
|
Financing costs
|
|
|
(80,850
|
)
|
|
|
-
|
|
Payments on capital lease
obligations
|
|
|
(156,207
|
)
|
|
|
(35,018
|
)
|
Proceeds from bank note
|
|
|
18,965
|
|
|
|
322,782
|
|
Proceeds from note payable
related party
|
|
|
14,000
|
|
|
|
(9,834
|
)
|
Payments on notes payable
related party
|
|
|
(10,000
|
)
|
|
|
(63,144
|
)
|
Proceeds from sales of common
stock
|
|
|
-
|
|
|
|
748,179
|
|
Payments on stock rescission
payable
|
|
|
-
|
|
|
|
(105,000
|
)
|
Net cash provided by financing
activities
|
|
|
594,408
|
|
|
|
1,322,609
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(187,291
|
)
|
|
|
(148,375
|
)
|
|
|
|
|
|
|
|
|
|
CASH
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
241,333
|
|
|
|
188,670
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
54,042
|
|
|
$
|
40,295
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements
84
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization,
Basis of Presentation and Significant Accounting Policies
The accompanying unaudited interim
financial statements of Digitiliti, Inc. have been prepared in accordance with
accounting principles generally accepted in the United States of America and
rules of the Securities and Exchange Commission, and should be read in
conjunction with the audited financial statements and notes thereto contained in
Digitilitis audited financial statements for the year ended December 31, 2007,
included elsewhere in this Registration Statement. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of financial position and the results of operations for the
interim periods presented have been reflected herein. The results of operations
for interim periods are not necessarily indicative of the results to be expected
for the full year. Notes to the consolidated financial statements which would
substantially duplicate the disclosure contained in the audited financial
statements, included elsewhere in this registration statement, have been
omitted.
The Company and
Nature of Operations
Digitiliti, Inc.
(the Company) began operations in 2004 and provides secure online data storage
solutions to companies in the United States and Canada. The Company is also
developing software products to offer data storage solutions for Apple networks
and to other small, medium and enterprise level markets.
New Accounting
Pronouncements
In September 2006, the FASB issued SFAS
157,
Fair Value Measurements
, as amended in February 2008 by FASB Staff
Position (FSP) FAS 157-2,
Effective Date of FASB Statement No. 157
.
SFAS 157 defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. FSP FAS 157-2 defers the
effective date of SFAS 157 for all nonfinancial assets and liabilities, except
those items recognized or disclosed at fair value on an annual or more
frequently recurring basis, until January 1, 2009. As such, we partially adopted
the provisions of SFAS 157 effective January 1, 2008. The partial adoption of
this statement did not have a material impact on our financial statements. We
expect to adopt the remaining provisions of SFAS 157 beginning in 2009. We do
not expect this adoption to have a material impact on our financial statements.
In February 2007, FASB issued SFAS 159,
The Fair Value Option for Financial Assets and Financial Liabilitiesincluding
an Amendment of FASB Statement No. 115
. This standard permits an entity to
choose to measure many financial instruments and certain other items at fair
value. Most of the provisions in SFAS 159 are elective; however the amendment to
SFAS 115,
Accounting for Certain Investments in Debt and Equity
Securities
, applies to all entities with available-for-sale securities. The
fair value option established by SFAS 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. The fair
value option: (a) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method;
(b) is irrevocable (unless a new election date occurs); and (c) is applied only
to entire instruments and not to portions of instruments. We have adopted this
statement as of January 1, 2008. The adoption created no impact to our financial
statements.
2.
Going Concern
The accompanying
condensed consolidated financial statements for the three months ended March 31,
2008 and 2007 have been prepared assuming that the Company will continue as a
going concern which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
As shown in the
accompanying financial statements, we have incurred a net loss of $1,797,881 for
the three months ended March 31, 2008. In addition, we have an accumulated
deficit of $8,849,088 and a working capital deficit of $3,141,970 as of March
31, 2008. These conditions raise substantial doubt as to our ability to continue
as a going concern.
Management
acknowledges that its ability to continue executing its current business plan,
even on a short-term basis, is dependent on its ability to obtain additional
debt of equity financing. There can be no guarantee that the Company will be
successful in generating future revenues, in obtaining additional debt of equity
financing, or that such additional debt of
85
equity financing
will be available on terms acceptable to the Company. Management plans to
raise additional funding through the issuance of convertible debt and the sale
of common stock. Our longer term plans include expanding our customer base to
generate cash from our operating activities.
3.
Acquisition of
Research and Development Software
On March 13, 2008, Digitiliti executed a Technology
Purchase Agreement (TPA) with StorageSwitch, LLC, a Colorado limited liability
company (StorageSwitch), to acquire a commercially-proven technology software.
This technology software compliments Digitilitis current business model and
also provides a base layer that Digitiliti will build upon to develop enhanced
storage service offerings.
In connection with the purchase, we made initial cash
payment of $10,000 upon execution of the Letter of Intent in January 2008, and a
cash payment of $200,000 on the date of closing. In addition, we will make a
$40,000 cash payment payable when the software is fully developed and in
production. We also issued 250,000 shares of common stock in connection with the
purchase, valued at $375,000 based upon the quoted market price of our stock on
the date of the purchase. We will issue an additional 250,000 shares when the
software is fully developed and in production. These shares will be valued based
on the quoted market price of our stock on the date of issuance.
The software was not technologically feasible on the date
of the acquisition. As a result, this transaction was accounted for as purchased
research and development costs and was expensed as research and development
expense in accordance with SFAS No. 2.
In conjunction with the
execution of the TPA, Digitiliti and StorageSwitch also signed the following
agreements; (1) a Non-Compete Agreement, (2) a Non-Disclosure Agreement, (3) a
Statement of Work Agreement and (4) a Consulting Services Agreement. Under the
Consulting Service Agreement, we will make the following payments to 2
principals of StorageSwitch: (1) semi-monthly cash payments of $6,250 (totaling
$25,000 per month) and (2) the issuance of 12,480 shares of Digitiliti common
stock (totaling 24,960 share of common stock per month). Stock issued under this
arrangement is accounted for in accordance with EITF 96-18 and valued using the
quoted market price of our common stock at the end of each month.
4.
Options, Warrants and
Restricted Stock Awards
In April 2008, the Board of
Directors approved a modification of the Companys Stock Option Plan increasing
the total number of shares issuable under the Plan from 4,000,000 shares to
9,000,000 shares.
No employee stock options were
granted, exercised or expired during the three months ended March 31, 2008.
However, we recognized $21,412 of compensation expense related to employee stock
options granted in a prior period. The weighted average exercise price of
employee stock options outstanding at March 31, 2008 was $0.37.
During the three months ended
March 31, 2008, the Company issued 4,008,050 warrant in conjunction with the
sale of convertible debt. The weighted average exercise price of stock
warrants outstanding at March 31, 2008 was $1.75.
On
March 13, 2008, we issued 250,000 shares of restricted stock in connection with
the purchase of software. (see Note 3)
On March 15, 2008, we issued
108,004 shares of restricted stock, valued at $162,006 using the grant-date
quoted stock price, in settlement of $37,801.50 of outstanding debt with a
related party. The difference between the fair value of the stock and the
outstanding debt was recorded as gain or loss on settlement of debt and is
included as a separate line item under Loss from Operations in our accompanying
financial statements. See Note 7, Subsequent Events for additional
information regarding the issuance of employee stock options, stock warrants and
restricted stock.
86
5.
Convertible Debt
During the three months
ended March 31, 2008, we issued $808,500 in convertible debt, along with 404,250
warrants with an exercise price of $1.50 and 404,250 warrants with an exercise
price of $2.25. We recorded a debt discount of $371,950, based on the relative
fair value of the warrants, which is being amortized using the effective
interest rate over the term of the convertible debt. For the three months ended
March 31, 2008, we amortized $112,459 of the discount into interest expense. In
addition, we incurred fees of $80,850, which were recorded as deferred financing
cost and are also being amortized using the effective interest method over the
term of the convertible debt.
On January 1, 2008, we
evaluated the assumptions used in the Black-Scholes model in light of new
information obtained after the year end. Based on this new information, we used
an expected volatility assumption of 113% in computing the fair value of
warrants issued with convertible debt in the first quarter of 2008. We are
accounting for this change in volatility as a change in accounting estimate
under SFAS No. 154, which requires us to apply this change prospectively.
Consequently, we are not restating or retrospectively adjusting amounts reported
in our prior financial statements.
The following summarizes the financial presentation of
our convertible debt at March 31, 2008:
|
|
Face value of convertible debt
|
$ 4,008,050
|
Adjustments:
|
|
Discount for warrants
issued
|
(1,625,692)
|
Amortization of debt
discount
|
283,571
|
Convertible notes balance, net
|
$ 2,665,929
|
6.
Supplementary Disclosures of Cash
Flow Information
Additional cash
flow information consisted of the following:
|
|
|
Three Months Ended March
31,
|
2008
|
2007
|
Cash
paid for interest
|
$18,875
|
$ 70,086
|
Cash
paid for income taxes
|
-
|
-
|
Noncash
financing and investing activities:
|
|
|
Conversion
of debt to equity
|
-
|
78,678
|
Insurance
of warrants for professional services
|
-
|
78,790
|
Issuance
of warrants in connection with convertible debt
|
371,950
|
-
|
Stock
rescission payable
|
105,000
|
-
|
87
7.
Subsequent Events
In April 2008, the Board of
Directors approved a modification of the Companys Stock Option Plan increasing
the total number of shares issuable under the Plan from 4,000,000 shares to
9,000,000 shares. Concurrently, the Board of Director approved the issuance of
3,900,000 in employee stock options to various employees, valued at $4,200,000
using the Black Scholes option pricing model. The value of these stock options
will be expensed over the service period of the respective employee.
Subsequent to March 31, 2008, we
issued $1,070,500 in convertible debt, along with 535,250 warrants with an
exercise price of $1.50 and 535,600 warrants with an exercise price of $2.25. In
connection with the issuance of these warrants, we recorded a debt discount of
$446,287, based on the relative fair value of the warrants on the date of grant.
In addition, we paid fees of $107,050 related to these debt issuances, which was
recorded as deferred financing costs. The discount and deferred financing cost
will be amortized over the 18-month maturity period using the effective interest
rate.
In April 2008, the Company
amended and restated its Certificate of Incorporation to add a class of
preferred stock with 10,000,000 shares authorized at a par value of $0.001 per
share.
88
Item 14. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
There have been no changes or disagreements with our
accountants on accounting and financial disclosure; however, effective June 10,
2008, our Board of Directors terminated Lurie Besikof Lapidus & Company, LLP
(Lurie Besikof Lapidus) as our auditors, and engaged Malone & Bailey, PC
(Malone & Bailey) to audit our consolidated financial statements for the
year ended December 31, 2008. Lurie Besikof Lapidus were the auditors of
Storage, and audited our consolidated financial statements for the years ended
December 31, 2007, and 2006, that are filed with this Registration Statement.
Malone & Bailey were our prior auditors, before the completion of the
Storage Merger, and audited our financial statements for the years ended
December 31, 2006, and 2005, prior to the Storage Merger.
There have been no disagreements between us and Lurie
Besikof Lapidus, during our two most recent fiscal years or to the date of
termination, whether resolved or not resolved, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved, would have caused Lurie Besikof Lapidus to
make reference to the subject matter of the disagreement in connection with
their reports.
The reports of Lurie Besikof Lapidus did not contain any
adverse opinion or disclaimer of opinion, and with the exception of a standard
going concern qualification because we have suffered recurring losses from
operations and have a substantial stockholders deficit and were not qualified
or modified as to uncertainty, audit scope or accounting principles.
During our two most recent fiscal years, and since then,
neither Lurie Besikof Lapidus nor Malone & Bailey has advised us that any of
the following exists or is applicable:
(1)
That the internal controls necessary
for us to develop reliable financial statements do not exist, that information
has come to their attention that has lead them to no longer be able to rely on
our managements representations, or that has made them unwilling to be
associated with the financial statements prepared by management;
(2)
That we need to expand significantly
the scope of our audit, or that information has come to their attention that if
further investigated may materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements or any
other financial presentation, or cause them to be unwilling to rely on our
managements representations or be associated with our financial statements for
the foregoing reasons or any other reason; or
(3)
That they have advised us that
information has come to their attention that they have concluded materially
impacts the fairness or reliability of either a previously issued audit report
or the underlying financial statements for the foregoing reasons or any other
reason.
During our two most recent fiscal years and since then,
we have not consulted Malone & Bailey regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on our financial statements
or any other financial presentation whatsoever.
We have provided Lurie Besikof Lapidus with a copy
of the disclosure provided under this heading of this Registration Statement and
have advised them to provide us with a letter addressed to the Securities and
Exchange Commission as to whether they agree or disagree with the disclosures
made herein. A copy of their response is filed as Exhibit 16.1 to this
Registration Statement. See Item 15.
89
Item 15. Financial Statements and
Exhibits
Financial Statements
|
|
|
Sequential Page Number
|
Report of Independent Registered Public Accounting
Firm
|
60
|
Consolidated Financial Statements for the years
ended December 31, 2007, and 2006*
|
|
Consolidated
Balance Sheets
|
61
|
Consolidated
Statements of Operations
|
62
|
Consolidated
Statements of Stockholders Equity (Deficit)
|
63
|
Consolidated
Statements of Cash Flows
|
64
|
Notes
to Consolidated Financial Statements
|
65 - 80
|
* See Item 14 regarding the June 10, 2008, change
in our auditors.
|
|
|
|
|
Sequential Page Number
|
Condensed Consolidated Financial Statements for the
quarters ended March 31, 2008, and 2007, and the year ended December 31,
2007 (unaudited)*
|
81
|
Condensed
Consolidated Balance Sheets (unaudited)
|
82
|
Condensed
Consolidated Statements of Operations (unaudited)
|
83
|
Condensed
Consolidated Statements of Cash Flows (unaudited)
|
84
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
85 - 88
|
* See Item 14 regarding the June 10, 2008, change
in our auditors.
|
|
Description of Exhibits
|
|
|
Exhibit No.
|
Title of Document
|
|
3.1
|
*Initial Certificate of Incorporation filed March
31, 2006.
|
|
3.2
|
*Bylaws.
|
|
3.3
|
*Certificate of Amendment regarding the name change
to digitiliti, inc. and the Recapitalization.
|
|
3.4
|
*Certificate Correction regarding the name change
to Digitiliti, Inc.
|
|
3.5
|
*Amended and Restated Certificate of Incorporation
filed May 13, 2008.
|
|
10.1
|
*Stock Purchase Agreement between Storage and our
former principal shareholders under which Storage acquired a controlling
interest in us.
|
|
10.2
|
*Agreement and Plan of Merger between us,
Themescapes and Bulldog under which we became a holding company.
|
|
10.3
|
*Agreement and Plan of Merger, as amended, between
us, Cyclone Acquisition and Storage under which Storage became our
wholly-owned subsidiary.
|
|
10.4
|
*XO Communications Contract.
|
|
10.5
|
*FRM Associates Lease, as amended.
|
|
10.6
|
*EBC Minneapolis, Inc. Sublease Agreement.
|
|
10.7
|
*Upper Corner Venture, LLC Lease Agreement.
|
|
10.8
|
*M2 Consulting Agreement of May 2006, with
Addendums.
|
|
10.9
|
*M2 Consulting Agreement of April 2007.
|
|
10.10
|
*5X Partners Corporate Development Services
Agreement with Addendums.
|
|
10.11
|
*StorageSwitch Consulting Services
Agreement.
|
|
90
|
|
|
10.12
|
*StorageSwitch Non-Compete Agreement.
|
|
10.13
|
*StorageSwitch Technology Purchase
Agreement.
|
|
10.14
|
*Vision to Practice, Inc. Development Services
Agreement.
|
|
10.15
|
**Form of 12% Convertible Note.
|
|
10.16
|
**Form of A Warrant for 12% Convertible Note
Offering.
|
|
|
|
|
10.17
|
**Form of B Warrant for 12% Convertible Note
Offering.
|
|
10.18
|
**Letter Agreement with M2 of June, 2008.
|
|
16.1
|
**Letter of Auditors regarding termination.
|
|
21
|
*Subsidiaries.
|
|
99.1
|
*Digitiliti, Inc. Stock Option Plan.
|
|
*
|
Incorporated by reference from initial filing on
May 13, 2008.
|
|
**
|
Incorporated by reference from amended filing on
July 11, 2008
|
|
SIGNATURES
Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
DIGITILITI, INC.
Date: August 13, 2008
.
By /s/Brad Wenzel
Brad
Wenzel, Chairman of the Board and Director
Date: August 13, 2008
By /s/Larry D. Ingwersen
Larry
D. Ingwersen, President and CEO and Director
Date: August 13, 2008
By /s/Laura Wenzel
Laura
Wenzel, Vice President, Secretary and Director
Date: August 13, 2008
By /s/William McDonald
William
McDonald, CFO/Treasurer
Date: August 13, 2008
By /s/Mark Savage
Mark
Savage, Director
91