United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
CURRENT
REPORT
Pursuant to Section 13 or 15[d] of the Securities Exchange Act of
1934
December 2,
2008
Date of Report
(Date of Earliest Event Reported)
DIGITILITI, INC.
(Exact name of Registrant as specified in
its Charter)
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Delaware
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0001-53235
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26-1408538
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(State or Other Jurisdiction of
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(Commission File Number)
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(I.R.S. Employer Identification
No.)
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Incorporation)
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266 East 7
th
Street,
4
th
Floor
St. Paul, Minnesota 55101
(Address of Principal Executive
Offices)
(651) 925-3200
(Registrants Telephone Number, including
area code)
N/A
(Former name or former address, if changed
since last report.)
Check the appropriate box below if the Form
8-K filing is intended to simultaneously satisfy the filing obligation of the
Registrant under any of the following provisions (see general instruction A.2.
below):
[ ] Written communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant
to Rule 14-a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
[ ] Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item 1.01 Entry into a Material Definitive
Agreement.
Effective December 5 2008, the Board of Directors
approved the issuance of a convertible note (the Convertible Note) and warrant
(the Warrant) to Jonathan S. Miner and Pamela J. Miner (the Miners), who are
both directors of the Company, for their immediate advance to the Company of the
sum of $175,000 and their agreement to advance up to an additional $75,000, all
to be utilized in the development of the Pyramid software storage product.
The principal terms of the Convertible Note and Warrant are as
follows:
A 12% Convertible Note in the amount of $250,000 with a
maturity date that is six (6) months from the date of issuance that comes within
the definition of restricted securities in Rule 144 of the Securities and
Exchange Commission and that is convertible into common stock of the Company
that are also restricted securities (the Common Stock) at $0.35 per each
share, together with 250,000 Warrants , each with a five year term and
exercisable at $0.35 per share
of Common Stock, that are also restricted securities, including the underlying
shares of Common Stock.
The Company has also executed a Security Agreement with
the Miners whereby it will grant to them as collateral and security for the
payment of the Convertible Note:
·
A security interest in all of its
software program known as Pyramid, which comprises a new storage solution of
Digitiliti set for release in early 2009, together with all existing software,
corrected software, enhanced software and new software relating to Pyramid (the
Pyramid Software);
·
All interest and rights of Digitiliti
in its vaults, including but not limited to the Assigra software, the Exanet
storage hardware, the networking switches, the Assigra server hardware, the
Assigra software licenses and computer programs and all of Digitilitis interest
in contracts and agreements associated therewith and receivables therefrom;
·
All rights and interest of Digitiliti
in non-disclosure agreements, non-competition agreements and similar agreements,
whether now existing or hereafter acquired, that are associated with the
collateral; and
·
Any enhancements, intellectual
property and related materials pertaining to the collateral.
The Company has also represented that it has good and
marketable title to all of the collateral, with the following exceptions:
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the Companys interest in the Pyramid Software and the vaults
granted by it to Data Sales Company
pursuant to a prior
UCC Financing Statement. See Exhibit 99.6 hereto, Amendment to the
Data Sales Company Lease and Blanket UCC filing for more
information. Data Sales Company has agreed to delete the
Storage Switch component of the Pyramid technology from its
security interest, thereby enabling the Miners to maintain a first
security interest in that collateral (the Storage Switch Collateral).
The Company has also executed a Confession of Judgment
pursuant to Minn. Stat. § 548.22 that allows the district court to enter
judgment without action against the Company if the Convertible Note is not paid
when due. To do so, the person confessing judgment must authorize the
entry of judgment pursuant to a written confession that is typically not filed
with the court until a default occurs. The Convertible Note provides
for a 30 day grace period following any default of the terms of the Convertible
Note.
The Company has further agreed to enter into an Escrow
Agreement with the Miners whereby the source code for the Storage Switch
collateral will be escrowed with an agreed-upon escrow agent. The escrowed
data shall include all statements of codes, instructions, program
specifications, contracts, reference materials, identity of programmers and
maintenance technicians and other elements of the Storage Switch collateral,
together with additional data, corrections, enhancements, replacements and
information regarding such collateral. It is anticipated that the Escrow
Agreement will enable the Miners to obtain access to the escrowed data in the
event of an uncorrected default under the terms of the Convertible Note or the
Security Agreement. The Escrow Agreement has not yet prepared.
As further consideration for the Miners agreement to
advance funds under the Convertible Note, Brad Wenzel, a director of the
Company, has agreed to assign and transfer to the Miners 100,000 shares of the
Companys common stock that are owned by him.
Copies of the available material documentation respecting
the Miner Loan are attached hereto and incorporated by reference. See the
Exhibit Index in Item 9.01. The foregoing summary is modified in its
entirety by this reference to such documentation.
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Item 5.02 Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers.
On December 2, 2008, Brad D. Wenzel (Wenzel) tendered
his resignation as Chairman of the Board of Directors. Mr. Wenzel remains on the
Board as a director. Roy A. Bauer, a current director, was elected as the
Chairman of the Board of Directors at a special meeting of the Board of
Directors held on December 2, 2008.
Item 7.01 Regulation FD
Disclosure.
See Exhibit 99.6, Shareholder Letter dated December 4,
2008, in Item 9.01, a copy of which is attached hereto and incorporated herein
by reference. The Company is experiencing and anticipates cash flow
shortages resulting from new product development, product launch and convertible
debt repayment needs. The Company plans to propose a debt restructuring
plan to its 12% convertible note holders. The plan will offer incentives
to note holders to either convert their existing convertible notes or extend the
term of their existing notes. Should all the convertible note holders
choose to convert their convertible notes, the potential increase in the number
of shares to be issued and resulting from the decrease in the conversion price
is approximately 5,199,567 shares. If the Company is unable to restructure
the convertible note debt, it will not be able to pay the convertible notes that
are due and become due. The proposal is intended to be valid for 45 days, once
made to the convertible note holders. See Item 8.01 for further discussion
of the convertible note deficiency and the Companys plan to attempt to
restructure this debt.
Item 8.01 Other Events.
Between the first quarter of 2007 and the third quarter
of 2008, the Company sold $5,500,000 in 12% convertible notes (the 12%
Convertible Notes) pursuant to its offering of units comprised of a 12%
Convertible Note convertible into shares of the Companys common stock at $0.50
per each share, one-half warrant to acquire one-half share of the Companys
common stock for each $1.00 invested, with a five year term and exercisable at
$1.50 per share of common stock, and one-half warrant to acquire one-half share
of the Companys common stock for each $1.00 invested, with a five year term and
exercisable at $2.25 per share of common stock (respectively, the A Warrants
and the B Warrants). The 12% Convertible Notes have a maturity date that is 18
months from the date of issuance.
At September 30, 2008, there was principal and accrued
interest due on 12% Convertible Notes issued in the first quarter of 2007 of
$481,346; and an additional $830,884 in principal and accrued interest will be
due on December 31, 2008, on 12% Convertible Notes issued in the second quarter
of 2007. Other principal and accrued interest requirements through March,
2009, are set forth below in the 12% Convertible Note Table below. Our
inability to restructure this debt could cause us to curtail operations
significantly, if not entirely.
12% Convertible Note Table
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Periods
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Total convertible notes issued
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Total accrued interest on convertible notes
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Total accrued interest and convertible notes
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Due date for accrued interest and convertible notes
for Qtr. Ended
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Q1 2007
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$ 401,050
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$ 80,298
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$481,346
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September 2008
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Q2 2007
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707,500
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123,384
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830,884
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December 2008
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Q3 2007
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1,165,000
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170,165
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1,335,165
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March 2009
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Q4 2007
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926,000
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114,977
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1,040,977
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June 2009
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Q1 2008
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808,500
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66,598
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872,098
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September 2009
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Q2 2008
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945,500
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54,651
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1,000,151
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December 2009
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Q3 2008
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546,450
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15,924
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562,374
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March 2010
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At this time, we are implementing a plan of approaching
our convertible note holders to request a restructuring of this debt through an
extension of the due dates of their respective convertible notes or to encourage
them to convert their respective convertible notes. It is anticipated that
this plan will also be applied retroactively to convertible note
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holders that have already
converted their convertible notes. Under the currently planned proposal, for
those convertible note holders who agree to convert their convertible notes, the
conversion price will be reduced to $0.35 per share from $0.50 per share; and
the exercise price of their A and B warrants will be decreased from $1.50 and
$2.25, respectively, to $1.00, with the five year warrant terms being extended
to six and one-half years. For those convertible note holders who agree to
extend their convertible notes rather than convert them, the exercise price of
their A and B warrants will be decreased from $1.50 and $2.25, respectively, to
$1.00, with the five year warrant terms being extended to six and one-half
years. The proposal would be in effect for a term of 45 days. The
Company has been advised by our auditors that restructuring the note terms would
not be a taxable event to the note holders. If all convertible note
holders converted their notes, the Company estimates that it will have to
recognize a non-cash expense of approximately $3,200,000 resulting from the
restructuring of the note terms. This adjustment reflects the recognition of the
beneficial conversion feature and warrant discount associated with the
convertible debt.
Although there is no guarantee that our convertible note
holders will agree to either of these two options, recent communications with a
number of convertible note holders has indicated an overall willingness by some
convertible note holders to extend or convert their convertible notes.
However, if we are unable to restructure this debt, we will not be able to
pay the convertible notes that are presently due and become due, with accrued
interest. This would have a substantial adverse impact on our ability to
continue our business operations.
Should all the convertible note holders choose to convert
their notes and accrued interest, the potential increase in the number of shares
to be issued due to the reduction in conversion price is 5,199,567 (4,714,,285
shares for principal and 1,132,324 shares for accrued interest), as set forth in
the Summary Capitalization Table, below. That will represent an increase
of 42.86% of the shares that were initially issuable under the 12% Convertible
Notes at a conversion price of $0.50 or an increase of 10.40% of the total
outstanding shares and common stock equivalents at September 30, 2008.
Summary Capitalization Table Common
Stock
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Current Number of Shares Convertible
at $0.50 per Share
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Current Number of Shares Convertible
at $0.35 per Share
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Increase in Number of Shares Based on
Conversion Rate Difference Between $0.50 and $0.35 per Share
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12,132,324
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17,331,891
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5,199,567
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Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
Exhibit No.
Exhibit Description
99.1
12% Convertible Note
99.2
Warrant
99.3
Security Agreement
99.4
Confession of Judgment
99.5
Miners UCC Financing Statement
99.6
Amendment to the Data Sales Lease and
blanket UCC filing
99.7
Shareholder Letter
99.8
Press Release
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SIGNATURES
Pursuant to the requirements of the
Securities and Exchange Act of 1934, the Registrant has duly caused this Current
Report to be signed on its behalf by the undersigned hereunto duly
authorized.
DIGITILITI, INC.
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Date:
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December 5, 2008
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By:
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/s/ Daniel J. Herbeck
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Daniel J. Herbeck
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President
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