ITEM 1. BUSINESS
GENERAL
DigitalTown owns and operates a nationwide social networking site of hyper-local on-line communities built around their domain names and the schools and communities they represent.
In March 2013, DigitalTown filed a trademark application with the U.S. Patent and Trademark Office for the service mark “America’s Prodigy”. The Company is the holder of Americasprodigy.com and various other prodigy related domain names. The application lists its goods and services as entertainment services, namely, conducting contests.
In February 2013, public registration began for TrustedWebmail, DigitalTown’s webmail platform. TrustedWebmail features advanced monitoring controls for schools, athletic directors, youth leagues and business and will provide an easy method for monitoring emails sent and received. DigitalTown plans to launch a second tool called Trusted Cell Phone, which is a predator-averse parental/coach/teacher monitoring application which allows you to monitor all texts (SMS or MMS), phone calls, or images into or out of any android based cellular phone under your control.
On July 31, 2012, DigitalTown and the National Interscholastic Athletic Administrators Association ("NIAAA") jointly announced that TrustedWebmail will be the official recommended email provider of the NIAAA for athletic administrators, coaches and athletes nationwide.
On May 23, 2012, DigitalTown and The Active Network, Inc. (“Active”) completed a Handoff Agreement of the technology assets supporting DigitalTown’s school spirit websites and its related social networking sites. The Handoff Agreement indicates that both DigitalTown and Active agreed to mutually terminate the Strategic Alliance Agreement, initially entered between the parties on September 29, 2009, and subsequently re-entered between the parties on September 30, 2011.
On May 14, 2012, DigitalTown Limited (“DTL”) was incorporated under Chapter 32 of the Laws of Hong Kong. DTL is 100% owned by TSN.
On May 3, 2012, DigitalTown created a new, wholly-owned subsidiary, The School Network, Inc. (“TSN”), under the laws of the State of Nevada.
On April 4, 2012, the Company executed a Domain Sale Agreement under which it agreed to sell one of the domain names the Company currently owns. The Company received $175,000 cash in consideration of the transfer of the domain name.
EMPLOYEES
As of February 28, 2014, DigitalTown, Inc. has three employees. The Company’s employees are not represented by a union. The Company knows of no adverse labor issues with any employee.
ITEM 1A.
ITEM 1A. RISK FACTORS
We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We have a history of losses and the report of our independent accountants issued in connection with the audit of our financial statements contained a qualification raising a substantial doubt about our ability to continue as a going concern.
We incurred net losses $2,717,256 and $1,403,327 for the years ended February 28, 2014 and 2013, respectively, and had an accumulated deficit of $28,195,262 at February 28, 2014. As a result of these conditions, the report of our independent accountants issued in connection with the audit of our financial statements as of and for our fiscal years ended February 28, 2014 and 2013 contained a qualification raising a substantial doubt about our ability to continue as a going concern. We can provide no assurance regarding when, if ever, we will become profitable. As a result, we may continue to generate losses for the foreseeable future and in the extreme case, discontinue operations.
We may not be able to collect on our stock subscription receivables or raise capital through the sale of our common stock as needed to fund our operations.
At February 28, 2014, the Company had stock subscription receivables of $641,395 and for the year ended February 28, 2014, the Company received stock subscription payments of $337,459.
We believe our current cash reserves, the amounts we expect to collect on our outstanding stock subscription receivables, proceeds from the sale of domain names and proceeds from the sale of our common stock should be sufficient to enable us to operate for the next 12 months. In the event that we are unable to collect on our outstanding stock subscription receivables as needed or raise capital through the sale of our common stock and domain names as needed, we would be forced to reduce operating expenses and/or cease operations altogether.
No assurances can be given that we will be successful in reaching or maintaining profitable operations. Our current monthly cash operating expenses are approximately $62,000 per month.
We may need to raise additional capital to finance operations.
Funding of our operations has relied almost entirely on the collection of outstanding subscription receivables and proceeds from the sale of our common stock. We will need to raise additional capital to fund our anticipated operating expenses and execute our business plan. We cannot be assured that financing will be available or on favorable terms. The sale of our common stock to raise capital may cause dilution to our existing stockholders. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price.
Our common stock may be affected by limited trading volume and may fluctuate significantly.
There has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our stockholders' ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Our common stock is traded on the OTC Markets “OTCQB”, which may make it more difficult for investors to resell their shares due to suitability requirements.
Our common stock is currently traded on the OTC Markets “OTCQB”. Broker-dealers often decline to trade in “OTCQB” stocks given that the market for such securities is often limited, the stocks are more volatile, and the risks to investors are greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
We could fail to retain or attract key personnel.
Our future success depends, in significant part, on the continued services of Linda Thrasher our Chief Executive Officer and Richard Pomije, our Chairman and Secretary/Treasurer. We cannot assure you that we would be able to find appropriate replacements for them or any other key personnel. Any loss or interruption of our key personnel's services could adversely affect our ability to develop our business plan. We do not have an employment agreement with Mr. Pomije nor do we presently maintain a key-man life insurance policy on him.
We could fail to renew our domain names on a timely basis.
Our future success depends, in significant part, on the continued renewal of our domain names on a timely basis. In order to retain the rights to our domain names, they have to be renewed on an annual basis by paying the annual renewal fee within a specified time period.
If the domain names are not renewed within the specified time period, they become available to the general public and the rights could be obtained by any outside third party if they paid the annual renewal fee. Any loss of our domain name rights could adversely affect our ability to execute our business plan. The Company does have controls and procedures in place to ensure that all domain names are renewed in a timely manner.
We need to raise additional capital to renew our domain names on a timely basis.
Funding of our domain name renewals has relied almost entirely on the collection of outstanding subscription receivables and proceeds from the sale of our common stock. We will need to raise additional capital in order to renew our domain names on a timely basis. We cannot be assured that financing will be available or on favorable terms. The sale of our common stock to raise capital may cause dilution to our existing stockholders. Our inability to obtain adequate financing will result in the need to curtail domain name renewals which would be materially harmful to our business and may result in a lower stock price.
Minnesota law and our charter may inhibit a takeover of our company that stockholders may consider favorable.
Provisions of Minnesota law, such as its business combination statute, may have the effect of delaying, deferring or preventing a change in control of our Company. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock.
Our officers and directors have the ability to exercise significant influence over matters submitted for stockholder approval and their interests may differ from other stockholders.
Our executive officers and directors, in the aggregate have the ability to appoint members to the Board of Directors. Accordingly, our directors and executive officers, whether acting alone or together, may have significant influence in determining the outcome of any corporate transaction or other matter submitted to our Board for approval, including issuing common and preferred stock, and appointing officers. This influence could have a material impact on mergers, acquisitions, consolidations, the sale of all or substantially all of our assets and the power to prevent or cause a change in control. The interests of these board members may differ from the interests of the other stockholders.
Our shares may be defined as "penny stock", the rules imposed on the sale of the shares may affect your ability to resell any shares you may purchase, if at all.
Shares of our common stock may be defined as a “penny stock” under the Securities and Exchange Act of 1934 and rules of the SEC. The Exchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to the sale. In addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid and offer quotations, the compensation to be received by the
broker-dealer and certain associated persons, and deliver certain disclosures required by the Commission. Consequently, the penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in the public markets.
Market for penny stock has suffered in recent years from patterns of fraud and abuse
Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
·
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
·
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
·
Boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons;
·
Excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and,
·
The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices creating consequential investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
Existing stockholders may experience significant dilution from the sale of our common stock.
The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.
Risk Factors Related to Our Securities.
Unless an active trading market develops for our securities, investors may not be able to sell their shares.
Although, we are a reporting company and our common shares are quoted on the OTC Markets “OTCQB” under the symbol “DGTW”, there is not currently an active trading market for our common stock and an active trading market may never develop or, if it does develop, may not be maintained. Failure to develop or maintain an active trading market will
have a generally negative effect on the price of our common stock, and you may be unable to sell your common stock or any attempted sale of such common stock may have the effect of lowering the market price and therefore your investment could be a partial or complete loss.
Since our common stock is thinly traded it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the price paid.
Since our common stock is thinly traded its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including (but not necessarily limited to):
·
the trading volume of our shares;
·
the number of securities analysts, market-makers and brokers following our common stock;
·
changes in, or failure to achieve, financial estimates by securities analysts;
·
new products or services introduced or announced by us or our competitors;
·
actual or anticipated variations in quarterly operating results;
·
general conditions or trends in our business industries;
·
announcements by us of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
·
additions or departures of key personnel;
·
sales of our common stock; and
·
general stock market price and volume fluctuations of publicly-traded, and particularly microcap, companies.
Investors may have difficulty reselling shares of our common stock, either at or above the price they paid for our stock, or even at fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company. In addition, there is a history of securities class action litigation following periods of volatility in the market price of a company’s securities. Although there is no such litigation currently pending or threatened against the Company, such a suit against us could result in the incursion of substantial legal fees, potential liabilities and the diversion of management’s attention and resources from our business. Moreover and as previously noted, our shares are currently traded on the OTC Market “OTCQB” and, further, are subject to the penny stock regulations. Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases from Jeff Mills, a Director and Stockholder of the Company, approximately 2,650 square feet of space used for offices at 11974 Portland Avenue, Burnsville, Minnesota. The terms of the lease call for monthly rent of $2,650 for the period of December 16, 2011 to December 15, 2012, $2,750 for the period of December 16, 2012 to December 15, 2013 and $2,850 for the period of December 16, 2013 to December 15, 2014
with the option to renew the lease for an additional term of one year at a monthly rent of $3,500. The future rent obligations of this lease at February 28, 2014 total $26,650.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is exposed to asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the resolutions of these matters are not expected to have a material adverse effect on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
DigitalTown, Inc.’s common stock is traded on the OTC Markets “OTCQB”. The following table sets forth the quarterly high and low sales prices as reported during the last two fiscal years ended February 28, 2014 and 2013.
These quotations represent inter dealer prices, without retail markup, markdown, or commission, and may not reflect actual transactions. As of May 29, 2014, there were approximately 140 record holders of the Company's common stock.
DIVIDEND POLICY
The Company has never paid cash dividends on any of its securities. The Company currently intends to retain any earnings for use in its operations and does not anticipate paying cash dividends in the foreseeable future. Any future dividend policy will be determined by the Company's Board of Directors based upon the Company's earnings, if any, its capital needs and other relevant factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information for DigitalTown, Inc. as of February 28, 2014 and 2013 and for the years then ended, which have been derived from our audited consolidated financial statements.
February 28,
February 28,
Balance Sheet Data
Total Assets
$ 108,098
$ 1,116,242
Total Liabilities
392,461
455,458
Stockholders’ Equity (Deficit)
(284,363)
660,784
February 28,
February 28,
Operating Statement Data
Revenues
$ 10,333
$ 49,562
Cost of revenues
291,973
462,903
Gross profit (loss)
(281,640)
(413,341)
Operating expenses
2,211,631
1,162,498
Loss from operations
(2,493,271)
(1,575,839)
Other income (expense), net
(223,985)
172,512
Net loss
$ (2,717,256)
$ (1,403,327)
Loss per common share-basic and diluted
$(0.09)
$(0.05)
Weighted average shares outstanding-basic and diluted
29,220,009
29,145,020
February 28,
February 28,
Cash Flow Statement Data
Net cash used in operating activities
$ (517,044)
$ (764,872)
Net cash provided by (used in) investing activities
(3,999)
134,174
Net cash provided by financing activities
535,626
444,800
Net change in cash
14,583
(185,898)
Cash and cash equivalents, beginning of period
36,006
221,904
Cash and cash equivalents, end of period
$ 50,589
$ 36,006
The data set forth above should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of operations of the Company for the years ended February 28, 2014 and 2013, which should be read in conjunction with, and is qualified in its entirety by, the audited financial statements and notes thereto included elsewhere in this report.
Company Overview
DigitalTown owns and operates a nationwide social networking site of hyper-local on-line communities built around their domain names and the schools and communities they represent.
In March 2013, DigitalTown filed a trademark application with the U.S. Patent and Trademark Office for the service mark “America’s Prodigy”. The Company is the holder of Americasprodigy.com and various other prodigy related domain names. The application lists its goods and services as entertainment services, namely, conducting contests.
In February 2013, public registration began for TrustedWebmail, DigitalTown’s webmail platform. TrustedWebmail features advanced monitoring controls for schools, athletic directors, youth leagues and business and will provide an easy method for monitoring emails sent and received. DigitalTown plans to launch a second tool called Trusted Cell Phone, which is a predator-averse parental/coach/teacher monitoring application which allows you to monitor all texts (SMS or MMS), phone calls, or images into or out of any android based cellular phone under your control.
On July 31, 2012, DigitalTown and the National Interscholastic Athletic Administrators Association ("NIAAA") jointly announced that TrustedWebmail will be the official recommended email provider of the NIAAA for athletic administrators, coaches and athletes nationwide.
On May 23, 2012, DigitalTown and The Active Network, Inc. (“Active”) completed a Handoff Agreement of the technology assets supporting DigitalTown’s school spirit websites and its related social networking sites. The Handoff Agreement indicates that both DigitalTown and Active agreed to mutually terminate the Strategic Alliance Agreement, initially entered between the parties on September 29, 2009, and subsequently re-entered between the parties on September 30, 2011.
On May 14, 2012, DigitalTown Limited (“DTL”) was incorporated under Chapter 32 of the Laws of Hong Kong. DTL is 100% owned by TSN.
On May 3, 2012, DigitalTown created a new, wholly-owned subsidiary, The School Network, Inc. (“TSN”), under the laws of the State of Nevada.
On April 4, 2012, the Company executed a Domain Sale Agreement under which it agreed to sell one of the domain names the Company currently owns. The Company received $175,000 cash in consideration of the transfer of the domain name.
RESULTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 2014 AND 2013
During the year ended February 28, 2014, the Company recorded revenue of $10,333 and cost of revenue of $291,973 for a gross loss of $(281,640) compared to revenue of $49,562 and cost of revenue of $462,903 for a gross loss of $(413,341) from operations during the year ended February 28, 2013. For the twelve months ended February 28, 2014, revenue mainly consisted of commissions generated from advertising of $1,209 and direct sale of display advertising totaling $9,114. For the comparable period revenue consisted of commissions generated from advertising and merchandise of $22,203, direct sale of display advertising totaling $27,010 and $349 from the sale of our Trusted Webmail service. Cost of revenue consisted of amortization of prepaid annual domain name renewal fees of $197,411 and $188,232, direct sales expense of $5,497 and $122,251, amortization of website development fees of $87,552 and $111,944, server/bandwidth expense of $1,513 and $40,476, respectively, for the two comparable periods.
Operating expenses for the year ended February 28, 2014, increased by $1,049,133 to $2,211,631 compared to a year ago. Stock compensation expense, included in selling, general and administration expenses, was $703,649 for the year ended February 28, 2014, compared to $179,339 for the year ended February 28, 2013, an increase of $524,310 compared to a year ago. Impairment expense was $919,323 during the year ended February 28, 2014, compared to $0 for the prior year. Excluding non-cash impairment expense and stock compensation expense for the two comparable periods, operating expenses were $588,659 for the current period, compared to $983,159 for the year ended February 28, 2013. The decrease of $394,500 for the two comparable periods is primarily due to a decrease of $179,964 in legal and professional fees, a decrease in payroll expense of $164,590, a decrease in employee benefits of $23,818, a decrease in travel and entertainment expense of $13,102 and an $8,278 decrease in supplies expense.
The Company’s overall net loss for the current year increased by $1,313,929 to $2,717,256. The increase was mainly due to an impairment charge of $919,323 to Intangible Assets and a loss of $164,324 on common stock issued for conversion of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash position at February 28, 2014, was $50,589, an increase of $14,583 from $36,006 at February 28, 2013. During the year ended February 28, 2014, net cash used in operating activities was $517,044 compared to cash used of $764,872 for the comparable period. When comparing the two periods, the decrease in cash used in operating activities of $247,828 for the year ended February 28, 2014 is primarily due to the conversion of accounts payable to common shares of $203,351 and a non-cash capital contribution of $100,000 to deferred officer compensation.
Net cash used in investing activities for the year ended February 28, 2014, was $3,999, which consisted of $3,486 used for website development costs and $513 used for the purchase of additional domain names as compared to net cash provided from investing activities of $134,174 for the comparable period which consisted of proceeds from the sale of a domain name of $175,000 offset by $11,223 used for website development costs, $4,526 used for
purchases of property and equipment and $25,077 used for the purchase of additional domain names.
Net cash provided by financing activities for the year ended February 28, 2014, was $535,626, which consisted of payments received on stockholder subscription receivables of $337,459, proceeds from third party note payable of $150,000 and proceeds from the issuance of common stock of $50,000 offset by principal payments of $1,833 on a loan from a director/stockholder loan. For the comparable period ended February 28, 2013, the Company received net cash provided by financing activities of $444,800 which consisted of payments received on stockholder subscription receivables of $320,800 and proceeds from the issuance of common stock of $75,000 and proceeds of $49,000 from a director/stockholder loan.
Monthly cash operating expenses for the year ended February 28, 2014, were approximately $62,000 per month. Based on current projections, the Company’s monthly cash operating expenses going forward should remain at approximately $62,000 per month, which includes the annual renewal cost of the existing domain names of approximately $197,000 and deferred wages of approximately $214,000. In addition to the normal monthly operating expenses, the Company’s committed cash requirements for the twelve months ending February 28, 2015, include the balance due of $30,000 for expenses pertaining to the Company’s Strategic Partnership Agreement with the NIAAA and $22,500 pertaining to a software development maintenance agreement. From March 1, 2014 to July 11, 2014, the Company has received cash proceeds of approximately $10,000 from stock subscription receivables.
As of February 28, 2014, the Company has the following stock subscription agreements outstanding:
2007 Agreements
On October 5, 2007, the Company received subscriptions for 1,300,000 restricted common shares at $2.50 per share (total value of $3,250,000). Significant terms of the original subscription agreement are as follows:
·
The price per share of $2.50 was based on the closing price on October 4, 2007.
·
At 24 months, 1/36 payments are due monthly.
·
The Company, at its option, may call up to 1/12 of the gross receivable per month if the preceding 30 day average trading price is at or above $7.00 a share with minimum trading volume of 5,000 shares per day.
·
If the purchaser sells these common shares, the purchaser shall be entitled to an amount equal to 200% of the original purchase price of each share and the Company shall be entitled to 50% of any additional net sales proceeds from the stock sale.
On February 25, 2010, due to the economic downturn and the market value of the Company’s stock, which was trading below $2.50 per share, the Company amended the pricing terms of the subscription agreements received by the Company on October 5, 2007. The amendment changed the following significant terms of the subscription agreement:
The parties agree that the initial pricing terms in the Confidential Binding Term Sheet dated October 5, 2007, of the Agreement will be amended to state as follows:
1.
The Subscriber offers to purchase shares of the Company for $0.75 per share. After the price adjustment, the revised total value of this subscription agreement is $975,000.
The following other provisions of the initial pricing and final pricing terms in the Confidential Binding Term Sheet dated October 5, 2007, of the Agreement will be deleted, and are not enforceable by either party:
·
Beginning October 5, 2009, and 1/36 payments are due each month thereafter on the 5th of every month.
·
The Company at its option may call up to 1/12 of the (gross) receivable note per month if the preceding 30 day average trading price is at or above $7.00 a share. Minimum trading Volume must be 5,000 shares a day.
·
As total consideration for the purchase and sale of the Company’s stock, purchaser shall ultimately pay to the Company the following amount (the “Purchase Price”):
A.
Purchaser shall first be entitled to an amount equal to 200% of the face amount of each share.
B.
After the purchaser receives the amount in A above, the Company shall be entitled to 50% of any additional net sales proceeds of the stock. Net sales proceeds shall mean the gross proceeds received from the sale of the stock, less reasonable brokerage commissions.
C.
Final adjusted net sales proceeds will be wired to the Company within 7 days from the final settlement of the sale of stock sold.
The outstanding balance owed on the revised 2007 subscription agreements at February 28, 2014, is $341,395.
2010 Agreement
Material terms of the subscription agreement received by the Company on June 22, 2010, for 400,000 restricted common shares at $0.75 per share (total value of $300,000) are as follows:
·
Payment is due in full in 60 months.
·
At 24 months, the Company can demand at its option, monthly 1/36 payments on the subscription agreement.
·
The Company has the option to charge simple annual interest of up to 4.0%.
·
The Company will provide downside protection of up to 30% of the stock price upon conversion.
The outstanding balance owed on the 2010 subscription agreement at February 28, 2014, is $300,000.
Summary
As of February 28, 2014, the Company had stock subscription receivables of $641,395 and for the twelve months ended February 28, 2014, the Company received stock subscription payments of $337,459.
The following table summarizes the stock subscription receivable, by quarter, at February 28, 2014:
Quarter Ended
Total Balance Due
Total Amount Collected
New Subscription Agreements
Participatory Rights in the Proceeds of the Resales Collected
Amount of Downside Protection Provided
February 28, 2013
978,854
-
-
-
-
May 31, 2013
910,854
68,000
-
-
-
August 31, 2013
821,854
89,000
-
-
-
November 30, 2013
679,354
142,500
-
-
-
February 28, 2014
641,395
37,959
-
-
-
In summary, we believe our current cash reserves, the amounts we expect to collect on our outstanding stock subscription receivables and future proceeds from the issuance of our common stock and the sale of existing domain names should be sufficient to enable us to operate for the next 12 months. In the event that we are unable to collect our stock subscription receivables as needed or raise additional capital through the sale of our common stock or sell existing domain names on acceptable terms, we would be forced to further reduce operating expenses and/or cease operations altogether.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Critical Accounting Policies
The discussion and analysis of DigitalTown, Inc.’s financial condition and results of operations are based on our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an ongoing basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While DigitalTown Inc.’s significant accounting policies are described in more detail in Note 1 to its financial statements, management believes the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements:
Intangible Assets - Domain Names/Website Development Costs
Domain name costs are accounted for in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC 350-30) guidance pertaining to Intangibles-Goodwill and Other, Website Development Costs. Certain modules and components of the Company’s overall website development are ready for their intended use and the Company’s resulting websites are currently operational. Accordingly, the annual domain name renewal fees are currently being amortized over one year and the purchase of any new domain names are capitalized. Previously, during the infrastructure development stage of its websites, the Company capitalized the purchase of new domain names and the annual domain name renewal fees. Since the ownership of each domain name can be renewed for a nominal renewal fee each year prior to their expiration date, the useful lives of the domain names are deemed to be indefinite and no amortization of the capitalized costs for the domain names will be recorded.
Website development costs are accounted for in accordance with the FASB Accounting Standards Codification (ASC 350-50) guidance pertaining to Intangibles-Goodwill and Other, Internal-Use Software which requires that all internal and external costs incurred to develop the internal-use software necessary to operate the websites be capitalized. The guidance further states, amortization should begin when an individual module or component of the overall internal-use software is ready for its intended use. The cost of such module or component will be amortized on a straight-line basis over its estimated useful life, as determined by the Company, after taking into account the effects of obsolescence, technology, competition and other economic factors.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and intangible assets - domain names/website development costs are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Stock-Based Compensation
The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.
The Company estimates the fair value of stock-based payment awards on the date of grant using an option pricing model. These option pricing models involve a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates. The Company is
using the Black-Scholes option pricing model. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.
Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carry-forwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.
In February 2013, FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:
-Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
-Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the
disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on our financial position or results of operations.
In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08,Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in the Company’s financial statements and in its financial position represents the potential loss arising from adverse changes in interest rates. This risk is low as the Company has very limited debt and has no third-party debt.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
DigitalTown, Inc.
We have audited the accompanying consolidated balance sheets of DigitalTown, Inc. (the “Company”) as of February 28, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DigitalTown, Inc. as of February 28, 2014 and 2013, and the results of its operations and cash flows for the for the periods described above, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern. See note 2 to the consolidated financial statements for further information regarding this uncertainty.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
July 14, 2014
DigitalTown, Inc.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
DigitalTown, Inc
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
DigitalTown, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended February 28, 2014 and February 28, 2013
The accompanying notes are an integral part of these consolidated financial statements.
DigitalTown, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
Note 1. Nature of Business and Summary of Significant Accounting Policies:
Nature of Business
The Company was founded in 1982 under the laws of the State of Minnesota as Command Small Computer Learning Center, Inc., a computer training company and operated under several different names in the computer hardware and training sector. In 2005, the Company began acquiring domain names. On March 1, 2007, the Company changed its name to DigitalTown, Inc. and began developing a business plan to develop their platform and monetize their domain names. The Company’s headquarters are located at 11974 Portland Avenue, Burnsville, MN 55337, and its telephone and facsimile numbers are (952) 890-2362 and (952) 890-7451, respectively. The Company's Internet address is www.digitaltown.com. The company is traded in the over-the- counter market under the ticker DGTW.
Principles of Consolidation
The Company files consolidated financial statements that include its wholly-owned subsidiaries Tiger Media and The School Network. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue when the following four criteria have been met:
·
Persuasive evidence that an agreement exists
·
Delivery has occurred
·
The price is fixed and determinable
·
Collectability is reasonably assured
The Company recognizes revenue from the sale of display advertising appearing on specific pages of individual spirit sites within DigitalTown’s network. Display advertising is sold by the Company directly to local merchants and placed by the Company on specific pages of individual spirit sites targeted by the local merchant. The terms of these sales are for a fixed monthly amount for a period ranging from three months to one year. The Company has also entered into certain third party agreements which allow display advertising to be placed on individual spirit sites within DigitalTown’s network. Per these agreements, the Company receives commissions based on a percentage of the per click or per-impression revenue generated by these ads. The Company recognizes these commissions received as revenue.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
Concentrations
During the year ended February 28, 2014, one customer accounted for 61% of revenues. During the year ended February 28, 2013, one customer accounted for 38% of revenues. At February 28, 2014, the Company had no accounts receivable and at February 28, 2013, one customer accounted for 100% of accounts receivable totaling $6,783.
Fair Value of Financial Instruments
Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company does not have any financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation of financial instruments at fair value on a non-recurring basis in the balance sheets as of February 28, 2014 and February 28, 2013:
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the years ended February 28, 2014 and February 28, 2013.
Level 3 assets consist of intangible assets. At February 28, 2014, the Company recorded an impairment charge of $919,323 for the full amount of their intangible assets. No fair value adjustment was necessary for the year ended February 28, 2013.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. As of February 28 2014 and 2013, the Company had no cash equivalents.
Cash Deposits in Excess of Federally Insured Limits
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are insured by the Federal Deposit Insurance Company and currently have insurance coverage up to $250,000. At February 28, 2014 and 2013, the Company had no uninsured cash balances.
Intangible Assets - Domain Names/Website Development Costs
Domain name costs are accounted for in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC 350-50) guidance pertaining to Intangibles-Goodwill and Other, Website Development Costs. Certain modules and components of the Company’s overall website development are ready for their intended use and the Company’s resulting websites are currently operational. Accordingly, the annual domain name renewal fees are currently being amortized over one year and the purchase of any new domain names are the only amounts being capitalized. Previously, during the infrastructure development stage of its websites, the Company capitalized the purchase of new domain names and the annual domain name renewal fees. Additionally, since the ownership of each domain name can be renewed for a nominal renewal fee each year prior to their expiration date, the useful lives of the domain names are deemed to be indefinite and no amortization of the capitalized costs for the domain names will be recorded.
Website development costs are accounted for in accordance with the FASB Accounting Standards Codification (ASC 350-50) guidance pertaining to Intangibles-Goodwill and Other, Internal-Use Software which requires that all internal and external costs incurred to develop the internal-use software necessary to operate the websites be capitalized. The guidance further states, amortization should begin when an individual module or component of the overall internal-use software is ready for its intended use. The
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
cost of such module or component will be amortized on a straight-line basis over its estimated useful life, as determined by the Company, after taking into account the effects of obsolescence, technology, competition and other economic factors. The Company recorded $87,552 and $111,944 of amortization expense for the years ended February 28, 2014 and 2013, respectively. See Note 4 for further information.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and intangible assets - domain names/website development costs are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. At February 28, 2014, the Company determined that a full impairment charge of $919,323 was necessary for the net carrying amount of its intangible assets.
Property and Equipment
Property and equipment are stated at cost and depreciated on a a straight-line basis over their estimated useful lives, ranging from three to five years. Leasehold improvements are amortized over the shorter of the useful life or the term of the related lease. The Company recorded $7,311 and $12,938 of depreciation expense for the years ended February 28, 2014 and February 28, 2013, respectively. Repairs and maintenance costs are expensed as incurred; major renewals and improvements are capitalized. As items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operating income. See Note 3 for further information.
Income Taxes
Deferred tax assets (net of any valuation allowance) and liabilities resulting from temporary differences, net operating loss carry-forwards and tax credit carry-forwards are recorded using an asset-and-liability method. Deferred taxes relating to temporary differences and loss carry-forwards are measured using the tax rate expected to be in effect when they are reversed or are realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be ultimately realized. The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related future benefits.
The Company accounts for income taxes pursuant to Financial Accounting Standards Board guidance. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company’s adoption on March 1, 2009 of the provisions specifically related to uncertain tax positions resulted in no cumulative effect adjustment. The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves or related accruals for interest and penalties have been recorded at February 28, 2014 and 2013. In
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
accordance with the guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of operations. The Company has three open years of tax returns subject to examination.
Stock-Based Compensation, including options and Warrants
The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors on a straight-line basis over the respective vesting period of the awards. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant of the portion of stock-based payment awards that are ultimately expected to vest.
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and items defined as other comprehensive income (loss). Items defined as other comprehensive income (loss) include such items as foreign currency translation adjustments and unrealized gains (losses) on certain marketable securities. For the years ended February 28, 2014 and 2013, the Company had no items defined as other comprehensive income (loss).
Advertising
Advertising costs are charged to operations when incurred. The Company did not incur any advertising expense during the years ended February 28, 2014 and 2013.
Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carry-forwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.
In February 2013, FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:
-Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
-Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on our financial position or results of operations.
In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08,Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.
Note 2. Going Concern
The Company’s consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
At February 28, 2014, the Company had an accumulated deficit of $28,195,262. Subsequent to February 28, 2014, the Company has received cash proceeds totaling approximately $10,000 from its stock subscription receivable. The Company anticipates that expected future proceeds from its stock subscription receivable, additional financing through the sale of its common stock or other equity-based securities, and additional sales of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least February 28, 2015. In the event that we are unable to obtain additional capital in the future, we would be forced to further reduce operating expenses and/or cease operations altogether.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
Note 3. Property and Equipment
Property and equipment are as follows:
February 28,
February 28,
Office equipment and furniture
$ 512,156
$ 512,156
Less accumulated depreciation
(502,220)
(494,909)
Property and equipment, net
$ 9,936
$ 17,247
Depreciation expense for the fiscal years ended February 28, 2014 and February 28, 2013 was $7,311 and $12,938, respectively.
Note 4. Intangible Assets
Intangible assets, net are as follows:
February 28,
February 28,
Domain names
$ 860,698
$ 860,185
Website development costs
366,166
362,680
Less accumulated amortization
(307,541)
(219,989)
Impairment charge
(919,323)
-
Intangible assets, net
$ -
$ 1,002,876
During the twelve months ended February 28, 2014, the Company capitalized $513 of additional domain name purchases. During the twelve months ended February 28, 2013, the Company capitalized $25,077 of additional domain name purchases and sold a single domain name with a book value of $700 for a net increase of $24,377 in capitalized domain names. Since the useful life of the domain names is deemed to be indefinite, no amortization has been recorded. At February 28, 2014, the Company determined that a full impairment charge of $860,698 was necessary for the carrying amount of its Intangible assets - domain names.
During the twelve months ended February 28, 2014 and 2013, the Company incurred $197,328 and $70,059, respectively, of annual domain name renewal fees and has expensed $197,411 and $188,232, respectively, to cost of revenues on a straight line basis and has recorded $47,573 and $47,656, respectively, as prepaid expense at February 28, 2014 and 2013.
During the twelve months ended February 28, 2014 and 2013, the Company capitalized $3,486 and $11,223, respectively, of website development costs. The Company has a total recorded cost of $366,166 at February 28, 2014 and it has determined that $351,457 of these costs pertain to a component that is ready for its intended use and have an estimated useful life of three years. During the twelve months ended February 28, 2014 and 2013, the Company recorded $87,552 and $111,944, respectively, of website development amortization expense pertaining to these components to cost of revenues in the
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
Company’s consolidated statement of operations. At February 28, 2014, the Company determined that a full impairment charge of $58,625 was necessary for the net carrying amount of its Intangible assets - website development costs.
Note 5. Deferred Officer Compensation
Richard Pomije, Chairman, Secretary and Treasurer of the Company elected to forego a portion of his salary at various times due to the Company’s limited operating funds. These amounts do not accrue interest and are due and payable as funds become available in the future. During the twelve months ended February 28, 2014, the Company recorded $242,883 of deferred compensation and made payments of $62,000 to Richard Pomije and recorded $70,673 of deferred compensation. On October 18, 2013, Richard Pomije elected to forego $100,000 of the deferred compensation due him and the Company treated it as a capital contribution which resulted in an increase to additional paid in capital and a corresponding decrease to deferred officer compensation of $100,000. During the twelve months ended February 28, 2013, the Company recorded $152,309 of deferred officer compensation and made no payments to Richard Pomije. The total balance recorded as deferred officer compensation at February 28, 2014 and 2013, was $233,192 and $152,309, respectively.
Note 6. Stockholders’ Equity
Fiscal 2014 Stock Transactions
On August 15, 2013, the Company issued 21,676 restricted common shares at $0.63 per share, valued at $13,655, to four directors and the Company’s contract CFO for payment of director fees, executive compensation and consulting fees. The restricted common shares were valued based at the market price on the grant date.
On November 15, 2013, the Company issued 8,823 restricted common shares at $0.51 per share, valued at $4,500, to three directors for payment of director fees. The restricted common shares were valued based at the market price on the grant date.
On February 5, 2014, the Company issued 294,669 restricted common shares at $0.40 per share, valued at $117,868 per a Debt Assumption Agreement whereby a shareholder of the Company assumed certain related party liabilities of the Company. The restricted common shares were valued based at the market price on the grant date. As the fair value of the liabilities was $88,401, and the fair value of the shares granted were $117,868, a loss on conversion of $29,467 was recognized in conjunction with the issuance of shares for payables.
On February 6, 2014, the Company issued 342,855 restricted common shares at $0.46 per share, valued at $157,713 per a Debt Assumption Agreement whereby a shareholder of the Company assumed certain related party liabilities of the Company. The restricted common shares were valued based at the market price on the grant date. As the fair value of the liabilities was $102,917, and the fair value of the shares
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
granted were $157,713, a loss on conversion of $54,796 was recognized in conjunction with the issuance of shares for liabilities.
On February 24, 2014, the Company entered into a stock purchase agreement and issued 100,000 restricted common shares at $0.50 per share, for total cash proceeds of $50,000.
On February 27, 2014, the Company issued 500,000 restricted common shares at $0.46 per share, valued at $230,000, to a shareholder of the Company in payment of the principal balance of $150,000, not in accordance with the debt agreement. As the fair value of the shares was $230,000 and the principal balance was $150,000, a loss on conversion of $80,000 was recognized in conjunction with the conversion as it was not within the terms of the agreement. The restricted common shares were valued based at the market price on the grant date.
Fiscal 2013 Stock Transactions
On March 19, 2012, the Company entered into a stock purchase agreement and issued 75,000 shares of restricted common stock at a per share price of $1.00, for total cash proceeds of $75,000.
On May 15, 2012, the Company issued 21,775 restricted common shares at $0.40 per share, valued at $8,710, to six directors of the Company for payment of director fees. The restricted common shares were valued based on the market price at the grant date.
On August 15, 2012, the Company issued 15,277 restricted common shares at $0.55 per share, valued at $8,403, to six directors of the Company for payment of director fees and 909 restricted common shares at $0.55 per share, valued at $500, as compensation for the interim CFO/President. The restricted common shares were valued based on the market price at the grant date.
Additional Paid In Capital
During October 2013, an officer who is also a related party, forfeited $100,000 of accrued compensation thereby reducing accrued compensation and increasing additional paid in capital by this amount which was treated as capital contributions for the Company.
Stock Warrants
As of February 28, 2014, the Company had 195,000 warrants outstanding with an exercise price of $0.75 and 300,000 warrants outstanding with an exercise price of $0.50. The weighted average remaining exercise period as of February 28, 2014, for the $0.75 warrants is 0.55 years and for the $0.50 warrants is 9.83 years.
On April 1, 2013, the Company issued 75,000 stock purchase warrants to a stockholder of the Company to purchase 75,000 shares of the Company’s stock for $0.75 per share for a term of one year. The warrants were issued in lieu of interest on an unsecured promissory note for a working capital loan of $150,000. The total fair value of the warrants granted by the Company on April 1, 2013 was $20,251,
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
which was recorded as a loan discount and will be amortized to interest expense over the term of the loan. During the year ended February 28, 2014, the Company amortized $20,251 of the discount to interest expense and at February 28, 2014 the discount had a remaining balance of $0.
On February 18, 2014, the Company issued an additional 75,000 stock purchase warrants to purchase 75,000 shares of the Company’s stock for $0.75 per share for a term of five years. The total fair value of the warrants granted by the Company on February 18, 2014 was $25,096, which was recorded as interest expense.
The Company utilized the following key assumptions in computing the fair value of the warrants using the Black-Scholes pricing model:
April 1,
February 18,
Weighted-average volatility
137%
152%
Expected dividends
None
None
Expected term (in years)
1.00
5.00
Weighted-average risk-free interest rate
0.14%
1.50%
Weighted-average fair value of options granted
$0.27
$0.33
On June 30, 2013, the Company failed to make its $150,000 payment due on its unsecured promissory note with a stockholder of the Company. Per the terms of the agreement, if the Company is in default for more than five days, it is required to issue an additional 10,000 warrants to the stockholder as a late payment fee. On July 5, 2013, the Company issued 10,000 stock purchase warrants to the stockholder allowing for the purchase of 10,000 shares of the Company's stock at $0.75 per share for a term of one year. The agreement further requires the Company to issue an additional 5,000 warrants to the stockholder each month that the note is in default, up to a maximum of 75,000 total additional warrants.
The following table recaps the additional warrants issued to the stockholder as late payment penalties:
Date
Warrants Issued
FMV
July 5, 2013
10,000
$ 2,696
August 5, 2013
5,000
$ 1,714
September 5, 2013
5,000
$ 1,508
October 5,2013
5,000
$ 1,555
November 5, 2013
5,000
$ 1,689
December 5, 2013
5,000
$ 818
January 5, 2014
5,000
$ 1,095
February 5, 2014
5,000
$ 843
During the year ended February 28, 2014, the Company charged $11,918 to interest expense relating to late payment penalties on its unsecured promissory note with a stockholder of the Company.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
On July 16, 2013, the Company issued 50,000 stock purchase warrants to a consultant of the Company to purchase 50,000 shares of the Company’s stock for $0.68 per share for a term of ten years. The Company utilized the following key assumptions in computing the fair value of the warrants using the Black-Scholes pricing model:
July 16,
Weighted-average volatility
144%
Expected dividends
None
Expected term (in years)
10.00
Weighted-average risk-free interest rate
2.55%
Weighted-average fair value of options granted
$0.67
The total fair value of the warrants granted by the Company on July 16, 2013 was $33,310, which was recorded as stock based compensation as the warrants vested immediately. On October 29, 2013, the Company terminated its relationship with the consultant and the warrants were forfeited on November 29, 2013.
On January 10, 2014, the Company issued 300,000 stock purchase warrants to four consultants of the Company to purchase 300,000 shares of the Company’s stock for $0.50 per share. The warrants vest over the next four years and have a term of ten years. The Company utilized the following key assumptions in computing the fair value of the warrants using the Black-Scholes pricing model:
January 10,
Weighted-average volatility
163%
Expected dividends
None
Expected term (in years)
10.00
Weighted-average risk-free interest rate
2.88%
Weighted-average fair value of options granted
$0.50
The total fair value of the warrants granted by the Company on January 10, 2014 was $148,711 and was recorded as stock based compensation in the current fiscal year.
Note 7. Stock Options
The Company has one stock option plan called The 2006 Employee Stock and Option Plan. As of February 28, 2014, an aggregate of 5,000,000 shares of common stock may be granted under this plan determined by the Board of Directors. The stock options may be granted to directors, officers, employees, consultants and advisors of the Company. Options granted under this plan are non-qualified stock options and have exercise prices and vesting terms established by the Board of Directors at the time of each grant. The potential vesting terms of the outstanding options range from immediate to three years from the grant date anniversary and the term of the options is five to ten years from the date of grant.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
The Company records its stock-based compensation arrangements calculating the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the consolidated statements of operations based on their grant date fair values. The fair value of the Company’s stock options have been estimated using the Black-Scholes pricing model, which requires assumptions as to expected dividends, the options expected life, volatility and risk-free interest rate at the time of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite vesting periods in the Company’s consolidated statements of operations.
For stock options granted during the years ended February 28, 2014 and 2013, we utilized the following key assumptions in computing fair value using the Black-Scholes option-pricing model:
February 28,
February 28,
Weighted-average volatility
347%
291%
Expected dividends
None
None
Expected term (in years)
5.75
Weighted-average risk-free interest rate
0.90%
0.91%
Weighted-average fair value of options granted
$0.57
$0.38
The Company recorded stock-based compensation expense of $554,939 and $179,339 for all outstanding options for the years ended February 28, 2014 and 2013, respectively. This expense is included in selling, general and administrative expense. There was no tax benefit from recording this non-cash expense due to the Company having a full valuation allowance against its deferred tax asset. The compensation expense impacted the basic (loss) per common share for the years ended February 28, 2014 and 2013 by $(0.018) and $(0.006), respectively. As of February 28, 2014, there remains $214,328 of total unrecognized compensation expense, which is expected to be recognized over future periods through January 31, 2016.
The following table summarizes information about the Company’s stock options as of February 28, 2014 and changes during the year ended February 28, 2014:
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
(1)
The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.
The following stock option grants were issued during the year ended February 28, 2014:
Grantee
Grant Date
Options Granted
Exercise Price
Option Term
Vesting Term
David R. Pomije (1)
4/16/2013
2,000,000
$ 0.70
10 years
3 years
Jeff Mills (2)
2/3/2014
300,000
$ 0.54
10 years
1 years
Paul R. Gramstad (3)
2/3/2014
125,000
$ 0.54
10 years
1 years
Linda Thrasher (4)
2/3/2014
300,000
$ 0.54
10 years
2 years
Linda Thrasher (5)
2/3/2014
200,000
$ 0.54
10 years
TBD
(1)
David R. Pomije was appointed as a Director on March 22, 2013 and as Chief Executive Officer on May 14, 2013 and resigned as Chief Executive Officer and Director on October 29, 2013. At the time of his resignation, 500,000 options had vested and the Company recognized $292,500 of compensation expense. The remaining 1,500,000 unvested options were forfeited on October 29, 2013 and the 500,000 vested options were forfeited on November 28, 2013.
(2)
Jeff Mills, a Director, was issued 300,000 options as compensation. The options vest as follows: 150,000 on February 3, 2014 and 150,000 on February 3, 2015.
(3)
Paul R. Gramstad, the contract Chief Financial Officer, was issued 125,000 options as compensation. The options vest as follows: 75,000 on February 3, 2014 and 50,000 on February 3, 2015.
(4)
Linda Thrasher was appointed Chief Executive Officer and a Director on March 10, 2014 and was issued 300,000 options as compensation. The options vest as follows: 100,000 on February 3, 2014, 100,000 on February 3, 2015 and 100,000 on February 3, 2016.
(5)
Linda Thrasher was appointed Chief Executive Officer and a Director on March 10, 2014 and was issued 200,000 options as compensation. The vesting of these options is contingent upon the Company moving to the AMEX, NASDAQ or NYSE exchange. If the contingency is met, the options vest as follows: 100,000 one year after the Company is listed on a new exchange and 100,000 two years after the Company is listed on a new exchange. As the vesting is uncertain for these 200,000 options, no stock compensation expense was recognized as of February 28, 2014.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
The following stock option grants were issued during the year ended February 28, 2013:
Grantee
Grant Date
Options Granted
Exercise Price
Option Term
Vesting Term
Robert B. Castle (1)
3/19/2012
600,000
$ 1.00
10 years
4 years
David W. Dahl (2)
12/1/2012
200,000
$ 1.00
10 years
3 years
Andy Dahl (3)
12/1/2012
200,000
$ 1.00
10 years
3 years
David W. Dahl (4)
12/1/2012
200,000
$ 1.00
10 years
3 years
(6)
Robert B. Castle was appointed Chief Executive Officer, President and Director on March 19, 2012 and resigned as Chief Executive Officer and President on August 1, 2012 and resigned as a Director on November 27, 2012. At the time of his resignation as a Director, 200,000 options had vested and the Company recognized $64,680 of compensation expense. The remaining 400,000 unvested options were forfeited on 11/27/12 and the 200,000 vested options were forfeited on 12/27/12.
(7)
David W. Dahl was appointed as a Director on December 10, 2012 and was issued 200,000 options as compensation. The options vest as follows: 20,000 on December 1, 2012, 30,000 on May 1, 2013, 50,000 on December 1, 2013, 50,000 December 1, 2014 and 50,000 on December 1, 2015.
(8)
Andy Dahl, an advisor to the Company, was issued 200,000 options as compensation. The options vest as follows: 20,000 on December 1, 2012, 30,000 on May 1, 2013, 50,000 on December 1, 2013, 50,000 December 1, 2014 and 50,000 on December 1, 2015. The options that vest on December 1, 2013, December 1, 2014 and December 1, 2015 carry a vesting period stock appreciation goal restriction of a $4.00 volume weighted average price ("VWAP") with an average of 25,000 shares trading per day over a 15 day period. Once this goal is achieved, the restriction is lifted for all the effected options and they will vest as scheduled. As the vesting is uncertain for these 150,000 options, no stock compensation expense was recognized.
(9)
David W. Dahl, an advisor to the Company, was issued 200,000 options as compensation. The options vest as follows: 20,000 on December 1, 2012, 30,000 on May 1, 2013, 50,000 on December 1, 2013, 50,000 December 1, 2014 and 50,000 on December 1, 2015. The options that vest on December 1, 2013, December 1, 2014 and December 1, 2015 carry a vesting period stock appreciation goal restriction of a $4.00 volume weighted average price ("VWAP") with an average of 25,000 shares trading per day over a 15 day period. Once this goal is achieved, the restriction is lifted for all the effected options and they will vest as scheduled. As the vesting is uncertain for these 150,000 options, no stock compensation expense was recognized.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
The following table summarizes information about stock options outstanding as of February 28, 2014:
Exercise Price
Number Outstanding
Weighted Average Remaining Life (years)
Weighted Average Exercise Price
Number Exercisable
Weighted Average Exercisable Price
$0.54
925,000
9.38
$0.54
325,000
$0.54
$1.00
3,025,000
7.66
$1.00
2,975,000
$1.00
$1.75
310,000
1.28
$1.75
310,000
$1.75
$0.54 - $1.75
4,260,000
7.57
$0.96
3,610,000
$1.02
Note 8. Related Party Transaction
Lease with Director/Stockholder
Since December 16, 2006, the Company has leased from Jeffrey L. Mills, a director and stockholder of the Company, approximately 2,650 square feet of space used for offices and operations equipment storage at 11974 Portland Avenue, Burnsville, Minnesota. In November 2011, the Company entered into a three year lease renewal through December 15, 2014 at a monthly rent of $2,650 for the period of December 16, 2011 to December 15, 2012, $2,750 for the period of December 16, 2012 to December 15, 2013 and $2,850 for the period of December 16, 2013 to December 15, 2014 with the option to renew the lease for an additional term of one year at a monthly rent of $3,500. Mr. Mills invoiced the Company $33,200 for the year ended February 28, 2014 and $32,000 for the year ended February 28, 2013. On February 6, 2014, the Company entered into a Debt Assumption Agreement with a shareholder of the Company whereby the shareholder assumed $35,950 of outstanding rent owed to Mr. Mills at the time of the agreement in exchange for 78,152 shares of restricted common stock valued at $0.46. At February 28, 2014, the Company had no outstanding rent owed to Mr. Mills pertaining to the lease.
Future minimum lease payments at February 28, 2014 are as follows:
FY 2015
$ 25,650
Accounts Payable - Related Party
The Company had accounts payable balances due to related parties of $28,562 at February 28, 2014, which consisted of $11,582 due to Richard Pomije and $16,980 due to Paul Gramstad. The balance at February 28, 2013 was $80,437 which consisted of $74,937 due to Richard Pomije and $5,500 due to Jeff Mills.
Deferred Officer Compensation
Richard Pomije, Chairman, Secretary and Treasurer of the Company elected to forego a portion of his salary at various times due to the Company’s limited operating funds. These amounts do not accrue
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
interest and are due and payable as funds become available in the future. During the twelve months ended February 28, 2014, the Company recorded $242,883 of deferred compensation and made payments of $62,000 to Richard Pomije and recorded $70,673 of deferred compensation. On October 18, 2013, Richard Pomije elected to forego $100,000 of the deferred compensation due him and the Company treated it as a capital contribution which resulted in an increase to additional paid in capital and a corresponding decrease to deferred officer compensation of $100,000. During the twelve months ended February 28, 2013, the Company recorded $152,309 of deferred officer compensation and made no payments to Richard Pomije. The total balance recorded as deferred officer compensation at February 28, 2014 and 2013, was $233,192 and $152,309, respectively.
Notes Payable - Related Party
On March 25, 2008, the Company signed an unsecured promissory note with Jeff Mills, a director and stockholder of the Company, for a working capital loan of $145,000, due on demand at an annual interest rate of 6.5%. In August 2010, the annual interest rate was increased to 7.5%. The outstanding balance of the loan at February 28, 2014 and 2013, was $0 and $49,000, respectively. For the fiscal years ended February 28, 2014 and 2013, the Company made principal payments of $1,833 and $0, respectively, and received additional advances of $0 and $49,000, respectively. On February 6, 2014, the Company entered into a Debt Assumption Agreement with a shareholder of the Company whereby the shareholder assumed the $47,106 balance of the note payable in exchange for 102,406 shares of restricted common stock valued at $0.46. Interest expense incurred on this loan for the fiscal years ended February 28, 2014 and 2013 was $3,662 and $923, respectively. Accrued interest at February 28, 2014 and 2013 was $0 and $991, respectively.
Note 9. Income Taxes
At February 28, 2014, the Company had net operating loss carryforwards of approximately $11,500,000. The net operating loss carryforwards are available to offset future taxable income through 2030 and may be subject to the limitations under Section 382 of the Internal Revenue Code if significant changes in the equity ownership of the Company have occurred.
The Company has recorded a full valuation allowance against its net deferred tax asset due to the uncertainty of realizing the related net benefits as follows:
Deferred tax assets:
Net operating loss carryforwards
$ 3,375,000
$ 3,854,000
Stock compensation
4,892,000
4,670,000
Total deferred tax assets
8,267,000
8,524,000
Valuation allowance
(8,267,000)
(8,524,000)
Net deferred tax assets
$ -
$ -
Reconciliation between the federal statutory rate and the effective tax rate for the years ended February 28, 2014 and 2013 is as follows:
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
The Company adopted the provisions of FASB ASC 740-10 on March 1, 2008. As of the date of adoption, the Company had no uncertain tax positions. The adoption of ASC 740-10 did not result in an adjustment to retained earnings. The Company will recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The Company had recognized no interest or penalties upon the adoption of this standard.
At February 28, 2014, the Company has no uncertain tax positions or associated interest and penalties. The Company does not expect any significant increases or decreases to its unrecognized tax positions within twelve months of this reporting date.
The Company is subject to U.S. Federal and Minnesota state income tax. The Company has three open years of tax returns subject to examination. The Company is not currently under Internal Revenue Service ("IRS") or Minnesota tax examinations.
Note 10. Commitments and Contingencies
The Company is exposed to asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.
On August 22, 2011, the Company entered into a nine month agreement with Enable Consulting, LLC (“Enable”) to complete the design and development of the Company’s Sales Center Application. The Company committed up to $66,000 for the development and maintenance support of this software application through May 31, 2012. On June 27, 2012, the Company signed an amendment to its existing contract with Enable to establish payment terms for the remaining balance due Enable of $36,000 and prioritize the remaining unresolved maintenance items which Enable will complete by August 15, 2012. The Company paid $13,500 on June 29, 2012. As of February 28, 2014, the maintenance items remain unresolved and the Company has a balance due Enable of $22,500 which is included in accounts payable.
On December 8, 2010, the Company entered into a five year strategic partnership agreement with the National Interscholastic Athletic Administrators Association (“NIAAA”). The NIAAA and DigitalTown will work together to establish a national, standardized system for recording schedules, scores, rosters and statistics for interscholastic sports teams and individual students. Pursuant to the agreement, the Company has committed to pay the expenses related to this strategic partnership; however any expenses
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
in excess of $5,000 must be preapproved by the Company. The Company has committed to deposit $50,000 for such expenses for the first fiscal year of the contract which the Company has paid as of February 29, 2012. In addition, as of February 28, 2014, the Company has paid $20,000 of the $50,000 due for the second fiscal year of the contract and the balance due of $30,000 is included in accounts payable. In addition, the Company has committed to donate 25% of the annual net sponsorship revenue in the scheduling and stats areas of its websites, with a total annual donation cap of $3,000,000, to yet to be named program funds that promote youth activities and the NIAAA. Lastly, the Company has committed to a minimal revenue share of $100,000 per year with the future launch of its beta 3 software. As of February 28, 2014, the Company has not yet launched its beta 3 software nor has it generated any net sponsorship revenue.
Note 11. Common Stock Subscriptions Receivable
As of February 28, 2014, the Company has the following stock subscription agreements outstanding all of which are due from a related party:
2007 Agreements
On October 5, 2007, the Company received subscriptions for 1,300,000 restricted common shares at $2.50 per share (total value of $3,250,000). Significant terms of the original subscription agreement are as follows:
·
The price per share of $2.50 was based on the closing price on October 4, 2007.
·
At 24 months, 1/36 payments are due monthly.
·
The Company, at its option, may call up to 1/12 of the gross receivable per month if the preceding 30 day average trading price is at or above $7.00 a share with minimum trading volume of 5,000 shares per day.
·
If the purchaser sells these common shares, the purchaser shall be entitled to an amount equal to 200% of the original purchase price of each share and the Company shall be entitled to 50% of any additional net sales proceeds from the stock sale.
On February 25, 2010, due to the economic downturn and the market value decline of the Company’s stock, which was trading below $2.50 per share, the Company amended the pricing terms of the subscription agreements received by the Company on October 5, 2007. The amendment changed the following significant terms of the subscription agreement:
The parties agree that the Initial Pricing terms in the Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be amended to state as follows:
1.
The Subscriber offers to purchase shares of the Company for $0.75 per share. After the price adjustment, the revised total value of this subscription agreement is $975,000.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
The following other provisions of the Initial Pricing and Final Pricing terms in the Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be deleted, and are not enforceable by either party:
·
Beginning October 5, 2009, 1/36 payments are due each month thereafter on the 5th of every month.
·
The Company at its option may call up to 1/12 of the (gross) receivable note per month if the preceding 30 day average trading price is at or above $7.00 a share. Minimum trading volume must be 5,000 shares a day.
·
As total consideration for the purchase and sale of the Company’s stock, purchaser shall ultimately pay to the Company the following amount (the “Purchase Price”):
A.
Purchaser shall first be entitled to an amount equal to 200% of the face amount of each share.
B.
After the purchaser receives the amount in A above, the Company shall be entitled to 50% of any additional net sales proceeds of the stock. Net sales proceeds shall mean the gross proceeds received from the sale of the stock, less reasonable brokerage commissions.
C.
Final adjusted net sales proceeds will be wired to the Company within 7 days from the final settlement of the sale of stock sold.
The outstanding balance owed on the revised 2007 subscription agreements at February 28, 2014 is $379,354.
2010 Agreement
Material terms of the subscription agreement received by the Company on June 22, 2010, for 400,000 restricted common shares at $0.75 per share (total value of $300,000) are as follows:
·
Payment is due in full in 60 months.
·
At 24 months, the Company can demand at its option, monthly 1/36 payments on the subscription agreement.
·
The Company has the option to charge simple annual interest of up to 4%.
·
The Company will provide downside protection of up to 30% of the stock price upon conversion.
The outstanding balance owed on the 2010 subscription agreement at February 28, 2014 is $300,000.
Summary
As of February 28, 2014, the Company had stock subscription receivables of $641,395 and for the twelve months ended February 28, 2014, the Company received stock subscription payments of $337,459.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
The following tables summarize information about the stock subscription receivable:
Receivable balance at February 29, 2008
$ 5,030,795
Cash collected
(523,832)
Receivable balance at February 28, 2009
4,506,963
Cash collected
(337,500)
2007 Subscription agreement pricing revised (1)
(2,275,000)
Receivable balance at February 28, 2010
1,894,463
New subscription agreement (2)
300,000
Cash collected
(771,809)
Receivable balance at February 28, 2011
1,422,654
Cash collected
(123,000)
Receivable balance at February 29, 2012
1,299,654
Cash collected
(320,800)
Receivable balance at February 28, 2013
978,854
Cash collected
(337,459)
Receivable balance at February 28, 2014
$ 641,395
Summary of outstanding subscriptions:
2007 subscriptions
$ 341,395
2010 subscriptions
300,000
$ 641,395
(1)
Amendment to the terms of the subscription agreements received by the Company on October 5, 2007 for 1,300,000 restricted common shares reducing the price paid per share from $2.50 to $0.75.
(2)
New subscription agreement received on June 22, 2010.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
Note 12. Earnings (Loss) Per Share
The Company computes earnings per share using two different methods, basic and diluted, and presents per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of common stock and common stock equivalents outstanding.
The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the years ended February 28, 2014 and February 28, 2013:
(1)
At February 28, 2014 and 2013, there were outstanding stock options equivalent to 4,260,000 and 4,410,000 common shares, respectively. The stock options are anti-dilutive at February 28, 2014 and 2013 and therefore, have been excluded from diluted earnings per share.
(2)
At February 28, 2014 and 2013, there were outstanding warrants equivalent to 495,000 and 980,410 common shares, respectively. The warrants are anti-dilutive at February 28, 2014 and 2013 and therefore, have been excluded from diluted earnings per share.
DigitalTown, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28, 2014 and February 28, 2013
Note 13. Subsequent Events
The Company has collected approximately $10,000 of its stock subscription receivables during the period from March 1, 2014 to July 11, 2014.
On March 18, 2014 the Company granted 25,000 stock options to an employee of the Company. The options have an exercise price of $0.50 per share and a term of 10 years. All 25,000 options vested on March 18, 2014.
On April 21, 2014, the Company canceled 300,000 stock purchase warrants issued to four consultants on January 10, 2014.
There were no additional significant subsequent events through July 14, 2014, the date the financial statements were issued.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
1.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness, as of February 28, 2014, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the Securities and Exchange Commission, or SEC, under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our management has concluded, as discussed below, that material weaknesses existed in our internal control over financial reporting as of February 28, 2014 and as a result, our disclosures controls and procedures were not effective. Notwithstanding the material weaknesses that existed as of February 28, 2014, our chief executive officer and chief financial officer have concluded that the financial statements included in this Annual Report on Form 10-K present fairly, in all material aspects, the financial position, results of operations and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management concluded that the Company did not maintain effective internal controls over financial reporting as of February 28, 2014. Management identified the following material weaknesses:
1.
Management did not maintain effective internal controls relating to the quarter end closing and financial reporting process in adequately preparing account reconciliations pertaining to stock option activity;
2.
The Company has insufficient internal personnel resources and technical accounting and reporting expertise within the Company’s financial closing and reporting functions; and
3.
Due to our small size, the Company did not maintain effective internal controls to assure proper segregation of duties as the same employee was responsible for initiating and recording of transactions, thereby creating a segregation of duties weakness;
This annual filing does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to an amendment to the Sarbanes-Oxley Act which exempts Smaller Issuers from the requirements of Section 404(b).
Changes in Internal Controls over Financial Reporting
During the fiscal quarter ended February 28, 2014, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remediation
In response to the material weaknesses in our internal controls noted above, we have formalized the following corrective procedures to remediate them;
Material weakness #1, #2 and #3;
·
Apply a more rigorous review of the quarterly close processes by the CFO to ensure that the performance of the control is evidenced through appropriate documentation which is consistently maintained;
Additional controls for material weakness #1;
·
Reconciliation of internal stock option register with new options expensed on a quarterly basis;
·
Review of new stock option agreements with Chairman on a quarterly basis;
·
All new stock option agreements will be sequentially numbered; and
·
All new stock option grants will be documented in the board minutes including grantee, date of grant, number of options granted, exercise price, vesting terms, and length of agreement.
With the implementation of these corrective actions, we believe that the previously reported material weaknesses will be remediated by the end of the first quarter of the fiscal year 2015; however such procedures will not be tested until our first quarter close.
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning each of the directors and executive officers of DigitalTown, Inc.
Name
Age
Position
David Pomije (1)
Chief Executive Officer and Director
Linda K. Thrasher
Chief Executive Officer and Director
Paul R. Gramstad (2)
Chief Financial Officer
Richard A. Pomije
Chairman and Secretary/Treasurer
Jeffrey L. Mills
Director
David Dahl
Director
Pierce McNally (3)
Director
Donald M. Fisher (4)
Director
(1) Mr. David Pomije was appointed a Director and CEO on May 14, 2013 and resigned both positions on October 29, 2013 and is the cousin of Richard A. Pomije, the Company's Chairman
(2) Mr. Gramstad is a contract employee of the Company.
(3) Mr. McNally resigned as a Director on March 22, 2013.
(4) Mr. Fisher resigned as a Director on March 22, 2013.
LINDA K. THRASHER was appointed a Director and CEO on March 10, 2014. Previously, Ms Thrasher served as the corporate practice leader at Himle Rapp & Company, Inc. Prior to joining Himle Rapp, Thrasher served as Vice President of Public Affairs at Mosaic and was responsible for building the brand and reputation of the Fortune 500 company. Thrasher previously held the position of director of public policy in Cargill Incorporated's Washington, D.C. office. She holds a B.A. in English and political science from St. Catherine University and a J.D. from William Mitchell College of Law. Thrasher serves on the boards of St. Catherine University and the YWCA of Minneapolis and is a member of the Minnesota Women's Economic Roundtable.
PAUL R. GRAMSTAD has served as CFO since July 2, 2009. On August 1, 2012, Mr. Gramstad was appointed interim CEO and President and relinquished those positions on May 14, 2013. Since 2005, Mr. Gramstad has worked as a financial consultant and since 2007, has been responsible for the Company’s financial reporting and accounting function and continues in that role as their contract CFO. Prior to that, Mr. Gramstad owned and operated a tax business, and held a number of senior level financial positions in the accounting and finance area. Mr. Gramstad is a 1983 graduate of Gustavus Adolphus College and a Certified Public Accountant.
RICHARD A. POMIJE On October 29, 2013, Mr. Pomije was appointed interim CEO and relinquished the position on March 10, 2014, but retains his positions as Secretary, Treasurer and Chairman of the Board. Mr. Pomije has been with DigitalTown, Inc. since 1982 and his primary responsibilities include overall strategic planning. Mr. Pomije holds a degree in Communication Technology, Audio Technology and Technical Services from Brown Institute. Mr. Pomije also received a First Class FCC license with radar endorsement.
JEFFREY L. MILLS has served as a director since December 23, 2003. Mr. Mills worked for Xerox Corporation for the past 28 years in various operation and sales positions. He has also served as director for one private company and has served as president, owner and operator of various business ventures. Mr. Mills is a 1984 graduate of the University of Northern Iowa and has held several securities licenses.
DAVID W. DAHL has served as a director since December 10, 2012. Mr. Dahl has worked at Hubbard Broadcasting since 1977 and has delivered the weather on-air for 5 Eyewitness News since 1979. Mr. Dahl also provides the forecast and current weather warnings or advisories weekdays on KS95 and 1500 ESPN Twin Cities radio stations. Mr. Dahl has received the American Meteorological Society Seal of Approval for television and radio weather broadcasting and was named 1998 Broadcaster of the Year by the Minnesota Broadcaster's Association. Other professional accomplishments include producing a documentary on tornado-chasing for The Weather Channel and a special report on The Discovery Channel for his tornado chase in April 1996. Dave also received an Emmy Award in 2003 for Single Newscast ("Wellstone Crash").
Directors are elected at the annual meeting of the stockholders and serve until their successors are elected and qualified. Officers are elected by the Board of Directors and serve at the discretion of the Board of Directors or until their earlier resignation or removal.
Audit Committee
The Audit Committee consisted of Mr. Mills and Mr. McNally until Mr. McNally's resignation from the board on March 22, 2013. Currently, Mr. Mills is the only member of the Audit Committee. The Audit Committee is responsible for assisting the Board of Directors with respect to its oversight of corporate accounting, reporting practices of the Company and the quality and integrity of the financial reports of the Company. The Board has named Mr. Mills as the "audit committee financial expert" as defined by Item 401(h)(2) of Regulation S-K under the Securities Act of 1933. The Company acknowledges that the designation of Mr. Mills as the “audit committee financial expert” does not impose on him any duties, obligations or liability that are greater than the duties, obligations and liability imposed on him as a member of the Audit Committee and the Board of Directors in the absence of such designation or identification.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid for services rendered during the fiscal years ended February 28, 2014 and 2013 to the Principal Executive Officer/Chief Executive Officer and the Principal Financial Officer/Chief Financial Officer. There were no other compensated officers in fiscal 2014.
Summary Compensation Table
(1)
The amounts shown are the aggregate grant date fair values of these awards computed in accordance with Financial Accounting Standards Board (“FASB”) guidance now codified as Accounting Standards Codification (“ASC”) FASB ASC Topic 718, “Stock Compensation” (formerly under FASB Statement No. 123(R)). The assumptions and methodologies used to calculate these amounts are discussed in Note 7 in the Notes to Financial Statements contained elsewhere in this Annual Report.
(2)
Automobile expenses - Richard A. Pomije:
FY2014 $2,779
FY2013 $4,558
(3)
Board member fees -Richard A. Pomije:
FY2014 $3,000 paid with issuance of restricted common stock
FY2013 $3,000 paid with issuance of restricted common stock
Board member fees -David Pomije:
FY2014 $1,500 paid with issuance of restricted common stock
Board member fees - Robert B. Castle:
FY2013 $2,710 paid with issuance of restricted common stock
(4)
Medical and dental insurance -Richard A. Pomije:
FY2014 $30,829
FY2013 $33,725
(5)
Richard A. Pomije resigned as CEO on March 19, 2012 and served as CEO from October 29, 2013 to March 10, 2014, but retains his positions as Secretary, Treasurer and Chairman of the Board.
(6)
Deferred compensation - Richard Pomije:
FY2014 $ 80,883
FY2013 $152,309
During FY2014 Richard Pomije elected to forego $100,000 of his deferred compensation. Deferred compensation does not accrue interest and is due and payable as funds become available in the future.
(7)
Robert B. Castle was appointed CEO, President and Director on March 19, 2012 and resigned as CEO and President on August 1, 2012 and resigned as a Director on November 27, 2012.
(8)
Paul R. Gramstad served as CFO on a contract basis for FY2013 and FY2014. He was appointed interim CEO and President on August 1, 2012 on a contract basis and relinquished the positions on May 14, 2013. Contract fees for FY2014 include $7,656 paid with the issuance of 12,152 shares of restricted common stock at $0.63 per share on August 15, 2013. Contract fees for FY2013 include $500 paid with the issuance of 909 shares of restricted common stock at $0.55 per share on August 15, 2012.
OPTIONS GRANTED IN THE LAST FISCAL YEAR
The following table sets forth information regarding options granted to the named executive officers and directors during the year ended February 28, 2014.
Grants of Plan-Based Awards
Name
Grant
Date
Number of shares - Underlying options granted
Exercise
Price
($/Share)
Grant
Date
Fair
Value
Expiration
Date
David Pomije (1)
4/16/13
2,000,000
$0.70
$1,170,286
4/16/23
Jeffrey L. Mills
2/3/14
300,000
$0.54
$151,764
2/3/24
Paul R. Gramstad
2/3/14
125,000
$0.54
$63,235
2/3/24
(1)
David Pomije resigned as Director and CEO on October 29, 2013. At the time of his resignation, 500,000 options had vested and the Company recognized $292,500 of compensation expense. The remaining 1,500,000 unvested options were forfeited upon his resignation and the 200,000 vested options were forfeited on November 29, 2013.
OUTSTANDING OPTIONS AT FISCAL YEAR-END
The following table provides information relating to the value of shares of common stock subject to options held by the named executive officers and directors as of February 28, 2014.
Outstanding Equity Awards at Fiscal Year-End
Name
Number of Unexercised Options Exercisable
Number of Unexercised Options Unexercisable
Option Exercise Price ($/share)
Option Expiration Date
Richard A. Pomije (officer & director)
2,750,000
-
$1.00
10/10/2021
Paul R. Gramstad (officer)
50,000
-
$1.75
12/2/2015
Paul R. Gramstad (officer)
50,000
-
$1.75
12/23/2014
Paul R. Gramstad (officer) (1)
75,000
50,000
$0.54
2/3/2024
Jeffrey L. Mills (director)
75,000
-
$1.00
10/10/2021
Jeffrey L. Mills (director)
100,000
-
$1.75
12/2/2015
Jeffrey L. Mills (director)
110,000
-
$1.75
12/23/2014
Jeffrey L. Mills (director) (2)
150,000
150,000
$0.54
2/3/2024
David W. Dahl (director) (3)
100,000
100,000
$1.00
11/30/2022
(1)
Mr. Gramstad's unexercised options vest as follows:
50,000 on February 3, 2015
(2)
Mr. Mills's unexercised options vest as follows:
150,000 on February 3, 2015
(3)
During FY2014, 200,000 of Mr. Dahl's options were canceled due to the non-renewal of the TIWI contract. Mr. Dahl's remaining unexercised options vest as follows:
50,000 on December 1, 2014; and
50,000 on December 1, 2015
OPTIONS EXERCISED BY THE EXECUTIVE OFFICERS AND DIRECTORS IN THE LAST FISCAL YEAR
None
DIRECTORS' COMPENSATION
The Company has the option to pay director fees with the issuance of restricted common stock. On August 31, 2012, the Company indefinitely suspended payment of director fees. For the current fiscal year, the Company reinstated the payment of director fees for three month periods ending August 31, 2013 and November 30, 2013 and issued the following restricted common stock valued at $10,500 for the payment of directors’ fees:
On August 15, 2013, the Company issued 9,524 restricted common shares at $0.63 per share, valued at $6,000, to four directors of the Company for payment of director fees. The restricted common shares were valued based on the market price at time of issue.
On November 15, 2013, the Company issued 8,823 restricted common shares at $0.51 per share, valued at $4,500, to three directors of the Company for payment of director fees. The restricted common shares were valued based on the market price at time of issue.
Director fees paid to Richard A. Pomije and David Pomije are reported as other annual compensation in the above Summary Compensation Table. The following table summarizes director fees paid to other Directors for the year ended February 28, 2014:
Director Compensation Table
Name
Stock Awards
Option Awards
Total
Jeffrey L. Mills
$ 3,000
$ 151,764
$ 154,764
David W. Dahl
3,000
-
3,000
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our common stock, on an as converted basis, beneficially owned as of February 28, 2014 for (i) each stockholder we know to be the beneficial owner of 5% or more of our outstanding common stock; (ii) all directors and executive officers; and (iii) all directors and executive officers as a group. The securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Commission and, accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days, per rule 13d-3(d)(1) under the Securities and Exchange Act of 1934. At February 28, 2014, we had 30,428,622 issued and outstanding shares of common stock.
Name of Beneficial Owner
Number of shares
Percentage of
Outstanding Shares
Directors and Officers:
Richard A. Pomije,
21,231,182(1)
63.99%(1)
Paul R. Gramstad
208,061(2)
0.68%(2)
Jeffrey L. Mills
924,950(3)
3.00%(3)
David W.Dahl
105,322(4)
0.34%(4)
All directors and executive officers as a group
22,469,515
66.33%
5% Stockholders:
None
(1)
Includes the right to acquire 2,750,000 shares through the exercise of stock options within 60 days of February 28, 2014.
(2)
Includes the right to acquire 175,000 shares through the exercise of stock options within 60 days of February 28, 2014.
(3)
Includes the right to acquire 435,000 shares through the exercise of stock options within 60 days of February 28, 2014.
(4)
Includes the right to acquire 100,000 shares through the exercise of stock options within 60 days of February 28, 2014.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, and the rules promulgated there under require the Company's officers, directors, and holders of 10% or more of its outstanding common stock to file certain reports with the Securities and Exchange Commission (the "Commission"). To the Company's best knowledge, based solely on information provided by the reporting individuals, all of the reports required to be filed by these individuals were filed.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DigitalTown, Inc. has leased from Jeffrey L. Mills, a director and stockholder of the Company, approximately 2,650 square feet of space used for offices and operations equipment storage at 11974 Portland Avenue, Burnsville, Minnesota since December 16, 2006. In November 2011, the Company entered into a three year lease renewal through December 15, 2014, at a monthly rent of $2,650 for the period of December 16, 2011 to December 15, 2012, $2,750 for the period of December 16, 2012, to December 15, 2013, and $2,850 for the period of December 16, 2013, to December 15, 2014, with the option to renew the lease for an additional term of one year at a monthly rent of $3,500. On February 6, 2014, the Company entered into a Debt Assumption Agreement with a shareholder of the Company whereby the shareholder assumed $35,950 of outstanding rent owed to Mr. Mills at the time of the agreement in exchange for 78,152 shares of restricted common stock valued at $0.46. The future rent obligations of this lease as of February 28, 2014, totaled $25,650.
ITEM 14.
ITEM 14. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES
M&K CPAS, PLLC ("M&K") served as the Company’s independent registered public accounting firm during the fiscal year ended February 28, 2014 and 2013. The aggregate fees billed by M&K for professional services rendered for the audit of our annual consolidated financial statements included in our annual reports on Form 10-K and for the reviews of the consolidated financial statements included in our quarterly reports on Form 10-Q for the fiscal years ended February 28, 2014 and 2013 were $26,000 and $26,500, respectively. There were no aggregate fees billed by M&K for other audit related services or tax services for the fiscal years ended February 28, 2014 and 2013.
Audit Committee Policies and Procedures:
The primary responsibility of the Audit Committee is to oversee the Company’s financial reporting process on behalf of the Board and report the results of their activities to the Board. Management is responsible for preparing the Company’s financial statements, and the independent auditors are responsible for auditing those financial statements. The Committee in carrying out its responsibilities and believes its policies and procedures should remain flexible in order to best react to changing conditions and circumstances.
The following shall be the principal recurring processes of the Audit Committee in carrying out its oversight responsibilities. The processes are set forth as a guide with the understanding that the Committee may supplement them as appropriate.
·
The Committee shall have a clear understanding with management and the independent auditors that the independent auditors are ultimately accountable to the board and the Audit Committee, as representatives of the Company’s stockholders. The Committee shall have the ultimate authority for and responsibility to evaluate and annually recommend the selection, retention, and, where appropriate, the replacement of the independent auditors. The Committee shall review and approve the performance by the independent auditors of any non-audit-related service if the fees for such service are projected to exceed 15% of the most recently completed fiscal year’s combined audit fees and audit-related service fees. The Committee shall review and discuss with the auditors their independence from management and the Company and the matters included in the written disclosures required by professional independence standards applicable to the independent auditors. Annually, the Committee shall review and assess whether the independent auditor’s performance of non-audit services is compatible with the auditor’s independence. In addition, the Audit Committee shall review any candidate for the senior accounting and/or financial executive position prior to his or her appointment by the Company.
·
The Committee shall review and discuss with the independent auditors and with the head of the Company’s finance department the overall scope and plans for the audits. Also, the Committee shall discuss with management and the independent auditors the adequacy and effectiveness of the accounting and financial controls, including the Company’s system to monitor and manage business risk, and legal and ethical compliance programs. Further, the Committee shall meet separately with the independent auditors, without management present, to discuss the results of their respective audit procedures.
·
The Committee shall review and discuss the results of the quarterly review and any other matters required to be communicated to the committee by the independent auditors under generally accepted auditing standards. The chair of the Committee may represent the entire Committee for the purpose of this review.
·
The Committee shall review and discuss with management and the independent auditors the financial statements to be included in the Company’s annual report on Form 10-K, including their judgment about the quality, not just the acceptability, of accounting principles, the reasonableness of significant judgments, the basis and appropriateness of any change in significant accounting policies and the clarity of the disclosures in the financial statements. Also, the Committee shall review and discuss the results of the annual audit and any other matters required to be communicated to the Committee by the independent auditors under generally accepted auditing standards.
·
The Committee shall review and discuss with management and the independent auditors any material financial or non-financial arrangements of the Company which do not appear in the financial statements of the Company and any transactions or courses of dealing with parties related to the Company which transactions are significant in size or involve terms or other aspects that differ from those that would likely be negotiated with independent parties, in each case where such arrangements or transactions are relevant to an understanding of the Company’s financial statements.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(a)
Consolidated Financial Statements
Audited Consolidated Financial Statements for the year ended February 28, 2014 and 2013
(b)
Exhibits.
3.1
Articles of Incorporation, as amended (1)
3.2
Bylaws (1)
10.1(3)
Lease agreement with Jeff Mills
10.3(3)
Stock Subscription Agreements
22.1
List of wholly owned subsidiaries
Certifications of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(a)/15d-14(a)
Certifications under Section 1350
101.INS(2)
XBRL Instance
101.SCH(2)
XBRL Taxonomy Extension Schema
101.CAL(2)
XBRL Taxonomy Extension Calculation
101.DEF(2)
XBRL Taxonomy Extension Definition
101.LAB(2)
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
(1)
Incorporated by reference to exhibit filed as a part of Registration Statement on Form 10-SB (Commission File No. 000-27225).
(2)
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
(3)
Incorporated by reference to exhibits filed as a part of our Annual Report on Form 10K filed April 16, 2009.
SIGNATURES
Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DigitalTown, Inc.
Dated: July 14, 2014
By: /s/ Linda K. Thrasher
Linda K. Thrasher
Chief Executive Officer & Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Dated: July 14, 2014
By: /s/ Linda K. Thrasher
Linda K. Thrasher
Chief Executive Officer & Director
(Principal Executive Officer)
Dated: July 14, 2014
By: /s/ Paul R. Gramstad
Paul R. Gramstad
Chief Financial Officer
(Principal Financial Officer)
Dated: July 14, 2014
By: /s/ Richard A. Pomije
Richard A. Pomije, Chairman
Dated: July 14, 2014
By: /s/ Jeff Mills
Jeff Mills, Director
Dated:
By:
David W. Dahl, Director