Form 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
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o |
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TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT |
For the transition period from ____________ to ____________
Commission File No. 000-53235
DIGITILITI, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of
incorporation or organization)
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26-1408538
(I.R.S. Employer Identification No.) |
266 East 7
th Street, 4
th Floor
St. Paul, Minnesota 55101
(Address of Principal Executive Offices)
(651) 925-3200
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 12, 2009, the Registrant had 34,123,313 shares of common stock issued and outstanding.
Explanatory Note
The consolidated financial statements for the three months ended March 31, 2009 and 2008 and the
related disclosures in this Amendment No. 1 to our Quarterly Report on Form 10-Q/A have been
restated in accordance with the changes described below.
On March 20, 2010, during the Companys year-end close procedures conducted during the audit of its
2009 financial statements, the Company concluded that it was necessary to amend this Quarterly
Report in order to restate its financial statements for the three months ended March 31, 2009 to
correct an understatement in the recognition of the beneficial conversion feature on notes that
were converted during the three months ended March 31, 2009 amounting to $771,453 which was
recognized as interest expense with a corresponding credit to additional paid-in capital.
Accordingly, the financial statements and other financial information included in this Amendment
No. 1 to the Quarterly Report on Form 10-Q has been restated. The Companys shareholders can no
longer rely on Digitilitis previously filed financial statement for the three months ended March
31, 2009.
PART I
Table of Contents
2
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Item 1. |
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Financial Statements. |
DIGITILITI, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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March 31, 2009 |
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December 31, 2008 |
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Restated |
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ASSETS |
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CURRENT ASSETS |
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Cash |
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$ |
58,769 |
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$ |
36,317 |
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Accounts receivable |
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572,176 |
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549,127 |
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Prepaid and other current assets |
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286,953 |
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201,488 |
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TOTAL CURRENT ASSETS |
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917,898 |
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786,932 |
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PROPERTY AND EQUIPMENT |
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940,260 |
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1,105,113 |
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SOFTWARE LICENSE |
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1,309,250 |
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1,302,158 |
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DEFERRED FINANCING COSTS |
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114,286 |
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202,484 |
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OTHER ASSETS |
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6,322 |
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6,322 |
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TOTAL ASSETS |
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$ |
3,288,016 |
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$ |
3,403,009 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
313,510 |
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$ |
234,957 |
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Accounts payable related parties |
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104,869 |
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104,869 |
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Accrued expenses |
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887,568 |
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1,136,408 |
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Due to related parties |
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88,936 |
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87,622 |
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Current maturities of note payable |
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1,104,100 |
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875,365 |
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Current maturities of capital lease obligations |
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368,900 |
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439,318 |
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Current maturities of notes payable related parties |
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231,540 |
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156,540 |
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Current maturities of convertible debt |
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721,859 |
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2,435,466 |
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TOTAL CURRENT LIABILITIES |
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3,821,282 |
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5,470,545 |
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CAPITAL LEASE OBLIGATIONS |
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59,150 |
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65,037 |
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CONVERTIBLE DEBT |
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1,726,532 |
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1,758,252 |
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CONVERTIBLE DEBT related parties |
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466,203 |
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342,532 |
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DEFERRED RENT |
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16,418 |
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18,130 |
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OTHER LIABILITIES |
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3,607 |
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3,607 |
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TOTAL LIABILITIES |
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6,093,192 |
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7,658,103 |
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STOCKHOLDERS DEFICIT |
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Common
stock, $.001 par value; 100,000,000 shares authorized, 33,552,845 and 26,665,020 shares issued
and outstanding |
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33,553 |
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26,665 |
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Additional paid-in capital |
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13,897,529 |
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10,092,294 |
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Accumulated deficit |
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(16,736,258 |
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(14,374,053 |
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TOTAL STOCKHOLDERS DEFICIT |
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(2,805,176 |
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(4,255,094 |
) |
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TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
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$ |
3,288,016 |
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$ |
3,403,009 |
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See accompanying notes to consolidated financial statements.
3
DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Restated |
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REVENUES |
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$ |
860,279 |
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$ |
563,206 |
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COST OF REVENUES |
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462,405 |
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427,621 |
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GROSS MARGIN |
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397,874 |
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135,585 |
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OPERATING EXPENSES |
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Selling and marketing |
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86,751 |
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161,690 |
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General and administrative |
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592,574 |
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769,864 |
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Research and development |
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90,507 |
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670,079 |
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Total Operating Expenses |
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769,832 |
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1,601,633 |
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LOSS FROM OPERATIONS |
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(371,958 |
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(1,466,048 |
) |
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INTEREST EXPENSE |
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1,990,247 |
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331,833 |
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NET LOSS |
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$ |
(2,362,205 |
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$ |
(1,797,881 |
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NET LOSS PER SHARE BASIC AND DILUTED |
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$ |
(0.07 |
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$ |
(0.07 |
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WEIGHTED-AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED |
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32,175,280 |
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25,149,884 |
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See accompanying notes to consolidated financial statements.
4
DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Restated |
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OPERATING ACTIVITIES |
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Net loss |
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$ |
(2,362,205 |
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$ |
(1,797,881 |
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Adjustments to reconcile net loss to net cash used by
operating activities: |
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Depreciation and amortization |
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271,435 |
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254,032 |
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Common stock issued for services |
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124,312 |
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Amortization of deferred financing costs |
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88,198 |
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49,220 |
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Amortization of discount on convertible debt |
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651,803 |
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112,459 |
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Employee stock option expense |
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63,241 |
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21,412 |
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Common stock issued for purchase of R & D |
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375,000 |
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Beneficial conversion feature on converted notes |
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979,809 |
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Warrant expense |
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172,660 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(30,264 |
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(90,064 |
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Prepaid and other current assets |
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(78,250 |
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(62,632 |
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Accounts payable |
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78,553 |
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505,821 |
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Accrued expenses |
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88,112 |
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Due to related parties |
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1,314 |
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Deferred rent |
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(1,712 |
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2,979 |
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Net cash used in operating activities |
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(77,306 |
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(505,342 |
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INVESTING ACTIVITIES |
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Purchases of property and equipment |
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(276,357 |
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Purchases of software licenses |
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(1,419 |
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Net cash used in investing activities |
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(1,419 |
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(276,357 |
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FINANCING ACTIVITIES |
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Proceeds from notes payable |
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165,197 |
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Payments on notes payable |
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(54,485 |
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Proceeds from issuance of convertible debt |
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808,500 |
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Financing costs |
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(80,850 |
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Payments on capital lease obligations |
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(84,535 |
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(156,207 |
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Proceeds from bank note |
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18,965 |
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Proceeds from note payable related party |
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75,000 |
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14,000 |
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Payments on notes payable related party |
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(10,000 |
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Net cash provided by financing activities |
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101,177 |
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594,408 |
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NET INCREASE (DECREASE) IN CASH |
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22,452 |
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(187,291 |
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CASH |
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Beginning of period |
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36,317 |
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241,333 |
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End of period |
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$ |
58,769 |
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$ |
54,042 |
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5
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Restated |
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Supplemental Cash Flow Information |
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Cash paid for interest |
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$ |
21,509 |
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$ |
18,875 |
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Cash paid for income tax |
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Non-Cash Financing and Investing Activities |
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Issuance of warrants in connection with convertible debt |
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$ |
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$ |
371,950 |
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Stock rescission payable |
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105,000 |
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Equipment acquired under capital lease |
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8,230 |
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Shares issued for accrued interest on convertible debt |
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307,954 |
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Shares issued for convertible debt |
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2,262,700 |
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Notes payable issued to acquire software |
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104,025 |
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See accompanying notes to consolidated financial statements.
6
DIGITILITI, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization, Basis of Presentation and Significant Accounting Policies
The accompanying unaudited interim financial statements of Digitiliti, Inc. have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
and with the instruction to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange
Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes
required under GAAP for complete financial statements. The consolidated financial statements should
be read in conjunction with the audited financial statements and notes thereto contained in
Digitilitis audited financial statements for the year ended December 31, 2008. In the opinion of
management, all adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim periods presented
have been reflected herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the consolidated financial
statements, which would substantially duplicate the disclosure contained in the audited financial
statements, included in Digitilitis Form 10-K, have been omitted.
Restatement
The financial statements as of and for the three months ended March 31, 2009 included in the
Quarterly Report on Form 10-Q filed with the SEC on May 21, 2009, contained an error related to the
recognition of the beneficial conversion feature on notes that were converted during the
three-months ended March 31, 2009. This error resulted in an understatement of interest expense and
net loss by $771,453 for the three-months ended March 31, 2009.
To correct this misstatement, the Company recorded a noncash adjustment for the three months ended
March 31, 2009 of $771,453 which served to increase interest expense and additional paid in
capital. This noncash adjustment resulted from an understatement in the amount of beneficial
conversion feature recognized when certain note holders converted their notes during the three
months ended March 31, 2009. The following table reflects the impact of the above error to the
consolidated statement of operations for the three months ended March 31, 2009.
The three months ended March 31, 2009:
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As previously |
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Reported |
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Adjustments |
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Restated |
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Interest expense |
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$ |
1,218,794 |
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$ |
771,453 |
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$ |
1,990,247 |
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Net loss |
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$ |
1,590,752 |
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$ |
771,453 |
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2,362,205 |
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Loss per share Basic and diluted |
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0.05 |
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0.02 |
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0.07 |
|
The above restatement served to increase additional paid in capital and accumulated deficit by
$771,453, respectively, but did not change the amount of total stockholders deficit reported in
the consolidated balance sheet as of March 31, 2009. The above restatement also served to increase
the Companys net loss by $771,453 for the three months ended March 31, 2009, but this increase in
the Companys net loss was offset by noncash adjustments to amortization of discount on convertible
debt, beneficial conversion feature on converted notes and warrant expense. Accordingly, the
above restatement did not change the net cash used by operating activities for the three months
ended March 31, 2009.
New Accounting Pronouncements
In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 107-1 and Accounting Principles
Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments, (FAS 107-1) to
amend SFAS No. 107, Disclosures about Fair Value of Financial Instruments and APB 28, Interim
Financial Reporting. FAS 107-1 changes the reporting requirements on certain fair value disclosures
of financial instruments to include interim reporting periods. FAS 107-1 is effective for interim
reporting periods ending after June 15, 2009, with early adoption encouraged. We are currently
assessing the impact, if any, that the adoption of this pronouncement will have on our disclosures.
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly, (FAS 157-4) to amend SFAS No. 157, Fair Value Measurements, (SFAS 157). FAS
157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the
volume and level of activity for an asset or liability has significantly decreased. In addition,
FAS 157-4 includes guidance on identifying circumstances that indicate a transaction is not
orderly. FAS 157-4 is effective for interim and annual reporting periods ending after June 15,
2009. We are currently assessing the impact, if any, that the adoption of this pronouncement will
have on our operating results, financial position or cash flows.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
APB 14-1). FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting
Principles Board Opinion No. 14 and that issuers of such instruments should account separately for
the liability and equity components of the instruments in a manner that will reflect the entitys
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and must be applied retrospectively to all periods presented. Adoption of this statement did
not have a material effect on our financial statements.
7
In June 2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). Paragraph 11(a) of Statement
of Financial Accounting Standard No 133 Accounting for Derivatives and Hedging Activities (SFAS
133) specifies that a contract that would otherwise meet the definition of a derivative but is
both (a) indexed to the Companys own stock and (b) classified in stockholders equity in the
statement of financial position would not be considered a derivative financial instrument. EITF
07-5 provides a new two-step model to be applied in determining whether a financial instrument or
an embedded feature is indexed to an issuers own stock and thus able to qualify for the SFAS 133
paragraph 11(a) scope exception. EITF 07-5 is effective for the first annual reporting period
beginning after December 15, 2008, and early adoption is prohibited. On January 1, 2009, we adopted
EITF 07-5 and the adoption of this statement had no material effect on our financial statements.
In June 2008, the Emerging Issues Task Force (EITF) reached final consensuses on EITF Issue 08-4,
Transition Guidance for Conforming Changes to Issue No. 98-5. Certain conclusions reached in EITF
Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, were nullified in EITF Issue No. 00-27, Application of
Issue No. 98-5 to Certain Convertible Instruments. Moreover, some of the conclusions in Issue No.
98-5 and Issue No. 00-27 were superseded by SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. While the conclusions reached in
Issue No. 98-5 were subsequently updated to reflect the issuance of Issue No. 00-27 and SFAS No.
150, the transition guidance in Issue No. 98- 5 was not revised. On January 1, 2009, we adopted
EITF 08-4. The adoption of this standard did not have a material impact on our financial condition,
results of operations, or cash flows.
2. Going Concern
The accompanying condensed consolidated financial statements for the three months ended March 31,
2009, have been prepared assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business.
As shown in the accompanying restated financial statements, we have incurred a net loss of
$2,362,205 for the three months ended March 31, 2009 and an accumulated deficit of $16,736,258 as
of the same date. These conditions raise substantial doubt as to our ability to continue as a
going concern.
We continue to be dependent on our ability to generate future revenues, positive cash flows and
additional financing. Management acknowledges that its ability to continue executing its current
business plan, even on a short-term basis, is dependent on its ability to obtain additional debt or
equity financing. There can be no guarantee that the Company will be successful in generating
future revenues, in obtaining additional debt of equity financing or that such additional debt or
equity financing will be available on terms acceptable to the Company.
3. Convertible Debt
In November 2008, we initiated a request to all of our 12% convertible debt holders to either
extend their respective convertible debt for another 18 months or to convert their principal and
accrued interest into common stock. During the first quarter of 2009, $2,262,700 of the
convertible debt was converted into 6,887,825 shares and $1,614,300 of convertible debt was
extended for an additional 18 months. The total extended as of March 31, 2009 was $2,184,300, with
$927,800 due in the next 12 months; $1,380,000 due in the next 24 months; and $659,500 are due in
next 29 months. In addition, $465,000 of the debt is in default as of March 31, 2009.
In exchange for extending their convertible debt for an additional 18 months, we agreed to reduce
the exercise price of the associated warrants from $1.50 and $2.25 per share to $1.00 per share,
respectively for the A and B warrants. In addition, we agreed to extend the term of both the A and
B warrants from 5 years to 6 1/2 years. Furthermore, the requirement of an effective registration was
not removed in the case of extending the note.
In exchange for converting their convertible debt into common stock, we agreed to reduce the
exercise price from $0.50 to $0.35 per share. We also agreed to reduce the exercise price of the
associated warrants from the $1.50 and $2.25 per share to $1.00 per share, respectively for the A
and B warrants. In addition, we agreed to extend the term of both the A and B warrants from 5 years
to 6 1/2 years. Furthermore, the requirement of an effective registration was removed to allow
conversion.
We evaluated the extension event in late December under FAS No. 15, EITF 02-4 and EITF 96-19.
Because the investors did not grant concession on these outstanding loans, the transactions were
not accounted for as troubled debt restructuring. Consequently, we evaluated these transactions
under EITF 96-19 Debtors Accounting for a Modification or Exchange of Debt Instruments to
determine if the modification was substantial. As a result, no gain or loss was recorded on the
date of the extension since the modification in terms is not considered significant. The Company
recognized $73,272 warrant expense associated with the extended debt under FAS 84 and charged the
unamortized warrant discount to interest expense over the remaining life of the convertible debt
under the new terms.
8
We accounted for the conversion event during the quarter ended March 31, 2009, under the provisions
of Financial Accounting Standard (FAS) No. 84 Induced Conversions of Convertible Debt and
recognized expense totaling $99,388, which is equal to the fair value of the incremental
compensation cost created by the modification of the exercise price of the warrants. The remaining
unamortized warrant discount of $16,377 was recognized through Additional Paid in Capital under the
guidance of Emerging Issues Task Force (EITF) 98-5.
In addition, the contingency related to the contingent beneficial conversion feature was resolved
on the date of conversion. The beneficial conversion feature calculated on the commitment date was
fully recognized through interest expense and Additional Paid in Capital according to EITF 00-27.
During the quarter ended March 31, 2009, $2,262,700 of debt was converted and $979,809 of the
contingent beneficial conversion feature was recognized into interest expense.
The Company is in default on $465,000 convertible debt net of discount of $12,965 as of March 31,
2009.
A summary of the convertible debt as of March 31, 2009, and December 31, 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Gross proceeds from the debts |
|
$ |
5,500,000 |
|
|
$ |
5,500,000 |
|
Less: discount on the warrants |
|
|
(2,116,131 |
) |
|
|
(2,116,131 |
) |
Less: principal converted to common stock |
|
|
(2,532,700 |
) |
|
|
(270,000 |
) |
Add: amortization of discount |
|
|
1,597,222 |
|
|
|
1,079,849 |
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
2,448,391 |
|
|
$ |
4,193,718 |
|
Less: current maturities |
|
|
(721,859 |
) |
|
|
(2,435,466 |
) |
|
|
|
|
|
|
|
Long-term portion of convertible debt |
|
$ |
1,726,532 |
|
|
$ |
1,758,252 |
|
|
|
|
|
|
|
|
9
4. Stockholders Equity
Common Stock:
During the quarter ended March 31, 2009, several convertible debt holders converted their
investment in Convertible Debt in the amount of $2,262,700, net of discount of $373,732, in
principal and accrued interest, to common stock. Total shares issued in exchange for the debt were
6,887,825.
Stock Options:
During the first quarter of 2009, options to purchase 650,000 shares of common stock were granted
by the Company to four employees at an exercise price of $0.385. These options have a contractual
term of 5 years, and have a vesting term of 3 years. Fair value of $74,637 was calculated using the
Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for
options issued during the quarter ended March 31, 2009 include (1) discount rate of 1.44%, (2)
expected life of 3.5 years (3) expected volatility of 152.07% and (4) zero expected dividends.
A summary of option activities for the quarter ended March 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Options |
|
|
Exercise Price |
|
Outstanding at December 31, 2008 |
|
|
4,116,806 |
|
|
$ |
0.37 |
|
Granted |
|
|
650,000 |
|
|
|
0.39 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
4,766,806 |
|
|
|
0.37 |
|
|
|
|
|
|
|
|
|
Stock option expense for the quarter ended March 31, 2009, was $46,971.
Stock Warrants:
During the first quarter of 2009, warrants to purchase 100,000 shares of common stock were granted
by the Company to one of its former employee at an exercise price of $0.35. These warrants have a
term of 5 years and they vest immediately. Fair value of $16,270 was calculated using the
Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for
warrants issued during the quarter ended March 31, 2009 include (1) discount rate of 1.79%, (2)
warrant life of 5 years (3) expected volatility of 142.26% and (4) zero expected dividends.
10
A summary of warrant activities for the quarter ended March 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Warrants |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
6,200,348 |
|
|
$ |
1.59 |
|
Granted |
|
|
100,000 |
|
|
|
0.35 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
6,300,348 |
|
|
|
1.57 |
|
|
|
|
|
|
|
|
|
Stock warrant expense for the quarter ended March 31, 2009 was $16,270.
11
|
|
|
Item 2. |
|
Managements Discussions and Analysis of Financial Condition and Results of Operations. |
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking
statements with respect to the goals, plan objectives, intentions, expectations, financial
condition, results of operations, future performance and our business, including, without
limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that
include the words may, would, could, should, expects, projects, anticipates,
believes, estimates, plans, intends, targets or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of
which are beyond our control) that could cause actual results to differ materially from those set
forth in the forward-looking statements, including the following: general economic or industry
conditions, nationally and/or in the communities in which we may conduct business, changes in the
interest rate environment, legislation or regulatory requirements, conditions of the securities
markets, general and specific economic conditions, our ability to raise capital, changes in
accounting principles, policies or guidelines, financial or political instability, acts of war or
terrorism, other economic, competitive, governmental, regulatory and technical factors affecting
our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these
statements. Forward-looking statements speak only as of the date they are made. We do not
undertake, and specifically disclaim, any obligation to update any forward-looking statements to
reflect events or circumstances occurring after the date of such statements.
Plan of Operation
We presently focus on providing a cost effective data protection solution to the small to medium
business (SMB) and small to medium enterprise (SME) markets through our remote Pharaoh Business
Fortress Storage Center. This data protection solution is geared specifically to help
organizations properly manage and protect their entire network from one centralized location, with
offsite redundancy. Our solution can backup and restore data on every machine in a network,
including desktops, laptops, file and print servers. We are dedicated to developing and delivering
superior storage technologies and methodologies that will enable our customers to manage and
protect massive data growth with ease.
Through our Pharaoh Business Fortress Storage Center, we combine a powerful, agent-less backup
software with our remote to deliver to our customers a powerful and effective online-offsite data
backup and restore solution. We provide storage from a utility based computing philosophy,
whereby customers pay only for the gigabytes of data they store in our Fortress Storage Center.
Our facilities allow us to provide offsite disaster recovery with an emphasis on intraday
protection and restore for all of our customer primary data centers and geographically dispersed
offices or campus settings. Our Fortress Storage Center is located in the base of the former
Minneapolis Federal Reserve Bank. It is a one of a kind facility that provides our web based
on-demand backup/restore service (digitiliti) with all the benefits of direct fiber access to a
Level 5 data center. The Fortress Storage Center has 24/7 onsite physical security, including
security guards, motion detectors, security cameras, card-key access, separate cages with
individual locking cabinets and ladder racking. It also has battery generator back up power,
temperature and humidity controls and fire suppression systems. Geographically, we are located at
the center point of the Metropolitan area network. Being centrally located at the focal point of
the Twin Cities Fiber Channel and Gig loop, the pipeline for data and load capabilities are
immense. This allows us to send data back and forth in real time.
The Fortress Storage Center houses all of the hardware and software needed for our digitiliti
solution to work. At the customer site, digitiliti administrator software is loaded on as many
or as few workstations as desired and will require a valid logon code, ensuring no unauthorized
access. At the customer site, the administrator software console acts as the interface with
digitiliti in the Fortress Storage Center and enables the configuration of all backups and
restores. The digitiliti backup software is totally agent-less, requiring no additional software
to be installed on any machines. From the customer administration console, the customer sets
retention policies, schedules automatic backups and initiates restores. The customer decides what
files to backup: emails, Windows, Linux, Mac, Lotus, AS400 or many more. Customers typically start
backing up one system and then add more systems to their backup sets as they continue to see how
easily our digitiliti works.
12
For large data volumes, the initial data backup may be downloaded to a portable disk unit at the
customer site. When the full backup of data is complete, the disks are transported to the Fortress
Storage Center where the data is loaded onto the equipment in the Fortress Storage Center. From
then on, all data is backed up in incremental changes over the Internet. All data is encrypted at
all times before it leaves the customer site and when stored offsite. The encryption key is
known only to the customer. The data can be unencrypted only by the customer, who would do so upon
the need of a restore. If a customer loses data, the customer simply enters the commands to
restore it via the administration console. At that time, the data would flow from the Fortress
Storage Center back to the customer site. If the customer loses all data, digitiliti can restore
the latest data to a location of the customers choosing using a portable disk unit. In addition
to being encrypted, the data is also highly compressed, making it extremely safe and impenetrable
from viruses. We maintain two copies of the customer data at all times.
We have contracted with XO Communications for our data center and communications. We lease our
Fortress Storage Center space from them, and they own the Internet lines we use. This relationship
helps keep capital expenditures at a minimum, while maintaining the flexibility to set up a new
data center in any one of 80 geographically dispersed locations throughout the world, thereby
reducing any geographic concerns about our digitiliti. XO Communications provides voice, data
and IP services to businesses and other telecommunications companies in 75 metropolitan markets
across the United States.
As a result of our sales and marketing efforts of our existing product, Pharaoh, our customer base
has expanded from approximately 20 in fiscal 2005; to approximately 100 in fiscal 2006; to 508 in
2007; to 731 in 2008; and now stands at 722 as of Mach 31, 2009. Correspondingly, our annual sales
have increased from $402,638 in 2006; to $1,329,386 in 2007; and to $3,075,308 in 2008. This
reflects an average monthly revenue exceeding $300,000. Despite the significantly improved cash
flows provided by the increased sales, we are experiencing and anticipate cash flow shortages
resulting from new product development, product launch and potential convertible debt repayment
requirements.
Our primary focus in 2009 is to evaluate our long term strategic direction. In doing so, we will
evaluate a number of alternatives for our future. Under consideration is a considered shift out of
our current Pharaoh Vault Business Service and into our new product area, Pyramid. Our reasons for
evaluating this strategic alternative are (i) to solve a major industry and customer problem of
managing their continually growing information volume and associated cost of storage and retrieval,
(ii) to be able to access a larger share of opportunity in the information management storage
business; (iii) our Pyramid technology is believed to have significant technological advantages to
our Pharaoh Vault Business Service; and (iii) our need to expand our storage capacity for
additional growth. This will require a significant capital investment of approximately $2M
$3M dollars in 2009. Our present financial situation does not currently enable us to invest funds
in both of these technologies at the same time. We require approximately $1M $2M to rollout
Pyramid and begin generating sales. We expect to have a determination and decision as to what
strategic options we will pursue in our second quarter of 2009.
We have determined that our new product, Pyramid, is positioned to achieve significantly more
market opportunity potential that our current Pharaoh Vault Business Service operations. This is
because we will offer a solution to fix an industry-wide problem of data proliferation, volume
growth, and the associated problems that causes, and, we will do this at significantly better cost
performance and simplicity. Therefore, we are currently evaluating the sale of our Pharaoh Business
Fortress Storage Center in order to more sufficiently fund our planned business operations. It is
anticipated that any sale of our Pharaoh Business Fortress Storage Center that may be negotiated
will be submitted to our stockholders for approval in accordance with the Delaware Business
Corporation Act.
We invested significant resources in our new product, Pyramid, in 2008, in an attempt to expand our
digitiliti product offering by developing a new generation of leading edge software. This
development activity will continue at a greater pace in 2009. Pyramid represents a significant
step toward our goal to become a technology leader in the data information management marketplace.
We are behind schedule on our development and launch of Pyramid by six to nine months, but since
February, 2009, we have implemented a rigorous product development approach, established a concrete
architectural framework and a very specific product development plan, with automated test and
integration system. We have restructured the product development team, and we are currently on
schedule to introduce Pyramid in the third quarter of 2009 and begin generating sales at that time.
We have three key milestones in our development plan, the first being a
May 15th date to
have the reference platform completed. This means that the basic
technology and performance capabilities of Pyramid are operational and meeting requirements. This
reference platform is the basic capability that Pyramid will introduce to the market in the third
quarter. We have completed this first milestone. With the reference platform being completed,
we can now begin to integrate value-added resellers (business partners) into our development plan
to Beta test and gain valuable insight and feedback for refinements. We are very encouraged by the
strong feedback from our
customers and industry analysts who have seen Pyramid product presentations. The process of
refining our digitiliti products, our sales and marketing systems, our product packaging, our
infrastructure scaling methods and revenue generation offerings are well underway. From industry
feedback, we believe our Pyramid technology will establish a new standard for how companies will
manage their information in the future. We believe, despite the delay in our schedule, that we
will introduce new, industry-changing capability to the storage solutions market and that we will
accomplish this goal well ahead of any other potential competitor. Presently, we believe there are
no competitors in this new market arena. We have high confidence in our development plan and our
development team and believe our schedule and capability are attainable in accordance with our
goals.
13
We are presently experiencing cash flow problems; however, we have been aggressively taking steps
to reduce overall operating costs as we conserve cash. Since 2008, we have reduced our annual
salaries and wages by over 20%, while increasing operational efficiencies and lowering overall
costs of goods sold. In the first quarter of 2009, we made additional cost improvements to our
infrastructure. As we determine our strategic alternatives, we will act swiftly to continue to
deploy and prioritize resources to manage expenses. In addition, we are raising more capital to
assure we have the financial resources to achieve our strategy.
Our increase in customer count and overall sales have been funded, in large part, through our $5.5
million offering of 12% convertible notes initiated in March 2007. Prior to implementation of the
Modification Proposal (discussed below), these convertible notes reflected a $0.50 per share
conversion rate upon expiration of an 18-month maturity date, currently resulting in principal and
accrued interest due of $1,334,770, estimated as of December 31, 2008. In addition, for every
dollar invested, these convertible notes allowed each investor to receive one-half warrant to
acquire one-half of a share of our common stock with a five year term at $1.50 per share and $2.25
per share, respectively. No warrant could have been exercised during the first six months and one
day following issuance, unless there was an effective registration statement covering the
underlying common stock that has been filed covering the shares underlying these warrants with the
Securities and Exchange Commission.
We directly contacted our convertible note holders to seek to restructure this debt by asking
the holders to extend the due dates of their respective convertible notes or to encourage them to
convert their respective convertible notes (the Modification Proposal). On November 13, 2008, as
a demonstration of confidence in our current plan, and as an act of good faith, our Board of
Directors unilaterally approved a reduction in the $1.50 and $2.25 exercise prices of the
convertible note holders warrants to $1.00 for both classes of warrants. In addition, our Board of
Directors approved an overall reduction in the conversion price of all convertible notes from $0.50
per share to $0.35 per share; the resolutions provided that the reduced conversion price would be
retroactive to include any convertible note holders who had already elected to convert their
respective convertible notes. $35,000.00 in convertible notes had already been converted at the
time of these resolutions; accordingly, we were obligated to issue a total of 109,000 shares of our
common stock for division among these holders. The table under Part II, Item 3, below, presents
information about our convertible notes that are still outstanding following conversions and
extensions of convertible notes under our Modification Proposal. Please see Part II, Item 3.
Results of Operations
For the three month periods ended March 31, 2009, and 2008
Our sales for the March 31, 2009, quarter increased by $297,073 to $860,279 compared to $563,206 for
the quarter ended March 31, 2008. The increase in revenue is a direct result of an increase in
customers under contract and the resulting terabytes of data added to our Fortress Storage Center,
combined with the growth in existing customer data. Consistent with this pattern of growth, our
customer base grew from 594 as of March 31, 2008 to 722 as of March 31, 2009. The growth of
customer contracts is a direct result of the heavy emphasis we have placed on marketing our
digitiliti service. Our efforts included attending industry tradeshows throughout the country, as
well as revamping our website. We also concentrated significant resources refining our product
presentation, product positioning and pricing models. Finally, we continued to enhance our network
of resellers throughout the country by providing strong dealer support services and offering a
compelling pricing program.
Our quarterly gross margin reflects an increase of $262,289 with a gross margin of $397,874 through
March 31, 2009, versus $135,585 through March 31, 2008. Factors contributing to this increase in
our gross margin are our deliberate targeting of a larger profile customer, which resulted in (i)
more efficient customer pricing; (ii) a significant increase or growth in customer base; and (iii)
an increase in organic growth of our customers data. In short, we have learned that our sales and
marketing efforts are better expended targeting larger customers in the SMB and SME markets. We
have learned how to sell our digitiliti service to this larger profile customer, which has
increased our revenue, proportionately reduced our costs of revenue and has allowed us to leverage
our infrastructure and efficiently bill for our customers data growth in our Fortress Storage
Center vault.
14
Research and development expenses decreased from $670,079 to $90,507 during the quarterly periods
ended March 31, 2008, and 2009, respectively. This significant decrease primarily reflects the
up-front costs of acquiring the software technology from StorageSwitch LLC consisting of an initial
cash outlay of $200,000 and the issuance of certain shares of our common stock valued at $375,000.
Selling and marketing expenses decreased to $86,751 from $161,690 for the quarterly periods ended
March 31, 2009, and 2008, respectively, reflecting a decrease of $74,939. This decrease principally
reflects our success in learning to market our digitiliti service to resellers that have the
requisite expertise to produce immediate results. Again, we have not only learned to market our
digitiliti service to larger profile customers, but also to larger profile and more technically
proficient resellers, thereby resulting in increased sales with fewer (or more efficient) marketing
expenditures.
General and administrative expenses decreased by $177,290 to $592,574 compared to $769,864 during
the quarterly periods ended March 31, 2009, and 2008, respectively. This decrease is generally
attributable to the reduced reliance on outside consultants (and corresponding consultants fees)
and reduced legal and accounting expenses. Interest expense during the quarter ended March 31,
2009, increased by $1,658,414 to $1,990,247 compared to $331,833 for the quarter ended March 31,
2008. This significant increase is related to the contingent beneficial conversion feature
associated with the debt converted during the first quarter of 2009 and the amortization of the
discount associated with our convertible debt that resulted from those convertible note holders who
chose to convert their convertible notes pursuant to our Modification Proposal discussed above.
Liquidity
Our liquidity is dependent, in the short term, on proceeds from newly issued debt and the sale of
our common stock for cash. In the long term, we need to continue expanding our capacity of the
Fortress Storage Center by investing in property and equipment and software licenses.
For the three month periods ended March 31, 2009, and 2008
During the three months ended March 31, 2009, we received proceeds of $165,197 from the issuance of
notes payable and $75,000 from related party, which helped to fund cash used in operations and
investment in property and equipment.
Net cash used by operating activities during the first three months of 2009 was $77,306 compared
to $505,342 during the first quarter of 2008. Net cash used by operating activities during the
three months ended March 31, 2009, was primarily impacted by:
|
|
|
Net loss of ($2,362,205). |
|
|
|
Depreciation and amortization of $271,435. |
|
|
|
Amortization of discount on convertible debt issued of $651,803. |
|
|
|
Increase in accounts receivable of $30,264. |
|
|
|
Increase in accounts payable and accrued expenses of $166,665. |
|
|
|
Beneficial conversion feature on converted debt of $979,809. |
Net cash used by operating activities during the three months ended March 31, 2008, was primarily
impacted by:
|
|
|
Net loss of ($1,797,881). |
|
|
|
Depreciation and amortization of $254,032 |
|
|
|
Increase in trade accounts payable and accrued expenses of $505,821. |
Net cash used by investing activities during the first three months of 2009 was $1,419, primarily
related to the purchase of software licenses. Net cash used by investing activities during the
first three months of 2008 was comprised of equipment and software licenses of $276,357.
Net cash provided by financing activities during the first three months of 2009 was $101,177,
primarily consisting of $84,535 in principal payments on capital leases; $165,197 from the issuance
of notes payable; $75,000 from the issuance of related party debt. Net cash provided by financing
activities during the first three months of 2008 was $594,408; $808,500 from the sale of convertible
debt securities. Offsetting these items were $156,207 in principal payments on capital leases and
$80,850 in payments of financing costs.
15
At March 31, 2009, our cash balance was $58,769 compared to $36,317 at December 31, 2008.
An aggregate of $465,000 of our convertible notes was due at March 31, 2009; Although we are
continuing to discuss payment and/or conversion or extension of these notes with note holders,
these outstanding obligations pose a risk to our ongoing operations.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
As a smaller reporting company, we are not required to provide disclosure under this Item 3.
|
|
|
Item 4T. |
|
Controls and Procedures. |
Evaluation of disclosure controls and procedures
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system is intended to provide reasonable assurance to our
management and Board of Directors regarding the preparation and fair presentation of published
financial statements and that we have controls and procedures designed to ensure that the
information required to be disclosed by us in our reports that we will be required to file under
the Exchange Act is accumulated and communicated to our management, including our principal
executive and our principal financial officers or persons performing similar functions, as
appropriate to allow timely decisions regarding financial disclosure. Managements current
assessment of the effectiveness of our internal controls is based principally on our financial
reporting as of December 31, 2008, and 2007, and the quarterly periods ended September 30, 2008,
June 30, 2008, and March 31, 2008. In making our assessment of internal control over financial
reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control Integrated Framework.
Accordingly, our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the date of this Quarterly
Report. Based on such evaluation of the above referenced periods, due to the material weaknesses in
our internal controls over financial reporting further described below, our Chief Financial Officer
concluded that such disclosure controls and procedures were not effective in providing reasonable
assurance that information required to be disclosed by us in the reports we file under the Exchange
Act was recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules, regulations and forms.
For the periods referenced above, managements assessment identified material deficiencies in our
internal control over financial reporting. These deficiencies include lack of segregation of
duties, lack of adequate documentation of our system of internal control, deficiencies in our
information technology systems, limited capability to interpret and apply United States generally
accepted accounting principles and lack of formal accounting policies and procedures and related
documentation.
Managements efforts to resolve these internal control weaknesses started with the hiring of a
full-time Controller on October 1, 2007. In April 2008, our Board of Directors approved this
persons promotion to Chief Financial Officer. Beginning in October 2007, management prepared a
written review of every facet of our information processing system, like cash disbursements, sales
and billing, cash receipts and other procedures. We continue to evaluate and address these
weaknesses to ensure adherence to written policy, completeness of reporting, segregation of
incompatible duties and compliance with generally accepted accounting principles; and we intend to
continue to monitor and evaluate these and other factors affecting our internal controls.
It is managements intent to correct all identified material deficiencies in our internal controls
as reported in previous periods. Until such time, our internal control over financial reporting may
be subject to additional material weaknesses and deficiencies that we have not yet identified.
Management has determined that these significant deficiencies, in the aggregate, constitute
material weaknesses in the design and operation of our internal controls in effect prior to
December 31, 2008, and 2007, and for the quarterly period ended March 31, 2009. We continue to
address and evaluate these issues.
16
Our former auditors also advised us of certain other material weaknesses and significant
deficiencies in our internal controls in connection with auditing our consolidated financial
statements for the years ended December 31, 2007, and 2006, including, in summary: (i) lack of
accounting expertise, with recommended additional training for our CFO; (ii) issues regarding
reimbursement of unsubstantiated expenses; (iii) segregation of duties of accounting functions
among various personnel; (iv) segregation of cash distribution responsibilities; (v) establishment
of initial control over cash receipts; (vi) material weaknesses on preparation of our consolidated
financial statements; and (vii) the establishment of an audit committee. We are also addressing
these concerns.
Our current costs to remediate our material weaknesses in internal controls include the increase in
salary of a full-time CFO at an annual cost of approximately $40,000 more than our former part-time
chief accounting officer, together with substantial time and expense of other employees involved in
addressing these issues. Future costs will include fees and costs associated with attendance at
seminars and other programs by our CFO and certain employees relative to recognizing and resolving
these types of issues.
Changes in internal control over financial reporting
Except as indicated in the preceding paragraph about managements evaluation of disclosure controls
and procedures, our management, with the participation of our chief executive officer and chief
financial officer, has concluded there were no significant changes in our internal controls over
financial reporting that occurred during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
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Item 1. |
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Legal Proceedings. |
None; not applicable.
Not required; however, various risk factors about us and our business prospects and products is
contained in Item 1A of our Form 10 Registration Statement that was filed with the Securities and
Exchange Commission on or about August 13, 2008, all of which are still applicable to us.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
During the first quarter of 2009, $2,262,700 of the convertible debt was converted into 6,887,825
shares and $1,614,300 of convertible debt was extended for an additional 18 months.
During the three months ended March 31, 2009, our Board of Directors approved the issuance of the
following equity securities to our former and present officer and directors: 225,000 stock options
to Roy A. Bauer and Benno Sand (individually) granted on February 6, 2009, reflecting a $0.385
exercise price and that vest over a 36 month period and 100,000 stock options to Jonathon S. and
Pamela J. Miner (individually) also granted on February 6, 2009, reflecting a $0.385 exercise price
and that vest over a 36 month period.
During the three months ended March 31, 2009, in conjunction with a severance agreement executed
between us and Dan Herbeck, acting though his company, Continental Technologies Solutions, LLC, we
approved the issuance of 100,000 five year cashless warrants to purchase 100,000 shares of our
common stock at $.35 per share.
In conjunction with the of the Separation Agreement executed between Brad D. Wenzel and us on April
20, 2009, Mr. Wenzel received warrants to purchase 300,000 shares of our common stock exercisable
at a price of $0.385 per share, over a three (3) year term.
Also pending is the extension of a $250,000 12% convertible note held by a shareholder that
reflected a maturity date of April 20, 2009. This convertible note is guaranteed by a member of
our Board of Directors and discussions are underway to confirm, among other terms, the issuance of
additional warrants as consideration for a minimum six month extension to this convertible note.
17
In reliance on a pending private offering not yet finalized, we received $100,000 from an existing
shareholder that shall be tied to a convertible note that reflects the following minimum terms: a
12% interest rate, a six month maturity date and a $0.35 conversion rate feature upon or before
maturity. In addition, this shareholder will have 100% warrant coverage and will receive one
warrant at a $0.50 exercise price for each dollar invested and should the shareholder decide to
convert the convertible note upon or before maturity, the warrant exercise price will be reduced to
$0.35 per share.
We issued all of these securities to persons who were accredited investors or sophisticated
investors as those terms are defined in Rule 501 of Regulation D of the Securities and Exchange
Commission; and each such person had prior access to all material information about us. We believe
that the offer and sale of these securities were exempt from the registration requirements of the
Securities Act, pursuant to Sections 4(2) and 4(6) thereof, and Rule 506 of Regulation D of the
Securities and Exchange Commission. Registration of sales to accredited investors and a limited
number of sophisticated investors are preempted from state regulation, though states may require
the filing of notices, a fee and other administrative documentation like consents to service of
process and the like.
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Item 3. |
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Defaults Upon Senior Securities. |
After implementation of our Modification Proposal (discussed in our Plan of Operation above in Part
I, Item 2), the following reflects as of May 15, 2009, the total amount of convertible notes that
were outstanding during each quarter when sold, the remaining principal and accrued interest
outstanding from those convertible note holders that did not convert or extend their convertible
notes, and the quarters in which those unconverted and unextended convertible notes mature.
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Due Date |
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Principal & |
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For |
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Principal |
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Acc. Interest |
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Accrued |
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Principal & |
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Original |
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Balance of |
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on |
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Interest on |
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Accrued |
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Total of |
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Conv. Notes |
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Conv. Notes |
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Conv. Notes |
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Interest on |
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Convertible |
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Outstanding |
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Outstanding |
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Outstanding |
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Convertible |
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Notes Sold at |
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as of |
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as of |
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as of |
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Notes at |
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12/31/2008 |
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5/15/2009 |
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5/15/2009 |
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5/15/2009 |
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5/15/2009 |
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1st Qtr 2007 |
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$ |
401,050 |
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$ |
60,000 |
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$ |
15,760 |
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$ |
75,760 |
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Sep-08 |
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2nd Qtr 2007 |
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$ |
707,500 |
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$ |
225,000 |
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$ |
53,498 |
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$ |
278,498 |
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Dec-08 |
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3rd Qtr 2007 |
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$ |
1,165,000 |
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$ |
130,000 |
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$ |
26,173 |
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$ |
156,173 |
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Mar-09 |
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4th Qtr 2007 |
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$ |
926,000 |
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$ |
140,000 |
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$ |
25,985 |
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$ |
165,985 |
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Jun-09 |
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1st Qtr 2008 |
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$ |
808,500 |
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$ |
15,000 |
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$ |
2,095 |
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$ |
17,095 |
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Sep-09 |
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2nd Qtr 2008 |
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$ |
945,500 |
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$ |
98,000 |
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$ |
11,771 |
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$ |
109,771 |
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Dec-09 |
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3rd Qtr 2008 |
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$ |
546,450 |
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$ |
65,000 |
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$ |
5,981 |
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$ |
70,981 |
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Mar-10 |
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$ |
5,500,000 |
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$ |
733,000 |
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$ |
141,263 |
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$ |
874,263 |
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Relative to the matured convertible notes detailed above, we have not entered into any formal
payment schedules, and we continue to negotiate alternative payment arrangements.
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Item 4. |
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Submission of Matters to a Vote of Security Holders. |
None; not applicable.
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Item 5. |
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Other Information. |
Board Members
In May 2009, the following individuals were added to our Board of Directors to fill vacancies.
Karen Gilles Larson. Ms. Larson retired in 2007 after nearly 10 years as the President and Chief
Executive Officer of Synovis Life Technologies, a publicly-held medical device company. Ms Larson
joined Synovis (at the time called Bio-Vascular, Inc.) in 1989 as its Director of Finance and
Administration. She was promoted to the positions of Vice President of Finance, Chief Financial Officer and Corporate Secretary. Ms. Larson filled those capacities until July of 1997,
when she was named President and Chief Executive Officer. In August of 1997, Ms. Larson was
appointed to the Synovis Board of Directors. She continues to serve as a Director of Synovis Life
Technologies.
18
During her tenure at Synovis, Ms. Larson developed and executed a growth and diversification
strategy which increased revenue from $9.7M to $58M within five years. She built and mentored a
strong executive team resulting in 24 quarters of uninterrupted revenue growth. Ms. Larson moved
the Synovis stock listing from OTC market to NASDAQ. Prior to joining Synovis, Ms. Larson was the
Controller at VEE Corporation; and previously, she was an accountant with the firm of McGladrey,
Hendrickson and Pullen (now called RSM McGladrey). She earned a Bachelor of Arts Degree in
Economics with a minor in Chemistry from the University of Minnesota.
Kedar R. Belhe. Mr. Belhe was Senior Director of Business Development at St. Jude Medical, AF
Division from 2004 to 2007 and again at the CV Division from 2007 to 2008. St. Jude Medical is a
$5B global medical device company with over 20 operations and manufacturing facilities worldwide.
At the CV Division, Mr. Belhe was responsible for mergers and acquisitions and technology licensing
transactions. He completed $260M of acquisitions in 2008. At the AF Division, he was responsible
for technology strategy planning of the newly created division. He led several initiatives of
technology integration within the acquired businesses, as well as technology partnerships with
major external companies. Mr. Belhe was Senior Director of Technology Development at St. Judes
Daig Division from 1999 to 2004.
Mr. Belhe is currently founder and President of Metamod, a medical device startup company focused
on metabolic disorders. He has strong functional expertise in technical, financial and strategic
assessment of high-technology value opportunities. He earned a Bachelor of Science degree in
Chemical Engineering from the University of Bombay, India, and a PhD in Chemical Engineering from
Washington University in St. Louis. He also earned a Master of Business Administration from
Washington University in St. Louis.
Ms. Larson and Mr. Belhes appointments strengthen our Board in the areas of growth initiatives,
business development, financial management and investor relations.
As compensation for service on our Board of Directors, each of these persons will be granted
options to acquire 225,000 shares of our common stock at an exercise price of $0.385 per shares
that vest over three years., under the Digitiliti, Inc. 2007 Stock Option Plan.
19
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Exhibit No. |
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Identification of Exhibit |
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3.1 |
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Initial Certificate of Incorporation filed March 31, 2006.
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Exhibit to our Form 10 |
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3.2 |
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Bylaws.
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Exhibit to our Form 10 |
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3.3 |
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Certificate of Amendment regarding the name change to Digitiliti,
inc. and the Recapitalization.
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Exhibit to our Form 10 |
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3.4 |
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Certificate Correction regarding the name change to Digitiliti, Inc.
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Exhibit to our Form 10 |
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3.5 |
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Amended and Restated Certificate of Incorporation filed May 13, 2008.
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Exhibit to our Form 10 |
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10.1 |
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Stock Purchase Agreement between Storage and our former principal
shareholders under which Storage acquired a controlling interest in
us.
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Exhibit to our Form 10 |
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10.2 |
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Agreement and Plan of Merger between us, Themescapes and Bulldog
under which we became a holding company.
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Exhibit to our Form 10 |
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10.3 |
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Agreement and Plan of Merger, as amended, between us, Cyclone
Acquisition and Storage under which Storage became our wholly-owned
subsidiary.
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Exhibit to our Form 10 |
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10.4 |
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XO Communications Contract.
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Exhibit to our Form 10 |
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10.5 |
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FRM Associates Lease, as amended.
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Exhibit to our Form 10 |
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10.6 |
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EBC Minneapolis, Inc. Sublease Agreement.
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Exhibit to our Form 10 |
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10.7 |
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Upper Corner Venture, LLC Lease Agreement.
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Exhibit to our Form 10 |
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10.8 |
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M2 Consulting Agreement of May 2006, with Addendums.
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Exhibit to our Form 10 |
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10.9 |
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M2 Consulting Agreement of April 2007.
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Exhibit to our Form 10 |
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10.10 |
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5X Partners Corporate Development Services Agreement with Addendums.
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Exhibit to our Form 10 |
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10.11 |
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StorageSwitch Consulting Services Agreement.
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Exhibit to our Form 10 |
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10.12 |
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StorageSwitch Non-Compete Agreement.
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Exhibit to our Form 10 |
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10.13 |
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StorageSwitch Technology Purchase Agreement.
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Exhibit to our Form 10 |
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10.14 |
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Vision to Practice, Inc. Development Services Agreement.
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Exhibit to our Form 10 |
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10.15 |
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Form of 12% Convertible Note.
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Exhibit to our Form 10/A-2 |
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10.16 |
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Form of A Warrant for 12% Convertible Note Offering.
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Exhibit to our Form 10/A-2 |
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10.17 |
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Form of B Warrant for 12% Convertible Note Offering.
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Exhibit to our Form 10/A-2 |
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10.18 |
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Letter Agreement with M2 of June, 2008.
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Exhibit to our Form 10/A-2 |
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16.1 |
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Letter of Auditors regarding termination.
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Exhibit to our Form 10/A-2 |
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21 |
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Subsidiaries.
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Exhibit to our Form 10 |
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31.1 |
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302 Certification of CEO, Roy A. Bauer |
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31.2 |
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302 Certification of CFO, William McDonald |
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32.1 |
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906 Certification |
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99.1 |
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Digitiliti, Inc. Stock Option Plan.
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Exhibit to our Form 10 |
20
SIGNATURES
Pursuant to the requirements 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
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Digitiliti, Inc.
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Date: September 24, 2010 |
By: |
/s/ Roy A. Bauer
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Roy A. Bauer, President, CEO and Director |
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Date: September 24, 2010 |
By: |
/s/ William McDonald
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William McDonald, CFO |
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21