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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-53235
DIGITILITI,
INC.
(Exact Name of Registrant as specified in its Charter)
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| Delaware
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26-1408538 |
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(State or other Jurisdiction of
Incorporation
or Organization)
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(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
(Registrant’s Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
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Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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.
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part IV of this Form 10-K
or any amendment to this Form 10-K. 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:
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Accelerated filed o
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Non-accelerated filer o
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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
Market Value of Non-Affiliate Holdings
State the aggregate market value of the voting and non-voting common stock held by non-affiliates
computed by reference to the price at which the common stock was last sold, or the average bid and
asked price of such common stock, as of the last business day of the Registrant’s most recently
completed third quarter.
At June 30, 2010, the aggregate market value of the shares of voting and non-voting common stock
held by non-affiliates was approximately $10,778,001, based on
59,887,782 shares being held by such
persons and the closing price of $0.18 for the Registrant’s common stock on the Pink OTC Markets,
Inc. (the “Pink Sheets”) on June 30, 2010.
Outstanding Shares
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as
of the latest practicable date:
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Outstanding at March 30, 2011 |
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| Common Stock, $.001 par value per share
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65,599,753 shares |
Documents Incorporated by Reference
Parts of the definitive Proxy Statement for the 2011 Annual Meeting of Stockholders which the
Registrant intends to file with the Securities and Exchange Commission within 120 days after the
end of the Registrant’s fiscal year ended December 31, 2010, are incorporated by reference in Part
III of this Annual Report on Form 10-K to the extent described herein. If the Registrant does not
file its Proxy Statement with the Commission on or before 120 days after the end of its 2010 fiscal
year, the Registrant will file the required information in an amendment to this Annual Report on
Form 10-K.
PART I
FORWARD-LOOKING STATEMENTS
In this Annual Report, references to “Digitiliti, Inc.,” “Digitiliti,” the “Company,” “we,” “us,”
“our” and words of similar import) refer to Digitiliti, Inc., a Delaware corporation (the
“Registrant”); and such references also include our wholly-owned subsidiary, Digitiliti, Inc., a
Minnesota corporation, which was formerly named “Storage Elements, Inc.,” our predecessor
(sometimes called “Storage” herein).
This Annual Report contains certain forward-looking statements, and for this purpose, any
statements contained in this Annual Report that are not statements of historical fact may be deemed
to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,”
“expect,” “believe,” “anticipate,” “estimate,” “continue” or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve substantial risks
and uncertainties, and actual results may differ materially depending on a variety of factors, many
of which are not within our control. These factors include, but are not limited to, economic
conditions generally and in the markets in which we may participate, competition within our chosen
industry, technological advances and any failure by us to successfully develop continuing business
relationships and customers or to successfully fund our current and intended operations.
We were organized under the name “Cyclone Holdings, Inc.” as a holding company under Delaware Law
on March 31, 2006.
On February 27, 2007, we changed our name to “Digitiliti, Inc.”
We acquired Storage Elements, Inc (the “Storage Merger”), effective August 17, 2007, and we became
a successor to Storage and its business operations, with Storage becoming our wholly-owned
subsidiary. References are often made to “Storage” throughout this Annual Report to provide a
clearer understanding of the information presented. We also changed the name of Storage to
“Digitiliti, Inc.” As a result, we both share the same name, respectively, in the States of
Delaware and Minnesota.
Currently, our principal executive offices are located at 266 East 7th Street,
4th Floor, St. Paul, Mn 55101, (651) 925-3000.
On March 13, 2008, we acquired a commercially-proven technology from StorageSwitch, LLC, a Colorado
limited liability company (“StorageSwitch”), which led to the development of our new product
discussed below under the heading “Business-DigiLIBE.” Since then we have made significant changes
to the product, and it is now called the “Universal Archive Platform”.
Our business is developing and delivering superior archiving and information management
technologies and methodologies enabling our customers to manage, control, protect and access their
information and data simply and cost effectively. Our traditional business is providing a cost
effective on-line data protection and data recovery solution to the small to medium business
(“SMB”) and small to medium enterprise (“SME”) markets through our DigiBAK service.”. This on-line
cloud storage management solution helps organizations properly manage and protect their entire
network from one centralized location.
Our emerging business product, released in the first quarter of 2010, is called the Universal
Archive Platform, DigiLIBE. We believe that DigiLIBE is a game-changing product that addresses the
desperate need for a fiscally responsible, integrated system to manage the increasing growth,
volume, and diversity of unstructured data that now represents up to 85% of enterprise information
and continues to grow rapidly. Content chaos is overwhelming companies’ ability to meet compliance,
utilize collaboration tools and optimize storage needs for their virtualized infrastructures.
DigiBAK and DigiLIBE are complementary products with DigiBAK providing cloud storage backup and
recovery of structured data and operating system files and DigiLIBE offers archiving and
information management and life-cycle control of unstructured data from end-user through archiving
and back to the end user.
Our Internet website address is www.Digitiliti.com. The information on this website is not
incorporated by reference into this Annual Report on Form 10-K. We make available free of charge
through our website annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, Forms 3, 4 and 5 filings, and all amendments to those reports and filings as soon as
reasonably practicable after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission (“SEC”).
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The DigiBAK business
Our DigiBAK solution can backup and restore emails and all company data on every machine in a
network, including desktops, laptops, file and print servers. We provide storage through a
“utility based computing” philosophy, where customers pay for the gigabytes of data they store in
DigiBAK’s Vault facility.
Through our DigiBAK service, we combine powerful, agent-less backup software with our highly
protected facility, to deliver to our customers an efficient and effective online-offsite data
backup and restore solution. Our facilities enable us to provide offsite disaster recovery
emphasizing intraday protection and restore for all of our customer primary data centers and
geographically dispersed offices or campus settings. Our DigiBAK Vault is located in the base of
the former Minneapolis Federal Reserve Bank. It is a one of a kind facility providing web based
on-demand backup/restore service with all the benefits of direct fiber access to a “Level 5” data
center. The Vault 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 and this capability allows us to send data
back and forth in real time.
We utilize both direct in-house sales and sales through business partner channels such as Value
Added Resellers (VARs) and third party integrators. Our resellers have extensive data
storage knowledge and expertise and an established customer base. Our sales plan targets reseller,
Original Equipment Manufacturer and channel partnerships regionally and nationally that possess
utility-oriented sales systems. We and our partners target vertical markets specifically in the
Small Business Market (SMB) and the Small and Intermediate size Enterprises of 100 — 5000
employees with an average of four sites and five — 20 Terabytes of information to archive.
As a result of our sales and marketing efforts of our DigiBAK product, our customer base has
expanded from approximately 20 in fiscal 2005 to approximately 100 in fiscal 2006, 508 in 2007, 731
in 2008, 789 in 2009 and 890 as of December 31, 2010. Correspondingly, our annual sales have
increased from $402,638 in 2006; to $1,329,386 in 2007, $3,075,308 in 2008 and $3,192,463 in 2009.
In 2010, while experienced an increase in customers, we experience a decline in sales posting
$2,143,882 through December 31, 2010. Despite this strong overall customer trend, we continue to
struggle with profitability because of increasing competitive pressure causing commodity-like
pricing through cloud-like storage. While we have continued to grow our customer base, we have
also had to adjust pricing to maintain competitive advantage. We have significantly improved our
support infrastructure and have been able to hold our margins. We still need to raise cash in 2011
to grow our overall business, but we believe we are in a much better financial and expense position
than we were a year ago through targeted expense reduction and debt conversion. The product
features that we are offering to our clients we believe have superior functionality to the
mainstream competition and fill a customer need. We expect this gain new business in 2011.
The Emerging New Universal Archive Platform (DigiLIBE) Product
In 2008, we begun to pursue a strategy of expanding our solution to address the need of the
industry for managing structured data through DigiBAK, but also provide information management
abilities for the unstructured data. This effort led to the development and release of the product
called Universal Archive Platform, DigiLIBE, a platform that is designed to consolidate together
multiple disparate hardware and data storage environments to provide organizations with the ability
to capture, classify, share, preserve, protect, achieve, and deliver the right information, to the
right people, at the right time, helping them make informed business decisions. DigiLIBE should be
understood as follows — as a company continues to virtualize their hardware and data storage
environments, DigiLIBE provides a complementary virtualized environment for the company’s primary
asset — its information and data. It does not matter if the information is on a user machine, on
a server, or in archive. A customer can control it, secure it, and access it and at the same time
reduce its IT storage costs.
Growing both Business Segments:
We believe the benefits of our strategic decision to grow both the DigiBAK and DigiLIBE businesses
are:
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solving a major industry and customer problem of managing continually growing
information volume and associated cost of storage and retrieval; |
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ability to access a larger share of opportunity in the information management storage
business; |
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offering significant technological advantages in control of information at the
corporate policy level and ability to leverage knowledge from the information it creates;
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optimization of the synergistic allocation of capital and resources between both
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DigiLIBE has received excellent feedback on the capability, performance, and function it delivers
since its initial release. Our sales and prospecting efforts have also reaffirmed the potential of
selling DigiBAK services as part of a DigiLIBE sale.
To date, Digitiliti has achieved market recognition and brand value having successfully
established its presence in several vertical markets such as Finance, Legal, Telecom, Managed
Service Provider, Healthcare, Information Technology Services, and Management Consulting. In June
2010, DigiLIBE won the Tech Awards Circle Gold Award in the Midrange Software category. In
briefings, leading industry analysts have described DigiLIBE as a unique and potentially disruptive
product integrating both the storage management and information management markets.
We believe DigiLIBE is a fiscally responsible solution at a price, performance, and ease of use
level that disrupts the current competitors’ point solution landscape and positions while exceeding
customers’ expectations and needs. We believe our new product represents a significant step toward
our goal of becoming a technology leader in the information content and context management
marketplace.
We began providing on-line backup and recovery services to the small and medium business (“SMB”)
and small to medium enterprise (“SME”) markets in 2005. This line of our business is referred to
as our “DigiBAK” service. This data protection solution helps organizations easily manage and
protect their entire network from one centralized location, with offsite redundancy. Our DigiBAK
service can backup and restore data on every machine in a network, including desktops, laptops,
file and print servers. The marketplace for on-line backup and recovery services is estimated to
be a $3 billion dollar opportunity.
The advantages of outsourcing on-line backup and disaster recovery for customers is that it
eliminates cumbersome tape storage and internal infrastructure costs associated with the effort and
capital to provide redundancy, disaster recovery and to comply with legal and regulatory
requirements for information management. We combine a powerful, agent-less backup software, with
our remote DigiBAK service, to deliver to our customers a powerful and effective online-offsite
data backup and restore solution located in the former Minneapolis Federal Reserve Bank, a highly
secure and protected facility.
Our Data Storage Center is located in the former Minneapolis Federal Reserve Bank. It is a one of
a kind facility providing our web based on-demand backup/restore service with all of the benefits
of direct fiber access to a “Level 5” data center. The Data 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, and this capability enables us to send data back and forth in real time.
At the customer site, DigiBAK administrator software is loaded on as many or as few workstations as
desired and requires a valid logon code, helps to eliminate any unauthorized access; the
administrator software console acts as the interface with DigiBAK in the Data Storage Center; and
enables the configuration of all backups and restores. The DigiBAK 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 and many more. To ensure security and confidentiality, customer data sent to our Data
Storage Center is encrypted and compressed. The encryption key is known only to the customer. The
data can be unencrypted only by the customer, affected upon the need of a restore of information.
Encrypted data is also highly compressed, making it extremely safe and impenetrable from viruses.
We currently have two storage vaults in our Data Storage Center; 1-105 Terabyte system and 1-95
Terabyte system. We built this vault infrastructure upon a third-party software system called
Asigra to efficiently manage the volumes of data being transmitted and stored. When we fully
consume existing storage capacity, we purchase additional Asigra licenses, as needed.
Customers are charged monthly for the gigabytes of data they store in our Data Storage Center. The
compelling business case is that industry statistics (and our own actual experience) show that
organizations grow data at a rate of 3% per month, so gigabyte billing per customer is estimated to
grow at that approximate rate. This model provides ongoing revenue growth from our existing
customer base. However, the down side of this growth is that it results in increased monthly and
annual costs for customers. At some point, the costs are such that the business case for
outsourcing backup and recovery services can no longer be justified by larger customers.
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In 2008, we began to develop a new product targeted to help customers deal with the ever-increasing
burden of data growth and data proliferation that would also stem the potential of rising storage
costs. In analyzing industry data growth issues, we determined that 80% of data being stored is
either duplicate or proliferated, and 80% of that data is categorized as “unstructured” data, such
as Word documents, PDF’s, Excel spread sheets, other Office documents, pictures and music, but with
the greatest issue being emails. “Structured” data, representing 20% of data stored, is typically
data contained in databases such as inventory, accounting data and the like. Our new product is
named DigiLIBE, or the Universal Archive Platform, previously referred to as “Pyramid” in our
previous reports and registration statements filed with the Securities and Exchange Commission.
The architecture of DigiLIBE was developed from the ground up, starting with the foundational
database software purchased from StorageSwitch in March, 2008. During most of 2008, we refined and
enhanced this base code and optimized it for our specific application. We struggled to define the
overall architecture and went through a number of false starts in trying to develop the overall
DigiLIBE system. In February, 2009, we brought in new management experienced in software
development. We reorganized our development team and solidified the overall architecture of this
product. We also identified significant areas of intellectual property in the architecture and
design and filed for patent protection on these aspects.
In analyzing the opportunity for this product, it became clear that existing solutions to the
problem of data growth did not address the root cause. They addressed pieces of the problem,
attacking symptoms with “point” solutions such as de-duplication, Indexing, Compression, Mass
Storage Devices, Archives and so forth. The aggregate industry opportunity for all these different
solutions is estimated to be somewhere between $30 billion and $45 billion, and potentially even
more, if you expanded beyond storage into e-discovery and business intelligence.
Our approach was to address the root cause of the data growth and proliferation problem/opportunity
by providing one universal architecture, in a simple-to-implement solution. Throughout most of
2009, we worked diligently to complete this project, gathering continuous feedback from industry
analysts, experts and potential customers. On December 19, 2009, we announced DigiLIBE as a
break-through data management product.
During this time, we attempted to sell our DigiBAK service business, but abandoned these efforts
because we could not agree to terms with the potential buyer. As a result, we restructured the
DigiBAK business to become more efficient, and reinitiated our effort to grow that business. A
component of our new DigiLIBE business is also an “active” Vault where customers archive and can
retrieve DigiLIBE information objects without the assistance of IT personnel. We believe customers
are looking for a one stop shopping storage solution, so as our DigiLIBE business grows, we see the
potential to also increase our DigiBAK business. Unstructured data (information objects) sent to
the DigiLIBE vault and structured data and all other backups sent to the DigiBAK vault, are all
done seamlessly and transparently for the customer.
As with DigiBAK, DigiLIBE’s Vault component is charged per gigabyte of customer storage. DigiLIBE
also has a onetime charge for its software license and storage device, along with annual
maintenance. We do not charge per client license fee as we believe it will discourage using the
system to its full ability and capacity. While there are a limited number of direct sales, both
products are distributed through industry resellers nationwide. DigiBAK and the DigiLIBE Vaults
are basically service businesses where our resellers can benefit by providing and gaining ongoing
service revenue. DigiLIBE has also a product component and a consulting services component, making
it a compelling value equation for resellers.
Our vision for DigiLIBE is to change the way customers approach the problem of data growth and
proliferation. In the past and current environment, customers have labored on implementing
technologies to solve individual issues like using indexers to find data, de-duplication devices to
control growth and email archivers to manage ever-growing email storage. DigiLIBE offers a
different approach: one where technology is secondary to the problem solution, DigiLIBE provides
organizations with the ability to focus their energy and resources on managing the content of
information created and putting their content into context for competitive advantage, rather than
concentrating on data growth problems.
Products, Software, Services and Related Technologies Utilized
The following information describes various products, services, software and other technologies
utilized in our products and services. We will define these in two categories; (1) storage
technologies, and (2) information technologies. Where it is not specifically indicated,
technologies identified are common to both DigiLIBE and DigiBAK.
Storage Technologies:
We use industry standard computing hardware and operating systems in our products. Our goal is to
use top-tier brand hardware and state of the art technology for overall system and network
performance, reliability and maintainability.
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We employ SCSI hard drive protocol for speed and reliability and Level 5 RAID storage redundancy
and fault-tolerance. We move data across high performance fiber channel networks between systems
and from disks to computer processors. Our network switches are also top-tier vendor solutions.
In DigiBAK, we rebranded a third party application from Asigra, which manages and controls the data
being archived and retrieved from the customer to our Data Storage Center. This solution provides
the capability to efficiently and effectively move and manage very large blocks of data and to
ensure the integrity and security of the information stored. It also provides the capability to
track and report on storage volumes by customers, providing the basis for our monthly billing. We
pay for their licenses and maintenance based on the number of systems and gigabytes of storage
allocated. We also pay them an annual “Branding” fee to employ a customer-facing Digitiliti brand.
The DigiLIBE Vault does not use any third party software. Secure storage is implemented in an
industry standard database.
Archiving & Information Technologies:
This category is unique to our Universal Archive Platform, DigiLIBE. DigiLIBE moves and manages
information objects, which, in effect, are human recognized content such as a Word document or an
Excel spreadsheet. Technologies employed in DigiLIBE include de-duplication to remove type of
unstructured of information from the system. One of DigiLIBE’s patent applications involves
“global de-duplication.” In other words, we de-duplicate objects from the time of creation to the
time of archive — over the life-cycle of the object. We can assure there are no duplicates in the
system. Another technology is indexing, where we save the contents of information objects so that
a user can search not only for title, but for any information contained in the content of the
object. And this indexing supports multiple languages. Other technologies include compression to
reduce the object size and encryption to protect security of customer information. DigiLIBE
information object technology also includes a policy engine to control factors like retention life,
versioning and other options targeted to allow users and company executives to define information
object storage parameters. Each information object has “meta-data” stored with the object.
Meta-data is basic information about the object such as who stored it, what type of data is it,
when was it stored and/or updated, what computer was its source and who accessed it. All these
capabilities are integrated into one package with DigiLIBE and contained on one storage appliance
called an “Information Director,” making this a simple and easy to use information content and
context delivery solution.
Principal Products or Services and their Markets
Markets
The on-line archiving market characterized by DigiBAK is projected to be a $3 billion dollar
opportunity. The market for DigiBAK is a horizontal market comprise of small and intermediate sized
establishments and enterprises. The industry definition is SMB (Small and Medium Businesses) and
SME (Small and Medium Enterprises) with up to 500 employees. Our DigiBAK customer profile is
typically in the 50 to 1000 employee segment with 500 gigabytes to 3 terabytes of stored data.
This business spans horizontally across all industry segments. However, regulated industries or
those having significant concerns about data protection and disaster recovery tend to be the
primary customer base. North America is the primary geographic region for our business. We expect
to move into broader geographic areas within two years.
Because of DigiLIBE’s highly and uniquely integrated architecture, the market opportunity is less
well defined. In order to complete a market opportunity assessment, one has to roll up the
individual opportunity for each “point” solution offering. Our estimates are that this industry
opportunity ranges from between $30 to $45 billion. It is new market defined by Gartner as
Enterprise Information Archiving (EIA) market. They issued a new magic quadrant report in October
2010 for the first time on this market. Not a data management and control market, but an
information content and context market transforming the current market definition of Primary
Storage, Secondary Storage and Archival Storage to a market of Content and Context Management that
not only includes Storage, but also includes Business Intelligence, e-Discovery and Information
Policy. DigiLIBE’s capability even makes the traditional file structures obsolete, encroaching
into traditional operating system space, as it relates to file storage and file structures.
DigiLIBE’s target market is similar to DigiBAK — SMB / SME. However the market segmentation has
more vertical tendencies and targeted to Health Care, Finance, Legal and some sectors of
government. However, DigiLIBE’s policy engine and life cycle management make it ideal for any
organization with regulatory compliance requirements. As with DigiBAK, North America is the
primary geographic region for DigiLIBE sales, but we expect to move into broader geographic areas
within two years.
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Products
DigiBAK is an on-line data backup and restore service. DigiLIBE is both a product and a service
offering. The product is our information management software contained in our Information Director
storage appliance Customers pay a one-time fee for this appliance and a one-time software license
fee, plus annual maintenance for this product. The service component is a monthly per-gigabyte fee
for archiving. DigiLIBE has an “active” archive, meaning that individual users have real-time
access to archived data (assuming they are authorized). Customers can use Digitiliti’s Data
Storage Vault services, their own storage or a third party for active archiving. Another service
component is consulting services to assist customers in enhancing the DigiLIBE policy engine and to
customize workflow applications to put content into context. DigiBAK is an on-line data backup and
recovery service. Both the DigiLIBE and DigiBAK services are charged by gigabyte of storage per
month.
An additional opportunity for DigiLIBE is an OEM solution and business partnership where DigiLIBE
software is placed on another vendor’s storage appliance and sold under that vendor’s brand.
Objectives
Through on-line research, engaging industry experts and through continuous customer contact, we
have identified the most pressing data management issues SMB/SME managers struggle with today.
Various ad-hoc collections of single purpose (point) software/hardware products and functions like
data de-duplication, encryption or application integration are a few examples of some of the
different data management issues we are addressing.
We believe our experience as a hybrid cloud backup/disaster recovery solution provider in the past
5 years brings us credibility in the market. We have learned from this experience and are in a
better position going forward. One of the strengths of DigiLIBE is built from the heritage of our
DigiBAK business. We believe that both our current business and our new product will complement
each other with a very good chance that we can grow both in a complementary sales strategy where we
provide an active archive for information objects of unstructured data and a traditional archive
for all other data of customers. In effect, we can be the “cloud” provider, but with value added
capability of using that content.
Targets
See “Markets,” above for our targeted market focus
“digitiliti” Product Operational Methodology
Our operational model is simply defined in these points:
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Develop simple and robust technologies. Mask technical complexity from IT and from the
users. |
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Develop technologies and process to scale sales through VARs |
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Reduce total cost of ownership (TCO) of managing information and archiving for IT and
organizations. |
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Provide customers with the business knowledge of the content they create and store, to
improve their efficiency and effectiveness. |
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Distribution Methods of the Products or Services
We sell and support our solutions and services through direct sales, and through relationships with
Value-Added Remarketers and third-party integrators (resellers). We have a current base of about
30 resellers in North America for DigiBAK, most of whom are local to a city or are regional in
nature. Over 80% of our current base of more than 700 DigiBAK customers has been signed through
resellers. For DigiLIBE, we are targeting regional and national resellers who can sell the
product, deploy the product and provide on-going consulting services. With DigiBAK, our value to
resellers is an on-going monthly revenue stream from on-line archive volumes. With DigiLIBE, we
have a more compelling reseller model. Resellers not only get revenue from the one-time sale of
the product, but they gain service revenue from the monthly archive volumes. They also have the
opportunity to engage the customer in business services such as consulting on policy setting
details, developing workflow applications to leverage information object content or to write
information applications that turn content into context.
For DigiLIBE, another potential distribution channel is OEM — Original Equipment Manufacturer. We
also market through traditional methods, including the web, trade publications, trade shows and
advertising. We are aggressively pursuing a plan to use our web site to grow our direct sales by
strategically improving our ability through the new site to go Viral. We are developing a limited
function assessment tool that will be distributed through the new website and help IT professionals
realize the value of the product and the reduction in their TCO.
Status of any Publicly Announced New Product or Service
Release 1 of DigiLIBE was announced on December 19, 2009.
Release 2 of DigiLIBE was announced on October, 2010. This release significantly improved the
functionality, stability, and scalability of the product. There are plans for additional releases
and future content targeted for new features and functions and for market expansion both to smaller
size organizations to the larger enterprises.
Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition
For DigiBAK, we compete with multiple information protection and storage service providers in all
geographic areas where we operate. We also compete with current and potential customers’ internal
information protection and storage service capabilities, especially larger customers where data
growth is driving costs to the point where outsourcing this service is cost prohibitive. The most
important competitive factors are, in order of priority: price, reliability and service. Over the
last few years, “Cloud” storage is emerging from a number of sources, including Amazon, Google,
Barracuda and others. “Cloud” offers basic backup service for very low entry point and has
attracted smaller business customers away from our more fully functional service.
Key national and international competitors for full function on-line archiving include Iron
Mountain, EVault, HP, and EMC. These companies focus on larger enterprises and offer services
similar to our services. Their competitive advantage is in financial strength, size and by the
fact that they are also hardware providers. We differ in our competitive advantages by our
agility, service and focus on small and intermediate businesses as our core business. Other
competition is more limited and tends to be localized to geographic areas. These competitors
operate with cost as a competitive advantage. However, they typically offer a subset of service
and capabilities and are targeted more to smaller enterprises and establishments. Iron Mountain,
EMC and some other large storage providers have made strategic purchases of companies offering
point solutions, which when linked together, offer a subset of capabilities offered by DigiLIBE.
They are clearly moving in a direction to offer a comprehensive solution to compete with DigiLIBE.
The question is when will they reach that capability, and that is presently unknown.
Competitive landscape for DigiLIBE:
Currently, there is no known competitor providing the comprehensive and integrated capability found
in DigiLIBE. We have been able to confirm this through calls with industry analysts. DigiLIBE’s
patent application architecture is “Client” based with a focus on the “Human” interface and on the
need for information management and control, with content put into context. Most competitive
products are individual “point” solutions offering technology to help solve a specific information
area like content indexing or de-duplicating or archiving. Some companies are integrating multiple
point solutions in a network to provide broader value, but most of this integration is done at the
storage layer versus the client or human point of data creation. This architectural limitation
leaves these competitors at a significant disadvantage relative to capturing key meta-data at point
of creation that can be used to put content into context. It also leaves them in a high cost, high
complexity environment. Key competitive factors are function/capability, simplicity and cost.
Competitors that have similar DigiLIBE function (with limitations) by integrating a number of point
solutions together include EMC, Evault, IBM, NetApp, Symantec, and HP. No one of these competitors
offers a complete suite except EMC. However, as stated, all these potential competitors’
weaknesses are the “storage-centric architecture versus the
client (human)-based design, and the cost of integrate and manage “point” solutions. It is
difficult to assess how much reengineering or redesign would be required and how much time it would
take for a top-tier competitor (like those listed above) to develop a cost and performance
competitive solution to compete directly with DigiLIBE. It is more likely that a second-tier or
startup company may introduce a product to compete with DigiLIBE. Our patents, if issued, will
afford some level of protection against strongly similar architectural solutions.
9
Sources and Availability of Raw Materials and Names of Principal Suppliers
For DigiBAK, our principal supplier partners are Asigra, a software vendor providing system
management tools; Exanet, which provides hardware and software and our data transmission supplier.
Asigra is a provider of comprehensive software solutions and IT expertise to back up data to
customers secure vaults. We pay for licenses and for annual maintenance agreements based on the
gigabytes of storage used. We chose Exanet because we believed it to be robust and the best fit
with the Asigra software. We built our software/hardware infrastructure around the Exanet product
(hardware and software) and the Asigra product (software). When we fully consume existing storage
capacity, we purchase additional Exanet or Asigra licenses as needed. XO Communications provides
voice, data and IP services to businesses and other telecommunications companies in 80 metropolitan
markets across the United States.
In January 2010, we learned that Exanet was purchased by Dell Computers (“Dell”) in a distressed
transaction. Continued long-term support for our Exanet system from Dell is uncertain. We are in
the process of evaluating a new hardware refresh of our current technology platform and are also
evaluating alternative vaulting solutions to support our DigiBAK service, so we do not expect this
development to have any adverse effect on our business operations.
For DigiLIBE, all our software is developed in-house. We use the Microsoft Developers Suite to
develop our software. Our hardware Information Director is industry standard and we outsource the
product from multiple vendors: Rorke Data, Inc, a division of Bell Micro; and PDS. We chose Rorke
and PDS because of their reputation and because they also provide effective and efficient hardware
support. Our DigiLIBE vault hardware is basically the same hardware as our Information Director.
This hardware is industry standard that can be provided from many different sources.
Dependence on One or a Few Major Customers
Our customers trust us with the ability to archive, protect and retrieve their information assets.
We serve customers throughout the United States in a diverse group of data intensive industries,
including financial services, engineering and scientific, construction, health care, education and
legal services, being the most important. We have strong relationships with our customers and high
customer satisfaction with our sales and technical support, and those of our business partners.
Our DigiBAK business has grown to over 800 customers in 2010 across North America. Of those
customers, approximately 71% of the revenue (based on gigabytes of stored data) is with our 10
largest customers. While loss of one or two of these large customers would present a challenge to
continued revenue growth, our contracts are for three years. Further, larger customers drive more
generic growth in data from the initial stored amounts over time. Our sales direction is toward
more intermediate sized customers similar to those in our top 10. With the introduction of
DigiLIBE, we offer customers alternatives to control their data growth as well as provide new
functions. With the combination of DigiBAK and DigiLIBE, we expect to grow both of our data
archiving businesses and retain larger customers who would otherwise leave the service because of
escalating costs driven by their own data growth.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts,
including Duration
Generally, we rely on a combination of patents, copyrights, trademarks, trade secrets (including
know-how), employee intellectual property agreements, and third-party agreements to establish and
protect proprietary rights in our products and technologies. It is our practice to seek protections
in all jurisdictions where such protections are deemed useful and desirable to our business and
competitive interests.
In 2008, we applied for and have a patent pending an Information Area Network Patent representing
the underlying technology and process of our DigiLIBE product. Key claims filed in January, 2010
include; (1) file creation, metadata attribution and storage, (2) persistent access to files, (3)
file policies and (4) global de-duplication.
We have customary software licenses required to conduct current and intended operations. We are in
the process of filing certain service mark applications that are deemed to be necessary or
beneficial to us.
We have or are party to the following service agreements that are deemed to be material.
10
StorageSwitch, LLC
In January 2008, we executed a nonbinding Letter of Intent (the “LOI”) with StorageSwitch to
purchase selective existing software technology and in March 2008 we signed and completed a
Technology Purchase Agreement for a purchase of certain technology software with a total payment of
$250,000 cash and 500,000 shares of our common stock that were restricted securities. We also
entered into a Consulting Service Agreement with a monthly payment of $25,000 and monthly issuance
of 24,960 shares of our common stock that were also “restricted securities”. This Consulting
Services Agreement terminated on August 1, 2008.
Vision to Practice, Inc.
On February 6, 2008, we entered into a Consulting Agreement with Vision to Practice, Inc., a
Minnesota corporation (“Vision”), to assist in bringing our new product initiatives to market
utilizing the technology software purchased from StorageSwitch. We pay semi-monthly payments of
$7,680 based on full-time service provided to us under this Consulting Agreement. We also issued
to the consultant’s principal 225,000 stock options at $0.35 per share, which vest over 36 months.
Vision is owned by Rodd Johnson.
This Consulting Agreement contains various provisions regarding independent contractor status,
confidentiality, due performance and care in performing services, notice of disputes and time for
correction, arbitration of disputes and indemnification by Vision, among other provisions, a copy
of which was filed as an Exhibit to our Form 10. The Scope of Work outline referenced in the
Consulting Agreement is not filed as an Exhibit as it considered confidential and proprietary
information to us and our storage technology. See Part IV, Item 15.
Research and Development Costs during the Last two Fiscal Years
In 2009 and 2010, we incurred research and development expenses of $830,247 and $967,591,
respectively to develop our new DigiLIBE product offering. We announced DigiLIBE on December 19,
2009, and launched Release 1 of our new DigiLIBE product in June 2010, and release 2 of DigiLIBE
was in October of 2010.
Number of Total Employees and Number of Full Time Employees
At year end 2009, our employee headcount was 19 comprised of 11 full-time employees and eight
subcontractors. At year end 2010 our employee headcount was 20 full-time employees and one
subcontractor. We utilized contract employees for specific skills required in short-term
activities. We hire full-time employees where we intend to focus on strategic skill needs. Over
the past two years, we have focused on maintaining a small and highly productive team and intend to
continue as such.
Reports to Security Holders
We are required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the
Securities Exchange Commission, and on a regular basis, are required to timely disclose certain
material events (e.g., changes in corporate control; acquisitions or dispositions of a significant
amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report
on Form 8-K.
You may read and copy any materials that we file with the Securities and Exchange Commission at the
Securities and Exchange Commissions’ Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549, on official business days during the hours of 10:00 am to 3:00 pm. You may obtain
information on the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. You may also find all of the reports that we have filed electronically with the
Securities and Exchange Commission at their Internet site www.sec.gov.
Risks Related to Our Business
We have not recorded annual profitable operations since our inception, and continued losses may
require us to curtail or terminate our business operations.
We have experienced operating losses each year since our inception. Our revenues decreased by
$1,048,581 to $2,143,882 in 2010 compared to $3,192,463 in 2009, with our net loss increasing to
$6,414,639 for the year ended December 31, 2010, compared to the net loss of $5,169,717 for the
year ended December 31, 2009. We may still incur additional future operating losses. Without
raising new capital, continued losses on our operations may require us to curtail or terminate our
business operations. Our operating results may fluctuate significantly and any failure to meet
financial expectations may disappoint securities analysts or investors and result in a decline in
our common stock price
on the Pink Sheets or any other nationally recognized quotation system upon which our common stock
may be publicly traded in the future.
11
Our substantial short term debt could adversely affect our financial condition and our ability to
continue our present and planned business operations.
As of December 31, 2010, and December 31, 2009, we had long term debt in the form of our 12%
convertible notes in the amount of $250,000 and $1,899,500, respectively.
From April 2009 through October 2009, we raised $750,000 from the sale of 12% convertible debt and
warrants that were secured against the assets associated with our DigiBAK vault located in the
located in the base of the former Minneapolis federal Reserve Bank. These notes reflected a
24-month maturity date. To address the debt concerns reflected above, in June 2010 we initiated an
Incentive Offer that requested all of our unsecured and secured convertible debt holders to convert
their convertible notes at a preferential $0.20 per share conversion rate. In response to this
offer, we converted $2,537,300 of its unsecured convertible debt and $728,673 of accrued interest
into 16,329,868 shares of the Company’s common stock. In addition, we converted $650,000 of our
secured convertible stock and $74,187 of accrued interest into 724,187 shares of the Company’s
Series A Convertible Preferred Debt.
During the year ended December 31, 2010, we raised $420,000 through the issuance of 420,000 shares
of Series B Convertible Preferred Stock. Each share of Series B Convertible Preferred Stock is
convertible into 5 common shares at the option of the holder and is entitled to annual cumulative
dividends at the rate of 5%.
We plan to continue to raise additional funds in the form of equity or debt offerings, secured and
otherwise, and we are continuing to evaluate alternative incentive programs to reduce and/or
eliminate this debt. If we are unable to pay these notes when due, including interest, and the
holders of these convertible notes do not elect to convert them to purchase shares of our common
stock or extend them, our financial condition could worsen substantially, and we may be required to
cease operations entirely.
We also have substantial other current liabilities as of December 31, 2010, that are principally
comprised of the following: notes payable ($231,540); convertible notes ($790,000); trade accounts
payable ($692,923); accrued expenses ($554,978); and obligations under capital leases ($23,308),
for total current liabilities of $2,295,679. See also Note 15, Subsequent Events, in the Notes to
the Consolidated Financial Statements.
Our substantial indebtedness could have important adverse consequences on our ability to carry on
our present and planned business operations.
For example, it could:
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make it more difficult for us to satisfy our obligations with respect to the current or
new debt financing, if any is offered in the future; |
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fund the selling and marketing expenses that support the national roll-out of DigiLIBE; |
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make us more sensitive to adverse economic conditions than some of our competitors with
less debt; |
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limit our ability to fund future working capital, acquisitions, capital expenditures and
other general corporate requirements; |
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limit our flexibility in planning for, or reacting to, changes in our business and the
records and information management services industry; |
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make it more difficult for us to obtain additional equity or debt financing for future;
and |
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limit our working capital requirements for future acquisitions or other reasons
important to our business strategy. |
Despite our current debt position, we may still need to incur substantial additional debt or we
will be unable to continue our planned operations.
We expect to continue to raise additional funding in the form of equity or debt offerings, secured
or otherwise. However, if we are unable to pay the currently outstanding 12% convertible notes and
accrued interest, trade accounts payable and accrued expenses, our financial condition may be
adversely affected to the point that no debt or equity financing may be available to us. That could
require us to cease or substantially limit our business operations, including termination of
employees and business associations necessary for us to continue in our business.
We have deficiencies in our internal controls that could adversely affect our financial statements
reporting, which could cause our financial statements to be inaccurate or un-auditable.
Our disclosure controls and procedures have been designed to ensure that information required to be
disclosed by us is collected and communicated to management to allow timely decisions regarding
required disclosures. Our Chief
Executive Officer and the Chief Financial Officer have concluded, based on their evaluation as of
December 31, 2010, that, as a result of material weaknesses in internal control over financial
reporting as described further in this Annual Report were not effective in providing reasonable
assurance that material information is made known to them by others within our Company:
12
We have material weaknesses in our internal controls over financial reporting that could
adversely affect our financial statements.
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 as appropriate to allow timely decisions
regarding financial disclosure.
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2010 and concluded that there were material weaknesses. Management is taking steps to
address these weaknesses. However, these weaknesses could cause our financial statements to be
inaccurate and may result in restatements of such financials statements. There can be no assurance
when and if we will be able to resolve the weaknesses in our internal controls.
If we fail to develop new products, or if we incur unexpected expenses or delays in product
development, we may lose our competitive position and incur substantial additional losses on our
operations or may be required to curtail or terminate our present and planned business operations.
Although we currently have fully developed products and services available for sale, we are also
developing various new products and technologies that we will rely on to remain competitive. Due to
the risks in developing new products and technologies, limited financing, competition,
obsolescence, loss of key personnel and other factors, we may fail to develop these technologies
and products, or we may experience lengthy and costly delays in doing so. Although we may be able
to license some of our technologies in their current stage of development, we cannot assure you
that we will be able to do so.
Our business may be adversely affected by downturns in the economy that may limit the sale of
storage and universal archiving solutions and our present and planned business operations may fail
as a result.
We are subject to the capital spending patterns of this industry. If our customers and potential
customers do not increase their capital spending budgets, we could face a weaker demand for our
products; however, such an event may not be materially adverse to us as our storage solution
products offers a more cost-effective methodology of data backup and restoring services.
We depend on our key personnel, and the loss of any would impair our ability to compete and gain
any market share in the storage solutions industry that we presently serve and intend to serve.
With the small number of people in our company, we are highly dependent on the principal members of
our management. The loss of services of any of these persons could seriously harm the growth and
success of our current and intended business operations. In addition, research, product development
and commercialization will require additional skilled personnel in the backup and storage retention
services industry procedures and products. Competition for and retention of personnel, particularly
for employees with technical expertise, is intense and the turnover rate for these qualified
personnel is high. If we are unable to hire, train and retain a sufficient number of qualified
employees, our ability to conduct and expand our business could be reduced. The inability to retain
and hire qualified personnel could also hinder the planned expansion of our business. We have
utilized stock options as the primary method for retaining key personnel.
Our intellectual property rights or contractual provisions may not protect us and our products and
as a result, our business may fail.
Our products could infringe on the intellectual property rights of others, which may involve us in
costly litigation and, if we are not successful in defending such claims, could also cause us to
pay substantial damages and prohibit us from selling our products. Third parties may assert
infringement or other intellectual property claims against us. Even if these claims are without
merit, defending lawsuits takes significant time, may be expensive and may divert management’s
attention from other business concerns. We are not currently aware of any third-party patents
claims against us or other legal proceedings.
With our own patents applications, assuming they result in the issuance of patents, we may need to
initiate lawsuits to protect or enforce our proprietary rights in our products, which would also be
expensive and, if we unsuccessful, may cause us to lose some of our intellectual property rights,
which would reduce our ability to compete in the market. In the future, we may rely on patents to
protect our intellectual property and our competitive position. The rights we rely upon to protect
the intellectual property underlying our products may not be adequate, which could enable third
parties to use this technology and would reduce our ability to compete in our markets.
13
We presently have filed certain patent applications on certain facets of our products, and no
assurance can be given that these filings will result in patents being issued, or if issued, that
they will protect us and not infringe on patents of others, in some part. See the heading
“Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts,
including Duration” of Part I, Item 1. We also rely on a combination of trade secrets,
nondisclosure agreements and other contractual provisions and technical code security measures to
protect our intellectual property rights. Nevertheless, these measures may not be adequate to
safeguard the technology underlying our storage solutions products. Notwithstanding our efforts to
protect our intellectual property, our competitors may independently develop similar or alternative
technologies or products that are equal or superior to our technology and storage solutions
products without infringing on any of our intellectual property rights or design around our
proprietary technologies.
We need additional capital to continue or expand our current business operations, and our business
operations may prove unsuccessful without additional funding.
Failure to raise additional capital or generate the significant capital necessary to continue and
expand our operations and launched, sell or license our DigiLIBE product could reduce our ability
to compete and result in lower revenue. We anticipate that our existing capital resources will only
enable us to maintain currently planned operations through the first quarter of 2011; and we expect
to continue to seek funding through equity and debt offerings, secured or otherwise. See the
caption “Recent Sales of Unregistered Securities,” Part II, Item 5, for a complete description of
our prior funding efforts. However, we premise this expectation on our current operating plans,
which may change as a result of many factors. Consequently, we may need additional funding sooner
than anticipated. Our inability to raise needed capital would harm our business. In addition, we
may choose to raise additional capital due to market conditions or strategic considerations even if
we believe we have sufficient funds for our current operating plans. To the extent that additional
capital is raised through the sale of equity, debt, convertible debt securities or other
combinations of our securities, including our newly authorized preferred stock, the issuance of
these securities could result in substantial dilution to our stockholders.
We currently have no credit facility or committed sources of capital. To the extent operating and
capital resources are insufficient to meet our future funding requirements, we will have to raise
additional funds to continue the commercialization of our products. These funds may not be
available on favorable terms, or at all. If adequate funds are not available on attractive terms,
we may be required to cease or curtail operations significantly or to obtain funds by entering into
financing, supply or collaboration agreements on unfavorable terms.
14
We face a higher risk of failure and loss of our entire business because we cannot accurately
forecast our future revenues and operating results.
Our short operating history, lack of adequate internal controls and the rapidly changing nature of
the market in which we compete make it difficult to accurately forecast our revenues and operating
results. Furthermore, we expect our revenues and operating results might fluctuate in the future
due to a number of factors, including the following:
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The timing of sales of our products and services; |
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The timing of product implementation; |
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Unexpected delays in introducing new products and services; |
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increased expenses, whether related to sales and marketing, product development or
administration; |
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The mix of product license and services revenue; and |
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Costs related to possible acquisitions of technology or businesses. |
Our limited resources may make it harder for us to manage growth, and the future of our business
model maybe adversely harmed if we are unable to adequately manage this growth.
We have a limited basis upon which to evaluate our Storage Management Solutions systems ability to
handle controlled or full commercial availability of our products and services. We anticipate that
we will expand our operations significantly in the near future, and we will have to expand further
to address the anticipated growth in our user base and market opportunities. To manage the expected
growth of operations and personnel, we will need to improve existing, and implement new systems,
procedures and internal controls. In addition, we will need to expand, train and manage an
increasing employee base. We will also need to expand our finance, administrative and operations
staff. We may not be able to effectively manage this growth. Our planned expansion in the near
future will place, and we expect our future expansion to continue to place, a significant strain on
our managerial, operational and financial resources. Our planned personnel, systems, procedures and
controls may be inadequate to support our future operations. If we cannot manage growth effectively
or if we experience disruptions during our expansion, the expansion may not be cost-effective.
If we do not respond effectively to technological change, our products and services could become
obsolete and our business may fail.
The development of our products and services and other technology entails significant technical and
business risks. To remain competitive, we must continue to improve our Information and Storage
Management Solutions products and their Responsiveness, functionality and features.
High technology industries are characterized by:
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Rapid technological change; |
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Changes in user and customer requirements and preferences; |
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Frequent new product and services introductions embodying new technologies; and |
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The emergence of new industry standards and practices. |
The rapid technological change could render our existing technology and systems obsolete. Our
success will depend, in part, on our ability to:
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license or acquire leading technologies useful in our business; |
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develop new services and technologies that address our users’ increasingly sophisticated
and varied needs; and |
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Respond to technological advances and emerging industry and regulatory standards and
practices in a cost effective and timely way. |
Future advances in technology may not be beneficial to, or compatible with, our business.
Furthermore, we may not use new technologies effectively or adapt our technology and systems to
user requirements or emerging industry standards in a timely way. In order to stay technologically
competitive, we may have to spend large amounts of money and time. If we do not adapt to changing
market conditions or user requirements in a timely way, our business, financial condition and
results of operations could be adversely affected.
We face competition for customers that could effectively keep us from being successful in our
planned business operations.
We compete with our current and potential customers’ internal records and information management
services capabilities. We can provide no assurance that these organizations will begin or continue
to use an outside company, such as us, for their future records and information management services
needs or that they will use us to provide these services. We also compete with multiple records and
information management services providers in all geographic areas where we operate. Potential
competitors with established market share and greater financial resources may introduce
competing products. Thus, there can be no assurance that we will be able to compete successfully in
the future, or that competition will not have a material adverse affect on our results of
operations. We also compete with multiple information protection and storage services providers in
all geographic areas where we operate. We continue to evaluate competitive activities to keep
abreast of industry changes with both large and well known competitors and emerging competition.
15
Our storage systems may fail, and we may be subject to substantial liabilities and could lose a
substantial portion of our customer base.
Our disaster recovery framework to control and address systems risks is not fully redundant, and we
may incur and/or suffer the costs, delays and customer complaints associated with system failures
and may not be able to efficiently and accurately provision new orders for services on a timely
basis to begin to generate revenue related to those services. While our storage system facilities
are highly secure and virtually disaster proof, we will refresh our storage technology in 2010 with
new equipment, which will include full redundancy and SAS 70 compliance.
Our operating results could be impaired if we become subject to burdensome government regulation
and legal uncertainties, all of which would increase our cash requirements and may cause our
business to fail.
Other than the Company’s requirements to file all public reports under the regulations administered
by the Securities and Exchange Commission, we are not currently subject to direct regulation by any
domestic or foreign governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, relating to:
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Characteristics and quality of products and services. |
The adoption of any additional laws or regulations may decrease the expansion of the Internet. A
decline in the growth of the Internet could decrease demand for our products and services and
increase our cost of doing business. Moreover, the applicability of existing laws to the Internet
is uncertain with regard to many issues, including property ownership, export of specialized
technology, sales tax, libel and personal privacy. Our business, financial condition and results of
operations could be seriously harmed by any new legislation or regulation. The application of laws
and regulations from jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online services could also
harm our business.
Our Information and Storage Management Solutions products rely substantially on the Internet in
multiple states. These jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in each state or foreign country. Our failure to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject us to taxes and
penalties. Other states and foreign countries may also attempt to regulate our business or
prosecute us for violations of their laws. Further, we might unintentionally violate the laws of
foreign jurisdictions and those laws maybe modified and new laws may be enacted in the future.
The United States Congress has enacted legislation limiting the ability of the states to impose
taxes on Internet accessory to impose multiple or discriminatory taxes on electronic commerce. This
legislation, known as the Internet Tax Nondiscrimination Act, imposed a moratorium, which commenced
November 1, 2003 and was extended to 2014, on state and local taxes on electronic commerce, where
such taxes are discriminatory, and Internet access, unless the taxes were generally imposed and
actually enforced prior to October 1, 1998. Various states continue to attempt to regulate and tax
Internet use and sales of products and services. The imposition of these taxes could seriously
adversely affect Internet commerce and hinder our ability to become profitable.
The Internet may fail or providers of these services may increase their costs for these and related
services, which could increase our costs and make our services less attractive to customers.
The secure transmission of confidential information over public networks is a significant barrier
to electronic commerce and communications. Anyone who can circumvent our security measures could
misappropriate confidential information or cause interruptions in our operations. We may have to
spend large amounts of money and other resources to protect against potential security breaches or
to alleviate problems caused by any breach. Peering agreements of our business partners like XO
Communications with Internet service providers, allow access to the Internet and exchange traffic
with these providers. Depending on the relative size of the providers involved, these exchanges may
be made without settlement charges. Recently, many Internet service providers that previously
offered peering have reduced or eliminated peering relationships or are establishing new, more
restrictive criteria for peering and an increasing number of these providers are seeking to impose
charges for transit. Increases in costs associated with Internet and exchange transit could
have an adverse effect on our revenues for our services, most of which require Internet access. Our
providers may not be able to renegotiate or maintain peering arrangements on favorable terms, which
could increase our costs and expenses and impair our growth and performance.
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Our auditor’s “Going Concern” qualification in our consolidated financial statements might create
additional doubt about our ability to stay in business, potentially resulting in total stockholder
loss on investment.
The following is a quotation from our auditor’s report that is filed as a part of this Annual
Report: “The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern.” See Note 2 to our consolidated financial statements.
The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.”
Note 2 of our consolidated financial statements states: “As shown in the accompanying financial
statements, the Company has incurred net losses of $6,414,639 for the year ended December 31, 2010
and a negative working capital at December 31, 2010 of $1,686,465. The Company continues to be
dependent on its ability to generate future revenues, positive cash flows and additional financing.
There can be no guarantee that the Company will be successful in generating future revenues, in
obtaining additional debt or equity financing or that such additional debt or equity financing will
be available on terms acceptable to the Company. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern.”
Multiple acts of God could result in data loss and subject us to substantial liabilities and the
loss of our business and customers.
The operation of our business depends on the efficient and uninterrupted operation of the Internet
and our Storage Management Solutions hardware systems. Our systems and operations will be
vulnerable to damage or interruption from many sources, including fire, flood, power loss,
telecommunications failure, break-ins, earthquakes and similar events. Our servers will also be
vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Any
substantial interruptions in the future could result in the loss of data and could destroy our
ability to generate revenues from operations.
Risks Related to Our Common Stock
Our common stock is “penny stock” under Securities and Exchange Commission Rules and Regulations,
which means there is a very limited trading market for our shares.
Our common stock is deemed to be penny stock as that term is defined in Rule 3a51-1 of the
Securities and Exchange Commission. Penny stocks are stocks (i) with a price of less than five
dollars per share; (ii) that are not traded on a “recognized” national exchange; (iii) whose prices
are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet
requirement (i) above); or (iv) in issuers with net tangible assets less than $2,000,000 (if the
issuer has been in continuous operation for at least three years); or $5,000,000 (if in continuous
operation for less than three years); or with average revenues of less than $6,000,000 for the last
three years. Section 15(g) of the Exchange Act and Rule 15g-2 of the Securities and Exchange
Commission require broker dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed and dated written
receipt of the document before effecting any transaction in a penny stock for the investor’s
account. Potential investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny stock.”
Moreover, Rule 15g-9 of the Securities and Exchange Commission requires broker dealers in penny
stocks to approve the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker dealer to (i) obtain from the
investor information concerning his, her or its financial situation, investment experience and
investment objectives; (ii) reasonably determine, based on that information, that transactions in
penny stocks are suitable for the investor, and that the investor has sufficient knowledge and
experience as to be reasonably capable of evaluating the risks of penny stock transactions;(iii)
provide the investor with a written statement setting forth the basis on which the broker dealer
made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement
from the investor, confirming that it accurately reflects the investor’s financial situation,
investment experience and investment objectives. Compliance with these requirements may make it
more difficult for investors in our common stock to resell their shares to third parties or to
otherwise dispose of them.
Due to the substantial instability in our common stock price, you may not be able to sell your
shares at a profit or at all, and as a result, any investment in our shares could be totally lost.
The public market for our common stock is very limited and volatile. As with the market for many
other small companies, any market price for our shares is likely to continue to be very volatile.
In addition, factors such as the following may significantly affect our share price:
| |
• |
|
Our competitors’ announcements and successes or failures; |
| |
• |
|
Other evidence about the safety or efficacy of our products;
|
17
| |
• |
|
Announcements of new competitive products or successes by our competitors; |
| |
• |
|
Increased or new governmental regulation of our products; |
| |
• |
|
Our competitors’ developments of competing patents or proprietary rights or other
technology; and |
| |
• |
|
Fluctuations in our operating results. |
Our common stock has a limited trading history, and it will be difficult to determine any market
trends or prices for our shares where this present limited market is believed to be based primarily
on supply and demand.
Our common stock currently is quoted on the Pink Sheets, under the symbol “DIGI.” However, with
very little trading history, a trading market that does not represent an “established trading
market,” a limited current public, volatility in the bid and asked prices and the fact that our
common stock is very thinly traded, you could lose all or a substantial portion of your funds if
you make an investment in us.
The sale or potential sale of shares of our common stock that may become publicly tradable under
Rule 144 in the future will have a severe adverse impact on any market that develops for our common
stock, and you may lose your entire investment or be unable to resell any shares in us that you
purchase.
12 months from the filing of our Form 10 Registration Statement or on or about May 13, 2009, and
provided that we are “current” in the filing of all of our reports that are then required to have
been filed with the Securities and Exchange Commission under the Exchange Act, substantially all
shares of our common stock will have been held for at least six months and will be available for
public sale under Rule 144. That will substantially increase the shares available to be freely
publicly traded. See the heading “Recent Sales of Unregistered Securities; Use of Proceeds from
Unregistered Securities,” Part II, Item 5, for information about the number of shares that may
become available for resale under Rule 144.
Our Data Storage Center is located at 250 Marquette Plaza, Minneapolis, MN 55401, and we have
contracted with XO Communications for data center space and communications (the “XO Communications
Contract”). XO Communications is a vendor that provides cabinet space, power and Internet
connectivity. This arrangement ensures capital expenditures are at a minimum, while maintaining
the flexibility to set up a new data center in any one of the 80 geographically dispersed locations
throughout the world. Our DigiBAK service is not limited by geographic concerns. As new customers
are added, we will also add capacity to our Data Storage Center that has virtually unlimited
scalability. Our Data Storage Center occupies approximately 1,500 square feet of this facility, at
a cost of $3,300 per month and houses our equipment and software.
We Also leased office space located at 250 Marquette Plaza, of approximately 3,093 rentable square
feet, at a monthly base rent of $3,349 and $3,352 in 2009 and 2010, respectively (the “FRM
Associates Lease”). With monthly operating expenses and monthly real estate tax assessments added
to these base $5,755.90 rental amounts, the overall monthly lease cost on this space approximates
to $5,938 and $6,041 for 2009 and 2010, respectively. We vacated these premises in August, 2007.
We subsequently sublet the space to two successive tenants, with the most recent sublease
reflecting a monthly sublease payment of $3,239, effective August 1, 2009, through October 31,
2010. The sublease was satisfied and our obligations under the lease terminated on October 31 2010.
We lease 8,736 square feet, consisting of floors three and four of the building located at 266 East
7th Street, St. Paul, MN 55101 (the “Upper Corner Lease”), for base rent of $6,450 per
month. Our formal lease expires on December 31, 2011.
|
|
|
| ITEM 3: |
|
LEGAL PROCEEDINGS |
Currently pending is a suit regarding the disputed payment pertaining to public relation services
rendered by a former vendor.
We are not a party to any pending legal proceeding. To the knowledge of our management, no federal,
state or local governmental agency is presently contemplating any proceeding against us. To the
knowledge of our management, no director, executive officer or affiliate of ours or owner of record
or beneficially of more than five percent of our common stock is a party adverse to us or has a
material interest adverse to us in any proceeding.
18
PART II
|
|
|
| ITEM 5: |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is traded on the PinkSheets under the trading symbol of “DIGI”. The following
table sets forththe high and low price for our common stock as quoted on the internet trading
services for the quarterly periods Within the last two fiscal years. The quotations set forth
below reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions. On March 30, 2011, the closing bid price was $0.11 for
the high and $0.11 for the low per share.
| |
|
|
|
|
|
|
|
|
| |
|
Closing Bid |
|
| Quarter Ended |
|
High |
|
|
Low |
|
March 31, 2009* |
|
$ |
.15 |
|
|
$ |
.12 |
|
June 30, 2009* |
|
$ |
.35 |
|
|
$ |
.35 |
|
September 30, 2009* |
|
$ |
.20 |
|
|
$ |
.20 |
|
December 31, 2009* |
|
$ |
.18 |
|
|
$ |
.17 |
|
March 31, 2010* |
|
$ |
.28 |
|
|
$ |
.28 |
|
June 30, 2010* |
|
$ |
.19 |
|
|
$ |
.18 |
|
September 30, 2010* |
|
$ |
.24 |
|
|
$ |
.20 |
|
December 31, 2010* |
|
$ |
.21 |
|
|
$ |
.21 |
|
Holders
According to the records of our transfer agent, we had approximately 348 stockholders of record,
not including an indeterminate number who may hold shares in “street name.”
Dividends
We have not declared any cash dividends with respect to our common stock during the last two fiscal
years, and do not intend to declare dividends in the foreseeable future. Instead, we intend to
focus on funding our business operations and our intended Plan of Operation. There are no material
restrictions limiting, or that are likely to limit, our ability to pay dividends on our securities.
Securities Authorized for Issuance under Equity Compensation Plans
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of securities |
|
| |
|
|
|
|
|
|
|
|
|
remaining available for |
|
| |
|
Number of Securities to be |
|
|
Weighted-average exercise |
|
|
future issuance under |
|
| |
|
issued upon exercise of |
|
|
price of outstanding |
|
|
equity compensation plans |
|
| |
|
outstanding options, |
|
|
options, warrants and |
|
|
excluding securities |
|
| |
|
warrants and rights |
|
|
rights |
|
|
reflected in column (a) |
|
| Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
2,990,000 |
* |
|
$ |
0.34 |
|
|
|
0
4,380,000 |
(2)
(3) |
Equity compensation
plans not approved
by security holders |
|
None |
|
|
None |
|
|
None |
|
Total |
|
|
2,990,000 |
(1) |
|
$ |
0.34 |
|
|
|
0
4,380,000 |
(2)
(3) |
| |
|
|
| (1) |
|
Reflects the overall grant of five year options totaling 9,661,000 that vest
over various periods, less (1) the cancellation, effective April 17, 2008, of an option
to purchase 525,000 shares granted to an employee who are no longer employed by us and
(2) the forfeiture of options totaling 6,146,000 pertaining to employees who are no
longer employed by us. |
| |
| (2) |
|
Reflects the approval by the Company’s Board of Directors on July 15, 2010 to
terminate the existing 2007 Stock Option Plan in favor of the 2010 Long Term Incentive
Plan approved on July 15, 2010, subject to approval by the shareholders at the
Company’s next annual meeting. |
| |
| (3) |
|
Reflects the approval by the Company’s Board of Directors on July 15, 2010,
and the subsequent approval by the Company’s stockholders at the Company’s Annual
Meeting on October 14, 2010, to enact the 2010
Long Term Incentive Plan. A narrative description of the material terms of the equity
compensation plans is set forth in Note 11 to our Consolidated Financial Statements. |
19
Exemptions from Registration for Sales of Restricted Securities.
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 of 1933, as amended (the “Securities Act”), pursuant to Sections 4(2) and Rule 506
of Regulation D of the Securities and Exchange Commission.
Purchases of Equity Securities by Us and Affiliated Purchasers
There were no purchases of our equity securities by us during the years ended December 31, 2019,
and 2009.
|
|
|
| ITEM 7: |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION |
This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, that reflect our current estimates, expectations and projections about our future
results, performance, prospects and opportunities. Forward-looking statements include, without
limitation, statements about our market opportunities, our business and growth strategies, our
projected revenue and expense levels, possible future consolidated results of operations, the
adequacy of our available cash resources, our financing plans, our competitive position and the
effects of competition and the projected growth of the industries in which we operate. This Annual
Report on Form 10-K also contains forward-looking statements attributed to third parties relating
to their estimates regarding the size of the future market for products and systems such as our
products and systems, and the assumptions underlying such estimates. Forward-looking statements are
only predictions based on our current expectations and projections, or those of third parties,
about future events and involve risks and uncertainties.
Although we believe that the expectations reflected in the forward-looking statements contained in
this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance can be given
that such expectations will be attained or that any deviations will not be material. In light of
these risks, uncertainties and assumptions, the forward-looking statements, events and
circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could
differ materially and adversely from those anticipated or implied in the forward-looking
statements. Important factors that could cause our actual results, level of performance or
achievements to differ materially from those expressed or forecasted in, or implied by, the
forward-looking statements we make in this Annual Report on Form 10-K are discussed under “Item 1A.
Risk Factors” and elsewhere in this Annual Report on Form 10-K.
20
Executive Summary
The Business
Our business is developing and delivering superior information management technologies and
methodologies enabling our customers to manage, control, protect and access their information and
data simply and cost effectively. Our traditional business is providing a cost effective on-line
data protection solution to the small to medium business (“SMB”) and small to medium enterprise
(“SME”) markets through our DigiBAK service.”. This on-line cloud storage management solution
helps organizations properly manage and protect their entire network from one centralized location.
Our emerging business product, released in the first quarter of 2010, is called DigiLIBE. We
believe that DigiLIBE is a game-changing product that addresses the desperate need for a fiscally
responsible, integrated system to manage the increasing growth, volume, and diversity of
unstructured data that now represents up to 85% of enterprise information and continues to grow
rapidly. Content chaos is overwhelming companies’ ability to meet compliance, utilize collaboration
tools and optimize storage needs for their virtualized infrastructures.
DigiBAK and DigiLIBE are complementary products — DigiBAK providing cloud storage backup and
recovery of structured data and operating system files and DigiLIBE offers information management
and life-cycle control of unstructured data from end-user through archiving and back to the end
user.
The DigiBak business
Our DigiBAK solution can backup and restore emails and all company data on every machine in a
network, including desktops, laptops, file and print servers. We provide storage through a
“utility based computing” philosophy, where customers pay for the gigabytes of data they store in
DigiBAK Vault facility.
Through our DigiBAK service, we combine powerful, agent-less backup software with our highly
protected facility, to deliver to our customers an efficient and effective online-offsite data
backup and restore solution. Our facilities enable us to provide offsite disaster recovery
emphasizing intraday protection and restore for all of our customer primary data centers and
geographically dispersed offices or campus settings. Our DigiBAK Vault is located in the base of
the former Minneapolis Federal Reserve Bank. It is a one of a kind facility providing web based
on-demand backup/restore service with all the benefits of direct fiber access to a “Level 5” data
center. The Vault 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.
We utilize both direct in-house sales and sales through business partner channels such as VAR’s
(Value Added Remarketers) and third party integrators. Our resellers have extensive
data storage knowledge and expertise and an established customer base. Our sales plan targets
reseller, Original Equipment Manufacturer and channel partnerships regionally and nationally that
possess utility-oriented sales systems. We and our partners target vertical markets specifically
in the Small Business Market (SMB) and the Small and Intermediate size Enterprises of 100 — 5000
employees with an average of four sites and five — 20 Terabytes of information to archive.
As a result of our sale and marketing efforts of our DigiBAK product, our customer base has
expanded from approximately 20 in fiscal 2005 to approximately 100 in fiscal 2006, 508 in 2007, 731
in 2008, 789 in 2009 and 890 as of December 31, 2010. Correspondingly, our annual sales have
increased from $420,638 in 2006, to $1,329,386 in 2007, $3,075,308 in 2008, $3,192,463 in 2009. In
2010, while we experienced in increase in customers, we experienced a decline in sales posting
$2,143,882 through December 31 2010. Despite this overall customer trend, we continue to struggle
with profitability because of increasing competitive pressure causing commodity-like pricing
through cloud-like storage. While we have continued to grow our customer base, we have also had to
adjust our pricing to maintain competitive advantage. We have significantly improved our support
infrastructure and have been able to hold the gross margins on our products and service. We still
need to raise cash in 2011 to grow our overall business, but we believe we are in a much better
financial and expense position that we were a year ago through targeted expense reductions and debt
conversion. The product features that we are offering to our clients have superior functionality to
the mainstream competition and answer the customer’s needs. W expect this will gain new business in
2011.
The Emerging New DigiLIBE Product
In 2008, we begun to pursue a strategy of expanding our solution to address the need of the
industry for managing structured data through DigiBAK, but also provide information management
abilities for the unstructured data. This effort led to the development and release of the product
called DigiLIBE, a virtual corporate library that is designed to link together multiple desperate
hardware and data storage environments to provide organizations with the ability to
capture, classify, share, preserve, protect, achieve, and deliver the right information, to the
right people, at the right time, helping them make smart informed business decisions. DigiLIBE
should be understood as follows — as a company continues to virtualize their hardware and data
storage environments, DigiLIBE provides a complementary virtualized environment for the company’s
primary asset — its information. It does not matter if the information is on a user machine, on a
server, or in archive. A customer can control it, secure it, and access it.
21
Growing both Business Segments:
We believe the benefits of making a strategic decision to grow both the DigiBAK and DigiLIBE
businesses are:
| |
(i) |
|
solving a major industry and customer problem of managing continually growing
information volume and associated cost of storage and retrieval; |
| |
(ii) |
|
being able to access a larger share of opportunity in the information management
storage business; |
| |
(iii) |
|
offering significant technological advantages in corporate policy level control of
information and ability to leverage knowledge from the information it creates; and |
| |
(iv) |
|
optimizing how we synergistically allocate capital and resources between both business. |
DigiLIBE has received excellent feedback on the capability, performance, and function it delivers
since its initial release. Our sales and prospecting efforts have also reaffirmed the potential of
selling DigiBAK services as part of a DigiLIBE sale.
To date, Digitiliti has achieved significant market recognition and brand value having
successfully established its presence in several vertical markets such as Finance, Legal, Telco,
Managed Service Provider, Healthcare, Information Technology Services, and Management Consulting.
In June 2010, DigiLIBE won the Tech Awards Circle Gold Award in the Midrange Software category.
In briefings, leading industry analysts have described DigiLIBE as a unique and potentially
disruptive product integrating both the storage management and information management markets.
“The first company to demonstrate that it can genuinely bridge the gap between storage and
information management will make existing products look archaic by comparison”
| |
|
|
|
|
|
Joseph Martins, Managing Director, Data Mobility Group LLC |
We believe DigiLIBE is a fiscally responsible solution at a price, performance, and ease of use
level that disrupts the current competitors’ point solution landscape and positions while exceeding
customers’ expectations and needs. Our new product represents a significant step toward our goal of
becoming a technology leader in the information content and context management marketplace.
Intellectual Property Protection
We have taken action to protect our key DigiLIBE technologies. There are currently four key claims
filed for patent protection in our initial patent application filed in January, 2009 that are
currently pending. We continue to enhance our innovative products and we believe in protecting
Digitiliti’s Intellectual Property.
The Market and Resellers
Our channel strategy for DigiBAK and DigiLIBE is to target regional and national resellers who have
technical support and infrastructure to deploy the products into the small and intermediate size
enterprises of 50 to 5000 employees or workstations. Our strategy is to target and develop these
channels with a vertical market focus on regulation and compliance, collaboration, and
virtualization. During 2010, we added notable regional and national resellers to the Digitiliti
family: Northland Systems, a Minnesota Company; RSM McGladrey, a National Consulting Services firm;
and Coolcat, Inc, a Florida Managed Services Provider (MSP) specializing in PCI (credit card)
compliance and based on our sales pipeline. We anticipate this list will grow rapidly. For
resellers, we believe their incentive is that they can grow their business by selling the products,
they get a monthly annuity from the cost of data archiving as they improve cost and efficiency of
their client’s environment, and they can provide value-added consulting and software services
through DigiLIBE’s Application Program Interfaces, (AP’s) and compliance engine.
Company Funding
In order to fund continuing operations and the growth of the new product DigiLIBE, we have
aggressively reduced overall operating costs to increase profitability of our DigiBAK operations.
We have continued to reduce the annual salaries and wages associated with our DigiBAK operations by
over 20% in the past two years, while increasing operational efficiencies and lowering overall
costs of goods sold. As previously stated, we implemented additional
restructuring of our DigiBAK operations to increase profitability, improve cash flow and reduce
cash burn rate. Through these actions, we reduced the cash burn rate per month associated with
DigiBAK by approximately $100,000 in 2009.
22
At present, we continue to raise additional capital to provide the financial resources needed to
achieve our strategy, while we are balancing our desire to aggressively launch our new product with
the reality of available capital.
Throughout 2010, our continuing operations have been funded, in large part, through the following:
| |
1. |
|
A $2,000,000 equity offering initiated in October 2009 and closed in May 2010.
This equity offering originally reflected a maximum offering of $1,000,000, but was
increased to $1,500,000 during the first quarter of 2010 and increased again to
$2,000,000 in April 2010. This equity round of financing offered shares of our common
stock at $0.20 per share and was closed in May 2010 resulting in $1,715,550 in equity
proceeds through the issuance of 9,290,000 common shares. |
| |
2. |
|
The Company conducted an equity offering of Series B Convertible Preferred
Stock reflecting a $1.00 par value that is convertible into 5 shares of the Company’s
common stock. As of December 31, 2010, the Company closed on the sale of $420,000 worth
of Series B Convertible Preferred Stock. |
In an effort to address the Company’s exposure to outstanding convertible debt and also raise
operating capital, in May 2010, the Company initiated an Incentive Offer affecting all our former
and current unsecured debt holders that offered to convert their debt into shares of our common
stock at $.20 per share and/or exercise their warrants at $.20 per share. In addition, our secured
debt holders were offered to convert their debt into shares of our Class A Convertible Preferred
Stock at $1.00 per share. The Incentive Offer was also extended to other convertible note holders
and miscellaneous warrants holders.
The closing of the Incentive Offer took effect on July 23, 2010 and, as of December 31, 2010 the
Company achieved the following conversion of convertible debt and exercise of warrants:
As of December 31, 2010:
| |
1. |
|
$2,537,300 of unsecured debt plus accrued interest of $728,673 associated with the $5.5
million offering was converted into 16,329,869 common shares, and |
| |
2. |
|
2,549,500 warrants were exercised into an equal number of common shares providing for
$509,900 of additional equity proceeds, and |
| |
3. |
|
$650,000 of secured debt plus accrued interest of $74,187 were converted into 724,187
Series A convertible preferred shares. |
As of December 31, 2010, the Company has $272,863 of debt and accrued interest outstanding from
the $5.5 million offering and $118,167 of debt and accrued interest outstanding from the $750,000
secured offering, reflecting more than 90% successful conversion.
23
Liquidity and Capital Resources
Our liquidity is dependent, in the short term, on proceeds from newly issued debt and the sale of
our common stock and preferred stock for cash. In the long term, we may need to continue expanding
our capacity of the Data Storage Center by investing in property and equipment and software
licenses. As discussed in Note 2 to the consolidated financial statements, the Company has suffered
recurring losses from operations and a working capital deficit. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
We have financed our operations, debt service and capital requirements through cash flows generated
from operations, the issuance of secured and unsecured convertible debt financing, capital leases
and issuance of equity securities. We had a working capital deficit of $1,686,465 at December 31,
2010. We had cash of $27,557 as of December 31, 2010, compared to having cash of $141,806 at
December 31, 2009.
We used $1,916,844 of net cash from operating activities for the year ended December 31, 2010,
compared to positive cash flows of $31,736 for the year ended December 31, 2009. Cash used in
operating activities during the year ended December 31, 2010, funded a net loss of $6,414,639. This
net loss was offset by non-cash charges of $632,670 for amortization and depreciation, $310,967
associated with stock options expense, $372,836 related to amortization of the discount on our
convertible debt and deferred financing costs, $306,428 loss on settlement of debt, $40,893 bad
debts expense, $238,340 for common stock issued for services, $1,522,950 additional beneficial
conversion feature on converted notes, $456,329 warrants expense and $539,793 in the cumulative
increase in accounts payable and accrued expenses. Cash used in operating activities during the
year ended December 31, 2009, funded a net loss of $5,169,717. This net loss was offset by non-cash
charges of $1,225,194 for amortization and depreciation, $349,996 associated with stock options
expense, $1,939,947 related to amortization of the discount on our convertible debt and deferred
financing costs, $87,656 gain on settlement of debt, $81,787 bad debts expense, $62,029 for shares
issued for interest, $124,323 for common stock issued for services, $200,304 additional beneficial
conversion feature on converted notes, $389,818 warrants expense and $1,055,976 in the cumulative
increase in accounts payable and accrued expenses.
Net cash flows used by investing activities was $69,509 for the year ended December 31, 2010,
compared to net cash flows used in investing activities of $45,702 for the year ended December 31,
2009. Both comparable totals are attributed to our purchase of property and equipment and software
licenses during these two periods.
Net cash flow provided by financing activities were $1,872,824 for the year ended December 31,
2010, compared to net cash provided by financing activities of $118,735 for the year ended December
31, 2009. During 2010, cash provided by financing activities is primarily due to proceeds of
$1,619,050 received from the issuance of equity securities, $509,900 received from the exercise of
warrants and proceeds of $250,000 from notes payable that supported
payments of $46,554 on capital
lease obligations, $364,572 payments on notes payable and $95,000 payments on convertible note.
During 2009, cash provided by financing activities is primarily due to proceeds of $683,500
received from the issuance of secured convertible debt, offset by $66,500 related financing costs
and $501,500 funds received from issuance of our common stock, offset by $43,500 in related
issuance costs. We used these proceeds to make $442,723 in capital lease payments and $647,042 of
payments on notes payable.
Results of Operations
Year Ended December 31, 2010 as compared to the Year Ended December 31, 2009
Our sales for 2010 decreased to $2,143,882 compared to $3,192,463 in 2000, reflecting a
$1,048,581 decrease in annual revenue, despite an increase in the number of our customers to 890 at
December 21, 2010 from 789 at December 31, 2009. During 2010, we experienced considerable
competitive and economic pressure on our pricing due to an ever-expanding range of viable
alternative storage platforms and services offered throughout the industry and the weak economy.
Concurrent with the pricing pressure, we took action to restructure our resources, strengthened our
VAR relationships, repositioned our offering and refined other aspects of the DigiBAK business to
increase our margins. Customers remain highly satisfied with the service and simplicity of our
DigiBAK offering, attributes of which are competitive differentiators and sought after by new
customers.
Gross margin for 2010 was $634,757 compared to $1,069,830 in 2009, reflecting a 4% decrease from
33% in 2009 down to 29% in 2010. Our overall gross margin has remained stable due to actions taken
in 2010 to restructure the resources associated with our DigiBAK business and the inherent benefits
of our business model that relies on the organic growth of our customer’s data, yet does not
require a proportionate expenditure in capital costs. We manage our Data Storage
Center to plan for growth and capacity and can efficiently manage and support this data growth
without requiring significant capital cost in the short term. We do, however, plan to refresh our
hardware technology on a three to four year cycle, which will be coming up in 2011.
24
Research and development expenses during 2010 were $967,591 compared to $830,247 in 2009. In 2009,
we reorganized out development effort by redefining the DigiLIBE architecture and release plan, we
brought the software development in-house with a combination of internal and targeted skilled
contractors and streamlined the development process, which produced a much more efficient and
effective approach. We continued this effort during 2010 producing greater focus and oversight
over design architecture and cost control which resulted in the successful development and first
quarter 2010 roll-out of our DigiLIBE product.
In conjunction with our first quarter roll-out of our new DigiLIBE product during 2010, we incurred
a significant increase in the associated sales and marketing expenses. The increase is primarily
attributable to an increase in new employees from two to eight during the year and the investment
that we made in public relations firm and online marketing in that time period. During 2010, we
incurred sales and marketing expense of $849,337, compared to $337,048 incurred during 2009. Our
2011 sales and marketing plan reflects a redesign of our website coupled with our transition to a
new public relations firm, which will help get our message viral, generate qualified leads and be
able to increase Digitiliti’s reach across the internet to o potential customers more effectively.
General and administrative expenses increased by $479,971 to $2,700,782 in 2010 compared to
$2,220,811 incurred during 2009. The increase is primarily attributable to the costs attendant the
nine new employees hired during 2010, including associated insurance cost, employee stock option
cost and other resources. Notwithstanding these additional expenditure, the company has maintained
a disciplined cost containment system that has historically reduced The general overhead expenses
through personnel realignment to priorities and goals, vendor contract negotiations, stock based
compensation alternatives, insurance costs and a daily/weekly focus between the CEO and CFO on
expenditures.
Interest expense for 2010 decreased by $713,839 to $2,225,258, compared to $2,939,097 incurred in
2009. In each of the last two years, the company has initiated programs to convert its outstanding
convertible debt into shares of the company’s common stock. During 2009, the company converted a
larger portion of the $5,500,000 12% convertible note debt than it converted during 2010. As a
result, a larger portion of the attendant cost of converting this debt was recognized in 2009,
which included the associated beneficial conversion feature and unamortized warrant cost that was
reflected as interest expense during 2009 and 2010.
Recent and other Significant Events affecting our results of Operations and Financial Condition
On February 28, 2011, the Company completed the placement of $1,182,844 Secured Convertible
Promissory Note and Warrants (the “Secured Convertible Debt Offering”). All of the securities
issued in conjunction with the Secured Convertible Debt Offering were made to “accredited
investors” as those terms are defined on Rule 501 of Regulation D of the Securities and Exchange
Commission, The Lenders in the Secured Convertible Debt Offering paid a 10% discount for their
investment, resulting in a “stepped-up” basis in their individual Secured Convertible Promissory
Notes. The Secured Convertible Promissory Notes bear interest at the rate of 12% per annum, have
an 18-month maturity date and a $.20 per share conversion rate in the Company’s common stock. The
Secured Convertible Promissory Notes are secured by a first lien on all assets of the Company;
provided, however, that the Lenders agreed to subordinate to a lien with respect to up to $100,000
of original principal amount of other notes against the Company’s vault.
The Lenders received Warrants to purchase an aggregate of 3,252,821 shares of Company Common Stock.
The Warrants have a five year term, $.30 exercise price and include a cashless exercise provision
and a put right in the event of an acquisition of the Company valued at the Black Scholes Value of
the unexercised portion of the Warrant obtained from the “OV” function on Bloomberg determined as
of the day prior to announcement of the transaction. The Warrants include antidilution provisions
for stock splits, stock dividends and recapitalization only.
The Secured Convertible Debt Offering was conducted in order to implement a previously approved
repayment of debt obligations owed to two stockholders (the “Miners”) (see Footnote 6, Note Payable
and Footnote 7, under “Other Convertible Notes”), as well as provide additional working capital for
the Company. The debt obligations owed to the Miners by the Company ( the “Miner Debt”) were
secured by a first lien on the Company’s assets and consisted of the following: a $250,000 12%
secured convertible note ($.20 per share conversion rate). This convertible note contained a
maturity date of October 16, 2009 and had been classified as past due in all public filings; a
$50,000 10% On-Demand Promissory Note that had been classified in the current maturity portion of
related party debt in all public filings; and a $231,540 6% On-Demand Promissory Note that had been
classified in the current maturity portion of related party debt in all public filings.
Contemporaneously with the closing of the Secured Convertible Debt Offering, the Company and the
Miners executed a Repayment of Note Obligations and Release of Security Interest Agreement that
provided for the repayment of $431,540 of principal of the Miner Debt with the remaining principal
balance owed of $100,000 being rolled into a secured promissory note under the Secured Convertible
Debt Offering. Correspondingly, all outstanding
accrued interest owed on the Miner Debt was paid to the Miners in the form of the Company’s common
stock based on a rate of $.15 per share, along with a modification in terms on 350,000 common stock
purchase warrants previously issued to the Miners and the issuance of an additional 200,000
warrants reflecting a five year term and a $.30 per share exercise price. After completion of all
documentation reflecting the repayment of the Miner Debt, the Miners released their first lien in
the Company’s assets in preference to those Lenders associated with the Secured Convertible Debt
Offering.
25
Critical Accounting Policies and Estimates
Software Revenue Recognition
The Company derives its revenue from sales of its products and services. Product revenue is derived
from sales of the Company’s DigiBak service and new DigiLibe service.
The DigiBak service provides an offsite storage solution through a “utility based computing
philosophy” where customers pay for the gigabytes of data they store in the DigiBak vault.
The DigiLibe service is a multiple element software sales arrangement that is comprised of three
key components that act as one: Client Agent, Information Director, and Archive Information Store.
For multiple element software license sales arrangements that do not require significant
modification or customization of the underlying software, we recognize revenue when: (1) we enter
into a legally binding software arrangement with a customer for the license of software, (2) we
deliver the software, (3) price is deemed fixed or determinable and free of contingencies of
significant uncertainties and (4) collection is probable.
For sales arrangements with multiple elements, we defer revenue for any undelivered elements, and
recognize revenue when the product is delivered or over the periods in which the service is
performed. If we cannot objectively determine the fair value of any undelivered element included in
bundled arrangements, we defer revenue until all elements are delivered and services have been
performed, or until fair value can objectively be determined for any remaining undelivered
elements.
Share-Based Payment
The Company accounts for share-based awards issued to employees and non-employees in accordance
with the guidance on share-based payments. Accordingly, employee share-based payment compensation
is measured at the grant date, based on the fair value of the award, and is recognized as an
expense over the requisite service period (generally the vesting is over a 3-year period).
Additionally, share-based awards to non-employees are expensed over the period in which the related
services are rendered at their fair value.
New Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”)
| (i) |
|
provide updated guidance on whether multiple deliverables exist, how
the deliverables in an arrangement should be separated, and how the
consideration should be allocated; |
| |
| (ii) |
|
require an entity to allocate revenue in an arrangement using
estimated selling prices (ESP) of deliverables if a vendor does not
have vendor-specific objective evidence of selling price (VSOE) or
third-party evidence of selling price (TPE); |
| |
| (iii) |
|
eliminate the use of the residual method and require an entity to
allocate revenue using the relative selling price method; and |
| |
| (iv) |
|
expand the disclosure requirements to require an entity to provide
both qualitative and quantitative information about the significant
judgments made in applying the revised guidance and subsequent
changes in those judgments that may significantly affect the timing
or amount of revenue recognition. |
In addition, in October 2009, the FASB also issued ASU No. 2009-14, “Certain Revenue
Arrangements That Include Software Elements” (“ASU 2009-14”) to amend the accounting standards for
revenue recognition to exclude tangible products containing software components and non-software
components that function together to deliver the tangible product’s essential functionality from
the scope of the software revenue recognition guidance. The revised revenue recognition accounting
standards are effective for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010 and shall be applied on a prospective basis. Earlier
application is permitted.
26
We are required to adopt this standard at the beginning of fiscal 2011, which begins on
January 1, 2011. We are assessing the impact of the new accounting standards on our financial
position and results of operations.
In January 2010, the FASB issued authoritative guidance that requires reporting entities to make
new disclosures about recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair value measurements, and information on
purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair
value measurements. The guidance is effective for annual reporting periods beginning after December
15, 2009, except for Level 3 reconciliation disclosures, which are effective for annual periods
beginning after December 15, 2010. The adoption of the above guidance did not impact the Company’s
financial position, results of operations or cash flows.
No other new accounting pronouncement issued or effective has had, or is expected to have, a
material impact on the Company’s consolidated financial statements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements during 2010 and 2009.
|
|
|
| ITEM 7A: |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required for smaller reporting companies.
|
|
|
| ITEM 8: |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
27
DIGITILITI, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
28
C O N T E N T S
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CONSOLIDATED FINANCIAL STATEMENTS |
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36 – 53 |
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29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Digitiliti, Inc.
St. Paul, Minnesota
We
have audited the accompanying consolidated balance sheets of Digitiliti, Inc. (the “Company”) as of December 31,
2010 and 2009 and the related consolidated statement of operations, changes in stockholders’
deficit and cash flows for the years then ended. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these 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 audit to obtain
reasonable assurance about whether the financial statements are free of material misstatements. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit 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 financial statements referred to above present fairly, in all material
respects, the financial position of Digitiliti, Inc. as of December 31, 2010 and 2009, and the
results of their operations and their cash flows for the years then ended 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. As discussed in Note 2 to the consolidated financial statements,
the Company has suffered losses from operations and has a working capital deficit. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans in regards to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MaloneBailey, LLP
www.malone-bailey.com
Houston, Texas
April 13, 2011
30
DIGITILITI, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash |
|
$ |
27,557 |
|
|
$ |
141,086 |
|
Accounts receivable, net |
|
|
333,687 |
|
|
|
484,203 |
|
Other current assets |
|
|
247,970 |
|
|
|
220,304 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
609,214 |
|
|
|
845,593 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
158,105 |
|
|
|
444,675 |
|
Software license, net |
|
|
436,608 |
|
|
|
713,199 |
|
Deferred financing costs |
|
|
4,466 |
|
|
|
113,334 |
|
Other assets |
|
|
6,322 |
|
|
|
7,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,214,715 |
|
|
$ |
2,124,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
692,923 |
|
|
$ |
361,194 |
|
Accounts payable — related parties |
|
|
— |
|
|
|
7,861 |
|
Accrued expenses |
|
|
554,978 |
|
|
|
1,222,143 |
|
Due to related parties |
|
|
— |
|
|
|
75,195 |
|
Deferred income |
|
|
9,989 |
|
|
|
— |
|
Notes payable |
|
|
231,540 |
|
|
|
518,371 |
|
Current maturities of convertible debt |
|
|
782,941 |
|
|
|
2,032,771 |
|
Current maturities of capital lease obligations |
|
|
23,308 |
|
|
|
45,819 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,295,679 |
|
|
|
4,263,354 |
|
|
|
|
|
|
|
|
|
|
Convertible debt, non-current |
|
|
250,000 |
|
|
|
1,646,502 |
|
Capital lease obligations, non-current |
|
|
— |
|
|
|
24,043 |
|
Other liabilities |
|
|
3,607 |
|
|
|
15,159 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,549,286 |
|
|
|
5,949,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock, $0.001 par value;
1,200,000 shares authorized for Series A, 724,187 outstanding
shares issued and outstanding |
|
|
724 |
|
|
|
— |
|
Series B Convertible Preferred Stock, $1.00 par value; 2,000,000 shares authorized for Series B, 420,000 shares issued and outstanding |
|
|
420,000 |
|
|
|
— |
|
Common stock, $.001 par value; 125,000,000 shares authorized,
65,699,753 and 38,808,736 shares issued and outstanding |
|
|
65,700 |
|
|
|
38,809 |
|
Additional paid-in capital |
|
|
24,409,477 |
|
|
|
15,952,089 |
|
Accumulated deficit |
|
|
(26,230,472 |
) |
|
|
(19,815,833 |
) |
|
|
|
|
|
|
|
Total stockholders’ deficit |
|
|
(1,334,571 |
) |
|
|
(3,824,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit |
|
$ |
1,214,715 |
|
|
$ |
2,124,123 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
31
DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
$ |
2,143,882 |
|
|
$ |
3,192,463 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES |
|
|
1,509,125 |
|
|
|
2,122,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
634,757 |
|
|
|
1,069,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
849,337 |
|
|
|
337,048 |
|
General and administrative |
|
|
2,700,782 |
|
|
|
2,220,811 |
|
Research and development |
|
|
967,591 |
|
|
|
830,247 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,517,710 |
|
|
|
3,388,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
|
(3,882,953 |
) |
|
|
(2,318,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
Gain (loss) on extinguishment of debt |
|
|
(306,428 |
) |
|
|
87,656 |
|
Interest expense |
|
|
(2,225,258 |
) |
|
|
(2,939,097 |
) |
|
|
|
|
|
|
|
Total other expense |
|
|
(2,531,686 |
) |
|
|
(2,851,441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(6,414,639 |
) |
|
$ |
(5,169,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE — BASIC AND DILUTED |
|
$ |
(0.12 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC AND DILUTED |
|
|
54,284,942 |
|
|
|
34,572,856 |
|
See notes to consolidated financial statements.
32
DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
| |
|
Series A Preferred Stock |
|
|
Series B Preferred Stock |
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2008 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
26,665,020 |
|
|
$ |
26,665 |
|
|
$ |
10,364,357 |
|
|
$ |
(14,646,116 |
) |
|
$ |
(4,255,094 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for convertible debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,656,606 |
|
|
|
7,657 |
|
|
|
2,695,928 |
|
|
|
— |
|
|
|
2,703,585 |
|
Stock issued
for cash |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,725,000 |
|
|
|
2,725 |
|
|
|
498,775 |
|
|
|
— |
|
|
|
501,500 |
|
Stock issued for services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
656,249 |
|
|
|
656 |
|
|
|
123,667 |
|
|
|
— |
|
|
|
124,323 |
|
Stock issued as payment of payables |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,105,861 |
|
|
|
1,106 |
|
|
|
245,316 |
|
|
|
— |
|
|
|
246,422 |
|
Beneficial conversion feature on converted notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
977,029 |
|
|
|
— |
|
|
|
977,029 |
|
Warrants expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
389,818 |
|
|
|
— |
|
|
|
389,818 |
|
Discount on convertible debt relating to warrants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
123,618 |
|
|
|
— |
|
|
|
123,618 |
|
Warrants issued as settlement of liabilities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
109,161 |
|
|
|
— |
|
|
|
109,161 |
|
Warrants issued for debt financing costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
74,424 |
|
|
|
— |
|
|
|
74,424 |
|
Employee stock option expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
349,996 |
|
|
|
— |
|
|
|
349,996 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,169,717 |
) |
|
|
(5,169,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
BALANCE, DECEMBER 31, 2009 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38,808,736 |
|
|
|
38,809 |
|
|
|
15,952,089 |
|
|
|
(19,815,833 |
) |
|
|
(3,824,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for convertible debt and interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16,329,869 |
|
|
|
16,330 |
|
|
|
3,249,643 |
|
|
|
— |
|
|
|
3,265,973 |
|
Stock issued for cash, net of issuance costs |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
6,565,000 |
|
|
|
6,565 |
|
|
|
1,192,485 |
|
|
|
— |
|
|
|
1,199,050 |
|
Stock issued for services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,082,253 |
|
|
|
1,082 |
|
|
|
234,038 |
|
|
|
— |
|
|
|
235,120 |
|
Stock issued as payment of payables |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
364,395 |
|
|
|
364 |
|
|
|
66,735 |
|
|
|
— |
|
|
|
67,099 |
|
Warrants exercised for cash |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,549,500 |
|
|
|
2,550 |
|
|
|
507,350 |
|
|
|
— |
|
|
|
509,900 |
|
Preferred stock issued for debt and interest |
|
|
724,187 |
|
|
|
724 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
648,208 |
|
|
|
— |
|
|
|
648,932 |
|
Preferred stock issued for cash |
|
|
— |
|
|
|
— |
|
|
|
420,000 |
|
|
|
420,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
420,000 |
|
Beneficial
conversion feature and incremental increase in fair value of
conversion options and warrants on converted notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,522,950 |
|
|
|
— |
|
|
|
1,522,950 |
|
Beneficial
conversion feature on extinguished debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
259,683 |
|
|
|
— |
|
|
|
259,683 |
|
Warrants expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
456,329 |
|
|
|
— |
|
|
|
456,329 |
|
Warrants issued as settlement of liabilities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,000 |
|
|
|
— |
|
|
|
9,000 |
|
Employee stock option expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
310,967 |
|
|
|
— |
|
|
|
310,967 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,414,639 |
) |
|
|
(6,414,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2010 |
|
|
724,187 |
|
|
$ |
724 |
|
|
|
420,000 |
|
|
$ |
420,000 |
|
|
|
65,699,753 |
|
|
$ |
65,700 |
|
|
$ |
24,409,477 |
|
|
$ |
(26,230,472 |
) |
|
$ |
(1,334,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
33
DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2010 |
|
|
2009 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,414,639 |
) |
|
$ |
(5,169,717 |
) |
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
336,797 |
|
|
|
714,370 |
|
Amortization of software licenses |
|
|
295,873 |
|
|
|
510,824 |
|
Amortization of deferred financing costs |
|
|
41,252 |
|
|
|
230,074 |
|
Amortization and write of discount on convertible debt |
|
|
331,584 |
|
|
|
1,709,873 |
|
(Gain) loss on extinguishment of debt |
|
|
306,428 |
|
|
|
(87,656 |
) |
Bad debt expense |
|
|
40,893 |
|
|
|
81,787 |
|
Shares issued for interest expense |
|
|
— |
|
|
|
62,029 |
|
Common stock issued for services |
|
|
238,340 |
|
|
|
124,323 |
|
Employee stock option expense |
|
|
310,967 |
|
|
|
349,996 |
|
Additional beneficial conversion feature on
converted debt |
|
|
1,522,950 |
|
|
|
200,304 |
|
Warrants expense |
|
|
456,329 |
|
|
|
389,818 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
109,623 |
|
|
|
(16,863 |
) |
Other current assets |
|
|
(27,666 |
) |
|
|
(18,816 |
) |
Other assets |
|
|
1,000 |
|
|
|
(1,000 |
) |
Accounts payable — trade |
|
|
384,595 |
|
|
|
355,382 |
|
Accounts payable — related parties |
|
|
(7,861 |
) |
|
|
(97,008 |
) |
Accrued expenses |
|
|
155,198 |
|
|
|
700,594 |
|
Deferred income |
|
|
9,989 |
|
|
|
— |
|
Deferred rent |
|
|
(8,496 |
) |
|
|
(6,578 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(1,916,844 |
) |
|
|
31,736 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(50,227 |
) |
|
|
(45,702 |
) |
Purchases of software licenses |
|
|
(19,282 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(69,509 |
) |
|
|
(45,702 |
) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible debt, net of financing costs |
|
|
250,000 |
|
|
|
683,500 |
|
Proceeds from exercise of warrants |
|
|
509,900 |
|
|
|
— |
|
Proceeds from issuance of preferred stock |
|
|
420,000 |
|
|
|
— |
|
Payments on convertible debt |
|
|
(95,000 |
) |
|
|
(100,000 |
) |
Payments on capital lease obligations |
|
|
(46,554 |
) |
|
|
(442,723 |
) |
Payments on notes payable |
|
|
(364,572 |
) |
|
|
(647,042 |
) |
Proceeds from notes payable |
|
|
— |
|
|
|
75,000 |
|
Proceeds from due to related parties |
|
|
— |
|
|
|
70,500 |
|
Payments on due to related parties |
|
|
— |
|
|
|
(22,000 |
) |
Proceeds from sale of common stock, net of issuance costs |
|
|
1,199,050 |
|
|
|
501,500 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,872,824 |
|
|
|
118,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
|
|
(113,529 |
) |
|
|
104,769 |
|
|
|
|
|
|
|
|
|
|
CASH |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
141,086 |
|
|
|
36,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
27,557 |
|
|
$ |
141,086 |
|
|
|
|
|
|
|
|
34
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Cash paid for interest |
|
$ |
77,710 |
|
|
$ |
54,736 |
|
Cash paid for income tax |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing and Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt and accrued interest to equity |
|
$ |
3,265,973 |
|
|
$ |
2,641,556 |
|
Preferred stock issued for debt and accrued interest |
|
|
724,187 |
|
|
|
— |
|
Stock issued to settle liabilities |
|
|
72,879 |
|
|
|
— |
|
Addition to property and equipment and maintenance fees paid
through issuance of note |
|
|
56,634 |
|
|
|
406,613 |
|
Accrued interest converted to debt principal |
|
|
21,107 |
|
|
|
99,411 |
|
Warrants issued for debt financing costs |
|
|
|
|
|
|
74,424 |
|
Equipment acquired under capital lease, including issuance
of warrants for capital lease |
|
|
|
|
|
|
8,230 |
|
Discount due to warrants granted with convertible notes |
|
|
|
|
|
|
123,618 |
|
See notes to consolidated financial statements.
35
DIGITILITI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description and Summary of Significant Accounting Policies
| |
|
The Company and Nature of Operations |
| |
|
Digitiliti, Inc. (we, our, the Company or Digitiliti) provides back up archiving and information
management and methodologies enabling our customer to manage, control, protect and access
their information data simply and cost effectively through our products and services. |
Principles of Consolidation
| |
|
The consolidated financial statements included the accounts of Digitiliti, a Delaware
corporation and its wholly owned subsidiary, Cyclone Acquisition Corp., a Minnesota
corporation. All significant intercompany balances and transactions were eliminated. |
| |
|
Correction of a Prior Period |
| |
|
During the year, the Company discovered and corrected an error related to options granted to
an employee that were inadvertently omitted from the Company’s employee stock option expense
from April 2008 through December 31, 2009. The error resulted to an understatement in stock
compensation expense and additional paid in capital. In accordance with the SEC’s Staff
Accounting Bulletin Nos. 99 and 108 (SAB 99 and SAB 108), the Company evaluated this error
and, based on an analysis of quantitative and qualitative factors and determined that the
error was immaterial to each of the prior reporting periods affected. However, if the
adjustments to correct the cumulative effect of the above error had been recorded in the year
ended December 31, 2010, the Company believes the impact would have been significant and would
impact comparisons to prior periods. Therefore, as permitted by SAB 108, the Company
corrected, in the current filing, previously reported results for the year ended December 31,
2010. |
| |
|
The Consolidated Balance Sheet as of December 31, 2009 was also revised to reflect the
cumulative effect of the error described above. The error resulted to an increase in
accumulated deficit and additional paid in capital of $503,697. There was no impact to the
total consolidated stockholders’ deficit as of December 31, 2009. |
| |
|
The following table shows the impact of the error to the Consolidated Statements of Operations
for the year ended December 31, 2009: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, 2009 |
|
| |
|
As Previously |
|
|
|
|
|
|
|
| |
|
Reported |
|
|
Adjustments |
|
|
As Revised |
|
General & administrative |
|
$ |
(1,989,177 |
) |
|
$ |
(231,634 |
) |
|
$ |
(2,220,811 |
) |
Total operating expenses |
|
$ |
(3,156,472 |
) |
|
$ |
(231,634 |
) |
|
$ |
(3,388,106 |
) |
Net loss from operations |
|
$ |
(2,086,642 |
) |
|
$ |
(231,634 |
) |
|
$ |
(2,318,276 |
) |
Net loss |
|
$ |
(4,938,083 |
) |
|
$ |
(231,634 |
) |
|
$ |
(5,169,717 |
) |
Net loss per common share — Basic and
Diluted |
|
$ |
(0.14 |
) |
|
|
|
|
|
$ |
(0.15 |
) |
Weighted-Average common shares
outstanding — Basic and Diluted |
|
|
34,572,856 |
|
|
|
|
|
|
|
34,572,856 |
|
36
| |
|
The adjustments to the Consolidated Statements of Cash Flows for the year ended December 31,
2009 did not result in any changes to the amounts previously reported for net cash from
operating activities, investing activities or financing activities. |
Use of Estimates
| |
|
The preparation of these consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that may affect certain reported amounts and disclosures in the
consolidated financial statements and accompanying notes. The significant estimates relate to
the collectability of accounts receivable, useful lives of software licenses, valuation of
beneficial conversion feature on convertible debts, valuation of warrants and stock options,
and valuation allowance for deferred income taxes. Actual results could differ from those
estimates. |
Credit risk
| |
|
Cash is maintained in bank accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts and does not believe it is exposed to
any significant credit risk on cash. |
| |
|
Allowance for Doubtful Accounts |
| |
|
The allowance for doubtful accounts is based on the aging, historical experience and
management’s judgment of the individual accounts receivable. Accounts receivable are written
off against the allowance when management determines a balance is uncollectible and no longer
actively pursues collection. Accounts receivable is presented net of the allowance for
doubtful accounts of $10,753 and $162,263 at December 31, 2010 and 2009, respectively. |
Property and Equipment
| |
|
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the related assets.
Computer equipment and furniture and fixtures are depreciated over three to five years.
Maintenance and repairs are charged to operations when incurred. |
Software Licenses
| |
|
Certain software is licensed from two vendors to facilitate the secure online data storage
solution. The licenses are nonexclusive. Upon full payment, the licenses are owned outright by
the Company and are amortized over five years. |
Long-Lived Assets
| |
|
All long-lived assets are reviewed when events or changes in circumstances indicate that the
carrying amounts of such assets may not be recoverable. An impairment loss is recognized when
estimated undiscounted cash flows that can be generated by those assets are less than the
carrying value of the assets. When an impairment loss is recognized, the carrying amount is
reduced to its estimated fair value based on appraisals or other reasonable methods to
estimate fair value. There was no impairment of long-lived assets as
of December 31, 2010 and 2009. |
| |
|
Costs associated with the issuance of debt is capitalized as deferred financing costs and
amortized into interest expense using the effective interest method over the life of the
related debt. At December 31, 2010 and 2009, deferred financing costs incurred totaled $0 and
$715,929, respectively. Accumulated amortization for the years ended December 31, 2010 and
2009 was $41,252 and $602,595, respectively. |
| |
|
Fair Value of Financial Instruments |
| |
|
The carrying value of short-term financial instruments, including cash, accounts receivable,
accounts payable and accrued expenses, short-term borrowings and capital lease obligations
approximate fair value due to the relatively short period to
maturity for these instruments. The long-term borrowings approximate fair value since the
related rates of interest approximates current market rates. |
37
| |
|
Software Revenue Recognition |
| |
|
The Company derives its revenue from sales of its products and services. Product revenue is
derived from sales of the Company’s DigiBak service and new DigiLibe service. |
| |
|
The DigiBak service provides an offsite storage solution through a “utility based computing
philosophy” where customers pay for the gigabytes of data they store in the DigiBak vault. |
| |
|
The DigiLibe service is a multiple element software sales arrangement that is comprised of
three key components that act as one: Client Agent, Information Director, and Archive
Information Store. |
| |
|
For multiple element software license sales arrangements that do not require significant
modification or customization of the underlying software, we recognize revenue when: (1) we
enter into a legally binding software arrangement with a customer for the license of software,
(2) we deliver the software, (3) price is deemed fixed or determinable and free of
contingencies of significant uncertainties and (4) collection is probable. |
| |
|
For sales arrangements with multiple elements, we defer revenue for any undelivered elements,
and recognize revenue when the product is delivered or over the periods in which the service
is performed. If we cannot objectively determine the fair value of any undelivered element
included in bundled arrangements, we defer revenue until all elements are delivered and
services have been performed, or until fair value can objectively be determined for any
remaining undelivered elements. |
| |
|
Research and Development Costs |
| |
|
Research and development costs are expensed as incurred. The Company expensed third party
development costs totaling $967,591 and $830,247 in 2010 and 2009, respectively. |
| |
|
The Company accounts for share-based awards issued to employees and non-employees in
accordance with the guidance on share-based payments. Accordingly, employee share-based
payment compensation is measured at the grant date, based on the fair value of the award, and
is recognized as an expense over the requisite service period (generally the vesting is over a
3-year period). Additionally, share-based awards to non-employees are expensed over the
period in which the related services are rendered at their fair value. |
| |
|
Deferred income tax assets and liabilities are recognized for the expected future income tax
consequences of events that have been included in the consolidated financial statements or
income tax returns. Deferred income tax assets and liabilities are determined based on
differences between the financial statement and tax bases of assets and liabilities using tax
rates in effect for the years in which the differences are expected to reverse. |
| |
|
In evaluating the ultimate realization of deferred income tax assets, management considers
whether it is more likely than not that the deferred income tax assets will be realized.
Management establishes a valuation allowance if it is more likely than not that all or a
portion of the deferred income tax assets will not be utilized. The ultimate realization of
deferred income tax assets is dependent on the generation of future taxable income, which must
occur prior to the expiration of the net operating loss carry forwards. |
| |
|
The Company also follows the guidance related to accounting for income tax uncertainties. In
accounting for uncertainty in income taxes, the Company recognizes the financial statement
benefit of a tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions meeting the more
likely than not threshold, the amount recognized in the consolidated financial statements is
the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement with the relevant tax authority. No liability for unrecognized tax benefits was
recorded as of December 31, 2010 and 2009. |
38
| |
|
It is the Company’s practice to recognize penalties and/or interest related to income tax
matters in interest and penalties expense. |
| |
|
The Company is subject to income taxes in the U.S. federal jurisdiction and various states and
local jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant judgment to
apply. The Company is not currently under examination by any taxing jurisdiction. |
Net Loss per Share
| |
|
Basic net loss per common share is computed by dividing the net loss by the weighted-average
number of common shares outstanding. Diluted net loss per common share is computed based on
the weighted-average number of common shares outstanding increased by dilutive common stock
equivalents. For the years ended December 31, 2010 and 2009, potential dilutive securities
had an anti-dilutive effect and were not included in the calculation of diluted earnings per
common share. |
| |
|
Certain 2009 amounts have been reclassified to conform to 2010 presentation. |
New Accounting Pronouncements
| |
|
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”) |
| |
(i) |
|
provide updated guidance on whether multiple deliverables
exist, how the deliverables in an arrangement should be
separated, and how the consideration should be allocated; |
| |
| |
(ii) |
|
require an entity to allocate revenue in an arrangement
using estimated selling prices (ESP) of deliverables if a
vendor does not have vendor-specific objective evidence of
selling price (VSOE) or third-party evidence of selling
price (TPE); |
| |
| |
(iii) |
|
eliminate the use of the residual method and require an
entity to allocate revenue using the relative selling price
method; and |
| |
| |
(iv) |
|
expand the disclosure requirements to require an entity to
provide both qualitative and quantitative information about
the significant judgments made in applying the revised
guidance and subsequent changes in those judgments that may
significantly affect the timing or amount of revenue
recognition. |
| |
|
In addition, in October 2009, the FASB also issued ASU No. 2009-14, “Certain Revenue
Arrangements That Include Software Elements” (“ASU 2009-14”) to amend the accounting standards
for revenue recognition to exclude tangible products containing software components and
non-software components that function together to deliver the tangible product’s essential
functionality from the scope of the software revenue recognition guidance. The revised revenue
recognition accounting standards are effective for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and shall be applied
on a prospective basis. Earlier application is permitted. We are required to adopt this
standard at the beginning of fiscal 2011, which begins on January 1, 2011. We are assessing
the impact of the new accounting standards on our financial position and results of
operations. |
| |
|
In January 2010, the FASB issued authoritative guidance that requires reporting entities to
make new disclosures about recurring or nonrecurring fair-value measurements including
significant transfers into and out of Level 1 and Level 2 fair value measurements, and
information on purchases, sales, issuances, and settlements on a gross basis in the
reconciliation of Level 3 fair value measurements. The guidance is effective for annual
reporting periods beginning after December 15, 2009, except for Level 3 reconciliation
disclosures, which are effective for annual periods beginning after December 15, 2010. The
adoption of the above guidance did not impact the Company’s financial position, results of
operations or cash flows. |
| |
|
No other new accounting pronouncement issued or effective has had, or is expected to have, a
material impact on the Company’s consolidated financial statements. |
39
| |
|
As shown in the accompanying financial statements, the Company incurred net losses of
$6,414,639 for the year ended December 31, 2010 and a negative working capital at December 31,
2010 of $1,686,465,. These conditions raise substantial doubt as to the Company’s ability to
continue as a going concern. |
| |
|
The Company continues to be dependent on its ability to generate future revenues, positive
cash flows and additional financing. There can be no guarantee that the Company will be
successful in generating future revenues, in obtaining additional debt or equity financing or
that such additional debt or equity financing will be available on terms acceptable to the
Company. The financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern. |
| 3. |
|
Property and Equipment |
| |
|
Property and equipment consisted of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Computer equipment |
|
$ |
2,656,071 |
|
|
$ |
2,605,845 |
|
Furniture and fixtures |
|
|
14,511 |
|
|
|
14,511 |
|
|
|
|
|
|
|
|
|
|
|
2,670,582 |
|
|
|
2,620,356 |
|
Less — accumulated depreciation |
|
|
(2,512,477 |
) |
|
|
(2,175,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
158,105 |
|
|
$ |
444,675 |
|
|
|
|
|
|
|
|
| |
|
Depreciation expense totaled $336,797 and $714,370 in 2010 and 2009, respectively. |
| |
|
Software licenses consisted of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
$ |
1,553,132 |
|
|
$ |
1,533,850 |
|
Less — accumulated amortization |
|
|
(1,116,524 |
) |
|
|
(820,651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
436,608 |
|
|
$ |
713,199 |
|
|
|
|
|
|
|
|
| |
|
Amortization expense totaled
$295,872 and $510,824 in 2010 and 2009, respectively. |
| 5. |
|
Related Parties Transactions |
| |
| |
|
At December 31, 2010 and 2009, balances due to the related parties consisted of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Note payable to a stockholder, bearing interest at 15%
per annum, payable monthly up to March 1, 2010 |
|
$ |
— |
|
|
$ |
53,475 |
|
|
|
|
|
|
|
|
|
|
Note payable to an officer, bearing interest at 12.25%
per annum, due on demand, unsecured |
|
|
— |
|
|
|
14,120 |
|
|
|
|
|
|
|
|
|
|
Note payable to an officer, bearing interest at 12.25%
per annum, due on demand, unsecured |
|
|
— |
|
|
|
7,600 |
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
$ |
75,195 |
|
|
|
|
|
|
|
|
40
| |
|
Interest expense on these payable was $0 and $12,516 for 2010 and 2009, respectively. |
Management and Founders Agreements:
| |
|
Our interim CEO, Dan Herbeck, who resigned in February 2009, provided consulting
services to us during 2008 through his company, Continental Technologies Solutions, LLC
(“Continental”). At the time of his resignation, the severance arrangement recognized
unpaid invoices owed to Continental of $105,344, payable at a discretionary rate of
$4,000 per month commencing in April, 2009. As recognition for our delay in payment, we
also granted Continental 100,000 “cashless” five year warrants to purchase 100,000 shares
of our common stock at $0.35 per share. On November 4, 2009, we entered into a
Settlement Agreement with Dan Herbeck, acting through his company, Continental, that
satisfied the outstanding balance owed of $120,172 (reflecting additional accrued
interest from the date of his resignation) in return for the issuance
of 600,861 shares of
Digitiliti common stock. There was no gain or loss recognized on this transaction. |
| |
|
M2 Capital Advisors, Inc. |
| |
|
On May 3, 2006, we executed a consulting agreement with M2. The duties of M2 include
introducing the Company to the financial community; researching and identifying potential
business partners, executives, consultants and Board of Director candidates; assisting with
securing leases or equipment financing; and other general business consulting services. The
agreement also provided for the payment of various fees for raising capital, identifying an
acquisition/reverse merger candidate, assisting with capital lease arrangements, etc. This
agreement was amended March 2007, effective May 6, 2006. |
| |
|
At the time, Mark Savage, our former President and a former director, was the President and a
principal stockholder of M2. While M2 was engaged, they assisted in raising $3,504,010 of
capital from the sale of our common stock and received $350,401 in fees for these services. In
addition, M2 assisted in raising $2,035,950 in 12% convertible notes and received fees totaling
$203,595. |
| |
|
On or about March 23, 2009, we agreed to pay a 10% introduction fee to M2 under their current
Letter Agreement with us that had been extended into May, 2009, on any funds raised by us in a
planned $1,500,000 financing through the sale of secured and unsecured convertible notes. |
| |
|
In April 2009, we initiated a $750,000 raise through the issuance of 12% convertible notes that
were secured by a third position security lien in our DigiBAK vault system and equipment. This
offering also included the issuance of an equal number of warrants. See Note 7 for further
details. We completed this offering in October 2009. In conjunction with the offering, M2
received $66,500 reflecting the 10% introduction fee and were issued 5 year warrants totaling
375,000 with an exercise price of $0.30. The introduction fee and the fair value of the
warrants amounting to $74,424 were charged to deferred financing costs. |
| |
|
Upon the closing of this convertible note offering in October 2009, we initiated an equity
offering in November 2009 of our common stock that comprised “restricted securities” as that
term is defined in Rule 144 of the Securities and Exchange Commission at a price of $0.20 per
share, for total aggregate proceeds up through December 31, 2009, of $545,000 to certain
“accredited investors” as that term is also defined in Rule 501. As of April 13, 2010, we have
received additional proceeds from this equity raise of $857,879 combining for total proceeds
received from this equity raise of $1,402,879. In conjunction with specific monies raised by M2
Capital that were associated with this equity offering, M2 received a 10% introduction fee of
$43,500 through December 31, 2009 and additional 10% introduction fees of $74,500 up through
April 13, 2010. The related fees were charged to additional paid in capital as stock issuance
costs. |
| |
|
In total, M2 partners earned total fees of approximately $74,500 and $110,000 for the years
ended December 31, 2010 and 2009, respectively. |
| |
|
In August 2007, we entered into a consulting arrangement with 5X Partners, LLC (“5X”). Under
the agreement, 5X provided services such as senior leadership, business development, sales and
marketing, product packaging, infrastructure scaling methods and other key areas of management,
business assessment and strategies. Under the arrangement, which was amended several times, we
agreed to pay 5X a fixed fee of $60,484 and monthly fees of $28,000, of which $8,000
would be deferred until reaching a financial funding goal. In addition, we agreed to issue 5X
stock options to purchase 2,850,000 shares of our common stock at $0.385 per share, which vests
over 24 months. |
41
| |
|
In October 2008, 5X principals resigned their executive positions with the Company, and on July
16, 2009, we agreed on a settlement agreement for amounts due under the consulting arrangement
whereby we issued 505,000 shares and 360,000 5-year warrants with an exercise price of $0.25 as
full payment of the outstanding balance of $100,227. In connection with the above
arrangement, we recognized a loss on settlement of $108,187. |
| |
|
We issued a $250,000 promissory note to a stockholder dated December 15, 2005. The note
mirrors a promissory note between the stockholder and his bank, which matured on December 15,
2009 and had an interest rate 0.5% above the bank’s index rate
(6.00% at December 31, 2009 and 6.00% at December 31, 2010).
Subsequent to December 15, 2009, the note was renewed to February 1, 2011. The balance of the
note was $231,540 at December 31, 2010 and 2009. Interest expense was $13,478 and $15,218 for
2010 and 2009, respectively. On February 28, 2011, this note was paid in full. |
| |
|
In June 2008, the Company negotiated a six-month payment plan with its primary software vendor
Asigra, Inc. Under the terms of this payment plan, the Company was granted extended payment
terms that omitted Asigra’s standard 20% discount for a net 30-day early payment. This payment
plan reflected monthly payments based on a percentage of outstanding invoices owed for
software licenses and maintenance, with any remaining outstanding balance payable in December
2008. In December 2008, this payment plan was extended for another 6 months with all
outstanding debt payable in May 2009. In July 2009, we executed a Payment and Security
Agreement (the “Security Agreement”) with Asigra that reflected an 8-month payment plan that
would satisfy the existing balance owed to Asigra along with the inclusion of amounts to be
charged over this 8-month period. This Security Agreement provided Asigra a security lien in
the Company’s DigiBAK vault system. As of March 6, 2010, the Company has made all payments
called for under this Security Agreement totaling $364,572 and now owns all of Asigra licenses
outright. |
| |
|
In December 2007, we entered into a Software Purchase Agreement (SPA) with Exanet, Inc. The
terms of the SPA reflect the financing of $485,000 of software over 36-months at 12% interest.
Commencing on January 15, 2008, we are obligated to make minimum monthly interest only
payments of $4,850 that increased to $20,000 effective October 15, 2008. The terms of the SPA
include a possible $2,500 increase to the minimum monthly interest only payments predicated on
performance goals. We have the right to prepay the outstanding balance without penalty
throughout the term of the agreement. |
| |
|
On December 31, 2009, we entered into a settlement agreement with Exanet whereby debt balance
amounting to $405,000 was discharged in exchange for the return of excess Exanet software
license. At the same time, we paid Exanet the balance of $80,000 to reflect the purchase of
active license in use at this time. As a result of the above, we recognized a gain on the
settlement of debt of $222,840 which is the difference between the value of the discharged
debt and the net book value of the software license returned to Exanet. |
| |
|
A summary of the convertible debt as of December 31, 2010 and 2009 is as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Gross proceeds from the debts |
|
$ |
7,000,000 |
|
|
$ |
6,750,000 |
|
Less: discount on the warrants |
|
|
(2,360,593 |
) |
|
|
(2,360,593 |
) |
Less: beneficial conversion feature |
|
|
(90,130 |
) |
|
|
(90,130 |
) |
Less: principal converted to common stock |
|
|
(5,795,000 |
) |
|
|
(2,607,700 |
) |
Less: principal payments |
|
|
(195,000 |
) |
|
|
(100,000 |
) |
Add: accrued interest converted into debt |
|
|
30,000 |
|
|
|
30,000 |
|
Add: amortization of discount |
|
|
1,821,359 |
|
|
|
1,679,106 |
|
Add: unamortized discount on converted debt charged to interest |
|
|
622,305 |
|
|
|
378,590 |
|
|
|
|
|
|
|
|
Total
convertible debt, net |
|
|
1,032,941 |
|
|
|
3,679,273 |
|
Current
maturities of convertible debt, net |
|
|
(782,941 |
) |
|
|
(2,032,771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt, non-current |
|
$ |
250,000 |
|
|
$ |
1,646,502 |
|
|
|
|
|
|
|
|
42
| |
|
A summary of the contingent beneficial conversion feature as of December 31, 2010 and 2009 are
as follows: |
| |
|
|
|
|
|
Unrecognized beneficial conversion feature (BCF) at December 31, 2008 |
|
$ |
1,745,660 |
|
Add: Contingent BCF for the $750,000 convertible debt, at measurement date |
|
|
127,085 |
|
Less: BCF charged to interest expense on converted debt |
|
|
(776,725 |
) |
|
|
|
|
Unrecognized BCF at December 31, 2009 |
|
|
1,096,020 |
|
Less: BCF
charged to interest on converted and extinguished debt |
|
|
(1,041,079 |
) |
|
|
|
|
Unrecognized BCF at December 31, 2010 |
|
$ |
54,941 |
|
|
|
|
|
| |
|
12% Convertible debt — $5.5 million Private Offering |
| |
|
In March 2007, we engaged M2 (see Note 5 — Related Party Transactions) to raise up to $5.5
million from the sale of 12% convertible debt and warrants. This $5.5 million raise was closed
in September 2008. Under the initial conversion terms, the debt was convertible into common
stock at $0.50 per share, subject to an effective registration statement covering the
underlying common stock that has been filed with the Securities and Exchange Commission. In
addition, for each $1 invested, the investor receives one half warrant to acquire one half of
a share of common stock with a five year term at $1.50 per share (the A warrants); and one
half warrant to acquire one half share of common stock with a five year term at $2.25 per
share (the B warrants) (see inducement discussion below). Each warrant cannot be exercised
during the first 6-months and one day following issuance, unless there is an effective
registration statement covering the underlying common stock that has been filed with the
Securities and Exchange Commission. The warrants are callable at $0.01 per warrant, if the
common stock of the Company trades for 20 consecutive days on its principal market above $2.25
for the first one half warrant and $3.00 for the second one half warrant, provided there is an
effective registration statement covering the underlying common stock that has been filed with
the Securities and Exchange Commission. A total of 840,000 warrants at $1.00, 2,330,000
warrants at $1.50 and 2,330,000 warrants at $2.25 were issued. |
| |
|
In conjunction with the sale of the 12% convertible debt referenced above, M2 received a 10%
introductory fee, which totaled $523,550 pursuant to a Consulting Agreement and an officer
also received a 10% introductory fee which totaled $26,450. These introductory fees were
accounted for as deferred financing cost and were amortized using the effective interest
method over the term of the convertible debt. |
| |
|
We analyzed these convertible debt and the warrants issued for derivative accounting
consideration and determined that derivative accounting is not applicable for these debts. |
| |
|
The convertible debt was evaluated for a beneficial conversion feature, at which time it was
concluded that a contingent beneficial conversion feature existed for a substantial portion of
the convertible debt. The beneficial conversion feature was measured using the commitment-date
stock price and will be recognized once the contingency is resolved. (see further discussion
below regarding induced conversion of debt below.) |
| |
|
In addition, the relative fair value of the warrants was measured using the Black-Scholes
Option Pricing Model and recorded as a debt discount, which is being amortized over the life
of the debt using the effective interest method. The total discount recorded was $2,116,131
and the unamortized balance at December 31, 2010 and 2009 was $0 and $295,580, respectively. |
| |
|
In November 2008, we initiated a request to all of these 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 2009, the Company converted $2,337,700 of its
convertible debt and $365,885 of accrued interest into 7,656,606 shares of the Company’s
common stock. |
| |
|
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. However, 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, which removed the contingency associated with the beneficial conversion feature.
As a result, the measured value associated with the converted debt was recognized as interest
expense. |
43
| |
|
In June 2010, under the terms of our Incentive Offer, we initiated a request to the remaining
convertible debt holders to convert their convertible notes at a preferential $0.20 per share
conversion rate. In response to this offer, the Company converted $2,537,300 of its
convertible debt and $728,673 of accrued interest into 16,329,869 shares of the Company’s
common stock. The debt holders who elected to convert were also allowed to exercise their
outstanding common stock warrants at a reduced exercise price of $0.20 per share. The Company
closed the Incentive Offer in July 2010. |
| |
|
During 2010, the Company
entered into settlement agreements with five unsecured convertible
note holders. Pursuant to these agreements, the Company repaid an
aggregate of $95,000 of
principal and $8,933 of accrued interest to settle the outstanding convertible notes. In
connection with the settlement, the note holders surrendered all or a
portion of the warrants associated
with these notes. |
| |
|
We evaluated the extension event in November 2008 under the guidance for troubled debt
restructuring and debt modification or exchange of debt instruments. 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 to determine if
the modification was substantial and determined they were not. As a result, no gain or loss
was recorded on the date of the extension since the modification in terms is not considered
significant. For the year ended December 31, 2009, the Company recognized warrant expense of
$73,272 associated with the modification of the exercise price of the warrants on the extended
debt and charged the unamortized discount to interest expense over the remaining life of the
convertible debt under the new terms. |
| |
|
We accounted for the conversion events in June 2010 and November 2008 as induced conversions
under the guidance of FASB ASC 470-20. Under ASC 470-20, the Company recognized additional
interest expense for 2010 and 2009 totaling $608,956 and $299,693, respectively, which is
equal to the fair value of the incremental compensation cost created by the modification of
the exercise price of the warrants and the incremental increase in the fair value of the
conversion option as a result of the reduction in the conversion price. In addition, the
remaining unamortized discount on the debt converted in 2010 and 2009 of $189,331 and $378,590,
respectively, was recognized to interest expense. |
| |
|
Likewise, the contingency related to the contingent beneficial conversion feature was resolved
on the respective dates of conversion. The beneficial conversion features calculated on the
respective commitment dates were fully recognized through interest expense and additional paid
in capital. During 2010 and 2009, $913,994 and $776,725, respectively, of the contingent
beneficial conversion feature was recognized into interest expense. At December 31, 2010, the
unamortized debt discount on the convertible debt and the unrecognized contingent beneficial
conversion feature amounted to $0 and $54,941, respectively. |
| |
|
The Company is also in default on $190,000 of convertible debt and accrued interest of $82,863
as of December 31, 2010. |
12% Convertible Debt — $750,000 Private Offering
| |
|
In April 2009, we raised $750,000 from the sale of 12% convertible debt and warrants that are
secured against the assets associated with our Pharaoh Business Fortress Storage Center,
subject to certain other liens. Under the conversion terms, the debt is convertible into
common stock at $0.35 per share, subject to an effective registration statement covering the
underlying common stock that has been filed with the Securities and Exchange Commission. In
addition, for each $1 invested, the investor receives one warrant to acquire one share of
common stock with a five year term at $0.50 per share. The warrants are callable at $0.01 per
warrant, if the common stock of the Company trades for 20 consecutive days on its principal
market above $1.50 per share, provided there is an effective registration statement covering
the underlying common stock that has been filed with the Securities and Exchange Commission.
In conjunction with the sale of the 12% convertible debt referenced above, we paid M2 10%
introductory fee totaling $66,500 and issued 5 year warrants totaling 375,000 with an exercise
price of $0.30. The introductory fee and the fair value of the warrants amounting to $74,424
were charged to deferred financing costs and are amortized using the effective interest method
over the term of the convertible debt. |
44
| |
|
We analyzed the convertible debt and the warrants issued for derivative accounting
consideration and determined that derivative accounting is not applicable for these debts. |
| |
|
The convertible debt was evaluated for a beneficial conversion feature at which time it was
concluded that a contingent beneficial conversion feature existed for a substantial portion of
the convertible debt. The beneficial conversion feature was measured using the commitment-date
stock price to be $127,085, which will be recorded once the contingency has been resolved. In
addition, the relative fair value of the warrants were measured using the Black-Scholes Option
Pricing Model to be $123,618 and recorded as a debt discount, which is amortized over the life
of the debt using the effective interest method. The unamortized discount as of December 31,
2010 amounted to $7,059. |
| |
|
In connection with the Incentive Offer noted above, the secured convertible debt holders were
also allowed to convert their convertible notes into shares of the Company’s Series A
Convertible Preferred Stock at a conversion rate of $1.00 per share (whereby each Preferred
Stock is convertible into five shares of common stock). In response, the Company converted
$650,000 of its secured convertible stock and $74,187 of accrued interest into 724,187 shares
of the Company’s Series A Convertible Preferred Debt. The secured debt holders who elected to
convert were also allowed to exercise their outstanding common stock warrants at a reduced
exercise price of $0.20 per share. |
| |
|
The Company accounted for the issuance of the Series A Convertible Preferred Stock for the
repayment of the secured convertible debt as a debt extinguishment under FASB ASC 470-50. As
a result, a total loss on the extinguishment of $173,830 was recognized for the year ended
December 31, 2010. |
| |
|
As of December 31, 2010, the unamortized discount and the unrecognized beneficial conversion
feature on the outstanding secured convertible debt amounted to $7,059 and $0, respectively. |
| |
| |
|
Other Convertible Notes |
| |
|
In October 2008, we issued a $250,000 12% convertible debt to an individual. The debt can be
converted into our common stock at $0.50 per share, subject to an effective registration
statement covering the underlying common stock that has been filed with the Securities and
Exchange Commission. The debt is guaranteed by a stockholder of the Company. In conjunction
with this convertible debt, we issued stock warrants to purchase 150,000 shares and 100,000
shares, respectively, of Digitiliti common stock with a five year term at $0.50 per share.
This convertible note reflected a 6-month maturity date that was later extended to October 16,
2009. |
| |
|
On June 30, 2010, the Company modified the terms of this $250,000 convertible note to reflect
an extended maturity date of December 31, 2011 and a reduction in the conversion rate from
$.50 to $.20 per share. In connection with this modification, the Company granted the holder
50,000 common stock warrants exercisable at $.20 per share. The fair value of the warrants was
determined to be $9,000 (see Note 12). The incremental increase in the fair value of the
conversion option was determined to be $132,598. The Company evaluated the modification under
FASB ASC 470-50 and determined the modification was substantial and the revised terms
constituted a debt extinguishment. As a result, the total loss on extinguishment of $141,598
was recognized during the year ended December 31, 2010. |
| |
|
In November 2008, we issued a $250,000 12% convertible debt to a stockholder. The debt can be
converted into our common stock at $0.35 per share, subject to an effective registration
statement covering the underlying common stock that has been filed with the Securities and
Exchange Commission. In conjunction with this convertible debt, we issued stock warrants to
purchase 250,000 shares of Digitiliti common stock with a five year term at $0.50 per share. |
| |
|
Pursuant to a security agreement with the stockholder, our DigiLIBE software and our DigiBAK
vaults along with other intellectual properties serve as the collateral for the above
guarantee, convertible debt and the related note payable (see Note 6). The convertible note
matured on May 20, 2009 and became past due. |
| |
|
On June 30, 2010, the Company modified the terms of the above convertible note whereby the
maturity date was extended from May 20, 2009 to August 31, 2010. The Company evaluated the
modification under FASB ASC 470-50 and determined that the modification was not substantial
and did not qualify as a debt extinguishment. Accordingly, no gain or loss was recognized from
the modification. |
| |
|
We analyzed these two convertible debt and the warrants issued for derivative accounting
consideration and determined that derivative accounting is not applicable for these debts. |
45
| |
|
We discounted the relative fair value of warrants attached to both debts and calculated the
intrinsic value of the beneficial conversion feature of the debt. The resulting discount of
$210,974 is being amortized over the life of the debts using the effective interest method.
The discount was fully amortized in 2009. |
| |
|
In December 2010, the Company issued a $250,000 12% convertible debt to a stockholder. The
debt reflects an 18-month maturity date and can be converted into common stock at $0.20 per
share. The debt is secured by a lien on all assets of the Company; provided, however, that the
stockholder agrees to be subordinate with respect to up to $100,000 of original principal
amount of other note against the vault. |
| 8. |
|
Capital Leases Obligations |
| |
|
In August and September 2008, the Company entered into three 36-month leases for computer
equipment with two financial institutions. The present value of the monthly lease payments was
capitalized using an imputed interest rate of approximately 20% and 10%. The amount
outstanding for the capital lease obligation was $23,308 and $69,862 at December 31, 2010 and
2009, respectively. |
| |
|
Amortization of capital
lease property is included in depreciation expense and was $194,250 and
$547,464 in 2010 and 2009, respectively. |
| |
|
Assets under capital leases, included in property and equipment, consisted of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Computer equipment |
|
$ |
944,545 |
|
|
$ |
1,944,545 |
|
Less accumulated depreciation |
|
|
(921,999 |
) |
|
|
(1,727,748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,546 |
|
|
$ |
217,797 |
|
|
|
|
|
|
|
|
| |
|
Income tax computed at the U.S. federal statutory rate reconciled to the effective tax rate
consisted of the following: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax benefit at statutory rate |
|
$ |
(2,180,977 |
) |
|
|
(34.0 |
)% |
|
$ |
(1,678,948 |
) |
|
|
(34.0 |
)% |
State income taxes, net of federal
tax |
|
|
(416,952 |
) |
|
|
(6.5 |
) |
|
|
(319,395 |
) |
|
|
(6.5 |
) |
Valuation allowance for deferred tax
|
|
|
2,562,469 |
|
|
|
39.9 |
|
|
|
1,107,137 |
|
|
|
22.4 |
|
Other |
|
|
35,460 |
|
|
|
.6 |
|
|
|
891,206 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax |
|
$ |
— |
|
|
|
— |
% |
|
$ |
— |
|
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
46
| |
|
The components of deferred income taxes consisted of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
December 31 |
|
| |
|
2010 |
|
|
2009 |
|
Current Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
Vacation accrual |
|
$ |
19,041 |
|
|
$ |
10,404 |
|
Allowance for uncollectible accounts |
|
|
4,355 |
|
|
|
65,665 |
|
Accrued expense |
|
|
— |
|
|
|
3,221 |
|
Stock based compensation |
|
|
199,685 |
|
|
|
199,528 |
|
|
|
|
|
|
|
|
Total |
|
|
223,081 |
|
|
|
278,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
Net operating loss carryforward |
|
|
8,749,217 |
|
|
|
6,280,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(101,676 |
) |
|
|
(14,086 |
) |
Deferred rent |
|
|
(1,238 |
) |
|
|
(4,674 |
) |
Deferred revenue |
|
|
(4,046 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Total |
|
|
(106,960 |
) |
|
|
(18,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance |
|
|
(8,865,338 |
) |
|
|
(6,540,180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Income Tax |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
| |
|
The Company established a valuation allowance to fully offset the net deferred income tax
assets due to the uncertainty of the Company’s ability to generate the future taxable income
necessary to realize those net deferred income tax assets, considering the Company’s history
of significant operating losses. In addition, future utilization of the available net
operating loss carryforward may be limited under Internal Revenue Code Section 382 as a result
of changes in ownership that have or may result from the issuance of common stock, and from
options and warrants for the purchase of common stock. |
| |
|
At December 31, 2010 and 2009 respectively, the Company had net operating loss carryforward of
approximately $21,603,000 and $15,518,000, respectively, which will begin to expire in 2026. |
| |
|
For the year ended December 31, 2009 |
| |
|
On various dates in 2009, sixty six convertible debt holders converted their investment in
convertible debt totaling $2,703,585, including principal and accrued interest, into common
stock. Total shares issued in exchange for the debt were 7,656,606. (See also Note 7) |
| |
|
In July 2009, the Company issued 505,000 shares of common stock, valued at $126,250, in
connection with the Settlement Agreement with 5X Partners (see Note 5). The Company recognized
a loss of $108,187 on the settlement of this transaction. |
| |
|
In the fourth quarter of 2009, in lieu of wages the Company issued 656,249 shares of fully
vested common stock to the CEO, valued at $124,323, in connection with his compensation
package. |
| |
|
On November 4, 2009, in lieu of cash, the Company issued 600,861 shares of common stock,
valued at $120,172, as payment of prior year consulting fees. |
| |
|
During the last two months of 2009, the Company sold 2,725,000 shares of common stock for cash
proceeds of $501,500, net of share issuance costs of $43,500. |
47
| |
|
For the year ended December 31, 2010 |
| |
|
During the year ended December 31, 2010, in connection with the Company’s Incentive Offer, the
Company issued 16,329,869 common shares to repay $2,537,300 of principal and $728,673 of
accrued interest on the convertible debt. (See Note 7) |
| |
|
During the year ended December 31, 2010, in connection with a private placement, the Company
sold 6,565,000 common shares at $0.20 per share for cash proceeds of
$1,199,050, net of
issuance costs of $112,950 |
| |
|
During the year ended December 31, 2010 the Company issued 1,082,253 common shares for
services valued at $235,120 based on the grant-date quoted market value of the Company’s
stock. |
| |
|
During the year ended December 31, 2010, the Company issued 364,395 common shares to settle
payables to an officer of the Company. The shares were valued at $67,099 based on the
grant-date quoted market value of the Company’s stock. In connection with this settlement,
the Company recorded additional compensation expense of $3,220 and a gain on the
extinguishment of liability of $9,000. |
| |
|
During the year ended December 31, 2010 the Company issued 2,549,500 common shares for the
exercise of 2,549,500 common stock warrants and received cash proceeds of $509,900. |
| |
|
During the year ended December 31, 2010 the Company issued 724,187 shares of Series A
Convertible Preferred Stock to repay $650,000 of principal and $74,187 of accrued interest on
the secured convertible debt (see Note 7). Each share of Series A Convertible Preferred Stock
is convertible into 5 common shares at the option of the holder and is entitled to annual
cumulative dividends at the rate of 6%. The Series A Convertible Preferred Stock will be
automatically converted into common shares if any one of the following events occurs: |
| |
a) |
|
The Company’s common stock trades at $0.60 per share for more than 10
consecutive days; |
| |
b) |
|
The Company conducts a capital raise of common stock at a price of at
least $0.50 per share and raises at least $5 million of gross proceeds; or |
| |
c) |
|
At least 2/3 of the authorized shares of the Series A Convertible
Preferred Stock have been converted to common shares. |
| |
|
During the year ended December 31, 2010, the Company issued 420,000 shares of Series B
Convertible Preferred Stock for cash. Each share of Series B Convertible Preferred Stock is
convertible into 5 common shares at the option of the holder and is entitled to annual
cumulative dividends at the rate of 5%. The Series B Convertible Preferred Stock will be
automatically converted into common shares if any one of the following events occurs: |
| |
d) |
|
The Company’s common stock trades at $1.00 per share for more than 20
consecutive days; |
| |
e) |
|
The Company conducts a capital raise of common stock at a price of at
least $0.50 per share and raises at least $5 million of gross proceeds; or |
| |
f) |
|
At least 2/3 of the authorized shares of the Series B Convertible
Preferred Stock have been converted to common shares. |
| |
|
On October 14, 2010, the Company held its annual meeting of stockholders. At the meeting, the
stockholders approved an Amendment to the Articles of Incorporation to increase the number of
authorized shares from 110,000,000 to 135,000,000 shares and to allocate the additional shares
as common stock. |
| |
|
For the year ended December 31, 2009 |
| |
|
Options to purchase 1,700,000 shares of common stock were granted by the Company to its
employees and consultants at exercise prices ranging from $0.35 to $0.385. These options have
a term of 5 years, and have vesting dates that vary from either full vesting at date of grant
or having a vesting period of 3 years from the date of grant. The fair value of $429,366 was
determined using the Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model include (1) discount rate ranging from 1.3 to 1.4%, (2) expected life of
3.5 years (3) expected volatility ranging from 152% to 183% and (4) zero expected dividends. |
| |
|
For the year ended December 31, 2010 |
| |
| |
|
On July 15, 2010, the Company’s Board of Directors approved the 2010 Long Term Incentive Plan,
subject to the approval of the Company’s stockholders at the annual meeting. In conjunction
with this resolution, the Board of Directors, by subsequent written action, shall authorize
the specific number of shares of common stock of the Company for issuance under the terms of
the 2010 Long Term Incentive Plan. On October 14, 2010, the stockholders approved
the 2010 Long Term Incentive Plan. |
48
| |
|
In connection with the Long-term Incentive Plan, a total of 20,000 common stock options were
granted to the Company’s non-employee directors with an exercise price, equal to the fair
value of the share at the date of grant, of $0.22. These options vest over a period of 1
year, have a term of 5 years and a fair value of $4,400, as calculated using the Black-Scholes
option pricing model. Variables used in the Black-Scholes option-pricing model for the options
included: (1) discount rate of 0.60%, (2) expected term of 3 years, (3) expected volatility of
352% and (4) zero expected dividends. |
| |
|
For the year ended December 31, 2010, in connection with the terms of his employment
agreement, the Company granted 600,000 common stock options to the CEO with an exercise price,
equal to the fair value of the share at the date of grant, of $0.21 per share. These options
have a term of 5 years, vests equally on December 31, 2010, December 31, 2011 and December 31,
2012 and have a fair value of $125,805, as calculated using the Black-Scholes option pricing
model. Variables used in the Black-Scholes option-pricing model for the options included: (1)
discount rates of 0.86% and 1.17%, (2) expected terms ranging from 2.6 to 3.6 years, (3)
expected volatility ranging from 358% to 453% and (4) zero expected dividends. |
| |
|
For the year ended December 31, 2010, the Company granted 100,000 common stock options to an
employee with an exercise price of $0.35 per share. These options have a term of 7 years,
vested immediately and have a fair value of $21,991, as calculated using the Black-Scholes
option pricing model. Variables used in the Black-Scholes option-pricing model for the options
included: (1) discount rate of 1.44%, (2) expected term of 3.5 years, (3) expected volatility
of 383% and (4) zero expected dividends. |
| |
|
Stock option expense for the twelve months ended December 31, 2010 totaled $310,967. As of
December 31, 2010, there was approximately $185,648 of unrecognized option expense which is
expected to be recorded through December 2012. |
| |
|
A summary of option
activities for the year ended December 31, 2010 and 2009 is
reflected below: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
Average |
|
| |
|
|
|
|
|
Exercise |
|
|
Remaining |
|
| |
|
Options |
|
|
Price |
|
|
Life (yrs) |
|
Outstanding at December 31, 2008 |
|
|
1,655,848 |
|
|
|
0.36 |
|
|
|
3.4 |
|
Granted |
|
|
1,700,000 |
|
|
|
0.38 |
|
|
|
|
|
Canceled |
|
|
— |
|
|
|
— |
|
|
|
|
|
Forfeited |
|
|
(985,848 |
) |
|
|
0.37 |
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
2,370,000 |
|
|
|
0.37 |
|
|
|
3.2 |
|
Granted |
|
|
720,000 |
|
|
|
0.23 |
|
|
|
|
|
Canceled |
|
|
— |
|
|
|
— |
|
|
|
|
|
Forfeited |
|
|
(100,000 |
)- |
|
|
0.35 |
- |
|
|
|
|
Outstanding at December 31, 2010 |
|
|
2,9990,000 |
|
|
|
0.34 |
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
2,010,971 |
|
|
|
0.35 |
|
|
|
3.1 |
|
| |
|
The weighted-average grant date fair value of options granted in 2010 was $0.21. The
outstanding options at December 31, 2010 have an intrinsic value of zero. |
| |
|
For the year ended December 31, 2009 |
| |
|
In connection with a private offering, the Company issued warrants to purchase 750,000 shares
of its common stock to certain institutional and accredited investors. These warrants expire
in 5 years and are exercisable at $.50 per share immediately. These warrants are classified as
equity and have a fair value of $123,618. |
49
| |
|
In conjunction with the private offering referenced above, the Company issued to M2 warrants
totaling 375,000 with an exercise price of $0.30. These warrants have a term of 5 years, vest
immediately and have a fair value of $74,424, as calculated using the Black-Scholes option
pricing model. Variables used in the Black-Scholes option-pricing model include (1) discount
rate of 2.19%, (2) warrant life of five years, (3) expected volatility of 176% and (4) zero
expected dividends. |
| |
|
During the third quarter of 2009, warrants to purchase 100,000 shares of common stock were
granted to an individual who provided loan to the Company at an exercise price of $0.20. These
warrants have a term of five years and vest immediately. Fair value of $17,048 was calculated
using the Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model include (1) discount rate of 1.79%, (2) warrant life of five years, (3)
expected volatility of 166% and (4) zero expected dividends. |
| |
|
During the third quarter of 2009, in exchange for the discharge of an approximate $100,227
balance of unpaid compensation due a former vendor, 5X, we issued warrants to purchase 360,000
shares of common stock at an exercise price of $0.385. These warrants have a term of five
years and they vest immediately. Fair value of $82,164 was calculated using the Black-Scholes
option-pricing model. Variables used in the Black-Scholes option-pricing model include (1)
discount rate of 2.52%, (2) warrant life of five years, (3) expected volatility of 160% and
(4) zero expected dividends. |
| |
|
During the second quarter of 2009, warrants to purchase 125,000 shares of common stock were
granted by the Company to one of its convertible note holders at an exercise price of $0.50.
These warrants have a term of three years and they vest immediately. Fair value of $26,997 was
calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model include (1) discount rate of 1.79%, (2) warrant life of three years, (3)
expected volatility of 146% and (4) zero expected dividends. |
| |
|
During 2009, warrants to purchase a total of 1,700,000 shares of common stock were granted by
the Company to a former director and certain employees with exercise prices ranging from $0.20
to 0.50. These warrants have terms ranging from three to five years. Of the total, 950,000
warrants vested immediately while 750,000 warrants would have vested upon the successful
achievement of certain performance goals that were not. The fair value of these warrants
amounted to $263,733 and was calculated using the Black-Scholes option-pricing model.
Variables used in the Black-Scholes option-pricing model include (1) discount rate ranging
from 1.79% to 2.31% (2) warrant life of three to five years, (3) expected volatility ranging
from 142% to 173% and (4) zero expected dividends. |
| |
|
For the year ended December 31, 2010 |
| |
|
In conjunction with the Company’s past equity raise, the Company granted 340,000 common stock
warrants with an exercise price of $0.30 per share to a consulting group that introduced
investors to the Company. These warrants have a term of 5 years, vested immediately and have a
fair value of $77,395, as calculated using the Black-Scholes option pricing model. Variables
used in the Black-Scholes option-pricing model for the warrants included: (1) discount rate of
2.37%, (2) expected life of five years, (3) expected volatility of 181% and (4) zero expected
dividends. The above warrants were accounted for against the Company’s additional paid-in
capital account as share issuance costs. |
| |
|
Pursuant to final terms of a former executive officer’s severance agreement confirmed on April
15, 2010, the Company granted 1,500,000 common stock warrants with an exercise price of $0.385
per share. These warrants have a term of 5 years, vested immediately and have a fair value of
$374,995, as calculated using the Black-Scholes option pricing model. Variables used in the
Black-Scholes option-pricing model for the warrants included: (1) discount rate of 1.79%, (2)
expected life of five years, (3) expected volatility of 393% and (4) zero expected dividends.
The fair value of the above warrants were recognized as warrant expense for the year ended
December 31, 2010. |
50
| |
|
As compensation for computer software programming services provided, the Company granted
50,000 common stock warrants with an exercise price of $0.35 per share. These warrants have a
term of 5 years, vested immediately and have a fair value of $12,500, as calculated using the
Black-Scholes option pricing model. Variables used in the Black-Scholes option-pricing model
for the warrants included: (1) discount rate of 1.79%, (2) expected life of five years, (3)
expected volatility of 393% and (4) zero expected dividends. The fair value of the above
warrants were recognized as warrant expense for the year ended December 31, 2010. |
| |
|
In return for extending the maturity date of a convertible note (see Note 7), the Company
granted 50,000 common stock warrants with an exercise price of $0.20 per share. These warrants
have a term of 5 years, vested immediately and have a fair value of $9,000, as calculated
using the Black-Scholes option pricing model. Variables used in the Black-Scholes
option-pricing model for the warrants included: (1) discount rate of 1.79%, (2) expected life
of five years, (3) expected volatility of 377% and (4) zero expected dividends. The value of
the above warrants were included in the loss on extinguishment of debt. |
| |
|
In conjunction with the sale of the Series B Convertible Preferred Stock, the Company granted
100,000 common stock warrants with an exercise price of $0.30 to a consultant. These warrants
have a term of 5 years, vested immediately and have a fair value of $23,998, as calculated
using the Black-Scholes option pricing model. Variables used in the Black-Scholes
option-pricing model for the warrants included: (1) discount rate of 1.79%, (2) expected life
of five years, (3) expected volatility of 356% and (4) zero expected dividends. |
| |
|
On October 14, 2010, the Company’s Board of Directors approved the issuance of warrants to the
Chairman of the Board as follows: |
| |
1. |
|
250,000 warrants with a five-year life and a $0.35 per share exercise price as a
result of the successful launch of the Company’s DigiLIBE product prior to March 31,
2010. These warrants will vest on January 14, 2011, and have a fair value of $55,000, as
calculated using the Black-Scholes option pricing model. Variables used in the
Black-Scholes option-pricing model for the warrants included: (1) discount rate of 1.18%,
(2) expected life of five years, (3) expected volatility of 443% and (4) zero expected
dividends. |
| |
2. |
|
250,000 warrants with a five-year life and an exercise price of $0.22 for raising
$2.35M of capital prior to June 30, 2010. These warrants will vest on December 1, 2010,
if the Company raises $1.3 million in additional capital as of November 30, 2010, and
have a fair value of $55,000, as calculated using the Black-Scholes option pricing model.
Variables used in the Black-Scholes option-pricing model for the warrants included: (1)
discount rate of 1.18%, (2) expected life of five years, (3) expected volatility of 443%
and (4) zero expected dividends. The performance condition was not met and the warrants
were forfeited. |
| |
3. |
|
250,000 warrants with a five-year life and an exercise price of $0.22 for his
assistance in facilitating a new CEO transition, along with his continued assistance in
providing technical advice and investor relations expertise. These warrants will vest on
January 14, 2011, and have a fair value of $55,000, as calculated using the Black-Scholes
option pricing model. Variables used in the Black-Scholes option-pricing model for the
warrants included: (1) discount rate of 1.18%, (2) expected life of five years, (3)
expected volatility of 443% and (4) zero expected dividends. |
| |
|
|
During the year, the Company reached settlement agreements with three convertible note holders
that included the surrender and forfeiture of an aggregate of 30,000 associated common stock
warrants. |
| |
|
|
During the year, the Company reached partial settlement agreements that were entered into in
conjunction with the Incentive Offer (see Note 7) involving two convertible note holders that
resulted in the surrender and forfeiture of 37,500 common stock warrants. |
| |
|
|
During the year, 750,000 contingent warrants granted to the Company’s former President/CEO
were forfeited since the related performance conditions were not met. |
51
| |
|
A summary of warrant activities for the years ended December 31, 2010 and 2009 are as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
| |
|
Warrants |
|
|
Exercise Price |
|
Outstanding at December 31, 2008 |
|
|
6,200,348 |
|
|
$ |
1.03 |
|
Granted |
|
|
3,410,000 |
|
|
|
0.39 |
|
Exercised |
|
|
(100,000 |
) |
|
|
1.88 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
9,510,348 |
|
|
|
0.79 |
|
Granted |
|
|
2,790,000 |
|
|
|
0.35 |
|
Exercised |
|
|
(2,549,500 |
) |
|
|
0.92 |
|
Forfeited |
|
|
(1,067,500 |
) |
|
|
0.52 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
8,683,348 |
|
|
|
0.65 |
|
|
|
|
|
|
|
|
|
| |
|
Except for 500,000 warrants
that will vest in January 14, 2011, all warrants are fully vested
and exercisable at December 31, 2010. |
| |
|
The weighted-average grant date fair value of warrants granted in 2010 and 2009 was $0.24
and $0.20, respectively. The outstanding warrants at December 31, 2010 have an intrinsic value
of $3,250. |
| 13. |
|
Commitments and Contingencies |
| |
|
Because some of our convertible note holders have not accepted our offers to convert their
notes under the terms of the Modification Proposal and Incentive Offer, we are presently in
arrears in principal and accrued interest payments in an aggregate total of $272,863 as of
December 31, 2010. 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. |
| |
|
On July 13, 2009, the Company was made a party to a complaint by nuArch, LLC, alleging breach
of contract and sought recovery of unpaid compensation of approximately $140,000 for alleged
services rendered during 2008 and 2009. On February 4, 2010, the Company entered into a
Settlement Agreement with nuArch that reflected an agreed upon payment of $75,000 to be paid
over a 9-month period commencing on March 22, 2010. Accordingly, the Company reduced the
related payable based on the agreed settlement amount. As of December 31, 2010, all payments
have been made in compliance with the terms of this Settlement Agreement. |
| |
|
From time to time, Digitiliti may be subject to routine litigation, claims, or disputes in the
ordinary course of business. In the opinion of management; no pending or known threatened
claims, actions or proceedings against Digitiliti are expected to have a material adverse
effect on Digitiliti’s consolidated financial position, results of operations or cash flows.
Digitiliti cannot predict with certainty, however, the outcome or effect of any of the
litigation or investigatory matters specifically described above or any other pending
litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits
and investigations. |
| |
|
The Company leases its office space for a period of 4.6 years through December 2011. In The
lease requires monthly rental payments that range from $4,450 to $6,450 through December 2008.
Thereafter, the rent will be consistent with other similar commercial properties. The Company
is recording deferred rent to equalize the monthly payments during the lease term. To date,
our base rent of $6,450 has not changed. |
| |
|
The Company’s previous office space lease expired in October 2010. This lease required the
Company to make rental payments in 2009 and 2010 ranging from $3,092 to $3,350. The Company
subleased this previous office space through the end of the lease term. Monthly sublease
payment amounted to $3,239. |
| |
|
For 2010, rent expense was
$140,264, net of $32,398 of sublease rental income. For 2009, rent
expense was $123,160, net of $45,349 sublease rental income. |
| |
|
The table below reflects the Company’s commitments as they come due over the next five years. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year |
|
|
Year |
|
|
Year |
|
|
Year |
|
|
Year |
|
| |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
Capital leases (includes interest) |
|
$ |
31,280 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Operating leases |
|
|
77,400 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Convertible debt and accrued
interest |
|
|
1,417,231 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,525,911 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
52
| 14. |
|
Major Customers and Vendors |
| |
|
The Company earned 21% percent of its revenues from one customer for the year ended December
31, 2010. |
| |
|
The Company primarily deals with four major vendors which account for approximately 52% of the
cost of revenues for the year ended December 31, 2010. |
| |
|
On January 24, 2011 the Board of Directors approved the grant of 1,200,000 options to
employees and independent contractors working for the Corporation. These options vest over a
period of 3 years and have a term of 5 years. The Board of
Directors approved the Compensation
Committee’s recommendation to grant options to certain employees and other Company personnel
so as to bring their respective option total into parity with other employees that have the
same management level and length of duration of service with the Company. The options were
priced at the closing price on the day of grant ($0.19) and are in some cases performance
based and in other cases based on service. |
| |
|
On January 24, 2011, the Board of Directors approved a cash reduction of 20% in salaries to
certain members of senior management, effective December 15, 2010 and continuing through June
15, 2011. The 20% cash reduction is to be paid in stock options, with the calculation of the
number of options earned reflecting the equivalent of the salary reduction accepted by members
of senior management up through June 30, 2011, based on the closing price of the Company’s
common stock on January 24, 2011. Once the total options have been calculated for each member
of Senior Management, the Company shall on the last day of each month vest that portion of
these total options that reflect that month’s portion of these total options. The amount of
salary forgone is $49,432. The terms of the related stock options will reflect a 3-year
vesting schedule and have a 5-year term and an exercise price equal to $0.19 per share based
on on the closing price on January 24, 2011. |
| |
|
Effective March 17, 2011, the Company’s CEO offered to receive his salary in stock in lieu of
cash for the six month period beginning February 15, 2011 and ending July 15, 2011. The Board
accepted Mr. Taghizadeh’s offer and agreed that on the last day of each month, cash
compensation due to Mr. Taghizadeh will be paid in common stock based on the amount due at the
end of each month divided by the closing price of the stock on that date. The amount of cash
compensation Mr. Tagizadeh has agreed to forgo is, $15,417 per month, or $92,500 for the six
month period, which includes the 20% cash previously forgone. |
| |
|
On February 28, 2011, the Company completed the placement of $1,182,844 Secured Convertible
Promissory Note and Warrants (the “Secured Convertible Debt Offering”). |
| |
|
The Lenders in the Secured Convertible Debt Offering paid a 10% discount for their investment,
resulting in a “stepped-up” basis in their individual Secured Convertible Promissory Notes.
The Secured Convertible Promissory Notes bear interest at the rate of 12% per annum, have an
18-month maturity date and a $0.20 per share conversion rate in the Company’s common stock.
The Secured Convertible Promissory Notes are secured by a first lien on all assets of the
Company; provided, however, that the Lenders agreed to subordinate to a lien with respect to
up to $100,000 of original principal amount of other notes against the Company’s vault. |
| |
|
The Lenders received Warrants to purchase an aggregate of 3,252,821 shares of Company Common
Stock. The Warrants have a five year term, $0.30 exercise price and include a cashless
exercise provision and a put right in the event of an acquisition of the Company valued at the
Black Scholes Value of the unexercised portion of the Warrant obtained from the “OV” function
on Bloomberg determined as of the day prior to announcement of the transaction. The Warrants
include antidilution provisions for stock splits, stock dividends and recapitalization only. |
| |
|
The Secured Convertible Debt Offering was conducted in order to implement a previously
approved repayment of debt obligations (see Notes 6 and 7) owed to two stockholders (the
“Miners”), as well as provide additional working capital for the Company. Contemporaneously
with the closing of the Secured Convertible Debt Offering, the Company and the Miners executed
a Repayment of Note Obligations and Release of Security Interest Agreement that provided for
the repayment of $431,540 of debt principal with the remaining principal balance owed of
$100,000 being rolled into a secured promissory note under the Secured Convertible Debt
Offering. Correspondingly, all outstanding accrued interest owed on the debt was paid to the
Miners in the form of the Company’s common stock based on a rate of $0.15 per share, along
with a modification in terms on 350,000 common stock purchase warrants previously issued to
the Miners and the issuance of an additional 200,000 warrants reflecting a five year term and
a $0.20 per share exercise price. After
completion of all documentation reflecting the repayment of the debt, the Miners released
their first lien in the Company’s assets in preference to those Lenders associated with the
Secured Convertible Debt Offering. |
53
| |
|
On March 2, 2011, the Company entered into a twenty-four month operating lease for equipment
to upgrade its vault. The lease expense for the years ended December 31, 2011, 2012 and 2013,
respectively will be $26,280., $63,072, and $21,024. A payment of $20,958, approximating
four months lease expense has been made. |
| |
|
Effective March 17, 2011, the Company retained an individual to provide various services to
the Company. The retainer for these services is 10,000 common stock warrants per month from
March to August 2011, reflecting a five year term and a $0.20 per share exercise price. |
| |
|
On March 24, 2011, the Company entered into a short term loan totaling $16,000 with a related
party that reflected a 12% annual rate of interest and a 3-month maturity. This debt
obligation was secured against first security lien in the Company accounts receivable. |
|
|
|
| ITEM 9: |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
None.
|
|
|
| ITEM 9A: |
|
CONTROLS AND PROCEDURES THIS ENTIRE SECTION NEED TO BE REVIEWED |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Securities and Exchange Commission reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Our disclosure controls and procedures are also designed to
accumulate and communicate information to our management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that
any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. Accordingly, management must apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We conducted our evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the
Exchange Act as of the end of the period covered by this report. Based on their review of our
disclosure controls and procedures, the Chief Executive Officer and the Chief Financial Officer
have concluded that our disclosure controls and procedures are not effective in providing
reasonable assurance that information required to be disclosed by us in the reports we file under
the Exchange Act were recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules, regulations and forms. In particular,
we have identified the following material weakness in our disclosure controls:
(a) We did not maintain sufficient personnel with an appropriate level of technical
accounting knowledge, experience, and training in the application of generally accepted accounting
principles commensurate with our complexity and our financial accounting and reporting
requirements. We have limited experience in the areas of financial reporting and disclosure
controls and procedures. As a result, there is a lack of monitoring of the reporting process and
there is a reasonable possibility will not be detected or made known to permit us to report on a
timely basis.
Management’s Report on Internal Control over Financial Reporting
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.
54
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2010. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
Control—Integrated Framework”. Based on this assessment, management has concluded that our
internal control over financial reporting was not effective as of December 31, 2010 as a result of
the material weaknesses described below.
Management’s assessment identified several material weaknesses in our internal control over
financial reporting. These material weaknesses 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 accounting principles generally
accepted in the United States and lack of formal accounting policies and procedures and related
documentation.
To address these weaknesses, management established an Audit Committee effective April 2009 and in
2010 the Company implemented a new accounting software system designed to provide for more detailed
and timely information processing and communication of financial data. In addition, management has
implemented a detailed system of processing cash disbursements and cash receipts that involves a
dual oversight function by two independent members of the accounting staff that should serve to
deter and detect inappropriate entries and processes. And management continues to take all steps
necessary to correct those identified material weaknesses in our internal controls. Unfortunately,
financial constraints prevents us from implementing at this time all corrective processes that
would provide reasonable assurance that the information required to be disclosed by us in our
reports 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. Until such time, our
internal control over financial reporting may be subject to additional material weaknesses and
deficiencies that we have not yet identified.
This annual report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in internal control over financial reporting
Except as indicated in the preceding paragraph about management’s 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.
|
|
|
| ITEM 9B: |
|
OTHER INFORMATION |
PART III
|
|
|
| ITEM 10: |
|
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information required in Item 10 (Directors, Executive Officers and Corporate Governance), Item
11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related
Transactions, and Director Independence), and Item 14 (Principal Accountant Fees and Services) will
be filed by amendment to this Annual Report on or before April 30, 2011 or incorporated by
reference to our definitive proxy statement for the 2011 Annual Meeting of Stockholders to be filed
with the SEC.
PART IV
|
|
|
| ITEM 15: |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
See the Exhibit Index
55
| |
|
|
|
|
|
|
| No. |
|
Description |
| |
|
|
|
|
|
|
| |
3.1 |
|
|
Amended and Restated Certificate of Incorporation filed
May 13, 2008.
|
|
Exhibit to our Form
10-K for the year
ended December 31,
2008 |
| |
3.2 |
|
|
Bylaws.
|
|
Exhibit to our Form
10-K for the year
ended December 31,
2008 |
| |
10.1 |
|
|
XO Communications Contract.
|
|
Exhibit to our Form 10 |
| |
10.2 |
|
|
FRM Associates Lease, as amended.
|
|
Exhibit to our Form 10 |
| |
10.3 |
|
|
EBC Minneapolis, Inc. Sublease Agreement.
|
|
Exhibit to our Form 10 |
| |
10.4 |
|
|
Upper Corner Venture, LLC Lease Agreement.
|
|
Exhibit to our Form 10 |
| |
10.5 |
|
|
5X Partners Corporate Development Services Agreement
with Addendums.
|
|
Exhibit to our Form 10 |
| |
10.6 |
|
|
StorageSwitch Consulting Services Agreement.
|
|
Exhibit to our Form 10 |
| |
10.7 |
|
|
StorageSwitch Non-Compete Agreement.
|
|
Exhibit to our Form 10 |
| |
10.8 |
|
|
StorageSwitch Technology Purchase Agreement.
|
|
Exhibit to our Form 10 |
| |
10.9 |
|
|
Vision to Practice, Inc. Development Services Agreement.
|
|
Exhibit to our Form 10 |
| |
10.10 |
|
|
Sub-Lease Agreement |
|
|
| |
14 |
|
|
Code of Ethics
|
|
Exhibit to our Form
10-K for the year
ended December 31,
2008 |
| |
21 |
|
|
Subsidiaries.
|
|
Exhibit to our Form 10 |
| |
31.1 |
* |
|
302 Certification of CEO, Roy A. Bauer |
|
|
| |
31.2 |
* |
|
302 Certification of CFO, William McDonald |
|
|
| |
32 |
* |
|
906 Certification |
|
|
| |
99.1 |
|
|
Digitiliti, Inc. Stock Option Plan.
|
|
Exhibit to our Form 10 |
| |
99.2 |
|
|
Charter of the Audit and Finance Committee of the Board
of Directors
|
|
Exhibit to our 8-K
Current Report dated
December 16, 2008 and
filed December 22,
2008 |
| |
99.3 |
|
|
Charter of the Corporate Governance and Nomination
Committee of the Board of Directors
|
|
Exhibit to our 8-K
Current Report dated
December 16, 2008 and
filed December 22,
2008 |
| |
99.4 |
|
|
Charter of the Compensation Committee of the Board of
Directors
|
|
Exhibit to our 8-K
Current Report dated
December 16, 2008 and
filed December 22,
2008 |
8-K Current Report dated December 2, 2008, filed with the Securities and Exchange Commission on
December 12, 2008.
8-K Current Report dated December 16, 2008, filed with the Securities and Exchange Commission on
December 22, 2008.
8-K Current Report dated April 20, 2009, filed with the Securities and Exchange Commission on April
24, 2009.
| • |
|
Filed with this Annual report. |
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| |
|
|
|
|
|
|
|
| |
|
DIGITILITI, INC. |
|
|
|
|
|
|
|
|
|
Date: April 14, 2011
|
|
By:
|
|
/s/ Eshhan Taghizadeh
Esshan Taghizadeh
|
|
|
|
|
|
|
Chief Executive Officer/President |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been
signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
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DIGITILITI, INC. |
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Date: April 14, 2011
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By:
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/s/ Esshan Taghizadeh
Eshhan Taghizadeh
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Chief executive Officer/President |
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Date: April 14, 2011
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By:
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/s/ William McDonald
William McDonald
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Chief Financial Officer |
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