x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 26-1408538 | |
(State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x | |||
(Do not check if smaller reporting company) |
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EX-10.1 | ||
EX-10.2 | ||
EX-10.3 | ||
EX-10.4 | ||
EX-10.5 | ||
EX-31.1 | ||
EX-31.2 | ||
EX-32.1 |
Item 1. | Financial Statements |
September 30, 2011 | December 31, 2010 | ||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash | $ | 209,723 | $ | 27,557 | |||
Accounts receivable | 541,941 | 333,687 | |||||
Prepaid and other current assets | 167,979 | 247,970 | |||||
Total current assets | 919,643 | 609,214 | |||||
Property and equipment, net | 68,570 | 158,105 | |||||
Software license, net | 236,187 | 436,608 | |||||
Deferred financing costs | 259,402 | 4,466 | |||||
Other assets | 6,322 | 6,322 | |||||
Total assets | $ | 1,490,124 | $ | 1,214,715 | |||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 510,358 | $ | 692,923 | |||
Accrued expenses | 670,674 | 554,978 | |||||
Deferred income | 9,989 | 9,989 | |||||
Notes payable | 50,000 | 231,540 | |||||
Note payable to related party | 66,000 | — | |||||
Current maturities of convertible debt, net of unamortized discounts of $18,936 and $7,059 | 471,064 | 782,941 | |||||
Current maturities of capital lease obligations | — | 23,308 | |||||
Total current liabilities | 1,778,085 | 2,295,679 | |||||
Convertible debt, non-current, net of unamortized discounts of $489,612 and $0 | 1,861,516 | 250,000 | |||||
Other liabilities | 3,607 | 3,607 | |||||
Total liabilities | 3,643,208 | 2,549,286 | |||||
STOCKHOLDERS’ DEFICIT | |||||||
Series A Convertible Preferred Stock, $0.001 par value; 1,200,000 shares authorized for Series A, 668,720 and 724,187 shares issued and outstanding | 669 | 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 | 420,000 | |||||
Common stock, $.001 par value; 125,000,000 shares authorized, 69,376,179 and 65,699,753 shares issued and outstanding | 69,376 | 65,700 | |||||
Additional paid-in capital | 25,880,222 | 24,409,477 | |||||
Accumulated deficit | (28,523,351 | ) | (26,230,472 | ) | |||
Total stockholders' deficit | (2,153,084 | ) | (1,334,571 | ) | |||
Total liabilities and stockholders' deficit | $ | 1,490,124 | $ | 1,214,715 |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
REVENUES | $ | 498,917 | $ | 555,386 | $ | 1,391,660 | $ | 1,719,520 | |||||||
COST OF REVENUES | 347,205 | 418,141 | 1,227,536 | 1,098,509 | |||||||||||
GROSS PROFIT | 151,712 | 137,245 | 164,124 | 621,011 | |||||||||||
OPERATING EXPENSES | |||||||||||||||
Selling and marketing | 52,962 | 239,490 | 292,008 | 616,068 | |||||||||||
General and administrative | 307,042 | 362,733 | 1,211,085 | 1,978,671 | |||||||||||
Research and development | 155,003 | 242,736 | 434,145 | 774,719 | |||||||||||
Total Operating Expenses | 515,007 | 844,959 | 1,937,238 | 3,369,458 | |||||||||||
LOSS FROM OPERATIONS | (363,295 | ) | (707,714 | ) | (1,773,114 | ) | (2,748,447 | ) | |||||||
OTHER INCOME AND EXPENSES | |||||||||||||||
Gain/Loss on extinguishment of debt | — | 2,866 | (71,634 | ) | (315,428 | ) | |||||||||
Interest expense | (200,909 | ) | (90,790 | ) | (448,131 | ) | (2,198,769 | ) | |||||||
Total other expenses | (200,909 | ) | (87,924 | ) | (519,765 | ) | (2,514,197 | ) | |||||||
NET LOSS | $ | (564,204 | ) | $ | (795,638 | ) | $ | (2,292,879 | ) | $ | (5,262,644 | ) | |||
NET LOSS PER SHARE — BASIC AND DILUTED | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.10 | ) | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC AND DILUTED | 69,023,327 | 64,433,023 | 67,541,576 | 50,631,136 |
Nine months ended September 30, | |||||||
2011 | 2010 | ||||||
OPERATING ACTIVITIES | |||||||
Net loss | $ | (2,292,879 | ) | $ | (5,262,644 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation expense | 95,398 | 252,497 | |||||
Amortization of software license | 200,421 | 222,619 | |||||
Beneficial conversion feature on converted notes | — | 1,522,950 | |||||
Amortization of deferred financing costs | 66,096 | 39,050 | |||||
Amortization of debt discounts | 189,011 | 324,173 | |||||
Loss on extinguishment of debt | 71,634 | 315,428 | |||||
Warrant expense | 49,548 | 387,067 | |||||
Common shares issued for services | 78,929 | 152,340 | |||||
Employee stock option expense | 253,696 | 214,742 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (208,254 | ) | 45,685 | ||||
Prepaid and other current assets | 79,991 | 78,805 | |||||
Other assets | — | 1,000 | |||||
Accounts payable | (150,089 | ) | 139,590 | ||||
Accounts payable — related parties | — | (7,861 | ) | ||||
Accrued expenses | 195,937 | 203,060 | |||||
Deferred income | — | 14,486 | |||||
Deferred rent | (764 | ) | (7,188 | ) | |||
Net cash used in operating activities | (1,371,325 | ) | (1,364,201 | ) | |||
INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (5,863 | ) | (47,794 | ) | |||
Purchase of software license | — | (19,282 | ) | ||||
Net cash used in investing activities | (5,863 | ) | (67,076 | ) | |||
FINANCING ACTIVITIES | |||||||
Proceeds from notes payable | 50,000 | — | |||||
Cash paid for debt issuance costs | (49,797 | ) | — | ||||
Proceeds from sale of common stock, net of issuance costs | 63,000 | 1,199,050 | |||||
Proceeds from issuance of Series B convertible preferred stock | — | 300,000 | |||||
Proceeds from exercise of warrants | — | 509,900 | |||||
Payments on capital lease obligations | (23,308 | ) | (35,537 | ) | |||
Proceeds from notes payable — related parties | 66,000 | — | |||||
Proceeds from convertible debt | 1,910,000 | — | |||||
Payments on notes payable | (231,540 | ) | (364,572 | ) | |||
Payments on convertible debt | (225,001 | ) | (95,000 | ) | |||
Net cash provided by financing activities | $ | 1,559,354 | $ | 1,513,841 |
NET INCREASE IN CASH | 182,166 | 82,564 | |||||
Cash at beginning of year | 27,557 | 141,086 | |||||
Cash at end of year | $ | 209,723 | $ | 223,650 | |||
SUPPLEMENTAL CASH FLOWS INFORMATION | |||||||
Cash paid for interest | $ | 63,290 | $ | 75,094 | |||
Cash paid for income taxes | — | — | |||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||
Convertible debt issued for debt issuance costs | 64,000 | — | |||||
Warrants issued for debt issuance costs | 207,235 | — | |||||
Accrued interest converted to convertible debt | 8,844 | — | |||||
Debt discount due to warrants issued with debt | 427,580 | — | |||||
Common stock issued for the conversion of convertible debt | 75,000 | — | |||||
Debt discount due to beneficial conversion feature | 144,635 | — | |||||
Common stock issued for the conversion of Series A preferred stock | 277 | — | |||||
Common stock issued for debt and accrued interest | 103,109 | 3,265,973 | |||||
Preferred stock issued for accrued interest | — | 724,187 | |||||
Common stock issued for liabilities | — | 12,879 | |||||
Notes payable issued for maintenance fees | — | 56,634 | |||||
Accrued interest converted to debt principal | — | 21,107 |
Convertible debt, net at December 31, 2010 | $ | 1,032,941 | |
Add: Notes issued | 2,101,128 | ||
Less: 10% discount on the Notes | (118,284 | ) | |
Less: discount due to relative fair value of warrants | (427,580 | ) | |
Less: discount due to beneficial conversion feature | (144,635 | ) | |
Less: principal payments | (225,001 | ) | |
Less: conversion to common stock | (75,000 | ) | |
Add: amortization of debt discounts | 189,011 | ||
Convertible debt, net at September 30, 2011 | $ | 2,332,580 | |
Less: current maturities, net | (471,064 | ) | |
Long-term portion of convertible debt, net | $ | 1,861,516 |
a) | issued 936,698 common shares for services valued at $78,929, |
b) | issued 687,393 common shares to repay accrued interest of $103,109 (see also Note 4), |
c) | issued 277,335 common shares for the conversion of 55,467 Series A preferred shares, |
d) | issued 1,400,000 common shares for total cash proceeds of $63,000, net of issuance costs of $7,000. |
e) | issued 375,000 common shares for conversion of debt principal of $75,000 (see also Note 4). |
Options | Weighted- Average Exercise Price | Weighted Average Remaining Life (yrs) | |||||||
Outstanding at December 31, 2010 | 2,990,000 | $ | 0.34 | ||||||
Granted | 3,735,707 | 0.13 | |||||||
Canceled | — | — | |||||||
Expired | (1,335,000 | ) | $ | (0.30 | ) | ||||
Outstanding at September 30,2011 | 5,390,707 | $ | 0.20 | 3.8 | |||||
Exercisable at September 30, 2011 | 2,306,263 | $ | 0.28 | 3.10 |
Warrants | Weighted- Average Exercise Price | Weighted Average Remaining Life (yrs) | ||||||||
Outstanding at December 31, 2010 | 8,683,348 | $ | 0.64 | |||||||
Granted | 8,848,322 | 0.17 | ||||||||
Expired | (15,824 | ) | (0.35 | ) | ||||||
Outstanding at September 30, 2011 | 17,515,846 | $ | 0.40 | 3.77 | ||||||
Exercisable at September 30, 2011 | 17,515,846 | $ | 0.40 | 3.77 |
Item 2. | Management's Discussions and Analysis of Financial Condition and Results of Operations. |
(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 the 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. |
Item 4. | Controls and Procedures. |
(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. |
Item 1. | Legal Proceedings. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 3. | Defaults Upon Senior Securities. |
Item 6. | Exhibits |
Digitiliti, Inc. | ||
Date: November 15, 2011 | By: | /s/ Jack B. Scheetz |
Jack B. Scheetz, Interim President, CEO (Principal Executive Officer) | ||
Date: November 15, 2011 | By: | /s/ William McDonald |
William McDonald, CFO (Principal Accounting Officer) |
Exhibit No. | Description of Exhibit |
31.1 | 302 Certification of Interim CEO, Jack B. Scheetz |
31.2 | 302 Certification of CFO, William McDonald |
32.1 | 906 Certification |
10.1 | Form of Convertible Promissory Note and Warrant Purchase Agreement dated as of February 28, 2011 (Incorporated by reference to Exhibit 10.1 of the Form 8-K filed on September 22, 2011). |
10.2 | Form of Secured Convertible Promissory Note dated as of February 28, 2011 (Incorporated by reference to Exhibit 10.2 of the Form 8-K filed on September 22, 2011). |
10.3 | Form of Security Agreement (Incorporated by reference to Exhibit 10.3 of the Form 8-K filed on September 22, 2011). |
10.4 | Form of Warrant Agreement (Incorporated by reference to Exhibit 10.4 of the Form 8-K filed on September 22, 2011). |
10.5 | Form of Severance Agreement between Digitiliti and Ehssan Taghizadeh dated June 29, 2011 (Incorporated by reference to Exhibit 10.5 of the Form 8-K filed on September 22, 2011). |
10.6 | Form of Employment Agreement between Digitiliti and Jack B. Scheetz (Incorporated by reference to Exhibit 10.6 of the Form 8-K filed on September 22, 2011). |
101.0 | XBRL Disclosure |
1. | Definitions. |
(a) | THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE BLUE SKY LAWS, AND IS SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS. THIS SECURITY MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. |
(b) | Any legend required by the blue sky laws of any state to the extent such laws are applicable to the Securities represented by the certificate bearing such legend. |
5. | Conditions of Closing. |
$___________ | , 2011 |
1. | Definitions. For purposes of this Note, the following terms shall have the definitions set forth below: |
8. | Events of Default and Acceleration. Any part or all of the then Outstanding Balance shall become immediately due and payable upon the occurrence of any of the following events of default (each an “Event of Default”): |
COMPANY: DIGITILITI, INC. By: _____ Name: ________________________________ Its: _________________________________ | |
INDIVIDUAL HOLDER: Signature: ______ Name: _________________________________ | |
ENTITY HOLDER: By: Name: ________________________________ Its: _________________________________ |
THE DEBTOR: DIGITILITI, Inc. a Delaware corporation By:_____________________________ Name: ______________________________ Its:_____________________________ Address: 266 East 7th Street, St. Paul, MN 55101 Phone: (651) 925-3200 Fax: (651) 925-3232 | COLLATERAL AGENT: INSERT NAME OF COLLATERAL AGENT, IF ANY By:_____________________________ Name: ______________________________ Its:_____________________________ Address: Phone: Fax: |
2. | Compensation for Past Services/Expenses. Company agrees to pay Employee compensation for the following: |
a) | Total cash payments as set forth on Exhibit B as due under the Employment Agreement for severance payments, earned and unused vacation as well as reimbursable expenses; |
b) | Common stock of Company in the amount of 597,129 shares as agreed to by both parties for five months of Employee's unpaid net salary, aU applicable federal and state taxes have already been paid in full by Company; and, |
c) | Five-year stock warrants in the amount of 200,000 and valued at $.06 per share as consideration for entering into this Agreement, including but not limited to the release of all daims in Section 6 and covenant not to sue in Section 7. |
Signature |
Date |
DIGITILITI, INC. |
Bill McDonald, CFO |
Date |
Based on the original annual compensation rate of $185,000 | |||
CASH PAYMENTS | |||
Cash Severance, 50% of base salary | $ | 92,500.00 | |
First HaIf 2011 Bonus as of June 30 | $ | 10,000.00 | |
Fourth Quarter 2010 Bonus | $ | 20,000.00 | |
Vacation | $ | 7,115.38 | |
Expenses | $ | 13,000.00 | |
Sub-Total | $ | 130,815.38 | |
1. | I have reviewed this Quarterly Report on Form 10-Q of Digitiliti, Inc.; |
2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; |
4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and |
d) | disclosed in this Quarterly Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions); |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: November 15, 2011 | By: | /s/ Jack B. Scheetz |
Jack B. Scheetz, Director and Interim President/CEO |
1. | I have reviewed this Quarterly Report on Form 10-Q of Digitiliti, Inc.; |
2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; |
4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and |
d) | disclosed in this Quarterly Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions); |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: November 15, 2011 | By: | /s/ William McDonald |
William McDonald, CFO |
(1) | The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: November 15, 2011 | By: | /s/ Jack B. Scheetz |
Jack B. Scheetz, Interim CEO and President | ||
Date: November 15, 2011 | By: | /s/ William McDonald |
William McDonald, CFO |
Consolidated Balance Sheets Parenthetical (USD $) | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Current Liabilities: | ||
Current maturities of convertible debt, unamortized discounts | $ 18,936 | $ 7,059 |
Noncurrent Liabilities: | ||
Convertible debt, non-current, unamortized discounts | $ 489,612 | $ 0 |
Stockholders' Deficit: | ||
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 125,000,000 | 125,000,000 |
Common stock, shares issued | 69,376,179 | 65,699,753 |
Common stock, shares outstanding | 69,376,179 | 65,699,753 |
SeriesA Convertible Preferred [Member] | ||
Stockholders' Deficit: | ||
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares authorized | 1,200,000 | 1,200,000 |
Preferred stock, shares issued | 668,720 | 724,187 |
Preferred stock, shares outstanding | 668,720 | 724,187 |
Series B Convertible Preferred [Member] | ||
Stockholders' Deficit: | ||
Preferred stock, par value | $ 1.00 | $ 1.00 |
Preferred stock, shares authorized | 2,000,000 | 2,000,000 |
Preferred stock, shares issued | 420,000 | 420,000 |
Preferred stock, shares outstanding | 420,000 | 420,000 |
Consolidated Statements of Operations (USD $) | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
REVENUES | $ 498,917 | $ 555,386 | $ 1,391,660 | $ 1,719,520 |
COST OF REVENUES | 347,205 | 418,141 | 1,227,536 | 1,098,509 |
GROSS PROFIT | 151,712 | 137,245 | 164,124 | 621,011 |
OPERATING EXPENSES | ||||
Selling and marketing | 52,962 | 239,490 | 292,008 | 616,068 |
General and administrative | 307,042 | 362,733 | 1,211,085 | 1,978,671 |
Research and development | 155,003 | 242,736 | 434,145 | 774,719 |
Total Operating Expenses | 515,007 | 844,959 | 1,937,238 | 3,369,458 |
LOSS FROM OPERATIONS | (363,295) | (707,714) | (1,773,114) | (2,748,447) |
OTHER INCOME AND EXPENSES | ||||
Gain/Loss on extinguishment of debt | 0 | 2,866 | (71,634) | (315,428) |
Interest expense | (200,909) | (90,790) | (448,131) | (2,198,769) |
Total other expenses | (200,909) | (87,924) | (519,765) | (2,514,197) |
NET LOSS | $ (564,204) | $ (795,638) | $ (2,292,879) | $ (5,262,644) |
NET LOSS PER SHARE — BASIC AND DILUTED | $ (0.01) | $ (0.01) | $ (0.03) | $ (0.10) |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC AND DILUTED | 69,023,327 | 64,433,023 | 67,541,576 | 50,631,136 |
Document and Entity Information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Nov. 15, 2011 | |
Entity Information [Line Items] | ||
Entity Registrant Name | Digitiliti Inc | |
Entity Central Index Key | 0001411658 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Smaller Reporting Company | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2011 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 | |
Amendment Flag | false | |
Entity Common Stock, Shares Outstanding | 69,376,179 |
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Stock Warrants | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Warrants [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Warrants Disclosure [Text Block] | Stock Warrants During the nine months ended September 30, 2011, the Company issued 50,000 warrants with an exercise price of $0.07 per share to a third party who provided a short term convertible loan to the Company (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $4,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.02%, (2) a warrant life of five years, (3) expected volatility of 406.18%, and (4) zero expected dividends. The relative fair value of these warrants of $3,704 was recorded as a discount to the short term loan provided by this third party. During the nine months ended September 30, 2011, the Company issued 50,000 warrants with an exercise price of $0.07 per share to a third party who provided a short term convertible loan to the Company (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $3,750 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.95%, (2) a warrant life of five years, (3) expected volatility of 406.19%, and (4) zero expected dividends. The relative fair value of these warrants of $3,488 was recorded as a discount to the short term loan provided by this third party. During the nine months ended September 30, 2011, the Company issued of total of 1,937,500 warrants with an exercise price of $0.06 per share to two individuals who provided services in connection with the Company’s Junior Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $127,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.88% and 0.95%, (2) warrant life of five years, (3) expected volatility ranging from 407.04% to 407.11%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, 25,000 warrants with an exercise price of $0.20 per share were granted to a third party who provided a short term loan to the Company (see Note 3). These warrants have a term of five years and vested immediately. The warrants have a fair value of $2,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.31%, (2) a warrant life of five years, (3) expected volatility of 401.22%, and (4) zero expected dividends. The relative fair value of these warrants of $1,923 was recorded as a discount to the short term loan provided by this third party. During the nine months ended September 30, 2011, a total of 500,000 warrants with an exercise price of $0.08 were granted to a third party consulting firm that provided services in connection with the $500,000 Equity Raise (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $25,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.05%, (2) warrant life of five years, (3) expected volatility of 402.61%, and (4) zero expected dividends. The fair value of these warrants was recorded as stock issuance cost in additional paid in capital during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, a total of 140,000 warrants with an exercise price of $0.05 were granted to a third party consulting firm that provided services in connection with the $500,000 Equity Raise (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $10,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.81%, (2) warrant life of five years, (3) expected volatility of 403.02%, and (4) zero expected dividends. The fair value of these warrants was recorded as stock issuance costs in an entry to additional paid in capital during the nine months ended September 30, 2011. In conjunction with the Company’s Junior Secured Convertible Debt Offering (see Note 4), the Company issued an aggregate of 833,333 warrants with an exercise price of $0.06 per share. These warrants have a term of 5 years, vested immediately and have a fair value of $58,333 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.62%, (2) warrant life of five years, (3) expected volatility of 405.90%, and (4) zero expected dividends. The relative fair value of these warrants of $52,239 was recorded as a debt discount to the $500,000 Junior Secured Convertible Debt Offering during the nine months ended September 30, 2011. As a condition associated with the closing on the Company's Junior Secured Convertible Debt Offering (see Note 4), the Company granted 200,000 warrants to the Company's former President and Chief Executive Officer with an exercise price of $0.06 per share. These warrants have a term of 5 years, vested immediately and have a fair value of $17,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.70%, (2) warrant life of five years, (3) expected volatility of 406.07%, and (4) zero expected dividends. The fair value of the warrants was recorded as stock based compensation for the nine months ended September 30, 2011. As an additional condition associated with the closing on the Company's Junior Secured Convertible Debt Offering (see Note 4), the Company granted 150,000 warrants to the Company's Interim President and Chief Executive Officer with an exercise price of $0.06 per share. These warrants have a term of five years, vested immediately and have a fair value of $12,750, as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.70%, (2) warrant life of five years, (3) expected volatility of 406.07% and (4) zero expected dividends. The fair value of the warrants was recorded as stock based compensation for the nine months ended September 30, 2011. In conjunction with the Company’s First Secured Convertible Debt Offering (see Note 4), the Company issued an aggregate of 3,252,821 warrants with an exercise price of $0.30 per share. These warrants have a term of five years, vested immediately and have a fair value of $487,918 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.13%, (2) warrant life of five years, (3) expected volatility of 400.26%, and (4) zero expected dividends. The relative fair value of the 2,977,821 warrants of $316,226 was recorded as a debt discount and the fair value of the 275,000 warrants of $41,250 was included in the calculation of the loss on the extinguishment of debt during the nine months ended September 30, 2011. In conjunction with the sale of $550,000 Junior Notes associated with the second tranche of the Company's Junior Secured Convertible Debt Offering, the Company issued an aggregate of 916,667 warrants with an exercise price of $0.06 per share. The warrants have a term of five years, vested immediately and have a fair value of $55,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.95% ,(2) warrant life of five years, (3) expected volatility of 408.42%, and (4) zero dividends. The relative fair value of the 916,667 warrants of $50,000 was recorded as a debt discount during the nine months ended September 30, 2011. In addition, the Company issued 200,000 warrants with an exercise price of $0.20 per share to the two stockholders whose outstanding note of $100,000 was converted into the Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years, vested immediately and have a fair value of $30,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.13%, (2) warrant life of five years, (3) expected volatility of 335.62%, and (4) zero expected dividends. The fair value of these warrants was included in the calculation of the loss on the extinguishment of debt during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, a total of 170,000 warrants with an exercise price of $0.20 per share were granted to an individual who provided services in connection with the Company’s Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $25,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years, (3) expected volatility of 400.26%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, 363,000 warrants with an exercise price of $0.30 were granted to an individual who provided services in connection with the Company’s Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $54,235 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years, (3) expected volatility of 344.35%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, a total of 60,000 warrants with an exercise price of $0.20 per share were issued to an individual who provided consulting services to the Company ratably over a six month period. These warrants have a term of five years and vested immediately. The warrants have a fair value of $3,059 as calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years, (3) expected volatility ranging between 400.90% and 407.04%, and (4) zero expected dividends. The fair value of these warrants was recorded stock based compensation for the nine months ended September 30, 2011. During the nine months ended September 30, 2011, the Company modified the terms of 350,000 previously granted warrants whereby the exercise price was reduced to $0.15 per share and the term was changed to 5 years. The incremental increase in the fair value of the warrants was determined to be $384 using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) expected terms ranging from 2.7 to 5.0 years, (3) expected volatility of 344.22%, and (4) zero expected dividends. The incremental increase in the fair value of these warrants was included in the calculation of the loss on the extinguishment of debt during the nine months ended Septmeber 30, 2011. A summary of warrant activities for the nine months ended September 30, 2011 is as follows:
The weighted average grant date fair value of warrants granted during 2011 was $0.10. The outstanding warrants at September 30, 2011 have an intrinsic value of $292,425. Warrants expense for the nine months ended September 30, 2011 and 2010 was $49,548 and $387,067, respectively. |
Notes Payable | 9 Months Ended |
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Sep. 30, 2011 | |
Notes Payable [Abstract] | |
Short-term Debt [Text Block] | Notes Payable During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is unsecured, bears interest at 12% per annum and matures on October 8, 2011. In connection with the loan, the lender received warrants to purchase an aggregate of 25,000 common shares at an exercise price of $0.20 per share. The warrants vested immediately and have a term of five years. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $1,923 and was recorded as a discount to the note. The entire discount was amortized to interest expense during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, the Company borrowed an aggregate of $50,000 from a member of the Company's Board of Directors. The notes are secured against the Company's accounts receivable and bear interest at 12% per annum. The first note amounting to $25,000 matured on July 29, 2011 and is currently past due. The remaining note for $25,000 matured on September 1, 2011 and is currently past due. During the nine months ended September 30, 2011, the Company borrowed $16,000 from a member of the Company's Board of Directors. The note is secured against the Company's accounts receivable, bears interest at 12% per annum and matured on June 25, 2011. This note is currently past due. During the nine months ended September 30, 2011, the Company repaid a previously issued note payable of $231,540. |
Subsequent Events | 9 Months Ended |
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Sep. 30, 2011 | |
Subsequent Events [Abstract] | |
Subsequent Events [Text Block] | Subsequent Events On October 14, 2011, the Company entered into a Confidential Settlement Agreement with one of its unsecured convertible note holders reflecting repayment of its convertible note that involves an extended payment plan. On October 31, 2011, the Company entered into a Confidential Settlement Agreement with one of its secured convertible note holders reflecting repayment of its convertible note that involves an extended payment plan. On October 25, 2011, the Company repaid a secured convertible note of $63,981. |
Commitments and Contingencies | 9 Months Ended |
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Sep. 30, 2011 | |
Commitments and Contingencies [Abstract] | |
Legal Matters and Contingencies [Text Block] | Commitments and Contingencies 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, except for the matter discussed below. Digitiliti cannot predict with certainty, however, the outcome or effect of any litigation or investigatory matters specifically described or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits and investigations. In June 2011, the Company was made a party to a lawsuit initiated by one of its preferred stockholders seeking recovery of their investment in the Company based on, among other claims, an alleged breach of the state's securities regulations. The Company believes the preferred stockholder's claim lacks factual basis and is without merit. Accordingly, the Company has not accrued any manner of loss contingency related to this claim and litigation is currently pending. On May 6, 2011, the Company entered into a Confidential Settlement Agreement with one of its unsecured convertible note holders reflecting repayment of their convertible note totaling $37,100, on a discounted basis, that involves an extended payment and the conversion of the outstanding principal balance based on an above-market conversion rate. Digitiliti evaluated the modification under FASB ASC 470-50 and determined that the modification was not substantial and did not qualify as a debt extinguishment. On September 6, 2011, the Company made the final payment and converted the outstanding principal balance based on the agreed to above market conversion rate. Some of the Company’s convertible note holders have not accepted offers to convert their notes under the terms of the Modification Proposal issued in 2009 and Incentive Offer from 2010, or otherwise. The Company is presently in arrears in principal and accrued interest payments in an aggregate total of $216,839 as of September 30, 2011. Although the Company is continuing to discuss payment and/or conversion or extension of these notes with note holders, these outstanding obligations pose a risk to the Company’s ongoing operations. |
Basis of Presentation | 9 Months Ended |
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Sep. 30, 2011 | |
Basis of Presentation [Abstract] | |
Basis of Presentation and Significant Accounting Policies [Text Block] | Basis of Presentation The accompanying unaudited interim consolidated financial statements of Digitiliti, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on April 14, 2011. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. 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 and 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. New Accounting Pronouncements The Company does not expect the adoption of recently issued or effective accounting pronouncements to have a material impact on the Company's consolidated financial statements. |
Convertible Debt | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Debt [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term Debt [Text Block] | Convertible Debt In June 2011, the Company initiated a Junior Secured Convertible Debt Offering that provides for the sale of up to an aggregate principal amount of $1,500,000 Junior Secured Convertible Promissory Notes (the “Junior Notes”) and Warrants. The investors in this Junior Secured Convertible Debt Offering receive five-year warrants to purchase that number of common shares equal to 10% of the principal amount of their Junior Note(s) divided by the exercise price of $.06 per share. The Junior Notes bear interest at 8% per annum, have a 24-month maturity date and are secured by the assets of the Company with the repayment being subordinated to the repayment of all secured notes previously issued by the Company. The Junior Notes also contain a contingent conversion option wherein, at the option of 60% of the investors and twelve months following the closing of the first tranche, all or a portion of the principal amount and accrued interest may be converted into common shares at an exercise price of $0.06 per share but only if at least $1,000,000 in aggregate principal amount of the Junior Secured Convertible Debt Offering has been raised. However, the Junior Notes automatically convert into common shares upon a subsequent equity funding round of at least $3 million of new equity capital ("Qualified Round") at a per share price equal to the per share price of the qualified round. On June 28, 2011, the Company closed on the first $500,000 tranche of the Junior Secured Convertible Debt Offering. In conjunction with the closing of the first tranche of the Junior Secured Convertible Debt Offering, the investors received warrants to purchase an aggregate of 833,333 common shares. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $52,239, which was recorded as a debt discount. The warrant discount is being amortized over the life of the notes using the effective interest method. The amortization expense recorded on the discount for the nine months ended September 30, 2011 totaled $5,911. In conjunction with the closing of the first tranche of the Junior Secured Convertible Debt Offering, the Company paid consultants fees totaling $103,750 consisting of $25,000 paid in cash and the issuance of 1,125,000 warrants valued at $78,750 using the Black-Scholes pricing option model. The warrants vested immediately, have a five-year life and an exercise price of $.06 per share. The total consulting fees of $103,750 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $6,701. On September 15, 2011, the Company broke escrow on the remaining $1,000,000 available under the second tranche of the $1,500,000 Junior Secured Convertible Debt Offering by closing on $550,000 of proceeds from the sale of the Junior Notes. In conjunction with the sale of $550,000 of these Junior Notes, the investors received an aggregate of 916,667 common stock warrants. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $50,000, which was recorded as a debt discount. The warrant discount is being amortized over the life of the notes using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $1,018. In conjunction with the September 2011 sale of these $550,000 of Junior Notes, the Company paid consultants fees totaling $75,000 consisting of $26,250 paid in cash and the issuance of 812,500 warrants valued at $48,750 using the Black-Scholes pricing option model. The warrants vested immediately, have a five-year life and an exercise price of $.06 per share. The total consulting fees of $75,000 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $5,634. The Company analyzed the Junior Secured Convertible Debt Offering for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments. In addition, the Junior Secured Convertible Debt Offering was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature associated with the closing of the first $500,000 tranche was measured on the date of the agreement and determined to be $135,572. And the intrinsic value of the beneficial conversion feature associated with the sale of the $550,000 Junior Notes was measured on the date the proceeds were received and was determined to be $50,000. However, due to the contingent nature of the conversion features, the beneficial conversion features associated with the tranches will be recognized when the contingency is lifted. On February 28, 2011, the Company completed the placement of $1,182,844 of Secured Convertible Promissory Note (the “Notes”) and Warrants (collectively, the “First Secured Convertible Debt Offering”). The Lenders in the First Secured Convertible Debt Offering paid a 10% discount for their investment, resulting in a “stepped-up” basis in their individual Notes for a total principal amount of $1,301,128. The Notes bear interest at the rate of 12% per annum, have an 18-month maturity date and are convertible to common shares at $0.20 per share. The Notes are secured by a first lien on all assets of the Company; but are subordinate to the lien with respect to up to $25,000 of original principal amount of other notes against the Company’s vault. In conjunction with the First Secured Convertible Debt Offering, the Lenders received warrants to purchase an aggregate of 3,252,821 common shares. The warrants vested immediately, have a five year term, a $0.30 exercise price and are redeemable by the Company in the event of an acquisition. The Company valued the warrants using the Black-Scholes option pricing model. The warrants include standard antidilution provisions for stock splits, stock dividends and recapitalization. During November and December of 2010, the Company received $250,000 of the cash proceeds under the First Secured Convertible Debt Offering in the form of advanced convertible notes. These advanced convertible notes originally matured at the earlier of the closing of the First Secured Convertible Debt Offering or May and June of 2012, had an interest rate of 12% per annum and were convertible into common shares at $0.20 per share. The principal and accrued interest amounting to $250,000 and $8,844, respectively, were converted into Notes under the First Secured Convertible Debt Offering upon closing. In conjunction with the sale of the 12% First Secured Convertible Debt Offering, the Company paid consultants fees totaling $64,000 and issued 170,000 five-year warrants with an exercise price of $0.20 per share and 363,000 five-year warrants with an exercise price of $0.30 per share. The fees were paid through the issuance of Notes in the 12% First Secured Convertible Debt Offering. The fees and the fair value of the warrants totaling $143,735 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $50,434. The aggregate unamortized deferred financing costs on all notes amounted to $259,402 as of September 30, 2011. The aggregate amortization of deferred financing costs during the nine months ended September 30, 2011 totaled $66,096 including the above mentioned costs and $3,327 of amortization of deferred financing costs incurred during fiscal 2010. The Company analyzed the First Secured Convertible Debt Offering for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments. The First Secured Convertible Debt Offering was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $126,729. In addition, the relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $316,226, which was recorded as a debt discount. The 10% face discount on the Notes was determined to be $118,284 resulting in an aggregate discount of $561,239 being recorded on the Notes. The aggregate discount is being amortized over the life of the Notes using the effective interest method. The amortization expense recorded on these discounts for the nine months ended September 30, 2011 totaled $166,938 resulting in a total unamortized discount of $394,302 as of September 30, 2011. On February 28, 2011, the Company entered into an agreement to repay and modify three debt obligations owed to two stockholders. The debt obligations owed to these two stockholders were secured by a first lien on the Company’s assets and consisted of the following: a $250,000 12% secured convertible note issued in November 2008 with a $0.35 per share conversion rate; a $50,000 payable that was due on demand and bore interest at 10% per annum; and a $231,540 6% promissory note that was due on demand. The terms of the agreement provided for the repayment of $431,540 of principal on the combined debt and payable with the remaining principal balance owed of $100,000 being converted into a Note under the Secured Convertible Debt Offering. In addition, the outstanding accrued interest owed to these two stockholders of $103,109 was paid through the issuance 687,393 common shares. Under the agreement, the terms of 350,000 warrants previously granted to these stockholders were modified whereby the exercise price was reduced to $0.15 and the term changed to 5 years. An additional 200,000 warrants with a 5-year term and a $0.20 per share exercise price were also granted to these stockholders. Upon final payment of the loan on April 21, 2011, the stockholders released their first lien in the Company’s assets in preference to those lenders associated with the First Secured Convertible Debt Offering. The Company evaluated the modification of the $100,000 owed to these two stockholders into the 12% First Secured Convertible Debt Offering under FASB ASC 470-50 and determined that the modification was substantial and qualified as a debt extinguishment. The incremental increase in the fair value of the 350,000 modified warrants of $384, the fair value of the additional 200,000 warrants issued of $30,000 and the fair value of the 275,000 warrants issued under the terms of the Secured Debt Offering of $41,250 were recorded as a loss on the extinguishment of debt for the nine months ended September 30, 2011 resulting in an aggregate loss of $71,634. During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is secured against the Company's accounts receivable, bears interest at 12% per annum and matures February 16, 2012. In connection with the loan, the lender received warrants to purchase an aggregate of 50,000 common shares at an exercise price of $0.07 per share. The warrants vested immediately and have a term of five years. The note is convertible at $0.07 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $3,704, which was recorded as a debt discount. The note was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $10,846 and was recorded as a debt discount. The debt discounts are being amortized over the life of the note using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $3,627. During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is secured against the Company's accounts receivable, bears interest at 12% per annum and matures February 11, 2012. In connection with the loan, the lender received warrants to purchase an aggregate of 50,000 common shares at an exercise price of $0.07 per share. The warrants vested immediately and have a term of five years. The note is convertible at $0.07 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $3,488, which was recorded as a debt discount. The note was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $7,060 and was recorded as a debt discount. The debt discounts are being amortized over the life of the note using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $2,535. The Company analyzed the two $50,000 convertible notes for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments. During the nine months ended September 30, 2011, the Company made an aggregate of $225,001 of payments on convertible notes and a previously issued convertible note of $75,000 was converted into 375,000 common shares. Amortization of the unamortized debt discounts totaled $7,059 during the nine months ended September 30, 2011. A summary of the changes in convertible debt for the nine months ended September 30, 2011, is as follows:
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Common Stock | 9 Months Ended | ||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||
Common Stock [Abstract] | |||||||||||||||||||||
Common Stock Disclosure [Text Block] | Common Stock During the nine months ended September 30, 2011, the Company:
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Stock Options | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Options [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disclosure of Compensation Related Costs, Share-based Payments [Text Block] | Stock Options During the nine months ended September 30, 2011, options to purchase 225,000 common shares were granted by the Company to a member of the Board of Directors at exercise price of $0.08 per share. These options have a contractual term of 5 years and vest over 3 years. The options have a fair value of $17,997 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 377.58%, and (4) zero expected dividends. During the nine months ended September 30, 2011, options to purchase 585,000 common shares were granted by the Company to executive management and a key employee at an exercise prices ranging from $0.05 to $0.07 per share. These options have a contractual term of 5 years and a vesting term of 3 years from the date of grant. The options have a fair value of $39,437 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility ranging from 348.34% to 360.03%, and (4) zero expected dividends. During the nine months ended September 30, 2011, options to purchase 1,050,000 common shares were granted by the Company to executive management and key employees at an exercise price of $0.08 per share. These options have a contractual term of 5 years and a vesting term of 3 years. The options have a fair value of $58,711 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life ranging between 3.0 to 4.0 years, (3) expected volatility ranging from 341.24% to 359.11%, and (4) zero expected dividends. During the nine months ended September 30, 2011, options to purchase 235,000 common shares were granted by the Company to certain members of the Board of Directors at exercise prices ranging from $0.06 to $0.09 per share. These options have contractual terms ranging from 5 to 10 years and vesting terms ranging from 12 months to 3 years. The options have a fair value of $19,675 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life ranging from 3.0 to 5.0 years, (3) expected volatility ranging from 359.11% to 372.09%, and (4) zero expected dividends. During the nine months ended September 30, 2011, options to purchase 1,200,000 common shares were granted by the Company to certain employees at an exercise price of $0.19 per share. These options have a contractual term of 5 years and a vesting term of 3 years with 154,566 of the options fully vested at grant date. The options have a fair value of $227,872 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 344.12%, and (4) zero expected dividends. During the nine months ended September 30, 2011, options to purchase 200,707 common shares were granted by the Company to certain officers, as payment of a portion of their salaries, at an exercise price of $0.19 per share. These options have a contractual term of 5 years and vest monthly through June 30, 2011. The options have a fair value of $38,014 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.05%, (2) expected life ranging from 2.51 to 2.72 years, (3) expected volatility of 366.57%, and (4) zero expected dividends. During the nine months ended September 30, 2011, options to purchase 250,000 common shares were granted by the Company to three employees at an exercise price of $0.19 per share. These options have a contractual term of 5 years, and a vesting term of 3 years. The options have a fair value of $47,473 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 344.12%, and (4) zero expected dividends. A summary of option activities for the nine months ended September 30, 2011 is reflected below:
The weighted average grant date fair value of options granted in 2011 was $0.12. The outstanding options at September 30, 2011 have an intrinsic value of $215. Stock option expense for the nine months ended September 30, 2011 and 2010 totaled $253,696 and $214,742 respectively. As of September 30, 2011, there was approximately $604,630 of unrecognized cost which is expected to be recognized through August 2014. |
Going Concern | 9 Months Ended |
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Sep. 30, 2011 | |
Going Concern [Abstract] | |
Going Concern Disclosure [Text Block] | Going Concern As shown in the accompanying financial statements, the Company incurred a net loss of $2,292,879 for the nine months ended September 30, 2011 and had a working capital deficit of $858,442 as of September 30, 2011. 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. |