Registration of Securities (General Form) — Form 10 Filing Table of Contents
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2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, HTML 181K
Liquidation or Succession
3: EX-2.2 Plan of Acquisition, Reorganization, Arrangement, HTML 113K
Liquidation or Succession
4: EX-2.3 Plan of Acquisition, Reorganization, Arrangement, HTML 112K
Liquidation or Succession
5: EX-3.1 Articles of Incorporation/Organization or By-Laws HTML 32K
6: EX-3.2 Articles of Incorporation/Organization or By-Laws HTML 18K
7: EX-3.3 Articles of Incorporation/Organization or By-Laws HTML 80K
8: EX-4.1 Instrument Defining the Rights of Security Holders HTML 7K
9: EX-10.1 Material Contract HTML 27K
10: EX-10.2 Material Contract HTML 64K
11: EX-21 Subsidiaries of the Registrant HTML 7K
12: EX-99.1 Miscellaneous Exhibit HTML 99K
13: EX-99.2 Miscellaneous Exhibit HTML 230K
10-12B — Registration of Securities (General Form)
(Registrant’s telephone number, including area code)
Securities
to be registered pursuant to Section 12(g) of the Act: None.
Securities
to be registered pursuant to Section 12(b) of the Act: Common stock, $0.001
par
value per share.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definition of “large accelerated filer,”“accelerated filer,” and “smaller
reporting company” in Rule 12b-2 if the Exchange Act:
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x
ITEM
1. DESCRIPTION OF BUSINESS
Overview
of our Business and its History
WebDigs,
Inc. (the “Company,”“Webdigs,”“we” or “us”) combines the power of the web,
along with proprietary technology and trained real estate agents and mortgage
brokers, to deliver a real estate buying and selling experience at a price
that
we expect to be significantly lower than that of the traditional
“full-commission” real estate broker model. We believe that the full-commission
real estate brokerage model has become expensive in relation to the value it
offers consumers. For instance, the average home in the Twin Cities metropolitan
area (Minnesota) sells for nearly $300,000 and the average brokerage commission
on residential real estate transactions is 6%, producing an average broker’s
commission of approximately $18,000. Often, the only value perceived by the
consumer in hiring a real estate agent is obtaining a listing on the Multiple
Listing Service, or “MLS.” Most of the other functions a traditional real estate
agent customarily performs can be easily performed by the consumer. According
to
the National Association of Realtors, in 77% of the nationwide residential
real
estate transactions in 2005, the buyer itself found the home on the internet
by
using the very same MLS search capabilities that are available to traditional
real estate agents.
Webdigs
offers unique, innovative and proprietary home search, purchase and sale
capabilities through the internet. Consumers can use our website to search
the
MLS in new, enjoyable and effective ways that we believe are not presently
available on other real estate search, purchase and sale sites. We have built
our site from the ground up, utilizing the MLS as a database and interfacing
with it using our custom-built, proprietary, data-mining software. As with
all
internet- and software-related businesses, we expect to continue to evaluate
and
upgrade the interface and performance of our website and related
software.
We
have
been operating since July 2007 in the Twin-Cities (Minneapolis-St. Paul)
metropolitan area and since November 2007 in south Florida. Currently, we
believe that market expansion opportunities exist in St. Louis, Dallas-Fort
Worth, Las Vegas, Denver, Detroit, Boston, New York City, Atlanta, Philadelphia,
Phoenix, Austin and Chicago, and in portions of Canada. Nevertheless, we
currently have no firm plans or commitments to commence operations in those
other markets.
Through
our wholly owned subsidiary, Marquest Financial, Inc., we also offer seamlessly
integrated mortgage brokerage services to our customers. Although the mortgage
brokerage business is a separate operation, its close alignment with Webdigs
enables us to make the administration of the entire home-buying process less
time consuming than that ordinarily involved with traditional full-fee real
estate and mortgage brokers.
Background
and Industry Trends
We
believe that the real estate market is undergoing a dramatic change not
dissimilar to that previously experienced by traditional stock brokerages.
Of
course, the most critical aspect driving this change is the advent of the
internet as a tool for searching for and researching real estate, eliminating
the commitments of time and expense involved with visiting multiple properties
in person. The changes in the industry are evident from National Association
of
Realtor statistics. According to that association, the percentage of home buyers
using the internet to search for homes increased from 41% in 2001 to 80% in
2006. In addition, home sellers can use the internet to check home valuations,
track the housing market and research comparable sales information. According
to
the California Association of Realtors, the percentage of California home
sellers using the internet in the sale process increased from 9% in 2002 to
62%
in 2006.
1
In
general, the internet enables transactions to be performed far more efficiently
than in the past, and facilitates automated business processes where information
is electronically conveyed and stored, and documents electronically signed
and
reviewed. All of these developments increase efficiency and serve to reduce
the
amount of time it takes to process a real estate transaction. Despite increased
efficiencies in processing transactions, the traditional model for real estate
agents and their compensation has changed little.
In
light
of the foregoing and especially in the current real estate market and economy,
we believe that consumers are looking for ways to cut unnecessary and
unjustifiable costs from their real estate transactions. In our view, consumers
have specifically begun targeting for change the traditional model under which
real estate agents are compensated. In fact, statistics from the National
Association of Realtors indicate that over 70% of home buyers or sellers would
not re-hire their prior real estate agent. Some particular factors that we
believe are contributing to consumer dissatisfaction include:
·
Commission
fees charged by traditional real estate agents, expressed in absolute
dollars, have risen in the past years.
Traditional commissions vary from market to market, but generally
range
from 5-6% of the total sales price of the home. Although the average
total
commission expressed as a percentage of the property being transacted
has
slowly declined in recent years, the gross dollar amount of the average
per-transaction commission has increased as home prices have
risen.
·
The
traditional agent incentive structure creates conflicting priorities
between agents and their clients.
Traditionally, real estate agents are paid commissions based on the
sales
price of the subject property. They do not receive a salary and they
do
not receive their commissions unless a transaction closes. As a result,
their economic interests are not fully aligned with the consumer,
as they
only receive compensation when and if a property is sold. As a result,
it
is reasonable to assume that traditional agents place great emphasis
on
closing transactions and may often encourage their clients to accept
offers even when it may be in a selling client’s best interest to hold out
for a better price.
In
sum,
we believe that the advent of the internet and increased participation by both
home sellers and buyers, increased efficiencies in effecting business
transactions in general and real estate transactions in particular, rising
commissions expressed in terms of absolute dollars, historical tensions and
conflicts in the priorities of traditional real estate agents, and a presently
stagnant economy and real estate market, are all conspiring to foment consumer
dissatisfaction with the traditional model of residential real estate
brokerage.
Our
Business Model, Products and Services
General
We
are a
full-service real estate brokerage primarily for residential home buyers and
sellers. We utilize the internet, proprietary technology and efficient business
processes to deliver significant savings to our home sellers and rewards to
our
home buyers. Our overall goal is to deliver services that are high-tech coupled
with high-touch. We believe that an emphasis on client service, when and as
needed or requested by our clients, will separate us from other discount
brokerage models; and our efficiency and cost savings will differentiate us
from
traditional brokerage models.
Through
subsidiary entities, we offer all services normally associated with a typical
residential real estate transaction, including mortgage and insurance brokerage
services. Our mortgage brokerage services are offered through our wholly owned
subsidiary Marquest Financial, Inc.
2
Currently,
we market to potential customers principally through the internet, print
advertising, television, radio, billboards, a variety of other media and word
of
mouth. Business with and on behalf of customers is transacted in person and
through the internet. We currently have market presence (and offer(s) our
services) in the Minneapolis-St. Paul metropolitan area of Minnesota, and in
southwest Florida.
Services
for Home Buyers
We
provide home buyers with a broad range of services. Through our website at
www.webdigs.com,
home
buyers can search our database of MLS listings, schedule home visits, make
offers and monitor the offer and counteroffer process. Our licensed real estate
agents, working from our offices, assist buyers by preparing offers,
counteroffers and other real estate documents, negotiating purchase contracts
and preparing for closings.
On
our
website, home buyers can view open house schedules and schedule home showings.
When our buyer is ready to make a purchase offer, he or she submits the terms
of
the offer through our website or directly to our Agent. Our agent calls the
buyer to discuss the offer and prepares the offer documents. Our agent presents
the buyer’s offer to the listing agent and a series of negotiations and
counteroffers often ensues. Our agents support the buyer at each step of this
negotiating process, until the purchase contract is signed. Our software tracks
the offer history for the property.
Normally,
after a contract is accepted our licensed agents work closely with the buyer
through the contingency period, when the buyer has a home inspection and
arranges home financing. After a closing, we pay our clients by check within
14
days. Our payments, characterized as rebates of sales commissions, are generally
two-thirds of the commission we receive from a transaction.
Our
home
buying clients have:
·
submitted
to us more than 1,000 requests for us to schedule a personal visit
of a
property
·
submitted
to us more than 200 requests to prepare purchase
offers
·
had
over 40 accepted offers to purchase properties,
and
·
closed
over 35 purchases of properties.
Services
for Home Sellers
We
provide our home sellers with Northstar MLS listings for a flat fee of $3,000
at
closing. The Northstar MLS contains listings from Minnesota, portions of western
Wisconsin, northern Iowa, and eastern North and South Dakota. Our listings
also
appear on Realtor.com and 14 other national home-listing websites.
In
addition to providing home sellers with a home listing, Webdigs arranges for
OBEO virtual home tours of our sellers’ homes so that the resulting virtual tour
may become a part of the listing on our website. To assist with the pricing
of a
seller’s home, we provide a comparative market analysis to the seller and
individual consultation on pricing strategies. Finally, we also provide a range
of individual strategies for readying a seller’s home for sale, including
appropriately staging the home. All of these sell-side services are furthered
by
our marketing and advertising campaign designed to drive traffic to our
website.
3
Our
home
selling clients have listed over 25 homes with us since April 1,2008.
Additional
Services
We
also
provide services that are complementary to real estate transactions in general,
such as mortgage brokerage services and services relating to title, property
and
casualty insurance, including homeowner’s insurance.
Our
Strategy
Our
long-term goal is to become the leader in comprehensive online real estate
brokerage services for buyers and sellers of residential real estate in the
United States and Canada. Initially, however, we are focused on achieving
profitability in our current market locations (the Minneapolis-St. Paul
metropolitan area and southern Florida) to demonstrate the viability of our
business model. To achieve these objectives, we are pursuing the following
broad
strategy:
·
Invest
in our website interface and technology.
We believe our website interface and technology platform will provide
us
with a competitive advantage. Our goal is to make the interface more
easy
to use, more intuitive, more enjoyable and distinguishable from the
other
websites and internet tools that buyers and sellers of homes are
accustomed to. We believe that continuing to update and enhance our
website and technology will be a key element in increasing traffic
and use
of our services.
·
Focus
on branding and creating market awareness.
We have spent considerable attention to building our brand and market
awareness with an advertising campaign that uses a mix of media,
including
the internet, television, print, radio, direct-mail, outdoor signage
and
various moveable signage (e.g., branded public buses in the Twin
Cities
metropolitan area). We expect to continue this branding effort on
a
selective and thoughtful basis, with a view towards achieving maximum
return for our marketing and advertising dollars and
efforts.
·
Develop
an efficient transaction-processing and back-office
operation.
We believe that one important factor in our overall profitability,
especially given our discounted commissions and flat-fee model, will
be
our ability to process high transaction volumes efficiently. Traditional
full-fee real estate brokerages typically do not have the volume,
expertise or need to have efficient and low-cost administrative
operations. Accordingly, we intend to structure our administrative
model
to reach outside traditional real estate and utilize transaction
processes
and computer systems more commonly found in high-volume industries
such as
banking and insurance.
·
Attain
profitability in our current markets.
There are a number of internet-based real estate brokers presently
attempting to capitalize on market, demographic, trade/industry and
economic changes. To our knowledge, none of these businesses have
reached
sustained profitability needed to validate the discounted internet-based
real estate brokerage model. Therefore, we believe that an initial
critical strategic goal is for Webdigs to attain overall profitability
across its two current markets in the Minneapolis-St. Paul metropolitan
area and southern Florida. We believe that profitability—especially
sustained profitability—will buoy consumer confidence in our services and
lead to further successes.
4
If
we can
attain profitability, we believe that our business model, being predicated
on
greater efficiency and volume than the traditional model but with an emphasis
on
expertise and extensive client service, will facilitate our expansion into
additional markets and the growth of our business. As indicated above and
elsewhere in this document, however, we are primarily focused on attaining
profitability in our current market locations.
Industry
Segments
We
currently operate in two primary operating segments: (1) online real estate
brokerage, and (2) mortgage brokerage. In our online real estate brokerage
business, we believe we provide customers an experience comparable to a
full-service broker with a lower cost. For our customers selling homes, we
offer
a flat fee structure for listing services (and related services). For our
customers buying homes, we offer a graduated fee structure by issuing rebates
for two-thirds of our broker commissions for the related transaction. In
our
mortgage brokerage business, we assist customers in refinancing their existing
home mortgages and in financing new home purchases.
Competition
The
residential real estate market is highly fragmented, and we have numerous
competitors, many of which have greater name recognition, longer operating
histories, larger client bases, and significantly greater financial, technical
and marketing resources than we do. We anticipate that the most critical
competitive factors in our business and industry include price, service and
the
ease of using website tools.
Some
of
our competitors in the residential real estate brokerage market are traditional
brokerage firms, including large national brokerage firms or franchisors, such
as Prudential Financial, Inc., RE/MAX International Inc. and Realogy
Corporation. Realogy owns the Century 21, Coldwell Banker and ERA franchise
brands. Realogy also owns NRT Incorporated, which itself owns and operates
brokerages that are typically affiliated with one of the franchise brands owned
by Realogy. We compete with these traditional brokers primarily on price,
service and the ease of use of our website interface. Although our commissions
are generally lower than these traditional brokers, consumers may be attracted
to traditional brokers because they offer or are perceived to offer higher
levels of individual attention and service.
We
also
compete with non-traditional real estate brokerage firms including
ZipRealty, Inc., iNest Realty, Inc. (a subsidiary of IAC/Interactive
Corp) and Redfin Corporation, each of whom pays cash rebates to clients and
relies to a large extent on the efficiencies of the internet. We believe that
these competitors generally have greater financial resources than we do, and
also have a longer operating history in the realm of online discount real estate
brokerage. Here too, we compete with these non-traditional brokers primarily
on
price, service and on the ease of use of our website interface. Our commissions
are generally equal to or lower than these non-traditional brokers. For example,
ZipRealty and Redfin respectively rebate approximately 20% and 66% of their
commission to home buyers. We generally rebate two-thirds of our commission
to
home buyers. iNest rebates 1% of the home sale price to buyers.
In
addition, we compete with discount real estate listing services, such as
ForSaleByOwner.com and BuyOwner.com. We compete with these discount service
providers primarily on level of service. Although we offer traditional services
to our clients at a discounted price, highly self-motivated consumers may be
attracted to these discount listing services because they are cheaper than
our
services. For example, we currently believe that a consumer can obtain an MLS
listing through ForSaleByOwner.com for anywhere from $90 per month to a $900
flat fee.
5
We
compete or may in the future compete with various online services, including
Move, Inc., Zillow.com, HouseValues, Inc., HomeGain.com,
Yahoo!, Inc., Google Inc. and Trulia, Inc., that also look to
attract and monetize home buyers and sellers using the internet. For instance,
Move, Inc. operates the www.realtor.comwebsite. Move, Inc. is
affiliated with National Association of Realtors, the National Association
of
Home Builders, the Manufactured Housing Institute and hundreds of MLSs, which
may provide Move, Inc. with preferred access to listing information and
other competitive advantages. We compete with these service providers primarily
on the basis of service and the ease of use of our website interface. We do
not
provide home valuation data, and some other sites (such as Realtor.com) have
more listings and more data about the community. Many of these currently limited
competitors and future competitors have significantly more resources than we
do.
Finally,
we expect to face significant competition in the home mortgage brokerage
industry. Wholesale Access, an industry research and consulting firm, reports
that in 2004 there were 53,000 mortgage brokerages operating in the United
States with the ten largest accounting for 37.3% of total loan originations.
In
addition to other mortgage brokerage firms, our mortgage brokerage business
competes with consumer finance companies and commercial banks. In this market,
we expect to compete primarily on the basis of price and service. Although
we
believe we offer competitive mortgage interest rates, consumers may be attracted
to other mortgage brokers or lenders because they offer or are perceived to
offer a higher level of service.
Environmental
Regulation
We
are
not subject to environmental regulations that have a material effect upon our
capital expenditures or otherwise.
Other
Regulation
The
Company is subject to governmental regulation by federal, state and local
regulatory authorities with respect to our real estate brokerage and mortgage
lending operations.
Federal
Regulation.
Federal
laws and regulations govern the real estate brokerage business. These include
the Real Estate Settlement Procedures Act of 1974, or RESPA, and federal fair
housing laws. RESPA requires disclosures to home buyers and sellers of
settlement costs and restricts the payment of kickback or referral fees for
settlement services. RESPA does not prohibit referral fees paid by one real
estate broker to another broker. Federal fair housing laws generally make it
illegal to discriminate against protected classes of individuals in housing
or
brokerage services. Other federal regulations protect the privacy rights of
consumers and affect our opportunities to solicit new clients. Like real estate
brokerage, mortgage brokerage is subject to RESPA and federal fair housing
laws.
Mortgage brokerage is also regulated by other federal laws such as the Truth
in
Lending Act, Regulation Z and the Equal Credit Opportunity Act. The
provision of title insurance is also highly regulated.
State
Regulation.
Real
estate licensing laws vary from state to state, but generally all individuals
and entities acting as real estate brokers or salespersons must be licensed
in
the state in which they conduct business. A person licensed as a broker may
either work independently or may work for another broker in the role of an
associate broker, conducting business on behalf of the sponsoring broker. A
person licensed as a salesperson must be affiliated with a broker in order
to
engage in licensed real estate brokerage activities. Generally, a corporation
engaged in the real estate brokerage business must obtain a corporate real
estate broker license. In order to obtain this license, most jurisdictions
require that an officer of the corporation be licensed individually as a real
estate broker in that jurisdiction. If applicable, this officer-broker is
responsible for supervising the licensees and the corporation’s real estate
brokerage activities within the state.
6
Real
estate licensees, whether they are brokers, salespersons, individuals or
entities, must follow the state’s real estate licensing laws and regulations.
These laws and regulations generally prescribe minimum duties and obligations
of
these licensees to their clients and the public, as well as standards for the
conduct of business, including contract and disclosure requirements, record
keeping requirements, requirements for local offices, trust fund handling,
agency representation, advertising regulations and fair housing requirements.
Although payment of rebates or credits to real estate purchasers of the type
we
offer are permitted in most states, some states either do not permit these
rebates or credits or do not permit them in the form that we currently provide
them. In each of Minnesota and Florida (i.e., the states where we currently
have
operations), we have designated one of our employees as the individually
licensed lead broker and we hold a corporate real estate broker’s license where
required by law. In addition to state laws regarding real estate brokerage,
we
must comply with state laws regarding mortgage brokerage, including laws that
regulate the timing and content of disclosures.
Local
Regulation.
Local
regulations also govern the conduct of our business. Local regulations generally
require additional disclosures by the parties to a real estate transaction
or
their agents, or the receipt of reports or certifications, often from the local
governmental authority, prior to the closing or settlement of a real estate
transaction.
Trade
Regulation.
In
addition to governmental regulations, we are subject to rules and regulations
established by private real estate trade organizations, including, among others,
local MLSs, the National Association of Realtors, and state and local
associations of realtors. The rules and regulations of the various MLSs to
which
we belong vary, and specify, among other things, how we as a broker member
can
use MLS listing data, including the use and display of such data on our
website.
The
United States Department of Justice recently agreed to settle claims it had
brought against the National Association of Realtors relating to the ability
to
access MLS listings. The settlement decree addresses two areas of particular
concern to non-traditional real estate brokerage firms such as Webdigs. First,
the decree prohibits "selective opt-outs," which enable a broker involved
in a
MLS to selectively prohibit certain MLS participants from displaying that
broker's MLS listings on the participants' website. Second, the decree prohibits
"blanket opt-outs," which enable a broker involved in a MLS to prohibit all
other MLS participants from displaying that broker's MLS listings, even though
traditional real estate brokerage firms could easily display or otherwise
convey
these same listings in other manners. Presently, we are optimistic that the
settlement will prohibit conduct that is unfair and potential harmful to
our
business.
The
National Association of Realtors, as well as the state and local associations
of
realtors, also have codes of ethics, rules and regulations governing the actions
of members in dealings with other members, clients and the public. We are
required to comply with these codes of ethics, rules and regulations by virtue
of our membership in these organizations.
7
Intellectual
Property
Our
success depends significantly upon our ability to protect our core technology
and intellectual property. To accomplish this, we rely on a combination of
intellectual property rights, including trade secrets, copyrights and
trademarks, as well as customary contractual protections.
We
presently possess the following intellectual property rights:
certain
patents in process (applications for which have not yet been filed)
relating to proprietary software
·
trademark
and trade name for “Webdigs”; and
·
trademark
for: “The New Way to do Real
Estate”
We
do not
have any issued patents, nor do we have any registered copyrights.
Our
ability to enforce our intellectual-property rights is subject to general
litigation risks. Typically, when a party seeks to enforce its
intellectual-property rights, it is often subjected to claims that the
intellectual-property right is invalid, or is licensed to the party against
whom
the claim is being asserted. We cannot be certain that our intellectual-property
rights will not be infringed upon, that others will not develop products in
violation of our intellectual-property rights, or that others may assert,
rightly or wrongly, that our intellectual-property rights are invalid or
unenforceable. In instances where we will rely on trade secrets for the
protection of our confidential and proprietary business information, we cannot
be certain that we would have adequate remedies for any such breach or that
our
trade secrets will not otherwise become discovered or independently developed
by
competitors. In general, defending intellectual-property rights is expensive
and
consumes considerable time and attention of management. Our involvement in
intellectual-property litigation would likely have a materially adverse effect
on our business, even if we were ultimately successful in defending our
intellectual-property rights.
Employees
The
Company (including its subsidiaries) currently has 19 employees, all of whom
are
full time.
Corporate
Structure and Information
Webdigs,
Inc. operates through direct and indirect subsidiaries. The principal operating
subsidiary is Webdigs, LLC, a Minnesota limited liability company. WebDigs,
LLC
was originally organized as a limited liability company in May 2007, under
the
laws of the State of Minnesota. In October 2007, Webdigs, LLC engaged in a
merger transaction with Select Video, Inc., a Delaware corporation. Following
the merger transaction, Select Video, Inc. changed its name to Webdigs, Inc.
(which we refer to throughout this document as the “Company”). Webdigs, LLC
continues to exist as a wholly owned operating subsidiary of the
Company.
Webdigs,
LLC itself owns 100% of the ownership interests of (i) Marquest Financial,
Inc.,
a Minnesota corporation and mortgage broker, (ii) Home Equity Advisors, LLC,
a
Minnesota limited liability and mortgage broker, and (iii) Credit Garage, LLC,
a
Minnesota limited liability company and consumer credit counseling company.
We
believe that these separate business lines are all complementary, and the
operations of such businesses are currently reflected in our financial
statements included in Item 13 below.
8
Our
principal offices are located at 3433 Broadway Street NE, Suite 501,
Minneapolis, Minnesota55413, and our telephone number at that office is (888)
932-3447. Our website address is www.webdigs.com.
The
information contained on our website or that can be accessed through our website
does not constitute part of this document.
Risk
Factors
Investment
in our common stock involves a high degree of risk and should be regarded as
speculative. As a result, you should only consider an investment in Webdigs
if
you can reasonably afford to lose your entire investment.
9
ITEM
1A. RISK FACTORS
An
investment in our common stock involves a number of risks. Before deciding
to
invest in our common stock, you should carefully consider each of the following
risk factors and all of the other information set forth in this document. The
following risks could materially harm our business, financial condition or
future results. If any such risks materialize, the value of our common stock
could decline, and you could lose all or part of your
investment.
We
are a newly organized start-up company with little history of operations and we
expect to incur losses for the foreseeable future.
We
began
operations in July 2007 and to date have not generated meaningful revenues.
As a
newly organized start-up company, we are subject to all of the risks associated
with a new business enterprise. Our prospects must be considered in light of
the
risks, expenses and difficulties frequently encountered by companies in their
early stages of development, especially in challenging and competitive
industries such as residential real estate and mortgage brokerage and
particularly in light of present economic conditions.
We
do not
have an operating history which would provide you with information about our
past or future operations. We anticipate incurring losses that will result
from
costs incurred in organizing our company, research and development, site
development, protecting our technology, raising capital and market research.
We
anticipate incurring operating losses for the foreseeable future. Moreover,
we
may not be able to generate material revenues in the future, and it is possible
that any revenues that we generate will be either insufficient for us to achieve
profitability or even continue operations.
We
will likely require additional financing in the future, but we are uncertain
whether such financing will be available to us.
We
will
likely require significant additional capital to continue and expand our
operations. To date, our revenues from operations have not generated cash flow
sufficient to finance our operations and growth. As a result, we have
periodically since our inception sought financing and we will likely continue
to
require additional financing in the foreseeable future. This is particularly
true if actual demand for our services exceeds our current expectations (which
would likely force us to incur additional expenses to meet such demands) or
if
our anticipated expenditures exceed our current expectations.
Additional
financing could be sought from a number of sources, including but not limited
to
additional sales of equity or debt securities, or loans from banks, other
financial institutions or our affiliates. If additional funds are raised by
the
issuance of our equity securities, such as through the issuance of stock,
convertible securities, or the issuance and exercise of warrants, then the
ownership interest of our existing stockholders will be diluted. If additional
funds are raised by the issuance of debt or other equity instruments, we may
become subject to certain operational limitations (e.g., negative operating
covenants), and such securities may have rights senior to those of the existing
holders of common stock.
If
adequate funds are not available on acceptable terms, we may be unable to fund
the operation or expansion of our business. As a result, we would likely be
forced to dramatically alter or cease operations.
10
We
critically rely on our executive management, and the loss of certain members
of
management would materially and negatively affect us.
Our
success materially depends upon the efforts of our management and other key
personnel, including but not limited to Robert A. Buntz, Jr., our Chief
Executive Officer. If we lose the services of Mr. Buntz or any other executive
managers or significant employees, our business would be materially and
adversely affected. We have entered into a formal services and non-competition
agreement with Mr. Buntz in the form of a Member Services Agreement between
Mr.
Buntz and our wholly owned operating subsidiary, Webdigs, LLC. Nevertheless,
agreements do not ensure the continued availability to us of Mr. Buntz or any
other manager or employee. Furthermore, we do not have “key person” life
insurance insuring the life of Mr. Buntz, and we do not presently intend to
purchase such insurance.
Our
future success also depends upon our ability to attract and retain highly
qualified management personnel and other employees. Any difficulties in
obtaining, retaining and training qualified employees could have a material
adverse effect on our results of operation or financial condition. The process
of identifying such personnel with the combination of skills and attributes
required to carry out our strategy is often lengthy. Any difficulties in
obtaining and retaining qualified managers and employees could have a material
adverse effect on our results of operation or financial condition.
We
may be unable to obtain market acceptance of our
services.
The
market for residential real estate sales is well-established. However, the
market for online residential real estate sales is relatively new, developing
and uncertain. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for products and services are subject to tremendous
uncertainty. Our future growth and financial performance will almost entirely
depend upon consumers’ acceptance of our “WebDigs solution” to purchase and sell
homes via the internet. In this regard, the failure of purchasers and sellers
of
residential property to accept online purchases and sales of homes in general,
and our online services in particular, or the inability of our services to
satisfy consumer expectations, would have a material adverse effect on our
business, and could cause us to cease operations.
Our
officers and directors, together with certain affiliates, possess controlling
voting power with respect to our common stock, which could limit your influence
on corporate matters.
Our
officers and directors collectively possess beneficial ownership of 7,798,231
shares representing approximately 35.3% of our common stock. In addition,
certain other significant stockholders identified on the beneficial ownership
table in this filing (see Item 4, “Security Ownership of Certain Beneficial
Owners and Management”) hold beneficial ownership of 5,154,194 shares
representing an additional 23.6% of our common stock. As a result, our directors
and officers, together with significant stockholders, will have the ability
to
greatly influence, if not outrightly control, our management and affairs through
the election and removal of our directors, and all other matters requiring
stockholder approval, including the future merger, consolidation or sale of
all
or substantially all of our assets.
This
concentrated control could discourage others from initiating any potential
merger, takeover or other change-of-control transaction that may otherwise
be
beneficial to our stockholders. Furthermore, this concentrated control will
limit the practical effect of your participation in our corporate matters,
through stockholder votes and otherwise. As a result, the return on your
investment in our common stock through the sale of your shares or our business
could be adversely affected.
11
We
rely on third parties for key aspects of the process of providing services
to
our customers, and any failure or interruption in the services provided by
these
third parties could harm our ability to operate our business and damage our
reputation.
We
rely
on third-party vendors, including data center and bandwidth providers. Any
disruption in the network access or co-location services provided by these
third-party providers or any failure of these third-party providers to handle
current or higher volumes of use could significantly harm our business. Any
financial or other difficulties our providers face may have negative effects
on
our business, the nature and extent of which we cannot predict. We exercise
little or no control over all of these third-party vendors, which increases
our
vulnerability to problems with the services they provide.
In
addition, we license technology and related databases from third parties to
facilitate aspects of our data center and connectivity operations, including,
among other things, internet traffic-management services. Any errors, failures,
interruptions or delays experienced in connection with these third-party
technologies and information services could materially and negatively impact
our
relationship with our customers and adversely affect our brand and our business.
It is possible that such errors, failures, interruptions or delays could even
expose us to liabilities to our customers or other third parties.
Interruption
or failure of our information technology and communications systems would impair
our ability to effectively provide our services, which could in turn damage
our
reputation and harm our business.
Our
ability to provide our services critically depends on the continuing operation
of our information technology and communications systems. Any damage to or
failure of our systems would likely result in interruptions in our service
to
customers and the closings of real estate transactions from which we principally
derive revenue. Accordingly, interruptions in our service would likely reduce
our revenues and profits, and our brand could be damaged, perhaps irreparably,
if people believe our system and services are unreliable.
To
our
knowledge, our systems are vulnerable to damage or interruption from terrorist
or malicious attacks, floods, tornados, fires, power loss, telecommunications
failures, computer viruses and other attempts to harm our systems, and similar
types of events. Our data centers are subject to break-ins, sabotage and
intentional acts of vandalism, and to other potential disruptions. Some of
our
systems are not fully redundant (i.e., backed up), and our disaster recovery
planning cannot account for all eventualities. The occurrence of a natural
disaster, or a decision to close a facility we are using without adequate notice
for financial reasons or other unanticipated problems at our data centers,
could
result in lengthy interruptions in our service. Any unscheduled interruption
in
our service would likely place a burden on our entire organization and result
in
an immediate loss of revenue. The steps we have taken to increase the
reliability and redundancy of our systems are expensive, reduce our operating
margin and even then may not be successful in reducing the frequency or duration
of unscheduled downtime.
We
will continue to depend on intellectual property rights to protect our
proprietary technologies, although we may not be able to successfully protect
these rights.
We
rely
on our proprietary technology to enhance some of our service offerings. To
protect this technology, we employ and rely on trademark, trade secret, and
copyright law in addition to contractual restrictions and protections. We intend
to apply for patent protection on our future technology developments to the
extent we believe such protection is available and economically warranted.
Nevertheless, even if we determine to file applications for patent protection
in
the United States or in other countries, we may not in the end receive letters
patent. Furthermore, even if we do obtain the rights to an issued patent, such
patent may not provide us with a competitive advantage.
12
While
we
have begun the process of preparing o file a patent application for some of
our
proprietary software, to date we have not yet filed any applications for patent
protection. Despite our efforts to date, it is entirely independently develop
technology that is similar to our technology, or offer or sell products or
services that utilize our technology. The development by others of technology
that is similar to our technology, or the sale of products or services that
incorporate our technology, would likely harm our competitive position and
have
a material adverse effect on our business.
Even
in
cases where we may apply for patent protection and receive a patent that affords
us a competitive advantage, we may have to resort to litigation to protect
and
enforce our patent rights, or to protect our trade secrets or know-how (or
other
intellectual property rights), or to determine their scope, validity, or
enforceability. Enforcing or defending intellectual property rights or
proprietary technology is generally extremely expensive, would likely cause
a
significant diversion of our resources, and ultimately may not prove successful.
In addition, we may not have the financial, personnel or other resources to
effectively enforce or defend our intellectual property rights, if at
all.
Finally,
we may determine, or a legal proceeding may result in a determination, that
our
intellectual property infringes the intellectual property rights of others.
If
our technology infringes the intellectual property rights of others, we may
be
subject to lawsuits and incur significant liabilities.
Our
certificate of incorporation grants our Board of Directors, without any action
or approval by our stockholders, the power to issue additional shares of capital
stock, including the power to designate additional classes of common and
preferred stock.
Our
authorized capital consists of 250,000,000 shares of capital stock. Pursuant
to
authority granted by our certificate of incorporation and applicable state
law,
our Board of Directors, without any action or approval by our stockholders,
may
designate and issue shares in such classes or series (including other classes
or
series of preferred stock) as it deems appropriate and establish the rights,
preferences and privileges of such shares, including dividends, liquidation
and
voting rights. The rights of holders of other classes or series of capital
stock, including preferred stock, that may be issued could be superior to the
rights of the shares of common stock offered hereby. The designation and
issuance of shares of capital stock having preferential rights could adversely
affect other rights appurtenant to the shares of our common stock. Finally,
any
issuances of additional capital stock (common or preferred) will dilute the
percentage of ownership interest of our stockholders and may dilute the
per-share book value of the Company.
There
is no public market for our common stock, which will be subject to significant
restrictions on future transfer.
Currently,
there is no public market for any of our common stock and no public market
will
develop as a result of the filing of this registration statement on Form 10.
To
date, we have not registered or qualified the offer or sale, or resale, of
our
common shares under federal or state securities laws and, if you buy any such
shares, you may not resell them unless (i) such sale is registered or qualified
under federal and state securities laws or (ii) exemptions from federal and
state registration and qualification are available.
We
have
no obligation to register or qualify the offer, sale or resale of our shares
of
common stock under either federal or state law. As a result, any investor in
our
common stock must be prepared to bear the economic risk of investing in our
common shares for an indefinite period of time.
13
We
are required to comply with governmental regulations, which will increase our
costs and could prohibit us from conducting business in certain
jurisdictions.
We
are
subject to governmental regulation by federal, state and local regulatory
authorities with respect to our real estate brokerage and mortgage lending
operations. As is standard in the residential real estate brokerage industry,
our real estate agents must be licensed. In some states, our proposed business
activities are prohibited and we may not operate in those states. Eight states
have “minimum service laws” that require realtors to provide a level of service
that online real estate businesses typically do not provide. Eleven states
prohibit rebates of real estate commissions. Governmental bodies may change
the
regulatory framework within which we intend to operate, without providing any
recourse for adverse effects that the change may have on our business.
We
can
give no assurance that we will be able to comply with existing laws and
regulations, that additional regulations that harm our business will not be
adopted, or that we will continue to maintain our licenses, approvals or
authorizations. Our failure to comply with applicable laws and regulations,
or
the adoption of new laws and regulations restricting our intended operations,
could have a material adverse effect on our business and could cause us to
cease
operations.
The
efforts of the National Association of Realtors or other organizations could
prevent us from operating our business, and could lead to the imposition of
significant restrictions on our operations.
The
online residential real estate sales model generally, and the Webdigs business
model specifically, is based on the assertion that full-commission real estate
brokers and agents do not provide an acceptable level of value to consumers
and
that consumers are willing to engage in online home search activities via the
internet if they can reduce the dollar amount of commissions paid on home sales
and purchases. This model is a direct and significant threat to traditional
residential real estate brokers and agents.
In
response to previous and ongoing efforts by discount online real estate
companies, the National Association of Realtors, which represents real estate
brokerages, has issued rules that attempt to block access of online real estate
companies to the Multiple Listing System (MLS) and may adopt additional rules
intended to reduce or eliminate competition from online discount real estate
businesses such as WebDigs. Our business is dependent upon the ability to access
the MLS to be competitive. We can give no assurance that the National
Association of Realtors will not be successful in preventing our access to
the
MLS, or that it or another organization will not be successful in adopting
rules
or imposing other restrictions on online real estate businesses such as WebDigs.
Such adoption or imposition of regulations or restrictions would have a material
adverse effect on our business.
Competition
in the traditional and online residential real estate industry is
intense.
The
residential real estate industry is highly competitive. We believe that
important competitive factors in this industry include (but are not limited
to)
price, service, and ease of use. We presently face competition from numerous
companies engaged in traditional residential real estate brokerage services
and
several online residential real estate sales companies, and we expect online
competition to increase in the future from existing and new competitors. Most
of
our current and potential competitors have substantially greater financial,
marketing and technical resources than us, as well as significant operating
histories. Accordingly, we may not be able to compete successfully against
new
or existing competitors. Furthermore, competition may reduce the prices we
are
able to charge for our services, thereby potentially lowering revenues and
margins, which would likely have a material adverse effect on our results of
operation and financial condition.
14
The
online residential real estate industry is subject to significant and rapid
technological change.
The
online residential real estate industry is subject to rapid innovation and
technological change, shifting customer preferences, new service introductions
and competition from traditional real estate brokerage firms. Competitors in
this market have frequently taken different strategic approaches and have
launched substantially different products or services in order to exploit the
same perceived market opportunity. Although we believe that we are offering
a
unique solution, there can be no assurance that our services will be competitive
technologically or otherwise, or that any other services developed by us will
be
competitive.
Our
ability to compete in this industry will depend upon, among other things, broad
acceptance of our services and on our ability to continually improve current
and
future services we may develop to meet changing customer requirements. There
can
be no assurance that we will successfully identify new service or product
opportunities and develop and bring to the market new and enhanced solutions
in
a timely manner, that such products or services will be commercially successful,
that we will benefit from such development, or that products and services
developed by others will not render our products and services noncompetitive
or
obsolete. If we are unable to penetrate markets in a timely manner in response
to changing market conditions or customer requirements, or if new or enhanced
products or services do not achieve a significant degree of market acceptance,
our business would be materially and adversely affected.
We
may be impacted by general economic conditions and economic conditions within
the United States residential real estate market.
The
residential real estate market has experienced vast fluctuations in recent
times. In some years, real estate home sales are brisk, while in other years
the
residential real estate market has been stagnant. Our ability to attract home
sellers and buyers to use our website will, in part, depend upon consumers’
willingness in general to buy or sell a home. When consumers sense that the
overall economy is not doing well, they are less likely to make an expensive
purchase such as a home. If consumer sentiment about the economy wanes, then
activity in the home sales market will also likely diminish. If real estate
transactions in general decline, that will likely result in a corresponding
reduction in our business and our revenues.
The
growth and expansion of our business could have a negative effect on our
Company.
We
believe that in order to be successful, we must grow and expand our operations.
To grow, we believe we must expand, train and manage our employee base,
particularly our marketing, management and skilled technical personnel, within
a
short time period. Rapid growth will also require an increase in the level
of
responsibility for both existing and new management and will require us to
implement and improve operational, financial and management information
procedures and controls. We compete with many companies in seeking to attract
qualified personnel. We can give no assurance that the management skills and
systems currently in place will be adequate, we will be able to effectively
manage any significant growth we experience, or we will be able to hire or
assimilate new personnel necessary to pursue our growth strategy. Our inability
to adequately manage growth could have a material adverse effect on
us.
Important
Note:
The
foregoing risks are likely not a complete list of all risks that do or may
affect the results of operation, financial condition or business prospects
of
Webdigs. In addition to the above risks, businesses are often subject to risks
not foreseen or fully appreciated by management. In reviewing this document,
potential investors should keep in mind other possible risks that could be
important. In sum, investors are urged to make their own evaluation of
Webdigs.
15
ITEM
2. FINANCIAL INFORMATION
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the financial statements
and related notes that appear at the end of this registration statement. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those discussed in “Risk Factors” elsewhere in this filing.
General
We
are a
web-based real estate company that offers innovative services to home buyers
and
sellers. We share with each buyer two-thirds of the broker commissions we
receive from the seller or listing broker. This gives buyers a large financial
incentive to use our services, while we earn meaningful net revenue per
transaction. Our primary market targets are those home buyers who are willing
and able to independently perform their initial home search on the internet.
As
part of our website interface and personal service, we also offer home buyers
tools to manage their purchase transactions from initial search to the closing
of their purchase. Currently, we also offer and generate revenue from our
related buy-side services, including mortgage brokerage, title and credit
counseling.
We
provide our home sellers with Northstar MLS listings for a flat fee of $3,000
at
closing (which averages to about 2.7% of the home sale price). The Northstar
MLS
contains listings from Minnesota, portions of western Wisconsin, northern Iowa,
and eastern North and South Dakota. Our listings also appear on Realtor.com
and
14 other national home-listing websites. In addition to providing home sellers
with a home listing, Webdigs arranges for OBEO virtual home tours of our
sellers’ homes so that the resulting virtual tour may become a part of the
listing on our website. To assist with the pricing of a seller’s home, we
provide a comparative market analysis to the seller and individual consultation
on pricing strategies. Finally, we also provide a range of individual strategies
for preparing a seller’s home for sale, including appropriately staging the
home. All of these sell-side services are furthered by our marketing and
advertising campaign designed to drive traffic to our website.
We
currently offer our services in two states—Minnesota and Florida. When we
represent buyers, we share with them two-thirds of our buyer broker commission,
which we receive from the seller or listing broker. Since inception (May 1,2007), our closed buy-side transaction gross revenue has exceeded $140,000,
from
which we have earned average gross commissions of over $7,000 per transaction.
From this, on average, we have paid buyers over $3,900 per transaction and
earned net revenue per transaction of approximately $3,100. The amount of the
commission we receive on a transaction depends on the price of the home and
percentage commission offered to the buyer’s broker by the seller or listing
broker. When choosing a percentage commission to offer to buyer brokers, a
seller or listing broker may consider factors such as the general state of
the
local housing market, how long the home has been on the market and how much
the
seller or listing broker values the services of buyer’s brokers. As of October31, 2007, we had received, on average, a gross buyer’s broker commission equal
to 2.7% percent of the home sale price before rebates to our
customers.
Currently,
our revenues consist primarily of (i) mortgage broker business commissions
received and loan fees earned at the time a mortgage transaction closes; (ii)
online real estate brokerage commissions received, as agents in residential
real
estate transactions, at the time a real estate transaction closes. We record
revenues as gross revenue. Consumer rebates and third-party agent commissions
paid to buyer’s brokers (in those instances where we represent the seller of a
home) are treated as offsetting reductions to gross revenue. Our net revenues
are principally driven by the number of transactions we close and the average
net revenue per transaction. Average net revenue per transaction is a function
of (1) the home purchase price and percentage commission we receive on each
transaction and (2) the fee income received from mortgage loan
origination.
16
Due
to
the highly publicized distress of the subprime mortgage lending industry, all
banks have tightened restrictions on new borrowers. This has noticeably affected
our mortgage brokerage business even though we have not engaged in any subprime
mortgage lending. Nevertheless, we are currently in the process of obtaining
our
license as an FHA approved mortgage broker. We believe that adding this lending
option will at least offset any lost transactions resulting from the nationwide
subprime lending crisis. Primarily, this belief is based on our tracking of
Webdigs buyers, which has indicated that a large percentage would qualify for
FHA lending. We expect to have approval to engage in FHA lending by September
2008.
We
have
also made some recent changes to further enhance our competitive positioning.
In
March 2008, we consolidated the previously separate mortgage brokerage
operations of Home Equity Advisors, LLC and Marquest Financial, Inc., into
one
operating unit. The savings resulting from this consolidation of operations
is
expected to help us better leverage our overhead costs. Our mortgage operations
are now headquartered in our Bloomington, Minnesota offices and supported with
a
satellite office in Naples, Florida.
Results
of Operation
The
following information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10 registration
statement.
Selected
financial information about our operations by segment for the period from
inception (May 1, 2007) to October 31, 2007 is as follows:
Online
Real Estate
Brokerage
Retail
Mortgage
Brokerage
Corporate
and Other
Total
Net
revenues
$
6,400
$
93,454
$
-
$
99,854
Operating
loss
(305,220
)
(70,267
)
(227,229
)
(602,716
)
Depreciation
and amortization
11,486
3,425
1,492
16,403
Assets
412,030
187,372
157,892
757,294
Capital
expenditures and website development costs
413,516
-
17,386
430,902
Consolidated
gross revenues from inception (May 1, 2007) to October 31, 2007 totaled
$105,675. After deducting customer rebates and third-party agent commissions,
we
finished our first six months (i.e., the fiscal year ended October 31, 2007)
with $99,854 in net revenues. These gross revenues resulted for the closing
of
21 real estate transactions during the period. The real estate brokerage
commissions earned on buy-side real estate transactions represented
approximately 5% of our total revenues and gross fee revenue for mortgage
origination represented 95% of the consolidated gross revenues. We did not
have
any sell-side real estate transactions during this period.
17
From
inception (May 1, 2007) through October 31, 2007, our total selling-related
expenses were $385,955, and our total general and administrative expenses were
$316,615. Selling-related expenses consist of salaries and wages of $149,703,
advertising and promotion of $156,082, website maintenance of $39,333, computer
supplies of $13,247, and other selling expenses of $27,590. General and
administrative expenses consist of salaries and wages of $202,369, professional
fees of $61,733, amortization and depreciation of $16,403, rent of $9,073 and
other general and administrative expenses of $27,037.
To
date,
we have spent considerable attention to building our brand and market awareness
with an advertising campaign that uses a mix of media, including the internet,
television, print, radio, direct-mail, outdoor signage and various moveable
signage (e.g., branded public buses in the Minneapolis/St. Paul metropolitan
area). These efforts generally commenced in September 2007. The costs of these
marketing campaigns, along with the startup expenses associated with developing
our state-of-the-art website and organizing our business operation, resulted
in
an operating loss of $602,716 from inception (May 1, 2007) to October 31, 2007.
Our accumulated deficit as of October 31, 2007 was $602,716.
Selected
financial information about our operations by segment for the six-month period
ended April 30, 2008 is as follows:
Online
Real Estate
Brokerage
Retail
Mortgage
Brokerage
Corporate
and Other
Total
Net
revenues
$
65,333
$
434,028
$
-
$
499,361
Operating
loss
(845,088
)
(79,902
)
(262,527
)
(1,187,517
)
Interest
expense
-
4,512
42
4,554
Depreciation
and amortization
73,392
39,775
-
113,167
Assets
371,130
194,318
114,338
679,786
Capital
Expenditures
15,938
2,278
-
18,216
Consolidated
gross revenues for the six months ended April 30, 2008 totaled $565,964. After
deducting customer rebates and third party agent commissions, we finished the
first six months of our current fiscal year (i.e. the fiscal year ending October31, 2008) with $499,361 in net revenues. These results represent 400% sequential
growth over the preceding six-month period ended October 31, 2007. In the
six-month period ending April 30, 2008, combined real estate services (the
revenue we earned from representing home buyers and home sellers) represented
approximately 23% of total gross revenues. Gross fee income for mortgage
origination during the same six-month period decreased to 77% of total revenues
as compared to 95% of total revenues during the prior six months from inception
(May 1, 2007) to October 31, 2007. Based on current trends, we presently
anticipate that approximately 35% of our total revenues for the fiscal year
ending October 31, 2008 will be derived from real estate brokerage services,
with the remaining 65% being derived from mortgage brokerage
services.
Over
the
six-month period ended April 30, 2008, our most significant cash outlays
continued to be directed to those efforts and areas that are intended to
generate long-term growth for our shareholders. For the six-month period ended
April 30, 2008, our total selling-related expenses were $1,345,720, and general
and administrative expenses totaled $341,158. Selling expense consists of
salaries and wages of $351,079; advertising and promotion of $351,086; website
maintenance and IT support of $274,525; amortization of $97,580 and other
selling expenses of $271,450. General and administrative expenses consist of
salaries, wages and stock compensation of $109,774; contract labor of $27,747;
professional fees of $105,183; rent of $61,201; depreciation of $15,586 and
other administrative expenses of $21,667. This compares to total selling-related
expenses of $385,955, and general and administrative expenses of $316,615,
in
the prior six-month period ended October 31, 2007.
18
For
the
six months ended April 30, 2008, we closed 21 real estate service transactions
resulting in net revenues (after deducting customer rebates) of $65,333.
Mortgage origination revenues were $434,028 for the same six-month
period. As a sign of progress, in May 2008 we closed 13 real estate
transactions, representing a new monthly record, and more than twice the total
of the next highest month since inception in May 2007. For the six-month period
from November 1, 2007 to April 30, 2008, primarily as a result of continued
brand building and investment in enhancing the experience our customers have
with our state-of-the-art real estate website, we incurred a net loss of
$1,192,071.
Assets
and Employees; Research and Development
Our
primary assets are cash and intellectual-property rights, which are the
foundation for our services. At this time, we do not anticipate purchasing
or
selling any significant equipment or other assets in the near term. Neither
do
we anticipate any imminent or significant changes in the number of our
employees. We may, however, increase the number of independent contractor real
estate agents upon whom we rely to provide personal services in the event that
we expand into other markets or our business in our current markets
significantly increases.
We
expect
that we will invest time, effort and expense in the continued refinement of
our
website and user interface. Currently, we expect to spend approximately $400,000
in such improvement activities over the course of fiscal 2008.
Liquidity
and Capital Resources; Anticipated Financing Needs
From
inception (May 1, 2007) to October 31, 2007, we incurred net operating losses
aggregating $602,716 to fund technology development, marketing and advertising,
business development and other activities as discussed above. We funded these
operations primarily through cash of $485,500 received from sales of membership
interests in Webdigs, LLC prior to the merger transaction on October 24, 2007,
and $75,000 received from common stock sales subsequent to the merger
transaction.
We used
$56,881 of cash in operating from inception (May 1, 2007) to October 31, 2007.
Cash used in operations included a net loss of $602,716, which was offset
by $195,373 of non-cash expenses for depreciation, amortization and
share-based compensation. Changes in operating assets and liabilities also
offsetting the loss were increases in accounts payable of $318,355 and accrued
expenses of $34,656, respectively. Cash flows used in investing activities
included payments for website development of $413,516. Cash flows from financing
activities included issuance of common stock for $553,937 and an increase in
due
to officer of $17,601. The due to officer amount was for business expenses
paid
on behalf of the Company which were reimbersed to the officer during the six
months ended April 30, 2008.
We
had
$113,280 of cash and cash equivalents as of October 31, 2007. From October31,2007 through January 31, 2008 (the end of our first fiscal quarter), we raised
$269,000 through the sale of our common stock in a private placement offering.
From February 1, 2008 through April 30, 2008 (the end of our second fiscal
quarter), we raised an additional $557,500 through the sale of our common stock
as part of the same private placement offering. We also raised $15,000 through
the sale of our common stock subsequent to April 30, 2008. Therefore, since
the
end of fiscal 2007 through June 17, 2008, we raised an aggregate of $841,500
in
gross proceeds from the sale of our common stock. In consideration of such
proceeds, we issued a total of 3,366,000 shares of common stock. We had $114,338
of cash and cash equivalents as of April 30, 2008.
We
used
$785,263 of cash in operating activities during the six months ended April30,2008. Cash used in operations included a net loss of $1,192,071, which included
$196,887 of non-cash expenses for depreciation, amortization, loss on disposal
of fixed assets and share-based compensation. Changes in operating assets
and
liabilities contributing to the use of use of cash primarily included decreases
in accrued expenses and commissions and fees of $18,356 and $23,258,
respectively, while an increase in accounts payable of $244,929 partially
mitigated the use of cash from operations. Cash flows used in investing
activities included payments for computer equipment of $18,216. Cash flows
from
financing activities included issuance of common stock for $826,500 and a
decrease in due to officer of $17,601.
For
the
issuances of common stock in the private placement offering, we relied on the
exemption from federal registration under Section 4(2) of the Securities Act
of
1933 and Rule 506 promulgated thereunder. We relied on this exemption and the
safe harbor thereunder based on the fact that there are and will continue to
be
a limited number of investors, all of whom will be “accredited investors” under
Rule 501 of the Securities Act of 1933 and all of whom have and will have
knowledge and experience in financial and business matters such that the
investors were capable of evaluating the risks of the investment. The securities
offered and sold in these transactions were not (and, with respect to the
aforementioned anticipated future sales, will not be) registered under the
Securities Act of 1933 and therefore may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements. The disclosure about the private placement offering contained
in
this information statement is not an offer to sell or a solicitation of an
offer
to buy any securities of the Company.
19
Over
the
course of the next several months, we expect to continue seeking additional
financing. The amount of financing we seek may be significant, and may range
from $5 million to $6 million. Assuming that we successfully obtain additional
financing, in such amount, over the next several months, our management believes
that such financing will be sufficient to finance our operations through October31, 2009. Thereafter, our management believes that we may require additional
capital to continue operations in our present markets or expand into other
markets. If, however, we are unable to obtain any of such additional financing,
we believe we will have cash sufficient to finance our operations through August31, 2008.
Additional
financing may not be available on terms favorable to us, especially in light
of
current debt and equity markets. If additional funds are raised by the issuance
of our equity securities, such as through the issuance and exercise of common
stock, then existing stockholders will experience dilution of their ownership
interest. If additional funds are raised by the issuance of debt or other types
of (typically preferred) equity instruments, then we may be subject to certain
limitations in our operations, and issuance of such securities may have rights
senior to those of the then existing holders of our common stock. If adequate
funds are not available or not available on acceptable terms, we may be unable
to fund expansion, develop or enhance products or respond to competitive
pressures.
During
the period from inception (May 1, 2007) to October 31, 2007 and from November1,2007 to April 30, 2008, we awarded certain key employees shares of restricted
common stock as a form of compensation. The total value of all restricted stock
awarded (utilizing the principles of SFAS 123R, discussed below under the
caption “Critical Accounting Policies”) was $463,360. Using the vesting schedule
applicable to each individual grant of restricted stock, compensation expense
recorded for the period from inception (May 1, 2007) to October 31, 2007 and
from November 1, 2007 to April 30, 2008, totaled $93,970 and $83,453,
respectively. During the period ended October 31, 2007, 3,992 shares of
restricted stock were forfeited. The remaining unvested shares awarded, having
a
total valuation at grant date of $281,945, have been recorded as unearned
compensation as of April 30, 2008. As these remaining shares vest, they will
be
accounted for as additional compensation expense.
Effective
as of May 7, 2008, we granted options to three non-employee directors as a
means
of inducing them to join the Board of Directors, giving each of them the right
to purchase up to 200,000 shares of common stock at the per-share price of
$0.25. These options may be exercised, to the extent vested, at any time prior
to October 24, 2012. Rights to purchase one-half of the shares issuable under
the options vested immediately upon issuance, with the remaining rights
scheduled to vest in two equal annual installments on each of October 24, 2008
and 2009. Under
SFAS No. 123R, for stock-based awards granted after January 1, 2006, we
recognize compensation expense based on estimated grant date fair value using
the Black-Scholes option-pricing model. Black-Scholes is used to determine
the
fair value for options issued to both employees and non-employees. The estimated
fair value of these stock option grants was $107,000, and will be recorded
as
stock compensation expense over the vesting period starting on May 7, 2008.
We
expect to take a third quarter charge of $53,695 as director’s compensation
expense for 300,000 vested options awarded to our outside
directors.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
are
based upon our financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosures. We evaluate these estimates on an on-going
basis. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or
conditions.
20
We
consider the following accounting policies to be those most important to the
portrayal of our results of operations and financial condition:
Revenue
Recognition.
Our
online real estate brokerage business recognizes revenue at the closing of
a
real estate transaction. Commissions and rebates due to third party real
estate agents or consumers are accrued at the time of closing and treated
as an offset to gross revenues. Our mortgage brokerage business recognizes
commissions received and loan fees earned at the time a mortgage loan
closes.
Income
Taxes.
Subsequent to the reverse merger on October 24, 2007, we account for income
taxes in accordance with SFAS No. 109, as clarified by FIN No. 48, which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Accordingly, deferred tax assets and liabilities arise from
the difference between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements. Deferred tax amounts are
determined using the tax rates expected to be in effect when the taxes will
actually be paid or refunds received, as provided under currently enacted tax
law. Valuation allowances are established when necessary to reduce deferred
tax
assets to the amount expected to be realized. Income tax expense or benefit
is
the tax payable or refundable, respectively, for the period plus or minus the
change in deferred tax assets and liabilities during the period.
FIN
No.
48 requires the recognition of a 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 financial
statements is the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement with the relevant tax
authority. See Note 9 to the consolidated financial statements included
elsewhere in the Form 10 for additional information regarding income
taxes.
Share-Based
Compensation. The
Company accounts for stock incentive plans under the recognition and measurement
provisions of FASB Statement No. 123(R), Share-Based Payments, which
requires the measurement and recognition of compensation expense for all
stock-based awards based on estimated fair values, net of estimated forfeitures.
Share-based compensation expense recognized for the period from inception (May1, 2007) to October 31, 2007 under Statement 123(R) includes compensation cost
for restricted awards.
21
Intangible
Assets. We have two types of intangible assets:
The
primary interface with the customer in our online real estate broker operation
is the Webdigs.com website. Certain costs incurred in development of this
website have been capitalized according to provision in Emerging Issues Task
Force Issue No. 00-2, Accounting
for Website Development Costs
(EITF
00-2), and AICPA Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.
These
capitalized costs totaled $413,516 from inception (May 1, 2007) to October31,2007. Amortization is on a straight-line based over the estimated useful
life of
the website of 3 years.
Customer
Lists
As
part
of our acquisitions of HEA and Marquest (See Note 2 to our financial statements
for the period from date of inception (May 1, 2007) to October 31, 2007 included
elsewhere in this Form 10), we recorded the fair value of pre-existing customer
relationships of these two entities. The fair value estimated for each customer
list was $27,404 for HEA and $130,859 for Marquest, for a total of $158,263.
The
fair values of these relationships will be amortized on a straight-line basis
(which approximates the anticipated revenue stream) over their estimated
useful
lives based on an estimated revenue period ranging from 2 to 3
years.
Seasonality
of Business
The
residential real estate market has traditionally experienced seasonality, with
a
peak in the spring and summer seasons and a decrease in activity during the
fall
and winter seasons. We expect revenues in each quarter to be significantly
affected by activity during the prior quarter, given the time lag between
contract execution and closing.
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements.
ITEM
3. PROPERTIES
We
lease
approximately 3,000 square feet of space at 3433 Broadway Street NE, Suite
501,
Minneapolis, Minnesota55413, on a month-to-month basis and at a per-month
cost
of approximately $3,500.
Marquest
Financial, Inc., our wholly owned subsidiary that offers mortgage brokerage
services, also leases two office properties. The first property, an office
suite
of approximately 3,000 square feet located at 3800 American Blvd W, Suite 1400,
Bloomington, Minnesota55431, houses Marquest Financial’s main sales and
administrative offices. The lease for this property has a term that expires
in
August 2009. Marquest Financial leases the property for approximately $5,550
per
month. The second property is approximately 1,500 square feet of office space
located at 5621 Strand Blvd. Naples, Florida. Maquest Financial leases this
space, which is used as its Florida sales office, at a per-month cost of
approximately $1,774. The lease for this property expires in May
2009.
22
ITEM 4.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
To
our
knowledge, the table below identifies the beneficial ownership of:
all
executive officers and directors of the Company as a group,
and
·
each
other beneficial holder (or group of holders) of five percent or
more of
our common stock
Each
person or entity included in the table below has sole voting and investment
power with respect to all shares of common stock shown as beneficially owned
by
them, except as indicated by footnote and subject to community property laws
where applicable. Percentage ownership is based on 21,808,840 shares of
common stock outstanding as of June 12, 2008.
Beneficial
ownership is determined in accordance with the applicable rules of
the
SEC. In computing the number of shares beneficially owned by a person
and
the percentage ownership of that person, shares of common stock subject
to
options or warrants (or similar purchase rights) held by that person
that
are presently exercisable, or will become exercisable within 60 days
hereafter, are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any
other
person. Unless otherwise indicated, the business address of each
of the
following persons is 3433 Broadway Street NE, Suite 501, Minneapolis,
Minnesota55413.
(2)
Mr.
Buntz is a director of the Company and the Company’s Chief Executive
Officer and President.
(3)
Mr.
Meckey is a director of the Company, and also serves as Vice President
of
Operations. 1,030,400 shares held by Mr. Meckey are contractually
restricted pursuant to the Company’s Restricted Stock Plan and the terms
and conditions of a Member Services Agreement by and between Mr.
Meckey
and Webdigs, LLC, dated as of October 22, 2007. Restrictions lapse
thereunder based on certain service-based conditions set forth in
the
Member Services Agreement. Of the restricted shares, 386,400 shares
are
eligible to vest on July 15, 2008 and the remaining shares are eligible
to
vest on July 15, 2009.
(4)
Mr.
Lumpkins is a non-employee director of the Company. Of those shares
set
forth on the table, 100,000 shares are issuable upon exercise of
vested
options to purchase common stock. In addition, 203,843 outstanding
common
shares are held jointly with Mr. Lumpkins’
spouse.
(5)
Mr.
Sjoblad is a non-employee director of the Company. Of those shares
set
forth on the table, 100,000 shares are issuable upon exercise of
vested
options to purchase common stock.
(6)
Mr.
Larson is a non-employee director of the Company. All 100,000 shares
are
issuable upon exercise of vested options to purchase common
stock.
(7)
Mr.
Wicker is the Company’s Chief Financial Officer. 1,030,400 shares held by
Mr. Wicker are contractually restricted pursuant to the Company’s
Restricted Stock Plan and the terms and conditions of a Member Services
Agreement by and between Mr. Wicker and Webdigs, LLC, dated as of
October22, 2007. Restrictions lapse thereunder based on certain service-based
conditions set forth in the Member Services Agreement. Of the restricted
shares, 386,400 shares are eligible to vest on July 15, 2008 and
the
remaining shares are eligible to vest on July 15,2009.
(8)
Includes
Messrs. Buntz, Meckey, Lumpkins, Sjoblad, Larson and
Wicker.
(9)
1,030,400
shares held by the stockholder are contractually restricted pursuant
to
the Company’s Restricted Stock Plan and the terms and conditions of a
Member Services Agreement by and between the stockholder and Webdigs,
LLC.
Restrictions lapse thereunder based on certain service-based conditions
set forth in the Member Services Agreement. Of the restricted shares,
386,400 shares are eligible to vest on July 15, 2008 and the remaining
shares are eligible to vest on July 15,2009.
24
ITEM
5. DIRECTORS AND EXECUTIVE OFFICERS
Directors,
Executive Officers and Other Key Employees
Our
Board
of Directors and management team includes:
Name
Age
Position(s)
Independent
Director
Robert
A. Buntz, Jr.
56
Director
(Chairman), Chief Executive Officer and President
No
Robert
L. Lumpkins
64
Director
Yes
Steven
Sjoblad
58
Director
Yes
Christopher
Larson
36
Director
Yes
Thomas
Meckey
32
Director,
Vice President of Operations
No
Edward
Wicker
48
Chief
Financial Officer
N/A
Biographies
for the members of our Board of Directors and our management team are set forth
below:
Robert
A. Buntz, Jr.,
has
served as a director of the Company, including Webdigs, LLC, since inception
in
April 2007. Mr. Buntz has been an entrepreneur for more than 30 years and a
real
estate broker for more than 25. In 1981, Mr. Buntz developed the award-winning
Bluefin Bay on Lake Superior, Tofte, Minnesota, and operated that resort until
2007. Among other achievements, Mr. Buntz’s development company donated the
land, time and funding to help create the North Shore Commercial Fishing Museum,
and Mr. Buntz created and developed one of the first rural affordable housing
projects, Tofte Homestead. From 1984 through 2006, and while he was
simultaneously operating Bluefin Bay, Mr. Buntz was the owner and operator
of
Tofte Land Co., Inc., a real estate holding and brokerage firm. He now has
more
than 25 years of hospitality experience as an owner-operator of destination
properties.
Mr.
Buntz
has served on the board of directors of the Explore Minnesota Tourism Council
and the (Minnesota) Governor’s Tourism Advisory Committee for more than 15
years. Currently, Mr. Buntz is a board member and past-chair of the board of
the
American Museum of Asmat Art. Mr. Buntz received the (Minnesota) Governor’s
Entrepreneurship Award from Governor Rudy Perpich and the Outstanding Individual
in Tourism Award from Governor Jesse Ventura. He is a graduate of Grinnell
College.
Robert
L. Lumpkins
was
appointed as a director of the Company on October 25, 2007. Mr. Lumpkins is
currently the Chairman of the Board of The Mosaic Company, a NYSE-listed crop
nutrition business with revenues of $7 billion. Mr. Lumpkins retired in the
fall
of 2006 as an executive and board member of Cargill Incorporated, a global
commodity trading and processing company with over $70 billion in revenues
and
150,000 employees. He served in a variety of financial and general management
assignments during his 38 years with Cargill, including Chief Financial Officer
(1989-2005) and Vice Chairman (1995-2006). He also serves as a director of
Ecolab Inc., and as the chairman of Black River Asset Management LLC (a $10
billion fixed-income-oriented asset management company). He is a trustee of
Howard University in Washington, D.C. Mr. Lumpkins is a graduate of the
University of Notre Dame and the Stanford Graduate School of
Business.
25
Steven
Sjoblad
was
appointed as a director of the Company on October 25, 2007. Steve Sjoblad has
more than 35 years of corporate strategy and marketing expertise. Mr. Sjoblad
spent 19 years building Fallon McElligott, one of the world’s preeminent
advertising agencies, where he guided global strategy and marketing programs
for
industry leaders and has worked in virtually every consumer and
business-to-business category (1981-1999). From 2001 through 2003, Mr. Sjoblad
ran Global Consumer Services for Fair Isaac Corporation (NYSE: FIC), originated
the myFICO.com business and ran the Fair Isaac Marketing Services business,
transforming it into a “precision marketing unit.” Additionally, he was a member
of the Fair Isaac Executive Committee and held the position of Chief Marketing
Officer. From 2003 through 2006, Mr. Sjoblad worked as an independent business
consultant. Since 2006, Mr. Sjoblad has served as the Chairman and Chief
Executive Officer of Captira Analytical, a software, data and analytics firm
serving the criminal justice vertical market based in Albany, NY. Mr. Sjoblad
is
also Chairman of uBid.com (UBHI.OB), an online retailer, a board member of
Schwan’s Foods, a $3.6 billion international food concern, and a founder and
board member of Fluxion, LLC, a marketing automation concern.
Christopher
Larson
was
appointed as a director of the Company on October 25, 2007. Mr. Larson is a
co-founder and has served as Chief Financial Officer of Cash Systems Inc. (AMEX:
CKN), a provider of cash access service to the casino industry, from June 1999
to January 2005. In January 2005, Mr. Larson was promoted to Chief Operating
Officer of Cash Systems. Mr. Larson has served as a director of Cash Systems
since that company went public in October 2001. Mr. Larson is presently also
the
Chief Executive Officer and President, and director of URON Inc. Mr. Larson
is a
certified public accountant.
Thomas
Meckey
was
appointed as a director of the Company on October 24, 2007. Mr. Meckey also
currently serves as the Vice President of Operations and was a co-founder of
Webdigs, LLC. Mr. Meckey has five years of experience in residential real estate
and finance. Mr. Meckey’s real estate and finance career includes his founding
of Home Equity Advisors, LLC in 2006, serving as a realtor with Re/Max Results
from 2004 to 2007, and serving as a loan officer with Wealth Spring Mortgage
from 2004 to 2006. Prior to that, Mr. Meckey worked as a software consultant
to
Ben Nevis, Inc. (2002-2003), an account executive at Adytum Software Co.
(2000-2002), and as a consultant with JD Edwards ERP Business Unit, which is
a
division of Ernst & Young, LLP (1998-2000). Mr. Meckey is a graduate of the
University of Pittsburgh and holds a degree in Information
Sciences.
Edward
Wicker
has
served as the Chief Financial Officer of the Company, including Webdigs, LLC,
since September 2007. Mr. Wicker provides a combination of large and small
company finance executive experience. Most recently, Mr. Wicker has served
as
CFO of several start-up companies in the Twin Cities, including Tailor Building
Systems (2005-2007), Michelina’s Inc. (2002), and Wireless Ronin Technologies
(2001-2002). Mr. Wicker also founded KMR Designs in 2002, which was a niche
supplier of ultra high performance custom winter accessories supplying people
who worked and played outdoors for long periods at below-zero temperatures.
Prior to these positions, Mr. Wicker had a long career at personal care products
maker Coty, Inc., where he served in several senior finance executive positions.
His final ten years with Coty were spent in Europe, where he served as VP of
Finance at Spanish and UK subsidiaries, as well as controller of Coty’s global
operations division. Prior to Europe, Mr. Wicker served as finance director
of
Coty’s then sister company—Reckitt Benckiser US Consumer Products Division.
Prior to working at Reckitt, he began his career at Ecolab, where he worked
in
internal audit and financial analyst positions. Mr. Wicker holds undergraduate
and MBA degrees from the University of Minnesota’s Carlson school of management.
Mr. Wicker is a CPA.
26
ITEM
6. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table sets forth the cash and non-cash compensation for each of the
last two fiscal years awarded to or earned by (i) our Chief Executive Officer
during the period from inception (May 1, 2007) to October 31, 2007;
and (ii) our four most highly-compensated executive officers (other than the
Chief Executive Officer) who served in such capacity at October 31, 2007 and
who
received in excess of $100,000 in salary and bonus during the fiscal year ended
October 31, 2007 (collectively, the “named executive officers”).
Name
and Principal Position
Year
Salary ($)
Bonus ($)
Stock Awards ($)
All Other
Compensation ($)
Total ($)
Robert
A. Buntz, Jr.,
Chief
Executive Officer
and
President
(1)
2007
$
100,000
(2)
$
0
$
0
$
0
$
100,000
Daniel
J. Shrader,
Chief
Executive Officer (3)
2007
0
0
90,000
(4)
0
90,000
(1)
Mr.
Buntz become our President and Chief Executive Officer on October24,2007. Mr. Buntz is also the Chairman of our Board of
Directors.
(2)
$85,000
of this amount was paid in the form of stock in lieu of cash
compensation.
(3)
Mr.
Shrader was the Chief Executive Officer of Select Video, Inc. prior
to the
October 24, 2007 merger transaction with Webdigs, LLC.
(4)
Amounts
listed reflects the estimated fair value of a stock award of 900,000
shares of Select Video based on contemporaneous sales of common stock
of
Select Video prior to the October 24, 2007 merger transaction with
Webdigs, LLC.
Employment
Agreements with Executives and Key Personnel
We
do not
currently have an employment agreement with Mr. Buntz. Nevertheless, our wholly
owned operating subsidiary, Webdigs, LLC, is party to a Members Services
Agreement with Mr. Buntz. In that agreement, Mr. Buntz has agreed not to compete
against Webdigs for a period of one year following any termination of service,
regardless of the reason for such termination, and has also agreed to customary
confidentiality and invention-assignment provisions. The Member Services
Agreement with Mr. Buntz provides that Mr. Buntz be paid an annual salary of
$120,000 for the year ending October 31, 2008.
We
have
also entered into Member Services Agreements with Mr. Edward Wicker, our Chief
Financial Officer, and Mr. Thomas Meckey, our Vice President of Operations,
through our wholly owned operating subsidiary, Webdigs, LLC. In the Member
Services Agreements with Messrs. Wicker and Meckey, we have agreed to pay each
of them an annual salary of $60,000, and each of Messrs. Wicker and Meckey
have
agreed not to compete against Webdigs for a period of one year following any
termination of service, regardless of the reason for such termination, and
have
also agreed to customary confidentiality and invention-assignment
provisions.
27
Outstanding
Equity Awards at Fiscal Year End
As
of
October 31, 2007, we had no options, warrants, unvested stock awards or equity
incentive plan awards issued and outstanding in the name of any of the named
executive officers.
Director
Compensation
Our
non-employee directors have elected to forego any compensation for participating
in Board of Directors and committee meetings telephonically until such time
as
we become profitable over the course of an entire fiscal year, at which time
the
Board of Directors may reconsider the structure of its director compensation.
In
general, director compensation will be subject to review and adjustment from
time to time at the discretion of our Board of Directors.
In
May
2008, we granted options to three non-employee directors in connection with
inducing them to join, and as a means of inducing them to remain on, our Board
of Directors. The options we granted give each of them the right to purchase
up
to 200,000 shares of common stock at the per-share price of $0.25. These options
may be exercised, to the extent vested, at any time prior to October 24, 2012.
Rights to purchase one-half of the shares issuable under the options vested
immediately upon issuance, with the remaining rights vesting in two equal annual
installments on each of October 24, 2008 and 2009.
ITEM
7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; DIRECTOR
INDEPENDENCE
Transactions
with Related Persons
None.
Director
Independence
The
Board
of Directors is comprised of a majority of “independent” directors as defined in
Rule 4200(a)(15) of the NASDAQ Stock Market. The independent directors are
identified by name in the chart that appears in the “Management and Board of
Directors” section of this filing.
Our
Board
of Directors has an Audit Committee consisting solely of members who are
independent as defined in Rule 4200(a)(15) of the Marketplace Rules of the
NASDAQ Stock Market. In addition, each member of the Audit Committee is
independent as defined in Exchange Act Rule 10A-3, a non-employee director
under
the rules of the SEC, and an outside director under the rules of the Internal
Revenue Service. The Board of Directors does not have a standing nominating
or
compensation committee (or other committees differently designed and performing
similar functions.) Instead, our entire Board of Directors performs the
functions traditionally discharged by nominating and compensation
committees.
ITEM
8. LEGAL PROCEEDINGS
We
are
not currently a party to any material litigation and are not aware of any
threatened litigation that would have a material effect on our
business.
28
ITEM 9.
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market
Information
Our
common stock is not, and has never been publicly traded. As such, there is
currently no market for our common stock. We anticipate that one or more
registered broker-dealers may apply to have our common stock listed on the
OTC
Bulletin Board following the effective date of this registration statement.
Nevertheless, the process of applying for quotation on the OTC Bulletin Board
is
undertaken and controlled by one or more market-makers (broker-dealers who
agree
to make a market for our common stock) and is largely outside of our control.
Accordingly, we cannot be certain that our common stock will be listed on the
OTC Bulletin Board or that, even if listed at some time in the future, an active
market will ever develop.
As
of the
date of this filing, we had outstanding options for the purchase of up to
600,000 shares of our common stock, but no other outstanding securities
convertible into or excercisable for any shares of our common (or other
capital) stock. As of the date of this filing, there are approximately 264,077
shares of common stock that may potentially be sold without restriction and
limitation. The Company has not, as of the date of this filing, agreed to
register the resale of any common shares by securityholders.
Holders
As
of the
date of this filing, we had approximately 200 holders of record of our common
stock.
Dividends
We
have
not paid any dividends on our common stock and do not anticipate paying any
such
dividends in the near future. Instead, we intend to use any earnings for future
acquisitions and expanding our business. Nevertheless, at this time there are
not any restrictions on our ability to pay dividends on our common
stock.
Securities
Authorized for Issuance Under Equity Compensation Plans
On
October 31, 2007, we had no equity compensation plans (including individual
compensation arrangements) outstanding. Nevertheless, we granted options to
three non-employee directors in May 2008. The options we granted give each
of
them the right to purchase up to 200,000 shares of common stock at the per-share
price of $0.25. These options may be exercised, to the extent vested, at any
time prior to October 24, 2012. Rights to purchase one-half of the shares
issuable under the options vested immediately upon issuance, with the remaining
rights vesting in two equal annual installments on each of October 24, 2008
and
2009.
Presently, we
are not required by applicable state law or the listing standards of any
self-regulatory agency (e.g., the OTC Bulletin Board, NASD, AMEX or NYSE) to
obtain the approval of our securityholders prior to issuing any such
compensatory options, warrants or other rights to purchase our
securities.
Potential
Anti-Takeover Effects
Certain
provisions set forth in our Amended and Restated Certificate of Incorporation,
as amended, in our bylaws and in Delaware law, which are summarized below,
may
be deemed to have an anti-takeover effect and may delay, deter or prevent a
tender offer or takeover attempt that a stockholder might consider to be in
its
best interests, including attempts that might result in a premium being paid
over the market price for the shares held by stockholders.
29
Blank
Check Preferred Stock.
Our
Certificate of Incorporation and bylaws contain provisions that permit us to
issue, without any further vote or action by the stockholders, up to 125,000,000
shares of preferred stock in one or more series and, with respect to each such
series, to fix the number of shares constituting the series and the designation
of the series, the voting powers, if any, of the shares of the series, and
the
preferences and relative, participating, optional and other special rights,
if
any, and any qualifications, limitations or restrictions, of the shares of
such
series.
Special
Meetings of Stockholders.
Our
bylaws provide that special meetings of stockholders may be called only by
the
chairman or by our board. Stockholders are not permitted to call a special
meeting of stockholders, to require that the board call such a special meeting,
or to require that our board request the calling of a special meeting of
stockholders.
While
the
foregoing provisions of our certificate of incorporation, bylaws and Delaware
law may have an anti-takeover effect, these provisions are intended to enhance
the likelihood of continuity and stability in the composition of the Board
of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control. In that regard, these provisions are designed
to
reduce our vulnerability to an unsolicited acquisition proposal. The provisions
also are intended to discourage certain tactics that may be used in proxy
fights. However, such provisions could have the effect of discouraging others
from making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of our common stock that could result
from actual or rumored takeover attempts. Such provisions also may have the
effect of preventing changes in our management.
Delaware
Takeover Statute
In
general, Section 203 of the Delaware General Corporation Law prohibits a
Delaware corporation that is a public company from engaging in any “business
combination” (as defined below) with any “interested stockholder” (defined
generally as an entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with such entity or person) for a period of three years following the date
that
such stockholder became an interested stockholder, unless: (1) prior to such
date, the Board of Directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (2) on consummation of the transaction that resulted
in
the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned (x) by persons who are directors and
also officers and (y) by employee stock plans in which employee participants
do
not have the right to determine confidentially whether shares held subject
to
the plan will be tendered in a tender or exchange offer; or (3) on or subsequent
to such date, the business combination is approved by the Board of Directors
and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
Section
203 of the Delaware General Corporation Law defines “business combination” to
include: (1) any merger or consolidation involving the corporation and the
interested stockholder; (2) any sale, transfer, pledge or other disposition
of
ten percent or more of the assets of the corporation involving the interested
stockholder; (3) subject to certain exceptions, any transaction that results
in
the issuance or transfer by the corporation of any stock of the corporation
to
the interested stockholder; (4) any transaction involving the corporation that
has the effect of increasing the proportionate share of the stock of any class
or series of the corporation beneficially owned by the interested stockholder;
or (5) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.
30
Transfer
Agent and Registrar
Our transfer
agent is Florida Atlantic Stock Transfer, Inc., located at 7130 Nob Hill Road,
Tamarac, Florida33321. The transfer agent’s telephone number is (954) 726-4954.
The transfer agent is registered under the Securities and Exchange Act of
1934.
Listing
Our
common stock is currently not listed on any stock exchange or consolidated
quotation or reporting system.
The
Company has sold and issued an
aggregate of 3,366,000 shares of common stock in a private placement offering
exempt from registration under Rule 506 of the Securities Act of 1933. The
shares were sold to a total of 28 accredited investors in Minnesota (and related
offers and sales were exempt from the registration requirements of the Minnesota
Securities Act) at the per share price of $0.25, resulting in aggregate gross
proceeds to the Company of $841,500. In such private placement offering, the
Company is offering a total of up to 4,000,000 common shares at a price of
$0.25
per share. All of the certificates representing shares sold in the offering
contain a restrictive legend indicating that the transferability of the shares
is restricted under the Securities Act of 1933.
Select
Video issued to one person a total of 2,500 common shares for
management-related consulting services in March 2006.
Select
Video issued to one person an aggregate of 13,750 common shares for
management-related consulting services from April to June 2006.
Select
Video issued 2,700,000 common shares for management services to three officers
and directors in August 2007.
Select
Video issued an aggregate of 650,000 common shares in August and September
2007
in a private placement offering exempt from registration under Rule 506 of
the
Securities Act of 1933. The shares were sold to a total of nine accredited
investors in Minnesota (and related offers and sales were exempt from the
registration requirements of the Minnesota Securities Act) at the per-share
price of $0.10, resulting in aggregate gross proceeds to the Company of $65,000.
None of the shares issued in the private placement were registered under the
Securities Act of 1933, and all of the certificates representing shares sold
in
the offering contain a restrictive legend indicating that the transferability
of
the shares is restricted under the Securities Act of 1933.
31
Select
Video issued to one person 300,000 common shares for real estate-related
consulting services in October 2007.
Select
Video issued an aggregate of 15,818,251 common shares to a total of 19
persons and entities in the merger transaction with Webdigs, LLC on October24,2007. None of the shares issued in the merger transaction were registered under
the Securities Act of 1933, and all of the certificates representing shares
issued in the merger transaction contain a restrictive legend indicating that
the transferability of the shares is restricted under the Securities Act of
1933.
Webdigs issued
an aggregate of 300,000 common shares on October 25, 2007 and October 27, 2007
in a private placement offering exempt from registration under Rule 506 of
the
Securities Act of 1933. The shares were sold to a total of two accredited
investors in Minnesota (and related offers and sales were exempt from the
registration requirements of the Minnesota Securities Act) at the per-share
price of $0.25, resulting in aggregate gross proceeds to the Company of $75,000.
None of the shares issued in the private placement were registered under the
Securities Act of 1933, and all of the certificates representing shares sold
in
the offering contain a restrictive legend indicating that the transferability
of
the shares is restricted under the Securities Act of 1933.
Except
as
noted above, the sales of the securities identified above were made in
transactions that did not involve a public offering of securities and,
accordingly, we believe that these transactions were exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof and rules promulgated thereunder. Each of the above-referenced cash
investors in our common stock represented to us in connection with their
investment that they were “accredited investors” (as defined by Rule 501
under the Securities Act of 1933) and were acquiring the shares for investment
and not distribution, that they could bear the risks of the investment and
could
hold the securities for an indefinite period of time. The investors received
written disclosures that the securities had not been registered under the
Securities Act and that any resale must be made pursuant to a registration
or an
available exemption from such registration. All of the foregoing securities
were
deemed restricted securities for purposes of the Securities Act when
issued.
ITEM
11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE
REGISTERED
The
following is a description of our capital stock and the material provisions
of
our certificate of incorporation, bylaws and certain agreements to which we
and
our stockholders are parties. The following is only a summary and is qualified
by applicable law and by the provisions of our certificate of incorporation,
bylaws and such other agreements, copies of which are available as set forth
under “Where You Can Find More Information.”
General
As
of
June 12, 2008, 21,808,840 shares of our common stock were issued and
outstanding, and there were 200 holders of record of our common stock. As
of the same date, our authorized capital consisted of 250,000,000 shares of
capital stock, par value $0.001 per share, of which 125,000,000 shares are
designated for issuance as common stock and 125,000,000 shares are designated
for issuance as preferred stock. As of June 12, 2008, we also had outstanding
options for the purchase of up to an aggregate of 600,000 shares of our common
stock.
Common
Stock
Voting.
The
holders of our common stock are entitled to one vote for each outstanding share
of common stock owned by that stockholder on every matter properly submitted
to
the stockholders for their vote. Stockholders are not entitled to vote
cumulatively for the election of directors.
Dividend
Rights.
Subject
to the dividend rights of the holders of any outstanding series of preferred
stock, holders of our common stock are entitled to receive ratably such
dividends and other distributions of cash or any other right or property as
may
be declared by our Board of Directors out of our assets or funds legally
available for such dividends or distributions.
32
Liquidation
Rights.
In the
event of any voluntary or involuntary liquidation, dissolution or winding up
of
our affairs, holders of our common stock would be entitled to share ratably
in
our assets that are legally available for distribution to stockholders after
payment of liabilities. If we have any preferred stock outstanding at such
time,
holders of the preferred stock may be entitled to distribution or liquidation
preferences. In either such case, we must pay the applicable distribution to
the
holders of our preferred stock before we may pay distributions to the holders
of
our common stock.
Conversion,
Redemption and Preemptive Rights.
Holders
of our common stock have no conversion, redemption, preemptive, subscription
or
similar rights.
Preferred
Stock
Under
our
Amended and Restated Certificate of Incorporation, as amended, our Board of
Directors is authorized, subject to limitations prescribed by law, to issue
up
to 125,000,000 shares of preferred stock in one or more series without
further stockholder approval. The Board of Directors has discretion to fix
the
number of shares of each series of our preferred stock and to determine the
rights, preferences, privileges and restrictions of any preferred stock,
including without limitation voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences. Accordingly, our Board of
Directors could authorize the issuance of shares of preferred stock with terms
and conditions that could have the effect of delaying, deferring or preventing
a
transaction or a change in control that might involve a premium price for
holders of our common stock or otherwise be in their best interest.
ITEM
12. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under
our
Amended and Restated Certificate of Incorporation, as amended, we are required
to indemnify and hold harmless, to the fullest extent permitted by law, each
person (a “Covered Person”) who was or is made or is threatened to be made a
party or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or
she,
or a person for whom he or she is the legal representative, is or was a director
or officer of ours or, while a director or officer of ours, is or was serving
at
our request as a director, officer, employee or agent of another corporation
or
of a partnership, joint venture, trust, enterprise or nonprofit entity,
including service with respect to employee benefit plans, against all liability
and loss suffered and expenses (including attorneys’ fees) reasonably incurred
by such Covered Person. Notwithstanding the preceding sentence, except as
otherwise provided in the certificate of incorporation, we are required to
indemnify a Covered Person in connection with any action, suit or proceeding,
whether civil, criminal, administrative or investigative (or part thereof)
commenced by such Covered Person only if the commencement of such action, suit
or proceeding (or part thereof) by the Covered Person was authorized by our
Board of Directors.
In
addition, as permitted by Delaware law, our certificate of incorporation
provides that no director will be liable to us or to our stockholders for
monetary damages for breach of certain fiduciary duties as a director. The
effect of this provision is to restrict our rights and the rights of our
stockholders in derivative suits to recover monetary damages against a director
for breach of certain fiduciary duties as a director, except that a director
will be personally liable for:
·
any
breach of his or her duty of loyalty to us or our
stockholders
·
acts
or omissions not in good faith which involve intentional misconduct
or a
knowing violation of law
33
·
the
payment of dividends or the redemption or purchase of stock in violation
of Delaware law; or
·
any
transaction from which the director derived an improper personal
benefit.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
34
ITEM
13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
to Consolidated Financial Statements and Information
Report
of Independent Registered Public Accounting Firm
F-1
Consolidated
Balance Sheet
F-2
Consolidated
Statement of Operations
F-3
Consolidated
Statement of Stockholders’ Equity
F-4
Consolidated
Statement of Cash Flows
F-5
Notes
to Consolidated Financial Statements
F-6
Consolidated
Financial Statements for the three and six months ended April 30,2008
(unaudited)
Consolidated
Balance Sheets
F-22
Consolidated
Statement of Operations
F-24
Consolidated
Statements of Cash Flows
F-25
Notes
to Consolidated Financial Statements
F-26
35
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
Webdigs,
Inc.
Minneapolis,
Minnesota
We
have
audited the accompanying consolidated balance sheet of Webdigs, Inc. (the
Company) as of October 31, 2007 and the related statement of operations, changes
in stockholders’ equity, and cash flows from inception (May 1, 2007) to October31, 2007. These consolidated financial statements are the responsibility of
the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our 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 consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Webdigs, Inc. as of October31, 2007, and the results of its operations and its cash flows from inception
(May 1, 2007) to October 31, 2007, 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 since inception (May 1, 2007) and has a net working capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. Management’s plans in regard 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.
Webdigs,
Inc. (“the Company”) was incorporated on May 25, 1994 under the name of Select
Video, Inc. The Company changed to its current name on October 23, 2007. Select
Video, Inc. was an inactive shell from February 29, 2000 to October 24, 2007
when it entered into a Agreement and Plan of Merger and
Reorginization whereby it agreed to issue 15,818,251 shares of its common
stock to its subsidiary Select Video Acquisition, LLC which in-turn used those
shares to acquire all of the outstanding units of Webdigs, LLC, a private
company organized in the state of Minnesota resulting in Webdigs, LLC as the
surviving entity. Webdigs, LLC, based in Minneapolis, MN, was organized on
May1, 2007 and consists of two strategic operating segments; (1) mortgage broker,
assisting homeowners in refinancing their home mortgages and assisting new
home
buyers in qualifying for home mortgages and brokering the financing, (2) online
real estate broker, offering the same customer experience as a full service
broker utilizing a flat fee structure for listing services to their selling
customers and a graduated fee structure for their buying customers by rebating
two-thirds of its broker commissions. The mortgage broker segment operates
under
the names of Home Equity Advisors, LLC (HEA) and Marquest Financial, Inc.
(Marquest). The online real estate broker segment operates as Webdigs,
LLC.
Upon
completion of the transaction on October 24, 2007, Webdigs, LLC became a wholly
owned subsidiary of Webdigs, Inc. Since the transaction resulted in the existing
members of Webdigs, LLC acquiring control of Webdigs, Inc., for financial
statement purposes, the merger has been accounted for as a recapitalization
of
Webdigs, Inc. (a reverse merger with Webdigs, LLC as the accounting
acquirer).
The
operations of Webdigs, LLC are the only continuing operations of the Company.
In
accounting for this transaction, Webdigs, LLC was deemed to be the purchaser
and
parent company for financial reporting purposes. Accordingly, its net assets
were included in the consolidated balance sheet at their historical value.
The
accompanying consolidated financial statements as of October 31, 2007 present
the historical financial information of Webdigs, LLC. The outstanding member
units of Webdigs, LLC from May 1, 2007 to October 24, 2007 have been restated
to
reflect the shares issued upon the reorganization. The accompanying consolidated
financial statements as of October 31, 2007 present the historical financial
information of Webdigs, LLC from the period from inception (May 1, 2007) to
October 31, 2007 consolidated with Webdigs, Inc. from the date of reorganization
(October 24, 2007) to October 31, 2007.
Consolidation
Policies
The
consolidated financial statements for the period from inception (May 1, 2007)
to
October 31, 2007 include the accounts of Webdigs, Inc. and its wholly-owned
subsidiary, Webdigs, LLC, which includes Marquest Financial, Inc., Home Equity
Advisors, LLC, and Credit Garage, Inc. as wholly-owned subsidiaries,
collectively the Company. All significant intercompany accounts and transactions
have been eliminated in the consolidation.
SFAS
No.
131 Disclosure
About Segments of an Enterprise and Related Information
defines
operating segments as components of a company about which separate financial
information is evaluated regularly by the chief decision maker in deciding
how
to allocate resources and assess performance. The Company has identified two
operating segments: mortgage brokerage and online real estate brokerage.
Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents,
commissions and fees receivable, accounts payable and accrued expenses. Pursuant
to Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
about Fair Value of Financial Instruments,
the
Company is required to estimate the fair value of all financial instruments
at
the balance sheet date. The Company considers the carrying value of its
financial instruments in the consolidated financial statements to approximate
fair value due to their short-term nature.
Cash
and Cash Equivalents
For
purposes of balance sheet presentation and reporting of cash flows, the Company
considers all unrestricted demand deposits, money market funds and highly liquid
debt instruments with an original maturity of less than 90 days to be cash
and
cash equivalents.
Commissions
and Fees Receivable
Loan
commissions and fees receivable are recorded at the amount the Company expects
to collect on loans or real estate transactions closed. These receivables
represent broker commission balances due from the Company’s investors/lenders or
listing real estate brokers and usually are settled within 10-15 days after
closing.
The
Company reviews the outstanding receivables on a monthly basis and receivables
are considered past due when payment has not been received 30 days after a
loan
closes. Management provides for probable uncollectible amounts through a charge
to earnings and a credit to a valuation allowance based on its assessment of
the
current status of individual accounts. Balances that are still outstanding
after
management has used reasonable collection efforts are written off through a
charge to the allowance for doubtful accounts and a credit to accounts
receivable. Historically, the Company has not experienced significant losses
related to receivables from individual customers. At October 31, 2007, the
Company considers its accounts receivable to be fully collectible and therefore,
has not recorded an allowance for doubtful accounts.
Impairment
of Long-Lived Assets
In
accordance with Statements of Financial Accounting Standards (SFAS) No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets,
long-lived assets, such as website development costs, furniture, equipment
and
customer lists, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the asset.
The
primary interface with the customer in the Company’s online real estate broker
operation is the Webdigs.com website. Certain costs incurred in development
of
this website have been capitalized according to provisions in Emerging Issues
Task Force Issue No. 00-2, Accounting
for Website Development Costs
(EITF
00-2), and AICPA Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use.
These
capitalized costs totaled $413,516 from inception (May 1, 2007) to October31,2007. Amortization is on a straight-line basis over the estimated useful life
of
the website of 3 years.
Customer
Lists
As
part
of the Company’s acquisitions of HEA and Marquest (See Note 2), the Company
recorded the fair value of the pre-existing customer relationships of these
two
entities. The fair value estimated for each customer list was $27,404 for HEA
and $130,859 for Marquest for a total of $158,263. The fair values of these
relationships will be amortized on a straight-line basis (which approximates
the
anticipated revenue stream) over their estimated useful lives based on an
estimated revenue period ranging from 2 to 3 years.
Office
equipment and fixtures are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets ranging
from
two to seven years. Maintenance and repairs are charged to expense as incurred;
major renewals and betterments are capitalized. When items of property or
equipment are sold or retired, the related costs and accumulated depreciation
are removed from the accounts and any gain or loss is included in operating
income.
Revenue
Recognition
The
Company’s mortgage brokerage business recognizes commissions received and loan
fees earned at the time a mortgage loan closes.
The
real
estate brokerage business recognizes revenue at the closing of a real estate
transaction. Commissions and rebates due to third party real estate agents
or
consumers are accrued at the time of closing and treated as an offset to gross
revenues.
Comprehensive
Income (Loss)
Comprehensive
income (loss) includes net income (loss) and items defined as other
comprehensive income (loss). Items defined as other comprehensive income (loss)
include items such as foreign currency translation adjustments and unrealized
gains and losses on certain marketable securities. For the period from inception
(May 1, 2007) to October 31, 2007, there were no adjustments to net loss to
arrive at comprehensive loss.
Net
Loss per Common Share
Basic
net
loss per common share is computed by dividing net loss applicable to common
shareholders by the weighted average number of commons shares outstanding during
the periods presented. Diluted net loss per common share is determined using
the
weighted average number of common shares outstanding during the periods
presented, adjusted for the dilutive effect of common stock equivalents,
consisting of shares that might be issued upon exercise of options, warrants
and
conversion of convertible debt. In periods where losses are reported, the
weighted average number of commons shares outstanding excludes common stock
equivalents, because their inclusion would be anti-dilutive. The Company did
not
have any common stock equivalents outstanding at October 31, 2007.
Income
Taxes
Subsequent
to the reverse merger on October 24, 2007, the Company accounts for income
taxes
in accordance with SFAS No. 109, as clarified by FIN No. 48, which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Accordingly, deferred tax assets and liabilities arise from
the difference between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements. Deferred tax amounts are
determined using the tax rates expected to be in effect when the taxes will
actually be paid or refunds received, as provided under currently enacted tax
law. Valuation allowances are established when necessary to reduce deferred
tax
assets to the amount expected to be realized. Income tax expense or benefit
is
the tax payable or refundable, respectively, for the period plus or minus the
change in deferred tax assets and liabilities during the
period.
FIN
No. 48 requires the recognition of a 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
fifty percent likelihood of being realized upon ultimate settlement with the
relevant tax authority. See Note 9 to the consolidated financial statements
for
additional information regarding income taxes.
Share-Based
Compensation
The
Company accounts for stock incentive plans under the recognition and measurement
provisions of FASB Statement No. 123(R), Share-Based
Payments,
which
requires the measurement and recognition of compensation expense for all
stock-based awards based on estimated fair values, net of estimated forfeitures.
Share-based compensation expense recognized for the period from inception (May1, 2007) to October 31, 2007 under Statement 123(R) includes compensation cost
for restricted stock awards.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense amounted
to
$150,599 for the period from inception (May 1, 2007) to October 31,2007.
Concentrations,
Risks and Uncertainties
Instability
of the Housing and Mortgage Sectors in the Company’s Regional
Markets:
The
Company’s operations are concentrated within the mortgage origination and real
estate brokerage industries throughout the Unites States and its prospects
for
success are tied indirectly to interest rates and the general housing and
business climates in these regions.
Cash
Deposits in Excess of Federally Insured Limits:
The
Company maintains cash balances at two financial institutions. Accounts at
each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. At times, the cash balances in these accounts may exceed federally
insured limits. The Company has not experienced any losses in such accounts
and
believes they are not exposed to any significant credit risk on cash and cash
equivalents.
The
Company has incurred significant operating losses from inception (May 1, 2007)
to October 31, 2007. At October 31, 2007, the Company reports a negative working
capital position of $327,882, accumulated deficit of $602,716 and a
stockholders’ equity of $248,215. It is management’s opinion that these facts
raise substantial doubt about the Company’s ability to continue as a going
concern without additional debt or equity financing.
In
order
to meet its working capital needs through the next twelve months, the Company
plans to seek additional financing, which could involve the issuance of equity,
debt and/or equity-linked securities. The Company is also looking to reduce
advertising expenditures and increase revenues through its existing customer
base and website traffic.
3
ACQUISITIONS
The
following acquisitions were accounted for as a purchase in accordance with
the
Statement of Financial Accounting Standards No. 141, Business
Combinations;
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair values determined by the
Company’s management based upon information currently available and on current
assumptions as to future operations.
HEA
On
July15, 2007, the Company (then operating as Webdigs, LLC) acquired all issued
and
outstanding units of HEA for a total purchase price of $32,000 by issuing 64,000
member units valued at $0.50 per unit. The 64,000 units were converted into
260,920 shares of common stock on October 24, 2007 in connection with the
reverse merger. The Company also incurred acquisition costs of
$1,998.
The
total
purchase consideration of $33,998 was allocated to the acquired assets and
liabilities assumed, including identifiable intangible assets, based on their
estimated fair values at the acquisition date. The allocation of the purchase
consideration was as follows:
On
October 22, 2007, the Company (then operating as Webdigs, LLC) acquired all
issued and outstanding shares of Marquest for $64,000 by issuing 64,000 member
units valued at $1.00 per unit. The 64,000 units were converted into 260,920
shares on October 24, 2007 in connection with the reverse merger. The Company
also incurred acquisition costs of $560. Additionally, in connection with the
acquisition of Marquest, the former owner of Marquest (a current shareholder
of
the Company) indemnified the Company of a certain prior debt obligation of
Marquest totaling approximately $78,000 which was set forth in the purchase
agreement. This debt has not been recorded by the Company in accounting for
this
acquisition as the Company believes the satisfaction of this debt will be
settled by the former parties.
The
total
purchase consideration of $64,560 was allocated to the acquired assets and
liabilities assumed, including identifiable intangible assets, based on their
estimated fair values at the acquisition date. The allocation of the purchase
consideration was as follows:
The
following unaudited pro forma consolidated results of operations of the Company
assume that the acquisition of HEA and Marquest occurred as of May 1,2007:
Webdigs, Inc.
HEA
Marquest
Total
Net
revenues
$
6,400
$
143,269
$
465,334
$
615,003
Selling,
general and administrative expense
(538,699
)
(185,541
)
(530,212
)
(1,254,452
)
Operating
(loss)
(532,299
)
(42,272
)
(64,878
)
(639,449
)
Interest
expense
-
(266
)
(7,489
)
(7,755
)
Net
loss before income taxes
(532,299
)
(42,538
)
(72,367
)
(647,204
)
Income
tax provision
-
-
-
-
Net
loss
$
(532,299
)
$
(4,538
)
$
(72,367
)
$
(647,204
)
Loss
per common share - basic and diluted
$
(0.06
)
$
(0.00
)
$
(0.01
)
$
(0.07
)
Weighted
average common shares outstanding - basic and diluted
9,359,494
9,359,494
9,359,494
9,359,494
The
unaudited pro forma amounts represent the historical operating results of the
entities acquired from HEA and Marquest with appropriate adjustments that give
effect to depreciation and amortization and interest expense. The pro forma
amounts are not necessarily indicative of the operating results that would
have
occurred in HEA and Marquest had they been in operation by Webdigs during the
periods presented. In addition, the pro forma amounts do not reflect potential
cost savings related to full optimization and the redundant effect of selling,
general and administrative expense.
4
RELATED
PARTY TRANSACTIONS
Accounts
Payable – Minority Stockholder
The
Company’s principal advertising agency/website developer was owed $274,413 at
October 31, 2007. The two principals of this advertising company also are
minority stockholders in the Company – holding approximately 3% of the
Company’s outstanding shares at October 31, 2007. For the period from inception
(May 1, 2007) to October 31, 2007, the Company incurred $586,912 in services
and
rent from this related party.
Included
in the $586,912 is $6,000 in office rent expense for the Company from inception
(May 1, 2007) to October 31, 2007. The Company informally rents office space
for
its headquarters and real estate operation in Minneapolis from the related
party
on a month to month basis. Beginning in March 2008, due to increased space
requirements, the Company has agreed to pay a monthly rent of $3,500 for
dedicated office space.
Due
to
Officer
As
of
October 31, 2007, the Company was indebted to its CEO/President in the amount
of
$17,601 for business expenses that he had paid on the Company’s behalf. The
indebtedness is due on demand and is non-interest bearing.
5
OFFICE
EQUIPMENT AND FIXTURES
Office
equipment and fixtures consists of the following at October 31,2007:
Office
equipment and fixtures
$
57,191
Less
accumulated depreciation
(1,492
)
Office
equipment and fixtures, net
$
55,699
Depreciation
expense amounted to $1,492 for the period from inception (May 1, 2007) to
October 31, 2007. Office equipment and fixtures held under a capital lease,
included above, had a total cost of $28,011 and no accumulated depreciation
as
it was leased near the end of the period.
The
future amortization expense is an estimate. Actual amounts may change from
such
estimated amounts due to additional intangible asset acquisitions, potential
impairments, accelerated amortization or other events.
7
CAPITAL
LEASE
The
Company, through its acquisition of Marquest, assumed a capital lease obligation
on two copiers. Under this agreement, the Company is required to make monthly
payments of $1,063 through February 2012 with interest at 9.25%.
Future
minimum lease payments including interest required under this lease are as
follows:
The
Company conducts a portion of its Marquest mortgage operations in a leased
facility under a non-cancelable operating lease expiring August 2009. In
addition to base rent, the Company is obligated for its share of insurance,
taxes, and common area expenses. Monthly base rent expense, including related
insurance, and common area expenses is $5,546 per month in its Bloomington,
Minnesota office. The Company also leases space in Naples, Florida for the
Florida regional office. This non-cancelable lease expires May 2009. Monthly
base rent in Naples is $1,774 per month. The Company assumed these lease
obligations with its acquisition of Marquest. Rent expense was $2,415 for the
period from inception (May 1, 2007) to October 31, 2007.
The
Company also leases office equipment under operating leases which expire at
various dates through 2009. Total base monthly lease payments for these
operating leases are $1,878. For the period from inception (May 1, 2007) to
October 31, 2007, total equipment and furniture lease payments totaled $657.
Additionally,
the Company leases office space at its Minneapolis, Minnesota location on a
month-to-month basis as noted in Note 3.
Future
minimum lease payments
The
future minimum lease payments under the Company’s noncancelable operating leases
are as follows:
One
of
the Company’s mortgage subsidiaries sponsors a 401(k) retirement plan covering
all employees meeting certain eligibility requirements, such as age and term
of
employment. Under the plan, eligible employees may elect to defer a percentage
of their salary, subject to Internal Revenue Service limits. The Company
contributions are voluntary and at the discretion of the Board of Directors.
No
contributions were made during the period from inception (May 1, 2007) to
October 31, 2007.
On
October 24, 2007, the Company entered into a reverse merger transaction with
Select Video, Inc. and its subsidiary, Select Video Acquisition, LLC, thereby
becoming a C-Corporation for income tax purposes. Prior to the merger, net
income and loss of Webdigs, LLC was passed through and reported on the tax
returns of the members of the LLC, therefore, there was no tax provision
recorded for the period from inception (May 1, 2007) to October 23, 2007.
Subsequent to the merger on October 24, 2007, the Company is following the
income tax accounting guidance of FAS 109. Also, in connection with the merger,
the Company recorded net deferred tax assets of $32,000 due to a change in
tax
status and a valuation allowance of $32,000 because realization of these net
deferred tax assets are not reasonably assured.
The
provision (benefit) for income taxes consists of the following for the period
from October 24, 2007 (merger date and change in tax status) to October 31,2007:
Current
$
-
Deferred
(8,000
)
(8,000
)
Establishment
of the net deferred tax asset as of October 24, 2007 due to the reverse
merger and change in tax status
(32,000
)
(40,000
)
Valuation
allowance
40,000
Provision
for income taxes
$
-
The
provision for income taxes varies from the statutory rate applied to the total
loss as follows for the period from inception (May 1, 2007) to October 31,2007:
Amount
Federal
income tax benefit at statutory rate (34%)
Deferred
income taxes, which result from the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes, consist of the following at
October 31, 2007:
Deferred
tax assets (liabilities):
Net
operating loss carryforwards
$
76,000
Accrued
expenses
20,000
Depreciation
(5,000
)
Amortization
(51,000
)
Net
deferred tax assets
40,000
Valuation
allowance
(40,000
)
Net
deferred tax assets
$
-
The
Company has a total net operating loss carryforward of approximately $192,000
which expires through 2027. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences will
become deductible. The Company considers the scheduled reversal of deferred
tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. The Company has recorded a full valuation allowance
against its net deferred tax assets because it is not currently able to conclude
that it is more likely than not that these assets will be realized. The amount
of deferred tax assets considered to be realizable could be increased in the
near term if estimates of future taxable income during the carryforward period
are increased.
Under
the
Internal Revenue Code Section 382 (IRC 382), certain stock transactions which
significantly change ownership, including the sale of stock to new investors,
the exercise of options to purchase stock, or other transactions between
shareholders could limit the amount of net operating loss carryforwards that
may
be utilized on an annual basis to offset taxable income in future periods.
In
October 2007, the Company acquired Marquest Financial, Inc. which had a net
operating loss carryforward of $172,000. Due to the limitations of IRC 382,
utilization of the loss is limited to $8,607 per year for the next 20 years
expiring on 2027.
11
SHAREHOLDERS'
EQUITY
At
inception on May 1, 2007, the Company (then operating as Webdigs, LLC) issued
member units equivalent to 4,403,020 shares to the Company’s founders for
$10,500 in cash.
For
the
period from inception (May 1, 2007) to October 31, 2007, a portion of the CEO
compensation was paid in stock. In total, 346,534 shares were issued with a
fair
value of $85,000.
During
the period from July 1, 2007 to October 23, 2007, the Company (then operating
as
Webdigs, LLC), sold Class A member units equivalent to 1,936,510 shares for
a
price of $0.2425 per share. The Company raised $475,000 in proceeds from this
sale to accredited investors. The Company incurred issuance costs of $6,563.
Preferred dividends of $5,857 were declared and paid to these members prior
to
their recharacterization to common stock at the time of the reverse merger
on
October 24, 2007.
On
July15, 2007, the Company (then operating as Webdigs, LLC), issued member units
equivalent to 260,920 shares to acquire the outstanding member units in Home
Equity Advisors, LLC at a valuation of $32,000.
On
October 23, 2007, the Company (then operating as Webdigs, LLC), issued member
units equivalent to 260,920 shares to acquire the outstanding common shares
in
Marquest Financial, LLC at a valuation of $64,000.
For
the
period from inception (May 1, 2007) to October 31, 2007, the Company awarded
8,610,347 of time-based restricted stock (non-vested shares), respectively,
to
certain officers and employees of the Company. As a condition of the award,
the
officers and employees must be employed with the Company in order to continue
to
vest in their shares over a two year period. The fair value of the non-vested
shares is equal to the fair market value on the date of grant and is amortized
ratably over the vesting period.
The
Company recorded $93,970 of compensation expense in the consolidated statement
of operations related to vested shares (restricted stock) for the period from
inception (May 1, 2007) to October 31, 2007.
A
summary
of the status of non-vested shares and changes as of October 31, 2007 is set
forth below:
Shares
awarded as unearned compensation are scheduled to vest over periods ending
October 31 as follows:
Shares
Amount
2008
2,311,225
$
166,908
2009
2,375,679
198,490
4,686,904
$
365,398
12
SEGMENT
FINANCIAL INFORMATION
The
Company has two reporting segments that fall within two primary business groups:
mortgage broker and online real estate broker.
The
mortgage broker segment assists homeowners in refinancing their home mortgages
and assists prospective home buyers in qualifying for a home mortgage and
brokering the financing. Its principal market is the United States.
The
online real estate broker segment offers a superior customer experience to
a
full service real estate broker. The main distinction offered by the Company’s
real estate brokerage services is that of a flat fee structure for listing
services and a graduated fee structure offering customers a rebate up to
two-thirds of the Company’s broker commission for real estate buyers. This
business segment operates as Webdigs, Inc. Its principal market is also the
United States.
The
corporate segment consists primarily of investments in office equipment,
personnel and other operating expenses associated with the Company’s corporate
offices in Minneapolis, and certain technology initiatives.
During
the period from November 1, 2007 to June 17, 2008the Company sold 3,366,000
shares of unregistered common stock to accredited investors for $841,500 ($0.25
per share) in cash proceeds.
On
May 7,2008, the Company awarded stock options to each of its three outside directors.
The grant total for all three directors is 600,000 shares with an exercise
price
of $0.25. The fair value of these option grants total $107,000 and will be
amortized over the vesting period through October 24, 2009.
Common
stock - $.001 par value; 125,000,000 shares authorized as common
stock and
an additional 125,000,000 shares designated as either common or preferred
stock; 21,748,840 and 18,442,840 common shares issued and outstanding
at
April 30, 2008 and October 31, 2007, respectively
21,749
18,443
Additional
paid-in capital
2,021,080
1,197,886
Unearned
compensation
(281,945
)
(365,398
)
Accumulated
deficit
(1,794,787
)
(602,716
)
Total
stockholders' equity (deficit)
(33,903
)
248,215
Total
liabilities and stockholders' equity (deficit)
$
679,786
$
757,294
The
accompanying notes are an integral part of the unaudited consolidated financial
statements.
The
accompanying unaudited consolidated financial information has been prepared
by
Webdigs, Inc. (the “Company”) in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and
the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities
and Exchange Commission (SEC). Accordingly, it does not include all of the
information and notes required by accounting principles generally accepted
in
the Untied States of America for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair statement of this financial information have
been included. Financial results for the interim period presented are not
necessarily indicative of the results that may be expected for the fiscal
year
as a whole or any other interim period. This financial information should
be
read in conjunction with the consolidated financial statements and notes
for the
period from inception (May 1, 2007) to October 31, 2007.
2
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Business
Webdigs,
Inc. (“the Company”) was incorporated on May 25, 1994 under the name of Select
Video, Inc. The Company changed to its current name on October 23, 2007.
Select
Video, Inc. was an inactive shell from February 29, 2000 to October 24, 2007
when they entered into a Share Exchange and Acquisition Agreement whereby
it
agreed to issue 15,818,251 shares of its common stock to its subsidiary Select
Video Acquisition, LLC which in-turn used those shares to acquire all of
the
outstanding units of Webdigs, LLC, a private company organized in the state
of
Minnesota resulting in Webdigs, LLC as the surviving entity. Webdigs, LLC,
based
in Minneapolis, MN, was organized on May 1, 2007 and consists of two strategic
operating segments; (1) mortgage broker, assisting homeowners in refinancing
their home mortgages and assisting new home buyers in qualifying for home
mortgages and brokering the financing, (2) online real estate broker, offering
the same customer experience as a full service broker utilizing a flat fee
structure for listing services to their selling customers and a graduated
fee
structure for their buying customers by rebating two-thirds of its broker
commissions. The mortgage broker segment operates under the names of Home
Equity
Advisors, LLC (HEA) and Marquest Financial, Inc. (Marquest). The online real
estate broker segment operates as Webdigs, LLC.
Upon
completion of the transaction on October 24, 2007, Webdigs, LLC became a
wholly
owned subsidiary of Webdigs, Inc. Since the transaction resulted in the existing
members of Webdigs, LLC acquiring control of Webdigs, Inc., for financial
statement purposes, the merger has been accounted for as a recapitalization
of
Webdigs, Inc. (a reverse merger with Webdigs, LLC as the accounting
acquirer).
The
operations of Webdigs, LLC are the only continuing operations of the Company.
In
accounting for this transaction, Webdigs, LLC was deemed to be the purchaser
and
parent company for financial reporting purposes. Accordingly, its net assets
were included in the consolidated balance sheet at their historical value.
The
accompanying consolidated financial statements as of April 30, 2008 and October31, 2007 present the historical financial information of Webdigs, LLC. The
outstanding member units of Webdigs, LLC from May 1, 2007 to October 24,2007
have been restated to reflect the shares issued upon the reorganization.
Since
Webdigs, LLC began their operations on May 1, 2007, there is no comparative
information for the six months ended April 30, 2007.
F-26
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
consolidated financial statements for the three and six month periods ended
April 30, 2008 include the accounts of Webdigs, Inc. and its wholly-owned
subsidiary, Webdigs, LLC, which has Marquest Financial, Inc., Home Equity
Advisors, LLC, and Credit Garage, Inc. as wholly-owned subsidiaries,
collectively the Company. All significant intercompany accounts and transactions
have been eliminated in the consolidation.
Segment
Information
SFAS
No.
131 Disclosure
About Segments of an Enterprise and Related Information
defines
operating segments as components of a company about which separate financial
information is evaluated regularly by the chief decision maker in deciding
how
to allocate resources and assess performance. The Company has identified
two
operating segments: mortgage brokerage and online real estate brokerage.
Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Income
Taxes
Subsequent
to the reverse merger on October 24, 2007, the Company accounts for income
taxes
in accordance with SFAS No. 109, as clarified by FIN No. 48, which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Accordingly, deferred tax assets and liabilities arise
from
the difference between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements. Deferred tax amounts are
determined using the tax rates expected to be in effect when the taxes will
actually be paid or refunds received, as provided under currently enacted
tax
law. Valuation allowances are established when necessary to reduce deferred
tax
assets to the amount expected to be realized. Income tax expense or benefit
is
the tax payable or refundable, respectively, for the period plus or minus
the
change in deferred tax assets and liabilities during the period. The Company
has
recorded a full evaluation allowance for its net deferred tax assets as of
April30, 2008 because realization of those assets is not reasonably
assured.
F-27
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company has incurred significant operating losses for the six-month period
ended
April 30, 2008. At April 30, 2008, the Company reports a negative working
capital position of $519,565, accumulated deficit of $1,794,787 and a
stockholders’ deficit of $33,903. It is management’s opinion that these facts
raise substantial doubt about the Company’s ability to continue as a going
concern without additional debt or equity financing.
In
order
to meet its working capital needs through the next twelve months, the Company
plans to seek additional financing, which could involve the issuance of
equity,
debt and/or equity-linked securities. The Company is also looking to reduce
operating expenditures and increase revenues through its existing customer
base
and website traffic.
Included
in the $396,894 is $15,000 in office rent expense for the Company for the
six-month period ended April 30, 2008. There is no ongoing commitment from
the Company or the related party regarding rental office space for which
the
Company currently pays a market rate rent of $3,500 per month.
Due
to
Officer
As
of
October 31, 2007, the Company was indebted to its CEO/President in the amount
of
$17,601 for business expenses that he had paid on the Company’s behalf. This
amount was repaid during the six months ended April 30, 2008.
During
the period from February 1, 2008 to April 30, 2008, the Company sold 2,230,000
shares to accredited investors for $557,500 ($0.25 per share) in cash
proceeds.
Restricted
Stock
For
the
period from inception (May 1, 2007) to October 31, 2007, the Company awarded
8,610,347 of time-based restricted stock (non-vested shares), respectively,
to
certain officers and employees of the Company. As a condition of the award,
the
officers and employees must be employed with the Company in order to continue
to
vest in their shares over a two year period. The fair value of the non-vested
shares is equal to the fair market value on the date of grant and is amortized
ratably over the vesting period. No additional awards were made during the
six
months ended April 30, 2008.
The
Company recorded $83,453 of compensation expense in the consolidated
statement of operations related to vested shares (restricted stock) for the
six
months ended April 30, 2008.
F-28
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Shares
awarded as unearned compensation are scheduled to vest over periods ending
October 31 as follows:
Shares
Amount
2008
- remaining
1,155,613
$
83,455
2009
2,375,679
198,490
3,531,292
$
281,945
6
SEGMENT
FINANCIAL INFORMATION
The
Company has two reporting segments that fall within two primary business
groups:
mortgage broker and online real estate broker.
The
mortgage broker segment assists homeowners in refinancing their home mortgages
and assists prospective home buyers in qualifying for a home mortgage and
brokering the financing. This business segment operates as Marquest and HEA.
Its
principal market is the United States.
The
online real estate broker segment offers a superior customer experience to
a
full service real estate broker. The main distinction offered by the Company’s
real estate brokerage services is that of a flat fee structure for listing
services and a graduated fee structure offering customers a rebate up to
two-thirds of the Company’s broker commission for real estate buyers. This
business segment operates as Webdigs, Inc. Its principal market is also the
United States.
F-29
WEBDIGS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
corporate segment consists primarily of investments in fixed assets, personnel
and other operating expenses associated with the Company’s corporate offices in
Minneapolis, and certain technology initiatives.
Selected
financial information about the Company’s operations by segment for the six
month period ended April 30, 2008 is as follows:
Online
Retail
Real
Estate
Mortgage
Corporate
Brokerage
Brokerage
and
Other
Total
Net
revenues
$
65,333
$
434,028
$
-
$
499,361
Operating
loss
(845,088
)
(79,902
)
(262,527
)
(1,187,517
)
Interest
expense
-
4,512
42
4,554
Depreciation
and amortization
73,392
39,775
-
113,167
Assets
371,130
194,318
114,338
679,786
Capital
expenditures and website development costs
15,938
2,278
-
18,216
Selected
financial information about the Company’s operations by segment for the three
month period ended April 30, 2008 is as follows:
During
the period from May 1, 2008 to June 17, 2008the Company sold 60,000 shares
of
unregistered common stock to accredited investors for $15,000 ($0.25 per
share)
in cash proceeds.
On
May 7,2008, the Company awarded stock options to each of its three outside directors
for board service. The grant total for all three directors is 600,000 shares
with an exercise price of $0.25. The fair value of these option grants total
$107,000 and will be amortized on a straight - line basis over the vesting
period through October 24, 2009.
F-30
ITEM 14.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 15.
FINANCIAL
STATEMENTS AND EXHIBITS
List
of Financial Statements
(a) Consolidated
financial statements of Webdigs, Inc. from inception (May 1, 2007) to October31, 2007, including Report of Independent Registered Public Accounting
Firm
(b) Consolidated
financial statements of Webdigs, Inc. for the three and six months ended April30, 2008 (unaudited)
(originally
submitted and filed under the Company’s prior name, “Select Video,
Inc.”)
3.2
Amendment
to Amended and Restated Certificate of Incorporation of Webdigs,
Inc.
(originally submitted and filed under the Company’s prior name, “Select
Video, Inc.”) (filed with the Minnesota Secretary of State on October 23,2007)
Financial
statements of Marquest Financial, Inc. for the fiscal years ended
December31, 2006 and 2005
36
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form 10 (including the exhibits,
schedules, and amendments to the registration statement) under the Securities
Exchange Act of 1934, with respect to our common stock. Upon the effectiveness
of the registration statement (generally, 60 days after filing with the SEC),
we
will become subject to the reporting and information requirements of the
Securities Exchange Act of 1934, and, as a result, we will thereupon be required
to file periodic and current reports, and other information with the SEC. You
may read and copy this information at the Public Reference Room of the SEC
located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC
at
1-800-SEC-0330 for further information on the operation of the Public Reference
Room. Copies of all or any part of the registration statement may be obtained
from the SEC’s offices upon payment of fees prescribed by the SEC. The SEC
maintains an internet site that contains periodic and current reports, proxy
and
information statements, and other information regarding issuers that file
electronically with the SEC. The address of the SEC’s website is http://www.sec.gov.
Statements
contained in this prospectus as to the contents of any contract, agreement
or
other document to which we make reference are not necessarily complete. In
each
instance, we refer you to the copy of such contract, agreement or other document
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by the more complete description of the matter
involved.
37
SIGNATURES
Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934,
the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
