10-K 1 v207653_10k.htm Unassociated Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended October 31, 2010
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________________ to ___________________

Commission File Number 001-34106
 

 
WEBDIGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
11-3820796
(State of incorporation)
 
(I.R.S. Employer Identification No.)
     
3433 West Broadway St, NE, Suite 501
   
Minneapolis, MN
 
55413
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (888) 932-3447

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  Common stock, $.001 par value


 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   
o Yes   x No
     
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   
o Yes   x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
      x Yes   o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                                                                                                          o Yes   o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer  o    Accelerated filer  o    Non-accelerated filer  o    Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).
    o Yes   x No

The aggregate market value of the voting stock held by persons other than officers, directors and more than 5% stockholders of the registrant (non-affiliates) was approximately $759,000 as of the last day of the Company’s most recently completed second fiscal quarter of April 30, 2010 when the last reported sales price was $0.04 per share.  As of December 30, 2010, 33,396,719 shares of common stock were outstanding.



 
 
 
 
Webdigs, Inc.
Form 10-K
Table of Contents
 
     
Page
       
PART I
     
Item 1.
Business
  1
Item 1A.
Risk Factors
  7
Item 2.
Properties
  12
Item 3.
Legal Proceedings
  12
       
PART II
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  13
Item 6.
Selected Financial Data
  16
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  17
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
   
Item 8.
Financial Statements and Supplementary Data
  24
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  25
Item 9A.
Controls and Procedures
  25
Item 9B.
Other Information
  26
       
PART III
     
Item 10.
Directors, Executive Officers and Corporate Governance
  27
Item 11.
Executive Compensation
  28
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  30
Item 13.
Certain Relationships and Related Transactions, and Director Independence
  31
Item 14.
Principal Accountant Fees and Services
  31
       
PART IV
     
Item 15.
Exhibits and Financial Statement Schedules
  32
 
Signatures
  33
 
 
 

 

PART I
ITEM 1. BUSINESS

Overview of our Business and its History

We are a web-assisted real estate services company primarily focused on residential home buyers and sellers. We utilize the Internet, proprietary technology and efficient business processes to attempt to deliver significant savings to our home sellers and rewards to our home buyers over the traditional “full commission” real estate brokerage model.  We attempt to emphasize client service, when and as needed or requested by our clients, to separate us from other  real estate services and discount brokerage models; and we attempt to provide efficiency and cost savings that will differentiate us from traditional brokerage models.

We operate under three brands. Webdigs.com, our first brand, is our full-service discounted real estate brokerage.  Webdigs offers rebates to its customers of up to 1% of the sales price of the home they purchase through us and offers listing services below the price of traditional full-service brokerages as well.  We do not mandate that our Webdigs real estate agents charge a pre-determined price for listing a seller’s home, but believe that all of our agents offer listings to their customers for less than other traditional brokerages, who we believe most often charge 5-7% for listing services.

Our second brand, IggysHouse.com, which launched in January 2010, is a month-to-month listing service that allows home sellers to list their home on their local MLS through our licensed real estate broker partners (who, pursuant to the rules of the MLS, are the only parties eligible to submit listings on the MLS) and on IggysHouse.com for a flat fee of $49.95 per month, with various other ala carte services available for purchase.

Our third brand, theMLSDirect.com, offers a $299 fixed price six month MLS listing, utilizing our licensed real estate broker partners, to consumers not wishing to engage the services of a listing real estate agent.

Currently, we market to potential customers principally through internet ad campaigns, limited but highly targeted e-mail, and direct mail.  Our most consistent source of business, however, has been referrals from previous satisfied customers of our businesses.

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. We believe that 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.  According to the National Association of Realtors’ 2010 “Member Profile,” 74% of home buyers use the internet to search for a home.  This actually exceeds the 69% who use a realtor for their search.  Note: many buyers use both the internet and a realtor in their search.  In addition, home sellers can use the Internet to check home valuations, track the housing market and research comparable sales information.

The increased use of technology throughout the entire process of a typical residential real estate transaction is an important development in the real estate market.  For instance, electronic communication and electronic data storage permits a real estate brokerage to quickly reproduce standard real estate transaction documents, store such documents and store other important information about customers and properties, and communicate quickly with other parties involved in real estate transactions (e.g., title companies, insurers, surveyors, inspectors and governmental agencies), all of which permits increased efficiencies in the process of buying and selling a home. The technological changes and developments generally make it possible to effect a greater volume of transactions with less effort and expense.

 
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We believe the technological developments in the real estate market and the increased amount of information available to and used by ordinary consumers appear to be circumstances that are similar to those developments that eventually gave rise to the non-traditional stock brokerages which have intruded upon the market dominance of traditional stock brokerages over the past two decades.  For example, we note that the non-traditional stock brokerages developed their services and products to compete primarily on the bases of price, consumer effort and technology. Their websites, such as TD Ameritrade or e-Trade, provide not only trading capacity for the average consumer, but also a tremendous amount of information about companies. In this regard, we note that there has recently been a proliferation of various Internet-related real estate businesses that seek to provide either specific and limited services or information relating to residential real estate transactions (e.g., ForSaleByOwner.com, BuyOwner.com and Zillow.com).  Like the non-traditional stock brokerages, these businesses typically rely on consumer effort, technology and price as the bases for competition. This is the model Webdigs has based its business practices on.

Further affecting the real estate industry over the last 4+ years has been the highly publicized financial crisis and resulting “housing bubble”.  Nationally, according to Zillow, Inc. residential real estate prices peaked in June 2006 and have not yet rebounded.   In the city of Minneapolis, the average sale price for a single family home has dropped 24% in the three years since October 2007 from $260,701 to $197,381 in October 2010.   Seasonally adjusted 12 month home sales have dropped by 42% in the Twin Cities Northstar Multiple Listing Service in the six years from October 2004 to October 2010.  Over the past twelve months home sales have dropped by 21,200 on a seasonally adjusted annual basis.   This drop from 52,100 as of October 2009 to 30,900 in October 2010 results from the drop off from the bump the housing market received last year from the federal government’s home buyer tax credit.

Our Business Model, Products and Services

Services for Home Buyers

We provide home buyers with a number of services. Through our website at Webdigs.com, home buyers can search our database of MLS listings, view open house schedules, schedule home visits, make offers and monitor the offer and counteroffer process. Our licensed real estate agents assist buyers by preparing offers, counteroffers and other real estate documents, negotiating purchase contracts, setting up inspections, arranging for financing, and preparing for closings.  Our agents support the buyer at each step of this process, until the transaction has closed.

After a closing, we pay our clients their rebate check within 14 days for their portion of our buy-side commission. Our rebate payments are generally 1% of the sale price of the home.

Using a generally accepted industry average fee of 2.7% (our estimate using informal data collected by our agents in Minnesota and Florida) for buyer representation, any customer purchasing a home for a price exceeding $111,000 may benefit financially from using Webdigs.com as the brokerage.    After collecting our minimum $3,000 fee per transaction, our buyers receive a cash rebate check of up to 1% of the purchase price of the home they have acquired through us. We believe this gives buyers a financial incentive to use our services.

Since our inception in July 2007 and as of November 30, 2010, our Webdigs.com home buying clients have:

 
·
closed 235 purchases of properties, and

 
·
collectively received $819,000 in cash rebates for their purchases (an average of $3,489 per transaction)

Services for Home Sellers

In our Minnesota and Wisconsin markets, Webdigs.com offers our home sellers a full service listing, including a listing on the Northstar MLS, for a fee below the price of other full service brokerages.  At times, our agents will offer a full service listing for a commission as low as 4.5% of the final sale price at closing of which 1.7% is paid to Webdigs, and the standard 2.7% goes to the buyer’s brokerage.  This represents a 25% savings compared to the average real estate fee of 6% of sales price.  Assuming a sales price of $300,000, a Webdigs listing customer could save 1.5% of the sales price ($4,500) by using Webdigs as their listing brokerage. To ensure that our customers receive the same attention from non-Webdigs agents representing potential buyers of a home listed by Webdigs, we typically offer the standard 2.7% of sales price commission to non-Webdigs brokerages who represent buyers purchasing a home listed by Webdigs.  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 may arrange for 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.  We support these services with marketing and advertising campaigns designed to drive traffic to our website. As of November 30, 2010, our home selling clients have sold over 110 homes with us since inception.

 
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Our second brand is IggysHouse.com, which began operating in January 2010.   Iggys provides the value conscious consumer the ability to tightly control their expenditures and avoid the traditional percentage fee costs charged to sellers (based upon our observations the fee typically is 3.3% to seller + 2.7% for buyers brokerage = 6.0% total).    For a basic MLS listing, utilizing one of our licensed real estate broker partners, IggysHouse.com charges a flat fee of $149.95 for a three month listing, or $249.95 for a six month listing, which can be continued at the election of the consumer.    If the customer chooses, they may still offer the buyer’s agent a commission (usually 2.7%).    As noted above, IggysHouse.com offers a full menu of add-on services which a customer can choose to purchase on an ala carte basis.  These menu selections include yard signs, enhanced photo tours, favored listing placements on selected national realtor websites and additional options which provides more exposure to the seller’s home.

To date, IggysHouse.com has been a disappointment.  We still remain convinced that the seller controlled low cost MLS listing  model will continue to gain traction as time passes – the advancement of technology will continue to empower consumers to actively manage their own home selling process.  Over the near term, however, our own investment priorities will not afford us the opportunity to continue supporting an aggressive growth strategy for Iggys.  We have scaled back our marketing support for IggysHouse.com in our primary Minnesota, Wisconsin, and Florida markets.  Additionally, we have discontinued using the Iggys House website we purchased due to the higher operating costs. Instead, we have found a low cost internet provider to support the small Iggys House operations for now.   Results of our scaled back operating philosophy have been encouraging and we will continue to monitor Iggys House closely in the months ahead.

The financial struggles of IggysHouse.com forced us to record an impairment charge of $1,251,455 in our third quarter ended July 31, 2010.     The only remaining intangible asset relating to IggysHouse.com is the website and associated database.  We have re-valued these together at $100,000.   If we choose not to use this asset in the future, we believe it has some value potentially to another real estate company.

Our third brand for selling homes, utilizing our licensed real estate broker partners, is the MLSDirect.com The MLSDirect.com website fills a void between our Webdigs.com and IggysHouse.com listing programs.  It offers a flat fee MLS listing for prices starting as low as $299. Like IggysHouse.com, there is also a full menu of add-on services on the website that the customer can choose to purchase.  MLSDirect.com net revenue is still very low at only $20,262 for fiscal 2010.

Additional Services

We also work with preferred partners in the mortgage brokerage industry who help support marketing that is beneficial in helping to attract customers to Webdigs.

Our Strategy

Our long-term goal is to become the leader in comprehensive web-assisted real estate (brokerage) services for buyers and sellers of residential real estate in the United States and Canada. Initially, however, we are focused on pursuing the following broad strategic initiatives:

 
·
Focus on finding buyers and sellers for Webdigs.com. We have narrowed our marketing focus to lead generation.  We are engaged in marketing to find consumers who could potentially benefit from the services we offer.  Our own research indicates to us that our consumers have found the Webdigs.com product offering to their liking.  As indicated previously, we generate a large proportion of our revenue from referrals of previously satisfied customers.   Therefore, we are marketing specifically to individuals who are or will be in the market to buy or sell their homes in the very near future using internet advertising, targeted e-email and direct mail.
 
 
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·
Develop a larger agent base.  To grow, we will need more agents.    We believe that the positive consumer experience that Webdigs’ past customers report will assist in bringing additional real estate agents into our Company.    Furthermore, we further enhanced our compensation plan in the fourth quarter of the year ended October 31, 2010.   We believe that our compensation plan, along with a newly launched third party supported website, and a renewed focus on low cost methods of marketing directly to home buyers and sellers has increased our overall attractiveness to experienced agents substantially.  We are confident that we will be able to compete successfully with larger brokerages in the recruitment of top performing agents.

 
·
Attain profitability in our current markets. There are a number of Internet-based real estate brokerages presently attempting to capitalize on perceived market, demographic, trade/industry and economic changes. To our knowledge, none of these businesses have reached the sustained profitability needed to validate the discounted Internet-based real estate brokerage and real estate services models.  Therefore, we believe that an initial critical strategic goal is for Webdigs, Iggyshouse.com and The MLSDiect.com to attain overall profitability across our current markets in Minnesota, Wisconsin, and Florida. We believe that profitability—especially sustained profitability—will buoy consumer confidence in our services and lead to further successes.

If we can attain profitability, we believe that our business model, being predicated on greater efficiency and volume than the traditional models but with an emphasis on expertise and extensive client service, will facilitate our expansion into additional markets and the growth of our business.

Industry Segments

We currently operate in one primary operating segment: web-assisted real estate services (brokerage).

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 Edina Realty.  We compete with these brokerages primarily on price, service and the ease of use of our website interfaces. Although our commissions are generally lower than other brokerages, consumers may be attracted to traditional brokerages 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 Zip Realty, Inc., and Redfin Corporation, each of which 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 brokerages primarily on price, service and on the ease of use of our website interface. Our commissions are generally competitive with these non-traditional brokerages. For example, ZipRealty and Redfin respectively rebate approximately 20% and 50% of their commissions to home buyers.   We generally rebate up to 1% of the purchase price of the home (usually in the neighborhood of 35% of the commission we receive) with a minimum fee for Webdigs of $3,000.
 
 
4

 

IggysHouse.com competes with multiple flat fee discount real estate listing services across a broad spectrum of pricing models, such as ForSaleByOwner.com and BuyOwner.com. We compete with these discount service providers primarily on level of service. Although with Webdigs, we offer traditional services to our clients at a discounted price, highly self-motivated consumers may be attracted to IggysHouse.com or other discount listing services because they are less expensive than our Webdigs branded 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.

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.com website.  Move, Inc. is affiliated with the 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. Many of these currently limited competitors and future competitors have significantly more resources than we do.

Environmental Regulation

We are not subject to environmental regulations that have a material effect upon our capital expenditures or otherwise.

Other Regulation

We are subject to governmental regulation by federal, state and local regulatory authorities with respect to our real estate 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 brokerage to another brokerage. 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 brokerage 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.
 
 
5

 

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. Eight states have “minimum service laws” that require realtors to provide a level of service that purely web-assisted real estate businesses typically do not provide (Delaware, Florida, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee and Wisconsin). We presently operate in the State of Florida and we believe the services we offer to residential real estate consumers comply with Florida’s minimum service law because: (i) for our clients buying homes, we show them homes, draw up the related offer paperwork, negotiate the purchase, answer all questions, and close the purchase transaction; and (ii) for our clients selling homes, we help the seller price the home (through a competitive market analysis or otherwise), draw up the listing agreement, negotiate the sale, and coordinate a closing of the sale. Nevertheless, we have not obtained any independent or governmental opinion relating to our compliance with Florida minimum-service laws. Eleven states prohibit rebates of real estate commissions (Alabama, Alaska, Iowa, Kansas, Louisiana, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee).

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. In Minnesota, Wisconsin, 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.

In 2008, the United States Department of Justice agreed to settle claims it had brought against the National Association of Realtors relating to the ability to access MLS listings. The settlement decree addressed 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 potentially 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.

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 possess the rights to over 50 website domain names and numerous trademarks and tradenames.   Some of the most prominent include:

 
·
domain name rights to www.Webdigs.com
 
·
domain name rights to www.IggysHouse.com
 
 
6

 

 
·
domain name rights to www.buysiderealty.com
 
·
domain name rights to www.MLSDirect.com
 
·
trademark and trade name for “Webdigs”;
 
·
trademark and trade name for “IggysHouse.com”;
 
·
trademark and trade name for “buysiderealty.com”;
 
·
trademark and trade name for “theMLSdirect.com”;
 
·
trademark for: “The New Way to do Real Estate”

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 3 employees, all of whom are full-time and over 9 real estate agents that are contractors.

Corporate Structure and Information

Webdigs, Inc. operates through direct and indirect subsidiaries. The principal operating subsidiary is Webdigs, LLC, a Minnesota limited liability company and licensed real estate brokerage.

Our principal offices are located at 3433 Broadway Street NE, Suite 501, Minneapolis, Minnesota 55413, 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.

ITEM 1A. RISK FACTORS

An investment in our common stock involves significant 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 recently formed company with no history of profitability.

We began operations in July 2007 and to date have not generated a yearly profit.   In addition, annual revenues remain under $1 million and are not growing.   As a young 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 current general economic, real estate and credit market conditions.

We do not yet have a significant operating history which would provide you with meaningful information about our past or future operations.   The Company is developing plans to become cash flow positive on a monthly basis before the end of the current fiscal year ending October 31, 2011, however, there is significant risk associated with achievement of that goal including the ability of key executive officers to continue to work while receiving no cash salary.
 
 
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We will require additional financing in the future, but such financing may not be available to us.

We will require significant additional capital to continue 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.  Since August, 1, 2009 our Chairman and Chief Executive Officer has invested $100,000 as equity and has additionally loaned the Company $528,500.   We expect that we will need approximately $150,000 in additional financing prior to the end of October 2011 to cover salaries, contracted website maintenance and development and other basic working capital needs.    This amount is based on our assumption that our CEO and CFO will continue to work without receiving any form of cash compensation and that the vendors to whom we owe significant past due payables will continue to be patient with us.   There remains the risk however, that our Chairman and CEO may not be willing to continue funding our losses.

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 of our business. As a result, we would likely be forced to dramatically alter or cease operations.

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.  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.

There is substantial doubt about our ability to continue as a going concern.

We have had net losses attributed to common shareholders for the years ended October 31, 2010 and 2009 of $3,080,671 and $1,084,815 respectively. Furthermore, we had a working capital deficit as of October 31, 2010 of $1,575,521.  Since the financial statements were prepared assuming that we would continue as a going concern, these conditions coupled with our current liquidity position raise substantial doubt about our ability to continue as a going concern. Furthermore, since we are pursuing new business, this diminishes our ability to accurately forecast our revenues and expenses. We expect that our ability to continue as a going concern depends, in large part, on our ability to generate sufficient revenues, limit our expenses without sacrificing customer service, and obtain necessary financing. If we are unable to raise additional capital, we may be forced to discontinue our business.
 
 
8

 

We may be unable to obtain sufficient market acceptance of our services.

The market for residential real estate sales is well-established.  However, the market for non-traditional residential real estate sales is relatively new, developing and even more 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 at discounted rates. In this regard, the failure of purchasers and sellers of residential property to accept our model 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 approximately 67,318,392 shares representing beneficial ownership of approximately 72.4% of our common stock.  As a result, our directors and officers have or could 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.

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 website providers and licensed real estate brokers. Any disruption in access to the websites developed and hosted 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 website and connectivity operations, including, among other things, internet home search 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.

 
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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.

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 limited public market for our common stock.

We commenced trading on the OTC Bulletin Board  on December 19, 2008 and there are currently over 6 million shares registered and eligible for sale via the OTCQB (a market tier on the over-the-counter Pink Sheets market).  To date, however, our stock has been thinly traded with some days having no shares sold.   We cannot guarantee that a highly liquid market will exist in the near future.

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 web-assisted real estate businesses typically do not provide. Eleven states outrightly 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.

 
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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 brokerages 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 brokerages and agents.

In response to previous and ongoing efforts by discount web-assisted real estate companies, the National Association of Realtors, which represents real estate brokerages, has issued rules that attempt to block access of web-assisted real estate companies to the Multiple Listing System (MLS) and may adopt additional rules intended to reduce or eliminate competition from web-assisted (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 web-assisted 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.

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.
 
 
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Consumer access to mortgage financing has been affordable and widely available by historic standards and any tightening in the availability of credit will have the potential to negatively impact our operating results.

The affordability and availability of mortgage financing is influenced by a number of factors, including interest rates, lender underwriting criteria, loan product availability and the performance of mortgage backed securities in the secondary market.  While the federal government has supported programs to make loans easier to obtain in recent months, we believe that the mortgage market still remains tight despite these efforts and near record low interest rates.    Real estate transaction volume remains significantly below levels of the market’s peak in 2006.

We may be impacted by general 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.

In addition, unemployment remains at the high levels by historical standards.    There also remains an enormous inventory of unsold and vacant homes.  In the first quarter of 2010, the US Census Bureau reported there were 19 million vacant homes in the United States.

Failure to achieve and maintain effective internal controls could limit our ability to detect and prevent fraud and thereby adversely affect our business and stock price.

Effective internal controls are necessary for us to provide reliable financial reports. All internal control systems, no matter how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our most recent evaluation of our internal controls resulted in our conclusion that our disclosure controls and procedures were not effective due to a lack of segregation of duties in our accounting and financial functions, including financial reporting and our quarterly closing process. In our case, our failure to achieve and maintain an effective internal control environment could cause us to be unable to produce reliable financial reports or prevent fraud. This may cause investors to lose confidence in our reported financial information, which could in turn have a material adverse effect on our stock price.

Important Note: The foregoing risks are not a complete list of all risks that do or may affect the results of operation, financial condition or business prospects of Webdigs, but do represent management’s understanding and belief of the material risks associated with the Company, its business and any investment in securities of the Company. 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.

ITEM 2. PROPERTIES

We lease approximately 3,000 square feet of space at 3433 Broadway Street NE, Suite 501, Minneapolis, Minnesota 55413, on a month-to-month basis and at a per-month cost of approximately $3,500. The landlord for this office space is MoCo, Inc. which is a minority shareholder of the Company.  Other than our agreement respecting our month-to-month lease, we do not have any written agreements with MoCo, Inc.  At October 31, 2010, the Company owed MoCo $583,708, which sum relates both to rent and to prior services rendered by MoCo to the Company for website development and hosting pursuant to an unwritten agreement between the parties.  Presently, however, the Company no longer obtains any website-related services from MoCo.

We conduct our IggysHouse.com operations in a leased facility at 1121 East Commercial Boulevard, Suite 47, Oakland Park, Florida, under an operating lease on a month-to-month basis.  Monthly base rent expense for this lease is $300 per month.

ITEM 3. 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.
 
 
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PART  II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

General

Our common stock is listed on the OTCQB under the symbol WBDG.PK.  Our stock began trading under the symbol “WBDG” on December 19, 2008.  The following table shows our high and low closing prices of our common stock at the end of each quarter for the fiscal years 2010 and 2009.

   
Year Ended
 
   
October 31, 2010
   
October 31, 2009
 
   
High
   
Low
   
High
   
Low
 
First quarter
  $ 0.21     $ 0.07     $ 0.55     $ 0.10  
Second quarter
  $ 0.21     $ 0.04     $ 0.55     $ 0.10  
Third quarter
  $ 0.04     $ 0.01     $ 0.75     $ 0.10  
Fourth quarter
  $ 0.07     $ 0.01     $ 0.16     $ 0.09  

Our closing stock price on December 15, 2010 was $0.01.  As of the date of this filing, we had approximately 257 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

The table below sets forth certain information, as of the close of business on October 31, 2010, regarding equity compensation plans (including individual compensation arrangements) under which our securities were then authorized for issuance.

   
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
   
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
   
Number of Securities
Remaining Available for
Issuance Under Equity
Compensation Plans
(excluding securities reflected
in column a)
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by shareholders
    -       N/A       -  
                         
Restricted Stock Plan and Stock Option  equity compensation plans not approved by shareholders (1) (2)
    800,000     $ 0.25    
None
 
 

(1)
In May 2008, the Board of Directors approved the issuance of incentive stock options totaling 600,000 shares to three of its non-employee directors, expiring in May 2013. An additional 200,000 options were granted to a new director on October 31, 2009, expiring in October 2011.
(2)
See Note 11 of the financial statements for more information on restricted stock grants.
 
 
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Presently, we are not required by applicable state law or the listing standards of any self-regulatory agency (e.g., the OTCQB, NASD, AMEX or NYSE) to obtain the approval of our security holders 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.

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.

 
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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.

Transfer Agent and Registrar

Our transfer agent is Pacific Stock Transfer Company, located at 4045 South Spencer Street, Suite 403, Las Vegas, Nevada 89119. The transfer agent’s telephone number is (702) 361-3033. The transfer agent is registered under the Securities and Exchange Act of 1934.

Listing

Our common stock is currently traded on the OTCQB (a market tier on the over-the-counter Pink Sheets market) under the symbol WBDG.PK.

Sales of Unregistered Securities

In May 2010, we granted 100,000 shares of treasury stock to an employee as compensation.  The shares were valued at $4,000 ($0.04 per share).  We did not sell any shares nor did we issue any additional shares for the year ended October 31, 2010.

During the year ended October 31, 2009, we sold 3,136,091 shares (which include 909,091 of shares purchased via conversion of a portion of convertible note proceeds received from our CEO) in a series of private placements for aggregate proceeds of $435,500 at effective prices ranging between $0.10 and $0.40 per share.  We also issued additional shares as follows: 7,262,500 to acquire selected assets of Iggys House, Inc., 273,244 to vendors for services, 200,000 shares to Lantern Advisors, LLC as part of the cost to Webdigs of entering into a promissory note agreement, 100,000 to acquire assets of the MLSDirect.com, 157,143 to officers of the company in lieu of cash compensation, 50,000 shares to a new employee as an incentive to join our company , and 150,000 shares to Webdigs’ CEO as compensation to him for the personal guarantee he offered to Lantern Advisors, LLC to repay the $250,000 convertible promissory note.  In total, we issued 11,328,978 new shares during the 12 months ended October 31, 2009.   In summary:

Private placements
 
·
In September 2009, Webdigs’ CEO converted $100,000 in principal of a convertible note he had with the Company to 909,091 shares ($0.11 per share).

 
·
In June 2009, in connection with the Iggys House asset purchase, the Company sold 375,000 shares of stock to 11 accredited investors for $150,000 ($0.40 per share).  In addition, 2.2 million shares of Webdigs stock received by Iggys House in the acquisition were transferred by Iggys House to these same investors, thereby effectively reducing their net purchase price per share to $.125.  Included in the 375,000 shares are purchases from the Company’s Chairman and CEO of 43,750 shares and an outside director of an additional 43,750 shares.

 
·
During May-July 2009, four accredited investors purchased an aggregate of 1,850,000 shares of stock for $185,000 ($0.10 per share).

 
·
In January 2009, one accredited investor acquired 2,000 shares for $500 ($0.25 per share).

Vendor Services
 
·
In October 2009, we issued 44,444 shares to a vendor for services.   The 44,444 shares satisfied a $4,889 payable ($0.11 per share) to the vendor.
 
 
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·
In January 2009, we issued 200,000 shares (100,000 each) to two separate vendors for consulting services.  The 200,000 shares were valued at $0.40 per share ($80,000 total) based upon the trading price of the Company’s shares at the time of issuance.

 
·
In November 2008, we issued 28,800 shares to a vendor for services.   The 28,800 shares satisfied a $7,000 contracted fee we owed the vendor ($0.24 per share).

Acquisition of Assets of  Iggys House
 
·
In June 2009, the Company issued 7,102,500 shares to Iggys House Inc. for the acquisition of all of its assets for a value of $1,775,625 ($0.25 per share). The Company also issued 160,000 shares to a registered placement agent for services provided in connection with the Iggys House asset acquisition for a value of $40,000 ($0.25 per share).

Promissory Note
 
·
In December 2008, we issued 200,000 shares to Lantern Advisors, LLC as part of the promissory note agreement we signed with them.   The 200,000 shares were assigned a value of $20,000 ($0.10 per share).

Acquisition of the MLSDirect.com
 
·
In May 2009, the Company issued 100,000 shares to an accredited investor at a value of $47,000 ($0.47 per share).  These shares were issued in connection with the acquisition of theMLSDirect.com.

Shares in Lieu of Cash Compensation
 
·
In May 2009, the Company’s CEO converted $50,000 of his accrued but unpaid compensation owed to him by the Company into shares at a per-share price of $0.35, receiving 142,857 shares. The Company’s CFO also converted $5,000 of his accrued but unpaid compensation into shares at the same price, receiving 14,286 shares.

Employee Award
 
·
In June 2009, the Company issued 50,000 shares to an employee of the Company at a value of $12,500 or $0.25 per share.

CEO Compensation
 
·
In September 2009, the Company’s CEO was granted 150,000 shares at a per share price of $0.11 in consideration (treated as compensation) for the personal guarantee he provided for Webdigs for the $250,000 convertible/promissory note agreement the Company entered into on December 12, 2008.

For these issuances of common stock, we relied on the exemption from federal registration under Section 4(2) of the Securities Act of 1933 and, in those instances where the issuances were made to affiliates or accredited investors, upon Rule 506 promulgated thereunder. In that regard, we relied on Rule 506 based on the fact that the investors who purchased these securities qualified as an “accredited investors” under Rule 501 of the Securities Act of 1933.  In all cases, investors had knowledge and experience in financial and business matters such that they were capable of evaluating the risks of the investment. The securities offered and sold in the transactions were not 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.

ITEM 6.  SELECTED FINANCIAL DATA

As a smaller reporting company, we are not required to provide the information required by this item.

 
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ITEM 7. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited consolidated financial statements and related notes that appear elsewhere in this filing.

Cautionary Note Regarding Forward-Looking Statements

Some of the statements made in this section of our report are forward-looking statements. These forward-looking statements generally relate to and are based upon our current plans, expectations, assumptions and projections about future events. Our management currently believes that the various plans, expectations, and assumptions reflected in or suggested by these forward-looking statements are reasonable. Nevertheless, all forward-looking statements involve risks and uncertainties and our actual future results may be materially different from the plans, objectives or expectations, or our assumptions and projections underlying our present plans, objectives and expectations, which are expressed in this section.

In light of the foregoing, prospective investors are cautioned that the forward-looking statements included in this filing may ultimately prove to be inaccurate—even materially inaccurate. Because of the significant uncertainties inherent in such forward-looking statements, the inclusion of such information should not be regarded as a representation or warranty by Webdigs, Inc. or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. The risks discussed in the Item 1A of this filing should be considered in evaluating our prospects and future performance.

General Overview

General Overview

Our business as a web-assisted real estate services company has been operational for slightly greater than three years.  We launched our services for buyers and sellers via Webdigs in October 2007.  In May, 2009, we added our second brand – The MLSDirect.com.  In January 2010, we added a third brand to our portfolio via the launch of IggysHouse.com.  Despite the introduction of Iggyshouse.com and the presence of theMLSDirect.com for a full fiscal year, for the year ended October 31, 2010, over 94% of our real estate revenue was produced by our Webdigs brand in our Minnesota and Florida markets.

Unfortunately, our January 2010 re-launch of Iggys has not proven to be as successful as we had expected.  We re-launched Iggys full of optimism in the future as the “pay as you go” real estate service for sellers who want to have their home listed on a local real estate Multiple Listing Service for a minimal monthly fee.  Our confidence caused us to invest a significant sum in our IggysHouse.com business.  However, in the first seven months of operation, from January 2010 through July 2010, Iggyshouse.com generated $2,026 in total revenue.  Without funding specifically designated for Iggyshouse.com, the prospects for the brand reaching a breakeven point seem dim.  As a result of Iggy’s performance, we took a $1,262,705 impairment charge in July 2010 to adjust the intangible assets to fair market value as defined by Generally Accepted Accounting Principles (GAAP).  We determined that the net realizable value of the Iggys assets as of July 31, 2010 was $100,000, which sum was attributable to the Iggyshouse.com website technology.  Due to the significant costs in operating this website, the Company has for the immediate future chosen to discontinue using the website.  Instead, we are using a low-cost third-party hosted website to support the operations we currently have with the Iggys House operations.  We are currently reassessing our strategic alternatives with this business.

Significant Trends and Uncertainties

Our core Webdigs business plateaued in the year ended October 31, 2010.  We recorded $441,944 in net sales from business generated under our www.webdigs.com real estate brand in the 12 months ended October 31, 2010.  This represents a 12% drop from the $501,995 revenue we enjoyed in our fiscal year ended October 31, 2009.  While this decline is significant, data provided by the Northstar MLS, the Twin Cities multiple listing service, indicates that the overall number of real estate closings in the Twin Cities, our largest market, dropped by over 17% during the same 12-month period.  This suggests to us that our experience was generally consistent in comparison with the general market.
 
 
17

 
 
We believe that our year-over-year revenue will grow in our current fiscal year thanks to an improved agent compensation plan, and a full offering of personalized websites for our agents.  With renewed efforts towards agent recruitment, we look to 2011 with excitement and anticipation.  These growth efforts will require additional funding of at least $150,000, subject to our ability to maintain the support of key executives and patient vendors in limiting amounts payable to them.  Our CEO and CFO have both indicated a willingness to continue to forgo cash compensation for the time being.  Fortunately, certain vendors to whom we owe large sums of money have also been allowing us to pursue growth without insisting on current payment.

Results of Operation

The following information should be read in conjunction with the audited financial statements and notes thereto appearing elsewhere in this Annual Report.

From October 31, 2009 to October 31, 2010:

Selected financial information about our operations for the fiscal years ended October 31, 2010 and 2009:

               
Change
 
   
2010
   
2009
   
2010 vs. 2009
 
                   
Net revenues
  $ 468,152     $ 503,777       -7 %
Selling general and administrative expenses
    888,102       1,298,223       -32 %
Amortization
    755,012       193,010       291 %
Impairment charge against intangible assets
    1,262,705       -       -  
Operating loss
    (2,437,667 )     (987,456 )     147 %
Equity in income (loss) from MHMW
    -       13,279       -100 %
Interest expense
    (643,004 )     (332,139 )     94 %
Depreciation
    20,986       17,172       22 %
Loss on change in fair value of derivatives and warrants
    -       (63,708 )     -100 %
Income from discontinued operations
    -       284,409       -100 %
Total assets
    137,074       2,200,524       -94 %
Capital expenditures
    21,760       187,085       -88 %

Consolidated net revenues for the year ended October 31, 2010 totaled $468,152, representing a 7% decrease over the $503,777 in net revenues for the year ended October 31, 2009.   During fiscal 2010, we closed 104 transactions in representation of 63 buyers and 41 transactions representing sellers, in comparison to having closed 131 transactions during the fiscal year ended October 31, 2009.   Looked at on a percentage basis, our net real estate brokerage transactions decreased by 21% for the fiscal year ended October 31, 2009.   However, our revenue per transaction went up due to revised pricing policies (lower cash rebates per transaction and higher fees charged for a full service listing). As noted above, we remain satisfied with our performance relative to the market especially in light of our 32% decrease in selling, general and administrative spending.

We incurred total selling general and administrative expenses for fiscal 2010 of $888,102 compared to $1,298,223 for fiscal 2009, a 32% year-to-year decrease.
 
 
18

 

Selling expenses consisted of advertising and promotion, information technology, selling-related compensation expense, depreciation expense, and other general selling expenses, all of which aggregated to $429,984 for fiscal 2010 compared to $666,025 for fiscal 2009, a 35% decrease.  Fiscal year 2010 marked a continuation of a turnaround in our marketing focus which we began in the year ended October 31, 2009.   We further moved away from broad advertising expenses such as billboards, print and TV advertising, and focused on targeted marketing to consumers who are likely to buy or sell their home in the near future.  Our main vehicle for reaching our target customer was via the use of internet “adword” marketing.  We cut advertising and promotion spending from $88,311 in the year ended October 31, 2009 to $20,638 for year ended October 31, 2010.  The other critical reductions in achieving the $236,041 selling expense decrease were wages and salaries (down $157,561 to $28,300), office supplies and other selling expenses (down $46,679 to $29,263) with smaller reductions in IT support and maintenance ($10,082) and travel ($5,036).  The large $157,561 decrease in wages and salaries comes from the elimination of our only two full-time salaried sales and marketing positions and the effects of moving our other sales team to a performance-based commission pay structure in April 2009.  In the current fiscal year, there were no salary expenses for our real estate agents.  Finally, we also now fully classify 100% of our CEO’s compensation as general and administrative expense.  In fiscal 2009, 60% of his compensation ($6,000 accrued per month) was classified as selling expense.   It became clear to us in the year ended October 31, 2010 that our CEO and Chairman was fully engaged as CEO directing the entire day to day operation and setting  strategy for us.  Originally, he had expected to have some time to participate directly in some sales and sales management activities.   Our decision to classify 100% of his compensation as general and administrative expense is based upon these facts.    We achieved the $46,679 in office expense reductions from drastic cuts to unneeded real estate software subscriptions ($19,474) and extra discounts totaling $13,582 on payables due  from selected vendors received in the year ended October 31, 2010 for purchases made in the fiscal year ended October 31, 2008 or October 31, 2007.

Offsetting expense reductions in selling expense were small increases of $30,728 in sales commissions and $16,283 in consulting expense.  The sales commission increases results from the fact that two of the founders of the Company, who received a fixed salary for the first six months of our prior fiscal year ended October 31, 2009 were paid sales commissions for the full fiscal year ended October 31, 2010.   The $16,283 increase in consulting fees results from incurring a full 12 months consulting fee for the contractor who runs our MLSDirect.com business for $2,500 per month.  In the prior fiscal year, he received this fee for only six months (due to the acquisition occurring in May 2009 – midway through our fiscal year).

We incurred $458,118 in general and administrative (G&A) expenses for the year ended October 31, 2010 compared to $632,198 for the year ended October 31, 2009, representing a $174,080 period-to-period decrease.  By far the biggest factor in the 28% year over year G&A expense decrease was a reduction in non-cash share based compensation expense of $193,117.  In prior years, we had been accruing expense for restricted share grants made to our company’s founders in October 2007 and our May 2008 award of stock options to our non-employee directors.  The restricted share grant cost accruals for these founder grants finished in the prior year and the director option grants produced only $8,763 expense in our most recent fiscal year ended October 31, 2010.  Supporting our cut in non-cash share based compensation costs were reductions in other professional fees of $98,589, audit fees of $13,398, legal fees of $10,855.  The big element driving the $98,589 decrease in other professional fees was a $95,000 expense reduction due to the fact that in the prior fiscal year our grant of restricted shares to investor relations professionals resulted in a charge to income.  In the fiscal year ended October 31, 2010, we incurred no such expenses.

The decreases in G&A expense were partially offset by an increase of $148,754 in wage and salary expense.  Of the $148,754 increase, over $84,000 comes from the switch previously mentioned to record 100% of our CEO’s monthly compensation as G&A expense.  In addition, we employed a full-time degreed accountant for the entire fiscal year ended October 31, 2010, compared to only three months last year.  No other significant changes in G&A spending occurred in the year ended October 31, 2010.

Amortization expense from continuing operations was $755,012 for the year ended October 31, 2010 compared to $193,010 for fiscal 2009.  Amortization expense increased due primarily to the fact that we placed in service all of ssthe different intangible assets acquired in the Iggyshouse.com (Iggys House, Inc.) purchase in June 2009 during January 2010.   The only significant amortization that occurred in fiscal 2009 was related to the  www.webdigs.com website.

As noted above, due to slow sales and difficulties in starting the new IggysHouse.com revenue model in January 2010, we took a $1,262,705 impairment charge for the intangible assets related to the June 2009 Iggys House purchase in the year ended October 31, 2010.
 
 
19

 

For the year ended October 31, 2010, we recorded interest expense of $643,004.    For the fiscal year ended October 31, 2009, we incurred only $332,139 of interest expense.  In a large part, the interest expense reflects the cost of borrowing $528,500 from our CEO.  For the year ended October 31, 2010 interest expense included a non-cash beneficial conversion feature amounting to $580,424 as a result of a conversion modification of our convertible note payable to our CEO.  For the year ended October 31, 2010 interest expense included a non-cash beneficial conversion feature amounting to $580,424 as a result of a conversion modification of our convertible note payable to the CEO.  Of the remaining $62,580 expense, $50,508 was accrued interest for the convertible note with our CEO.   The other $12,072 was vendor interest charges.  For fiscal 2009, approximately $311,000 of the $332,139 total resulted from a convertible promissory note we had issued to Lantern Advisers, LLC.  The remainder of last year’s interest costs, not related to the Lantern promissory note, came from interest on officer loans, capital lease, and vendor interest charges.

In addition to the above-mentioned interest costs related to the convertible promissory note issued to Lantern Advisors, LLC, in fiscal 2009 we also recorded a loss on the change in fair value of derivatives and warrants related to the convertible debt of $63,708.  There were no such charges in fiscal 2010 because the Lantern promissory note was paid off prior to October 31, 2009.

For the year ended October 31, 2009, we also recorded income of $13,279 from our discontinued joint venture Marketplace Home Mortgage – Webdigs, LLC.  This investment was discontinued as of October 26, 2009.

Again for the year ended October 31, 2009, we recorded a gain of $297,412 on the sale of our Marquest Financial, Inc., mortgage subsidiary which was partially offset by operating expenses of $13,003.  In total, we recorded income from discontinued operations of $284,409 for our prior fiscal year.

Assets and Employees; Research and Development

We do not anticipate purchasing any significant equipment or other assets in the near term nor do we anticipate staffing changes at our corporate office.  As stated previously, we are looking at potential strategic alternatives for the Iggyshouse.com assets.  We do expect to add more non-employee independent real estate agents to represent our www.webdigs.com brands in the year ahead.  We plan no investments in internally developed website technology.

Liquidity and Capital Resources; Anticipated Financing Needs

For the year ended October 31, 2010, we incurred an operating loss from continuing operations of $2,437,667.  These losses funded cash expenses such as marketing and advertising, business development and sales agent commission in addition to significant non-cash amortization and asset impairment charges as discussed above.  For the year ended October 31, 2009, our operating losses from continuing operations were $987,456.  In the most recent year ended October 31, 2010, we funded operating losses primarily through cash of $355,500 received from a convertible note from our CEO.  In the prior year ended October 31, 2009, operating losses were funded through $335,500 in sales of our Webdigs common stock through private placements, cash proceeds of $226,000 through the issuance of convertible debentures, and $273,000 from a loan from our Chairman and CEO.  As of October 31, 2010, we had $5,236 of cash and cash equivalents, and current liabilities of $1,595,617.

On an aggregate level, cash used in operations was $343,345 for the year ended October 31, 2010 and $431,758 for the same period last year.  Offsetting the operating loss for the year ended October 31, 2010 were various non-cash expenses for depreciation, amortization, beneficial conversion feature charges, impairment charges and share-based compensation.  For the year ended October 31, 2010, these non-cash items totaled $2,635,015.  For the year ended October 31, 2010, we were able to make progress on reducing balances owed to key vendors, thereby using $143,709 of cash for a reduction in accounts payable.  In the prior year ended October 31, 2009, we used $71,780 in cash to reduce accounts payable.  As we continued to conserve cash, our CEO and CFO have accepted to defer the cash element of their payroll.  This resulted in an increase in accrued expenses of $161,219.    We also have agreed with our CEO to accrue the monthly interest on his convertible note with the Company.  This loan, for which we accrued $50,508 in interest for the year ended October 31, 2010, is the main factor behind the increase in cash flow from other liabilities of $48,231.

 
20

 
 
Cash outflows from investing activities were $21,760 in the year ended October 31, 2010 compared to $182,025 for the same period last year.  Our only investments in the year ended October 31, 2010 was third party contracted software development for our IggysHouse.com website.  For the year ended October 31, 2009, our major investments were payments of $160,005 in connection with the purchase of Iggys House Inc. intangible assets and $22,080 used for web development of the IggysHouse.com website.    We also used $5,000 for the business acquisition of the MLSDirect.com.   In the prior year, we also received proceeds of $5,064 from the dissolution of the Marketplace Home Mortgage – Webdigs joint venture.

Financing activities provided $334,318 and $612,000 for the years ended October 31, 2010 and 2009, respectively. For the current fiscal year ended October 31, 2010, we generated $355,500 in loan proceeds from our CEO.  We also were able to reduce balances due to our officers by $16,986.   In the prior fiscal year ended October 31, 2009, we generated $335,500 from common stock issuances and $226,000 from a promissory note we issued in December 2008.  Our CEO convertible note provided $273,000 in cash during the fiscal year ended October 31, 2009.  A substantial portion of the CEO loan proceeds were used to repay $250,000 on the 2008 promissory note.

Given our low cash position, our near term focus in fiscal 2011 continues to be to create positive operating cash flow from our web-assisted real estate brokerage (our Webdigs brand).  We strive in the current year to add revenues while holding expenses relatively flat.  We believe that our new agent friendly compensation plan, and enhanced website tools for our agents will help produce more revenue without extensive outlays of cash.  We also have moved from operating with internally developed websites to sites that are developed and hosted by third parties.  We expect this change will have a significantly positive effect on our expenses without compromising our technology and customer service.  We believe that we will be able to fund operations for the current fiscal with minimal cash infusions.  We are working hard to put plans in place to generate positive operating cash flow on a monthly basis prior to the end of our current fiscal year ending October 31, 2011, and believe that we will need at least $120,000 (in addition to the $30,000 we obtained in November 2010 through the issuance of a convertible note) of additional financing to allow us to complete the current year with sufficient operating capital.

Certain vendors have been inquiring about when to expect past due payments in the past 12 months.   The cash requirements mentioned above assumes that these vendors will continue to work with us patiently to allow our business to operate until we generate sufficient cash to settle past balances.  In most cases, we do not have an express agreement with vendors on the exact timing of expected payment of past due invoices.  Therefore, it is possible that a vendor may demand payment or refuse to provide services that are critical to the ability of the Company to either continue to operate or to timely file required reports with the SEC.  If any such risk materializes, it would possibly decrease our likelihood of obtaining financing on terms acceptable to us, if at all.  In addition, if we fail to reach sales revenue objectives (for any reason, including due to continued poor real estate and credit market conditions beyond our control), additional financing may not be available on terms favorable to us, if at all.

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.  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.

Given the financing needs of the Company’s business, as conducted under its three separate brands, the Company is actively reviewing possible strategic alternatives for some or all of its brands with a view to (i) presenting a clearer business and financial picture to potential financiers, thereby increasing the likelihood of obtaining financing, (ii) diminishing the chance of liabilities of one brand adversely affecting another, and, ultimately, (iii) providing increased shareholder value.
 
 
21

 

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.   Our significant estimates are determining some of the inputs for our stock option fair value calculation and assessing the valuation allowance for income taxes.

We consider the following accounting policies to be those most important to the portrayal of our results of operations and financial condition:

Revenue Recognition.  Real estate brokerage revenues are recognized at the closing of a real estate transaction.  Commissions and rebates due to third party real estate agents or clients are accrued at the time of closing and treated as an offset to gross revenues.

Income Taxes. The Company accounts for income taxes using 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 valuation allowance for its net deferred tax assets as of October 31, 2010 and 2009 because realization of those assets is not reasonably assured.

The Company will recognize 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.

The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves, or related accruals for interest and penalties has been recorded at October 31, 2010 and 2009.

Share-Based Compensation. The Company accounts for stock incentive plans by 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 years ended October 31, 2010 and 2009 includes compensation cost for restricted stock awards and stock options.  The Company uses the Black-Scholes option-pricing model to determine the fair value of options granted as of the grant date.

Intangible Assets.  We have two types of intangible assets:

Website Development
The primary interface with the customer in our web-assisted real estate brokerage operation is the Webdigs.com website.  Certain costs incurred in development of this website have been capitalized.  Amortization is on a straight-line method over the estimated three year useful life of the website.  As of October 31, 2010, the Company’s principal www.webdigs.com website has been fully amortized and the Iggyshouse.com website technology, which is not currently being used, is being held at an estimated fair value of $100,000 with no monthly amortization.

Website Domain Names
The Company capitalizes the fair value of website domain names acquired through business combinations or asset acquisitions.  The Company purchased 17 domain names in 17 states in May 2009 from theMLSDirect.com and are amortizing these names over a 2 year estimated useful life.

 
22

 

The Company reviews the carrying values of its intangible asset whenever facts and circumstances indicate the assets may be impaired. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment is measured by the amount by which the carrying amount the asset exceeds the fair value.

Commissions and Fees Receivable.  Real estate commissions and fees receivable are recorded at the amount the Company expects to collect from real estate transactions closed.  These receivables represent brokerage commission balances due the Company from clients or listing real estate brokerages and usually are settled within 1 to 10 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 transaction 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 receivables.  Historically, the Company has not experienced significant losses related to receivables from individual customers.  At October 31, 2010 and 2009, the Company considers its accounts receivable to be fully collectible and therefore, has not recorded an allowance for doubtful accounts.

Office Equipment and Fixtures.  Office equipment and fixtures are recorded at cost.  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.

Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets as follows:

Office equipment
2 to 5 years
Furniture and fixtures
3 to 7 years

Segment Information
The Company operates and manages the business under one reporting segment.

Recently Issued Accounting Pronouncements
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  ASU 2010-06 provides additional disclosure requirements related to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Disclosure requirements applicable to Level 3 transactions are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years, with early adoption permitted.  The portion of ASU 2010-06 that was effective beginning after December 15, 2009 did not have a material effect on the financial position, results of operations or cash flows of the Company. Additionally, the Company does not anticipate that the disclosure requirements applicable to Level 3 transactions that are effective for fiscal years beginning after December 15, 2010 will have a material effect on the financial position, results of operations or cash flows of the Company.

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.    A typical real estate transaction has a 30 day lag between contract signing and closing of the transaction.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

 
23

 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
WEBDIGS, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED OCTOBER 31, 2010 and 2009
 
 
24

 

WEBDIGS, INC.

TABLE OF CONTENTS

 
PAGE
   
Report of Independent Registered Public Accounting Firm
F-1
   
Consolidated Financial Statements:
 
   
Consolidated Balance Sheets
F-2
   
Consolidated Statements of Operations
F-4
   
Consolidated Statements of Stockholders’ Equity (Deficit)
F-5
   
Consolidated Statements of Cash Flows
F-6
   
Notes to Consolidated Financial Statements
F-8
 
 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee, Stockholders and Board of Directors
Webdigs, Inc.
Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheets of Webdigs, Inc. as of October 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Webdigs, Inc. as of October 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered losses from operations since its inception on May 1, 2007. This factor 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Moquist Thorvilson Kaufmann Kennedy & Pieper LLC

Edina, Minnesota
January 7, 2011

 
F-1

 

WEBDIGS, INC.
 

CONSOLIDATED BALANCE SHEETS

   
October 31,
 
   
2010
   
2009
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 5,236     $ 36,023  
Commissions and fees receivable
    4,669       9,449  
Prepaid expenses and deposits
    4,608       10,847  
Other current assets
    5,583       10,284  
                 
Total current assets
    20,096       66,603  
                 
Office equipment and fixtures, net
    9,692       30,678  
                 
Intangible assets, net
    107,286       2,103,243  
                 
Total assets
  $ 137,074     $ 2,200,524  

The accompanying notes are an integral part of these consolidated financial statements.

 
F-2

 

WEBDIGS, INC.
 

CONSOLIDATED BALANCE SHEETS (continued)

   
October 31,
 
   
2010
   
2009
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
           
             
Current liabilities:
           
Current portion of capital lease obligations
  $ 4,603     $ 4,197  
Accounts payable
    115,355       259,064  
Accounts payable - minority stockholder
    583,708       562,858  
Due to officers
    8,345       25,331  
Convertible notes payable to officer/stockholder
    528,500       173,000  
Accrued expenses:
               
Professional fees
    23,500       39,000  
Payroll and commissions
    263,201       86,482  
Other liabilities
    68,405       20,174  
                 
Total current liabilities
    1,595,617       1,170,106  
                 
Long term liabilities:
               
Capital lease obligation, less current portion
    1,631       6,233  
                 
Total liabilities
    1,597,248       1,176,339  
                 
Stockholders' equity (deficit):
               
Common stock - $.001 par value; 125,000,000 shares authorized as common
               
stock and an additional 125,000,000 shares designated as common or
               
preferred stock; 33,396,719 common shares issued and
               
outstanding at October 31, 2010 and 2009
    33,397       33,397  
Treasury stock - $.001 par value: 963,628 and 1,063,628 shares held in
               
treasury as of October 31, 2010 and 2009, respectively
    (240,907 )     (265,907 )
Additional paid-in capital
    5,626,770       5,034,458  
Accumulated deficit
    (6,879,434 )     (3,777,763 )
                 
Total stockholders' equity (deficit)
    (1,460,174 )     1,024,185  
                 
Total liabilities and stockholders' equity (deficit)
  $ 137,074     $ 2,200,524  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-3

 

WEBDIGS, INC.
 

CONSOLIDATED STATEMENTS OF OPERATIONS

   
Years Ended
 
   
October 31,
 
   
2010
   
2009
 
             
Revenue:
           
Gross revenues
  $ 728,813     $ 863,505  
Less: customer rebates and third-party agent commissions
    (260,661 )     (359,728 )
                 
Net revenues
    468,152       503,777  
                 
Operating expenses:
               
Selling
    429,984       666,025  
General and administrative
    458,118       632,198  
Amortization of intangible assets
    755,012       193,010  
Impairment charge against intangible assets
    1,262,705       -  
                 
Total operating expenses
    2,905,819       1,491,233  
                 
Operating loss from continuing operations
    (2,437,667 )     (987,456 )
                 
Other income (expense):
               
Equity in income from Marketplace Home Mortgage - Webdigs, LLC
    -       13,279  
Interest expense
    (643,004 )     (332,139 )
Loss on change in fair value of derivatives and warrants
    -       (63,708 )
Other income
    -       800  
                 
Total other expense
    (643,004 )     (381,768 )
                 
Loss from continuing operations before income taxes
    (3,080,671 )     (1,369,224 )
                 
Income tax provision
    -       -  
                 
Net loss from continuing operations
    (3,080,671 )     (1,369,224 )
                 
Income from discontinued operations of Marquest Financial, Inc.
               
net of applicable taxes of zero
    -       284,409  
                 
Net loss
  $ (3,080,671 )   $ (1,084,815 )
                 
Net loss per common share - basic and diluted:
               
Loss from continuing operations
    (0.09 )     (0.05 )
Income from discontinued operations
    -       0.01  
Net loss
  $ (0.09 )   $ (0.04 )
                 
Weighted average common shares outstanding - basic and diluted
    33,396,719       26,584,547  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4

 
 
WEBDIGS, INC.
 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended October 31, 2010 and 2009
 
                                 
Total
 
   
Common Stock
         
Additional
         
Stockholders'
 
   
Shares
   
Amount
   
Treasury
Stock
   
Paid-in
Capital
   
Accumulated
Deficit
   
Equity
(Deficit)
 
                                     
Balances, October 31, 2008
    22,308,711     $ 22,309       -     $ 2,002,226     $ (2,692,948 )   $ (668,413 )
                                                 
Directors stock option compensation
    -       -       -       25,738       -       25,738  
Common stock issued for services
    273,244       273       -       91,616       -       91,889  
Restricted shares issued as part of convertible promissory note with Lantern Advisors, LLC
    200,000       200       -       19,800       -       20,000  
Warrants issued as part of the amendment and extension of the convertible promissory note with Lantern Advisors
    -       -       -       138,010       -       138,010  
Conversion of derivative and warrant liability to additional paid in capital due to the amendment of the convertible promissory note with Lantern Advisors
    -       -       -       191,291       -       191,291  
Shares transferred from minority shareholder to consultant for services
    -       -       -       40,000       -       40,000  
Shares issued in private placement offerings
    2,227,000       2,227       -       333,273       -       335,500  
Partial conversion of note payable to officer/stockholder
    909,091       909       -       99,091       -       100,000  
Webdigs' common stock (1,063,628 shares) received in connection with the Marquest Financial, Inc. disposition
    -       -       (265,907 )     -       -       (265,907 )
Shares issued to acquire Iggys House assets, (including 160,000 shares issued to Northland Securities for services in connection with the acquisition)
    7,262,500       7,263       -       1,808,362       -       1,815,625  
Shares issued to acquire theMLSDirect.com
    100,000       100       -       46,900       -       47,000  
Shares issued to officers (CEO and CFO) for accrued salary
    157,143       157       -       54,843       -       55,000  
Restricted shares issued to employee in lieu of cash compensation
    50,000       50       -       12,450       -       12,500  
Restricted shares issued to CEO as compensation for his personal guarantee of convertible promissory note
    150,000       150       -       16,350       -       16,500  
Compensation related to vesting of restricted common stock awards, net of forfeitures
    (240,970 )     (241 )     -       154,508       -       154,267  
Net loss
    -       -               -       (1,084,815 )     (1,084,815 )
Balances, October 31, 2009
    33,396,719       33,397       (265,907 )     5,034,458       (3,777,763 )     1,024,185  
                                                 
Directors stock option compensation
    -       -       -       8,763       -       8,763  
Compensation related to vesting of restricted common stock awards, net of forfeitures
    -       -       -       3,125       -       3,125  
Treasury shares issued to employee as compensation
    -       -       25,000               (21,000 )     4,000  
Beneficial conversion charge related to a modification of the convertible notes payable to officer/stockholder
    -       -       -       580,424       -       580,424  
Net loss
    -       -       -       -       (3,080,671 )     (3,080,671 )
Balances, October 31, 2010
    33,396,719     $ 33,397     $ (240,907 )   $ 5,626,770     $ (6,879,434 )   $ (1,460,174 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 

WEBDIGS, INC.
 

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Years Ended
 
   
October 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net loss
  $ (3,080,671 )   $ (1,084,815 )
Adjustments to reconcile net loss to net cash flows used in operating activities:
               
Depreciation
    20,986       17,172  
Stock warrant expense to debt holders for agreement modification
    -       138,010  
Amortization of intangible assets
    755,012       219,544  
Amortization of convertible note payable discounts
    -       147,583  
Amortization of debt issuance costs
    -       4,000  
Impairment charge against intangible assets
    1,262,705       -  
Beneficial conversion charge due to debt modification
    580,424       -  
Loss on change in fair value of derivatives and warrants
    -       63,708  
Equity in the income of Marketplace Home Mortgage - Webdigs, LLC
    -       (13,279 )
Share-based compensation
    15,888       209,005  
Gain on sale of subsidiary
    -       (297,412 )
Common stock issued for services
    -       11,889  
Changes in operating assets and liabilities:
               
Commissions and fees receivable
    4,780       3,018  
Prepaid expenses and deposits
    6,239       123,164  
Other current assets
    4,701       (4,159 )
Accounts payable
    (143,709 )     (71,780 )
Accounts payable - minority stockholder
    20,850       12,652  
Accrued expenses
    161,219       84,938  
Other liabilities
    48,231       5,004  
Net cash flows used in operating activities
    (343,345 )     (431,758 )
                 
Cash flows from investing activities:
               
Purchase of equipment and intangible assets
    (21,760 )     (182,085 )
Cash paid for business acquisition
    -       (5,000 )
Cash received upon dissolving the Marketplace Home Mortgage - Webdigs, LLC joint venture
    -       5,064  
Net cash flows used in investing activities
    (21,760 )     (182,021 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    -       335,500  
Proceeds from issuance of convertible debentures, net of debt issuance
               
costs of $4,000 and unrelated accrued legal fees of $20,000
    -       226,000  
Principal payments on convertible/promissory note
    -       (250,000 )
Proceeds from issuance of convertible notes payable to officer/stockholder
    355,500       273,000  
Increase (decrease) in due to officers
    (16,986 )     31,329  
Principal payments on capital lease obligations
    (4,196 )     (3,829 )
Net cash flows provided by financing activities
    334,318       612,000  
                 
Net change in cash and cash equivalents
    (30,787 )     (1,779 )
                 
Cash and cash equivalents, beginning of period
    36,023       37,802  
                 
Cash and cash equivalents, end of period
  $ 5,236     $ 36,023  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-6

 

WEBDIGS, INC.
 

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
   
Years Ended
 
    October 31,  
   
2010
   
2009
 
Supplemental Cash Flow information
           
Cash paid for interest
  $ -     $ 22,152  
                 
Supplemental disclosure of non-cash investing and financing activities
               
Issuance of common stock to convertible debt holder as a discount on the debt
  $ -     $ 20,000  
                 
Conversion of note payable officer/stockholder
  $ -     $ 100,000  
                 
Discount on convertible debt due to detachable warrant and embedded conversion option
  $ -     $ 127,583  
                 
Accrued legal fees paid from convertible debenture proceeds
  $ -     $ 20,000  
                 
Related party contribution of Webdigs common stock to consultant for prepaid consulting fees
  $ -     $ 40,000  
                 
Common stock issued for prepaid consulting fees
  $ -     $ 80,000  
                 
Webdigs common stock received in connection with the divestiture of Marquest Financial, Inc.
  $ -     $ 265,907  
                 
Cost method deficiency of treasury shares issued as compensation to an employee
  $ 21,000          
                 
Issuance of common stock to acquire Iggy's assets ($17,648 for computer hardware and $1,797,977 for intangible assets)
  $ -     $ 1,815,625  
                 
Issuance of common stock to acquire theMLSDirect.com
  $ -     $ 47,000  
                 
Convert accrued officer salary to common stock
  $ -     $ 55,000  
                 
Conversion of derivative and warrant liability to additonal paid in capital due to amendment of convertible promissory note with Lanter Advisors
  $ -     $ 191,291  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-7

 
 
WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Webdigs, Inc. (“the Company”), a Delaware corporation, became a public company in October 2007 after a reverse shell transaction with Select Video, Inc. which was incorporated in Delaware in 1994. Our business is dedicated to web-assisted residential real estate brokerage services. This is done through our wholly-owned subsidiary Webdigs, LLC.

All of the Company’s real estate brokerage operations are operated under Webdigs, LLC. Webdigs.com is a web-assisted real estate website and brokerage, offering a similar customer experience as a full service brokerage utilizing a discounted percentage fee structure for listing services to their selling customers and a graduated fee structure for their buying customers by rebating up to 1% of the sale price of the home to the buyer. IggysHouse.com and theMLSDirect.com are website domains operated by Webdigs, LLC that offer customers the chance to list their homes through Webdigs, LLC for a flat fee.

Basis of Consolidation

The consolidated financial statements for the years ended October 31, 2010 and 2009 include the accounts of Webdigs, Inc. and its wholly-owned subsidiary, Webdigs, LLC, which includes the dormant wholly owned subsidiaries of Home Equity Advisors, LLC, and Credit Garage, LLC. The consolidated financial statements for Webdigs, Inc. for the year ended October 31, 2009 also include its former wholly-owned subsidiary of Marquest Financial Inc. (Marquest). The Company divested Marquest on June 4, 2009 (see Note 5). The net results from Marquest have been segregated for all periods presented in the consolidated statement of operations. Additionally, the Company’s previous investment in Marketplace Home Mortgage – Webdigs, LLC (49% ownership) was recorded on the equity method. This unconsolidated joint venture was dissolved on October 26, 2009 (see Note 6). All significant intercompany accounts and transactions have been eliminated in the consolidation.

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.

 
F-8

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

Debt Issuance Costs

The Company accounts for debt issuance costs and other debt discounts by amortizing the amounts using the effective interest method over the term of the related debt instrument.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, commissions and fees receivable, accounts payable, accrued expenses, notes payable and capital lease obligations. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.

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

Real estate commissions and fees receivable are recorded at the amount the Company expects to collect from real estate transactions closed. These receivables represent broker commission balances due the Company from clients or listing real estate brokers and usually are settled within 1 to 10 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 transaction 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 receivables. Historically, the Company has not experienced significant losses related to receivables from individual customers. At October 31, 2010 and 2009, the Company considers its accounts receivable to be fully collectible and therefore, has not recorded an allowance for doubtful accounts.

 
F-9

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

Intangible Assets

The Company has two types of intangible assets:

Website Development
The primary interface with the customer in our web-assisted real estate broker operation is the Webdigs.com website. Certain costs incurred in development of this website have been capitalized. Amortization is on a straight-line method over the estimated three year useful life of the website. As of October 31, 2010, the Company’s principal www.webdigs.com website has been fully amortized and the Iggyshouse.com website technology, which is not currently being used, is being held at a written down estimated fair value of $100,000 with no monthly amortization.

Website Domain Names
The Company capitalizes the fair value of website domain names acquired through business combinations or asset acquisitions. The Company purchased 17 domain names in 17 states in May 2009 from theMLSDirect.com and are amortizing these names over a 2 year estimated useful life.

Office Equipment and Fixtures

Office equipment and fixtures are recorded at cost. 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.

Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets as follows:

Office equipment
 
2 to 5 years
Furniture and fixtures
 
3 to 7 years

Segment Reporting

The Company operates and manages the business under one reporting segment.

Impairment of Long-Lived Assets

The Company accounts for the impairment or disposal of long-lived assets, such as website development costs, customer lists, non-compete agreements, website domain names, contractual agreements, furniture and equipment by reviewing 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 Company has assessed impairment of its long-lived assets as of July 31, 2010, and determined that an impairment charge was required (see Note 3). In our re-assesment as of October 31, 2010, we determined that there was no additional impairment charge required. The Company will retest for impairment again on October 31, 2011 or sooner if circumstances change.

 
F-10

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

Revenue Recognition

Real estate brokerage revenues are recognized at the closing of a real estate transaction. Commissions and rebates due to third party real estate agents or clients 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 years ended October 31, 2010 and 2009, there were no adjustments to net loss to arrive at comprehensive loss.

Accounting for Convertible Debentures, Warrants and Derivative Instruments

The Company does not enter into derivative contracts for purposes of risk management or speculation. However, from time to time, the Company enters into contracts that are not considered derivative financial instruments in their entirety but that include embedded derivative features.

The Company accounts for its embedded conversion features and freestanding warrants that are settled in a company’s own stock to be designated as an equity instrument, asset, or a liability. A contract designated as an asset or a liability is carried at fair value on a Company’s balance sheet, with any changes in fair value recorded in the results of operations.

The Company accounts for certain warrants to purchase common stock and embedded conversion options as liabilities at fair value and the unrealized changes in the values of these derivatives are recorded in the statement of operations as “gain or loss on warrants and derivatives”. Contingent conversion features that reduce the conversion price of warrants and conversion features are included in the valuation of the warrants and the conversion features. The recognition of the fair value of derivative liabilities (i.e. warrants and embedded conversion options) at the date of issuance is applied first to the debt proceeds. The excess fair value, if any, over the proceeds from a debt instrument, is recognized immediately in the consolidated statement of operations as interest expense. The value of warrants or derivatives associated with a debt instrument is recognized at inception as a discount to the debt instrument. This discount is amortized over the life of the debt instrument using the effective interest method. A determination is made upon settlement, exchange, or modification of the debt instruments to determine if a gain or loss on the extinguishment has been incurred based on the terms of the settlement, exchange, or modification and on the value allocated to the debt instrument at such date.

 
F-11

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

The Company uses the Black-Scholes pricing model to determine fair values of its derivatives. Valuations derived from this model are subject to ongoing internal verification and review. The model uses market-sourced inputs such as interest rates, exchange rates, and option volatilities. Selection of these inputs involves management’s judgment and may impact net income (loss). The fair value of the derivative liabilities are subject to the changes in the trading value of the Company’s common stock. As a result, the Company’s financial statements may fluctuate from quarter-to-quarter based on factors, such as the bid price of the Company’s stock at the balance sheet date, the amount of shares converted by note holders and/or exercised by warrant holders, and changes in the determination of market-sourced inputs. Consequently, the Company’s financial position and results of operations may vary materially from quarter-to-quarter based on conditions other than its operating revenues and expenses.

As of October 31, 2010 and 2009, the Company has no remaining derivatives recorded on its balance sheet.

Income Taxes

The Company accounts for income taxes using 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 valuation allowance for its net deferred tax assets as of October 31, 2010 and 2009 because realization of those assets is not reasonably assured.

The Company will recognize 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.

The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves, or related accruals for interest and penalties has been recorded at October 31, 2010 and 2009.

 
F-12

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

Share-Based Compensation

The Company accounts for stock incentive plans by 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 years ended October 31, 2010 and 2009 includes compensation cost for restricted stock awards and stock options. The Company uses the Black- Scholes option-pricing model to determine the fair value of options granted as of the grant date.

Advertising

The Company expenses advertising costs as incurred. Advertising expense amounted to $20,638 and $88,312 for the years ended October 31, 2010 and 2009, respectively.

Concentrations, Risks and Uncertainties

Instability of the Housing Sector in the Company’s Regional Markets:

The Company’s operations are concentrated within the real estate brokerage industry in Minnesota, Wisconsin and Florida 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 three financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation at varying amounts. 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.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). ASU 2010-06 provides additional disclosure requirements related to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Disclosure requirements applicable to Level 3 transactions are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years, with early adoption permitted. The portion of ASU 2010-06 that was effective beginning after December 15, 2009 did not have a material effect on the financial position, results of operations or cash flows of the Company. Additionally, the Company does not anticipate that the disclosure requirements applicable to Level 3 transactions that are effective for fiscal years beginning after December 15, 2010 will have a material effect on the financial position, results of operations or cash flows of the Company.

 
F-13

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

2
GOING CONCERN

The Company has incurred significant operating losses for the years ended October 31, 2010 and 2009. At October 31, 2010, the Company reports a negative working capital position of $1,575,521, and an accumulated deficit of $6,879,434. 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 raise additional funds through the issuance of additional shares of common stock and debt through private placements. Although we intend to obtain additional financing to meet our cash needs, we may be unable to secure any additional financing on terms that are favorable or acceptable to us, if at all. The Company began reducing operating expenditures during the year ended October 31, 2008 and has continued with further expense reductions in the years ended October 31, 2009 and 2010. The Company is hopeful that it can increase revenues through its existing Webdigs.com customer base in the upcoming fiscal year. The Company is also potentially looking at other strategic alternatives for its three business units.

3
FIXED ASSETS AND INTANGIBLE ASSETS

On June 12, 2009, the Company entered into an Asset Purchase Agreement with Iggys House, Inc. (Iggys House) to acquire selected assets of Iggys House in consideration of $150,000 in cash and the issuance of 7,262,500 shares of Webdigs common stock to the former owners of Iggys House. Iggys House was a dormant entity that previously had operated as a web-assisted real estate broker in 38 states. The transaction was determined not to be a business combination and therefore was accounted for as an asset purchase. In connection with this transaction, the Company incurred legal costs of $10,005.

The Company calculated total consideration given for the asset purchase at $1,975,630 using a per share fair value of $0.25 for the 7,262,500 ($1,815,625) issued as part of the transaction, the $150,000 in cash paid, and legal costs of $10,005. The Company allocated the fair value of the purchase consistent with Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. The fair values of the assets acquired were valued internally by the Company based upon numerous methods including discounted cash flows, annualized revenues and original costs.

 
F-14

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

The allocated fair values for the asset purchase were as follows:

Asset Allocation
 
Fair Value
 
       
Fixed Assets:
     
Computer hardware
  $ 17,648  
         
Intangible Assets:
       
Website software
    1,336,041  
Customer lists
    355,922  
Non-compete agreements
    266,019  
         
Subtotal intangible assets
    1,957,982  
         
Total asset purchase allocation
  $         1,975,630  

Since the Company’s purchase of the Iggys House assets, the Company has experienced limited revenue from the IggysHouse.com website since it went live on January 6, 2010. A continued lack of growth from this website has resulted in the Company’s management evaluating the intangible assets acquired from IggysHouse.com with respect to future financial results and cash flows. As a result of this review, the Company’s management determined that the fair value and future undiscounted cash flows were less than their carrying value. The fair value of the Iggys House software assets originally capitalized at $1,336,041 as of the June 9, 2009 acquisition date was reduced to $100,000 during the year ended October 31, 2010. All other intangible assets acquired as part of the Iggys House acquisition were fully impaired in the year ended October 31, 2010. As a result, the Company recognized a total impairment charge of $1,251,455 during the year ended October 31, 2010 for the Iggys House intangible assets.

A separate impairment test for the intangible assets acquired in the May 2009 acquisition of theMLSDirect.com (see Note 4), also produced an impairment charge of $11,250. The Company’s re-evaluation of the 17 affiliate broker relationships acquired as part of the acquisition revealed that none of the 17 affiliates were acting as brokers for the MLSDirect.com as of July 31, 2010.

 
F-15

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

At October 31, 2010 and 2009, the Company’s fixed assets are as follows:

   
October 31, 2010
   
October 31, 2009
 
   
Gross
         
Net
   
Gross
         
Net
 
   
Carrying
   
Accumulated
   
Carrying
   
Carrying
   
Accumulated
   
Carrying
 
   
Amount
   
Depreciation
   
Amount
   
Amount
   
Depreciation
   
Amount
 
Fixed Assets
                                   
Furniture and fixtures
  $ 9,981     $ (7,187 )   $ 2,794     $ 9,981     $ (4,791 )   $ 5,190  
Computer hardware
    50,972       (44,074 )     6,898       50,972       (25,484 )     25,488  
                                                 
Total Fixed Assets
  $ 60,953     $ (51,261 )   $ 9,692     $ 60,953     $ (30,275 )   $ 30,678  

Depreciation expense amounted to $20,986 and $17,172 for the years ended October 31, 2010 and 2009, respectively.

At October 31, 2010 and 2009, the Company’s remaining intangible assets are as follows:

   
October 31, 2010
   
October 31, 2009
 
   
Gross
         
Net
   
Gross
         
Net
 
   
Carrying
   
Accumulated
   
Carrying
   
Carrying
   
Accumulated
   
Carrying
 
   
Amount
   
Amortization
   
Amount
   
Amount
   
Amortization
   
Amount
 
                                     
Identifiable assets with determinable lives:
                                   
Website software
  $ 100,000     $ -     $ 100,000     $ 1,771,637     $ (287,164 )   $ 1,484,473  
Customer lists
    -       -       -       355,922       -       355,922  
Non-compete agreements
    -       -       -       266,019       (44,336 )     221,683  
Contractual relationships
    -       -       -       27,000       (5,625 )     21,375  
Website domain names
    25,000       (17,714 )     7,286       25,000       (5,210 )     19,790  
                                                 
Total Intangible Assets
  $ 125,000     $ (17,714 )   $ 107,286     $ 2,445,578     $ (342,335 )   $ 2,103,243  

The estimated remaining amortization expense for the website domain names for the year ending October 31, 2011 and thereafter is $7,286 and $0, respectively. The Iggys House website software is not currently in service and will not be amortized further until the Company determines its future course of action with this asset.

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.

 
F-16

 

WEBDIGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2010 and 2009

4
ACQUISITION

The Company acquired the intangible assets, including a series of exclusive website domain names and operations from the owners of theMLSDirect.com on May 13, 2009. The transaction was accounted for as a business combination. The purchase price was allocated to the assets acquired based on the estimated fair values determined by the Company’s management based upon information then currently available and on assumptions as to future operations. The Company gave consideration consisting of $5,000 in cash and 100,000 shares of restricted common stock to complete the transaction. The share issuance was valued at $0.47 per common share based upon the quoted OTC Bulletin Board price on the date of closing for a total share value of $47,000. The business operations of theMLSDirect.com have been integrated into the existing Webdigs, LLC operating entity.

The total purchase consideration of $52,000 was allocated to the acquired identifiable intangible assets, based on their estimated fair values at the acquisition date. The Company used internally estimated replacement costs to determine the fair values of the assets acquired. The estimated allocation of the purchase consideration was as follows:

Allocation of Consideration
 
Value
 
       
Network of affiliate real estate brokers in 17 states
  $ 27,000  
Website domain names
    25,000  
         
Total consideration paid
  $         52,000