U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended: February 29, 2016

Commission file number: 000-27225

DigitalTown, Inc.

(Name of registrant in its charter)

Securities registered under Section 12(g) of the Exchange Act:

Title of Each Class

Common Stock

Par Value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    [  ] Yes      [X] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.      [  ] Yes      [X] No

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and disclosure 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

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

Large Accelerated Filer [  ]

Accelerated Filer [  ]

Non-Accelerated Filer [  ]

Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  [  ] Yes    [X] No

The aggregate value of the Company’s common stock held by non-affiliates of the Company was approximately $6,515,235 as of the last day of the Company’s most recently completed second fiscal quarter (August 31, 2015), when the last reported sales price was $0.40.

There were 41,461,543 shares of the registrant’s common stock outstanding as of June 3, 2016.

DOCUMENTS INCORPORATED BY REFERENCE

There are incorporated by reference in this report on Form 10-K certain previously filed exhibits identified in Part III, Item 13 hereof.

TABLE OF CONTENTS

PART I

ITEM 1.   BUSINESS

1

ITEM 1A.  RISK FACTORS

3

ITEM 2.  PROPERTIES

7

ITEM 3.  LEGAL PROCEEDINGS

7

ITEM 4.  MINE SAFETY DISCLOSURES

8

PART II

ITEM 5.  MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

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ITEM 6.  SELECTED FINANCIAL DATA

10

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

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

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ITEM 9A.  CONTROLS AND PROCEDURES.

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ITEM 9B. OTHER INFORMATION

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PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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ITEM 11.  EXECUTIVE COMPENSATION

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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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ITEM 14. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES

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PART IV

ITEM 15.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

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SIGNATURES

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PART I

ITEM 1.   BUSINESS

GENERAL

DigitalTown is building the leading platform for hosted Smart City Management. Our easy to use tools, make it easier than ever to build and manage a feature-rich Smart City for web and mobile devices for providing residents and visitors with 24/7 access to Content, Community and Commerce.

Market Opportunity

DigitalTown provides an integrated search, community, and commerce platform for both web and mobile devices. DigitalTown powers connected online communities that enable members of a community to find information, and acquire the goods and services they need locally where possible. The DigitalTown platform changes how the local economy consumes and transacts. It does this by helping local community members to “See the World through local eyes”. Residents and visitors are able to use a DigitalTown powered search engine to access content, community and commerce from an easy search tool. If there are local vendors that can fulfill a product or service that relates to a search term, then these options are presented to the user. Local vendors can also become direct merchants on the platform, effectively allowing the local town to be its own "Amazon”.

The Strategic Importance of Local Online Economic Development

The DigitalTown platform elevates local communities to an advanced state of technical capability.  Whereas most cities have historically taken a hands-off approach towards the Internet, as the Internet becomes as important as roads and bridges, city management must begin to view the Internet as an integral part of their strategic plan for economic wellbeing.

The continued rapid expansion of big box retailers and steep growth of national eCommerce creates increasing pressure on locally owned small businesses.  This dual threat requires a new approach to online economic development –one that equips local merchants with the means to compete locally as well as sell nationally.

The rise of big box retail is a well-documented threat to small business. For example, Wal-Mart’s entry into a new market has been found to have a strongly negative effect on existing retailers with supermarkets and discount variety stores the most adversely effected sectors, suffering sales declines of 10 to 40% after Wal-Mart moves in.  

Meanwhile, online consumer spending has risen steadily and is now 10% of sales. National eCommerce leaders such as Amazon.com, Walmart.com, Costco.com and Target.com as well as niche retailers such as eBay and Etsy, are out-competing local merchants by offering 24/7 shopping, competitive pricing and free shipping.

Why the DigitalTown solution makes sense now

The DigitalTown platform is a cost effective solution for enabling and community to become a smart community, connected to shared content and local commerce. A key enabler for this

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capability is the rapid adoption of SmartPhones that are powered by common frameworks, notably Apple iOS and Android.  The result is that nearly every adult is now able to communicate and transact in real-time using their SmartPhone as a proxy of their identity, reputation, preferences and methods of payment.  In effect, the SmartPhone has become the Digital Wallet.  The massive early success of Uber has proven that the consumer is ready to use their Digital Wallet as a means for interacting and transacting with other members of a digitally connected community.  We believe this opportunity is global and goes beyond ride-sharing.  The missing ingredient in many cases is the presence of a trusted platform that connects stakeholders.  We further believe that our approach which emphasizes public-private partnerships will be enable accelerated adoption particularly in rural communities where trust of technology is lower and yet where economic models are at greatest risk.

How the DigitalTown SmartCity Platform is part of the new SmartWeb

A core component of the DigitalTown approach is to build branded web destinations that are intuitive to discover.  Part of what makes this possible is the emergence of new domain extensions that are descriptive.  For example, .CITY routes a visitor to a website about a city and .MENU routes a user to a website about restaurants in that city.  Due to management’s long-standing relation with domain registry operators, the Company will seek to bring structure to the emerging landscape of new domain extensions, while at the same time emphasizing distribution of a unified mobile application to work as a digital companion alongside the growing network of direct navigation brands.

The DigitalTown Platform

DigitalTown platform creates powerful online and mobile communities. We tap into locally relevant news and content in order to keep community members informed and aware.  We provide community tools to keep community members connected. We enable commerce and fulfillment in local communities thereby helping residents to buy locally while equipping

merchants to sell both locally and globally.

Content Search

The DigitalTown search engine is at the core of the local experience.  Whereas most residents may go once or twice per year to the official city site, the DigitalTown-powered search engine is designed for daily use as a preferred homepage for local residents and businesses.

Community

Consumers are already familiar with social networking through applications like Facebook and Twitter.  The integrated DigitalTown web service and mobile app make it easy to stay informed, as well as to connect with and communicate with other members of the Leavenworth community.   Community members can message, join groups, shop online, make payments, and even have the option of sharing their physical location with other members of the community.

Commerce

The DigitalTown platform provides merchants with turn-key solutions for online commerce.  Approved merchants can begin selling immediately without any setup cost or fixed costs of any kind. Transaction processing services are provided by DigitalTown, thereby eliminating the need for each retailer to secure a merchant processing account.  The community may also enable a private currency for use within the community.

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Courier Management

An integrated courier application is included, enabling approved couriers to be notified about items from merchants to be picked up and delivered to the customer, thereby enabling any approved merchant to also offer delivery services to the end-customer.

Administration

The DigitalTown platform provides integrated administrative tools for managing Content, Community and Commerce, making it easy to administer all aspects of the online economy. The administrative tools are designed from the ground up to be the back end of a smart community. For example, administrators can create Frequently Asked Questions (FAQ) that are then intelligently presented through the site search. For example, a question about “Where do I get a fishing license?” can be answered in the form of a pre-written FAQ article.  This FAQ article is then intelligently suggested when someone types a fishing-related keyword into the search box on the site, 24 hours a day, 7 days a week.

EMPLOYEES

As of February 29, 2016, DigitalTown, Inc. has six employees.  The Company’s employees are not represented by a union.  

ITEM 1A.  RISK FACTORS

We are subject to various risks that may materially harm our business, financial condition and results of operations.  You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock.  If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed.  In that case, the trading price of our common stock could decline and you could lose all or part of your investment.

RISK FACTORS RELATED TO OUR BUSINESS

We have a history of losses and the report of our independent accountants issued in connection with the audit of our financial statements contained a qualification raising substantial doubt about our ability to continue as a going concern.

We incurred net losses of $2,549,577 and $678,035 for the years ended February 29, 2016 and February 28, 2015, respectively, and had an accumulated deficit of $31,422,874 at February 29, 2016. As a result of these conditions, the report of our independent accountants issued in connection with the audit of our financial statements as of and for the fiscal years ended February 29, 2016 and February 28, 2015 contained a qualification raising substantial doubt about our ability to continue as a going concern. We can provide no assurance regarding when, if ever, we will become profitable. As a result, we may continue to generate losses for the foreseeable future and in the extreme case, discontinue operations.

We may not be able to collect on our stock subscriptions receivable or raise capital through the sale of our common stock as needed to fund our operations.

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At February 29, 2016, the Company had stock subscriptions receivable of $12,150 and for the year ended February 29, 2016, the Company sold common hsares for cash receipts of $895,250.

We believe our current cash reserves, the amounts we expect to collect on our outstanding stock subscriptions receivable, booked software licensing revenue, and proceeds from the sale of our common stock should be sufficient to enable us to operate for the next 12 months.  In the event that we are unable to collect on our outstanding stock subscriptions receivable as needed or raise capital through the sale of our common stock as needed, we would be forced to reduce operating expenses and/or cease operations altogether.

No assurances can be given that we will be successful in reaching or maintaining profitable operations.  Our current monthly cash operating expenses going forward are approximately $80,000 per month.

We may need to raise additional capital to finance operations.

Funding of our operations has relied almost entirely on the collection of outstanding subscriptions receivable and proceeds from the sale of our common stock.  We will need to raise additional capital to fund our anticipated operating expenses and execute our business plan.  We cannot be assured that financing will be available or on favorable terms.  The sale of our common stock to raise capital may cause dilution to our existing stockholders.  Our inability to obtain adequate financing will result in the need to curtail business operations.  Any of these events would be materially harmful to our business and may result in a lower stock price.

Our common stock may be affected by limited trading volume and may fluctuate significantly.

There has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop.  As a result, this could adversely affect our stockholders' ability to sell our common stock in short time periods, or possibly at all.  Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance.  In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.

Our common stock is traded on the OTC markets, which may make it more difficult for investors to resell their shares due to suitability requirements.

Our common stock is currently traded on the Over-the-counter market “OTC” and quoted on the OTCMarkets “OTCQB”. Broker-dealers often decline to trade in OTC stocks given that the market for such securities is often limited, the stocks are more volatile, and the risks to investors are greater.  These factors may reduce the potential market for our common stock by reducing the number of potential investors.  This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them.  This could cause our stock price to decline.  

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Since our common stock is thinly traded it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the price paid.

Since our common stock is thinly traded its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including (but not necessarily limited to):

Investors may have difficulty reselling shares of our common stock, either at or above the price they paid for our stock, or even at fair market value.  The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes.  These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company.  In addition, there is a history of securities class action litigation following periods of volatility in the market price of a company’s securities.  Although there is no such litigation currently pending or threatened against the Company, such a suit against us could result in the incursion of substantial legal fees, potential liabilities and the diversion of management’s attention and resources from our business.  Moreover and as previously noted, our shares are currently quoted on the OTCMarkets “OTCQB” and, further, are subject to the penny stock regulations.  Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.

We could fail to retain or attract key personnel.

Effective on May 18, 2015, the Company appointed Robert Monster as Chief Executive Officer.  Our future success depends, in significant part, on the continued services of Mr. Monster. We cannot be assured that we would be able to find appropriate replacements for them or any other key personnel.  Any loss or interruption of our key personnel's services could adversely affect our ability to develop our business plan.  We do have an employment agreement with Mr. Monster but we do not presently maintain a key-man life insurance policy on him.  The Company expects to be able to renew Mr. Monster’s contract in Spring 2016 after his one year term comes to an end.

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Minnesota law and our charter may inhibit a takeover of our company that stockholders may consider favorable.

Provisions of Minnesota law, such as its business combination statute, may have the effect of delaying, deferring or preventing a change in control of our Company.  As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock.

Our officers and directors have the ability to exercise significant influence over matters submitted for stockholder approval and their interests may differ from other stockholders.

Our current directors, in the aggregate have the ability to appoint new members to the Board of Directors.  Accordingly, our directors and executive officers, whether acting alone or together, may have significant influence in determining the outcome of any corporate transaction or other matter submitted to our Board for approval, including issuing common and preferred stock, and appointing officers. This influence could have a material impact on mergers, acquisitions, consolidations, the sale of all or substantially all of our assets and the power to prevent or cause a change in control.  The interests of these board members may differ from the interests of the other stockholders.

Our shares may be defined as "penny stock", the rules imposed on the sale of the shares may affect your ability to resell any shares you may purchase, if at all.

Shares of our common stock may be defined as a “penny stock” under the Securities and Exchange Act of 1934 (“Exchange Act”) and rules of the Securities and Exchange Commission (“SEC”).  The Exchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or in transactions not recommended by the broker-dealer.  For transactions covered by the penny stock rules, a broker-dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to the sale.  In addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons, and deliver certain disclosures required by the SEC.  Consequently, the penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in the public markets.

Market for penny stock has suffered in recent years from patterns of fraud and abuse.

Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:

·

Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

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·

Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

·

Boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons;

·

Excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and,

·

The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices creating consequential investor losses.

Our management is aware of the abuses that have occurred historically in the penny stock market.  Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.  The occurrence of these patterns or practices could increase the volatility of our share price.

Existing stockholders may experience significant dilution from the sale of our common stock.

The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock.  Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock.  By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.  

ITEM 2.  PROPERTIES

Not applicable.

ITEM 3.  LEGAL PROCEEDINGS

The Company is not exposed to any pending legal proceedings except for routine litigation incurred in the normal course of business. In the opinion of management, the resolutions of these matters are not expected to have a material adverse effect on the Company's financial position or results of operations.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.  MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

DigitalTown, Inc.’s common stock is traded on the OTC Markets “OTCQB”. The following table sets forth the quarterly high and low sales prices as reported during the last two fiscal years ended February 29, 2016 and February 28, 2015.

These quotations represent inter dealer prices, without retail markup, markdown, or commission, and may not reflect actual transactions.  As of May 27, 2016, there were approximately 182 record holders of the Company's common stock.

DIVIDEND POLICY

The Company has never paid cash dividends on any of its securities. The Company currently intends to retain any earnings for use in its operations and does not anticipate paying cash dividends in the foreseeable future. Any future dividend policy will be determined by the Company's Board of Directors based upon the Company's earnings, if any, its capital needs and other relevant factors.

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ITEM 6.  SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial information for DigitalTown, Inc. as of February 29, 2016 and February 28, 2015 and for the years then ended, which have been derived from our audited consolidated financial statements.

The data set forth above should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes.

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

The following is a discussion of the financial condition and results of operations of the Company for the years ended February 29, 2016 and February 28, 2015, which should be read in conjunction with, and is qualified in its entirety by, the audited financial statements and notes thereto included elsewhere in this report.

RESULTS OF OPERATIONS

YEARS ENDED FEBRUARY 29, 2016 AND FEBRUARY 28, 2015

During the year ended February 29, 2016, the Company recorded revenues of $839 and cost of revenues of $255,925 for a negative gross profit of $(255,086) compared to revenues of $1,596 and cost of revenues of $178,739 for a negative gross profit of $(177,143) during the year ended February 28, 2015.  For the year ended February 29, 2016, revenues mainly consisted of commissions generated from advertising on our websites of $839.  For the comparable prior year period revenues mainly consisted of commissions generated from advertising on our websites of $801 and domain name lease revenue of $795.  Cost of revenues consisted of amortization of prepaid annual domain name renewal fees of $166,312 and $178,699, development expense of $85,000 and $0, amortization of website development fees of $49 and $0, and server/bandwidth expense of 4,564 and $40, respectively, for the two comparable periods.

Operating expenses for the year ended February 29, 2016 increased by $1,530,308 to $2,028,877 compared to the prior year. Stock compensation expense included in selling, general and administration expenses was $1,445,298 for the year ended February 29, 2016, compared to $190,246 for the year ended February 28, 2015, an increase of $1,255,052 compared to the prior year.  Excluding stock compensation expense for the two comparable periods, operating expenses were $583,579 for the current period compared to $308,323 for the year ended February 28, 2015.  The increase of $275,256 for the two comparable periods is primarily due to an increase in payroll and benefits expense of $167,494, an increase of $135,133 in legal and professional fees, a decrease in rent expense of $18,368, and a $10,227 decrease in interest expense.

The Company’s overall net loss for the current year increased by $1,871,542 to $2,549,577.  The increase was mainly due to the general and administrative items above and a loss of $293,633 on common stock subscriptions settled for conversion of accrued salary during the year ended February 29, 2016.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash position at February 29, 2016 was $134,469, an increase of $119,809 from $14,660 at February 28, 2015.  During the year ended February 29, 2016, net cash used in operating activities was $700,441 compared to cash used of $294,042 for the comparable prior year period.  When comparing the two periods, the increase in cash used in operating activities of $406,399 for the year ended February 29, 2016 is primarily due to an increase of $585,740 in cash operating expenses and a decrease in related parties’ accounts payable of $57,013.

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Net cash used in investing activities was $0 for the years ended February 29, 2016, and February 28, 2015.

Net cash provided by financing activities for the year ended February 29, 2016, was $820,250, which consisted of proceeds from related party notes payable of $15,000, proceeds from the issuance of common stock of $895,250 offset by principal payments of $90,000 on a related party note payable.  For the comparable period ended February 28, 2015, the Company received net cash provided by financing activities of $258,113, which consisted of payments received on stockholder subscriptions receivable of $15,913, proceeds from related party notes payable of $85,000, proceeds from the issuance of common stock of $166,000 and proceeds from related party payables of $1,200 offset by principal payments of $10,000 on a related party note payable.

Monthly cash operating expenses for the year ended February 29, 2016, were approximately $60,000 per month. Based on current projections, the Company’s monthly cash operating expenses going forward should be approximately $80,000 per month which includes the monthly cost for the renewal of the existing domain names of approximately $11,000. In addition to the normal monthly operating expenses, the Company’s committed cash requirements for the 12 months ending February 28, 2017 include the balance due of $30,000 for expenses pertaining to the Company’s Strategic Partnership Agreement with the NIAAA and $22,500 pertaining to a software development maintenance agreement. From March 1, 2016 to May 27, 2016, the Company received cash proceeds of $12,150 from its stock subscriptions receivable and the Company entered into stock purchase agreements of 2,164,706 restricted common shares at $0.17 and $0.25 per share, for total cash proceeds of $496,000.  

We believe our current cash reserves, the amounts we expect to collect on our outstanding stock subscriptions receivable and future proceeds from the issuance of our common stock and the sale of existing domain names should be sufficient to enable us to operate for the next 12 months.  In the event that we are unable to collect our stock subscriptions receivable as needed or raise additional capital through the sale of our common stock or sell existing domain names on acceptable terms, we would be forced to further reduce operating expenses and/or cease operations altogether.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Critical Accounting Policies

The discussion and analysis of DigitalTown, Inc.’s financial condition and results of operations are based on our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an ongoing basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While DigitalTown Inc.’s significant

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accounting policies are described in more detail in Note 1 to its financial statements, management believes the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements:

Prepaid Domain Names

The annual domain name renewal fees are currently being amortized over one year and the purchase of any new domain names are the only amounts being capitalized.  See Note 4 for further information.

Stock-Based Compensation

The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards.  The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.

The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.

Recently Issued Accounting Pronouncements

Information regarding recently issued accounting pronouncements is included in Note 1 to the consolidated financial statements in “Item 8. Financial Statements and Supplemental Data” in this Annual Report on Form 10-K.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The market risk inherent in the Company’s financial statements and in its financial position represents the potential loss arising from adverse changes in interest rates.  This risk is low as the Company has very limited debt and has no third-party debt.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

DigitalTown, Inc.

We have audited the accompanying consolidated balance sheets of DigitalTown, Inc. (the “Company”) as of February 29, 2016 and February 28, 2015, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DigitalTown, Inc. as of February 29, 2016 and February 28, 2015, and the results of its operations and cash flows for the periods described above, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern.  These consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern. See note 2 to the consolidated financial statements for further information regarding this uncertainty.

/s/ M&K CPAS, PLLC

www.mkacpas.com

Houston, Texas

June 6, 2016

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DigitalTown, Inc.

CONSOLIDATED BALANCE SHEETS

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

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DigitalTown, Inc

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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DigitalTown, Inc.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

Years Ended February 29, 2016 and February 28, 2015

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

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DigitalTown, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS  

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

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Note 1. Nature of Business and Summary of Significant Accounting Policies:

Nature of Business

The Company was founded in 1982 under the laws of the State of Minnesota as Command Small Computer Learning Center, Inc., a computer training company and operated under several different names in the computer hardware and training sector. In 2005, the Company began acquiring domain names.  On March 1, 2007, the Company changed its name to DigitalTown, Inc. and began developing a business plan to develop a platform to monetize their domain names.  The Company’s headquarters are located at 10655 NE 4^th Street, Suite 801, Bellevue, WA 98004, and its telephone and facsimile numbers are (425) 295-4564 and (425) 651-2889, respectively.  The Company's Internet address is www.digitaltown.com.  The Company’s common stock is traded in the over-the-counter market under the ticker DGTW.

The Company’s consolidated financial statements have been prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has a working capital deficit, recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.  

At February 29, 2016 the Company had an accumulated deficit of $31,327,076.  The Company anticipates that expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least February 28, 2017.  In the event that the Company is unable to obtain additional capital in the future, the Company would be forced to further reduce operating expenses and/or cease operations altogether.

Principles of Consolidation

The Company files consolidated financial statements that include its wholly-owned subsidiaries Tiger Media and The School Network, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications  

Certain prior period amounts in the consolidated statement of cash flows have been reclassified to conform to the current period presentation. Proceeds from related party notes payable received in the prior period have been reclassified from the prior period classification.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the

18

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable arose from the sale of and commission earned from display advertising.  The Company evaluates collectability of accounts receivable based on a combination of factors including the age of the receivable or a specific customer’s inability to meet its financial conditions.  In these circumstances, the Company records an allowance to reduce the receivable to an amount it deems collectible.  The Company has determined that an allowance for doubtful accounts is not necessary as of February 29, 2016 and February 28, 2015.

Revenue Recognition

The Company recognizes revenue when the following four criteria have been met:

·

Persuasive evidence that an agreement exists

·

Delivery has occurred

·

The price is fixed and determinable

·

Collectability is reasonably assured

The Company recognizes revenue from the sale of display advertising appearing on specific pages of individual spirit sites within DigitalTown’s network.  Display advertising is sold by the Company directly to local merchants and placed by the Company on specific pages of individual spirit sites targeted by the local merchant.  The terms of these sales are for a fixed monthly amount for a period ranging from three months to one year.  The Company has also entered into certain third party agreements which allow display advertising to be placed on individual spirit sites within DigitalTown’s network.  Per these agreements, the Company receives commissions based on a percentage of the per click or per-impression revenue generated by these ads.  The Company recognizes these commissions received as revenue.

Fair Value of Financial Instruments

Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under accounting principles generally accepted in the U.S. (“U.S. GAAP”), certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

As of February 29, 2016 and February 28, 2015, the Company does not have any financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability.

There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the years ended February 29, 2016 and February 28, 2015.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents.  As of February 29, 2016 and February 28, 2015, the Company had no cash equivalents.

Cash Deposits in Excess of Federally Insured Limits

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are insured by the Federal Deposit Insurance Company and currently have insurance coverage up to $250,000.  At February 29, 2016 and February 28, 2015, the Company had no uninsured cash balances.

Prepaid Domain Names

The annual domain name renewal fees are currently being amortized over one year and the purchase of any new domain names are the only amounts being capitalized.  See Note 4 for further information.

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives, ranging from three to five years. Leasehold improvements are amortized over the shorter of the useful life or the term of the related lease. The Company recorded $3,588 and $4,119 of depreciation expense for the years ended February 29, 2016 and February 28, 2015, respectively.  Repairs and maintenance costs are expensed as incurred; major renewals and improvements are capitalized.  As items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operating income.  See Note 3 for further information.

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Income Taxes

Deferred tax assets (net of any valuation allowance) and liabilities resulting from temporary differences, net operating loss carryforwards and tax credit carryforwards are recorded using an asset-and-liability method.  Deferred taxes relating to temporary differences and loss carryforwards are measured using the tax rate expected to be in effect when they are reversed or are realized.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be ultimately realized.  The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related future benefits.

The Company accounts for income taxes pursuant to FASB guidance.  This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.  The Company’s adoption on March 1, 2009 of the provisions specifically related to uncertain tax positions resulted in no cumulative effect adjustment.  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 have been recorded at February 29, 2016 or February 28, 2015.  In accordance with the guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of operations.  The Company has three open years of tax returns subject to examination.

Stock-Based Compensation, Including Options and Warrants

The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards.  The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors, consultants and advisors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.

The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.

Advertising

Advertising costs are charged to operations when incurred.  The Company did not incur any advertising expense during the years ended February 29, 2016 or February 28, 2015.

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Recently Issued Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory, which requires that inventory be measured within the scope of the Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this Update are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This ASU conforms with the Company's current protocol for evaluating inventory and the Company will prospectively implement adoption of this ASU. The Company does not expect the adoption of the ASU to have a significant impact on our consolidated financial statements.

On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts.  The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Early application is permitted.  The ASU requires retrospective application to all prior periods presented in the financial statements. The Company has elected not to early adopt ASU 2015-03.

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards.  This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

Management does not anticipate that the adoption of these standards will have a material impact on the financial statements.

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Note 2. Going Concern

The Company’s consolidated financial statements have been prepared using accounting principles generally accepted in the U.S. applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has a working capital deficit,

22

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

recurring losses, and negative cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.  

At February 29, 2016 the Company had an accumulated deficit of $31,422,874.  The Company anticipates that expected future proceeds from additional financing through the sale of its common stock or other equity-based securities, and additional sales and/or leases of existing domain names will be sufficient to meet its working capital and capital expenditure needs through at least February 28, 2017.  In the event that the Company is unable to obtain additional capital in the future, the Company would be forced to further reduce operating expenses and/or cease operations altogether.

Note 3. Property and Equipment

Property and equipment are as follows:

Depreciation expense for the fiscal years ended February 29, 2016 and February 28, 2015 was $3,588 and $4,119, respectively.

Note 4. Prepaid Domain Names

During the years ended February 29, 2016 and February 28, 2015, the Company incurred $127,005 and $190,755, respectively, of annual domain name renewal fees and has expensed $166,312 and $178,699, respectively, to cost of revenues on a straight-line basis and has recorded $21,203 and $59,629, respectively, as prepaid domain name renewal fees as of February 29, 2016 and February 28, 2015.  The amounts paid for the annual domain name renewal fees of $127,005 and $190,755, are paid directly to Epik, LLC, a company which is controlled by Robert Monster, the Company’s Chief Executive Officer. Epik, LLC, then uses those funds to directly pay Verisign and ICANN companies for the annual domain renewal costs of $7.85 and $0.25, respectively, per domain name.

Note 5. Accrued Salary and Deferred Officer Compensation

Richard Pomije, the former CEO, CFO and Chairman of the Company has elected to forego a portion of his salary at various times due to the Company’s limited operating funds. These amounts do not accrue interest and are due and payable as funds become available in the future. During the year ended February 29, 2016, the Company recorded $25,807 of deferred officer compensation and made payments of $46,250 to Richard Pomije. During the year ended February 28, 2015, the Company recorded $150,000 of deferred officer compensation and made payments of $30,900 to Richard Pomije.  The total balance

23

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

recorded as deferred officer compensation at February 29, 2016 and February 28, 2015 was $0 and $352,292, respectively.  On May 11, 2015, Mr. Pomije agreed to accept the stock subscriptions receivable in lieu of his deferred officer accrued compensation. The total balance recorded as deferred officer compensation at May 11, 2015 (date of agreement), was $331,849. As a result of the difference between the amount recorded for stock subscriptions receivable and deferred officer compensation, the Company recorded a loss on conversion of deferred officer compensation into equity of $293,633 in May 2015. See Notes 8 and 11 for further information.

On May 18, 2015, Founder Richard Pomije resigned from the Company.  At that time, the Board of Directors was aware of no continuing employment agreement.  The Company released Mr. Pomije on September 11, 2015 concurrent with closing the Burnsville, MN office.  Mr. Pomije is asserting a continuing obligation on the part of the Company in the form of a monthly salary for a 1 year term. The Company has accrued a liability of $95,798 as of February 29, 2016.

On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 common shares and 1 year stock options with an exercise price of $0.15.  The shares and warrants were valued on the conversion date in the amounts of $109,846 and $19,385, respectively.  As the value of the shares and warrants equaled the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction.  As of February 29, 2016 and February 28, 2015, the accrued salary owed to Robert Monster was $0 and $0, respectively.

Note 6. Stockholders’ Equity

Fiscal 2016 Stock Transactions

During the year ended February 29, 2016, the Company entered into stock purchase agreements and issued 4,927,000 restricted common shares at $0.10 per share, for total cash proceeds of $895,250.  The restricted common shares were valued based at the cash sales price of $0.10. Each of these shares included 1 year warrants with an exercise price of $0.15. The fair market value of the warrants issued during the year ended February 29, 2016 was $152,628.  The relative fair market value of the shares and warrants to the cash received were $179,906 and $98,594, respectively.

On January 1, 2016, 750,000 common shares were issued into escrow at par value of $7,500 in preparation by the Company for an acquisition to occur during Q1’17.

On January 1, 2016, the Company issued 3,312,811 common shares to Robert Monster, CEO, in accordance with his employment agreement dated May 18, 2015.  The shares were valued based on the employment agreement date.  As 2,597,761 shares were earned due to the one year term of the employment agreement which has not yet completed, the stock based compensation of $779,325 was recorded during the year ended February 29, 2016.  The remaining shares which were not yet vested were recorded as a subscription receivable to be recorded in the 2017 fiscal year upon the completion of the employment agreement term.

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 common shares and 1 year stock options with an exercise price of $0.15.  The shares and warrants were valued on the conversion date in the amounts of $109,846 and $19,385, respectively.  As the value of the shares and warrants equaled the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction.

During the year ended February 29, 2016, 41,000 common shares were issued for stock payables from the 2015 fiscal year which amounted to $11,500 which was previously recorded as a stock payable as of February 28, 2015.

Fiscal 2015 Stock Transactions

During the three months ended February 28, 2015, the Company entered into stock purchase agreements and issued 260,000 restricted common shares at $0.25 per share, for total cash proceeds of $65,000. The restricted common shares were valued based on the cash sales price. The Company also entered into stock purchase agreements at $0.25 per share for total cash proceeds of $9,000 for which the 36,000 restricted common shares were not issued as of February 28, 2015. The $9,000 is included in the stock payable balance of $11,500 as of February 28, 2015.

During the three months ended November 30, 2014, the Company entered into stock purchase agreements and issued 268,000 restricted common shares at $0.25 per share, for total cash proceeds of $67,000. The restricted common shares were valued based at the market price on the grant date.

On October 22, 2014, the Company issued 106,800 restricted common shares at $0.25 per share to the Company’s former contract Chief Financial Officer as settlement for the outstanding balance of his related party accounts payable balance of $26,700 related to past consulting fees. Even though the fair value of the liability was $26,700, and the fair value of the shares granted as of October 9, 2014, the date of the oral agreement, was $16,020 (based on market value of $0.15 per share), the balance of $10,680 was recognized in additional paid-in capital due to the related party status.

On August 7, 2014, the Company entered into a stock purchase agreement and issued 60,000 restricted common shares at $0.25 per share, for total cash proceeds of $15,000. The restricted common shares were valued based at the market price on the grant date.

On May 6, 2014, the Company entered into a stock purchase agreement and issued 5,000 restricted common shares at $0.50 per share, for total cash proceeds of $2,500. The restricted common shares were valued based at the market price on the grant date.  The stockholder purchased 10,000 shares for $5,000 but the transfer agent only issued 5,000 shares (in February 2015).  The other $2,500 received on May 6, 2014 is recorded as stock payable as of February 28, 2015 until the remaining shares are issued in the first quarter of fiscal 2016.  

On April 25, 2014, the Company entered into a stock purchase agreement and issued 10,000 restricted common shares at $0.50 per share, for total cash proceeds of $5,000. The restricted common shares were valued based at the market price on the grant date.

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Stock Warrants

As of February 29, 2016, the Company had 4,510,000 warrants outstanding with an average exercise price of $0.14. The warrants expire one-ten years from their date of issue and have a weighted average remaining exercise period as of February 29, 2016 of 4.70 years.

Stockholders purchasing stock during the fourth quarter of fiscal year 2016 were granted a one year warrant for each share of stock purchased.  The $0.15 warrants vested immediately and expire January 1, 2017.

On December 4, 2015, one board member was issued 200,000 warrants as compensation to purchase shares of the Company stock at $0.10 per share.  The warrants vested immediately and expire December 3, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.13 was $25,994.

On December 4, 2015, one consultant was issued 200,000 warrants as compensation to purchase shares of the Company stock at $0.10 per share.  The warrants vested immediately and expire December 3, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.13 was $25,944.

On September 10, 2015, one consultant was issued 200,000 warrants as compensation to purchase shares of the Company stock at the closing price as of September 9, 2015 of $0.30 per share.  The warrants vested immediately and expire on September 10, 2025.  The total estimated value using the Black-Scholes Model, based on a volatility rate of 121% and a call option value of $0.285 was $57,001.

On September 10, 2015, one consultant was issued 200,000 warrants as compensation to purchase shares of the Company stock at the price of $0.30 per share.  The warrants vested immediately and expire on September 10, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 121% and a call option value of $0.285 was $57,001.

On September 10, 2015, one consultant was issued 100,000 warrants as compensation to purchase shares of the Company stock at the price of $0.30 per share.  The warrants vested immediately and expire on September 10, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 121% and a call option value of $0.285 was $28,500.

On May 5, 2015, Jeffrey Mills, a Director, was issued 200,000 warrants as compensation to purchase shares of the Company stock at the price as of May 4, 2015 of $0.25 per share.  The warrants vested immediately and are exercisable until May 5, 2025.  The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.24 was $47,817.

On May 5, 2015, one consultant was issued 200,000 warrants as compensation to purchase shares of the Company stock at the price of $0.25 per share.  The warrants vested immediately and are exercisable until

26

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

May 5, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.24 was $47,817.

On May 5, 2015, one consultant was issued 50,000 warrants as compensation to purchase shares of the Company stock at the price of $0.25 per share.  The warrants vested immediately and are exercisable until May 5, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.24 was $11,954.

On May 5, 2015, Darvin Habben, Chairman of the Board, was issued 400,000 warrants as compensation to purchase shares of the Company stock at the price of $0.25 per share.  The warrants vested immediately and are exercisable until May 5, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 125% and a call option value of $0.24 was $95,634.

On April 3, 2015, one consultant was issued 300,000 warrants as compensation to purchase shares of the Company stock at the price of $0.15 per share.  The warrants vested immediately and are exercisable until April 3, 2025. The total estimated value using the Black-Scholes Model, based on a volatility rate of 122% and a call option value of $0.14 was $42,808.

On April 21, 2014, the Company canceled 300,000 stock purchase warrants issued to four consultants on January 10, 2014.

The Company utilized the following key assumptions in computing the fair value of the warrants using the Black-Scholes pricing model:

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

The following table summarizes information about the Company’s stock warrant changes during the years ended February 29, 2016 and February 28, 2015:

The following table summarizes information about stock warrants outstanding as of February 29, 2016:

The Company recorded stock-based compensation expense of $388,532 and $62,494 for all outstanding stock warrants for the years ended February 29, 2016 and February 28, 2015, respectively.  This expense is included in selling, general and administrative expense.

Note 7. Stock Options

The Company has one stock option plan called The 2006 Employee Stock and Option Plan. As of February 29, 2016, an aggregate of 5,000,000 shares of common stock may be granted under this plan determined by the Board of Directors. The stock options may be granted to officers and employees of the Company.  Options granted under this plan are non-qualified stock options and have exercise prices and vesting terms established by the Board of Directors at the time of each grant.  Vesting terms of the outstanding options range from immediate to four years from the date of grant.  The terms of the options range from five to ten years from the date of grant.

The Company records its stock-based compensation arrangements calculating the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the consolidated statements of operations based on their grant date fair values.  The fair value of the Company’s stock options have been estimated using the Black-Scholes pricing model, which

28

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

requires assumptions as to expected dividends, the options expected life, volatility and risk-free interest rate at the time of the grant.  The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite vesting periods in the Company’s consolidated statements of operations.

For the year ended February 29, 2016 the Company granted 1,292,310 options to Robert Monster, CEO with a term of 10 years and the options vested on the grant date of February 10, 2016.  

In addition during the year ended February 29, 2016 the Company granted: (1) 200,000 options to Robert Monster and 400,000 options to two officers with a term of 10 years and the options vested on the grant date of December 4, 2015: (2) 200,000 options to two employees with a term of 10 years and the options vested on the grant date of September 10, 2015: (3) and 500,000 options to three employees with a term of 10 years and the options vested on the grant date of May 5, 2015.

In May 2015, Richard Pomije resigned as CEO, President, CFO and Chairman of the Board.  Due to his resignation, Mr. Pomije forfeited 2,750,000 options that were granted in October 2011.

The fair value of the Company’s stock options have been estimated using the Black-Scholes pricing model, which requires assumptions as to expected dividends, the option’s expected life, volatility and risk-free interest rate at the time of the grant.  The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite vesting periods in the Company’s consolidated statements of operations.

The Company utilized the following key assumptions in computing the fair value of the options using the Black-Scholes pricing model:

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

The Company recorded stock-based compensation expense of $271,116 and $190,246 for all outstanding options for the years ended February 29, 2016 and February 28, 2015, respectively.  This expense is included in selling, general and administrative expense. As of February 29, 2016, the Company has not recorded any tax benefit from this non-cash expense due to the Company having a full valuation allowance against its deferred tax assets. The compensation expense impacted the basic (loss) per common share for the years ended February 29, 2016 and February 28, 2015 by $(0.025) and $(0.006), respectively.  As of February 29, 2016, there was no remaining unrecognized compensation expense to be recognized over future periods.

The following table summarizes information about the Company’s stock options as of February 29, 2016 and changes during the years ended February 29, 2016 and February 28, 2015:

The following table summarizes information about stock options outstanding as of February 29, 2016:

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Note 8. Related Party Transactions

Lease with Director/Stockholder

Since September 1, 2014 the Company has had a month-to-month agreement requiring rental payments of $1,050 per month. Mr. Mills invoiced the Company $1,868 and $20,250 for the years ended February 29, 2016 and February 28, 2014, respectively.  At February 29, 2016 and February 28, 2015, the Company owed Mr. Mills $0 and $24,065, respectively, pertaining to the lease.

Accounts Payable – Related Parties

The Company had accounts payable balances due to related parties of $4,269 at February 29, 2016 due to Richard Pomije.  The balance at February 28, 2015 was $61,282 which consisted of $37,217 due to Richard Pomije and $24,065 due to Jeffrey Mills.

Deferred Officer Compensation

The Company owed deferred officer compensation to Richard Pomije, the former CEO, CFO and Chairman of the Company as of February 29, 2016 and February 28, 2015 of $0 and $352,292, respectively. On May 18, 2015, Founder Richard Pomije resigned from the Company.  At that time, the Board of Directors was aware of no continuing employment agreement.  The Company released Mr. Pomije on September 11, 2015 concurrent with closing the Burnsville, MN office.  Mr. Pomije is asserting a continuing obligation on the part of the Company in the form of a monthly salary for a 1 year term. The Company has accrued a liability of $95,798 as of February 29, 2016.  See Note 5 for additional information.

Accrued Salary Conversion

On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 common shares and 1 year stock options with an exercise price of $0.15.  The shares and warrants were valued on the conversion date in the amounts of $109,846 and $19,385, respectively.  As the value of the shares and warrants equaled the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction.

Employment Agreement Share Issuance

On January 1, 2016, the Company issued 3,312,811 common shares to Robert Monster, CEO, in accordance with his employment agreement dated May 18, 2015.  The shares were valued based on the employment agreement date.  As 2,597,761 shares were earned due to the one year term of the employment agreement which has not yet completed, the stock based compensation of $779,325 was recorded during the year ended February 29, 2016.  The remaining shares which were not yet vested were recorded as a subscription receivable to be recorded in the 2017 fiscal year upon the completion of the employment agreement term.

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Prepaid Domain Names

During the years ended February 29, 2016 and February 28, 2015, the Company incurred $127,005 and $190,755, respectively, of annual domain name renewal fees. The amounts paid for the annual domain name renewal fees of $127,005 and $190,755, are paid directly to Epik, LLC, a company which is controlled by Robert Monster, the Company’s Chief Executive Officer. Epik, LLC, then uses those funds to directly pay Verisign and ICANN companies for the annual domain renewal costs of $7.85 and $0.25, respectively, per domain name.

Notes Payable – Related Party

On April 22, 2014, the Company signed an unsecured promissory note with Richard Pomije, former CEO, CFO and Chairman for a working capital loan of $75,000, due in one year at an annual interest rate of 5%.  On December 1, 2014, the Company signed an additional unsecured promissory note with Richard Pomije for a working capital loan of $10,000 due in one year at an annual interest rate of 4%.  On August 14, 2014, the Company made a $10,000 principal payment on the $75,000 note payable leaving a remaining principal balance of $75,000 on the two notes payable as of February 28, 2015. On April 3, 2015, the Company signed an additional unsecured promissory note with Richard Pomije for a working capital loan of $15,000 due in one year at an annual interest rate of 4%.  In May 2015, the Company paid off all three notes payable resulting in no notes payable owed as of May 31, 2015. Accrued interest of $0 and $2,945 related to the $75,000 note payable is included in accounts payable as of February 29, 2016 and February 28, 2015, respectively, and accrued interest of $0 and $99 related to the $0 and $15,000 notes payable is included in accounts payable – related parties as of February 29, 2016 and February 28, 2015, respectively. All accrued interest was paid as of February 29, 2016.

Common Stock Subscriptions Receivable

The Company has stock subscriptions receivable due from a stockholder, Richard Pomije, the previous CEO, as of February 29, 2016 and February 28, 2015 of $0 and $625,482, respectively.  See Notes 8 and 11 for additional information.  

Note 9. Income Taxes

The Company accounts for income taxes under standards issued by the FASB. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.

No provision for federal income taxes has been recorded due to the net operating loss carry forwards totaling approximately $9,591,131 as of February 29, 2016 that will be offset against future taxable

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

income.  The available net operating loss carry forwards will expire in various years through 2036. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carry forwards.

The actual income tax provisions differ from the expected amounts calculated by applying the statutory income tax rate to the Company’s loss before income taxes.  The components of these differences are as follows at February 29, 2016 and February 28, 2015:

Note 10. Commitments and Contingencies

The Company is exposed to asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.

On August 22, 2011, the Company entered into a nine-month agreement with Enable Consulting, LLC (“Enable”) to complete the design and development of the Company’s Sales Center Application.  The Company committed up to $66,000 for the development and maintenance support of this software application through May 31, 2012.  On June 27, 2012, the Company signed an amendment to its existing contract with Enable to establish payment terms for the remaining balance due Enable of $36,000 and prioritize the remaining unresolved maintenance items which Enable was to have completed by August 15, 2012.  The Company paid $13,500 on June 29, 2012.  As of February 29, 2016, the maintenance items remain unresolved and the Company has a balance due Enable of $22,500, which is included in accounts payable.   

On December 8, 2010, the Company entered into a five-year strategic partnership agreement with the National Interscholastic Athletic Administrators Association (“NIAAA”).  The NIAAA and DigitalTown

33

DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

will work together to establish a national, standardized system for recording schedules, scores, rosters and statistics for interscholastic sports teams and individual students.  Pursuant to the agreement, the Company has committed to pay the expenses related to this strategic partnership; however, any expenses in excess of $5,000 must be preapproved by the Company.  The Company has committed to deposit $50,000 for such expenses for the first fiscal year of the contract which the Company has paid as of February 29, 2012.  In addition, as of February 28, 2015, the Company has paid $20,000 of the $50,000 due for the second fiscal year of the contract and the balance due of $30,000 is included in accounts payable.  In addition, the Company has committed to donate 25% of the annual net sponsorship revenue in the scheduling and stats areas of its websites, with a total annual donation cap of $3,000,000, to yet to be named program funds that promote youth activities and the NIAAA. Lastly, the Company has committed to a minimal revenue share of $100,000 per year with the future launch of its beta 3 software.  As of February 29, 2016, the Company has not yet launched its beta 3 software nor has it generated any net sponsorship revenue.

Note 11. Common Stock Subscriptions Receivable

Prior to May 11, 2015, the Company had the 2007 and 2011 stock subscription agreements outstanding all of which were due from a related party: (See Notes 3 and 5 for further information).

Summary

As of February 29, 2016, the Company is owed $5,000 for stock issued and has accrued an additional $7,150 for stock which is payable during the 2017 fiscal year under the employment agreement with Robert Monster.  The Company did not have any stock receivables remaining related to the 2007 and 2010 agreements.

As of February 28, 2015, the Company had stock subscriptions receivable of $625,482 and for the year ended February 28, 2015, the Company received stock subscription payments of $15,913.

The following tables summarize information about the 2007 and 2010 agreements for stock subscriptions receivable with Richard Pomije:

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Note 12. Earnings (Loss) Per Share

The Company computes earnings per share using two different methods, basic and diluted, and presents per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding.

The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the years ended February 29, 2016 and February 28, 2015:

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DigitalTown, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended February 29, 2016 and February 28, 2015

Note 13. Subsequent Events

On March 4, 2016, the Company completed an acquisition of the operating assets of Cloud.Market, a Washington corporation and appointed the Founder of Cloud.Market, Mr Chris Maxwell, to the newly created position of Chief Technology Officer.

On May 25, 2016, the Company entered into a stock purchase agreement for 1,600,000 restricted common shares at $0.25 per share, for total cash proceeds of $400,000.

There were no additional significant subsequent events through June 1, 2016, the date the financial statements were issued.

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES.

1.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness, as of February 29, 2016, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the Securities and Exchange Commission (“SEC”), under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our management has concluded, as discussed below, that material weaknesses existed in our internal control over financial reporting as of February 29, 2016 and as a result, our disclosures controls and procedures were not effective.  Notwithstanding the material weaknesses that existed as of February 29, 2016, our chief executive officer and chief financial officer have concluded that the financial statements included in this Annual Report on Form 10-K present fairly, in all material aspects, the financial position, results of operations and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Management’s Annual Report on Internal Control Over Financial Reporting  

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management concluded that the Company did not maintain effective internal controls over financial reporting as of February 29, 2016.  Management identified the following material weaknesses:

1.

Management did not maintain effective internal controls relating to the quarter end closing and financial reporting process in adequately preparing account reconciliations pertaining to stock option activity;

2.

The Company has insufficient internal personnel resources and technical accounting and reporting expertise within the Company’s financial closing and reporting functions; and

3.

Due to our small size, the Company did not maintain effective internal controls to assure proper segregation of duties as the same employee was responsible for initiating and recording of transactions, thereby creating a segregation of duties weakness;

This annual filing does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to an amendment to the Sarbanes-Oxley Act which exempts Smaller Issuers from the requirements of Section 404(b).

Changes in Internal Controls over Financial Reporting

During the fiscal quarter ended February 29, 2016, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Remediation

In response to the material weaknesses in our internal controls noted above, we have formalized the following corrective procedures to remediate them;

Material weakness #1, #2 and #3;

·

Apply a more rigorous review of the quarterly close processes by the CFO to ensure that the performance of the control is evidenced through appropriate documentation which is consistently maintained;

Additional controls for material weakness #1;

·

Reconciliation of internal stock option register with new options expensed on a quarterly basis;

·

Review of new stock option agreements with Chairman on a quarterly basis;

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·

All new stock option grants will be documented in the board minutes including grantee, date of grant and number of options granted.

With the implementation of these corrective actions, we believe that the previously reported material weaknesses will be remediated by the end of the first quarter of the fiscal year 2017; however such procedures will not be tested until our first quarter close.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information concerning each of the directors and executive officers of DigitalTown, Inc.

      (1)  Mr. Habben’s appointment is effective June 1, 2015, succeeding Richard A. Pomije, outgoing Chairman and CEO.

      (2)  Mr. Monster was appointed to the Board on May 11, 2015, and was appointed CEO effective May 18, 2015.

DARVIN R. HABBEN.  On May 12, 2015, Mr. Habben was appointed Chairman of the Board, effective June 1, 2015.  Mr. Habben is Founder, Chairman and Chief Executive Officer of Crossroads Trailer Sales and Service, Inc. in Albert Lea, MN.  Mr. Habben is Owner and CEO of Agilis, a national donations processing and fulfillment company serving non-profit companies.

ROBERT W. MONSTER.  On May 11, 2015, Mr. Monster was appointed to the Board and appointed as CEO effective May 18, 2015.  Mr. Monster is Founder, Chairman and CEO of Epik and Managing Director of Monster Venture Partners LLC.  Mr. Monster was the Founder of GMI (Global Market Insite, Inc.). Prior to founding GMI, Mr. Monster was a global product development manager with Procter & Gamble.  Mr. Monster has both a BS and an MBA from Cornell University.

JEFFREY L. MILLS has served as a director since December 23, 2003. Mr. Mills worked for Xerox Corporation for 27 years in various management and operational roles and is currently consulting in the digital marketplace.  Additionally, Mr. Mills has held a variety of leadership roles across various private equity companies, including President and Director level positions.  He also currently serves as a director for one private company. Mr. Mills is a graduate of the University of Northern Iowa.

JAMES B. PARSONS.  On May 22, 2015, Mr. Parsons was appointed to the Board. Mr. Parsons is Managing Partner of Parsons/Burnett/Bjordahl/Hume, LLP, a law firm with offices in Bellevue and Spokane, Washington.  He has been in practice for 35 years, emphasizing securities, both public and private, and general corporate law.  Mr. Parsons is a member of the Washington State Bar Association Securities Law Committee of the Business Law Section, and past Chair of the Northwest Securities Law Institute.  He served as past President and member of the Board of Eastside Legal Assistance Program, serving the legal needs of low income citizens.  He is a graduate of the University of Puget Sound and Lewis and Clark Law School, where he served on the Moot Court Board.

Directors are elected at the annual meeting of the stockholders and serve until their successors are elected and qualified. Officers are elected by the Board of Directors and serve at the discretion of the Board of Directors or until their earlier resignation or removal.

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Audit Committee

Currently, Mr. Mills is the only member of the Audit Committee. The Audit Committee is responsible for assisting the Board of Directors with respect to its oversight of corporate accounting, reporting practices of the Company and the quality and integrity of the financial reports of the Company. The Board has named Mr. Mills as the "audit committee financial expert" as defined by Item 401(h)(2) of Regulation S-K under the Securities Act of 1933. The Company acknowledges that the designation of Mr. Mills as the “audit committee financial expert” does not impose on him any duties, obligations or liability that are greater than the duties, obligations and liability imposed on him as a member of the Audit Committee and the Board of Directors in the absence of such designation or identification.

ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth the compensation paid for services rendered during the fiscal years ended February 29, 2016 and February 28, 2015 to the Principal Executive Officer/Chief Executive Officer and the Principal Financial Officer/Chief Financial Officer.  

Summary Compensation Table

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OPTIONS GRANTED IN THE LAST FISCAL YEAR

The following table sets forth information regarding options granted to the named executive officers and directors during the year ended February 29, 2016.

Grants of Plan-Based Awards

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OUTSTANDING OPTIONS AT FISCAL YEAR-END

The following table provides information relating to the value of shares of common stock subject to options held by the named executive officers and directors as of February 29, 2016.

Outstanding Equity Awards at Fiscal Year-End

OPTIONS EXERCISED BY THE EXECUTIVE OFFICERS AND DIRECTORS IN THE LAST FISCAL YEAR

None

DIRECTORS' COMPENSATION

The Company indefinitely suspended payment of directors’ fees for the fiscal years ended February 29, 2016 and February 28, 2015.  

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding our common stock, on an as converted basis, beneficially owned as of February 29, 2016 for (i) each stockholder we know to be the beneficial owner of 5% or more of our outstanding common stock; (ii) all directors and executive officers; and (iii) all directors and executive officers as a group.  The securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the SEC and, accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days, per rule 13d-3(d)(1) under the Securities and Exchange Act of 1934.  As of May 31, 2016 we had 41,461,543 issued and outstanding shares of common stock.

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(1)

On June, 1, 2015, Mr. Pomije surrendered the 2,750,000 options with a $1.00 exercise price.  

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, and the rules promulgated there under require the Company's officers, directors, and holders of 10% or more of its outstanding common stock to file certain reports with the Securities and Exchange Commission (the "Commission"). To the Company's best knowledge, based solely on information provided by the reporting individuals, all of the reports required to be filed by these individuals were filed.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Lease with Director/Stockholder

Since September 1, 2014 the Company has had a month-to-month agreement requiring rental payments of $1,050 per month. Mr. Mills invoiced the Company $1,868 and $20,250 for the years ended February 29, 2016 and February 28, 2014, respectively.  At February 29, 2016 and February 28, 2015, the Company owed Mr. Mills $0 and $24,065, respectively, pertaining to the lease.

Accounts Payable – Related Parties

The Company had accounts payable balances due to related parties of $4,269 at February 29, 2016 due to Richard Pomije.  The balance at February 28, 2015 was $61,282 which consisted of $37,217 due to Richard Pomije and $24,065 due to Jeffrey Mills.

Deferred Officer Compensation

The Company owed deferred officer compensation to Richard Pomije, the former CEO, CFO and Chairman of the Company as of February 29, 2016 and February 28, 2015 of $0 and $352,292, respectively. See Note 3 for additional information.

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Accrued Salary Conversion

On February 10, 2016, Robert Monster, CEO converted $129,231 of his accrued salary into 1,292,310 common shares and 1 year stock options with an exercise price of $0.15.  The shares and warrants were valued on the conversion date in the amounts of $109,846 and $19,385, respectively.  As the value of the shares and warrants equaled the conversion amount of accrued salary, no gain or loss was recorded as a result of this transaction.

Employment Agreement Share Issuance

On January 1, 2016, the Company issued 3,312,811 common shares to Robert Monster, CEO, in accordance with his employment agreement dated May 18, 2015.  The shares were valued based on the employment agreement date.  As 2,597,761 shares were earned due to the one year term of the employment agreement which has not yet completed, the stock based compensation of $779,325 was recorded during the year ended February 29, 2016.  The remaining shares which were not yet vested were recorded as a subscription receivable to be recorded in the 2017 fiscal year upon the completion of the employment agreement term.

Prepaid Domain Names

During the years ended February 29, 2016 and February 28, 2015, the Company incurred $127,005 and $190,755, respectively, of annual domain name renewal fees. The amounts paid for the annual domain name renewal fees of $127,005 and $190,755, are paid directly to Epik, LLC, a company which is controlled by Robert Monster, the Company’s Chief Executive Officer. Epik, LLC, then uses those funds to directly pay Verisign and ICANN companies for the annual domain renewal costs of $7.85 and $0.25, respectively, per domain name.

Notes Payable – Related Party

On April 22, 2014, the Company signed an unsecured promissory note with Richard Pomije, former CEO, CFO and Chairman for a working capital loan of $75,000, due in one year at an annual interest rate of 5%.  On December 1, 2014, the Company signed an additional unsecured promissory note with Richard Pomije for a working capital loan of $10,000 due in one year at an annual interest rate of 4%.  On August 14, 2014, the Company made a $10,000 principal payment on the $75,000 note payable leaving a remaining principal balance of $75,000 on the two notes payable as of February 28, 2015. On April 3, 2015, the Company signed an additional unsecured promissory note with Richard Pomije for a working capital loan of $15,000 due in one year at an annual interest rate of 4%.  In May 2015, the Company paid off all three notes payable resulting in no notes payable owed as of May 31, 2015. Accrued interest of $0 and $2,945 related to the $75,000 note payable is included in accounts payable as of February 29, 2016 and February 28, 2015, respectively, and accrued interest of $0 and $99 related to the $0 and $15,000 notes payable is included in accounts payable – related parties as of February 29, 2016 and February 28, 2015, respectively. All accrued interest was paid as of February 29, 2016.

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Common Stock Subscriptions Receivable

The Company has stock subscriptions receivable due from a stockholder, Richard Pomije, the previous CEO, as of February 29, 2016 and February 28, 2015 of $0 and $625,482, respectively. See Notes 8 and 11 for additional information.  

ITEM 14. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES

M&K CPAS, PLLC ("M&K") served as the Company’s independent registered public accounting firm during the fiscal year ended February 29, 2016 and February 28, 2015.  The aggregate fees billed by M&K for professional services rendered for the audit of our annual consolidated financial statements included in our annual reports on Form 10-K and for the reviews of the consolidated financial statements included in our quarterly reports on Form 10-Q for the fiscal years ended February 29, 2016 and February 28, 2015 were $26,000 and $26,500, respectively.  There were no aggregate fees billed by M&K for other audit related services or tax services for the fiscal years ended February 29, 2016 or February 28, 2015.  

Audit Committee Policies and Procedures:

The primary responsibility of the Audit Committee is to oversee the Company’s financial reporting process on behalf of the Board and report the results of their activities to the Board. Management is responsible for preparing the Company’s financial statements, and the independent auditors are responsible for auditing those financial statements. The Committee in carrying out its responsibilities and believes its policies and procedures should remain flexible in order to best react to changing conditions and circumstances.

The following shall be the principal recurring processes of the Audit Committee in carrying out its oversight responsibilities. The processes are set forth as a guide with the understanding that the Committee may supplement them as appropriate.

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47

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PART IV

ITEM 15.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

(a)

Consolidated Financial Statements

Audited Consolidated Financial Statements for the year ended February 29, 2016 and February 28, 2015

(b)

Exhibits.

(1)

Incorporated by reference to exhibit filed as a part of Registration Statement on Form 10-SB (Commission File No. 000-27225).

(2)

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

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