##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q/A
 AMENDMENT NO. 1
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
 For the transition period from  to
 Commission File No. 000-53235
 DIGITILITI, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    26-1408538(State or Other Jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 th th
 (Address of Principal Executive Offices)
  (Registrants telephone number, including area code)
  (Former name, former address and former fiscal year,
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ




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Explanatory Note




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##### 



PART I
  PART IItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4T. Controls and Procedures
    
    
    20PART IIItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    
    24SIGNATURES
    
    
    25Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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Item 1. Financial Statements.
 DIGITILITI, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 September 30, 2009
    
    
    December 31, 2008RestatedASSETSCURRENT ASSETSCash
    
    $
    116,865
    
    
    $
    36,317Accounts receivable
    
    
    589,382
    
    
    
    549,127Prepaid and other current assets
    
    
    151,978
    
    
    
    201,488TOTAL CURRENT ASSETS
    
    
    858,225
    
    
    
    786,932PROPERTY AND EQUIPMENT
    
    
    616,608
    
    
    
    1,105,113SOFTWARE LICENSE
    
    
    1,115,384
    
    
    
    1,302,158DEFERRED FINANCING COSTS
    
    
    71,919
    
    
    
    202,484OTHER ASSETS
    
    
    6,322
    
    
    
    6,322TOTAL ASSETS
    
    $
    2,668,458
    
    
    $
    3,403,009LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable
    
    $
    436,985
    
    
    $
    234,957Accounts payable  related parties
    
    
    117,771
    
    
    
    104,869Accrued expenses
    
    
    920,086
    
    
    
    1,136,408Due to related parties
    
    
    21,074
    
    
    
    87,622Current maturities of note payable
    
    
    1,829,950
    
    
    
    875,365Current maturities of capital lease obligations
    
    
    123,766
    
    
    
    439,318Current maturities of notes payable  related parties
    
    
    
    
    
    
    156,540Current maturities of convertible debt
    
    
    1,427,183
    
    
    
    2,435,466TOTAL CURRENT LIABILITIES
    
    
    4,876,815
    
    
    
    5,470,545CAPITAL LEASE OBLIGATIONS
    
    
    36,141
    
    
    
    65,037CONVERTIBLE DEBT
    
    
    1,405,442
    
    
    
    1,758,252CONVERTIBLE DEBT  related parties
    
    
    
    
    
    
    342,532DEFERRED RENT
    
    
    16,781
    
    
    
    18,130OTHER LIABILITIES
    
    
    
    
    
    
    3,607TOTAL LIABILITIES
    
    
    6,335,179
    
    
    
    7,658,103STOCKHOLDERS DEFICITCommon stock, $.001 par value; 100,000,000 shares
authorized, 34,736,316 and 26,665,020 shares
issued and outstanding
    
    
    34,736
    
    
    
    26,665Additional paid-in capital
    
    
    14,647,866
    
    
    
    10,092,294Accumulated deficit
    
    
    (18,349,323
    )
    
    
    (14,374,053
    )TOTAL STOCKHOLDERS DEFICIT
    
    
    (3,666,721
    )
    
    
    (4,255,094
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    2,668,458
    
    
    $
    3,403,009
 See accompanying notes to consolidated financial statements.
  3




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DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008RestatedREVENUES
    
    $
    760,017
    
    
    $
    880,549
    
    
    $
    2,479,965
    
    
    $
    2,211,958COST OF REVENUES
    
    
    492,490
    
    
    
    521,743
    
    
    
    1,499,013
    
    
    
    1,410,698GROSS PROFIT
    
    
    267,527
    
    
    
    358,806
    
    
    
    980,952
    
    
    
    801,260OPERATING EXPENSESSelling and marketing
    
    
    62,046
    
    
    
    195,692
    
    
    
    267,375
    
    
    
    520,815General and administrative
    
    
    320,413
    
    
    
    1,122,346
    
    
    
    1,534,336
    
    
    
    2,898,055Research and development
    
    
    206,504
    
    
    
    402,542
    
    
    
    539,383
    
    
    
    1,339,413TOTAL OPERATION EXPENSES
    
    
    588,963
    
    
    
    1,720,580
    
    
    
    2,341,094
    
    
    
    4,758,283LOSS FROM OPERATIONS
    
    
    (321,436
    )
    
    
    (1,361,774
    )
    
    
    (1,360,142
    )
    
    
    (3,957,023
    )LOSS ON SETTLEMENT OF PAYABLE
    
    
    108,187
    
    
    
    
    
    
    
    108,187
    
    
    
    INTEREST EXPENSE
    
    
    226,217
    
    
    
    643,294
    
    
    
    2,506,941
    
    
    
    1,506,018NET LOSS
    
    $
    (655,840
    )
    
    $
    (2,005,068
    )
    
    $
    (3,975,270
    )
    
    $
    (5,463,041
    )NET LOSS PER SHARE  BASIC AND DILUTED
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.12
    )
    
    $
    (0.22
    )WEIGHTED-AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED
    
    
    34,648,490
    
    
    
    25,701,388
    
    
    
    33,845,310
    
    
    
    25,386,626
 See accompanying notes to consolidated financial statements.
  4




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DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months EndedSeptember 30,2009
    
    
    2008RestatedOPERATING ACTIVITIESNet loss
    
    $
    (3,975,270
    )
    
    $
    (5,463,041
    )Adjustments to reconcile net loss to net cash used by
operating activities:Depreciation and amortization
    
    
    817,212
    
    
    
    801,449Amortization of deferred financing costs
    
    
    187,065
    
    
    
    201,848Amortization of discount on convertible debt
    
    
    750,804
    
    
    
    675,520Loss on settlement of payable
    
    
    108,187
    
    
    
    Bad debt expense
    
    
    20,692
    
    
    
    Common stock issued for services
    
    
    
    
    
    
    568,149Common stock issued for purchase of R & D
    
    
    
    
    
    
    375,000Employee stock option expense
    
    
    164,778
    
    
    
    910,402Beneficial conversion feature on converted notes
    
    
    977,029
    
    
    
    Warrants expense
    
    
    302,297
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (60,947
    )
    
    
    (367,900
    )Prepaid and other current assets
    
    
    49,510
    
    
    
    (31,935
    )Accounts payable
    
    
    202,028
    
    
    
    155,766Accounts Payable-related parties
    
    
    12,902
    
    
    
    Accrued expenses
    
    
    330,448
    
    
    
    697,909Deferred rent
    
    
    (4,956
    )
    
    
    (764
    )Net cash used by operating activities
    
    
    (118,221
    )
    
    
    (1,477,597
    )INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (29,678
    )
    
    
    (480,318
    )Net cash used by investing activities
    
    
    (29,678
    )
    
    
    (480,318
    )FINANCING ACTIVITIESProceeds from issuance of convertible debt
    
    
    630,000
    
    
    
    2,480,370Financing costs
    
    
    (54,500
    )
    
    
    (230,050
    )Payments on capital lease obligations
    
    
    (352,678
    )
    
    
    (533,011
    )Proceeds from notes payable  related parties
    
    
    
    
    
    
    25,012Payments on notes payable  related parties
    
    
    
    
    
    
    (10,000
    )Payments on due to related parties
    
    
    (2,000
    )
    
    
    Proceeds from notes payable
    
    
    287,197
    
    
    
    Payments on notes payable
    
    
    (279,572
    )
    
    
    Net cash provided by financing activities
    
    
    228,447
    
    
    
    1,732,321
  5




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DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
 Nine Months EndedSeptember 30,2009
    
    
    2008RestatedNET INCREASE (DECREASE) IN CASH
    
    
    80,548
    
    
    
    (225,594
    )CASHBeginning of period
    
    
    36,317
    
    
    
    241,333End of period
    
    $
    116,865
    
    
    $
    15,739Supplemental Cash Flow InformationCash paid for interest
    
    $
    59,802
    
    
    $
    18,875Cash paid for taxes
    
    
    
    
    
    
    Non-Cash Financing and Investing Activities:Equipment acquired under capital lease
    
    $
    8,230
    
    
    $
    Notes payable issued to acquire software
    
    
    104,025
    
    
    
    Shares issued for accrued interest on convertible debt
    
    
    335,503
    
    
    
    Shares issued for convertible debt
    
    
    2,312,700
    
    
    
    Warrant and BCF discount on convertible debt
    
    
    237,163
    
    
    
    Reclassification of related parties debt to non-related party debt
    
    
    857,484
    
    
    
    
 See accompanying notes to consolidated financial statements.
  6




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DIGITILITI, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Organization, Basis of Presentation and Significant Accounting Policies
  Restatement
   The nine months ended September 30, 2009:
 As previouslyReported
    
    
    Adjustments
    
    
    AdjustedInterest expense
    
    $
    1,735,488
    
    
    $
    771,453
    
    
    $
    2,506,941Net loss
    
    $
    3,203,817
    
    
    $
    771,453
    
    
    
    3,975,270Loss per share  Basic and diluted
    
    
    0.09
    
    
    
    0.02
    
    
    
    0.12
  Reclassification
  New Accounting Pronouncements
   2. Going Concern
     7




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3. Convertible Debt
 12% Convertible Debt  $5.5 million Private Offering
  1 2
 1 2
    12% Convertible Debt  $750,000 Private Offering
    8




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September 30,
    
    
    December 31,2009
    
    
    2008Gross proceeds from the debts
    
    $
    6,130,000
    
    
    $
    5,500,000Less: discount on the warrants
    
    
    (3,433,064
    )
    
    
    (3,369,874
    )Less: beneficial conversion feature
    
    
    (173,973
    )
    
    
    Less: principal converted to common stock
    
    
    (2,582,700
    )
    
    
    (270,000
    )Add: accumulated amortization of discount
    
    
    2,892,362
    
    
    
    2,333,592Subtotal
    
    
    2,832,625
    
    
    
    4,193,718Less: current maturities
    
    
    (1,427,183
    )
    
    
    (2,435,466
    )Long-term portion of convertible debt
    
    $
    1,405,442
    
    
    $
    1,758,252
  Convertible debt at December 31, 2008
    
    $
    4,193,718Add: gross proceeds from the convertible debt
    
    
    630,000Less: principal amount converted to common stock
    
    
    (2,312,700
    )Less: discount on the warrant
    
    
    (63,190
    )Less: beneficial conversion feature discount
    
    
    (173,973
    )Add: discount associated with converted debt
    
    
    378,590Add: amortization of discount
    
    
    180,180Convertible debt at September 30, 2009
    
    $
    2,832,625
 4. Related Party Transactions
    9




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5. Notes Payable
  September 30,
    
    
    December 31,2009
    
    
    2008Exanet Software Purchase Agreement
    
    $
    485,000
    
    
    $
    485,000Asigra Software vendor financing
    
    
    440,063
    
    
    
    390,365Note payable to an individual
    
    
    47,403
    
    
    
    Reclassification of due to former related party
    
    
    71,637
    
    
    
    Reclassification of notes payable to former related party
    
    
    231,540
    
    
    
    Reclassification of convertible debt to former related parties
    
    
    554,307
    
    
    
    Total Notes Payable
    
    $
    1,829,950
    
    
    $
    875,365
  6. Stockholders Equity
 Common Stock:
   10




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Stock Options:
       Weighted-AverageOptions
    
    
    Exercise PriceOutstanding at December 31, 2008
    
    
    4,116,806
    
    
    $
    0.37Granted
    
    
    1,700,000
    
    
    
    0.38Forfeited
    
    
    (1,623,806
    )
    
    
    0.37Outstanding at September 30, 2009
    
    
    4,193,000
    
    
    
    0.37
  11




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Stock Warrants:
         12




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Weighted-AverageWarrants
    
    
    Exercise PriceOutstanding at December 31, 2008
    
    
    6,200,348
    
    
    $
    1.59Granted
    
    
    1,665,000
    
    
    
    0.39Outstanding at September 30, 2009
    
    
    7,865,348
    
    
    
    1.34
  7. Subsequent Events
      13




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Item 2. Managements Discussions and Analysis of Financial Condition and Results of Operations.
 Forward-looking Statements
    Plan of Operation
     14




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15




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www.digitiliti.com
   16




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Results of Operations
 For the three months period ended September 30, 2009, and 2008
      17




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For the nine months ended September 30, 2009, and 2008
       18




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st
 Liquidity
       19




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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4T. Controls and Procedures.
 Evaluation of disclosure controls and procedures
 
    Changes in internal control over financial reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 1A. Risk Factors.
   20




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Quarterly Period Ended September 30, 2009
   Subsequent to September 30, 2009
     21




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Item 3. Defaults Upon Senior Securities.
  Total
    
    
    Due DateTotal
    
    
    Total
    
    
    Principal &
    
    
    ForPrincipal
    
    
    Acc. Interest
    
    
    Accrued
    
    
    Principal &Balance of
    
    
    on
    
    
    Interest on
    
    
    AccruedTotal of
    
    
    Conv. Notes
    
    
    Conv. Notes
    
    
    Conv. Notes
    
    
    Interest onConvertible
    
    
    Outstanding
    
    
    Outstanding
    
    
    Outstanding
    
    
    ConvertibleNotes Sold at
    
    
    as of
    
    
    as of
    
    
    as of
    
    
    Notes at12/31/2008
    
    
    11/14/2009
    
    
    11/14/2009
    
    
    11/14/2009
    
    
    11/14/20091st Qtr 2007
    
    $
    401,050
    
    
    $
    60,000
    
    
    $
    19,620
    
    
    $
    79,620
    
    
    Sep-082nd Qtr 2007
    
    $
    707,500
    
    
    $
    225,000
    
    
    $
    67,973
    
    
    $
    292,973
    
    
    Dec-083rd Qtr 2007
    
    $
    1,165,000
    
    
    $
    105,000
    
    
    $
    28,062
    
    
    $
    133,062
    
    
    Mar-094th Qtr 2007
    
    $
    926,000
    
    
    $
    140,000
    
    
    $
    34,992
    
    
    $
    174,992
    
    
    Jun-091st Qtr 2008
    
    $
    808,500
    
    
    $
    15,000
    
    
    $
    3,060
    
    
    $
    18,060
    
    
    Sep-092nd Qtr 2008
    
    $
    945,500
    
    
    $
    98,000
    
    
    $
    17,976
    
    
    $
    115,976
    
    
    Dec-093rd Qtr 2008
    
    $
    546,450
    
    
    $
    65,000
    
    
    $
    10,163
    
    
    $
    75,163
    
    
    Mar-10$
    5,500,000
    
    
    $
    708,000
    
    
    $
    181,846
    
    
    $
    889,846
   
 Item 4. Submission of Matters to a Vote of Security Holders.
  For
    
    
    Against
    
    
    AbstainRoy A. Bauer
    
    
    26,226,323
    
    
    
    70,284
    
    
    
    452,569Karen Gilles Larson
    
    
    26,033,718
    
    
    
    70,284
    
    
    
    244,974Kedar Belhe
    
    
    25,983,518
    
    
    
    70,284
    
    
    
    244,974
 
 Item 5. Other Information.
    22




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Base Salary:
    Other Compensation:
   Performance Incentives:
     23




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Item 6. Exhibits.
 Exhibit No.
    
    Identification of Exhibit3.1
    
    
    Initial Certificate of Incorporation filed March 31, 2006.
    
    Exhibit to our Form 103.2
    
    
    Bylaws.
    
    Exhibit to our Form 103.3
    
    
    Certificate of Amendment regarding the name change to Digitiliti,
inc. and the Recapitalization.
    
    Exhibit to our Form 103.4
    
    
    Certificate Correction regarding the name change to Digitiliti, Inc.
    
    Exhibit to our Form 103.5
    
    
    Amended and Restated Certificate of Incorporation filed May 13, 2008.
    
    Exhibit to our Form 1010.1
    
    
    Stock Purchase Agreement between Storage and our former principal
shareholders under which Storage acquired a controlling interest in
us.
    
    Exhibit to our Form 1010.2
    
    
    Agreement and Plan of Merger between us, Themescapes and Bulldog
under which we became a holding company.
    
    Exhibit to our Form 1010.3
    
    
    Agreement and Plan of Merger, as amended, between us, Cyclone
Acquisition and Storage under which Storage became our wholly-owned
subsidiary.
    
    Exhibit to our Form 1010.4
    
    
    XO Communications Contract.
    
    Exhibit to our Form 1010.5
    
    
    FRM Associates Lease, as amended.
    
    Exhibit to our Form 1010.6
    
    
    EBC Minneapolis, Inc. Sublease Agreement.
    
    Exhibit to our Form 1010.7
    
    
    Upper Corner Venture, LLC Lease Agreement.
    
    Exhibit to our Form 1010.8
    
    
    M2 Consulting Agreement of May 2006, with Addendums.
    
    Exhibit to our Form 1010.9
    
    
    M2 Consulting Agreement of April 2008.
    
    Exhibit to our Form 1010.10
    
    
    5X Partners Corporate Development Services Agreement with Addendums.
    
    Exhibit to our Form 1010.11
    
    
    StorageSwitch Consulting Services Agreement.
    
    Exhibit to our Form 1010.12
    
    
    StorageSwitch Non-Compete Agreement.
    
    Exhibit to our Form 1010.13
    
    
    StorageSwitch Technology Purchase Agreement.
    
    Exhibit to our Form 1010.14
    
    
    Vision to Practice, Inc. Development Services Agreement.
    
    Exhibit to our Form 1010.15
    
    
    Form of 12% Convertible Note.
    
    Exhibit to our Form 10/A-210.16
    
    
    Form of A Warrant for 12% Convertible Note Offering.
    
    Exhibit to our Form 10/A-210.17
    
    
    Form of B Warrant for 12% Convertible Note Offering.
    
    Exhibit to our Form 10/A-210.18
    
    
    Letter Agreement with M2 of June, 2008.
    
    Exhibit to our Form 10/A-216.1
    
    
    Letter of Auditors regarding termination.
    
    Exhibit to our Form 10/A-221
    
    
    Subsidiaries.
    
    Exhibit to our Form 1031.1
    
    
    302 Certification of CEO, Roy A. Bauer31.2
    
    
    302 Certification of CFO, William McDonald32.1
    
    
    906 Certification99.1
    
    
    Digitiliti, Inc. Stock Option Plan.
    
    Exhibit to our Form 10
  24




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SIGNATURES
  Digitiliti, Inc.Date: September 24, 2010
    
    By:
    
    /s/ Roy A. Bauer

Roy A. Bauer, President, CEO and
DirectorDate: September 24, 2010
    
    By:
    
    /s/ William McDonaldWilliam McDonald, CFO
  25