The following is a discussion of the financial condition as of August 31, 2019
and its results of operations of the Company for the six months ended August 31,
2019 and 2018, which should be read in conjunction with, and is qualified in its
entirety by, the financial statements and notes thereto included elsewhere in
this report and the audited consolidated financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended February 28, 2019.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q for the quarter ended August 31, 2019, contains forward-looking
statements. Forward-looking statements may be identified by the use of
forward-looking terminology, such as "may," "shall," "could," "expect,"
"estimate," "anticipate," "predict," "probable," "should," "continue," or
similar terms, variations of those terms or the negative of those terms. The
forward-looking statements specified in the following information have been
compiled by our management and are considered by management to be reasonable.
Our future operating results, however, may be materially different and no
representation, guaranty, or warranty is to be inferred from those
forward-looking statements.
GENERAL
DigitalTown, Inc. ("The Company", "We", "Us", "Our" and "DigitalTown") provides
turn-key hosted solutions to power a comprehensive platform for government
entities, citizens and merchants. Our solutions improve the quality of life for
residents and visitors through integrated technology for economic development,
civic engagement, digital inclusion and smart tourism for cities around the
world. The easy to use platform helps city officials and local merchants manage
a feature-rich Smart City for web and mobile devices, and provides residents and
visitors with access to Content, Community and Commerce.
The Company's fiscal year end is the last day in February. Our current fiscal
year ends on February 29, 2020 and we refer to it as "fiscal 2020". Last year,
our fiscal year ended on February 28, 2019 and we refer to this year as "fiscal
2019".
Market Opportunity
We provide 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 when possible. The DigitalTown platform is intended to improve
how the local economy consumes and transacts. It does this by helping local
community citizens interact with city government, as well as local merchants.
Residents and visitors are able to use the 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 those 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 hub for mass commerce.
The Strategic Importance of Local Online Economic Development
The DigitalTown platform elevates local communities to an advanced state of
technical capability. To date, most cities have historically taken a hands-off
approach towards the Internet. However, we believe city management will further
consider the Internet as an integral part of their strategic plan for economic
growth.
The continued expansion of big box retailers and steep growth of national
eCommerce has created an increased number of challenges for locally owned small
businesses. This requires a new approach to online economic development - one
that equips local merchants with the means to compete locally and sell
nationally. DigitalTown provides a cost-effective solution to help local
businesses compete against entities with greater reach, scale and resources.
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Why the DigitalTown solution makes sense now
The DigitalTown platform is a cost-effective solution for enabling a community
to become a smart community, which we define as connected to shared content and
local commerce. A key enabler for this capability is the continued growth of
smartphones that are powered by common frameworks, such as Apple iOS and
Android. The use of smartphones has enabled individuals to communicate and
transact in real-time anywhere they choose using their smartphone, which serves
as a proxy for identity, reputation, preferences and method of payment. In
effect, the smartphone has become the Digital Wallet. We believe this
opportunity is global and our approach, which emphasizes public-private
partnerships, will enable accelerated adoption particularly in rural communities
where trust of technology is lower, the need is potentially the greatest, and
economic models are at the 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 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
The DigitalTown platform supports powerful online and mobile communities. We tap
into locally relevant news and content in order to keep community members
informed. 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 locally, nationally and even
globally.
Content Search
The DigitalTown search engine serves as 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. This will be accomplished through a
combination of marketing and education to residents. In addition, we believe
adoption can happen through building a strong level of trust with the residents,
since our platform will be endorsed or supported by the local government whom
the residents know. This compares to large national companies with limited to no
connection to the local residents.
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 and communicate with other
members of a given community. Community members can message, join groups, shop
online, and make payments.
Commerce
The DigitalTown platform provides merchants with a turn-key solution for online
commerce. Once the approved merchant loads SKU's and inventory available for
sale, the merchants can begin selling without any setup fees or capital
investment costs. 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.
Courier and Delivery Management
In a growing number of participating cities, an integrated courier and delivery
application is included, enabling approved delivery service providers 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. Delivery time is chosen by the customer and can be hours to
days.
Administration
The DigitalTown platform provides integrated administrative tools for managing
Content, Community and Commerce, making it easy to administer. The
administrative tools are designed to be the back end of the smart community. For
example, administrators can create Frequently Asked Questions (FAQ) that are
then presented through the site search. This FAQ article is then systematically
provided as information when a user makes an inquiry that matches the keywords
into the search box on the site.
Intellectual Property
Domain Name Portfolio. The Company is developing a proprietary platform for
Smart City Management. As part of this platform rollout, the Company has secured
approximately 13,000 of the .CITY domains that map to significant population
centers. DigitalTown has methodically secured the .CITY domains through both
acquisition from existing registrants, or via direct purchase from the operator
of the .CITY registrar.
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Software: The Company has developed a proprietary platform for enabling any city
to become a Smart City, incorporating advanced features for economic
development, community engagement and digital inclusion. In addition, the
Company has completed acquisitions of 7 software companies: Cloud.Market,
Software Masters, Inc, Rezserve Technologies Ltd, Appointment.com, Comencia Inc,
Congo Ltd. and CityInformation BV, each of which brought significant
intellectual property and is in process of being fully integrated into the
DigitalTown platform. The Company continues to invest in software with an
emphasis on capital efficiency and return on investment.
Dispositions
In late fiscal 2019, the Company sold the balance of its useful assets,
including 4 of the above-mentioned previously acquired software companies that
had not been integrated into the DigitalTown platform. The Company is also no
longer acquiring or renewing its domain name portfolio.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2019 AND 2018
During the second quarter of fiscal 2020, the Company recorded no revenues, cost
of revenues, or gross profit compared to revenues of $20,047 and cost of
revenues of $114,937 for a gross loss of $94,890 during the second quarter of
fiscal 2019.
The Company's operating expenses are currently all related to general and
administrative activity. These expenses were $263,007 in the second quarter of
fiscal 2020 compared to $1,511,914 in the second quarter of fiscal 2019, a
decrease of $1,248,907. Our stock-based compensation expense was $134,000 for
the second quarter of fiscal 2020 as compared to $639,496 for the second quarter
of fiscal 2019, a decrease of $505,496.
The Company's loss from discontinued operations was $0 in the second quarter of
fiscal 2020, compared to $71,453 in the second quarter of fiscal 2019, a
decrease of $71,453.
The Company's overall net loss from continuing operations for the current second
quarter decreased by $2,270,821 to $390,242. The decrease was mainly due to a
decrease in stock compensation expense, a decrease in debt and warrant discount
amortization, a decrease in prepaid annual domain name renewal fees, and the
decrease in general and administrative expenses.
SIX MONTHS ENDED AUGUST 31, 2019 AND 2018
During the first six months of fiscal 2020, the Company recorded revenues of
$50,000 and cost of revenues of $306 for a gross profit of $49,694 compared to
revenues of $41,972 and cost of revenues of $521,989 for a gross loss of
$480,017 during the first six months of fiscal 2019. For the first six months of
fiscal 2020, revenues mainly consisted of development fees. Cost of revenues
consisted of amortization of prepaid annual domain name renewal fees of $0 and
$302,989, development expense of $0 and $217,278, and merchant processing fees
of $306 and $1,722, for the first six months of fiscal years 2020 and 2019,
respectively.
The Company's operating expenses are currently all related to selling, general
and administrative activity. These expenses were $605,381 in the first six
months of fiscal 2020 compared to $2,687,358 in the first six months of fiscal
2019, a decrease of $2,081,977. Our stock-based compensation expense decreased
by $797,975 to $320,392 for the first six months of fiscal 2020, as compared to
$1,118,367 for the first six months of fiscal 2019.
The Company's loss from discontinued operations was $0 in the first six months
of fiscal 2020, compared to $173,610 in the first six months of fiscal 2019, a
decrease of $173,610.
The Company's overall net loss for the first six months of fiscal 2020 decreased
by $4,039,849 to $948,809, as compared to the first six months of fiscal 2019.
The decrease was mainly due to a decrease in stock compensation expense, a
decrease in debt and warrant discount amortization, a decrease in prepaid annual
domain name renewal fees, and the decrease in general and administrative
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at August 31, 2019 was $4,689, a decrease of $10,582
from $15,271 at February 28, 2019. During the first six months of fiscal 2020,
net cash used in operating activities was $79,582 compared to net cash used of
$1,540,094 for the first six months of fiscal 2019. When comparing the two
periods, the decrease in net cash used in operating activities of $1,460,512 for
the first six months of fiscal 2020 is primarily due to a decrease of cash
operating expenses.
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Net cash provided by investing activities was $0 and $718,181 for first six
months of fiscal years 2020 and 2019, respectively. In the second quarter of
fiscal 2019, the Company received cash from the sale of digital currencies.
Net cash provided by financing activities for the first quarter of fiscal 2020
was $70,000, compared to $796,359 in the first quarter of fiscal 2019, which
consisted mainly of borrowings on convertible notes.
Monthly cash operating expenses for the first quarter of fiscal 2020, were
approximately $40,000 per month. Based on current projections, the Company's
monthly cash operating expenses going forward should be approximately $40,000
per month.
We believe our current cash reserves, the amounts we expect from 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 operate profitably or raise additional capital
through the sale of our common stock, we would be forced to further reduce
operating expenses or cease operations altogether.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
Effective March 1, 2018, the Company adopted ASC 606 - Revenue from Contracts
with Customers. Under ASC 606, the Company recognizes revenue from the
commercial sales of products, licensing agreements and contracts to perform
pilot studies by applying the following steps: (1) identify the contract with a
customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to each
performance obligation in the contract; and (5) recognize revenue when each
performance obligation is satisfied. For the comparative periods, revenue has
not been adjusted and continues to be reported under ASC 605 - Revenue
Recognition. Under ASC 605, revenue is recognized when the following criteria
are met: (1) persuasive evidence of an arrangement exists; (2) the performance
of service has been rendered to a customer or delivery has occurred; (3) the
amount of fee to be paid by a customer is fixed and determinable; and (4) the
collectability of the fee is reasonably assured.
There was no impact on the Company's financial statements as a result of
adopting Topic 606 for the first quarter of fiscal 2020 or the twelve months
ended February 28, 2019.
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 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 amortized over one year and
the purchase of any new domain names are the only amounts capitalized. See Note
5 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.
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Recently Issued Accounting Pronouncements
Information regarding recently issued accounting pronouncements is included in
Note 1 to the consolidated financial statements in "Item 1 - Financial
Statements" in this Quarterly Report on Form 10-Q.
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