What happened to DigitalTown

DigitalTown files reorganization plan to explains what went wrong.

DigitalTown (OTC: DGTW) filed for Chapter 11 bankruptcy in September following failing to come to terms with former CEO and founder Richard Pomije.

The firm is relevant to the domain name industry for many reasons:

• It developed a number of premium domain names
• Its creditors include GMO Registry and Whatbox? Holdings
• Its investors include top level domain firm MMX
• Rob Monster, CEO of Epik, was a previous CEO and is a creditor
• Its “clean up team” includes former ICANN CFO Kevin Wilson
• The firm registered many second level domains in fresh top level domains (sometimes under an arrangement in which the fresh TLD operator paid it to acquire the domains).

DigitalTown filed its Plan of Reorganization (pdf) on Monday. It lays out current management’s view of what went wrong at the firm. It summarizes:

DigitalTown has never lacked entrepreneurial spirit, but it has lacked a coherent management philosophy and an ability to execute on its ambitious plans. Many ideas were ill-conceived and lacked the necessary resources to effectively develop and promote them. Programs were implemented with little regard or understanding of registration and licensing requirements, such as the CityShare program (and the potential of it being confused with a securities offering); and disregard of fierce and inexorable competition, like the SmartWallet solution (and the associated implications of registering as a money services business).

It also blames the firm’s buyout strategy:

The Firm’s strategy also included the buyout of various organizations around the world, using cash from the equity raises, and many as all-stock transactions. These firms were not cash flow positive, and most required significant working capital, causing a further drain on the Firm’s liquid assets. Further, none were initially well-aligned with the Firm’s vision, creating further distractions for all involved.

The reorganization plan explains many challenges the firm faced.

Ultimately, DigitalTown convinced all of its major creditors except for Pomije to convert their debt into equity. The holdout pushed the firm into bankruptcy.

DigitalTown has a business plan related to local commerce, and it hopes to exit from bankruptcy protection to execute its plan.

All of this begs the question, is a public firm shell worth all of this effort? Why not just start a fresh firm to execute the plan?

Following all, the plan makes it clear that there’s no value in the firm. It states:

The Debtor essentially has only one asset – its proprietary software. The software is outdated and needs to be updated. Ultimately, the Debtor believes that the software has no liquidation value. The costs of updating the software is likely more than the costs of developing a similar software “from scratch” for a third party and would therefore not likely attract any interest in the marketplace.

But then also states:

We will repurpose our portfolio of existing intellectual property. By utilizing existing software code, we can quickly and efficiently go to market with a modest outlay of cash and time.

The reorganization plan provides one hint as to why, beyond being publicly traded, it makes sense to go through this effort: the firm has net operating losses that can provide a tax benefit going forward.