<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-22047
GO2NET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1710182
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
999 Third Avenue, Suite 4700
SEATTLE, WA 98104
---------------------------------------
(Address of principal executive offices)
(206) 447-1595
--------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant: (1) 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.
(1) Yes X No
---- ----
As of August 14, 1998, there were 5,910,592 shares of the Registrant's common
stock outstanding.
<PAGE> 2
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Balance Sheets as of June 30, 1998
and September 30, 1997 ...................................... 3
Condensed Statements of Operations for the three and nine
months ended June 30, 1998 and 1997 ......................... 4
Condensed Statements of Cash Flows for the nine
months ended June 30, 1998 and 1997 ........................ 5
Notes to Financial Statements .................................. 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 9
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings ............................................... 15
ITEM 2: Changes in Securities ........................................... 15
ITEM 3: Defaults Upon Senior Securities ................................. 15
ITEM 4: Submission of Matters to a Vote of Security Shareholders ........ 15
ITEM 5: Other Information ............................................... 15
ITEM 6: Exhibits and Reports on Form 8-K ................................ 15
SIGNATURES ...................................................... 16
Exhibit 27 Financial Data Schedule ...................................... 17
</TABLE>
2
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go2net, Inc.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
-------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 645,825 $ 10,926,781
Short-term investments ........................................................ 7,150,000 --
Receivables, net .............................................................. 735,228 99,031
Prepaid expenses .............................................................. 382,094 145,114
------------ ------------
Total current assets ....................................................... 8,913,147 11,170,926
Property and equipment, net ..................................................... 1,244,158 621,986
Intangibles, net ................................................................ 71,667 688,107
Deposits ........................................................................ 300,000 307,365
Long-term investments in marketable securities .................................. 1,444,248 --
Other assets .................................................................... 45,299 22,681
------------ ------------
Total assets ............................................................... $ 12,018,519 $ 12,811,065
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ......................................... $ 1,266,785 $ 151,920
Notes payable to shareholders ................................................ 38,798 130,081
Short term debt .............................................................. 128,063 34,580
Deferred revenue ............................................................. 164,769 20,637
------------ ------------
Total current liabilities .................................................. 1,598,415 337,218
Shareholders' equity:
Common stock, $0.01 par value, authorized 50,000,000 shares at June 30, 1998
and 9,000,000 shares at September 30, 1997; outstanding 5,753,093 at June
30, 1998 and 5,743,260 shares at September 30, 1997 ........................ 14,870,401 14,741,986
Accumulated deficit ........................................................... (4,450,297) (2,268,139)
Total shareholders' equity ................................................. 10,420,104 12,473,847
------------ ------------
Total liabilities and shareholders' equity ................................. $ 12,018,519 $ 12,811,065
============ ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 4
go2net, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue .................................................. $ 1,330,865 $ 218,443 $ 2,875,640 $ 218,443
Cost of revenue ......................................... 533,609 132,490 1,350,500 132,490
----------- ----------- ----------- -----------
Gross profit ............................................ 797,256 85,953 1,525,140 85,953
Operating expenses:
Sales and marketing ................................ 319,594 16,118 699,831 38,274
Product development ................................ 272,574 234,689 697,963 621,633
General and administrative ......................... 661,586 379,484 1,608,909 896,986
Merger and acquisition related costs ............... 715,982 -- 715,982 --
Impairment loss .................................... 398,126 -- 398,126 --
----------- ----------- ----------- -----------
Total operating expenses ................................. 2,367,862 630,291 4,120,811 1,556,893
Loss from operations ..................................... (1,570,606) (544,338) (2,595,671) (1,470,940)
Interest income, net ..................................... 134,476 107,238 413,513 115,439
----------- ----------- ----------- -----------
Net loss ................................................. $(1,436,130) $ (437,100) $(2,182,158) $(1,355,501)
=========== =========== =========== ============
Basic and diluted net loss per share (Note 2) ............ $ (.25) $ (.10) $ (.38) $ (.40)
=========== =========== =========== ============
Number of shares used in computing basic and
diluted net loss per share ............................... 5,753,093 4,334,622 5,745,060 3,412,406
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 5
go2net, Inc.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
June 30, 1998 June 30, 1997
------------ --------------
<S> <C> <C>
Operating activities:
Net loss ................................................................. $ (2,182,158) $(1,355,501)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ............................................ 531,553 85,581
Writedown of intangibles ................................................. 398,126 --
Stock Compensation ...................................................... -- 28,000
Changes in working capital: ................................................ --
Receivables .............................................................. (636,197) (32,502)
Prepaid expenses and other assets ........................................ (259,598) (297,750)
Deposits ................................................................. 7,365 (343,629)
Deferred revenue ......................................................... 144,132 --
Accounts payable and accrued expenses .................................... 1,114,865 217,173
------------ -----------
Net cash used in operating activities ...................................... (881,912) (1,698,628)
------------ -----------
Investing activities:
Purchases of investments ................................................. (28,400,138) --
Sales and maturities of investments ...................................... 19,805,890 --
Acquisition of property and equipment .................................... (935,411) (235,074)
------------ -----------
Net cash used in investing activities ...................................... (9,529,659) (235,074)
------------ -----------
Financing activities:
Proceeds from Issuance of Common Stock, net ............................. 128,415 12,983,788
Borrowing on Line of Credit ............................................. 200,000 500,000
Payment on Line of Credit ............................................... (200,000) (500,000)
Short-term borrowing .................................................... 152,578 59,834
Payment on short term borrowing .......................................... (59,095) --
Proceeds from Shareholder Notes .......................................... 32,856 201,595
Payments on Shareholder Notes ............................................ (124,139) (350,027)
Proceeds from Stock Subscription Receivable .............................. -- 80,000
------------ -----------
Net cash provided by financing activities .................................. 130,615 12,975,190
------------ -----------
Net increase/(decrease) in cash and cash
equivalents .............................................................. (10,280,956) 11,041,488
Cash and cash equivalents at beginning
of period ................................................................ 10,926,781 1,206,824
------------ -----------
Cash and cash equivalents at end of period ................................. $ 645,825 $12,248,312
============ ===========
</TABLE>
See notes to condensed financial statements.
5
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GO2NET, INC.
NOTES TO FINANCIAL STATEMENTS
1 THE COMPANY AND BASIS OF PRESENTATION
go2net, Inc. ("The Company") (http://www.go2net.com) offers a network of
technology and community-driven Web sites focused on the following categories:
personal finance, search, commerce, and games. The Company also develops
Web-related software. go2net's properties include: Silicon Investor
(http://www.techstocks.com), the Web's largest financial discussion site;
StockSite (http://www.stocksite.com), which offers proprietary articles,
portfolio tracking tools, company research and news relating to business and
finance; MetaCrawler (http://www.metacrawler.com), a search/index guide that
combines various existing search/index guides into one service (a "metasearch
engine"); WebMarket (http://www.webmarket.com), a one-stop comparison shopping
service; and PlaySite (http://www.playsite.com), a Java-based multiplayer online
games site. The Company's go2net Labs division develops innovative technologies
for use on the go2net sites and for licensing to other Internet companies.
In June 1998, the Company acquired Silicon Investor, Inc. ("SI") in a
merger transaction accounted for as a pooling of interests. Silicon Investor,
Inc. (URL: http://www.techstocks.com) operates a site on the Web focused on
personal finance. SI's primary focus is its discussion community, which has over
5,000,000 messages currently in its database. SI was incorporated in April 1995
and has since attracted over 60,000 subscribers who have in certain cases paid a
membership fee to participate in SI's financial discussions and other features.
All financial information has been restated to reflect the combined operations
of the Company and SI (see Note 3).
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles and reflect all adjustments which in the opinion of management are
necessary to fairly state the Company's financial position, result of operations
and cash flows for the periods presented.
These financial statements should be read in conjunction with the Company's
audited financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1997 and the Company's
supplemental consolidated financial statements reflecting the combined
operations of the Company and Silicon Investor, Inc. a transaction accounted for
as a pooling of interests, as included in the Company's Current Report on Form
8-K/A as filed with the Securities and Exchange Commission on August 13, 1998.
The results of operations for the period ended June 30, 1998 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending September 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company's revenue is derived principally from the sale of
advertisements on short-term contracts. Advertising revenue is recognized
ratably in the period in which the advertisement is displayed, provided that no
significant Company obligations remain and collection of the resulting
receivable is probable. To the extent that minimum guarantees are not met, the
Company defers recognition of the corresponding revenue until the remaining
guaranteed levels are achieved. Deferred revenue is comprised of billings in
excess of recognized revenue relating to contracts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates, and such
differences may be material to the financial statements.
6
<PAGE> 7
Investments
Investments are composed substantially of government and corporate fixed
income securities. The Company purchases such securities with the general
intention of having them available-for-sale. The amortized cost of investments
available-for-sale approximated fair market value.
Restricted Investments
The Company has restricted investments at June 30, 1998 of approximately
$300,000. This amount consists of a restricted certificate of deposit of
$300,000 held as collateral by a financial institution as a security deposit on
the lease of the Company's corporate headquarters.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of accounts receivable at June 30, 1998.
Generally, the Company does not require collateral or other security to support
customer receivables. The Company performs periodic credit evaluations of its
customers and maintains an allowance for potential credit losses based on
historical experience and other information available to management. Actual
credit losses may differ significantly from estimated amounts included in the
allowance for doubtful accounts and such difference could be material to the
financial statements.
Net Loss per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share also excludes any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The computation of basic
and diluted earnings per share is set forth in the statement of operations.
Reclassifications
Certain prior years' balances have been reclassified to conform to the
current year presentation.
3. BUSINESS COMBINATIONS
On June 23, 1998, the Company acquired all of the issued and outstanding
capital stock of Silicon Investor, which began operations in April 1995, in
exchange for 1,238,043 shares of the Company's Common Stock. In addition, the
Company assumed options to purchase capital stock of Silicon Investor, of which
11,957 are exercisable. This acquisition was accounted for as a pooling of
interests.
In connection with the merger, the Company incurred approximately $715,982
in merger-related expenses primarily for legal and other professional fees in
the third quarter of 1998.
Separate results for the combined entities for the three and nine months
ended June 30, 1998 and 1997 and for the approximate three-month and nine-month
period ended June 23, 1998 are as follows.
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
June 23, 1998 June 23, 1998 June 30, 1997 June 30, 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
go2net ............ $ 877,702 $ 1,812,238 $ 149,590 $ 149,590
Silicon Investor .. 453,163 1,063,402 68,853 68,853
----------- ----------- ----------- -----------
1,330,865 2,875,640 218,443 218,443
Net Income/(Loss):
go2net ............ (1,461,348) (2,472,524) (443,669) (1,219,547)
Silicon Investor .. 25,218 290,366 6,569 (135,954)
----------- ----------- ----------- -----------
(1,436,130) (2,182,158) (437,100) (1,355,501)
</TABLE>
7
<PAGE> 8
There were no significant intercompany transactions between the two
companies and no significant conforming accounting adjustments.
4. NON-RECURRING CHARGES
In addition to the non-recurring charges associated with the merger of SI,
the Company recorded a non-recurring charge of approximately $398,126 to reflect
permanent impairment in the Company's original investment in certain technology
licenses, which were included as intangible assets. The Company considers the
future value of the licenses to be insufficient to recover its carrying value,
as the Company is no longer using the technology under license.
5. SUBSEQUENT EVENTS
In August 1998, the Company acquired Hypermart, Inc. a provider of free Web
hosting for businesses, in a transaction accounted for as a pooling of
interests. In connection with this acquisition, the Company issued approximately
157,499 shares of Common Stock and incurred approximately $200,000 in
merger-related expenses primarily for legal and other professional fees. Because
the results of operations and financial position of Hypermart were not material
to go2net's consolidated financial statements prior to June 30, 1998, financial
information prior to the date of acquisition will not be restated.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below in
"Additional Factors that May Affect Future Results" as well as those discussed
in this section and elsewhere in this Report, and the risks discussed in the
"Additional Factors that May Affect Future Results" section included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997.
OVERVIEW
go2net, Inc. ("The Company") (http://www.go2net.com) offers a network of
technology and community-driven Web sites focused on the following categories:
personal finance, search, commerce, and games. The Company also develops
Web-related software. go2net's properties include: Silicon Investor
(http://www.techstocks.com), the Web's largest financial discussion site;
StockSite (http://www.stocksite.com), which offers proprietary articles,
portfolio tracking tools, company research and news relating to business and
finance; MetaCrawler (http://www.metacrawler.com), a search/index guide that
combines various existing search/index guides into one service (a "metasearch
engine"); WebMarket (http://www.webmarket.com), a one-stop comparison shopping
service; and PlaySite (http://www.playsite.com), a Java-based multiplayer online
games site. The Company's go2net Labs division develops innovative technologies
for use on the go2net sites and for licensing to other Internet companies.
The Company has an extremely limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company
anticipates that advertising revenue from the Company's Internet sites will
constitute substantially all of the Company's revenue, if any, during the
foreseeable future. Because the Company anticipates that its operations will
incur significant operating losses for the foreseeable future, the Company
believes that its success will depend upon its ability to obtain revenue from
advertising on its Internet sites, which cannot be assured. The Company's
ability to generate revenue is subject to substantial uncertainty. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by early stage companies in general, and specifically
with respect to the new and rapidly evolving market for Internet-based products
and services. To address these risks, the Company must, among other things,
effectively establish, develop and maintain relationships with advertising
customers, advertising agencies and other third parties, provide original and
compelling products and services to Internet users, develop and upgrade its
technology, respond to competitive developments, attract new qualified personnel
and retain existing qualified personnel. There can be no assurance that the
Company will succeed in addressing such risks and the failure to do so would
have a material adverse effect on the Company's business, financial condition
and operating results. Additionally, the Company's lack of an extensive
operating history makes prediction of future operating results difficult.
Accordingly, there can be no assurance that the Company will be able to generate
significant revenue or that the Company will achieve, or maintain profitability
or continue to generate revenues from operations in the future. Since inception,
the Company has incurred significant losses and as of June 30, 1998 had an
accumulated deficit of $4,450,297. The Company currently intends to increase
substantially its operating expenses in order to, among other things, expand and
improve its Internet operations, fund increased advertising and marketing
efforts, expand and improve its Internet user support capabilities and develop
new Internet technologies, applications and other products and services. The
Company expects to continue to incur significant losses on a quarterly and
annual basis for the foreseeable future. To the extent such increases in
operating expenses are not offset by revenue, the Company will incur greater
losses than anticipated.
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside of the Company's
control. Factors that may adversely affect the Company's quarterly operating
results include the level of use of the Internet, demand for advertising,
seasonal trends in both Internet use and advertising placements, the addition or
loss of advertisers, advertising budgeting cycles of individual advertisers, the
level of use of the Company's Internet sites, the amount and timing of capital
expenditures and other costs relating to the development, costs and expenses
relating to acquisitions, operation and expansion of the Company's Internet
operations, the introduction of new sites and services by the Company or its
competitors, price competition or pricing changes in the industry, technical
difficulties or system failures, general economic conditions and economic
conditions specific to the Internet and Internet media. In seeking to
effectively implement its
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operating strategy, the Company may elect from time to time to make certain
advertising and marketing or acquisition decisions that could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company believes that period to period comparisons of its operating
results are not meaningful and should not be relied upon for an indication of
future performance. Due to all of the foregoing factors, it is likely that in
some future quarters, the Company's operating results may be below the
expectations of public market analysts and stockholders. In such event, the
price of the Company's Common Stock would likely be materially adversely
affected.
RESULTS OF OPERATIONS
REVENUE
Total revenues for the three and nine months ended June 30, 1998 were
$1,330,865 and $2,875,640, versus $218,443 for the three and nine months ended
June 30, 1997. The increase in revenue is the result of the development of the
Company's Web sites over the last year, the increase in usage of these Web
sites, and an increase in advertisers purchasing advertising on those sites.
The increase in revenues is also the result of an increase in paying
subscribers for Silicon Investor memberships year-over-year. Subscribers pay a
membership fee for the right to participate in SI's financial discussions. The
increase in subscription revenues is the result of the growth in the SI
subscriber base year-over-year.
For the three and nine months ended June 30, 1998, the Company has recorded
$0 and $63,960 in non-cash barter transactions versus $133,390 in non-cash
barter transactions for the three and nine months ended June 30, 1997.
COSTS OF REVENUE
Costs of revenue consists primarily of expenses associated with the
production, enhancement, maintenance and support of the Company's Web sites.
These costs consist primarily of fees paid to third parties for content included
in the online properties, Internet connection charges, equipment depreciation,
and compensation. Costs of revenue also include, for all periods presented,
expenses associated with license agreements and royalties.
For the three and nine months ended June 30, 1998, costs of revenue were
$533,609 and $1,350,500. Costs of revenue were $132,490 for the three and nine
months ended June 30, 1998. The increase is due primarily to royalties and
amortization associated with technology licenses and increased costs relating to
maintaining and supporting the Company's Web sites. Royalties and other costs
increased as compared to 1997 in the comparable period in 1998 as a result of
the growth in revenues subject to revenue sharing agreements.
GROSS MARGIN
Gross margin as a percentage of revenue was 60% and 53% for the three and
nine-month periods ended June 30, 1998 compared to 39% for the comparable
periods in 1997. The increase in the gross margin as a percentage of revenue for
the three and nine months ended June 30, 1998 versus the three and nine months
ended June 30, 1997, was due primarily to the fact that revenues have increased
at a faster rate than costs to support those revenues. The increase in gross
margins can also be attributed to the higher margins associated with
subscription revenues.
In the future, the types of advertisements sold and revenue sharing
provisions of content agreements may affect gross margins. Advertisements that
target a specific audience typically have higher gross margins than
advertisements that target a broader population. Furthermore, in certain
circumstances, the Company shares advertising revenue with third-party content
providers based upon the number of consumers directed to specific areas within
its sites. A decrease in targeted advertising sold, advertising rates or an
increase in revenue sharing obligations could adversely affect gross margins.
Changes in the subscription services and technology costs may also have
a detrimental impact on gross margins in the future. The addition of increased
products and services could increase the costs of servicing
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<PAGE> 11
subscription members. An increase in competition could affect the pricing of
subscription services, which could also adversely affect gross margins in the
future.
OPERATING EXPENSES
The Company's operating expenses have increased since inception through
June 30, 1998. This reflects the Company's investment in infrastructure and
personnel costs to develop, market and sell its services. The Company believes
that continued expansion of its operations is essential in achieving and
maintaining market share. As a result, the Company intends to continue to
increase expenditures in all operating areas for the foreseeable future.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, agency and consulting fees, travel, and
promotional and advertising expenses. Sales and marketing expenses incurred by
the Company for the three and nine months ended June 30, 1998 were $319,594 and
$699,831, respectively. Sales and marketing expenses for the comparable periods
in 1997 were $16,118 and $38,274, respectively. The increase is primarily
attributable to the hiring of additional marketing and sales staff. The Company
intends to significantly increase its sales and marketing expenses in future
periods.
Product Development. Product development expenses consist of expenses
incurred by the Company in the development of its Internet sites, as well as
enhancements to the sites. Product development expenses include compensation and
related expenses, costs of computer hardware and software, and the cost of
acquiring, designing and developing Internet technologies, products and
services. All of the costs incurred to date in connection with the development
of the Company's Internet sites have been expensed. Product development expenses
incurred by the Company for the three and nine months ended June 30, 1998 were
$272,574 and $697,963, respectively. Product development expenses for the
comparable periods in 1997 were $234,689 and $621,633, respectively. The Company
believes that significant investments in enhancing its Internet sites will be
necessary to be competitive. As a result, the Company may continue to incur, or
increase the level of, product development expenses.
General and Administrative. General and administrative expenses consist
primarily of compensation not otherwise attributable to development expenses,
rent expense, fees for professional services and other general corporate
purposes. General and administrative expenses for the three and nine months
ended June 30, 1998 were $661,586 and $1,608,909, respectively. General and
administrative expenses for the comparable periods in 1997 were $379,484 and
$896,986, respectively. The increase was primarily attributable to an increase
in personnel, professional service fees, relocation to new facilities, provision
for doubtful accounts and depreciation on capital equipment. The Company expects
general and administrative expenses to significantly increase in future periods
as a result of, among other things, the additional costs of being a public
company.
Merger and acquisition related expenses. During the three months ended June
30, 1998, the Company incurred $715,982 related to the merger with Silicon
Investor, Inc. The expenses were primarily for legal, accounting and other
professional fees. The Company may in the future, acquire businesses,
technologies, and other Web sites.
Nonrecurring charges. The Company recorded nonrecurring charges of $398,126
for the three months ended June 30, 1998 associated with the impairment to
estimated fair value of technology licenses. The Company considers the future
value of the licenses to be insufficient to recover its carrying value, as the
Company is no longer using the technology under license.
Interest Income. Interest income for the three and nine months ended June
30, 1998 was $137,491 and $413,513, respectively. Interest income for the
comparable periods in 1997, was $107,238 and $115,439, respectively. Interest
income was higher in 1998 as compared to 1997 as a result of interest earned on
cash received from the Company's initial public offering.
Income Taxes. The Company has not recorded an income tax benefit because it
has incurred net operating losses since its inception.
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<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's principal source of liquidity was $645,825
in cash and cash equivalents and $7,150,000 in short-term investments, derived
primarily from the sale of the Company's equity securities. The Company also has
a $1,000,000 revolving line of credit with a commercial bank that expires on
December 13, 1998. All borrowings under such line of credit accrue interest at
such bank's prime annual lending rate. As of June 30, 1998, no amounts were
outstanding under this line of credit.
Capital expenditures were approximately $936,911 and $235,074 for the nine
months ended June 30, 1998 and June 30, 1997, respectively. The Company has no
material commitments for capital expenditures other than approximately $100,000
relating to the purchase of computer hardware and software. The Company
anticipates a substantial increase in its capital expenditures through the
remainder of fiscal 1998 consistent with its anticipated growth.
The Company currently believes that available funds, cash flows expected to
be generated from operations, if any, and the existing line of credit will be
sufficient to fund its working capital and capital expenditures requirements for
at least the next twelve months. Thereafter, the Company may need to raise
additional funds. The Company's ability to grow will depend in part on the its
ability to expand and improve its Internet operations, expand its advertising
and marketing efforts, expand and improve its Internet user support capabilities
and develop new Internet-based products and services. In connection therewith,
the Company may need to raise additional capital in the foreseeable future from
public or private equity or debt sources in order to finance such possible
growth. In addition, the Company may need to raise additional funds in order to
avail itself to unanticipated opportunities (such as more rapid expansion,
acquisitions of complementary businesses or the development of new products or
services), to react to unforeseen difficulties (such as the loss of key
personnel or the rejection by Internet users or potential advertisers of the
Company's Internet-based products and services) or to otherwise respond to
unanticipated competitive pressures. If additional funds are raised through the
issuance of equity securities, then the percentage ownership of the Company's
then existing stockholders will be reduced, stockholders may experience
additional and significant dilution and such equity securities may have rights,
preferences or privileges senior to those of the Company's Common Stock. There
can be no assurance that additional financing will be available on terms
acceptable to the Company or at all. If adequate funds are not available or are
not available on terms acceptable to the Company, the Company may be unable to
implement its business, sales or marketing plan, respond to competitive forces
or take advantage of perceived business opportunities, which could have a
material adverse effect in the Company's business, financial condition and
operating results.
YEAR 2000 RISKS
The Company has designed and tested the most current versions of its
products to be year 2000 compliant. There can be no assurances that the
Company's current products do not contain undetected errors or defects with year
2000 date functions that may result in material costs to the Company. Although
the Company is not aware of any material operational issues or costs associated
with preparing its internal systems for the year 2000, there can be no
assurances that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are comprised predominantly of
acquired technology and the Company's own software developments.
12
<PAGE> 13
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company has an extremely limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets. To address these
risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified persons and
continue to upgrade its technologies and commercialize products and services
incorporating such technologies. There can be no assurance that the Company will
be successful in addressing such risks. The limited operating history of the
Company makes the prediction of future results of operations difficult or
impossible, and therefore there can be no assurance that the Company will
achieve revenue growth or profitability. The Company has incurred significant
net losses since inception and expects to continue to incur significant losses
on a quarterly and annual basis for the foreseeable future.
As a result of the Company's extremely limited operating history, the
Company does not have historical financial data for any significant period of
time on which to base planned operating expenses. The Company's expense levels
are based in part on its expectations as to future revenues and to a large
extent are fixed. Quarterly sales and operating results generally depend on
advertising revenues, which are difficult to forecast. The Company may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in relation to the Company's
expectations would have an immediate adverse impact on the Company's business,
results of operations and financial condition. In addition, the Company plans to
significantly increase its operating expenses to fund greater levels of research
and development, increase its sales and marketing operations, broaden its
customer support capabilities and establish brand identity and strategic
alliances. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, results of operations
and financial condition will be materially adversely affected.
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, some of which are outside of the Company's
control. These factors include general economic conditions, specific economic
conditions in the Internet industry, usage of the Internet, demand for Internet
advertising, seasonal trends in advertising sales, the advertising budgeting
cycles of individual advertisers, capital expenditures and other costs relating
to the expansion of operations, costs and expenses relating to acquisitions, the
introduction of new products or services by the Company or its competitors, the
mix of services sold, the channels through which those services are sold and
pricing changes. As a strategic response to a changing competitive environment,
the Company may elect from time to time to make certain pricing, service or
marketing decisions or acquisitions that could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company believes that period to period comparisons of its operating results are
not meaningful and should not be relied upon for an indication of future
performance. The Company also expects that, in the future, it may experience
seasonality in its business, with advertising revenues being somewhat lower
during the summer and year-end vacation and holiday periods, when usage of the
Company's Internet sites and services may be expected to decline. Due to all of
the foregoing factors, it is likely that in some future quarter, the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's common stock would likely
be materially adversely affected.
The Company derives the majority of its revenues from the sale of
advertising, including advertisements on the Company's various Web sites. Many
of the Company's customers purchasing advertisements purchase these
advertisements on a short-term basis, and many of these customers may terminate
their commitments at any time without penalty. Consequently, there can be no
assurance that these customers will continue or increase their level of
advertising on the Company's Web sites or that these customer will not move
their advertising to competing Web sites or to other forms of media. Therefore,
there can be no assurance that the Company will be successful in maintaining or
increasing the amount of advertising on the Company's Web sites, and the failure
to do so would have a material adverse effect on the Company's business, results
of operations and financial condition.
In addition, there is intense competition in the sale of advertising on the
Web, resulting in a wide range of rates and a variety of pricing models offered
by different vendors for a variety of advertising services, which makes it
difficult to project future levels of advertising revenues and rates. It is also
difficult to predict which pricing models the industry or advertisers will
adopt. For example, advertising rates based on the number of "click throughs",
or user requests for additional information made by clicking on the
advertisement from the Company's
13
<PAGE> 14
network to the advertiser's Web pages, instead of rates based solely on the
number of impressions displayed on users' computer screens, could materially
adversely affect the Company's revenues. As a result of these risks, there can
be no assurance that the Company will be successful in generating significant
future advertising revenues from Web-based advertising, and the failure to do so
would have a material adverse effect on the Company's business, results of
operations and financial condition.
The recently completed acquisition of SI involves a number of risks, which
could adversely affect the Company's business, results of operations and
financial condition. For example, the assimilation of SI's and the Company's
operations will require, among other things, the integration of Web sites and
services, coordination of research and development and sales and marketing
efforts of the sites and services. Also, the assumption of liabilities and costs
associated with the relocation of SI employees, as well as the distraction of
the Company's management from the day-to-day business of the Company could
adversely affect the Company's results of operations. Any failure to address
these acquisition risks could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company operates in a rapidly changing environment that involves a
number of risks and uncertainties, some of which are beyond the Company's
control. In addition to the factors discussed in this report, factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the "Additional Factors that May Affect Future Results" section
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1997.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities
On June 23, 1998, the Company acquired all of the issued and
outstanding capital stock of Silicon Investor in exchange for
1,238,043 shares of the Company's Common Stock. In addition, the
Company assumed options to purchase capital stock of Silicon
Investor, which options are now exercisable for 11,957 shares of
the Company's Common Stock.
ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Holders
At a Special Meeting of Stockholders of the Company held on June
22, 1998, the following proposals were approved: (i) the merger
of Silicon Acquisition Corp., a wholly-owned subsidiary of the
Company, with and into Silicon Investor, Inc. ("Silicon
Investor"), in accordance with terms of the Agreement and Plan of
Merger, dated April 22, 1998, pursuant to which the Company
issued an aggregate of 1,250,000 shares of Common Stock to the
holders of Common Stock of Silicon Investor and holders of
options to purchase Common Stock of Silicon Investor; (ii) an
amendment to the Company's Restated Certificate of Incorporation
to increase the number of authorized shares of Common Stock from
9,000,000 to 50,000,000 shares; and (iii) an amendment to the
Company's 1996 stock Option Plan to increase the number of shares
reserved for grant thereunder from 1,500,000 to 2,500,000 shares.
With respect to the approval of the acquisition of Silicon
Investor, the voting was as follows:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
2,405,411 400 3,100 1,806,052
With respect to the approval of the amendment to the Restated
Certificate of Incorporation, the voting was as follows:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
4,129,441 81,612 3,910 0
With respect to the approval of the amendment to the 1996 Stock
Option Plan, the voting was as follows:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
2,327,939 77,912 3,060 1,806,052
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K
No reports on Form 8-K filed during the period.
Exhibit 27 - Financial Data Schedule
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements 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.
GO2NET, INC.
Date: August 14, 1998
By: /s/ Russell C. Horowitz
----------------------------------
Russell C. Horowitz
President, Chief Executive Officer,
Chief Financial Officer and
Director (Principal Executive and
Accounting Officer)
16
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