GO ONLINE NETWORKS CORP (GONT.OB)
Quarterly Report (SEC form 10QSB)
2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-QSB contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends that such forward-looking statements be subject to the safe harbors created by such statutes. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Accordingly, to the extent that this Quarterly Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including intensification of price competition and entry of new competitors and products, adverse federal, state and local government regulation, inadequate capital, unexpected costs and operating deficits, increases in general and administrative costs, lower sales and revenues than forecast, loss of customers, customer returns of products sold to them by the Company, termination of contracts, loss of supplies, technological obsolescence of the Company's products, technical problems with the Company's products, price increases for supplies and components, inability to raise prices, failure to obtain new customers, litigation and administrative proceedings involving the Company, the possible acquisition of new businesses that result in operating losses or that do not perform as anticipated, resulting in unanticipated losses, the possible fluctuation and volatility of the Company's operating results, financial condition and stock price, inability of the Company to continue as a going concern, losses incurred in litigating and settling cases, adverse publicity and news coverage, inability to carry out marketing and sales plans, loss or retirement of key executives, changes in interest rates, inflationary factors and other specific risks that may be alluded to in this Quarterly Report or in other reports issued by the Company. In addition, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements. The inclusion of forward looking statements in this Quarterly Report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.
GENERAL OVERVIEW
Go Online Networks Corporation operates in the high technology and e-commerce business utilizing a three-tiered revenue model. In initiating our strategy, we acquired and currently operate three distinct divisions, each described below:
Internet Kiosk Division -
We are pursuing a strategy in the installation of internet kiosks in the mid-priced hotel market. Our internet kiosks, designed in three primary models, are installed in the hotel lobby or an alternative centralized public access room. Our kiosk division has developed two suppliers capable of manufacturing small, integrated kiosks that can provide pay-as-you-use stand-alone internet access. At no cost to the hotel owner and sharing revenues with us and the owner, our internet kiosks have been and will continue to be marketed to these mostly mid-priced hotels by sales agent organizations employed by our kiosk division. Presently, 415 hotels have signed contracts and 254 kiosks have been installed in 237 locations in 40 states and one Canadian province as of September 30, 2000. We have 18 units presently in transit. We believe that we will have many more by year end and hope to reach our goals of installation of enough kiosks to make us profitable by the first quarter of 2001.
ShopGoOnline.com
Utilizing online video and audio technology to assist with customer review, our ShopGoOnline.com internet website offers a variety of products and services via the world wide web. ShopGoOnline.com sells products such as jewelry, coins, collectibles, electronics, computers, skin care and beauty products, and personal fitness products. At ShopGoOnline.com, the customer can search for products we have to sell by category or by product name and obtain a full description of the product offer including a complete audio presentation of the product as well as a video demonstration when appropriate.
Digital West Marking, Inc.
Digital West is a computer service firm based in Chatsworth, California, north of Los Angeles. Revenues for 1999 were approximately $6.8 million. The company operates out of a 24,000 square foot facility currently employing in excess of 45 people. The core of Digital West's business is to contract with major retail entities and computer hardware manufacturers to refurbish computer products returned to retail establishments by customers. The products are re-engineered or refurbished to factory specifications by Digital West's factory trained A+ certified technicians. The computer products including hard drives, CD ROMs, monitors, printers, circuit boards, CD writers, DAT drives are then resold into the secondary market and service channels. Digital West is a state-of-the-art, multi-vendor multi-product facility that provides value-added services, logistics services, depot repair, and spare parts distribution for virtually all major PC brands and system components including peripherals. Digital West deals with more than forty manufacturers to ensure an ability to handle any and all customer's requests for programs such as repair, part sales, advance exchanges, cross-ships, emergency parts and other asset management programs. Digital West's web site is www.DigitalWest.com.
RESULTS OF OPERATIONS OF THE COMPANY
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1999
Our net loss during the three months ended September 30, 2000 was ($789,505), compared to ($1,331,381) for the same period in 1999. The reduction in this loss is attributable to an increase in sales of both the kiosk and ShopGoOnline divisions offset by increased expenses (primarily in our kiosk division).
Sales were $436,358 for the three months ended September 30, 2000, compared to $12,643 for the three months ended September 30, 1999. Approximately twenty percent of the sales was generated by our ShopGoOnline.com division, and the other eighty percent by our Internet kiosk business.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999
Our net loss during the nine months ended September 30, 2000 was ($2,102,541), compared to ($1,972,725) for the same period in 1999. The increase in this loss is attributable to acquisition expenses in connection with the Company's acquisition of Westlake Capital Corporation and consulting services in connection with that transaction, increased expenses (primarily in our kiosk division), increased legal and professional fees, increased salaries, offset by an increase in sales of both the kiosk and ShopGoOnline divisions and a non-recurring gain from the sale of Auctionomics.
Sales were $692,834 for the nine months ended September 30, 2000, compared to $13,017 for the nine months ended September 30, 1999. Approximately twenty percent of the sales was generated by our ShopGoOnline.com division, and the other eighty percent by our Internet kiosk business.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had assets of $2,504,068, compared to $829,351 as of December 31, 1999. This increase was attributable to an increase in cash from financing activities, and equipment, primarily additional kiosks.
Our current liabilities increased from $1,254,553 as of December 31, 1999 to $2,289,368 as of September 30, 2000, due primarily to an increase in the current portion of the Series A, 8% convertible note issued in January 2000 and advances payable. Total liabilities also increased, from $1,793,015 as of December 31, 1999 to $3,314,368 as of September 30, 2000, again due primarily to the issuance of the Series A, 8% convertible note issued in January and advances payable, offset by the cancellation of $538,462 in convertible debentures.
As of September 30, 2000, our accumulated deficit was $10,913,777, while our stockholders deficit was $810,300, as compared to $8,811,236 and $963,664, respectively, as of December 31, 1999. The accumulated deficit and stockholders deficit increases are attributable to our continuing operating losses, as set forth above.
Effective January 10, 2000, the Company entered into a Securities Purchase Agreement whereby the buyer agreed to buy from the Company $1,000,000 of its Series 2000-A Eight Percent (8%) convertible notes, maturing March 31, 2002, and payable in quarterly installments in arrears on March 31, June 30, September 30, and December 31, of each year during the term of the note, with the first such payment to be made June 30, 2000. Accrual of interest may be payable either in cash or common stock at the holder's option. If interest is paid in common stock, the number of shares to be delivered in payment will be determined by taking the dollar amount of interest being paid divided by the average of the closing bid prices for the common stock for the ten trading days prior to the due date of such interest. The notes are convertible into common stock, upon certain registration, and for prices determined at various dates as defined in the agreement. The purchase price was $500,000 in cash and cancellation of the $538,462 of the convertible debentures outstanding as of December 31, 1999. The notes were issued in two parts, one of which was issued during March 2000, and payment dates were deferred based upon date of issuance.
The Company made no material capital expenditures during the quarter ended September 30, 2000.
On September 5, 2000, the Company acquired Digital West Marketing, Inc. ("Digital West"), a computer service firm based in Chatsworth, California, north of Los Angeles.
The Company acquired Digital West in accordance with the terms of an Amended and Restated Reorganization and Stock Purchase Agreement (the "Acquisition Agreement"). In accordance with the Acquisition Agreement, the Company acquired 100% of the stock of Digital West from Andrew Hart, its sole shareholder in consideration for (i) $825,000 in cash, (ii) 750,000 shares of Company restricted common stock and (iii) 750,000 options to purchase shares of Company restricted common stock at an exercise price of $0.22 per share for a period of two years. The cash purchase price was held in escrow and used to pay off 100% of Digital West's obligation to Pacific Century Bank as well as to repay certain outstanding accounts payable and accrued expense obligations of Digital West.
The Company also entered into an employment agreement with Andrew Hart, President of Digital West, who remains as President of Digital West. Mr. Hart's employment agreement provides for a term of three years with an annual salary equal to 2% of Digital West's gross income up to $15,000,000 and 1.25% of Digital Wests annual sales in excess of $15,000,000. For the first six months, Mr. Hart will receive a guaranteed monthly salary against those percentages of $15,000 per month, with $12,000 guaranteed subsequent to such six month period. Mr. Hart will also receive a cash bonus equal to 15% of the total cumulative EBITDA of Digital West less $825,000 and any and all funds advanced to Digital West by the Company. Mr. Hart will also receive stock options to purchase common stock as follows: At the end of year one, Mr. Hart will become eligible to purchase 250,000 shares of stock at $0.22 per share; at the end of year two Mr. Hart will become eligible to purchase an additional 200,000 shares of stock at $0.40 per share; and at the end of year three Mr. Hart will become eligible to purchase an additional 200,000 shares of stock at $0.80 per share. All options granted are exercisable for two years from the date of grant.
The Company obtained the funds for the cash purchase price of Digital West from cash on hand from advances from Netstrat, Inc. and Amer Software, Inc. and investments of certain convertible debentures.
Subject to certain terms and conditions to be performed at closing, including a registration with the Securities and Exchange Commission, the Company's wholly-owned subsidiary, Westlake Capital Corp., will merge with Netstrat, Inc. and Amer Software, Inc., whereby 4,166,666 shares and 1,388,888 of the Company's common stock, respectively, will be issued for all of the common stock of the two companies. The combined companies have advanced $950,000 in cash to the Company as of September 30, 2000.
We believe that proceeds from our previous financings, together with our other resources and expected revenues, will be sufficient to cover working capital requirements for at least six months. Should revenue levels expected by us not be achieved, we would nevertheless require additional financing during such period to support our operations, continued expansion of our business and acquisition of products or technologies. Such sources of financing could include capital infusions from some of our strategic alliance partners, additional equity financings or debt offerings. Other than the proposed sale of securities in this registration statement, we have made no arrangements or commitments for such financing.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On December 3, 1998, a default judgment was entered against us in the approximate amount of $55,000 for alleged amounts owed by Real Estate Television Network for which the plaintiff alleges was also owed by us. On July 14, 1999 the default judgement was set aside based on the fact that we were never properly served with a summons and complaint. We contend that we are not liable for the amounts due since Real Estate Television Network was a separate corporation and we never guaranteed this obligation. Neverthless, in April 2000, we entered into a settlement agreement with the plaintiff and agreed to pay him the sum of $12,500 in cash and 30,000 shares of Series A Preferred Stock.
ITEM 2 CHANGES IN SECURITIES
In July 2000, the Company sold an aggregate of $525,000 in aggregate principal amount of 10% Convertible Notes due July 2002. These convertible notes were sold to two accredited investors. The convertible notes are convertible into common stock at the lower of (i) 60% of the average closing price for the ten days prior to conversion or (ii) $0.18 per share. This sale by the Company was completed in accordance with Section 4(2) of the Securities Exchange Act of 1934, as amended.
In September 2000, the Company issued 150,000 shares of Series A Preferred Stock to various persons for consulting activities. This sale by the Company was completed in accordance with Section 4(2) of the Securities Exchange Act of 1934, as amended.
Effective September 5, 2000 in connection with the acquisition of Digital West Marketing, Inc., the Company issued (ii) 750,000 shares of Company restricted common stock and (iii) 750,000 options to purchase shares of Company restricted common stock at an exercise price of $0.22 per share for a period of two years. This sale by the Company was completed in accordance with Section 4(2) of the Securities Exchange Act of 1934, as amended.
On September 25, 2000, the Company issued 1,350,000 shares of its common stock to various persons for legal and consulting services. This sale by the Company was completed in accordance with Section 4(2) of the Securities Exchange Act of 1934, as amended.
ITEM 3 DEFAULTS UNDER SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has scheduled its Annual Meeting of Shareholders for November 17, 2000. There were no matters submitted to shareholders during the quarter ended September 30, 2000.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On September 20, 2000, the Company filed a Form 8-K reporting the acquisition of Digital West Marketing, Inc. by the Company.
On November 6, 2000, the Company filed a Form 8-K/A with respect to the acquisition of Digital West Marketing, Inc. by the Company which included financial statements of Digital West and pro forma financial information. |
