U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File No. 1-11873
K2 DIGITAL, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3886065
------------------------------- ------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Identification Number) Incorporation or Organization)
c/o Calvey & Amon, LLP
770 Lexington Avenue
6th Floor
New York, NY 10021
------------------
(Address of Principal Executive Offices)
(212) 935-6000
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required 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.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at November 14, 2003
-------------------------------------- --------------------------------
Common stock, par value $.01 per share 4,982,699
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes |_| No |X|
K2 DIGITAL, INC. AND SUBSIDIARY
INDEX
PAGE
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed consolidated balance sheet - September 30, 2003 (unaudited)............................................. 2
Condensed consolidated statements of operations and comprehensive income (loss)
- three and nine months ended September 30, 2003 (unaudited) and September 30, 2002 (unaudited)............. 3
Condensed consolidated statements of cash flows - nine months
ended September 30, 2003 (unaudited) and September 30, 2002 (unaudited)..................................... 4
Notes to condensed consolidated financial statements............................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 6
ITEM 3. CONTROLS AND PROCEDURES............................................................................................. 7
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................................... 8
SIGNATURES ................................................................................................................. 8
1
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ............................................................ $ 7,404
Investment in security available-for-sale ....................... 93,750
------------
Total current assets ...................................... $ 101,154
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ............................................. $ 153,806
Accrued expenses and other current liabilities ............... 80,100
-----------
Total current liabilities ................................. 233,906
-----------
STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized;
0 shares issued and outstanding ........................... --
Common Stock, $0.01 par value, 25,000,000 shares authorized;
5,400,116 shares issued and 4,982,699 shares outstanding .. 54,001
Treasury stock, 417,417 shares at cost ....................... (819,296)
Additional paid-in capital ................................... 8,317,910
Accumulated other comprehensive income ....................... 76,500
Accumulated deficit .......................................... (7,761,867)
-----------
Total stockholders' deficit ..................................... (132,752)
-----------
Total liabilities and stockholders' deficit ............ $ 101,154
===========
See the accompanying notes to condensed consolidated financial statements.
2
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
Unaudited Unaudited Unaudited Unaudited
Revenues $ -- $ -- $ -- $ --
Other income 9,750 16,246 37,950 22,617
General and administrative expenses 20,431 20,850 62,107 97,297
---------------------------------------------------------------
Net income (loss) $ (10,681) $ (4,604) $ (24,157) $ (74,680)
Net income (loss) per common share-
basic and diluted $ (0.002) $ (0.001) $ (0.005) $ (0.015)
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,982,699 4,982,699 4,979,036
Comprehensive income (loss):
Net income (loss) $ (10,681) $ (4,604) $ (24,157) $ (74,680)
Other comprehensive income (loss) -
unrealized gain (loss) on
available-for-sale securities 7,350 17,600 76,500 15,400
---------------------------------------------------------------
Comprehensive income (loss) $ (3,331) $ 12,996 $ 52,343 $ (59,280)
===============================================================
See the accompanying notes to condensed consolidated financial statements.
3
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(24,157) $(74,680)
Adjustments to reconcile net loss to net cash used
in operating activities:
Realized gain on sale of available-for-sale securities (37,950)
Non-cash consulting and compensation expense 72,355
Changes in operating assets and liabilities:
Prepaid expense and other current assets (16,246)
Accounts receivable, net 68,807
Accounts payable 15,338 (70,288)
Accrued expenses and other current liabilities 15,159
-----------------------
Net cash used in operating activities (46,769) (4,893)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES,
gross proceeds from sale of available-for-sale securities 46,000
-----------------------
Net increase (decrease) in cash (769) (4,893)
CASH, beginning of period 8,173 5,380
-----------------------
CASH, end of period $ 7,404 $ 487
=======================
See the accompanying notes to condensed consolidated financial statements.
4
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRIOR BUSINESS AND GOING CONCERN CONSIDERATION
Through August 2001, K2 Digital, Inc. (together with its wholly-owned
subsidiary, the "Company") was a strategic digital services company that
provided consulting and development services including analysis, planning,
systems design and implementation. In August 2001, the Company completed the
sale of fixed and intangible assets essential to its business operations to
Integrated Information Systems, Inc. ("IIS").
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed above, the
Company sold fixed and intangible assets essential to its business operations to
IIS and effectively became a "shell" company with no operational revenues and
continuing general and administrative expenses. Further, at September 30, 2003,
the Company has cumulative losses of approximately $7.8 million, a diminutive
cash balance and working capital and stockholders' deficits of approximately
$133,000. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Management's plan includes a proposed business combination with Future X Media,
f/k/a First Step Distribution Network, Inc. ("FX"), a California-based consumer
Internet entertainment firm, in a reverse merger transaction. If the transaction
is consummated, it is anticipated that the shareholders of FX will thereby
acquire substantially all of the issued and outstanding voting common stock of
the Company. The proposed transaction is subject to various conditions
including, but not limited to, a 5.1 to 1 reverse stock split of the Company's
common stock and completion of a shareholders meeting. If the Company is
unsuccessful in completing the preceding transaction, management's alternative
plan may include a further search for a similar business combination or
strategic alliance. There can be no assurances that the transaction described
above or management's alternative plan will be realized. On October 8, 2003, the
Company notified FX that, in light of delays in its consummating the proposed
merger with the Company, the Company's Board of Directors had decided to explore
other options to enhance shareholder value. These options may include a merger
or similar transaction with another entity, consummation of the merger with FX,
or liquidation of the Company through a Chapter 7 filing.
2. BASIS OF PRESENTATION, NET LOSS PER SHARE AND NEW ACCOUNTING PRONOUNCEMENTS
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company and reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation of the financial position as of September 30, 2003 and the
financial results for the three and nine months ended September 30, 2003 and
2002, in accordance with accounting principles generally accepted in the United
States of America for interim financial statements and pursuant to Form 10-QSB
and Regulation S-B. Certain information and footnote disclosures normally
included in the Company's annual audited consolidated financial statements have
been condensed or omitted pursuant to such rules and regulations.
The results of operations for the three and nine months ended September 30, 2003
and 2002, respectively, are not necessarily indicative of the results of
operations to be expected for a full fiscal year. These interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the fiscal year ended December 31, 2002,
which are included in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of K2
Digital, Inc. and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
5
NET LOSS PER SHARE OF COMMON STOCK
The Company complies with SFAS No. 128, "Earnings Per Share", which requires
dual presentation of basic and diluted earnings per share. Basic earnings (loss)
per share excluded dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average common shares
outstanding for the year. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted to common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Since the effect of
outstanding options is antidilutive, they have been excluded from the Company's
computation of net loss per common share. Therefore, basic and diluted loss per
common share for the three and nine months ended September 30, 2003 and 2002
were the same.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No.149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No.133. The Statement is generally effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003 and should be applied prospectively. The implementation of
this standard is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No.150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.150
requires certain freestanding financial instruments, such as mandatory
redeemable preferred stock, to be measured at fair value and classified as
liabilities. The provisions of SFAS No.150 are effective at the beginning of the
first interim period beginning after June 15, 2003. The implementation of this
standard is not expected to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
STOCK-BASED COMPENSATION
The Company complies with the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation", as amended by SFAS No.148 "Accounting
for Stock-based Compensation Transaction and Disclosure". During the three and
nine month periods ended September 30, 2003 and 2002, the Company did not grant
options pursuant to its stock option plans.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to; those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Factors
Affecting Operating Results and Market Price of Stock".
OVERVIEW
Founded in 1993, the Company is a digital professional services company that,
until August 2001, historically provided consulting and development services,
including analysis, planning, systems design, creation and implementation. In
August 2001, upon the sale of assets to Integrated Information Systems, Inc.
("IIS"), the Company effectively ceased operations.
RESULTS OF OPERATIONS
During the three and nine months ended September 30, 2003 and 2002, the Company,
operating as a "shell," incurred a net income (loss) of approximately, $(11,000)
and $(24,000), respectively for 2003 and $(5,000) and $(75,000) respectively for
2002. The Company's 2003 net income (loss) consists primarily of a gain on sale
of available-for-sale securities less accounting, legal and public company
expenses related to maintaining the "shell" corporation. The Company's 2002 net
loss consists primarily of an approximate $63,000 non-cash compensation charge
related to an employment agreement, which expired during the first quarter of
2002 and ongoing general and administrative expenses, most notably professional
fees.
CONTINUING OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the sale of assets to IIS, the Company effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. The Company does not have any ongoing
business operations or revenue sources beyond those assets not purchased by IIS.
Accordingly, the Company's remaining operations will be limited to either a
business combination with an existing business or the winding up of the
Company's remaining business and operations, subject, in either case, to the
approval of the stockholders of the Company. These, among other matters, raise
substantial doubt about the Company's ability to continue as a going concern.
6
The Board of Directors of the Company has determined that, subject to
stockholder approval, the best course of action for the Company is to complete a
business combination with an existing business. On January 15, 2002, the Company
entered into the Merger Agreement with Future X Media, Inc., ("FX") f/k/a First
Step Distribution Network, Inc. Under the terms of the Merger Agreement, the
Company intends to acquire FX by means of a triangular merger, pursuant to which
a subsidiary of the Company will merge with and into FX in a tax free
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended. The proposed transaction is subject to various conditions
including, but not limited to, a 5.1 for 1 reverse stock split of the Company's
common stock (the "Reverse Stock Split") and shareholder approval.
In the event that the transactions contemplated by the Merger Agreement are not
consummated for any reason, the Company's remaining assets will not be
sufficient to meet its ongoing liabilities and the Company's remaining
operations will be wound up subject to the approval of the stockholders of the
Company. The anticipated closing date for the Merger has been postponed due to
delays in FX's ability to secure the financing for the transaction that is
required pursuant to the terms and conditions of the Merger Agreement, as well
as delays in the preparation and finalization of the requisite financial and
other information about FX that will be included in the Company's information
statement being prepared in connection with the solicitation of stockholder
approval for the Reverse Stock Split.
On October 8, 2003, the Company notified FX that, in light of delays in its
consummating the proposed merger with the Company, the Company's Board of
Directors has decided to explore other options to enhance shareholder value.
These options may include a merger or similar transaction with another entity,
consummation of the merger with FX, or liquidation of the Company.
The Company's cash balance of $7,404 at September 30, 2003, decreased by $769 or
9% compared to the $8,173 cash balance at December 31, 2002. This decrease is
primarily due to the sale during the third quarter of 5,000 shares of 24/7 Real
Media ("TFSM") common stock at $1.70 per share, offset by certain operating
expenses incurred by the Company which has effectively ceased its operations and
continues to wind down activities.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
For the last two years, the Company has been a "shell" company with no
operational revenues and continuing general and administrative expenses.
In August 2001, the Company sold certain fixed and intangible assets essential
to its business operations and entered into a purchase agreement containing
provisions restricting the Company's ability to continue to engage in the
business engaged in by the Company prior to the transaction. Accordingly, the
Company's remaining operations have been limited to liquidating assets,
collecting accounts receivable, paying creditors, and negotiating and
structuring the transactions contemplated by the Merger Agreement or the winding
up of the Company's remaining business and operations, subject, in either case,
to the approval of the stockholders of the Company.
The transactions contemplated by the Merger Agreement may never be consummated.
In the event that the transactions contemplated by the Merger Agreement are not
consummated for any reason, the Company's remaining assets will not be
sufficient to meet its ongoing liabilities and the Company's remaining
operations may be wound up subject to the approval of the stockholders of the
Company. On October 8, 2003, the Company notified FX that, in light of delays in
its consummating the proposed merger with the Company, the Company's Board of
Directors has decided to explore other options to enhance shareholder value.
These options may include a merger or similar transaction with another entity,
consummation of the merger with FX, or liquidation of the Company.
ITEM 3. CONTROLS AND PROCEDURES
The Company's President has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the President concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been made known to him in a timely
fashion. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the President completed his evaluation.
7
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Company*
3.1(a) Amendment to Certificate of Incorporation of
the Company*
3.1(b) Amendment to Certificate of Incorporation of
the Company**
3.2 By-laws of the Company*
3.2(b) Amendment to By-laws of the Company*
3.3 Letter Agreement, dated June 28, 2002, between
the Company and First Step***
4.1 Common Stock Certificate*
4.2 Voting Agreement among Messrs. Centner, de
Ganon, Cleek and Szollose*
31 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Form 8-K filed October 14, 2003.
* Incorporated by reference from the Company's Registration Statement on Form
SB-2, No. 333-4319.
** Incorporated by reference from the Company's Form 10-KSB for its fiscal year
ended December 31, 2000.
*** Incorporated by reference from the Registrant's Form 10-QSB/A filed on June
28, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
K2 DIGITAL, INC.
Date: November 14, 2003
By: /s/ Gary Brown
-----------------------------
Gary Brown
President
(Principal Financial and
Accounting Officer)
8