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, 2004
|_| 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 Thomas G. Amon
500 Fifth Avenue, Suite 1650
New York, NY 10110
----------------------------------------
(Address of Principal Executive Offices)
(212) 810-2430
------------------------------------------------
(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 October 31, 2004
------------------------ ---------------------------------
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, 2004 (unaudited)................................................. 2
Condensed consolidated statements of operations and comprehensive
income (loss) - three and nine months ended September 30, 2004
(unaudited) and September 30, 2003 (unaudited).................................................................. 3
Condensed consolidated statements of cash flows - nine months
ended September 30, 2004 (unaudited) and September 30, 2003 (unaudited)......................................... 4
Notes to condensed consolidated financial statements................................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 7
ITEM 3. CONTROLS AND PROCEDURES................................................................................................. 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS................................................................................................................ 10
SIGNATURES...................................................................................................................... 11
1
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash................................................................................................................ $ 12,840
Investment in security available-for-sale........................................................................... 49,790
-------------
Total current assets.......................................................................................... $ 62,630
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................................................................................. $ 154,796
Accrued expenses ................................................................................................ 16,995
-------------
Total current liabilities..................................................................................... 171,791
-------------
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........................................................................... 34,840
Accumulated deficit.............................................................................................. (7,696,616)
-------------
Total stockholders' deficit......................................................................................... (109,161)
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Total liabilities and stockholders' deficit................................................................ $ 62,630
=============
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,
2004 2003 2004 2003
Unaudited Unaudited Unaudited Unaudited
Revenues $ -- $ -- $ -- $ --
Other income 2,641 9,750 2,641 37,950
General and administrative expenses -- 20,431 (13,665) 62,107
-------------------------------------------------------------------------
Net income (loss) $ 2,641 $ (10,681) $ 16,306 $ (24,157)
Net income (loss) per common share -
basic and diluted $ 0.001 $ (0.002) $ 0.003 $ (0.005)
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,982,699 4,982,699 4,982,699
Comprehensive income (loss):
Net income (loss) $ 2,641 $ (10,681) $ 16,306 $ (24,157)
Other comprehensive income (loss) -
unrealized gain (loss) on available-for-sale
security (27,600) 7,350 (42,860) 76,500
-------------------------------------------------------------------------
Comprehensive income (loss) $ (24,959) $ (3,331) $ (26,554) $ 52,343
=========================================================================
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,
2004 2003
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 16,306 $ (24,157)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Realized gain on sale of available-for-sale security (2,630) (37,950)
Changes in operating assets and liabilities:
Accounts payable and accrued expenses (21,209) 15,338
---------------------------------------
Net cash used in operating activities (7,533) (46,769)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES,
gross proceeds from sale of available-for-sale security 3,780 46,000
---------------------------------------
Net increase (decrease) in cash (3,753) (769)
CASH, beginning of period 16,593 8,173
CASH, end of period $ 12,840 $ 7,404
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, 2004,
the Company has cumulative losses of approximately $7.7 million, a diminutive
cash balance and working capital and stockholders' deficits of approximately
$109,000. 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.
On January 15, 2002, K2 and FutureXmedia, Inc. ("FX"), f/k/a First Step
Distribution Network, Inc., entered into an Agreement and Plan of Merger (the
"Agreement") by and among FX and its shareholders and First Step Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of K2 ("Merger Sub").
Under the terms of the Agreement, as amended, K2 was to have acquired FX by
means of a triangular merger, pursuant to which the Merger Sub would have been
merged with and into FX in a tax free reorganization. Subsequent to the
execution of the Agreement, FX encountered difficulties in financing its
business and in October 2003, K2 notified FX that it was exploring other
possible transactions. The proposed merger with FX has now been terminated.
AGREEMENT AND PLAN OF MERGER
On January 30, 2004, the Company signed a non-binding letter of intent (the
"Merger Agreement") with SunriseUSA, Inc. ("Sunrise"), a Delaware Corporation,
whereby Sunrise will merge with the Company (the "Merger"). Sunrise is a
privately-held holding company that was founded with the objective of
capitalizing on emerging opportunities within rural USA cable markets.
Ultimately, Sunrise will provide bundled telecommunication and cable services
that will represent a convenient alternative to single product offerings of
competing vendors.
Effective July 29, 2004, the Company signed a definitive Merger Agreement with
Sunrise and K2 Acquisition Corporation ("Acquisition"), a Delaware Corporation.
Pursuant to the Merger Agreement, the Company, Sunrise and Acquisition will
consummate a merger wherein the shareholders of Sunrise will exchange all of the
issued and outstanding common stock of Sunrise for newly issued shares of common
and preferred stock of K2, Acquisition will merge with and into Sunrise, and
Sunrise will become a wholly-owned subsidiary of K2. Post Merger, the current
shareholders of the Registrant will own a minimum of 2.5% of the surviving
entity, which percentage may be adjusted upward to 3.5% of the surviving entity
if a minimum new equity funding has not been received by December 31, 2004. The
minimum value of shares owned by current shareholders of the Company after the
Merger is complete and financing closed shall be $533,000 or approximately $0.11
per share, based upon 4,982,699 currently issued and outstanding shares.
The Merger is subject to a number of conditions, including private equity
funding of not less than $3,000,000. In addition, Sunrise will be responsible
for payment of all expenses related to the transaction.
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, 2004 and the
financial results for the three and nine months ended September 30, 2004 and
2003, 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.
5
The results of operations for the three and nine months ended September 30, 2004
and 2003 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, 2003, 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.
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 anti-dilutive, 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, 2004 and 2003
were the same.
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, 2004 and 2003, the Company did not grant
options pursuant to its stock option plans.
6
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, 2004 and 2003, the Company,
operating as a "shell," incurred net income (loss) of approximately, $2,600 and
$16,300, respectively for 2004 and approximately ($10,700) and ($24,100) for
2003. The Company's 2004 net income is the result of (i) the Company reversing
certain 2003 liabilities relating to professional fees that Sunrise agreed to
pay, and paid, on behalf of the Company in 2004, (ii) diminutive general and
administrative expenses as a result of Sunrise paying a majority of the
Company's ongoing public company expenses and (iii) a gain on the sale of a
portion of its available-for-sale security. The Company's 2003 net loss consists
primarily of accounting, legal and other expenses related to maintaining the
"shell" corporation offset partially by a gain on the sale of a portion of its
available-for-sale security.
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.
On January 15, 2002, K2 and FutureXmedia, Inc. ("FX"), f/k/a First Step
Distribution Network, Inc., entered into an Agreement and Plan of Merger (the
"Agreement") by and among FX and its shareholders and First Step Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of K2 ("Merger Sub").
Under the terms of the Agreement, as amended, K2 was to have acquired FX by
means of a triangular merger, pursuant to which the Merger Sub would have been
merged with and into FX in a tax free reorganization. Subsequent to the
execution of the Agreement, FX encountered difficulties in financing its
business and in October 2003, K2 notified FX that it was exploring other
possible transactions. The proposed merger with FX has now been terminated.
In January 2004, the Company signed a non-binding letter of intent (the "Merger
Agreement") with SunriseUSA, Inc. ("Sunrise"), a Delaware Corporation, whereby
Sunrise would merge with the Company. Sunrise is a privately-held holding
company that was founded with the objective of capitalizing on emerging
opportunities within rural U.S. cable markets. Ultimately, Sunrise will look to
provide bundled telecommunication and cable services that will represent a
convenient alternative to the single product offerings of some competing
vendors.
Effective July 29, 2004 the Company signed a definitive Merger Agreement with
Sunrise and K2 Acquisition Corporation ("Acquisition"), a Delaware Corporation.
Pursuant to the Merger Agreement, the Company, Sunrise and Acquisition will
consummate a merger wherein the shareholders of Sunrise will exchange all of the
issued and outstanding common stock of Sunrise for newly issued shares of common
and preferred stock of K2, Acquisition will merge with and into Sunrise, and
Sunrise will become a wholly-owned subsidiary of K2. Post Merger, the current
shareholders of the Registrant will own a minimum of 2.5% of the surviving
entity, which percentage may be adjusted upward to 3.5% of the surviving entity
if a minimum new equity funding has not been received by December 31, 2004. The
minimum value of shares owned by current shareholders of the Company after the
Merger is complete and financing closed shall be $533,000 or approximately $0.11
per share, based upon 4,982,699 currently issued and outstanding shares.
The Merger is subject to a number of conditions, including private equity
funding of not less than $3,000,000. In addition, Sunrise will be responsible
for payment of all expenses related to the transaction.
7
If the Company is unsuccessful in completing the Sunrise transaction,
management's alternative plan may include a further search for a similar
business combination or strategic alliance. There can be no assurance that the
transaction described above or management's alternative plan will be realized.
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 $12,840 at September 30, 2004, decreased by $3,753
or approximately 23% compared to the $16,593 cash balance at December 31, 2003.
This decrease is primarily due to the Company paying down its obligations offset
by cash infusions of approximately $14,000. During the quarter ending September
30, 2004, the Company received $11,000 from Sunrise for the Company's operating
expenses. In addition, the Company sold 1,000 shares, at 3.78 per share, of 24/7
Real Media, Inc. common stock (available-for-sale security).
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
FOR THE LAST THREE 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 in the non-binding letter of intent 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. The Company's Board of Directors intends to explore other options,
which may include a merger or similar transaction with another entity, or
liquidation of the Company.
8
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.
9
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
(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*
31.1 Sarbanes-Oxley Act Section 302 Certification****
32.1 Sarbanes-Oxley Act Section 906 Certification****
* 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.
**** Filed Herewith.
SIGNATURES
In accordance with 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 18, 2004
BY: /s/ GARY BROWN
-----------------------------
GARY BROWN
PRESIDENT
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
10