1
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 MARCH 31, 2001
[ ] 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
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
13-3886065
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
30 BROAD STREET, 16TH FLOOR
NEW YORK, NEW YORK 10004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 301-8800
(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 APRIL 30, 2001
----- -----------------------------
Common stock, par value $.01 per share.......................................... 3,843,279
Common stock redeemable purchase warrants....................................... 625,000
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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K2 DIGITAL, INC. AND SUBSIDIARY
INDEX
PAGE
----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheet - March 31, 2001 (unaudited)............................ 1
Consolidated statements of operations - three months ended
March 31, 2001 (unaudited) and March 31, 2000 (unaudited).......................... 2
Consolidated statements of cash flows - three months ended
March 31, 2001 (unaudited) and March 31, 2000 (unaudited)....................... 3
Notes to consolidated financial statements......................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 7
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................ 11
Item 6. Exhibits and Reports on Form 8-K................................................... 11
SIGNATURES ................................................................................ 12
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PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2001
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 440,446
Accounts receivable, net of allowance for doubtful accounts of $100,000.......... 512,092
Unbilled revenue................................................................. 197,831
Prepaid expenses and other current assets........................................ 163,445
Investment in securities available for sale...................................... 37,818
------------
Total current assets................................................................ 1,351,632
FIXED ASSETS, net................................................................... 507,206
RESTRICTED CASH..................................................................... 250,000
OTHER ASSETS........................................................................ 240,893
------------
Total assets................................................................ $ 2,349,731
============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations..................................... $ 27,429
Accounts payable................................................................. 509,940
Accrued compensation and payroll taxes........................................... 99,015
Accrued expenses................................................................. 275,270
Deferred revenue................................................................. 335,766
Deferred rent ................................................................... 241,443
Customer advances................................................................ 127,703
------------
Total current liabilities........................................................... 1,616,566
LONG-TERM CAPITAL LEASE OBLIGATIONS................................................. 6,650
------------
Total liabilities.............................................................. 1,623,216
STOCKHOLDERS' EQUITY:
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;
4,260,696 shares issued and 3,843,279 shares outstanding....................... 42,607
Treasury stock, 417,417 shares at cost........................................... (819,296)
Additional paid-in capital....................................................... 8,296,805
Accumulated other comprehensive loss............................................. (1,400,229)
Deferred compensation............................................................ (259,852)
Deferred commitment costs........................................................ (718,367)
Accumulated deficit.............................................................. (4,415,152)
------------
Total stockholders' equity.......................................................... 726,515
------------
Total liabilities & stockholders' equity.................................... $ 2,349,731
============
The accompanying notes are an integral part of these Consolidated
Financial Statements.
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K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
---------------------------
MARCH 31,
2001 2000
---- ----
UNAUDITED UNAUDITED
------------ -------------
Gross revenues................................ $ 830,017 $ 1,933,010
Less: pass-through costs...................... 35,908 (444,162)
----------- -------------
Net revenues.................................. 865,925 1,488,848
Direct salaries and costs..................... 1,005,192 885,078
Selling, general and administrative
expenses.................................. 1,075,964 857,100
Write off of deferred transaction costs....... 584,452 --
Depreciation.................................. 90,466 79,417
----------- -------------
Loss from operations before interest and
other income, net and income taxes........ (1,890,149) (332,747)
Interest and other income, net................ 12,470 41,634
Provision for income taxes.................... -- 4,120
----------- -------------
Net income (loss)............................. $(1,877,679) $ (295,233)
============ ==============
Net income (loss) per share --
Basic and Diluted............................. $ (0.51) $ (0.09)
=========== ==============
Weighted average common shares
outstanding - basic and diluted........... 3,681,338 3,346,874
=========== =============
The accompanying notes are an integral part of these Consolidated
Financial Statements.
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K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $ (1,877,679) $ (295,233)
Adjustments to reconcile net loss to net cash used
in operating activities --
Non-cash compensation expense.................................... 62,500 143,683
Write-off of deferred transaction costs.......................... 254,494 --
Depreciation..................................................... 90,466 79,417
Changes in --
Accounts receivable, net......................................... 1,158,056 79,714
Prepaid expenses and other current assets........................ (14,379) (7,863)
Unbilled revenue................................................. 284,943 (612,609)
Other assets..................................................... -- 2,882
Accounts payable................................................. (267,921) (41,608)
Accrued compensation and payroll taxes........................... (96,005) (43,996)
Other accrued expenses........................................... (263,781) 208,447
Deferred revenue................................................. 161,779 --
Deferred rent.................................................... 133,492 --
------------ -------------
Net cash used in operating activities............................ (374,036) (487,166)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Gross proceeds from sale of investment securities................ 94,127 --
Purchase of equipment............................................ (8,073) (131,831)
------------- --------------
Net cash used in investing activities............................ (86,053) (131,831)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations.................. (7,177) (7,178)
Options exercised for cash....................................... -- 11,251
------------ -------------
Net cash (used in) provided by financing activities.............. (7,177) 4,073
------------- -------------
Net decrease in cash and cash equivalents........................ (295,160) (614,924)
CASH AND CASH EQUIVALENTS, beginning of period................... 735,606 2,936,918
------------ -------------
CASH AND CASH EQUIVALENTS, end of period......................... $ 440,446 $ 2,321,994
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest......................................................... $ 1,031 $ 660
Income taxes..................................................... $ 464 $ 4,120
The accompanying notes are an integral part of these Consolidated
Financial Statements.
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K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
K2 Digital, Inc., a Delaware corporation ("K2" or the "Company"), is a strategic
digital services company, providing consulting and development services
including analysis, planning, systems design, creative and implementation.
2. BASIS OF PRESENTATION
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 March 31, 2001 and the
financial results for the three months ended March 31, 2001 and 2000, in
accordance with generally accepted accounting principles 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 months ended March 31, 2001 and March
31, 2000, 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 audited
consolidated financial statements for the fiscal year ended December 31, 2000,
which are included in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and revenues and expenses
during the reporting periods. Actual results may differ from those estimates.
3. GOING CONCERN
The Company has incurred negative cash flows from operations and sustained net
losses. Accordingly, the Company is dependent on obtaining financing to fund its
operations. Management's plans include obtaining additional equity financing.
This financing will be used to fund the operations of the Company. There is no
assurance that such financing will be obtained and that, if additional financing
is obtained, management's plans will be sufficient to sustain the Company as a
going concern. The Company's independent public accountants have added an
explanatory paragraph to their audit opinion issued in connection with the 2000
financial statements which states that the Company's losses since inception and
dependence on outside financing raise substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
4. NET LOSS PER SHARE OF COMMON STOCK
SFAS 128, "Earnings per Share," establishes standards for computing and
presenting earnings per share ("EPS"). The standard requires the presentation of
basic EPS and diluted EPS. Basic EPS is calculated by dividing income available
to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing income
available to common stockholders by the weighted average number of shares of
common stock outstanding adjusted to reflect potentially dilutive securities.
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In accordance with SFAS 128, the following table reconciles net loss and share
amounts used to calculate basic and diluted loss per share:
THREE MONTHS ENDED
------------------
MARCH 31,
2001 2000
---- ----
UNAUDITED UNAUDITED
--------- ---------
Numerator: Net loss................. $(1,877,679) $ (295,233)
Denominator: Weighted average number
of common shares outstanding
Basic .............................. 3,681,338 3,346,874
Diluted............................. 3,681,338 3,346,874
Net loss per share --
Basic and Diluted.................. $ (0.51)* $ (0.09)*
* Excludes all outstanding stock options and warrants as of March 31, 2001
and 2000, as they are antidilutive.
5. INVESTMENT IN SECURITIES
As of March 31, 2001, the Company held 110,000 shares of common stock of 24/7
Media Inc. These shares have been classified as "investments in securities
available for sale" as a result of the Company's ability and intent to sell such
shares in the near future. In accordance with SFAS No. 115, the shares are
stated at fair market value on the Company's March 31,2001 consolidated balance
sheet. The unrealized holding loss is reflected as "other comprehensive loss" in
the stockholders' equity section of the balance sheet.
The following disclosures are presented in accordance with SFAS No. 115:
Equity Securities:
Aggregate fair market value....................... $ 37,818
Gross unrealized holding loss..................... $(1,400,229)
The Company did not sell any shares of capital stock of 24/7 Media Inc. during
the quarter ended March 31,2001.
6. FUSION CAPITAL AGREEMENT
On December 11, 2000, the Company entered into a common stock purchase agreement
(the "Fusion Facility") with Fusion Capital Fund II, LLC ("Fusion Capital").
Under the terms of the Fusion Facility, Fusion Capital has agreed to purchase $6
million of the Company's common stock and the Company has the option to require
Fusion Capital to enter into a second identical common stock purchase agreement
for the purchase of an additional $6 million of its common stock. Each month,
provided there is no event of default under the Fusion Facility, the Company has
the right to sell to Fusion Capital $250,000 of its common stock at a price
based upon the market price of the Company's common stock on the date of each
sale, without any fixed discount to the market price. Although the notification
from The Nasdaq Stock Market that the Company's common stock had failed to
maintain the minimum bid price of $1.00 per share over the prior 30 consecutive
trading days as required by the Marketplace Rules of The Nasdaq SmallCap Market
may constitute an event of default under the Fusion Facility, Fusion Capital has
waived its right to terminate the Fusion Facility for this reason. In January
2001, the Company issued to Fusion Capital as a commitment fee for the Fusion
Facility, 380,485 shares of common stock, as well as warrants to purchase
297,162 shares of
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common stock at an exercise price of $.01 per share, exercisable at any time
over a five year period. The fair market value of such shares and warrants at
the date of grant of approximately $700,000 was recorded as deferred issuance
costs and will be charged against the proceeds to be received under the Fusion
Facility. As of March 31, 2001, no amounts had been drawn under the Fusion
Facility.
7. STOCKHOLDERS' EQUITY
On March 14, 2001, the Company held a special meeting of stockholders. The
shareholders of the Company approved each of the following proposals detailed in
the Company's Notice of Special Meeting and Definitive Proxy Statement dated
February 14, 2001:
- to amend the Certificate of Incorporation of the Company to
increase the authorized capital stock of the Company to
25,000,000 shares;
- to issue up to 3,500,000 shares of the Company's common stock to
Fusion Capital pursuant to the Fusion Facility; and
- to amend the Company's 1997 Stock Incentive Plan to increase the
number of shares of common stock issuable thereunder to
3,000,000 shares.
8. SUBSEQUENT EVENTS
Under an agreement in principle announced July 11, 2000, the Company negotiated
to acquire a majority interest in SilverCube, Inc., a professional services firm
specializing in wireless content delivery strategy and development. The
transaction was expected to close in the first quarter of 2001. In April 2001,
the Company terminated its discussions with SilverCube, Inc. As a result, the
Company has written-off all capitalized costs and advances for the proposed
transaction, totaling $584,452 as of March 31, 2001.
On May 15, 2001, the Company entered into a non-binding letter of intent with
SGI Graphics LLC, a Delaware limited liability company ("SGI"), pursuant to
which SGI will, subject to certain conditions, purchase approximately 6,526,449
shares of restricted common stock of K2, representing fifty-one percent (51%) of
the issued and outstanding capital stock of K2 on a fully diluted basis (after
giving effect to all outstanding warrants and to options having an exercise
price less than $1.75), for a total purchase price of $2,000,000. Under the
terms of the letter of intent, SGI will also receive warrants to purchase an
additional 717,903 shares of K2 common stock. Concurrently with the execution
of the letter of intent, K2 borrowed $250,000 from K2 Holdings LLC, a Delaware
limited liability company and an affiliate of SGI, for working capital purposes
pursuant to a short term promissory note secured by all of the assets of K2.
The loan proceeds will be credited toward the purchase price to be paid by SGI
in the equity investment.
The consummation of the $2 million equity investment by SGI is subject to
certain conditions, including the implementation of a pre-approved
cost-reduction program by K2, a fairness opinion from the Company's financial
advisors, the approval of the transaction by the shareholders of K2 and the
execution of mutually satisfactory final documentation. Proceeds of the equity
investment are expected to be used for working capital purposes.
After the consummation of the equity investment, K2 and SGI expect to enter into
discussions and negotiations in good faith with respect to the potential
combination of the business of K2 with all or a portion of the business of SGI.
Although neither party has yet committed to any such combination, both parties
have acknowledged in the letter of intent that a potential combination of the
assets and operations of SGI with K2 would be expected to result in substantial
revenue growth opportunities and cost savings for the combined companies, would
be expected to offer the stockholders of K2 the opportunity to participate in a
new combined company with substantially greater resources and capabilities, and
is a substantial business reason for the equity investment by SGI.
In connection with the transaction, K2 also received an additional $250,000
equity investment through its equity facility established last year with Fusion
Capital Fund II, LLC.
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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 (unaudited) 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. Readers are encouraged to review "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 10 of the
Company's 2000 Annual Report on Form 10-KSB for a discussion of certain of these
risks and uncertainties which such risk factors are hereby incorporated by
reference into this Report.
RESULTS OF OPERATIONS
General
The Company works with clients to develop strategies for using new and emerging
technologies to help the clients build one-to-one relationships with their
customers, employees and vendors. Through the strategic and technical expertise,
media knowledge, and creative talent of the Company's team of employees, the
Company assists its clients in achieving a favorable return-on-investment from
digital channels of e-commerce, information, customer support, advertising and
entertainment. These channels include Web sites, transmission of broadband
content, intranets, extranets, online media, and wireless appliances.
The Company currently provides its clients with a range of services, including:
qualitative and quantitative research, usability labs to test graphical user
interfaces, navigation, functionality and systems, positioning studies for
online branding, strategic planning, e-commerce planning, business process
reengineering, online media planning and buying, proprietary media partnerships,
marketing strategies, Web design, creative services for online advertising
(e.g., banners, rich media, interstitials), technical strategies, requirements
specifications and programming.
Revenues are recognized on a percentage of completion basis. Provisions for any
estimated losses on uncompleted projects are made in the period in which such
losses are determinable. Most of the Company's revenues have been generated on a
fixed fee or cap fee basis. The Company also provides ongoing services to
certain customers.
While the Company considers the presentation of gross revenues to be
appropriate, as a result of the Company assuming the economic risk related to
reimbursable expenses, such as pass-through media costs, the Company has elected
to present net revenues in its statement of operations, because they are
representative of the Company's fee-based strategic and process consulting and
development services, which are at the core of the current business model. Net
revenues represent gross revenues, less reimbursable expenses, such as media
pass-through costs. The Company's operating results discussed herein are not
necessarily representative of future periods.
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PERCENTAGE OF NET REVENUES
---------------------------
THREE MONTHS ENDED
---------------------------
MARCH 31,
2001 2000
--------------------------
(UNAUDITED) (UNAUDITED)
---------- ------------
Net revenues....................................... 100.0% 100.0%
Direct salaries and costs.......................... 116.1% 59.4%
Selling, general and administrative
expenses......................................... 124.3% 57.6%
Depreciation....................................... 10.4% 5.3%
Write off of deferred transaction costs............ 67.5% --
Loss from operations before interest and other
income, net and income taxes..................... (218.3%) (22.3%)
Interest and other income, net..................... 1.4% 2.8%
Provision for income taxes......................... -- (0.3%)
Net loss........................................... (216.8%) (19.8%)
Revenues
Net revenues consist of gross revenues less pass-through expenses such as media
placement costs. Net revenues for the three months ended March 31, 2001
decreased by 41.8% compared to the same quarter in 2000. In the 2001 first
quarter, net revenues were approximately $865,900 compared to $1,488,800 in the
2000 first quarter, or a decrease of approximately $622,900, due to lower than
anticipated revenues in the 2001 first quarter. This decrease in net revenues
was due to the general economic slowdown which significantly reduced
expenditures for IT and Internet professional services and delayed
implementation of certain projects already underway. During the three months
ended March 31, 2001, the three largest net revenue-producing clients accounted
for approximately 47.1%, 17.3% and 15.6%, respectively, of the Company's net
revenues. Accordingly, although the Company has increased its efforts to
maintain and enhance client relationships, loss of major clients without
comparable replacements could cause quarterly results to fluctuate and could
have a material adverse effect on the Company's financial condition. See
"Fluctuations in Quarterly Operating Results."
Direct Salaries and Costs
Direct salaries and costs include all direct labor costs and other direct costs
related to project performance, such as independent contractors, supplies, and
printing and equipment costs, less any reimbursed expenses. As a percentage of
net revenues, direct salaries and costs increased for the three months ended
March 31, 2001 as compared to the same period in 2000. This was primarily due to
increases in staff hired to service the increased business during the fourth
quarter of 2000 and projects scheduled for the first quarter of 2001 which were
planned by clients in 2000, but were postponed or cancelled. Direct salaries and
costs increased by approximately $120,100 to approximately $1,005,200 for the
2001 first quarter from approximately $885,100 for the 2000 first quarter. In
the 2001 first quarter, direct salaries and costs primarily consisted of
approximately $932,500 paid as direct salary costs and $35,200 paid as
independent contractor costs. In the 2000 first quarter, direct salaries and
costs consisted primarily of approximately $626,400 paid as direct salary costs
and approximately $206,800 paid as independent contractor costs. Gross profit,
which is net revenues less direct salaries and costs, totaled ($139,300) for the
2001 first quarter as compared to $603,700 for the 2000 first quarter, resulting
in a gross margin of (16.1%) and 40.6%, respectively. The unfavorable gross
profit for the 2001 first quarter was due primarily to the lower than
anticipated net revenues recognized during the 2001 first quarter, relative to
increased staff costs.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March
31, 2001 and 2000 were approximately $1,076,000 and $857,100, respectively, and
consisted primarily of labor costs, professional fees, occupancy costs,
recruitment costs and communications costs. In the 2001 first quarter, the
changes in selling, general and administrative costs were primarily due to an
additional staff member hired for business development, a Chief Operating
Officer and costs related to merger and acquisition activity, more fully
explained under the heading "Subsequent Events" in note 8 to the consolidated
financial statements.
Write off of Deferred Transaction Costs
The Company incurred $314,452 of legal and accounting costs in connection with
the proposed acquisition transaction described under "Subsequent Events" in note
8 to the consolidated financial statements. In addition, an advance of $270,000
was made under a promissory note executed in connection with the proposed
transaction. In April 2001, the Company terminated the proposed transaction. As
a result, the Company has written-off all capitalized costs and advances for the
proposed transaction during the first quarter of 2001.
Depreciation and Amortization
Depreciation and Amortization expense was approximately $90,500 and $79,400 for
the three months ended March 31, 2001 and 2000, respectively, and related to
depreciation of equipment, furniture and fixtures, and leasehold improvements.
The Company's depreciation expenses in 2001 have increased as a result of
purchases of additional computer and office equipment and the amortization of
certain capitalized software development costs.
Operating Loss
The operating loss for the three months ended March 31, 2001 was approximately
($1,890,100) as compared to an operating loss of approximately ($332,700) for
the three months ended March 31, 2000. Contributing to the operating loss for
the three months ended March 31, 2001 were increases in direct labor and
selling, general and administrative costs and expenses related to merger and
acquisition activities as discussed above. The operating loss for the three
months ended March 31, 2001 represented an increase of approximately $1,557,300
or 468.0% over the operating loss of approximately $332,700 for the three months
ended March 31, 2000.
Income Taxes
For the three months ended March 31, 2001, the Company had a loss before
provision for income taxes of approximately $1,877,700. Due to the operating
loss discussed above, there were no provisions for income taxes in the first
quarter of 2001. The provision for income taxes for the three months ended March
31, 2000 related to minimum statutory taxes due.
Net Loss
Net loss for the three months ended March 31, 2001 was approximately
($1,877,700) as compared to net loss of approximately ($295,200) for the three
months ended March 31, 2000.
Fluctuations in Quarterly Operating Results
Quarterly revenues and operating results have fluctuated and will fluctuate as a
result of a variety of factors. These factors, some of which may be managed by
the Company and some of which are beyond the Company's control, include the
timing of the
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completion, material reduction, postponement or cancellation of major projects,
the loss of a major customer or the termination of a relationship with a channel
source, the timing of the receipt of new business, the timing of the hiring or
loss of personnel, changes in the pricing strategies and business focus of the
Company or its competitors, capital expenditures, operating expenses and other
costs relating to the expansion of operations, general economic conditions and
acceptance and use of the Internet.
Liquidity and Capital Resources
The Company's cash balance of $440,446 at March 31, 2001, decreased by $295,160
or 40% compared to the $735,606 cash balance at December 31, 2000. This decrease
is primarily due to lower than anticipated revenues for the period, while
operating expenses were not similarly reduced. The Company has initiated a cost
reduction program in order to reduce operating expenses to a level consistent
with future expected revenue levels, but the full impact of these cost
reductions is not expected to be reflected in operating results until later
in 2001.
Although as of March 31, 2001, the Company's cash position had substantially
decreased since December 31, 2000, on May 16, 2001, the Company received
$250,000 as proceeds of a bridge loan from K2 Holdings LLC in connection with
the proposed $2 million equity investment by SGI Graphics LLC described under
the heading "Subsequent Events" in note 8 to the consolidated financial
statements. The loan was entered into pursuant to a short term promissory note
secured by all of the assets of K2. The loan proceeds will be used for working
capital purposes and will be credited toward the purchase price to be paid by
SGI in the proposed equity investment described below. Simultaneously with the
same transaction, the Company received an additional $250,000 equity investment
through its equity facility established last year with Fusion Capital Fund II,
LLC. The Company believes that, after giving effect to these transactions, its
cash position, together with cash expected to be generated by operations, will
be sufficient to finance its operations until the funding of the equity
investment by SGI described below.
In addition, as described under the heading "Subsequent Events" in note 8 to the
consolidated financial statements, on May 15, 2001, the Company executed a
non-binding letter of intent with SGI Graphics LLC pursuant to which SGI will,
subject to certain conditions, purchase approximately 6,526,449 shares of
restricted common stock of K2, representing fifty-one percent (51%) of the
issued and outstanding capital stock of K2 on a fully diluted basis (after
giving effect to all outstanding warrants and to options having an exercise
price less than $1.75), for a total purchase price of $2,000,000. Although the
Company has executed a non-binding letter of intent with SGI, such financing may
not ultimately be available if SGI elects not to consummate the investment or if
the conditions to the investment, which include approval of the transaction by
the shareholders of the Company, are not satisfied. If all of the conditions to
the equity investment are satisfied, the Company expects to complete the equity
investment by SGI in the third quarter of 2001. If the Company is not able to
consummate the investment by SGI or obtain other financing, the Company will not
have the funds to relieve any liquidity problems, should they arise, or to
finance the expansion of its business.
The Company's independent public accountants have added an explanatory paragraph
to their audit opinion issued in connection with the 2000 financial statements
which states that the Company's dependence on outside financing and losses since
inception raise substantial doubt about its ability to continue as a going
concern. The Company's independent public accountants also advised the Company
that if there will be no change in the circumstances their opinion to be issued
in connection with the 2001 financial statements of the Company will include an
explanatory paragraph addressing the going concern uncertainty as well.
Recent Technical Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), as amended, which is effective
for all quarters of the fiscal year beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging securities. The adoption of SFAS No. 133 has no
material impact on the Company's consolidated financial position, results of
operations and cash flows.
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
Affecting Operating results and Market Price of Stock" contained in the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2000 for a discussion of the risks and uncertainties which
may affect this statement.
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13
PART II
OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
In January 2001, the Company issued 380,485 shares of unregistered common
stock, as well as warrants to purchase an additional 297,162 shares of common
stock, to Fusion Capital as a commitment fee in connection with the
establishment of the Fusion Facility. Because the shares were issued as a
commitment fee, the Company received no proceeds from the issuance.
In March 2001, the Company filed with the Secretary of State of the State of
Delaware an amendment to the certificate of incorporation of the Company
increasing the authorized capital stock of the Company to 25,000,000 shares,
consisting of 24,000,000 shares of Common Stock, par value $.01 per share, and
1,000,000 shares of Preferred Stock, par value $.01 per share. The increase,
which was approved by the stockholders of the Company during the special
meeting of stockholders held on March 14, 2001, may have a dilutive effect on
the current stockholders of the Company to the extent that newly authorized
shares are issued from time to time in the future.
ITEM 4. Submission of Matters to a Vote of Security Holders.
On March 14, 2001, the Company held a special meeting of stockholders. The
shareholders of the Company approved each of the proposals detailed in the
Company's Notice of Special Meeting and Definitive Proxy Statement dated
February 14, 2001 as follows:
- The proposal to amend the Certificate of Incorporation of the Company to
increase the authorized capital stock of the Company was approved by a
total of 1,952,500 votes, or 50.8% of the issued and outstanding shares
of the Company, and 92.9% of all the votes cast at the meeting. A total of
136,690 votes were cast against the proposal and 12,247 shares abstained
from voting.
- The proposal to issue up to 3,500,000 shares of the Company's common
stock to Fusion Capital pursuant to the common stock purchase agreement
entered into with Fusion Capital was approved by a total of 1,681,513 votes,
or 97.7% of all the votes cast at the meeting. A total of 27,392 votes were
cast against the proposal and 12,047 shares abstained from voting.
- The proposal to amend the Company's 1997 Stock Incentive Plan to
increase the number of shares of common stock issuable thereunder was
approved by a total of 1,932,852 votes, or 91.9% of the votes cast at the
meeting. A total of 158,638 votes were cast against the proposal and 9,947
shares abstained from voting.
Shareholders of the Company represented in person or by proxy voted a total of
2,101,437 shares, or 54.7% of the 3,843,279 issued and outstanding shares.
Fusion Capital was not permitted to vote its shares in connection with the
proposal authorizing the transaction with Fusion Capital.
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*
4.1 Common Stock Certificate*
4.2 Warrant Certificate*
4.4 Warrant Agreement by and between Continental Stock
Transfer & Trust Company and the Company*
4.5 Voting Agreement among Messrs. Centner, de Ganon, Cleek
and Szollose*
* Incorporated by reference from the Registrant's Registration Statement
on Form SB-2, No. 333-4319.
** Incorporated by reference from the Registrant's Form 10-KSB for its
fiscal year ended 12/31/00
(b) Reports on Form 8-K:
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
K2 DIGITAL, INC.
Date: May 15, 2001
By: /s/ LYNN FANTOM
---------------------------------
Lynn Fantom
Chief Executive Officer and President
By: /s/ GARY BROWN
---------------------------------
Gary Brown
Chief Operating Officer
(Principal Financial and
Accounting Officer)
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