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, 2005
|_| 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 April 30, 2005
-------------------------------------- -----------------------------
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 - March 31, 2005 (unaudited)..... 2
Condensed consolidated statements of operations and comprehensive
income (loss) - three months ended March 31, 2005 (unaudited)
and March 31, 2004 (unaudited).................................. 3
Condensed consolidated statements of cash flows - three months
ended March 31, 2005 (unaudited) and March 31, 2004 (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 AND REPORTS ON FORM 8-K.................................. 10
SIGNATURES ............................................................... 11
1
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash............................................................ $ 942
Investment in security available-for-sale....................... 32,500
-----------
Total current assets...................................... 33,442
-----------
Total assets ......................................... 33,442
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................. $ 163,907
Accrued expenses ............................................ 13,495
-----------
Total current liabilities................................. 177,402
-----------
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
Additional paid-in capital................................... 8,317,910
Accumulated other comprehensive income....................... 21,000
Accumulated deficit.......................................... (7,717,575)
-----------
675,336
Treasury stock, 417,417 shares at cost....................... (819,296)
-----------
Total stockholders' deficit..................................... (143,960)
-----------
Total liabilities and stockholders' deficit........... $ 33,442
===========
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
MARCH 31,
2005 2004
Unaudited Unaudited
Revenues $ -- $ --
Other income 6,602
General and administrative expenses (9,712) 14,000
----------------- ---------------
Net income (loss) $ (3,110) $ 14,000
================= ===============
Net income (loss) per common share-
basic and diluted $ (0.001) $ 0.003
================= ===============
Weighted average common shares
outstanding - basic and diluted 4,982,699 4,982,699
================= ===============
Comprehensive income (loss):
Net income (loss) $ (3,110) $ 14,000
Other comprehensive income (loss) -
Unrealized gain (loss) on
available-for-sale security (13,770) 7,700
Reclassification adjustment for
gain included in net loss (6,570)
----------------- ---------------
Comprehensive income (loss) $ (23,450) $ 21,700
================= ===============
See the accompanying notes to condensed consolidated financial statements.
3
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
2005 2004
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,110) $ 14,000
Adjustments to reconcile net income (loss)
to net cash used in operating
activities:
Realized gain on sale of available-for-sale
security (6,570)
Changes in operating assets and liabilities:
Accounts payable (3,264) 6,175
Accrued expenses (3,500) (32,021)
------------- -------------
Net cash used in operating activities (16,444) (11,846)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES,
gross proceeds from sale of
available-for-sale security 10,020
------------- -------------
Net decrease in cash (6,424) (11,846)
CASH, beginning of period 7,366 16,593
------------- -------------
CASH, end of period $ 942 $ 4,747
============= =============
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 March 31, 2005, the
Company has cumulative losses of approximately $7.7 million, a diminutive cash
balance and working capital and a stockholders' deficit of approximately
$144,000. 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 30, 2004, the Company signed a non-binding letter of intent with
SunriseUSA, Inc. ("Sunrise"), whereby Sunrise will merge with the Company.
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 would look to provide bundled telecommunication and cable
services that will represent a convenient alternative to single product
offerings of competing vendors. Effective July 23, 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 would consummate a merger wherein the
shareholders of Sunrise would exchange all of the issued and outstanding common
stock of Sunrise for newly issued shares of common and preferred stock of K2,
Acquisition would merge with and into Sunrise, and Sunrise would become a
wholly-owned subsidiary of K2. Post Merger, the current shareholders of the
Registrant would own a minimum of 2.5% of the surviving entity, which percentage
would be adjusted upward to 3.5% of the surviving entity since new equity
funding was not received by December 31, 2004 (a provision of the definitive
merger agreement).
On December 31, 2004, the Company notified Sunrise that in light of the delays
in its consummating the proposed merger, it had decided to terminate the Merger
Agreement dated July 23, 2004 between the Company, Sunrise and K2 Acquisition
Corporation, effective December 31, 2004. Thereafter the parties continued to
discuss the terms of an extension of the Merger Agreement but the Company has
advised Sunrise that it is now exploring other options to enhance shareholder
value. These options may include a merger or similar transaction with another
entity, consummation of a merger with Sunrise pursuant to a new merger agreement
or amendment to the terminated agreement, or liquidation of the Company under
Chapter 7 of the U.S. Bankruptcy Code.
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 March 31, 2005 and the
financial results for the three months ended March 31, 2005 and 2004, 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 months ended March 31, 2005 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, 2004, 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 condensed 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.
5
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 Statement of Financial Accounting Standard ("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 months ended March 31, 2005 and 2004 were the same.
STOCK-BASED COMPENSATION (AND NEW ACCOUNTING PRONOUNCEMENT)
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 month
periods ended March 31, 2005 and 2004, the Company did not grant options
pursuant to its stock option plans.
In December 2004, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment." SFAS No 123R is a revision of SFAS No. 123,
"Accounting for Stock Based Compensation," and supersedes APB Opinion No. 25
("APB No. 25"). Among other items, SFAS No. 123R eliminates the use of APB No.
25 and the intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the
financial statements. The effective date of SFAS No. 123R for the Company is the
first quarter 2006. The adoption of this statement is not expected to have a
material impact on the Company's results of operations since it has not issued
any options in the last few years nor does it expect to issue options in the
near term.
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 months ended March 31, 2005 and 2004, the Company, operating as
a "shell," incurred net income (loss) of approximately, $(3,100) and $14,000,
respectively. The Company's 2005 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.
The Company's 2004 net income is the result of (i) the Company reversing certain
liabilities relating to professional fees that Sunrise agreed to pay, and paid,
on behalf of the Company in 2004 and, (ii) diminutive general and administrative
expenses as a result of Sunrise paying a majority of the Company's ongoing
public company expenses.
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.
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 would 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 23, 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 would
consummate a merger wherein the shareholders of Sunrise would exchange all of
the issued and outstanding common stock of Sunrise for newly issued shares of
common and preferred stock of K2, Acquisition would merge with and into Sunrise,
and Sunrise would become a wholly-owned subsidiary of K2. Post Merger, the
current shareholders of the Registrant would own a minimum of 2.5% of the
surviving entity, which percentage would be adjusted upward to 3.5% of the
surviving entity since new equity funding was not received by December 31, 2004
(a provision of the definitive merger agreement).
On December 31, 2004, the Company notified Sunrise that in light of the delays
in its consummating the proposed merger, it had decided to terminate the Merger
Agreement dated July 23, 2004 between the Company, Sunrise and K2 Acquisition
Corporation, effective December 31, 2004. Thereafter the parties continued to
discuss the terms of an extension of the Merger Agreement but the Company has
advised Sunrise that it is now exploring other options to enhance shareholder
value. These options may include a merger or similar transaction with another
entity, consummation of a merger with Sunrise pursuant to a new merger agreement
or amendment to the terminated agreement, or liquidation of the Company under
Chapter 7 of the U.S. Bankruptcy Code.
The Company's cash balance of $942 at March 31, 2005, decreased by $6,424 or
approximately 87% compared to the $7,366 cash balance at December 31, 2004. This
decrease is primarily due to the Company paying its obligations offset by a cash
infusion of approximately $10,000 related to proceeds received in connection
with the Company's sale of 24/7 Real Media, Inc. common stock
(available-for-sale security).
7
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
FOR ALMOST FOUR 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 NON-BINDING LETTER OF INTENT MAY NEVER BE
CONSUMMATED.
In the event that the transactions contemplated by the non-binding letter of
intent 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 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*
99.1 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.
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: MAY 20, 2005
BY: /S/ GARY BROWN
-----------------------------
GARY BROWN
PRESIDENT
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
10
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary Brown, certify that:
1. I have reviewed this quarterly report of K2 Digital Inc. and its subsidiary;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
o designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which the quarterly report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
o all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 20, 2005
By: /s/ Gary Brown
-------------------------
Gary Brown
President
(Principal Financial and
Accounting Officer)
11