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, 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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) (Pursuant to rule 33-8587)
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, 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 - September 30, 2005 (unaudited)..... 2
Condensed consolidated statements of operations and comprehensive
income (loss) - three and nine months ended September 30, 2005
(unaudited) and September 30, 2004 (unaudited)........................ 3
Condensed consolidated statements of cash flows - nine months
ended September 30, 2005 (unaudited) and
September 30, 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 .................................................................. 10
1
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash................................................................ $ 3,273
Investment in security available-for-sale........................... 28,160
----------
Total current assets.......................................... $ 31,433
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................................. $ 184,518
Accrued expenses ................................................ 13,000
----------
Total current liabilities..................................... $ 197,518
==========
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........................... 23,560
Accumulated deficit.............................................. (7,742,260)
----------
653,211
Less: Treasury stock, 417,417 shares, at cost.................... (819,296)
----------
Total stockholders' deficit......................................... (166,085)
----------
Total liabilities and stockholders' deficit................ $ 31,433
==========
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
2005 2004 2005 2004
Unaudited Unaudited Unaudited Unaudited
Revenues $ -- $ -- $ -- $ --
Other income 17,836 2,641 27,941 2,641
General and administrative expenses 29,414 55,736 (13,665)
--------------------------------------------------------------------
Net income (loss) $ (11,578) $ 2,641 $ (27,795) $ 16,306
====================================================================
Net income (loss) per common share-
basic and diluted $ (0.002) $ 0.001 $ (0.006) $ 0.003
====================================================================
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,982,699 4,982,699 4,982,699
====================================================================
Comprehensive loss:
Net income (loss) $ (11,578) $ 2,641 $ (27,795) $ 16,306
--------------------------------------------------------------------
Other comprehensive loss,
Unrealized gain (loss) on available-for-sale security:
Unrealized holding gain (loss) arising during the period 4,600 (24,970) 10,350 (40,230)
Reclassification adjustment for gain included
in net income (loss) (17,800) (2,630) (27,850) (2,630)
--------------------------------------------------------------------
(13,200) (27,600) (17,500) (42,860)
--------------------------------------------------------------------
Comprehensive loss $ (24,778) $ (24,959) $ (45,295) $ (26,554)
====================================================================
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,
2005 2004
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (27,795) $ 16,306
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Realized gain on sale of available-for-sale security (27,850) (2,630)
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 13,352 (21,209)
----------------------------------
Net cash used in operating activities (42,293) (7,533)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES,
gross proceeds from sale of available-for-sale security 38,200 3,780
----------------------------------
Net decrease in cash (4,093) (3,753)
CASH, beginning of period 7,366 16,593
----------------------------------
CASH, end of period $ 3,273 $ 12,840
==================================
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, 2005,
the Company has cumulative losses of approximately $7.7 million, a diminutive
cash balance and working capital and stockholders' deficits of approximately
$166,000. 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 (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 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 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 (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.
On June 27, 2005, the Registrant signed a letter of intent with Alternative
Construction Company, Inc. ("ACC") a Florida corporation, whereby ACC will
acquire approximately 1,320,000 shares of K2 common stock or preferred shares
convertible into common stock at a purchase price of $150,000. K2, its
wholly-owned subsidiary K2 Acquisition Corp. ("Merger Sub") and ACC intend to
enter into a merger agreement whereby Merger Sub will merge with and into ACC.
In connection with the merger, the shareholders of ACC will acquire a
controlling interest in K2. ACC's designees will be appointed as directors of K2
and the Board and shareholders will approve a reverse split of K2 shares such
that the current shareholders of K2 will own a minimum of $500,000 in value of
K2 shares.
ACC is a leader in the production of patented, galvanized-steel interlocking
structural insulated panels that are used in both the residential and commercial
construction industry. ACC's panel systems are used as an alternative to
conventional materials such as lumber and bricks and are at the forefront of
"green" building technology. ACC also manufactures patented in-house safe rooms
used for the protection of loved ones and valuables in the event of weather
disasters or home intrusions. ACC contends its' panels are superior to frame and
block construction materials due to: superior strength and load characteristics,
superior wind ratings, superior R-factor and insulation labor costs, reduced
construction labor costs, speed and ease of construction and, additionally, its'
resistance capabilities to fire, moisture, mold and insects.
On October 1, 2005, the Company and ACC terminated their previously announced
Letter Agreement dated June 27, 2005. The Company is currently considering other
options, which may include a merger or similar transaction with another entity
or liquidation of the Company under Chapter 7 of the U.S. Bankruptcy Code.
5
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, 2005 and the
financial results for the three and nine months ended September 30, 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 and nine months ended September 30, 2005
and 2004 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.
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, 2005 and 2004
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, 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 and nine months ended September 30, 2005 and 2004, the Company,
operating as a "shell," incurred net income (loss) of approximately $(11,600)
and $(27,800), respectively, in 2005 and $2,600 and $16,300, respectively, in
2004. The Company's net income for the nine months ended September 30, 2005
consists primarily of accounting, legal and other expenses related to
maintaining the "shell" corporation ("ongoing costs") offset partially by a gain
on the sale of a portion of its available-for-sale security. The Company's net
income for the three and nine months ended September 30, 2004 consists of (i)
ongoing costs offset by payments made by merger candidate, Sunrise and (ii) a
small gain on the sale of a portion of an 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.
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 (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 or liquidation of the Company under Chapter 7 of the U.S. Bankruptcy Code.
On June 27, 2005, the Registrant signed a letter of intent with Alternative
Construction Company, Inc. ("ACC"), a Florida corporation, whereby ACC will
acquire approximately 1,320,000 shares of K2 common stock or preferred shares
convertible into common stock at a purchase price of $150,000. K2, its
wholly-owned subsidiary K2 Acquisition Corp. ("Merger Sub") and ACC intend to
enter into a merger agreement whereby Merger Sub will merge with and into ACC.
In connection with the merger, the shareholders of ACC will acquire a
controlling interest in K2. ACC's designees will be appointed as directors of K2
and the Board and shareholders will approve a reverse split of K2 shares such
that the current shareholders of K2 will own a minimum of $500,000 in value of
K2 shares.
ACC is a leader in the production of patented, galvanized-steel interlocking
structural insulated panels that are used in both the residential and commercial
construction industry. ACC's panel systems are used as an alternative to
conventional materials such as lumber and bricks and are at the forefront of
"green" building technology. ACC also manufactures patented in-house safe rooms
used for the protection of loved ones and valuables in the event of weather
disasters or home intrusions. ACC contends its' panels are superior to frame and
block construction materials due to: superior strength and load characteristics,
superior wind ratings, superior R-factor and insulation labor costs, reduced
construction labor costs, speed and ease of construction and, additionally, its'
resistance capabilities to fire, moisture, mold and insects.
On October 1, 2005, the Company and ACC terminated their previously announced
Letter Agreement dated June 27, 2005. The Company is currently considering other
options, which may include a merger or similar transaction with another entity
or liquidation of the Company under Chapter 7 of the U.S. Bankruptcy Code.
The Company's cash balance of $3,273 at September 30, 2005, decreased by $4,093
or approximately 56% compared to the $7,366 cash balance at December 31, 2004.
This decrease is primarily due to the Company paying down its obligations offset
by net proceeds from sale of investment securities. During the nine months
ending September 30, 2004, the Company received $14,000 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). In the quarter ending March 31, 2005, the Company sold an additional
3,000 shares of 24/7 at $3.34 per share. In the quarter ending June 30, 2005,
the Company sold an additional 2,000 shares of 24/7 at $2.89 per share. In the
quarter ending September 30, 2005 the Company sold an additional 4,000 of 24/7
shares at $5.60 per share.
7
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
FOR THE PAST 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 MAY NEVER BE CONSUMMATED.
To date, the Company has been unsuccessful in finding a suitable merger partner.
The Company's remaining assets may not be sufficient to meet its ongoing costs
of remaining a shell company and paying its liabilities. The Company's Board of
Directors is considering other options, which may include a merger or similar
transaction with another entity, or liquidation of the Company under Chapter 7
of the U.S. Bankruptcy Code.
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*
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.
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 14, 2005
BY: /s/ GARY BROWN
-----------------------------
Gary Brown
President
(Principal Financial and
Accounting Officer)
10