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 JUNE 30, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
COMMISSION FILE NO. 1-11873
K2 DIGITAL, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3886065
-------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
c/o Thomas G. Amon, Esq.
770 Lexington Avenue
6th Floor
New York, NY 10021
------------------
(Address of Principal Executive Offices)
(212) 935-6000
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at July 31, 2004
------------------------------------- ----------------------------
Common stock, par value $.01 per share 4,982,699
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes |_| No |X|
K2 DIGITAL, INC. AND SUBSIDIARY
INDEX
PAGE
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed consolidated balance sheet - June 30, 2004 (unaudited) ............................... 2
Condensed consolidated statements of operations and comprehensive income (loss)
- three and six months ended June 30, 2004 (unaudited) and June 30, 2003 (unaudited) ..... 3
Condensed consolidated statements of cash flows -six months
ended June 30, 2004 (unaudited) and June 30, 2003 (unaudited) ............................ 4
Notes to condensed consolidated financial statements ............................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............ 7
ITEM 3. CONTROLS AND PROCEDURES .......................................................................... 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................................................. 10
SIGNATURES ............................................................................................... 11
1
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ............................................................. $ 4,453
Investment in security available-for-sale ........................ 78,540
-----------
Total current assets ....................................... $ 82,993
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable .............................................. $ 161,200
Other accrued expenses ........................................ 5,995
-----------
Total current liabilities .................................. 167,195
-----------
STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized;
0 shares issued and outstanding ............................ --
Common Stock, $0.01 par value, 25,000,000 shares authorized;
5,400,116 shares issued and 4,982,699 shares outstanding ... 54,001
Treasury stock, 417,417 shares at cost ........................ (819,296)
Additional paid-in capital .................................... 8,317,910
Accumulated other comprehensive income ........................ 62,440
Accumulated deficit ........................................... (7,699,257)
-----------
Total stockholders' deficit ...................................... (84,202)
-----------
Total liabilities and stockholders' deficit ................ $ 82,993
===========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
Unaudited Unaudited Unaudited Unaudited
Revenues $ -- $ -- $ -- $ --
Other income 28,200 28,200
----------- -----------
General and administrative expenses 335 18,605 (13,665) 41,676
----------- ----------- ----------- -----------
Net income (loss) $ (335) $ 9,595 $ 13,665 $ (13,476)
Net income (loss) per common share-
basic and diluted $ (0.001) $ 0.002 $ 0.003 $ (0.003)
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,982,699 4,982,699 4,982,699
Comprehensive income (loss):
Net income (loss) $ (335) $ 9,595 $ 13,665 $ (13,476)
Other comprehensive income (loss) -
unrealized gain (loss) on
available-for-sale securities (22,960) 40,000 (15,260) 48,800
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (23,295) $ 49,595 $ (1,595) $ 35,324
=========== =========== =========== ===========
See the accompanying notes to condensed consolidated financial statements.
3
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
2004 2003
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 13,665 $ (13,476)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Realized gain on sale of available-for-sale securities (28,200)
Changes in operating assets and liabilities:
Accounts payable 13,203 9,515
Accrued expenses (39,008)
------------------- -------------------
Net cash used in operating activities (12,140) (32,161)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES,
gross proceeds from sale of available-for-sale securities 37,500
------------------- -------------------
Net increase (decrease) in cash (12,140) 5,339
CASH, beginning of period 16,593 8,173
CASH, end of period $ 4,453 $ 13,512
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 June 30, 2004, the
Company has cumulative losses of approximately $7.7 million, a diminutive cash
balance and working capital and stockholders' deficits of approximately $84,000.
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.
AGREEMENT AND PLAN OF MERGER
On January 30, 2004 the Company signed a non-binding letter of intent (the
"Merger Agreement") with SunriseUSA, Inc. ("Sunrise"), a Delaware Corporation,
whereby Sunrise will merge with the Company (the "Merger"). Sunrise is a
privately held holding company that was founded with the objective of
capitalizing on emerging opportunities within rural USA cable markets.
Ultimately, Sunrise will provide bundled telecommunication and cable services
that will represent a convenient alternative to single product offerings of
competing vendors.
Effective July 29, 2004, the Company signed a definitive Merger Agreement with
Sunrise, a Delaware Corporation and K2 Acquisition Corporation ("Acquisition"),
a Delaware Corporation and wholly-owned subsidiary of the Company. 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 the Company, Acquisition will merge with and into Sunrise,
and Sunrise will become a wholly-owned subsidiary of the Company. Post Merger,
the current shareholders of the Company will own a minimum of 2.5% of the
surviving entity, which percentage may be adjusted upward to 3.5% of the
surviving entity if a minimum new equity funding has not been received by
December 31, 2004. The minimum value of shares owned by current shareholders of
the Company after the Merger is complete and financing closed shall be $533,000
or approximately $0.11 per share, based upon 4,982,699 currently issued and
outstanding shares. Additionally, the holders of 1,000,000 Sunrise options shall
receive, in exchange for their options, options to purchase shares of the
Company common stock, however the exchange is subject to the close of the
transaction.
As the shareholders of Sunrise will control the Company after the transaction,
the proposed merger will be accounted for as a reverse acquisition under which,
for accounting purposes, Sunrise will be deemed to be the acquirer and the
Company will be deemed to be the acquired entity. Under these accounting
principles, the post-merger company financial statements will represent Sunrise
on a historical basis consolidated with the results of operations of the Company
from the effective date of the merger. Since the merger is expected to be
accounted for as a reverse acquisition with a shell company, no goodwill is
expected to be recorded.
The Merger is subject to a number of conditions, including private equity
funding of not less than $3,000,000. In addition, Sunrise will be responsible
for payment of all expenses related to the transaction.
2. BASIS OF PRESENTATION, NET LOSS PER SHARE AND STOCK-BASED COMPENSATION
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 June 30, 2004 and the
financial results for the three and six months ended June 30, 2004 and 2003, in
accordance with accounting principles generally accepted in the United States of
America for interim financial statements and pursuant to Form 10-QSB and
Regulation S-B. Certain information and footnote disclosures normally included
in the Company's annual audited consolidated financial statements have been
condensed or omitted pursuant to such rules and regulations.
5
The results of operations for the three and six months ended June 30, 2004 and
2003, respectively, are not necessarily indicative of the results of operations
to be expected for a full fiscal year. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements for the fiscal year ended December 31, 2003, which are
included in the Company's Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of K2
Digital, Inc. and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NET LOSS PER SHARE OF COMMON STOCK
The Company complies with SFAS No. 128, "Earnings Per Share", which requires
dual presentation of basic and diluted earnings per share. Basic earnings (loss)
per share excludes dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average common shares
outstanding for the year. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted to common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Since the effect of
outstanding options is antidilutive, they have been excluded from the Company's
computation of net loss per common share. Therefore, basic and diluted loss per
common share for the three and six months ended June 30, 2004 and 2003 were the
same.
STOCK-BASED COMPENSATION
The Company complies with the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation", as amended by SFAS No.148 "Accounting
for Stock-based Compensation Transaction and Disclosure". During the three and
six month periods ended June 30, 2004 and 2003, the Company did not grant
options pursuant to its stock option plans.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to; those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Factors
Affecting Operating Results and Market Price of Stock".
OVERVIEW
Founded in 1993, the Company is a digital professional services company that,
until August 2001, historically provided consulting and development services,
including analysis, planning, systems design, creation and implementation. In
August 2001, upon the sale of assets to Integrated Information Systems, Inc.
("IIS"), the Company effectively ceased operations.
RESULTS OF OPERATIONS
During the three and six months ended June 30, 2004 and 2003, the Company,
operating as a "shell," incurred a net income (loss) of approximately $(300) and
$13,700, respectively for 2004 and approximately $9,600 and ($13,500),
respectively, for 2003. The Company's 2004 net income (6 months) is the result
of the Company reversing certain liabilities relating to professional fees that
Sunrise has agreed to pay on behalf of the Company. The Company's 2003 net loss
(6 months) consists primarily of accounting, legal and public company expenses
related to maintaining the "shell" corporation, offset by an approximate $28,000
realized gain on the sale of available-for-sale securities.
CONTINUING OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the sale of assets to IIS, the Company effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. The Company does not have any ongoing
business operations or revenue sources beyond those assets not purchased by IIS.
Accordingly, the Company's remaining operations will be limited to either a
business combination with an existing business or the winding up of the
Company's remaining business and operations, subject, in either case, to the
approval of the stockholders of the Company. These, among other matters, raise
substantial doubt about the Company's ability to continue as a going concern.
On January 15, 2002, K2 and FutureXmedia, Inc., f/k/a First Step Distribution
Network, Inc. ("FX") entered into an Agreement and Plan of Merger (the
"Agreement") by and among FX and its shareholders and First Step Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of K2 ("Merger Sub").
Under the terms of the Agreement, as amended, K2 was to have acquired FX by
means of a triangular merger, pursuant to which the Merger Sub would have been
merged with and into FX in a tax free reorganization. Subsequent to the
execution of the Agreement, FX encountered difficulties in financing its
business and in October 2003 K2 notified FX that it was exploring other possible
transactions. The proposed merger with FX has now been terminated.
In January 2004, the Company signed a non-binding letter of intent with
SunriseUSA, Inc. ("Sunrise") 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 with 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, a Delaware Corporation 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 Company will own a minimum of 2.5%
of the surviving entity, which percentage may be adjusted upward to 3.5% of the
surviving entity if a minimum new equity funding has not been received by
December 31, 2004. The minimum value of shares owned by current shareholders of
the Company after the Merger is complete and financing closed shall be $533,000
or approximately $0.11 per share, based upon 4,982,699 currently issued and
outstanding shares. Additionally, the holders of 1,000,000 Sunrise options shall
receive, in exchange for their options, options to purchase shares of the
Company common stock however the exchange is subject to the close of the
transaction.
The Merger is subject to a number of conditions, including private equity
funding of not less than $3,000,000. In addition, Sunrise will be responsible
for payment of all expenses related to the transaction.
7
If the Company is unsuccessful in completing the Sunrise transaction,
management's alternative plan may include a further search for a similar
business combination or strategic alliance. There can be no assurance that the
transaction described above or management's alternative plan will be realized.
The Company's cash balance of $4,453 at June 30, 2004, decreased by $12,140 or
73% compared to the $16,593 cash balance at December 31, 2003. This decrease is
primarily due to certain operating expenses incurred by the Company which has
effectively ceased its operations and continues to wind down activities.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
FOR THE LAST THREE YEARS, THE COMPANY HAS BEEN A "SHELL" COMPANY WITH NO
OPERATIONAL REVENUES AND CONTINUING GENERAL AND ADMINISTRATIVE EXPENSES.
In August 2001, the Company sold certain fixed and intangible assets essential
to its business operations and entered into a purchase agreement containing
provisions restricting the Company's ability to continue to engage in the
business engaged in by the Company prior to the transaction. Accordingly, the
Company's remaining operations have been limited to liquidating assets,
collecting accounts receivable, paying creditors, and negotiating and
structuring the transactions contemplated in the non-binding letter of intent or
the winding up of the Company's remaining business and operations, subject, in
either case, to the approval of the stockholders of the Company.
THE TRANSACTIONS CONTEMPLATED BY THE 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 Merger Agreement dated as of July 23, 2004 by and
among K2 Digital, Inc. K2 Acquisition Corporation
and SunriseUSA, Inc.****
31.1 Sarbanes-Oxley Act Section 302 Certification.
32.1 Sarbanes-Oxley Act Section 906 Certification.
(b) Reports on Form 8-K:
The Registrant filed a current report on Form 8-K on August 2, 2004 reporting
the execution of a merger agreement with SunriseUSA, Inc.
* 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.
**** Incorporated by reference from the Registrant's Form 8-K filed on August 2,
2004
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: AUGUST 13, 2004
BY: /s/ GARY BROWN
-----------------------------
GARY BROWN
PRESIDENT
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
10