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 JUNE 30, 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 JULY 31, 2001
- ----- ----------------------------
Common stock, par value $.01 per share.................. 4,705,348
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
2
K2 DIGITAL, INC. AND SUBSIDIARY
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheet - June 30, 2001 (unaudited)................................................ 1
Consolidated statements of operations - three and six months ended
June 30, 2001 (unaudited) and June 30, 2000 (unaudited)............................................... 2
Consolidated statements of cash flows - three and six months ended
June 30, 2001 (unaudited) and June 30, 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 6. Exhibits and Reports on Form 8-K...................................................................... 11
SIGNATURES..................................................................................................... 12
3
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 164,622
Accounts receivable, net of allowance for doubtful accounts of $50,000 283,482
Unbilled revenue ..................................................... 121,856
Prepaid expenses and other current assets ............................ 147,472
Investment in securities available for sale .......................... 34,100
-----------
Total current assets .................................................... 751,532
FIXED ASSETS, net ....................................................... 430,196
RESTRICTED CASH ......................................................... 250,000
OTHER ASSETS ............................................................ 1,250
-----------
Total assets ................................................... $ 1,432,978
===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations ......................... $ 23,575
Notes payable ........................................................ 250,000
Accounts payable ..................................................... 512,163
Accrued compensation and payroll taxes ............................... 128,234
Accrued expenses ..................................................... 189,451
Deferred revenue and customer advances ............................... 185,403
Current portion of deferred rent credit .............................. 34,698
-----------
Total current liabilities ............................................... 1,323,524
LONG-TERM CAPITAL LEASE OBLIGATIONS ..................................... 3,326
LONG-TERM DEFERRED RENT CREDIT .......................................... 198,069
-----------
Total liabilities ................................................. 1,524,919
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;
5,122,765 shares issued and 4,705,348 shares outstanding .......... 51,228
Treasury stock, 417,417 shares at cost ............................... (819,296)
Additional paid-in capital ........................................... 8,288,184
Accumulated other comprehensive loss ................................. (1,403,947)
Deferred compensation ................................................ (197,353)
Accumulated deficit .................................................. (6,010,757)
-----------
Total stockholders' equity .............................................. (91,941)
-----------
Total liabilities & stockholders' equity ....................... $ 1,432,978
===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
1
4
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, JUNE 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
----------- ----------- ----------- -----------
Gross revenues $ 890,669 $ 1,641,896 $ 1,720,686 $ 3,574,906
Less: pass-through costs 72,183 (993,560) 108,091 (1,437,722)
----------- ----------- ----------- -----------
Net revenues 962,852 648,336 1,828,777 2,137,184
Direct salaries and costs 763,940 768,011 1,769,132 1,653,089
Selling, general and
administrative expenses 1,007,755 768,458 2,083,719 1,625,559
Write off of deferred issuance and
transaction costs 503,367 -- 1,087,819 --
Assets impairment 222,748 -- 222,748 --
Depreciation 93,904 86,075 184,370 165,492
----------- ----------- ----------- -----------
Loss from operations before
interest and other income, net and
income taxes $(1,628,862) $ (974,208) $(3,519,011) $(1,306,956)
Interest and other income, net 7,430 39,504 19,900 81,139
Provision for income taxes (25,827) 6,750 (25,827) 10,870
----------- ----------- ----------- -----------
Net income (loss) $(1,595,605) $ (941,454) $(3,473,284) $(1,236,687)
Net Income (loss) per share --
----------- ----------- ----------- -----------
Basic and Diluted $ (0.38) $ (0.28) $ (0.88) $ (0.37)
Weighted average common shares
outstanding - basic and diluted 4,235,299 3,361,779 3,959,859 3,354,327
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
5
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
JUNE 30,
2001 2000
UNAUDITED UNAUDITED
----------- -----------
CASH FROM OPERATING ACTIVITIES:
Net Loss $(3,473,284) $(1,236,687)
Adjustments to reconcile net loss to net cash used
In operating activities --
Non-cash compensation expense 125,000 200,359
Write-off of deferred issuance and transaction costs 757,861 --
Assets impairment 222,748 --
Depreciation 184,370 165,492
Changes in --
Accounts receivable, net 1,386,666 108,019
Prepaid expenses and other current assets (33,404) (56,544)
Unbilled revenue 360,917 39,690
Other assets -- 2,882
Accounts payable (265,698) 252,720
Accrued compensation and payroll taxes (66,412) 56,149
Other accrued expenses (349,973) 283,241
Deferred revenue (116,289) --
Deferred rent 124,817 --
----------- -----------
Net cash used in operating activities $(1,142,681) $ (184,679)
CASH FLOWS FROM INVESTING ACTIVITIES:
Gross proceeds from sale of investment securities 94,127 --
Purchase of equipment (8,074) (218,125)
Software development costs -- (180,011)
----------- -----------
Net cash used in investing activities 86,053 (398,136)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (14,356) (14,356)
Increase in Short Term Debt 250,000
Equity Issuance 250,000
Options exercised for cash -- 22,500
----------- -----------
Net cash (used in) provided by financing activities 485,644 8,144
----------- -----------
Net decrease in cash and cash equivalents (570,984) (574,671)
CASH AND CASH EQUIVALENTS, beginning of period $ 735,606 $ 2,936,918
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 164,622 $ 2,362,247
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest $ 2,060 $ 1,690
Income taxes -- $ 3,820
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
6
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 June 30, 2001 and the
financial results for the three and six months ended June 30, 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 and six months ended June 30, 2001 and
June 30, 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 INCOME (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.
4
7
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 SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
--------- --------- --------- ---------
Numerator: Net Loss ($1,595,605) ($ 941,454) ($3,473,284) ($1,236,687)
Denominator: Weighted average number
of common shares outstanding -
Basic and Diluted 4,235,299 3,361,779 3,959,849 3,354,357
Net loss per share --
Basic and Diluted ($0.38) ($0.28) ($0.88) ($0.37)
* Excludes all outstanding stock options and warrants as of June 30, 2001
and 2000, as they are antidilutive.
5. INVESTMENT IN SECURITIES
As of June 30, 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 June 30, 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............. $ 34,100
Gross unrealized holding loss........... $ (1,403,947)
The Company did not sell any shares of capital stock of 24/7 Media Inc. during
the quarter ended June 30, 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"). In
May 2001, the Company issued 862,069 shares of common stock under the Fusion
Facility in exchange for net proceeds of $250,000. Under the Company's current
financial circumstances, it does not anticipate that it will be able to make any
further issuances under the facility.
7. ASSETS IMPAIRMENT AND OTHER CHARGES
During the second quarter of 2001 the Company recorded assets impairment of
$222,748. Such impairment was required to write off the remaining net book
values of certain internal developed software, as management determined that no
economic benefit of such software is feasible.
In addition, the Company recorded a charge of approximately $500,000 in order to
write off stock issuance costs related to the Fusion Facility. Such charge was
required as management determined that it would not be feasible to use such
facility.
In the first quarter of 2001 the Company recorded a charge of $584,452 in order
to write off proposed transaction costs due to termination of such proposed
transaction.
5
8
8. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt FAS 142 effective January 1,
2002. The Company believes that the provisions of FAS 141 and FAS 142 will have
a material effect on its results of operations and financial position.
9. SUBSEQUENT EVENTS
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 plans, subject to certain conditions, to 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 would 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 "Bridge Loan"). The loan proceeds are to
be credited toward the purchase price to be paid by SGI in the equity
investment, if such investment is consummated. In connection with the Bridge
Loan, on May 15, 2001, K2 also received an additional $250,000 equity investment
through its equity facility established last year with Fusion Capital Fund II,
LLC.
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.
As of the date of filing of this Report, SGI and the Company have been unable to
reach agreement on the terms of the equity investment, and, although neither
party has terminated the letter of intent, management believes the prospects for
reaching a definitive agreement that would result in the consummation of the
equity investment are poor. On July 9, 2001, the Company received a notice from
SGI and K2 Holdings LLC demanding repayment in full of the Bridge Loan on or
before October 7, 2001 pursuant to the terms and conditions of the demand
promissory note evidencing the Bridge Loan.
On March 13, 2001, the Staff of the Nasdaq Stock Market notified K2 that it had
failed to demonstrate a closing bid price of at least $1.00 per share for 30
consecutive trading days and was in violation of Nasdaq Marketplace Rule
4310(c)(4). In accordance with applicable Nasdaq Marketplace rules, K2 was
provided a 90-day grace period, through June 11, 2001, during which to regain
compliance. On June 20, 2001, K2 requested a hearing, which effectively stayed
the delisting. However, after submission of materials in support of K2's
position to the Panel, the Panel decided to delist K2's common stock from the
Nasdaq SmallCap Market as of the open of business on August 15, 2001.
6
9
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.
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.
7
10
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
--------- --------- --------- ---------
Net revenues 100.0% 100.0% 100.0% 100.0%
Direct salaries and costs 79.3% 118.5% 96.7% 77.4%
Selling, general and administrative expenses 104.7% 118.5% 113.9% 76.1%
Write-off of deferred issuance and transaction
costs 52.3% -- 59.5% --
Assets impairment 23.1% -- 12.2% --
Depreciation 9.8% 13.3% 10.1% 7.7%
Loss from operations before interest and
other income, net and income taxes (169.2%) (150.3%) (192.4%) (61.2%)
Interest and other income, net (0.8%) 6.1% 1.1% 3.8%
Provision for income taxes (2.7%) 1.0% (1.4%) 0.5%
Net loss (165.7%) (145.2%) (189.9%) (57.9%)
Revenues
Net revenues consist of gross revenues less pass-through expenses such as media
placement costs. Net revenues for the three months ended June 30, 2001 increased
by 48.5% compared to the same quarter in 2000. In the 2001 second quarter, net
revenues were approximately $962,900 compared to $648,300 in the 2000 second
quarter, or an increase of approximately $314,600. However, this increase in
revenues was achieved despite the general economic slowdown that significantly
reduced expenditures for IT and Internet professional services and delayed
implementation of certain projects already underway. Furthermore, the second
quarter 2000 was itself a weak quarter. Net revenues for the six months ended
June 30, 2001 decreased by 14.4% compared to the same period in 2000. Net
revenues for the six months ended June 30, 2001 were approximately $1,828,800
compared to approximately $2,137,200 for the six months ended June 30, 3000, or
a decrease of approximately $308,400. During the three months ended June 30,
2001, the three largest net revenue-producing clients accounted for
approximately 26%, 25% and 12%, respectively. During the six months ended June
30, 2001, the three largest net revenue-producing clients accounted for
approximately 36%, 22% and 8%, 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 decreased for the three months ended
June 30, 2001 as compared to the same period in 2000. This was primarily due to
increases in net revenues, as the actual direct costs were essentially
unchanged. Direct salaries and costs decreased by approximately $4,100 to
approximately $763,900 for the 2001 second quarter from approximately $768,000
for the 2000 second quarter. In the 2001 second quarter, direct salaries were
the primary costs, as amounts paid to independent contractors was nil. In the
2000 second quarter, direct salaries and costs consisted primarily of
approximately $655,000 paid as direct salary costs and approximately $46,000
paid as independent contractor costs. Gross profit, which is net revenues less
direct salaries and costs, totaled $198,900 for the 2001 second quarter as
compared to ($119,700) for the 2000 second quarter, resulting in a gross margin
of 20.7% and (18.5%), respectively. The improved gross profit for the 2001
second quarter was due primarily to the increased net revenues recognized during
the 2001 second quarter, compared to the second quarter 2000. Gross profit
totaled approximately $59,600 for the first six months of 2001 compared to
approximately $484,100 for the first six months of 2000, representing a gross
profit margin of 3.3% and 22.7% respectively. The decline in gross profit margin
was the result of increases in direct costs and decreased net revenues for 2001.
For the six months ended June 30, 2001 direct salaries and costs were
approximately $1,769,100 compared to approximately
8
11
$1,653,100 for the six months ended June 30, 2000, and increase of 7.0%. The
increase in costs were primarily related to direct labor costs incurred during
the first quarter of 2001, as the second quarter costs were essentially
unchanged from the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30,
2001 and 2000 were approximately $1,007,800 and $768,500, respectively, and
consisted primarily of labor costs, professional fees, occupancy costs,
recruitment costs and communications costs. Selling, general and administrative
expenses for the six months ended June 30, 2001 and 2000 were approximately
$2,083,700 and $1,625,600, respectively. In the 2001 second quarter and first
six months, the changes in selling, general and administrative costs were
primarily due to increased occupancy costs, legal and professional expenses
related to merger and acquisition activity and Fusion Capital, more fully
explained under the heading "Subsequent Events" in note 9 to the consolidated
financial statements.
Depreciation and Amortization
Depreciation and Amortization expense was approximately $93,900 and $86,100 for
the three months ended June 30, 2001 and 2000, respectively. Depreciation and
Amortization expense was approximately $184,400 and $165,500 for the six months
ended June 30, 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 June 30, 2001 was approximately
($1,628,900) as compared to an operating loss of approximately ($974,200) for
the three months ended June 30, 2000. Contributing to the operating loss for the
three months ended June 30, 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
June 30, 2001 represented an increase of approximately $654,700 or 67.2%
compared to the operating loss for the three months ended June 30, 2000.
Included in these costs were the write-off of certain transaction costs and
asset impairment costs. The operating loss for the six months ended June 30,
2001 was approximately ($3,519,000) as compared to an operating loss of
approximately ($1,307,000) for the six months ended June 30, 2000. The first
quarter ending March 31, 2001 included the write-off of certain deferred
transaction costs totaling approximately $584,500.
Income Taxes
For the three months ended June 30, 2001, the Company had a loss before
provision for income taxes of approximately ($1,621,400). Due to the operating
loss discussed above, there were no provisions for income taxes in the second
quarter of 2001. The provision for income taxes for the three months ended June
30, 2000 related to minimum statutory taxes and tax refunds due.
Net Loss
Net loss for the three months ended June 30, 2001 was approximately ($1,595,600)
as compared to net loss of approximately ($941,500) for the three months ended
June 30, 2000. Net loss for the six months ended June 30, 2001 was approximately
($3,473,300) as compared to net loss of approximately ($1,236,700) for the six
months ended June 30, 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 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.
9
12
Liquidity and Capital Resources
The Company's cash balance of $164,622 at June 30, 2001, decreased by $570,984
or 78% 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 is dependent on its current cash and investment securities, together
with cash generated by operations, for working capital in order to be
competitive, to meet the increasing demands of service, quality and pricing and
for the expansion of its business. The Company's current cash position, even
when combined with cash expected to be generated by operations, will not be
sufficient to finance its continued operations unless the Company is immediately
able to obtain additional financing. Unless the Company is successful in
negotiating and consummating a financing within the next few weeks, a
liquidation or bankruptcy filing is almost certain to occur. At this time, the
Company's liabilities exceed its assets, such that it is highly unlikely that
shareholders will receive any value in a liquidation, and any financing is
likely to be so highly dilutive as to effectively eliminate current shareholder
value. Although the Company is in advanced negotiations with respect to
additional financing to satisfy its critical and immediate need for working
capital, such financing may not ultimately be available or may be prohibitively
expensive or may not be obtained in time to meet the Company's immediate and
critical need for cash.
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 July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt FAS 142 effective January 1,
2002. The Company believesthat the provisions of FAS 141 and FAS 142 will have
a material effect on its results of operations and financial position.
10
13
PART II
OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds.
On May 15, 2001, the Company issued 862,069 shares of common stock under the
Fusion Facility in exchange for net proceeds of $250,000. The proceeds of this
issuance were used for general working capital purposes.
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.
11
14
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: August 20, 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)
12