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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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-28213
KANAKARIS WIRELESS
(Name of small business issuer in its charter)
NEVADA 86-0888532
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2716 OCEAN PARK BLVD., SUITE 2005
SANTA MONICA, CA 90405
(Address of principal executive offices)
Issuer's telephone number (including area code): (949) 760-5470
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's only class of
common stock, $.001 par value per share, was 13,156,325 on May 6, 2002.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
KANAKARIS WIRELESS AND SUBSIDIARIES
Condensed Consolidated Balance Sheet at March 31, 2002.....................F-1
Condensed Consolidated Statements of Operations for the Three Months
and Six Months Ended March 31, 2002 and 2001..........................F-3
Condensed Consolidated Statements of Comprehensive Loss for the
Three Months and Six Months Ended March 31, 2002 and 2001.............F-4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2002 and 2001.........................................F-5
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Deficiency) for the Six Months Ended March 31, 2002..................F-7
Notes to Condensed Consolidated Financial Statements.......................F-8
2
KANAKARIS WIRELESS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2002
(UNAUDITED)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 349,876
Accounts receivable 20,547
Investments in marketable securities 23,200
Current maturities of notes receivable -
shareholders and related parties 36,280
Notes receivable 200,000
Interest receivable 52,107
Advances to suppliers 700
-----------------
Total current assets 682,710
-----------------
Property and equipment, net of accumulated
depreciation and amortization 38,180
-----------------
Other assets:
Film library - net of amortization 334,562
Other 1,750
-----------------
Total other assets 336,312
-----------------
Total assets $ 1,057,202
=================
See accompanying notes to condensed consolidated financial statements.
F-1
KANAKARIS WIRELESS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2002
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- -------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 860,223
Convertible debentures 3,342,500
Convertible promissory notes 372,550
Due to former shareholder of subsidiary 113,183
-------------------
Total current liabilities 4,688,456
-------------------
Stockholders' equity (deficiency):
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; 1,000,000 Class A Convertible issued
and outstanding 10,000
Common stock, $0.001 par value; 250,000,000
shares authorized; 9,626,273 issued and
outstanding 9,626
Additional paid-in capital 31,111,087
Accumulated deficit (33,732,830)
Deferred expense (940,337)
Comprehensive loss (88,800)
-------------------
Total stockholders' equity (deficiency) (3,631,254)
-------------------
Total liabilities and
stockholders' equity (deficiency) $ 1,057,202
===================
See accompanying notes to condensed consolidated financial statements.
F-2
KANAKARIS WIRELESS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 16,493 $ 517,388 $ 31,588 $ 778,464
Cost of sales 2,337 82,494 25,487 137,932
------------ ------------ ------------ ------------
Gross profit 14,156 434,894 6,101 640,532
------------ ------------ ------------ ------------
Operating expenses:
Executive compensation 213,112 89,750 499,447 763,050
Salaries 8,530 46,844 22,209 186,648
Payroll taxes and employee benefits 3,254 11,180 5,076 15,679
Consulting services 324,635 183,751 696,890 1,254,189
Travel and entertainment 12,972 32,516 36,045 97,644
Telephone and utilities 6,292 12,251 9,987 25,804
Marketing, advertising and investor relations 30,870 160,093 52,639 548,257
Professional fees 260,415 253,801 396,367 430,120
Rent - 25,323 - 25,323
Office and other expenses 56,939 54,054 102,906 145,432
Equipment rental and expense - - 1,018 -
Insurance 15,316 18,082 35,115 34,144
Depreciation and amortization 30,013 29,588 60,035 58,155
Taxes - other - - - 2,400
Bank charges 356 407 560 612
Website development - 8,685 323 38,145
Contributions 13,500 - 13,500 -
------------ ------------ ------------ ------------
Total operating expenses 976,204 926,325 1,932,117 3,625,602
------------ ------------ ------------ ------------
Loss from operations (962,048) (491,431) (1,926,016) (2,985,070)
Financing and other income (expense), net (1,063,353) (1,136,960) (1,165,045) (1,220,473)
------------ ------------ ------------ ------------
Loss before discontinued operations (2,025,401) (1,628,391) (3,091,061) (4,205,543)
Discontinued operations (132,509) (3,451) (76,864) 32,279
------------ ------------ ------------ ------------
Net loss $(2,157,910) $(1,631,842) $(3,167,925) $(4,173,264)
============ ============ ============ ============
Net (loss) income per common share:
Basic and diluted-continuing operations $ (.23) $ (.66) $ (.41) $ (1.89)
Basic and diluted-discontinued operations (.02) - (.01) .01
------------ ------------ ------------ ------------
Net loss per share $ (.25) $ (.66) $ (.42) $ (1.88)
============ ============ ============ ============
Weighted average common shares
outstanding - basic and diluted 8,717,977 2,465,069 7,569,320 2,224,876
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
F-3
KANAKARIS WIRELESS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss $(2,157,910) $(1,631,842) $(3,167,925) $(4,173,264)
Other comprehensive loss:
Unrealized loss on securities (39,200) (185,520) (40,800) (937,520)
------------ ------------ ------------ ------------
Comprehensive loss $(2,197,110) $(1,817,362) $(3,208,725) $(5,110,784)
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
F-4
KANAKARIS WIRELESS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $(3,167,925) $(4,173,264)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of goodwill - 14,195
Depreciation and amortization 60,139 58,279
Write-off of goodwill 337,052 -
Gain on sale of assets (247,301) -
Deferred advertising income realized - (750,000)
Compensation, consulting, marketing and
professional services, incurred in exchange
for common stock 996,546 1,683,587
Consulting services incurred in exchange
for stock options 46,841 62,704
Convertible debt-marketing cost 154,500 190,100
Convertible debt-financing cost 893,452 903,000
Convertible debt-interest cost 59,214 187,378
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable 101,546 252,762
Inventory - 998
Prepaid expenses 20,063 90,375
Advances to suppliers and security deposits 386 (1,050)
Interest receivable (16,802) (23,604)
Increase (decrease) in:
Accounts payable and accrued expenses 148,208 124,355
Other current liabilities (2,766) -
------------ ------------
Net cash used in operating activities (616,847) (1,380,185)
------------ ------------
Cash flows from investing activities:
Sale of property and equipment - (13,754)
Increase in notes receivable -
shareholders and related parties 74,530 74,529
Notes receivable collections 50,000 47,000
Acquisition of film library - (31,397)
------------ ------------
Net cash provided by investing activities 124,530 76,378
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock 245,220 50,000
Payment to former shareholder of subsidiary - (5,000)
Proceeds from convertible debt 545,500 1,109,900
------------ ------------
Net cash provided by financing activities 790,720 1,154,900
------------ ------------
Net decrease in cash and cash equivalents 298,403 (148,907)
Cash and cash equivalents, beginning of period 51,473 615,101
------------ ------------
Cash and cash equivalents, end of period $ 349,876 $ 466,194
============ ============
F-5
Supplemental disclosure of non-cash investing and financing activities:
During the six months ended March 31, 2002, the Company issued 2,612,128 shares
of common stock for consulting services having a fair value of $709,227.
During the six months ended March 31, 2002, the Company issued 65,200 shares of
common stock for legal services having a fair value of $7,500.
During the six months ended March 31, 2002, the Company issued 830,000 shares of
common stock in lieu of compensation of $112,055.
During the six months ended March 31, 2002, the Company issued an aggregate
of 897,991 shares of common stock having a fair value of approximately $173,000
to various debentures investors representing the conversion of principal and
interest.
During the six months ended March 31, 2002, the Company converted $372,550 of
accounts payable to convertible promissory notes.
During the six months ended March 31, 2001, the Company issued 247,147 shares of
common stock for consulting, and professional services having a fair value
of $1,683,587.
During the six months ended March 31, 2001, the Company issued an aggregate of
601,941 shares of common stock having a fair value of approximately $2,259,000
to various debentures investors representing the conversion of principal and
interest.
See accompanying notes to condensed consolidated financial statements.
F-6
KANAKARIS WIRELESS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
COMMON STOCK ISSUED PREFERRED STOCK
------------------ --------------- ACCUMULATED DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT APIC DEFICIT EXPENSE LOSS TOTAL
----------- ------- ----------- -------- ------------ ------------- ------------ --------- ------------
BALANCES
SEPTEMBER 30, 2001 4,514,704 $ 4,514 1,000,000 $ 10,000 $ 28,928,690 $(30,564,905) $(1,108,101) $ (48,000) $(2,777,802)
STOCK ISSUED FOR CASH: 706,250 707 - - 244,513 - - - 245,220
STOCK ISSUED FOR:
COMPENSATION 830,000 830 - - 111,225 - 253,125 - 365,180
CONSULTING SERVICES 2,612,128 2,612 - - 706,615 - (85,361) - 623,866
PROFESSIONAL SERVICES 65,200 65 - - 7,435 - - - 7,500
CONVERTED DEBENTURES 897,991 898 - - 172,316 - - - 173,214
CONVERTIBLE DEBT FINANCING
COSTS - - - - 893,452 - - - 893,452
ISSUANCE OF COMMON
STOCK OPTION FOR
CONSULTANTS - - - - 46,841 - - - 46,841
UNREALIZED LOSS ON
INVESTMENT - - - - - - - (40,800) (40,800)
NET (LOSS) - - - - - (3,167,925) - - (3,167,925)
----------- ------- ----------- -------- ------------ ------------- ------------ --------- ------------
BALANCES
MARCH 31, 2002 9,626,273 $ 9,626 1,000,000 $ 10,000 $ 31,111,087 $(33,732,830) $ (940,337) $ (88,800) $(3,631,254)
=========== ======= =========== ======== ============ ============= ============ ========== ============
See accompanying notes to condensed consolidated financial statements.
F-7
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -- ------------------------------------------
(A) BASIS OF PRESENTATION
-------------------------
The condensed consolidated financial statements included herein have
been prepared by Kanakaris Wireless, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. Kanakaris Wireless believes that the disclosures
are adequate to make the information presented not misleading when read
in conjunction with its financial statements for the year ended
September 30, 2001 included in Form 10-KSB. The financial information
presented reflects all adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for the
interim periods presented. The results of operations for the six months
ended March 31, 2002 are not necessarily indicative of the results to
be expected for the full year ending September 30, 2002, or any other
period.
(B) BUSINESS ORGANIZATION AND ACTIVITY
--------------------------------------
Kanakaris Wireless, which on June 2, 2000 changed its name from
Kanakaris Communications, Inc. (formerly Big Tex Enterprises, Inc.)
(the "Company"), was incorporated in the State of Nevada on November 1,
1991. The Company develops and supplies Internet products for
electronic commerce, operates an on-demand movie website, and also
operates a website called AK.TV, an interactive TV-style web channel
viewable in devices including Pocket PCs, laptop and desktop computers
and TVs. The Company also operated a subsidiary, which was sold in
March of 2002, which designed and installed modular data control
consoles.
(C) BUSINESS COMBINATIONS
-------------------------
On October 10, 1997 (the "Acquisition Date"), Kanakaris Internetworks,
Inc. ("KIW") consummated a Stock Purchase Agreement with the
shareholder (the "Seller") of Desience Corporation ("Desience") to
purchase 10,000 common shares representing 100% of its issued and
outstanding common stock in exchange for a 4% royalty on the gross
sales (after collection) of Desience subsequent to the Acquisition
Date, to be paid monthly for as long as Desience remains in business or
its products are sold. Pursuant to APB 16, since the Seller had no
continuing affiliation with KIW, the 4% royalty is accounted for as an
increase to goodwill at the date the amount is determinable. In
addition, the Seller shall receive 5% of funds which are to be
allocated to Desience arising from KIW's next securities offering as a
non-refundable advance on the royalty. As of March 31, 2002, no
advances have been given. KIW will hold harmless the Seller from any
claims, causes of action, costs, expenses, liabilities, and prior
shareholder
F-8
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
advances. Immediately following the exchange, Desience became a
wholly-owned subsidiary of KIW. The fair value of the assets and
liabilities acquired pursuant to the acquisition of Desience was
$148,776 and $468,120, respectively, which resulted in goodwill of
$319,344 at the Acquisition Date since no trademarks, copyrights,
existing or identified long term requirement contracts or other
intangibles existed at that date. Additions to goodwill resulting from
the royalty for the six months ended March 31, 2002 and 2001 were $8,488
and $12,144, respectively. As of March 31, 2002, all goodwill has been
written-off.
On March 4, 2002, the Company entered into an asset purchase agreement
whereby substantially all of the assets and business of Desience were
sold. Included in the sale were all contract rights. Accordingly, for
accounting purposes, the financial activity of Desience is being treated
as a discontinued operation and is presented in the statements of
operations separately from continuing operations. (See Note 10.)
On November 25, 1997, KIW and its stockholders (the "Stockholders")
consummated an acquisition agreement with Big Tex Enterprises, Inc.
("Big Tex"), an inactive public shell with no recent operations at that
time, whereby the shareholders sold all of their preferred and common
stock, which represented 100% of KIW's issued and outstanding capital
stock, to Big Tex in exchange for 1,300,000 shares (300,000 common,
1,000,000 preferred) of Big Tex's restricted stock, representing 66.67%
of the issued and outstanding common stock and 100% of the issued and
outstanding preferred stock of Big Tex, aggregating 75% of the total
voting rights (the "Exchange"). Big Tex was founded in 1991 for the
purpose of lawful business or enterprise, but had been inactive since
1991. Immediately following the exchange, Big Tex changed its name to
Kanakaris Communications, Inc., which was subsequently changed to
Kanakaris Wireless.
Generally accepted accounting principles require that a company whose
stockholders retain the majority interest in a combined business be
treated as the acquiror for accounting purposes. Accordingly, the Big
Tex acquisition was accounted for as an acquisition of Big Tex by KIW
and a recapitalization of KIW.
On March 15, 2002, the Company formed a new corporation called FFM
Acquisition Corp. This corporation was used to acquire the business of
Fast Forward Marketing, Inc. in April of 2002, and now operates under
the name of Fast Forward Marketing, Inc. As of March 31, 2002, there was
no activity in this corporation.
F-9
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(D) PRINCIPLES OF CONSOLIDATION
-------------------------------
The accompanying condensed consolidated financial statements include the
accounts of the Company, and its wholly owned subsidiaries Kanakaris
Internetworks Inc., Desience, and Fast Forward Marketing, Inc. (formerly
known as FFM Acquisition Corp.). All significant intercompany balances
and transactions have been eliminated in consolidation. Desience has
been classified as a discontinued operation, and the prior year's
information has been restated to account for this classification.
(E) EARNINGS PER SHARE
----------------------
Earnings (loss) per share is computed using the weighted average of
common shares outstanding as defined by Financial Accounting Standards
No. 128, "Earnings Per Share." The assumed exercise of outstanding
common share equivalents was not utilized since the effect was
anti-dilutive.
2. COMMITMENTS AND CONTINGENCIES
-- -----------------------------
(A) LEGAL ACTIONS
-----------------
Dataview Consoles, Inc., dba Swanson Engineering & Manufacturing
Company, entered into a settlement agreement in 2001 under which the
Company and Desience agreed to pay twelve monthly installments of
$3,500. As of March 31, 2002, only one more payment was payable.
On March 8, 2001, Loudeye Technologies, Inc., commenced an action
against the Company. The complaint alleged breach of contract for
$44,107. The Company has certain defenses to this claim and intends to
seek an out-of-court settlement of these claims. A formal answer has
been filed to the Complaint and no further action has been taken.
The Company is subject to certain legal proceedings, claims and
litigation arising in the ordinary course of business. While the amounts
claimed may be substantial, the ultimate liability cannot presently be
determined because of considerable uncertainties that exist. Therefore,
it is possible that the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating
results or cash flows when resolved in a future period. However, based
on facts currently available, management believes such matters will not
have a material adverse effect on the Company"s financial position,
results of operations or cash flows.
F-10
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(B) SERVICE AGREEMENTS
----------------------
On October 9, 2001, the Company entered into a service agreement with
Mind Pointe, Inc. Based upon the terms of the contract, Mind Pointe,
Inc. will provide web hosting, development services, and programming
and design assistance for the Company's websites. The Company has
agreed to pay approximately $17,000 each month for these services. For
the three months ended March 31, 2002, $38,575 was charged to
operations under this agreement.
On November 5, 2001, the Company entered into a consulting agreement to
obtain assistance in entering and developing international markets. For
the three months ended March 31, 2002, $56,667 was charged to
operations under this agreement.
3. REVOLVING LINE OF CREDIT
- -- ------------------------
On February 25, 1999, the Company entered into a Revolving Line of
Credit Agreement ("the Agreement") with Alliance Equities, Inc.
("Alliance"), a Florida-based venture capital firm. Under the terms of
the Agreement, as amended to date, Alliance will make available through
December 30, 2003, a $7,000,000 revolving line of credit with interest
on the unpaid principal at 10% per annum. Under the terms of the
Agreement, the Company may draw up to $500,000 per month on the total
line of credit upon written request by the Company to the Lender.
Additionally the parties have agreed that any portion of the
indebtedness may be paid back by the Company either with cash or by the
issuance of common stock. Furthermore, in a separate Memorandum of
Agreement the two parties agreed that Alliance will provide ongoing
consulting services to the Company including, but not limited to,
strategic growth advice and introductions, marketing advice, and
business ideas. Alliance will be compensated for these services at the
option of the Company either in cash, or through the issuance of stock
or credit towards the purchase of stock. As of March 31, 2002, no
amounts were outstanding under this line of credit, and the Company had
issued to Alliance 80,000 shares of common stock valued at
approximately $554,000 for these services since 1999.
4. DEBENTURE INVESTORS
- -- -------------------
In order to provide working capital and financing for the Company's
expansion, on various dates during 2000, the Company entered into
several agreements with four accredited investors the ("Purchasers")
whereby the Purchasers acquired aggregates of $1,000,000 and $4,500,000
of the Company's 10% Convertible Debentures, due February 1, 2001 and
May 1, 2001, respectively.
The Purchasers converted portions of the 2000 debentures and accrued
interest into shares of common stock of the Company at various times.
The initial conversion price of these debentures was equal to the
lesser of $.97 and 66.66% of the average closing bid price during the
20 trading days immediately preceding the conversion dates.
F-11
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Also, in order to provide working capital and financing for the
Company's expansion, effective as of January 5, 2001, the Company
entered into a securities purchase agreement and related agreements with
four accredited investors (the "Purchasers") for the purchase of the
Company's 12% Convertible Debentures due January 5, 2002 and March 9,
2002.
The Purchasers made investments in tranches, the first in the aggregate
amount of $650,000, which was received upon signing of the definitive
investment agreements and the second, in the aggregate amount of
$650,000, which was received in March 2001.
Upon the issuance of the first $650,000 of convertible debentures, the
Purchasers received five-year term warrants to purchase three shares of
the Company's common stock for each $1.00 invested or which may have
been invested in the two $650,000 tranches of convertible debentures.
The initial exercise price of the warrants was equal to the lesser of
(i) $2.50 and (ii) the average of the lowest three intraday trading
prices during the twenty trading days immediately preceding the exercise
date. For all debentures issued in January and March 2001, interest is
12% per annum, payable quarterly in common stock or cash at the option
of the Purchasers.
The debentures are immediately convertible into shares of the Company's
common stock. The initial conversion price for the January and March
2001 debentures was equal to the lesser of (i) $3.00 and (ii) the
average of the lowest three intraday trading prices during the twenty
trading days immediately prior to the conversion date, discounted by
37.5%.
As of April 30, 2001, $1,848,500 of the original $4,500,000 principal
balance of 10% Convertible Debentures due May 1, 2001 remained
outstanding. As of April 30, 2001, the Company entered into an agreement
with the holders of these debentures to extend the due date of these
debentures to May 1, 2002. In consideration for the extension, the
Company granted to the holders warrants to purchase up to an aggregate
of 1,350,000 shares of common stock at an initial exercise price equal
to the lesser of the average of the lowest three intraday trading prices
during the 20 trading days immediately preceding the grant of the
warrants, discounted by 37.5%, and the average of the lowest three
intraday trading prices of a share of common stock during the 20 trading
days immediately preceding exercise of the warrants.
In order to provide working capital and financing for the Company's
expansion, as of June 29, 2001, the Company entered into a securities
purchase agreement and related agreements with three accredited
investors (the "Purchasers") for the purchase of $500,000 of the
Company's 12% Convertible Debentures due June 29, 2002. The debentures
bear interest at a rate of 12% per annum, payable quarterly in common
stock or cash at the option of the Purchasers.
The debentures initially are convertible into shares of common stock at
the lesser of $2.00 per share and 50% of the average of the lowest three
intraday trading prices of a share of common stock during the trading
days immediately preceding conversion.
F-12
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Upon the issuance of the June 2001 debentures, the Purchasers received
five-year term warrants to purchase three shares of the Company's common
stock for each $1.00 invested. The initial exercise price of the
warrants was equal to the lesser of $1.168 and the average of the lowest
three intraday trading prices of a share of common stock during the 20
trading days immediately preceding exercise.
As of June 29, 2001, the Company entered into a letter agreement with
certain of its debenture investors, which letter agreement provided
various anti-dilution adjustments to the debentures and warrants issued
in the April 2000, January 2001 and March 2001 debenture offerings.
These adjustments were made partly in lieu of other adjustments that
would have been imposed under the terms of the April 2000, January 2001
and March 2001 debenture offering documents. As a result of these
adjustments, the conversion prices for the debentures held by these
entities and issued in the April 2000, January 2001 and March 2001
offerings were reduced to the lesser of (i) $2.00 per share, and (ii)
50% of the average of the three lowest intraday trading prices of a
share of our common stock for the 20 trading days immediately preceding
the conversion of the debentures. In addition, the exercise prices of
the warrants issued in connection with the April 2000, January 2001 and
March 2001 offerings were reduced to the lesser of (i) $1.168 per share,
and (ii) the average of the three lowest intraday trading prices of a
share of our common stock for the 20 trading days immediately preceding
the exercise of the warrants.
In order to provide working capital and financing for the Company's
expansion, as of January 9, 2002, the Company entered into a securities
purchase agreement and related agreements with one accredited investor
(the "Purchasers") for the purchase of $200,000 of the Company's 12%
Convertible Debentures due January 9, 2003. The debentures bear interest
at a rate of 12% per annum, payable quarterly in common stock or cash at
the option of the Purchasers.
The debentures initially are convertible into shares of common stock at
the lesser of $0.055 per share and 50% of the average of the lowest
three intraday trading prices of a share of common stock during the
trading days immediately preceding conversion.
Upon the issuance of the January 2002 debentures, the Purchasers
received five-year term warrants to purchase three shares of the
Company's common stock for each $1.00 invested. The initial exercise
price of the warrants was equal to the lesser of $0.055 and the average
of the lowest three intraday trading prices of a share of common stock
during the 20 trading days immediately preceding exercise.
As of January 9, 2002, the Company entered into a letter agreement with
certain of its debenture investors, which letter agreement provided
various anti-dilution adjustments to the debentures and warrants issued
in the April 2000 debenture offering. These adjustments were made partly
in lieu of other adjustments that would have been imposed under the
terms of the April 2000 debenture offering documents. As a result of
these adjustments, the conversion prices for the debentures held
by these entities and issued in the April 2000 offering were reduced to
the lesser of (i) $0.055 per share, and (ii) 50%
F-13
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of the average of the three lowest intraday trading prices of a share of
our common stock for the 20 trading days immediately preceding the
conversion of the debentures. In addition, the exercise price of the
warrants issued to certain debenture investors in connection with the
April 2000 and January 2001 offerings, respectively, and issued on April
30, 2001, were reduced to 50% of the average of the three lowest
intraday trading prices of a share of our common stock for the 20
trading days immediately preceding the exercise of the warrants. In
addition, the exercise period of the warrants issued in connection with
the April 2000, January 2001 and March 2001 offerings was extended from
five to seven years.
In order to provide working capital and financing for the Company's
expansion and for the acquisition of the Company's Fast Forward
Marketing, Inc. business, as of March 29, 2002, the Company entered into
a securities purchase agreement and related agreements with four
accredited investors (the "Purchasers") for the purchase of $500,000 of
the Company's 12% Convertible Debentures due March 29, 2003. The
debentures bear interest at a rate of 12% per annum, payable quarterly
in common stock or cash at the option of the Purchasers. The net
proceeds of the offering, after payment of some related expenses, were
$380,000.
The debentures initially are convertible into shares of common stock at
the lesser of $0.035 per share and 50% of the average of the lowest
three intraday trading prices of a share of common stock during the
trading days immediately preceding conversion.
Upon the issuance of the March 2002 debentures, the Purchasers received
five-year term warrants to purchase three shares of the Company's common
stock for each $1.00 invested. The initial exercise price of the
warrants was equal to the lesser of $0.035 and the average of the lowest
three intraday trading prices of a share of common stock during the 20
trading days immediately preceding exercise.
Pursuant to the rules and regulations of the SEC regarding beneficial
conversion features, the Company expensed as financing costs any excess
of the fair market value of the common stock at the debenture issuance
date over the fixed conversion price, which amounted to approximately
$736,400 for the six months ended March 31, 2002. There was no
amortization period for these financing costs since the debentures were
convertible immediately upon issuance.
The Company's convertible debentures and related warrants contain
anti-dilution provisions whereby, if the Company issues common stock or
securities convertible into or exercisable for common stock at a price
less than the conversion or exercise prices of the debentures or
warrants, the conversion and exercise prices of the debentures or
warrants shall be adjusted as stipulated in the agreements governing
such debentures and warrants.
F-14
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recorded financing costs of approximately $157,100 for the
six months ended March 31, 2002 in connection with the repricing of
existing debentures and warrants that occurred as a result of the
January 2002 debenture offering.
During the six months ended March 31, 2002, the Company issued an
aggregate of 897,991 shares of common stock to five accredited investors
in connection with regular interest payments and upon conversion of an
aggregate of $114,000 of principal plus accrued interest of
approximately $59,000 on the Company's convertible debentures.
As of March 31, 2002, the Company was indebted for an aggregate of
$3,342,500 on these convertible debentures. To the extent debentures
issued by the Company are converted into shares of common stock, the
Company will not be obligated to repay the converted amounts.
On January 5, 2002, approximately $185,000 of convertible debentures
matured. Further, on March 9, 2002 and on May 1, 2002, approximately
$440,000 and $1,480,000, respectively, of convertible debentures
matured. The Company is in the process of registering a portion of the
shares of common stock underlying certain of these debentures to satisfy
these obligations upon conversion by the debenture holders of these
debentures into shares of the Company's common stock. On May 9, 2002,
the Company filed a Registration Statement on Form SB-2 with the SEC to
register shares of common stock in order to partially satisfy these
obligations.
5. CONVERTIBLE PROMISSORY NOTES
- -- ----------------------------
On February 28, 2002, the Company entered into agreements with its legal
counsel and its accounting firm to replace an aggregate of $372,550 of
existing accounts payable to those entities with 6% convertible
promissory notes due November 30, 2002. The convertible promissory notes
have a conversion price equal to the lesser of (i) $0.085 and (ii) the
average of the three lowest intraday trading prices of a share of our
common stock for the 20 trading days immediately preceding the
conversion of the notes. As of March 31, 2002, the full amount of these
promissory notes remained outstanding.
6. STOCKHOLDERS' EQUITY AND STOCK ISSUANCES
- -- ----------------------------------------
A. DEBENTURE INVESTORS
----------------------
During the six months ended March 31, 2002, the Company issued an
aggregate of 897,991 shares of common stock having a fair value of
approximately $173,000 to various debentures investors representing the
conversion of principal and interest.
During the six months ended March 31, 2001, the Company issued an
aggregate of 601,941 shares of common stock having a fair value of
approximately $2,259,000 to various debentures investors representing
the conversion of principal and interest.
F-15
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
B. LEGAL AND CONSULTING
-----------------------
(i) On January 9, 2002, the Company issued 65,200 shares of common
stock having a fair value of $7,500 for legal services.
(ii) On March 18, 2002, the Company issued 160,000 shares of common
stock for consulting services having a fair value of $11,520.
(iii) On March 20, 2002, the Company issued 150,000 shares of common
stock for consulting services having a fair value of $10,800.
C. SETTLEMENT AGREEMENT
-----------------------
On December 3, 2001, the Company entered into a settlement agreement
with a former officer in satisfaction of certain claims, and issued
125,000 shares of common stock having a fair market value of $37,500,
62,500 of which shares are covered by registration rights. During the
three months ended March 31, 2002, an additional 25,000 shares of common
stock were issued to that former officer having a fair market value of
$9,375.
7. ADJUSTMENTS TO OUTSTANDING SECURITIES
- -- -------------------------------------
In January 2002, the Company entered into an agreement with Bank
Insinger de Beaufort, Bristol Investment Fund, Ltd., Bristol Capital,
LLC, and Paul Kessler, who is a principal of Bristol Capital, LLC. Under
the agreement, the conversion price of the 10% Convertible Debenture due
May 1, 2002 that Bank Insinger purchased in the Company's April 2000
offering was amended to be the lesser of $0.055 and 50% of the average
of the lowest three intraday trading prices during the twenty trading
days immediately preceding a conversion. In addition, the exercise
prices of the warrants issued to Bank Insinger in the February 2000,
April 2000 and May 2001 offerings, the warrants issued to Bristol
Investment Fund in the January 2001 offering, the warrants issued to
Bank Insinger in the April 2000 offering that were transferred to
Bristol Capital, and the option issued to Paul Kessler pursuant to a
consulting agreement dated as of September 26, 2000 were amended so that
the exercise prices are equal to 50% of the average of the lowest three
intraday trading prices during the twenty trading days immediately
preceding an exercise. The expiration dates of each of the warrants and
options described in the preceding sentence were extended so that each
is exercisable until the seventh anniversary of its issuance.
F-16
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT INFORMATION
- -- -------------------
Segment information is no longer presented because the modular consoles
segment was discontinued upon the sale of substantially all of the
assets and business of the Desience subsidiary. (See Note 10.)
9. RELATED PARTY TRANSACTIONS
- -- --------------------------
During the six months ended March 31, 2002, the Company issued 1,080,000
shares of its common stock to officers, directors and related party
consultants, having an aggregate fair market value of $201,600. During
this period, the Company also loaned $36,000 at an annual interest rate
of 5% to an officer and director. The loan and all accrued and unpaid
interest was payable five years following the date of the loan. As of
March 31, 2002, the full amount of this loan was offset against deferred
compensation owed that officer and director.
10. DISCONTINUED OPERATIONS
- --- -----------------------
On March 4, 2002, the Company sold substantially all of the assets and
business of its Desience division. The purchase price was $250,000, with
$50,000 paid at closing and $25,000 per month to be paid over a period
of eight months following the closing. In addition, if a certain pending
sales transaction closes in 2002, the Company may receive up to an
additional $100,000. Included in the loss from discontinued operations
at March 31, 2002, is the write-off of goodwill associated with our
Desience division of approximately $337,000.
F-17
KANAKARIS WIRELESS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is included in the loss from discontinued operations for
the six months ended March 31, 2002:
Sales $ 214,826
Cost of sales 135,432
--------------
Gross profit 79,394
Operating expenses (89,235)
Other income 22,728
--------------
Income before discontinued operations 12,887
Gain on sale of business assets 247,301
Write-off of remaining goodwill (337,052)
--------------
Loss from discontinued operations $ (76,864)
==============
11. SUBSEQUENT EVENTS
- --- -----------------
On January 5, 2002, approximately $185,000 of convertible debentures
matured. Further, on March 9, 2002 and on May 1, 2002, approximately
$440,000 and $1,480,000, respectively, of convertible debentures
matured. The Company is in the process of registering a portion of the
shares of common stock underlying certain of these debentures to satisfy
these obligations upon conversion by the debenture holders of these
debentures into shares of the Company's common stock. On May 9, 2002,
the Company filed a Registration Statement on Form SB-2 with the SEC to
register shares of common stock in order to partially satisfy these
obligations.
Effective April 10, 2002, the Company entered into an Exchange Agreement
with Bristol Capital, LLC pursuant to which it issued 900 shares of its
Series B Convertible Preferred Stock and acquired from Bristol Capital
its 50% interest in the Company's now wholly-owned Fast Forward
Marketing subsidiary which was issued to Bristol Capital in
consideration for providing the opportunity to acquire the Fast Forward
Marketing business. Each share of the Company's Series B Convertible
Preferred Stock has a stated value of $1,000 and is convertible into
shares of its common stock at the lesser of (i) $0.086, and (ii) 82% of
the average of the three lowest intraday trading prices of a share of
its common stock during the twenty trading preceding the conversion
date. The Series B Convertible Preferred Stock accrues dividends at a
rate of 8% per annum, which is payable on a quarterly basis in arrears,
at the option of the holder, in cash or shares of our common stock based
on the then applicable conversion price.
In April of 2002, FFM Acquisition Corp. amended its articles of
incorporation to change its name to Fast Forward Marketing, Inc. On
April 8, this corporation acquired, for a cost of up to $516,000, the
assets of a distributor of video products for both major motion picture
studios and independent producers. The predecessor company had revenues
associated with its video distribution business in excess of $4 million
in 2001.
In May 2002, we restated our June 2001 debenture issued to Alliance
Equities to reflect an additional $125,000 investment by Alliance
Equities, resulting in a June 2001 debenture held by Alliance Equities
in the principal amount of $225,000 and an aggregate of $625,000 in June
2001 debentures outstanding.
On May 4, 2002, we entered into a private placement transaction with
one accredited investor in which we issued 714,285 shares of common
stock in exchange for $30,000 cash.
F-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read with our
consolidated financial statements and notes to financial statements included
elsewhere in this document.
OVERVIEW
We provide secure communication services that enable consumers,
businesses and government/military to send, receive, store, replicate, monitor
and interact with media-rich data, including video, audio, text and real-time
telemetry, or two-way wireless monitoring of remote devices. We provide online
delivery of films and books and offer business services, including encoding of
video for online delivery. We also distribute video products to retailers and
directly to consumers through mail order catalogs.
We derive our revenue from our content delivery services and
distribution of video products. We expect to continue to place significant
emphasis upon the further development and expansion of our wireless content
delivery and e-commerce activities. As funds become available, we intend to
increase our marketing efforts substantially in order to develop awareness,
brand loyalty and sales for our www.AK.TV interactive online channel, our other
web sites and our CinemaWEAR(TM) video-to-Internet encoding process. We also
intend to increase our marketing efforts in order to develop awareness and sales
for our video distribution business. We intend to generate revenue from
advertising sponsorships, subscriptions, pay-per-view and product sales
pertaining to the AK.TV channel and our other web sites. We also intend to
derive revenue from both product sales and service fees pertaining to our
CinemaWEAR(TM) encoding. As funds become available, we intend to continue to
invest in the development of new products and services that enhance AK.TV, our
other web sites and CinemaWEAR(TM) encoding and to further develop our existing
wireless products and services.
In March 2002, we sold our Desience Division to obtain additional
funding for, and to strengthen our focus on, our Internet and e-commerce
business activities. Prior to March 2002, our Desience Division's business
involved the design, manufacture and installation of ergonomic data control
console systems for high-end computer command centers.
In April 2002, we purchased substantially all of he assets of FFM from
its sole shareholder, Intervisual Books, Inc., a California corporation. We
intend to further expand into the video distribution market and integrate this
new aspect of our business with our existing products and services.
COMPARISON OF RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2002 AND
THREE MONTHS ENDED MARCH 31, 2001
NET SALES. Net sales decreased $500,895 (96.8%) from $517,388 for the
quarter ended March 31, 2001 to $16,493 for the quarter ended March 31,
2002. This decrease was primarily due to a decrease in advertising revenue
generated from our web sites and from the discontinuance of the operations of
our Desience division.
GROSS PROFIT. Gross profit decreased $420,738 (96.7%) from a gross
profit of $434,894 for the quarter ended March 31, 2001 to a gross profit of
$14,156 for the quarter ended March 31, 2002. This decrease in gross profit
was due primarily to the decrease in net sales noted above.
OPERATING EXPENSES. Total operating expenses increased $49,879
(5.4%) from $926,325 for the quarter ended March 31, 2001 to $976,204
for the quarter ended March 31, 2002. This increase in total operating
expenses was due primarily to an increase in executive compensation and
consulting services expenses. Marketing, advertising and investor relations
costs decreased $129,223 (80.7%) from $160,093 for the quarter ended
March 31, 2001 to $30,870 for the quarter ended March 31, 2002,
primarily due to our decreased consumer and trade advertising and marketing.
Executive compensation increased $123,362 (137.5%) from $89,750 for the
quarter ended March 31, 2001 to $213,112 for the quarter ended March 31, 2002,
primarily due to the increase in the issuance of common stock to executives as
compensation. Salaries decreased $38,314 (81.8%) from $46,844 for the quarter
ended March 31, 2001 to $8,530 for the quarter ended March 31, 2002, due to
both decreases in staff and decreases in salaries of existing staff. Consulting
services expenses increased $140,884 (76.7%) from $183,751 for the quarter
ended March 31, 2001 to $324,635 for the quarter ended March 31, 2002. Some
of these operating expenses were paid through the issuance of shares of our
common stock to the service provider.
3
INTEREST AND OTHER EXPENSE. Interest and other expense decreased
$73,607 (6.5%) from $1,136,960 for the quarter ended March 31, 2001 to
$1,063,353 for the quarter ended March 31, 2002. This decrease in interest and
other expense was due to the decrease in the issuance of stock as payment of
interest accrued and payable on, and upon conversion of portions of the
principal balances of our convertible debentures.
NET LOSS. Net loss increased $526,068 (32.2%) from $1,631,842 for the
quarter ended March 31, 2001 to $2,157,910 for the quarter ended March 31,
2002. This increase in net loss was due to increased operating expenses and
decreased net sales, as discussed above.
COMPARISON OF RESULTS OF OPERATIONS FOR SIX MONTHS ENDED MARCH 31, 2002 AND
SIX MONTHS ENDED MARCH 31, 2001
NET SALES. Net sales decreased $746,876 or 95.9%, from $778,464 for the
six months ended March 31, 2001 to $31,588 for the six months ended March 31,
2002, due primarily to a decrease in advertising revenues.
GROSS PROFIT. Gross profit decreased $634,431 or 99.0%, from $640,532
for the six months ended March 31, 2001 to $6,101 for the six months ended
March 31, 2002. This decrease in gross profit primarily was due to the decrease
in advertising revenues noted above.
OPERATING EXPENSES. Total operating expenses decreased $1,693,485 or
46.7%, from $3,625,602 for the six months ended March 31, 2001 to $1,932,117 for
the six months ended March 31, 2002. This decrease in total operating expenses
primarily was due to decreases in consulting fees, marketing, advertising and
investor relations costs, executive compensation and salaries. Consulting fees
decreased $557,299 or 44.4%, from $1,254,189 for the six months ended March 31,
2001 to $696,890 for the six months ended March 31, 2002. Marketing, advertising
and investor relations costs decreased $495,618 or 90.4%, from $548,257 for the
six months ended March 31, 2001 to $52,639 for the six months ended March 31,
2002. Executive compensation decreased $263,603 or 34.5%, from $763,050 for the
six months ended March 31, 2001 to $499,447 for the six months ended March 31,
2002. Salaries decreased $164,439 or 88.1%, from $186,648 for the six months
ended March 31, 2001 to $22,209 for the six months ended March 31, 2002. These
fees and costs each decreased primarily due to reduced issuances of our common
stock for services during the quarter ended March 31, 2002.
INTEREST AND OTHER EXPENSE. Other expense decreased $55,428 or 4.5%,
from $1,220,473 for the six months ended March 31, 2001 to $1,165,045 for the
six months ended March 31, 2002. This decrease primarily was due to a decrease
in the cost of convertible debt financing costs.
NET LOSS. Net loss decreased $1,005,339 or 24.1%, from $4,173,264 for
the six months ended March 31, 2001 to $3,167,925 for the six months ended March
31, 2002. This decrease is due to the decreased operating expenses, as discussed
above.
4
LIQUIDITY AND CAPITAL RESOURCES
We currently finance our operations primarily through private
placements of securities and revenue generated from our operations. We also have
available to us a $7,000,000 revolving line of credit from Alliance Equities
that can be drawn upon by us for up to $500,000 per month, with interest to
accrue at the rate of 10% per annum. However, during the fiscal year ended
September 30, 2001 and through May 15, 2002, no amounts were outstanding under
the line of credit.
In January 2001, we issued $650,000 of 12% convertible debentures due
January 5, 2002 to four accredited investors in the first stage of a two-stage
offering. The debentures were accompanied by warrants to purchase up to an
aggregate of 195,000 shares of common stock. The net proceeds of that offering,
after payment of related expenses, were approximately $631,500. In March 2001,
we issued $650,000 of 12% convertible debentures due March 9, 2002 in the second
stage of the offering. The net proceeds of that offering, after payment of some
related expenses, were approximately $647,500.
On June 29, 2001, we issued an aggregate of $500,000 of 12% convertible
debentures in a private offering to three accredited investors. The debentures
were accompanied by warrants to purchase up to an aggregate of 75,000 shares of
common stock. The net proceeds of that offering, after payment of related
expenses, were approximately $420,000.
As of March 31, 2002, we had a working capital deficiency of $4,005,746
and an accumulated deficit of $33,732,830. As of that date, we had approximately
$349,876 in cash, $20,547 in accounts receivable, $52,107 of interest
receivable, and $36,280 in notes receivable from stockholders and related
parties. We had accounts payable and accrued expenses of $860,223 and
outstanding convertible debentures and convertible promissory notes of
$3,715,050, including convertible debentures and notes issued prior to the
beginning of fiscal year 2001. To the extent convertible debentures we have
issued are converted into shares of common stock, we will not be obligated to
repay the converted amounts.
Cash used in our operating activities totaled $616,847 for the six
months ended March 31, 2002 as compared to $1,380,185 for the six months ended
March 31, 2001. Cash provided by our investing activities totaled $124,530 for
the six months ended March 31, 2002 as compared to cash provided by our
investing activities of $76,378 for the quarter ended March 31, 2001.
Cash provided by our financing activities totaled $790,720 for the six
months ended March 31, 2002 as compared to $1,154,900 for the six months ended
March 31, 2001. We raised $545,500 of the cash provided by our financing
activities during the six months ended March 31, 2002 and $1,109,900 of the cash
provided by our financing activities during the six months ended March 31, 2001
from the issuance of convertible debentures.
For the quarter ended March 31, 2002, we had net sales of approximately
$16,500 and a net loss of $2,157,910, of which loss $1,368,602 (63.4%) consisted
of non-cash expenses and $337,052 (15.6%) resulted from non-cash charges
associated with discontinued operations. These non-cash expenses included
$475,150 of compensation, marketing and professional services expenses incurred
in exchange for common stock.
In January 2002, we issued a 12% convertible debenture due January 9,
2003 in a private offering to one accredited investor, which was accompanied by
warrants to purchase up to an aggregate of 600,000 shares of common stock. The
net proceeds of that offering, after payment of some related expenses, were
$165,500. The investor may, at its option, purchase an additional $200,000 of
our 12% convertible debentures and warrants to purchase up to 600,000 shares of
common stock within 30 days after the effective date of the registration
statement relating to that offering. However, the investor is not committed to
purchase the additional debentures.
In March 2002, we issued an aggregate of $500,000 of our 12%
convertible debentures due March 29, 2003 in a private offering to three
accredited investors, which were accompanied by warrants to purchase up to an
aggregate of 1,500,000 shares of common stock. The net proceeds of that
offering, after payment of related expenses, were $380,000.
5
Effective April 10, 2002, we entered into an Exchange Agreement with
Bristol Capital, LLC pursuant to which we issued 900 shares of our Series B
Convertible Preferred Stock and acquired from Bristol Capital its 50% interest
in our now wholly-owned Fast Forward Marketing subsidiary which was issued to
Bristol Capital in consideration for providing the opportunity to acquire the
Fast Forward Marketing business. Each share of our Series B Convertible
Preferred Stock has a stated value of $1,000 and is convertible into shares of
our common stock at the lesser of (i) $0.086, and (ii) 82% of the average of the
three lowest intraday trading prices of a share of our common stock during the
twenty trading preceding the conversion date. The Series B Convertible Preferred
Stock accrues dividends at a rate of 8% per annum, which is payable on a
quarterly basis in arrears, at the option of the holder, in cash or shares of
our common stock based on the then applicable conversion price.
In May 2002, we restated our June 2001 debenture issued to one
accredited investor to reflect an additional $125,000 investment, resulting
in a June 2001 debenture held by that investor in the principal amount of
$225,000 and an aggregate of $625,000 in June 2001 debentures outstanding.
On May 4, 2002, we entered into a private placement transaction with
one accredited investor in which we issued 714,285 shares of common stock in
exchange for $30,000 cash. Our continued operations are dependent on securing
additional sources of liquidity through debt and/or equity financing.
As of May 15, 2002, we were in default under our 12% convertible
debentures due January 5, 2002, our 12% convertible debentures due March 9, 2002
and our 10% convertible debentures due May 1, 2002. As of May 15, 2002, the
aggregate amount of indebtedness outstanding under these debentures was
$2,104,100 plus accrued and unpaid interest. We are presently unable to repay
the balances of those debentures but are registering for resale a portion of the
shares of our common stock that are issuable upon conversion of those debentures
and anticipate that the debenture holders will convert portions of those
debentures into those shares of common stock.
We have been, and currently are, working toward identifying and
obtaining new sources of funding. Deteriorating global economic conditions and
the effects of ongoing military actions against terrorists may cause prolonged
declines in investor confidence in and accessibility to capital markets.
Further, our current debenture financing documents contain notice and right of
first refusal provisions and the grant of a security interest in substantially
all of our assets in favor of a debenture investor, all of which provisions will
restrict our ability to obtain debt and/or equity financing.
Any future financing that we may obtain may cause significant dilution
to existing stockholders. Any debt financing or other financing of securities
senior to common stock that we are able to obtain will likely include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition, results of
operations and cash flows.
If adequate funds are not available, we may be required to delay, scale
back or eliminate portions of our operations and product and service development
efforts or to obtain funds through arrangements with strategic partners or
others that may require us to relinquish rights to certain of our technologies
or potential products or other assets. Accordingly, the inability to obtain such
financing could result in a significant loss of ownership and/or control of our
proprietary technology and other important assets and could also adversely
affect our ability to fund our continued operations and our product and service
development efforts that historically have contributed significantly to our
competitiveness.
In an effort to increase sales related to our wireless business, we are
implementing an enhanced marketing and sales strategy. For example, we are
selling advertising sponsorships to our AK.TV 24-hour streaming Internet
television channel. We also are completing research and development of
additional attributes to our CinemaWEAR(TM) technology with the goal of
launching an interactive personal meeting site within the AK.TV interactive
channel. Also, we are enhancing our efforts to obtain online user registration
for movie viewing on AK.TV, soliciting monthly subscriptions to and pay-per-view
sales of movie viewing on AK.TV, introducing revenue-sharing web partner
programs and improving tracking of our market share.
In addition, we are devoting efforts to expand our customer base for
our video distribution business, in order to increase sales related to this
business. We are examining the viability of distributing videos over the
Internet in order to increase sales of our video distribution business and to
reduce our distribution costs as a result of more efficient video distribution
procedures. We believe that if we are successful in implementing the above
business strategies, we will generate increased revenues from our Internet and
e-commerce business activities.
6
RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information in this document, you should carefully
consider the following risk factors before deciding to invest in shares of our
common stock. If any of the following risks actually occurs, it is likely that
our business, financial condition and operating results would be harmed. As a
result, the trading price of our common stock could decline, and you could lose
part or all of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED OPERATING LOSSES, EXPECT CONTINUED LOSSES AND MAY NOT
ACHIEVE PROFITABILITY. IF WE CONTINUE TO LOSE MONEY, WE MAY HAVE TO CURTAIL
OUR OPERATIONS.
Our consolidated financial statements have been prepared assuming we
will continue as a viable business. We have not been profitable and we may
continue to lose money for the foreseeable future. Historically, we have
incurred losses and experienced negative cash flow. As of March 31, 2002, we
had an accumulated deficit of approximately $33,733,000. We may continue to
incur losses and may never achieve or sustain profitability. An extended period
of losses and negative cash flow may prevent us from operating and expanding our
business.
WE NEED AND MAY BE UNABLE TO OBTAIN ADDITIONAL FUNDING ON SATISFACTORY
TERMS, WHICH COULD DILUTE OUR STOCKHOLDERS OR IMPOSE BURDENSOME FINANCIAL
RESTRICTIONS ON OUR BUSINESS.
Historically, we have relied upon cash from financing activities and
revenues generated from operations to fund all of the cash requirements of our
activities. We have not been able to generate significant cash from our
operating activities in the past and cannot assure you that we will be able to
do so in the future. We require new financing. Deteriorating global economic
conditions and the effects of ongoing military actions against terrorists may
cause prolonged declines in investor confidence in and accessibility to capital
markets. Future financing may not be available on a timely basis, in sufficient
amounts or on terms acceptable to us. This financing may also dilute existing
stockholders' equity. Any debt financing or other financing of securities senior
to common stock will likely include financial and other covenants that will
restrict our flexibility. At a minimum, we expect these covenants to include
restrictions on our ability to pay dividends on our common stock. Any failure to
comply with these covenants would have a material adverse effect on our
business, prospects, financial condition and results of operations because we
could lose any existing sources of funding and impair our ability to secure new
sources of funding.
WE RELY HEAVILY ON OUR KEY EMPLOYEES, AND THE LOSS OF THEIR SERVICES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Alex Kanakaris. We have not entered into any employment
agreement with Mr. Kanakaris or any other officer of Kanakaris Wireless. The
loss of Mr. Kanakaris could have a material adverse effect on Kanakaris Wireless
because Mr. Kanakaris has experience, skills and vision upon which we draw
heavily in our day-to-day operations and strategic planning and financing
activities. We are the beneficiary of 80% of the proceeds of a term life
insurance policy in the amount of $10,000,000 covering Mr. Kanakaris. However,
we cannot assure you that receipt of these proceeds would be sufficient to
enable us to continue our business without significant temporary or permanent
disruption following the loss of Mr. Kanakaris.
7
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THESE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS
RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL
CONDITION.
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary technology and
intellectual property rights. We do not hold any patents. However, we believe
that some of our proprietary technologies, including our CinemaWEAR(TM) Encoding
technology, our CinemaWEAR(TM) Wireless Delivery technology and our Embedded
Electronic Commerce(TM) technology, could benefit from patent protection.
Accordingly, we intend to file patent applications for those technologies with
the United States Patent and Trademark Office. There can be no assurance that
our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop comparable or superior technologies
or obtain unauthorized access to our proprietary technologies.
We own, license or have otherwise obtained the right to use
technologies incorporated into our web sites and products. We may receive
infringement claims from third parties relating to our technologies. In those
cases, we intend to investigate the validity of the claims and, if we believe
the claims have merit, to respond through licensing or other appropriate
actions. To the extent claims relate to technology that we have licensed from
third parties for incorporation into our web sites and products, we would
forward those claims to the appropriate third party. If we were unable to
license or otherwise provide any necessary technology on a cost-effective basis,
we could be prohibited from using that technology, incur substantial costs in
redesigning our web sites and products that incorporate that technology, or
incur substantial costs defending any legal action taken against us, all of
which could have a material adverse effect on our business, prospects, financial
condition, results of operations and cash flows.
We hold the Internet domain names "AK.TV," "KKRS.Net," "WordPop.com,"
"CinemaPop.com" and many others. Under current domain name registration
practices, no one else can obtain an identical domain name, but someone might
obtain a similar name, or the identical name with a different suffix, such as
".org," or with a country designation. The regulation of domain names in the
United States and in foreign countries is subject to change, and we could be
unable to prevent third-parties from acquiring domain names that infringe or
otherwise decrease the value of our domain names.
IF COMMUNICATIONS TO OUR PRIMARY SERVERS ARE INTERRUPTED, OUR OPERATIONS
COULD BE NEGATIVELY IMPACTED.
Our movies and general web sites are hosted on servers owned and
operated by a third party. Although offsite backup servers are maintained by
our host, all of our primary servers
are vulnerable to interruption by damage from fire, flood, power loss,
telecommunications failure, break-ins and other events beyond our control. We
have, from time to time, experienced periodic systems interruptions and
anticipate that these interruptions will occur in the future. We do not maintain
business interruption insurance. If we experience significant system
disruptions, our business, results of operations and financial condition would
be materially adversely affected because we would be unable to deliver our
Internet-related products and services during the disruption and may therefore
lose existing and potential customers.
8
OUR COMPUTER INFRASTRUCTURE MAY SUFFER SECURITY BREACHES. ANY SUCH BREACHES
COULD JEOPARDIZE CONFIDENTIAL INFORMATION TRANSMITTED OVER THE INTERNET,
CAUSE INTERRUPTIONS IN OUR OPERATIONS OR CAUSE US TO HAVE LIABILITY TO
THIRD PARTIES.
We rely on technology that is designed to facilitate the secure
transmission of confidential information. Our computer infrastructure is
potentially vulnerable to physical or electronic computer break-ins, viruses and
similar disruptive problems. A party who is able to circumvent our security
measures could misappropriate proprietary information, jeopardize the
confidential nature of information transmitted over the Internet or cause
interruptions in our operations. Concerns over the security of Internet
transactions and the privacy of users could also inhibit the growth of the
Internet in general, particularly as a means of conducting commercial
transactions. To the extent that our activities involve the storage and
transmission of proprietary information, including personal financial
information, security breaches could expose us to a risk of financial loss,
litigation and other liabilities. Our insurance does not currently protect us
against these losses. Consequently, any security breach could have a material
adverse effect on our business, results of operations and financial condition.
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.
Our business strategy envisions a period of rapid growth that may put a
strain on our administrative and operational resources. Our ability to
effectively manage growth will require us to continue to expand the capabilities
of our operational and management systems and to attract, train, manage and
retain qualified engineers, technicians, salespersons and other personnel. There
can be no assurance that we will be able to do so, particularly if our losses
continue and we are unable to obtain sufficient financing. If we are unable to
successfully manage our growth, our business, prospects, financial condition and
results of operations could be adversely affected.
ALTHOUGH INTERNET COMMERCE HAS YET TO ATTRACT SIGNIFICANT REGULATION,
GOVERNMENT REGULATION MAY RESULT IN FINES, PENALTIES, TAXES OR OTHER COSTS
OR CONSEQUENCES THAT MAY REDUCE OUR FUTURE EARNINGS.
The United States Congress has passed or is considering passing
legislation regulating certain aspects of the Internet, including online
content, copyright infringement, user privacy, taxation, access charges, digital
signatures and liability for third-party activities. The European Union also has
enacted several directives relating to the Internet, including directives that
address the use of personal data, e-commerce activities, security, commercial
piracy, consumer protection and taxation of e-commerce transactions. Various
states have adopted and are considering Internet-related legislation and
regulations. Governmental authorities in the United States and abroad are
considering other legislative and regulatory proposals to further regulate the
Internet. Areas of potential regulation include libel, pricing, quality of
products and services and intellectual property ownership. We cannot predict
what new laws will be enacted, or how courts will interpret existing and new
laws, and therefore are uncertain as to how new laws or the application of
existing laws will affect our business. In addition, our business may be
indirectly affected by legislation that affects the ability of our customers to
engage in e-commerce activities. Increased regulation of the Internet may
decrease the growth in the use of the Internet, which could decrease the demand
for our products and services, increase our cost of doing business or otherwise
harm our business, results of operations and financial condition.
9
COMPETITION AMONG VIDEO DISTRIBUTORS HAS INTENSIFIED AND THE MOVEMENT OF
SOME OF OUR PRINCIPLE SUPPLIERS INTO THE VIDEO DISTRIBUTION MARKET COULD
SIGNIFICANTLY REDUCE OUR MARKET SHARE.
The ongoing consolidation of traditional video distributors and the
movement of some of the major motion picture studios, who are some of our
principal suppliers in that industry, into the video distribution market has
intensified the competition within the video distribution market. As a result,
some of our competitors in the video distribution market have greater access to
capital, marketing and advertising resources which gives them a significant
advantage over us. The movement of some of the major motion picture studios into
the video distribution market has threatened some of our larger accounts because
those motion picture studios often contact large retailers directly. If our
smaller accounts grow into larger accounts, there is an increasing possibility
that major studios may try to sell to these larger accounts directly and
circumvent us. If we are unable to protect our customer base as it grows, we may
be forced to change our marketing efforts in the video distribution market to
target smaller accounts. This potential change in marketing strategy coupled
with the potential loss of larger accounts may result in a decrease in our
revenues and may adversely affect our business, prospects, financial condition
and results of operations.
CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS ALLOW
CONCENTRATION OF VOTING POWER IN ONE INDIVIDUAL, WHICH MAY, AMONG OTHER
THINGS, DELAY OR FRUSTRATE THE REMOVAL OF INCUMBENT DIRECTORS OR A TAKEOVER
ATTEMPT, EVEN IF SUCH EVENTS MAY BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our articles of incorporation and bylaws may delay or
frustrate the removal of incumbent directors and may prevent or delay a merger,
tender offer or proxy contest involving Kanakaris Wireless that is not approved
by our board of directors, even if those events may be beneficial to the
interest of our stockholders. For example, Alex Kanakaris, our Chairman of the
Board, President and Chief Executive Officer, is the holder of all of the
1,000,000 authorized, issued and outstanding shares of our Class A Convertible
Preferred Stock. Under our articles of incorporation, each share of Class A
Preferred Stock is entitled to 100 non-cumulative votes per share on all matters
presented to our stockholders for action. Consequently, Mr. Kanakaris has
sufficient voting power to control the outcome of all corporate matters
submitted to the vote of our common stockholders. Those matters could include
the election of directors, changes in the size and composition of the board of
directors, and mergers and other business combinations involving Kanakaris
Wireless. In addition, through his control of the board of directors and voting
power, he may be able to control certain decisions, including decisions
regarding the qualification and appointment of officers, dividend policy, access
to capital (including borrowing from third-party lenders and the issuance of
additional equity securities), and the acquisition or disposition of assets by
Kanakaris Wireless. In addition, the concentration of voting power in the hands
of Mr. Kanakaris could have the effect of delaying or preventing a change in
control of Kanakaris Wireless, even if the change in control would benefit our
stockholders, and may adversely affect the market price of our common stock.
10
WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF TERRORISM
AND THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND THE
PUBLIC MAY HAVE ON OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND CASH FLOWS.
The recent terrorist attacks in the United States, which have brought
devastation to many people and shaken consumer confidence, have disrupted
commerce throughout the world. The continuing threat of terrorism in the United
States and other countries and heightened security measures, as well as current
and any future military action in response to such threat, may cause significant
disruption to the global economy, including widespread recession. To the extent
that such disruptions result in a general decrease in government, business and
consumer spending that could decrease demand for our current and planned
products and services, in our inability to effectively market our products and
services, or in financial or operational difficulties for the service providers,
such as server operators, on which we rely, our business and results of
operations could be materially and adversely affected. We are unable to predict
whether the continuing threat of terrorism or the responses to such threat will
result in any long-term commercial disruptions or whether such terrorist
activities or responses will have a long-term material adverse effect on our
business, prospects, financial condition, results of operations and cash flows.
BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY
FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.
Our common stock trades under the symbol "KKRW" on the NASD's OTC
Bulletin Board(R). Because our stock trades on the OTC Bulletin Board(R) rather
than on a national securities exchange, you may find it difficult to either
dispose of, or to obtain quotations as to the price of, our common stock.
CONVERSION OF OUR OUTSTANDING CONVERTIBLE SECURITIES COULD SUBSTANTIALLY
DILUTE YOUR INVESTMENT AND CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE
BECAUSE THE CONVERSION PRICE OF THOSE SECURITIES DEPENDS UPON THE MARKET
PRICE OF OUR COMMON STOCK, AND THERE IS NO CEILING ON THE NUMBER OF SHARES
OF OUR COMMON STOCK THAT ARE ISSUABLE UPON EXERCISE OF THOSE SECURITIES.
We have issued to several security holders debentures, notes, warrants
and shares of preferred stock that are convertible or exercisable at prices that
are equal to the lesser of a fixed price and a variable price that is based upon
a discount on the market price of our common stock. As of May 6, 2002, we had a
total of 13,156,325 shares of common stock outstanding, the closing sale price
of a share of our common stock on the OTC Bulletin Board(R) was $.07, and the
debentures, notes, warrants and shares of preferred stock with variable
conversion or exercise prices were convertible or exercisable into approximately
136,500,000 shares of common stock. The number of shares that those debentures,
notes and warrants ultimately may be converted into or exercised for could prove
to be greater than this estimate if the market price of our common stock
declines. You could, therefore, experience substantial dilution and a decline in
the value of your investment as a result of the conversion of the debentures and
exercise of the warrants.
IF OUR SECURITY HOLDERS ENGAGE IN SHORT SALES OF OUR COMMON STOCK,
INCLUDING SALES OF SHARES TO BE ISSUED UPON CONVERSION OR EXERCISE OF
DERIVATIVE SECURITIES, THE PRICE OF OUR COMMON STOCK MAY DECLINE.
Selling short is a technique used by a stockholder to take advantage of
an anticipated decline in the price of a security. A significant number of short
sales or a large number of other sales within a relatively short period of time
can create a downward pressure on the price of the security. The decrease in
market price would allow holders of our debentures and warrants that have
conversion or exercise prices based upon a discount on the market price of our
common stock to convert their debentures and exercise their warrants into an
increased number of shares of our common stock. Further sales of common stock
issued upon conversion of debentures or exercise of warrants could cause even
greater declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage short sales
that could further undermine the value of our common stock. You could,
therefore, experience a decline in the value of your investment as a result of
short sales of our common stock.
11
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INVESTORS AND LITIGATION AGAINST US.
The stock market as a whole and individual stocks historically have
experienced extreme price and volume fluctuations, which often have been
unrelated to the performance of the related corporations. Our common stock
trades on the OTC Bulletin Board(R) under the symbol "KKRW." For the quarter
ended March 31, 2002, taking into account the 1-for-20 reverse common stock
split that occurred on December 7, 2001, the high and low closing sale prices
for a share of our common stock were $0.15 and $0.072, respectively. The trading
prices of our common stock could experience wide fluctuations in the future in
response to:
o quarter-to-quarter variations in our operating results;
o material announcements of technological innovations;
o establishment of strategic partnerships by us or our
competitors or providers of alternative products and services;
o general conditions in the Internet and e-commerce
industries; or
o other events or factors, many of which are beyond our control.
If our operating results in future quarters fall below the expectations
of market makers, securities analysts and investors, the price of our common
stock likely will decline, perhaps substantially. In the past, securities class
action litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which you purchase shares of our common stock may not
be indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING
ACTIVITY IN OUR STOCK MAY BE REDUCED.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, broker-dealers who sell these securities to
persons other than established customers and "accredited investors" must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules, and investors in our common stock may find it difficult to
sell their shares.
12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, including among
others:
o the projected growth in the video distribution, Internet and
e-commerce industries and the markets for our products and
services within these industries;
o our business strategy for expanding our presence in the
existing and proposed markets in which our products and
services could be used;
o anticipated trends in our financial condition and results of
operations;
o the impact of the continuing threat of terrorism and the
responses to such threat by military, government, business and
the public; and
o our ability to distinguish ourselves from our current and
future competitors.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions. You may find these forward-looking statements under the captions
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business," as well as
captions elsewhere in this document. A number of factors could cause results
to differ materially from those anticipated by forward-looking statements,
including those discussed under "Risk Factors" and "Business."
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the forward-
looking statements.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Dataview Consoles, Inc., a California corporation dba Swanson
Engineering & Manufacturing Company, commenced an action against Kanakaris
Wireless and our subsidiary, Desience Corporation, in the Los Angeles Superior
Court (Case No. BC245203) on February 14, 2001. The complaint alleged that
Kanakaris and Desience owed Dataview $104,601 under several invoices for
equipment manufactured for Desience by Dataview in 1997. Concurrently with the
filing of the complaint, Dataview filed an application for a right to attach
order against Kanakaris and Desience to secure repayment of the debt alleged in
the complaint. Effective as of April 3, 2001, the parties to the dispute entered
into a settlement agreement under which Kanakaris and Desience paid Dataview
$63,584 and agreed to pay Dataview an additional $42,000 in twelve monthly
installments of $3,500 beginning May 1, 2001. The agreement provides that we
will be entitled to file a request for dismissal after we have made all of the
installment payments in accordance with the agreement. The agreement also
provides that Kanakaris and Desience, on the one hand, and Dataview and Nels
Swanson, on the other hand, shall all retain the unrestricted right to market,
sell, distribute and manufacture or have manufactured under their own respective
names all of the data control console products that Dataview had been
manufacturing for Desience.
Loudeye Technologies, Inc., or Loudeye, filed a complaint for money due
and owing against us in the Superior Court for the State of Washington (King
County) (Case No. 01-2-07608-6SEA) on March 8, 2001. Loudeye claims we failed to
pay $44,107 owing for encoding services furnished by Loudeye under the parties'
purported contract. The complaint also seeks attorneys' fees, court costs and
late charges. We filed an answer to the Loudeye complaint on October 11, 2001
that includes a general denial of all allegations made by Loudeye.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In January 2002, we issued an aggregate of 65,200 shares of common
stock valued at approximately $7,500 to one consultant as compensation for
services rendered.
On January 9, 2002 we issued an aggregate of $200,000 of 12%
convertible debentures in a private offering to one accredited investor. The
investor, if certain conversion limitations are disregarded, is a beneficial
owner of 5% or more of our outstanding shares of common stock. The debentures
initially were convertible into shares of common stock at the lesser of $.055
per share and 50% of the average of the lowest three intraday trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 600,000 shares of common stock at a per share exercise price equal
to the lesser of $.055 and the average of the lowest three intraday trading
prices during the 20 trading days immediately preceding an exercise.
In January 2002, in connection with the issuance of our January 2002
debentures, we issued warrants to purchase an aggregate of 60,000 shares of
common stock to two entities as a transaction fee, which warrants are
exercisable at a per share exercise price equal to the lesser of $.055 and the
average of the lowest three intraday trading prices during the 20 trading days
immediately preceding an exercise.
In February 2002, we issued to two entities 6% convertible promissory
notes due November 30, 2002 in the aggregate principal amount of $372,550. The
promissory notes are immediately convertible into shares of common stock at an
initial per share price equal to the lesser of $.085 and the average of the
three lowest intraday sale prices during the 20 trading days immediately
preceding a conversion.
14
On March 29, 2002 we issued an aggregate of $500,000 of 12% convertible
debentures in a private offering to four accredited investors. Two of the
investors, if certain conversion limitations are disregarded, are beneficial
owners of 5% or more of our outstanding shares of common stock. The debentures
initially were convertible into shares of common stock at the lesser of $.035
per share and 50% of the average of the lowest three intraday trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 1,500,000 shares of common stock at a per share exercise price
equal to the lesser of $.035 and the average of the lowest three intraday
trading prices during the 20 trading days immediately preceding a conversion or
exercise.
In March 2002, we issued an aggregate of 740,000 shares valued at
approximately $53,300 to seven officers and directors as compensation for
services rendered.
In March 2002, we issued an aggregate of 160,000 shares valued at
approximately $11,500 to two consultants as compensation for services rendered.
In March 2002, we issued an aggregate of 150,000 shares valued at
$10,800 to four consultants as compensation for services rendered.
Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide.
Dividend Policy
---------------
We have never paid any dividends on our common stock and do not
anticipate declaring or paying cash dividends in the foreseeable future. We
intend to retain future earnings, if any, to reinvest in our business. We expect
that covenants in our future financing agreements will prohibit or limit our
ability to declare or pay cash dividends.
16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At January 5, 2002, we were in default in the repayment of principal of
approximately $185,000 plus related interest on 12% Convertible Debentures due
January 5, 2002. At March 9, 2002, we were in default in the repayment of
principal of approximately $439,000 plus related interest on 12% Convertible
Debentures due March 9, 2002. As of March 31, 2002, each of these defaults was
continuing. At May 1, 2002, we were in default in the repayment of principal of
approximately $1,480,000 plus related interest on 10% Convertible Debentures due
May 1, 2002. At March 31, 2002, we also were in default under our obligations to
register for resale shares of our common stock underlying all of our outstanding
convertible debentures, other than those issued as of March 29, 2002. In
addition, at March 31, 2002, we also were in default under our obligations to
make quarterly interest payments under all of our outstanding convertible
debentures. We are in the process of registering for resale with the Securities
and E xchange Commission a portion of the shares of common stock underlying the
convertible debentures under which we are in default and expect that the
convertible debentures ultimately will be converted into shares of our common
stock and that we therefore will not be obligated to repay the outstanding
principal and accrued and unpaid interest amounts on those debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
Exhibit No. Description
- ----------- -----------
2.1 Asset Purchase Agreement between Desience Corporation, a
wholly-owned subsidiary of Kanakaris Wireless, and Russ Bassett
Corp., dated as of March 4, 2002. (2)
2.2 Asset Purchase Agreement dated as of March 29, 2002 by and between
the Registrant, FFM Acquisition Corp., Fast Forward Marketing, Inc.
and Intervisual Books, Inc. (3)
3.1 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of Kanakaris Wireless (3)
10.1 Securities Purchase Agreement dated as of January 9, 2002 by
and between Bank Insinger de Beaufort Safe Custody NV and
the Registrant (1)
10.2 Convertible Debenture due January 9, 2003 made by the
Registrant in favor of Bank Insinger de Beaufort Safe
Custody NV (1)
10.3 Registration Rights Agreement dated as of January 9, 2002
by and between the Registrant and Bank Insinger de Beaufort
Safe Custody NV (1)
10.4 Stock Purchase Warrant dated as of January 9, 2002 issued by
the Registrant to Bank Insinger de Beaufort Safe Custody NV (1)
10.5 Security Agreement dated as of January 9, 2002 by and between
the Registrant and Bank Insinger de Beaufort Safe Custody NV (1)
10.6 Letter Agreement dated January 9, 2002 by and between the
Registrant and Bank Insinger de Beaufort Safe Custody NV,
Bristol Investment Fund, Ltd., Bristol Capital, LLC and
Paul Kessler (1)
17
10.7 Agreement dated as of February 28, 2002 by and between the
Registrant and Rutan & Tucker, LLP (4)
10.8 6% Convertible Promissory Note due November 30, 2002 made by
the Registrant in favor of Rutan & Tucker, LLP (4)
10.9 Agreement dated as of February 28, 2002 by and between the
Registrant and Haynie & Company (4)
10.1 6% Convertible Promissory Note due November 30, 2002 made by
the Registrant in favor of Haynie & Company (4)
10.1 Stock Purchase Warrant dated as of January 9, 2002 issued by
the Registrant to Bristol Capital, LLC (4)
10.1 Stock Purchase Warrant dated as of January 9, 2002 issued by
the Registrant to Alexander Dunham Capital Group, Inc. (4)
10.1 Securities Purchase Agreement dated as of March 29, 2002 by
and among the Registrant and each of the purchasers identified
therein (3)
10.1 Form of 12% Secured Convertible Debenture due March 29, 2003 (3)
10.1 Form of Common Stock Purchase Warrant dated March 29, 2002 (3)
10.1 Registration Rights Agreement dated as of March 29, 2002 by and
among the Registrant and each of the investors identified
therein (3)
10.1 Security Agreement dated as of March 29, 2002 by and among the
Registrant and each of the secured parties identified therein (3)
- ----------
(1) Filed as an exhibit to the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission on January 15, 2002 (File No.
0-28213)and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on March 19, 2002 (File No. 0-28213)
and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on April 22, 2002 (File No. 0-28213)
and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on May 9, 2002 (Registration
No. 333-87908) as incorporated herein by reference.
(b) Reports on Form 8-K
-------------------
We filed a report on Form 8-K on March 19, 2002 in connection
with the sale of our Desience division effective March 4,
2002. A copy of our related press release was included in that
report. The Form 8-K included "Item 2. Acquisition or
Disposition of Assets" and "Item 7. Financial Statements and
Exhibits."
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KANAKARIS WIRELESS
Dated: May 20, 2002 By: /S/ DAVID SHOMAKER
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David Shomaker
Acting Chief Financial Officer
(principal financial and accounting officer)
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