U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File No. 1-11873
K2 DIGITAL, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3886065
------------------------------- --------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
c/o Thomas G. Amon
500 Fifth Avenue, Suite 1650
New York, NY 10110
------------------
(Address of Principal Executive Offices)
(212) 810-2430
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) (Pursuant to rule 33-8587)
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at October 31, 2006
-------------------------- ----------------------------------
Common stock, par value
$.01 per share .................................... 4,982,699
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
K2 DIGITAL, INC. AND SUBSIDIARY
INDEX
PAGE
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheet - September 30, 2006 (unaudited).....2
Condensed consolidated statements of operations and comprehensive income
(loss) - three and nine months ended September 30, 2006 (unaudited)
and September 30, 2005 (unaudited).....................................3
Condensed consolidated statements of cash flows - three and nine months
ended September 30, 2006 (unaudited) and September 30, 2005
(unaudited)............................................................4
Notes to condensed consolidated financial statements......................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................7
Item 3. Controls and Procedures...............................................10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................11
SIGNATURES ...................................................................11
1
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ...........................................................................$ 75,337
Note receivable - net .......................................................... 9,253
Investment in security available-for-sale ...................................... 17,080
--------
Total current assets .....................................................$101,670
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable .............................................................$ 117,412
Accrued expenses ............................................................. 9,000
-----------
Total current liabilities ................................................ 126,412
===========
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $0.01 par value, 1,000,000 shares authorized;
1,000,000 shares issued and outstanding .................................... 165,000
Common Stock, $0.01 par value, 25,000,000 shares authorized; 5,400,116
shares issued and 4,982,699 shares outstanding ............................. 54,001
Additional paid-in capital ................................................... 8,317,910
Accumulated other comprehensive income ....................................... 14,780
Accumulated deficit .......................................................... (7,757,137)
-----------
794,554
Less: Treasury stock, 417,417 shares, at cost ............................... (819,296)
-----------
Total stockholders' deficit .................................................... (24,742)
-----------
-----------
Total liabilities and stockholders' deficit ..............................$ 101,670
===========
See the accompanying notes to condensed consolidated financial statements.
2
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
Revenues $ -- $ -- $ -- $ --
-- -- -- --
Other income 10,281 17,836 42,198 27,941
General and administrative expenses 15,101 29,414 64,106 55,736
----------- ----------- ----------- -----------
Net income (loss) $ (4,820) $ (11,578) $ (21,908) $ (27,795)
=========== =========== =========== ===========
Comprehensive income (loss):
Net income (loss) $ (4,820) $ (11,578) $ (21,908) $ (27,795)
Other comprehensive income (loss),
unrealized gain (loss) on available-for-sale security:
Unrealized holding gain (loss) arising during the period (480) 4,600 2,400 10,350
Reclassification adjustment for gain included in net income -- (17,800) -- (27,850)
----------- ----------- ----------- -----------
(480) (13,200) 2,400 (17.500)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (5,300) $ (24,778) $ (19,508) $ (45,295)
=========== =========== =========== ===========
Net income (loss) per common share -
basic and diluted $ (0.001) $ (0.005) $ (0.004) $ (0.009)
----------- ----------- ----------- -----------
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,982,699 4,982,699 4,982,699
----------- ----------- ----------- -----------
See the accompanying notes to condensed consolidated financial statements.
3
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,908) $ (27,795)
Adjustments to reconcile net loss to net cash used in operating activities:
Realized gain on sale of available-for-sale security (27,850)
Changes in operating assets and liabilities:
Note receivable - net (9,253)
Accounts payable and accrued expenses (59,862) 13,352
--------- ---------
Net cash used in operating activities (91,023) (42,293)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
Gross proceeds from sale of available-for-sale security 38,200
Gross proceeds from sale of convertible preferred securities 165,000
--------- ---------
Net increase (decrease) in cash 73,977 (4,093)
CASH, beginning of period 1,360 7,366
--------- ---------
CASH, end of period $ 75,337 $ 3,273
========= =========
See the accompanying notes to condensed consolidated financial statements.
4
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRIOR BUSINESS AND GOING CONCERN CONSIDERATION
Through August 2001, K2 Digital, Inc. (together with its wholly-owned
subsidiary, the "Company") was a strategic digital services company that
provided consulting and development services including analysis, planning,
systems design and implementation. In August 2001, the Company completed the
sale of fixed and intangible assets essential to its business operations to
Integrated Information Systems, Inc. ("IIS").
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed above, the
Company sold fixed and intangible assets essential to its business operations to
IIS and effectively became a "shell" company with no operational revenues and
continuing general and administrative expenses. Further, at September 30, 2006,
the Company has cumulative losses of approximately $7.8 million, a minimal cash
balance and working capital and stockholders' deficits of approximately $24,700.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying condensed consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
AGREEMENT AND PLAN OF MERGER
On December 22, 2005, the Company signed a letter of intent ("LOI") with NPOWR
Digital Media, Inc. ("NPOWR"), a California corporation, whereby NPOWR will
acquire K2 preferred shares convertible into 1,500,000 shares of K2 common stock
for $165,000 and subsequently enter into a merger agreement with the Company.
On January 24, 2006, the Company completed the sale of 1,000,000 shares of its
convertible preferred shares to NPOWR at a purchase of $165,000. K2, its
wholly-owned subsidiary, K2 Acquisition Corp. ("Merger Sub") and NPOWR intended
to enter into a merger agreement whereby Merger Sub would merge with and into
NPOWR. In connection with the merger, the shareholders of NPOWR would have
acquired a controlling interest in K2. Further, prior to closing of the
transaction, K2 was entitled to issue up to 500,000 stock options with an
exercise price of $0.11 per share to its officers and directors. The transaction
is subject to the normal conditions for closing, including satisfactory due
diligence by the parties.
On July 27, 2006, the Company and NPOWR determined to abandon the contemplated
merger between the parties. Pursuant to the LOI, NPOWR is obligated to pay all
expenses of the Company as specified in the LOI to the date of termination. On
September 29, 2006, NPOWR executed a promissory note in the amount of $18,253
representing amounts due to the Company under the LOI. The note is payable in
four installments, the first due November 1, 2006 in the amount of $4,753
followed by three additional payments of $4,500 on or before December 31, 2006,
February 28, 2007 and April 30, 2007.
The Company will continue to actively seek other business alternatives, through
acquisition or merger or consider other options such as liquidation of the
Company under Chapter 7 of the U.S. Bankruptcy Code.
5
2. BASIS OF PRESENTATION, NET LOSS PER SHARE AND NEW ACCOUNTING PRONOUNCEMENTS
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company and reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation of the financial position as of September 30, 2006 and the
financial results for the three and nine months ended September 30, 2006 and
2005, in accordance with accounting principles generally accepted in the United
States of America for interim financial statements and pursuant to Form 10-QSB
and Regulation S-B. Certain information and footnote disclosures normally
included in the Company's annual audited consolidated financial statements have
been condensed or omitted pursuant to such rules and regulations.
The results of operations for the three and nine months ended September 30, 2006
and 2005 are not necessarily indicative of the results of operations to be
expected for a full fiscal year. These interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements for the fiscal year ended December 31, 2005, which are included in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of K2 Digital, Inc. and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NET LOSS PER SHARE OF COMMON STOCK
The Company complies with SFAS No. 128, "Earnings Per Share", which requires
dual presentation of basic and diluted earnings per share. Basic loss per share
excluded dilution and is computed by dividing net loss available to common
stockholders by the weighted average common shares outstanding for the year.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
to common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. Since the effect of outstanding options is
anti-dilutive, they have been excluded from the Company's computation of net
loss per common share. Therefore, basic and diluted loss per common share for
the three and nine months ended September 30, 2006 and 2005 were the same.
STOCK-BASED COMPENSATION
On January 1, 2006, we adopted SFAS No. 123R, "Share-Based Payment," which is a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB No. 25, "Accounting for Stock Issues to Employees." Among other
items, SFAS 123R requires companies to record compensation expense for
share-based awards issued to employees and directors in exchange for services
provided. The amount of compensation expense is based on the estimated fair
value of the awards on their grant dates and is recognized over the required
service periods. The compensation amount includes (i) compensation expense for
stock options granted prior to January 1, 2006 but not yet vested as of January
1, 2006, based on the grant date fair value estimated in accordance with the
pro-forma provisions of SFAS 123 and (ii) compensation expense for stock options
granted subsequent to January 1, 2006 based on the grant date fair value
estimated in accordance with SFAS 123R. During the three and nine months ended
September 30, 2006 and 2005, the Company did not grant options pursuant to its
stock option plans.
6
3. CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of its convertible preferred
stock with such designations, voting and other rights and preferences, as may be
determined from time to time by the Board of Directors and shareholders. Each
holder of preferred shares is entitled to one vote for each full share of common
stock into which such holders' preferred shares would be convertible. In the
event of any liquidation, dissolution, or winding up of the Company, the holders
of preferred stock shall be entitled to receive, prior and in preference to any
distributions to the holders of common stock, the amount of $0.165 per share of
preferred stock. If that amount is not sufficient to meet the full preferential
amount to which the holders of the preferred stock are entitled, then the entire
assets of the Company shall be distributed to the holders of the preferred stock
on a proportional basis. During the quarter ended March 31, 2006, the Company
completed the sale of 1,000,000 shares of its convertible preferred shares at a
purchase price of $165,000. These shares are convertible into 1,500,000 common
shares at a ratio of 1 preferred share to 1.5 common shares, at the discretion
of the Board of Directors and shareholders.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Factors
Affecting Operating Results and Market Price of Stock".
OVERVIEW
Founded in 1993, the Company is a digital professional services company that,
until August 2001, historically provided consulting and development services,
including analysis, planning, systems design, creation and implementation. In
August 2001, upon the sale of assets to Integrated Information Systems, Inc.
("IIS"), the Company effectively ceased operations.
On December 22, 2005, the Company signed a letter of intent with NPOWR Digital
Media, Inc. ("NPOWR"), a California corporation, whereby NPOWR will acquire K2
preferred shares convertible into 1,500,000 shares of K2 common stock for
$165,000 and subsequently enter into a merger agreement with the Company.
On January 24, 2006, the Company completed the sale of 1,000,000 shares of its
convertible preferred shares to NPOWR at a purchase of $165,000. K2, its
wholly-owned subsidiary, K2 Acquisition Corp. ("Merger Sub") and NPOWR intended
to enter into a merger agreement whereby Merger Sub would merge with and into
NPOWR. In connection with the merger, the shareholders of NPOWR would have
acquired a controlling interest in K2. Further, prior to closing of the
transaction, K2 was entitled to issue up to 500,000 stock options with an
exercise price of $0.11 per share to its officers and directors. The transaction
is subject to the normal conditions for closing, including satisfactory due
diligence by the parties.
On July 27, 2006, the Company and NPOWR determined to abandon the contemplated
merger between the parties. Pursuant to the LOI, NPOWR is obligated to pay all
expenses of the Company as specified in the LOI to the date of termination. On
September 29, 2006, NPOWR executed a promissory note in the amount of $18,253
representing amounts due to the Company under the LOI. The note is payable in
four installments, the first due November 1, 2006 in the amount of $4,753
followed by three additional payments of $4,500 on or before December 31, 2006,
February 28, 2007 and April 30, 2007. The Company has established a provision
for $9,000 for to amounts due after December 31, 2006.
The Company will continue to actively seek other business alternatives, through
acquisition or merger or consider other options such as liquidation of the
Company under Chapter 7 of the U.S. Bankruptcy Code.
8
RESULTS OF OPERATIONS
During the three and nine months ended September 30, 2006, the Company,
operating as a "shell," incurred net losses of approximately ($4,800) and
($21,900) respectively. During the three and nine months ended September 30,
2005, the Company incurred net losses of approximately ($11,600) and ($27,800)
respectively. The Company's net income (loss) for the three and nine months
ended September 30, 2006 consists primarily of accounting, legal and other
expenses related to maintaining the "shell" corporation. The Company's results
from operations were improved as a result of reimbursement of ongoing public
company costs from NPOWR totaling $30,000 paid during the quarter ending June
30, 2006 and $18,253 NPOWR committed by execution of a promissory note for that
amount in the quarter ending September 30, 2006, reduced by an allowance of
$9,000. The Company's net loss for the three and nine months ended September 30,
2005 was the result of the Company's ongoing public company expenses, partially
offset by a gain on the sale of a portion of its available-for-sale security.
CONTINUING OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the sale of assets to IIS, the Company effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. The Company does not have any ongoing
business operations or revenue sources beyond those assets not purchased by IIS.
Accordingly, the Company's remaining operations will be limited to either a
business combination with an existing business or the winding up of the
Company's remaining business and operations, subject, in either case, to the
approval of the stockholders of the Company. These, among other matters, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's cash balance of $75,337 at September 30, 2006 increased by $73,977
or approximately 5439% compared to the $1,360 cash balance at December 31, 2005.
This increase is primarily due to the Company's issuance of $165,000 preferred
stock in connection with the proposed merger with NPOWR, offset by paying down
its obligations. In the quarter ending September 30, 2005 the Company sold 4,000
shares of TFSM at $5.60 per share.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
For the past five years, the Company has been a "shell" company with no
operational revenues and continuing general and administrative expenses.
In August 2001, the Company sold certain fixed and intangible assets essential
to its business operations and entered into a purchase agreement containing
provisions restricting the Company's ability to continue to engage in the
business engaged in by the Company prior to the transaction. Accordingly, the
Company's remaining operations have been limited to liquidating assets,
collecting accounts receivable, paying creditors, and negotiating and
structuring the transactions contemplated in the non-binding letter of intent or
the winding up of the Company's remaining business and operations, subject, in
either case, to the approval of the stockholders of the Company.
The transactions contemplated may never be consummated.
To date, the Company has been unsuccessful in finding a suitable merger partner.
The Company's remaining assets may not be sufficient to meet its ongoing costs
of remaining a shell company and paying its liabilities. The Company's Board of
Directors is considering other options, which may include a merger or similar
transaction with another entity, or liquidation of the Company under Chapter 7
of the U.S. Bankruptcy Code.
9
ITEM 3. CONTROLS AND PROCEDURES
The Company's President has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the President concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been made known to him in a timely
fashion. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the President completed his evaluation.
10
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Company*
3.1(a) Amendment to Certificate of Incorporation of the
Company*
3.1(b) Amendment to Certificate of Incorporation of the
Company**
3.2 By-laws of the Company*
3.2(b) Amendment to By-laws of the Company*
3.3 Letter Agreement, dated June 28, 2002, between the
Company and First Step***
4.1 Common Stock Certificate*
4.2 Voting Agreement among Messrs. Centner, de Ganon,
Cleek and Szollose*
31.1 Sarbanes-Oxley Act Section 302 Certification
32.1 Sarbanes-Oxley Act Section 900 Certification
* Incorporated by reference from the Company's Registration Statement on Form
SB-2, No. 333-4319.
** Incorporated by reference from the Company's Form 10-KSB for its fiscal year
ended December 31, 2000.
*** Incorporated by reference from the Registrant's Form 10-QSB/A filed on June
28, 2002.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
K2 DIGITAL, INC.
Date: November 14, 2006
By: /s/ Gary Brown
-----------------------------
Gary Brown
President
(Principal Financial and
Accounting Officer)
11