SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 October 31, 2004
[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from ______________ to _____________
- --------------------------------------------------------------------------------
Commission File Number: 000-30071
KIK Technology International, Inc.
(Exact name of small business issuer as specified in its charter)
California 91-2021602
(State of incorporation) (IRS Employer ID Number)
590 Airport Road, Oceanside CA 92054
(Address of principal executive offices)
(760) 967-2777
(Issuer's telephone number)
- --------------------------------------------------------------------------------
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 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: December 8, 2004: 25,171,865
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
KIK TECHNOLOGY INTERNATIONAL, INC.
Form 10-QSB for the Quarter ended October 31, 2004
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 19
Item 3 Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 23
SIGNATURES 23
2
PART I
ITEM 1 - FINANCIAL STATEMENTS
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 31, 2004 and 2003
(UNAUDITED)
October 31, October 31,
2004 2003
---------- ----------
ASSETS
CURRENT ASSETS
Cash on hand and in bank $ 63,104 $ 46,253
Accounts receivable
Trade, net of allowance for doubtful accounts
of approximately $14,230 and $9,262, respectively 293,798 449,655
Other 9,145 7,009
Inventories 365,330 339,691
Prepaid expenses 831 2,316
---------- ----------
TOTAL CURRENT ASSETS 732,208 844,924
---------- ----------
PROPERTY AND EQUIPMENT - AT COST,
NET OF ACCUMULATED DEPRECIATION 137,893 157,982
---------- ----------
OTHER ASSETS
Funds held in trust by officer 53,400 53,400
Refundable deposits 4,800 4,800
Deferred debt issuance costs, net of accumulated
amortization of approximately $21,840 and $20,930, respectively -- 910
---------- ----------
TOTAL OTHER ASSETS 58,200 59,110
---------- ----------
TOTAL ASSETS $ 928,301 $1,062,016
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - CONTINUED
October 31, 2004 and 2003
(UNAUDITED)
October 31, October 31,
2004 2003
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to investors, net of accompanying warrant
discount of approximately $-0- and $354, respectively $ 25,000 $ 74,646
Current maturities of long-term debt 28,403 3,738
Accounts payable - trade 358,209 365,842
Other accrued expenses 42,458 3,719
Management fee payable to majority shareholder 210,000 90,000
Advances from majority shareholder 16,000 16,000
----------- -----------
TOTAL CURRENT LIABILITIES 680,070 553,945
----------- -----------
LONG-TERM DEBT
Notes payable to investors, net of current maturities 19,000 --
Capital lease payable 6,968 11,666
----------- -----------
TOTAL LIABILITIES 706,038 565,611
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $0.001 par value
100,000,000 shares authorized
25,171,865 and 25,021,865 shares issued and outstanding 25,172 25,022
Additional paid-in capital 5,152,423 5,146,573
Accumulated deficit (4,955,332) (4,675,190)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 222,263 496,405
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 928,301 $ 1,062,016
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Nine and Three months ended October 31, 2004 and 2003
(UNAUDITED)
Nine months Nine months Three months Three months
ended ended ended ended
October 31, October 31, October 31, October 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES - net of returns and allowances $ 2,007,300 $ 2,712,570 $ 704,469 $ 990,843
COST OF SALES (1,765,599) (2,336,076) (585,276) (874,381)
----------- ----------- ----------- -----------
GROSS PROFIT 241,701 376,494 119,193 116,462
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling, general and administrative expenses 467,482 523,362 150,035 167,418
Compensation expense related to common stock
issuances at less than "fair value" -- 945 -- --
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 467,482 524,307 150,035 167,418
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (225,781) (147,813) (30,842) (50,956)
OTHER INCOME
Interest and other income (expense) - net (5,049) (2,012) (1,423) 997
----------- ----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (230,830) (149,825) (32,265) (49,959)
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET LOSS (230,830) (149,825) (32,265) (49,959)
OTHER COMPREHENSIVE INCOME -- -- -- --
----------- ----------- ----------- -----------
COMPREHENSIVE LOSS $ (230,830) $ (149,825) $ (32,265) $ (49,959)
=========== =========== =========== ===========
Net loss per weighted-average share
of common stock outstanding, calculated
on Net Loss - basic and fully diluted $ (0.01) $ (0.01) nil nil
=========== =========== =========== ===========
Weighted-average number of shares
of common stock outstanding 25,077,704 24,779,879 25,171,865 25,021,865
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended October 31, 2004 and 2003
(UNAUDITED)
Nine months Nine months
ended ended
October 31, October 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $(230,830) $(149,825)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 28,575 36,458
Amortization of warrant discount on notes payable -- 4,421
Expenses paid with common stock 6,000 6,780
Compensation expense related to common stock
issuances at less than "fair value" -- 945
(Increase) Decrease in
Accounts receivable - trade and other 76,786 (79,048)
Inventory (42,267) (38,280)
Prepaid expenses and other 1,861 (1,880)
Increase (Decrease) in
Accounts payable 71,436 268,796
Other accrued expenses 4 (68,301)
Accrued management fees to parent company 90,000 90,000
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES 1,565 70,066
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (8,915) (47,706)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (8,915) (47,706)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable to investors (7,000) --
Payments on long-term capital lease (3,060) (2,799)
Cash advanced by majority shareholder -- --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (10,060) (2,799)
--------- ---------
INCREASE (DECREASE) IN CASH (17,410) 19,561
Cash at beginning of period 80,514 26,692
--------- ---------
CASH AT END OF PERIOD $ 63,104 $ 46,253
========= =========
SUPPLEMENTAL DISCLOSURE OF INTEREST AND
INCOME TAXES PAID
Interest paid for the period $ 7,400 $ 982
========= =========
Income taxes paid for the period $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Trade accounts payable settled with issuance of common stock $ -- $ 73,401
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
KIK Technology International, Inc. (KTII) was incorporated on February 1, 2000
under the laws of the State of California as Russian-Imports.com.
Russian-Imports.com was initially founded to develop an internet e-commerce
website which would sell handmade lacquer boxes, Matroshka dolls and crystal
imported from Russia. This business plan was unsuccessful and, subsequently,
terminated. The Company then adopted a business plan to locate and combine with
an existing, privately-held company which is profitable or, in management's
view, has growth potential, irrespective of the industry in which it is engaged.
On September 4, 2001, KTII (formerly Russian-Imports.com) issued 16,700,000
shares of restricted, unregistered common stock to KIK Tire Technologies, Inc.
(a publicly-owned Canadian corporation) (KTTI) for 100.0% of the issued and
outstanding stock of KIK Technology, Inc. (a wholly-owned subsidiary of KTTI).
By virtue of this transaction, KIK Technology, Inc. became a wholly-owned
subsidiary of KTII and KTTI became an approximate 73.6% shareholder in KTII.
Concurrent with this transaction, Russian-Imports.com changed it's corporate
name to KIK Technologies International, Inc.
At the transaction date, KTII was a "shell company" as the Company had no assets
or liabilities, had generated no revenues since inception and had incurred total
expenses of approximately $940,000 since its inception on February 1, 2000
through the September 4, 2001 transaction.
KIK Technology, Inc (KTI) was incorporated in June 1988 under the laws of the
State of California. KTI manufactures and markets an extensive and high quality
line of off-highway micro-cellular polyurethane tires for the healthcare, light
industrial, lawn and garden and recreational industries. KTI operates from a
sole manufacturing plant and marketing offices located in Oceanside, CA.
The Company's principal raw materials are purchased from a sole supplier who is
also a major customer for the Company's products. In the event of any disruption
in the availability of raw materials or a market for the Company's products
purchased by this key supplier, the Company may experience a negative economic
impact. The Company believes that suppliers of raw materials are available at
comparable prices and management is seeking other avenues of distribution of the
Company's products to consumers. Management is of the opinion that no
interruption of either raw materials or product demand will occur.
NOTE B - PREPARATION OF FINANCIAL STATEMENTS
The acquisition of KIK Technology, Inc. (KTI), on September 4, 2001, by KTII
effected a change in control of KTII and was accounted for as a "reverse
acquisition" whereby KTI is the accounting acquiror for financial statement
purposes. Accordingly, the historical consolidated financial statements of the
Company are those of KTI from it's inception and those of the consolidated
entity subsequent to the September 4, 2001 transaction date.
The Company follows the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America and has
adopted a year-end of January 31.
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.
7
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - PREPARATION OF FINANCIAL STATEMENTS - CONTINUED
Management further acknowledges that it is solely responsible for adopting sound
accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB/A for the year ended
January 31, 2004. The information presented within these interim financial
statements may not include all disclosures required by generally accepted
accounting principles and the users of financial information provided for
interim periods should refer to the annual financial information and footnotes
when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending January 31, 2005.
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
These financial statements reflect the books and records of KIK Technology
International, Inc. (formerly Russian-Imports.com) (KTII) and KIK Technology,
Inc. (KTI) as of and for the periods ended October 31, 2004 and 2003,
respectively. All significant intercompany transactions have been eliminated in
consolidation. The consolidated entities are referred to as Company.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on
hand and in banks, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, to be
cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
(Remainder of this page left blank intentionally)
8
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
2. Accounts receivable and Revenue Recognition
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United
States and are principally concentrated in the Midwest region of the
country. Depending upon management's assessment of creditworthiness and
order size, certain shipments are made on "COD" terms using common
carriers. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts receivable shown on the balance sheet at the date of
non-performance.
The Company recognizes revenue from the sale of tires and accessories upon
shipment to, or receipt by customers, depending upon contractual terms and
when there is no significant uncertainty regarding the consideration to be
received and the associated costs to be incurred. Additionally, the Company
recognizes reductions of recorded revenue for product returns from
unsatisfied customers and other billing adjustments or corrections, at the
point that the returned products are received by the Company or upon the
completion of negotiations between the Company and it's customer.
3. Inventory
Inventory consists of raw materials, principally chemical feedstocks, and
finished goods, principally tires and accessories manufactured by the
Company and other minor miscellaneous items purchased from third-party
vendors for resale as a component of the Company's products.
Inventory is valued at the lower of cost or market value, using principally
the average cost method.
4. Property and Equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives, generally two (2) to seven (7)
years, of the individual assets using the straight-line method. Gains and
losses from the disposition of property and equipment are included in
operations as incurred.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company follows the policy of evaluating all property and equipment as of
the end of each reporting quarter. For each of the years ended January 31,
2004 and 2003 and the period through October 31, 2004, no charges to
operations were made for impairments in the future benefit of property and
equipment.
5. Deferred Debt Issue Costs
Deferred debt issue costs represent monies paid investment bankers and
legal counsel in connection with the issuance of $75,000 in convertible
notes payable. These costs were amortized as a component of operations over
the life of the underlying debt instrument using the straight line method.
(Remainder of this page left blank intentionally)
9
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At October 31, 2004 and 2003, the deferred tax asset and deferred
tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization, allowance for doubtful accounts and vacation
accruals.
As of October 31, 2004 and 2003, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved.
7. Advertising costs
The Company does not conduct any direct response advertising activities.
For non-direct response advertising, the Company charges the costs of these
efforts to operations at the first time the related advertising is
published.
8. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common shareholders by the weighted-average number of
common shares outstanding during the respective period presented in our
accompanying financial statements. Fully diluted earnings (loss) per share
is computed similar to basic income (loss) per share except that the
denominator is increased to include the number of common stock equivalents
(primarily outstanding options and warrants).
Common stock equivalents represent the dilutive effect of the assumed
exercise of the outstanding stock options and warrants, using the treasury
stock method, at either the beginning of the respective period presented or
the date of issuance, whichever is later, and only if the common stock
equivalents are considered dilutive based upon the Company's net income
(loss) position at the calculation date.
At October 31,2004 and 2003, all of the Company's issued and outstanding
warrants, options and convertible debt are considered antidilutive due to
the Company's net operating loss position.
9. Employee Stock Options
For periods prior to November 1, 2002, the Company chose to account for
employee stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25),
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, employee compensation cost for stock options and warrants is
measured as the excess, if any, of the market price of the Company's stock
at the date of the grant over the amount an employee must pay to acquire
the stock. This treatment was allowed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123).
In December 2002, FASB issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS 148). This statement amends SFAS 123 and provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. This
statement also amends the disclosure requirements of SFAS 123 to require
more prominent and frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for financial statements
issued for fiscal years ending after December 15, 2002. Effective November
1, 2003, the first day of the reporting quarter including the effective
date of SFAS 148, the Company's Board of Directors, in conjunction with
public opinion and SFAS 148, elected to expense the imputed compensation
cost related to any stock options granted during Fiscal 2003 and for future
periods.
10
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. Employee Stock Options - continued
The Company did not issue any stock options during Fiscal 2004 or Fiscal
2003 and the adoption of SFAS 148 did not have a material impact on our
results of operations or financial condition.
10. New and Pending Accounting Pronouncements
Statement of Financial Accounting Standard (SFAS) No. 143 establishes
accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is effective in
fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company adopted SFAS No. 143 effective February 1, 2003 and the
adoption had no impact on its consolidated results of operations and
financial position.
SFAS No. 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS No.
144 superseded Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS No. 121), and APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". The Company adopted SFAS No. 144
effective February 1, 2002. The adoption of SFAS No. 144 had no material
impact on Company's consolidated financial statements.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
SFAS No. 13, and Technical Corrections." This Statement rescinds SFAS,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment
of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements" and SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers". This Statement amends SFAS No. 13, "Accounting
for Leases," to eliminate an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to sale-
leaseback transactions. We do not expect the adoption to have a material
impact to our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 did not have a
material impact on the Company's financial position or results of
operations.
(Remainder of this page left blank intentionally)
11
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. New and Pending Accounting Pronouncements - continued
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002, with earlier application permitted in
certain circumstances. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods
beginning after December 15, 2002. The adoption of this statement did not
have a material impact on our financial position or results of operations
as we have not elected to change to the fair value based method of
accounting for stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by
which one company includes another entity in its consolidated financial
statements. Previously, the criteria were based on control through voting
interest. Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. A company that
consolidates a variable interest entity is called the primary beneficiary
of that entity. The consolidation requirements of Interpretation 46 apply
immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The adoption did not have a material impact to our financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends
SFAS No. 133 to provide clarification on the financial accounting and
reporting of derivative instruments and hedging activities and requires
that contracts with similar characteristics be accounted for on a
comparable basis. The provisions of SFAS No. 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149
did not have a material impact on our results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
SFAS No. 150 establishes standards on the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The adoption of SFAS No.
150 did not have a material impact on our results of operations or
financial position.
(Remainder of this page left blank intentionally)
12
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
NOTE E - CONCENTRATIONS OF CREDIT RISK
KTII and KTI maintain their respective cash accounts in financial institutions
subject to insurance coverage issued by the Federal Deposit Insurance
Corporation (FDIC). Under FDIC rules, both KTII and KTI are entitled to
aggregate coverage of $100,000 per account type per separate legal entity per
financial institution. During the years ended January 31, 2004 and 2003 and for
the period through October 31, 2004, respectively, KTTI and KTI, from
time-to-time, had deposits in a financial institution with credit risk exposures
in excess of statutory FDIC coverage. The Company has incurred no losses as a
result of any of these unsecured situations.
NOTE F - INVENTORIES
Inventories consist of the following at October 31, 2004 and 2003:
October 31, October 31,
2004 2003
-------- --------
Raw materials $ 61,038 $111,415
Finished goods 304,292 228,276
-------- --------
Total $365,330 $339,691
======== ========
NOTE G - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31, 2004 and 2003:
October 31, October 31,
2004 2003 Estimated life
--------- --------- --------------
Machinery and Equipment $ 596,796 $ 576,496 7 years
Office furniture and fixtures 25,441 24,534 5 years
Leasehold improvements 14,180 14,180 2 years
Vehicles 9,279 9,279 5 years
--------- ---------
645,696 624,489
Less accumulated depreciation (507,803) (466,507)
--------- ---------
Net property and equipment $ 137,893 $ 157,982
========= =========
13
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - PROPERTY AND EQUIPMENT - CONTINUED
Total depreciation expense for the nine month periods ended October 31, 2004 and
2003 was approximately $28,575 and $36,458, respectively.
NOTE H - FUNDS HELD IN TRUST BY OFFICER
In May 2001, the Company advanced $53,400 to its President to hold in trust as a
contingency fund for the sole use of the Company in the event of a unanticipated
cash shortfall. The advance bears interest at 4.0% annually and is unsecured.
The original documentation required repayment of the advance and accrued, but
unpaid, interest in May 2003. As of October 31, 2004, with the approval of the
Company's Board of Directors, the Company's President continues to maintain
these funds as trustee on behalf of the Company.
NOTE I - NOTES PAYABLE TO INVESTORS
Pursuant to the terms of a private placement agreement, the Company attempted to
raise up to $600,000 through the placement of two-year senior notes bearing
interest at 10% payable quarterly. This Private Placement Memorandum was
terminated by the Company during the fiscal quarter ended October 31, 2002.
In November 2001, the Company entered into an agreement with an investment
banker whereby the investment banker would act as exclusive dealer-manager in
this private placement of securities to be issued by the Company pursuant to
Regulation D of the Securities Act of 1933, as amended. As compensation, the
investment banker was paid $15,000 for professional fees, received a commission
equal to 10% of the gross proceeds, an unaccountable expense allowance equal to
4% of the gross proceeds, and for every $500,000 raised, 150,000 shares of the
Company's restricted, unregistered common stock. Such shares will be issued upon
completion of the private placement. In addition, the investment banker will
have the option to nominate one person to the Company's Board of Directors if at
least $2,000,000 is raised. As of the termination of this Private Placement
Memorandum, only $75,000 had been successfully raised.
Note holders can elect, with the consent of the Company, to accept Company
common stock in lieu of cash interest payments. Such payments in stock would be
calculated at 50% of the daily average of the market price of the common stock
for the 30-calendar days preceding the interest due date. After six months from
the date of issue of the notes, the Company can convert the notes to common
stock if the daily average market price of the Company's common stock for any
30-calendar days after the initial six-month period equals or exceeds $1.00. The
conversion of the notes to common stock would also be calculated at 50% of the
daily average market price for the 30 days prior to the Company giving notice of
its plan to convert.
In conjunction with the offering of the notes, each note holder was given one
warrant for each $1.00 invested. Each warrant allows the holder to purchase one
share of the Company's common stock at an initial exercise price of $0.60 per
share, and is exercisable for two years. In March 2002, the Company repriced the
outstanding warrants to an exercise price of $0.40 per share.
(Remainder of this page left blank intentionally)
14
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - NOTES PAYABLE TO INVESTORS - CONTINUED
Pursuant to the private placement, the Company sold a $50,000 convertible note
on November 12, 2001 and a $25,000 convertible note on December 26, 2001 to two
unrelated investors. Warrants to purchase a combined total of 75,000 shares of
the Company's common stock at $0.60 per share were also issued to the investors.
The warrants were valued at $11,789 using the Black-Scholes option-pricing
model, and therefore $11,789 of the total debt proceeds of $75,000 was allocated
to the warrants, resulting in a discount on the notes, was amortized to interest
expense over the initial term of the underlying debt. During the years ended
January 31, 2004 and 2003, approximately $9,100 and $5,900 of the discount was
amortized to interest expense. The weighted average assumptions utilized to
value the warrants using the Black-Scholes option-pricing model were as follows:
Expected life of the option: The initial life of the corresponding option,
generally two (2) years
Expected volatility in
the Company's stock price: 150.0%, which was based on fluctuations of the
Company's stock price over the past Fiscal year.
Expected dividends: Zero (0.00) based on past performance
Anticipated risk free
interest rate: Estimated to be 2.80%.
The convertible notes contained a beneficial conversion feature valued at a
combined total of approximately $63,000. However, because the conversion
features were fully contingent upon the occurrence of certain future events, the
Company did not record a discount resulting from the beneficial conversion
feature.
The notes matured on November 12, 2003 ($50,000) and December 26, 2003
($25,000), respectively.
On February 16, 2004, the Company restructured the $50,000 convertible note.
Under the restructured terms, the Company paid all accrued interest and a $3,000
principal reduction on March 16, 2004, as of February 16, 2004. The Company is
obligated to pay $2,000 per month, plus accrued interest, for the period from
March 16, 2004 through August 16, 2004 and $1,000 per month, plus accrued
interest, on the 16th of each month thereafter until all outstanding amounts are
paid in full. The restructured note bears interest at 10.0% per annum.
The $50,000 restructured note is convertible into shares of unregistered,
restricted common stock at the discretion of the Noteholder with the Company's
consent, provided that the daily average (calculated from the last sale price
daily) of the market price of the Company's common stock for any 30 calendar day
period equals or exceeds $1.00 per share, with the conversion being calculated
at a 50% discount of such 30 day average.
The $50,000 Noteholder also has the election to receive the monthly interest
payments in restricted, unregistered common stock of the Company at the daily
average (calculated from the last sale price daily) of the market price of the
Company's common stock for the 30 calendar day period prior to the interest due
date, with the number of shares to be issued calculated at a 50% discount of
such 30 day average.
Through October 31, 2004, the Company has paid approximately $7,000 in principal
and $6,667 in cumulative accrued interest on the $50,000 restructured
convertible note.
The $25,000 convertible note is in default and no demand for payment has been
made to the Company. The Company continues to accrue interest on this
convertible note in accordance with the original terms and conditions.
The aggregate maturities of the notes are as follows:
Balance as of October 31, 2004 $ 68,000
Less current portion (49,000)
--------
Long-term portion $ 19,000
========
15
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - NOTES PAYABLE TO INVESTORS - CONTINUED
The Company recognized interest expense related to the all outstanding debt,
including the convertible notes payable, equipment financing and trade accounts
payable service charges of approximately $5,930 and $11,002 for the nine month
periods ended October 31, 2004 and 2003, respectively.
NOTE J - CAPITAL LEASE PAYABLE
Capital lease payable is as follows:
October 31, October 31,
2004 2003
-------- --------
$21,080 capital lease payable to a finance corporation
Interest at 8.60%. Payable in monthly installments
of approximately $432, including accrued interest
Final maturity due in April 2007. Collateralized by
equipment $ 11,371 $ 15,404
Less current maturities (4,403) (3,738)
-------- --------
Long-term portion $ 6,968 $ 11,666
======== ========
Future annual maturities of long-term capital leases payable, as of January 31,
2004, for each of the following years ending January 31 are as follows:
Year ending
January 31, Amount
----------- ------
2005 $ 4,095
2006 4,468
2007 4,872
2008 996
-------
Total $14,431
=======
NOTE K - INCOME TAXES
The components of income tax (benefit) expense for the nine month periods ended
October 31, 2004 and 2003, respectively, are as follows:
October 31, October 31,
2004 2003
------- -------
Federal:
Current $ -- $ --
Deferred -- --
------- -------
-- --
------- -------
State:
Current -- --
Deferred -- --
------- -------
-- --
------- -------
Total $ -- $ --
======= =======
16
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - INCOME TAXES - CONTINUED
The Company has a net operating loss carryforward of approximately $4,600,000 to
offset future taxable income. Subject to current regulations, this carryforward
will begin to expire in 2005. The amount and availability of the net operating
loss carryforwards may be subject to limitations set forth by the Internal
Revenue Code. Factors such as the number of shares ultimately issued within a
three year look-back period; whether there is a deemed more than 50 percent
change in control; the applicable long-term tax exempt bond rate; continuity of
historical business; and subsequent income of the Company all enter into the
annual computation of allowable annual utilization of the carryforwards.
The Company's income tax expense for the nine month periods ended October 31,
2004 and 2003, respectively, are as follows:
October 31, October 31,
2004 2003
-------- --------
Statutory rate applied to loss before income taxes $(78,500) $(51,000)
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Other, including reserve for deferred tax asset 78,500 51,000
-------- --------
Income tax expense $ -- $ --
======== ========
Temporary differences, consisting primarily of net operating loss carryforwards,
statutory deferrals of expenses for organizational costs and accrued, but
unpaid, accruals for officer compensation and statutory differences in the
depreciable lives for property and equipment, between the financial statement
carrying amounts and tax bases of assets and liabilities give rise to deferred
tax assets and liabilities as of January 31, 2004 and 2003, respectively:
January 31, January 31,
2004 2003
----------- -----------
Deferred tax assets
Net operating loss carryforwards $ 1,564,000 $ 1,496,000
Less valuation allowance (1,564,000) (1,496,000)
----------- -----------
Net Deferred Tax Asset $ -- $ --
=========== ===========
During the Fiscal years ended January 31, 2004 and 2003, respectively, the
valuation allowance for the deferred tax asset increased (decreased) by
approximately $68,000 and $(204,000).
(Remainder of this page left blank intentionally)
17
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMON STOCK TRANSACTIONS
Effective February 1, 2003 and May 1, 2003, the Company and the holders of the
two convertible notes agreed for the payment of accrued interest in restricted,
unregistered common stock. The Company issued an aggregate 206,987 shares of
restricted, unregistered common stock in payment of accrued interest. These
transactions were valued at an aggregate approximately $3,782. The convertible
note terms allow for the payment of accrued interest with restricted,
unregistered common stock using an average value of 50% of the daily average of
the market price of the common stock for the 30 calendar days preceding the
interest due date. In both instances, the closing stock price on the settlement
date was in excess of the prescribed calculation. The differential between the
discounted "fair value" and the settlement price resulted in a charge to
operations of approximately $945 for compensation expense related to common
stock issuances at less than "fair value". The Company relied upon Section 4(2)
of The Securities Act of 1933, as amended, for an exemption from registration on
these shares.
In February 2003, the Company issued 150,000 restricted, unregistered shares of
common stock in payment of a contract for marketing services. This transaction
was valued at approximately $3,000, which was equal to or in excess of the
discounted closing price of the Company's common stock on the NASDAQ Electronic
Bulletin Board on the date of each respective transaction. The Company relied
upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption
from registration on these shares.
In April 2003, the Company issued 22,500 restricted, unregistered shares of
common stock in settlement of a January 31, 2003 trade account payable in the
amount of approximately $552. The value of this transaction was equal to or in
excess of the discounted closing price of the Company's common stock on the
NASDAQ Electronic Bulletin Board on the date of each respective transaction. The
Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for
an exemption from registration on these shares.
In May 2003, the Company issued 575,664 restricted, unregistered shares of
common stock in payment of trade accounts payable to the Company's primary legal
counsel in the amount of approximately $72,849. The value of this transaction
was equal to or in excess of the discounted closing price of the Company's
common stock on the NASDAQ Electronic Bulletin Board on the date of each
respective transaction. The Company relied upon Section 4(2) of The Securities
Act of 1933, as amended, for an exemption from registration on these shares.
In July 2004, the Company issued 150,000 restricted, unregistered shares of
common stock in payment of a contract for professional services. This
transaction was valued at approximately $6,000, which was equal to or in excess
of the discounted closing price of the Company's common stock on the NASDAQ
Electronic Bulletin Board on the date of each respective transaction. The
Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for
an exemption from registration on these shares.
NOTE M - STOCK WARRANTS
At January 31, 2004, the 75,000 warrants sold in conjunction with the
convertible notes private placement had expired.
In conjunction with the reverse acquisition, which was concluded in September
2001, The Company granted 2,300,000 warrants to certain shareholders of KTTI.
These warrants have an exercise price of approximately $0.05 per share and
expired in April 2004.
(Remainder of this page left blank intentionally)
18
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - STOCK WARRANTS - CONTINUED
The following table lists the issued and outstanding stock warrants as of
October 31, 2004, January 31, 2004 and 2003, respectively:
Warrants
issued Exercise price
------ --------------
Balance at January 31, 2002 2,375,000
Granted --
Exercised --
Forfeited/Expired --
----------
Balance at January 31, 2003 2,375,000
Granted --
Exercised --
Forfeited/Expired (75,000) $0.40
----------
Balance at January 31, 2004 2,300,000
Granted --
Exercised --
Forfeited/Expired (2,300,000)
----------
Balance at October 31, 2004 --
==========
Warrants exercisable at October 31, 2004 --
==========
Weighted-average exercise price per warrant N/A
==========
NOTE N - RELATED PARTY TRANSACTIONS
During the nine months ended October 31, 2004 and during the year ended January
31, 2004, the Company accrued approximately $90,000 and $120,000 in
administrative service fees payable to KTTI, respectively.
NOTE O - COMMITMENTS AND CONTINGENCIES
LEASED FACILITIES
The Company leases its facilities under a non-cancellable operating lease, which
expires in May 2005. The lease requires monthly payments as follows: $8,307 for
the first 12 months; $8,639 for the next 12 months and $8,984 for the next 12
months. Rent expense incurred under this lease was approximately $102,340 and
$97,800 for each of the years ended January 31, 2004 and 2003, respectively.
19
KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - COMMITMENTS AND CONTINGENCIES - CONTINUED
LEASED FACILITIES - CONTINUED
Future amounts due under this agreement are as follows:
Year ending
January 31, Amount
----------- ------
2005 $106,428
2006 35,936
--------
Total $142,364
========
EMPLOYMENT CONTRACT
In May 2000, KIK entered into an employment agreement with William M.
Knooihuizen, the Company's current President and Director. The term of the
agreement is for a period of five (5) years. For such services, KIK agreed to
pay Mr. Knooihuizen an annual salary in the amount of $143,000, to be paid
weekly.
NOTE P - SIGNIFICANT CUSTOMERS
During the year ended January 31, 2004, the Company had two separate customers
responsible for an aggregate of approximately 78.47% (69.06% and 9.41%,
respectively) of total sales. The largest customer is also a significant vendor
of raw materials. The largest key customer was responsible for approximately
48.95% of accounts receivable and 76.17% of accounts payable at January 31,
2004. The second key customer was responsible for approximately 1.72% of
accounts receivable and 0.00% of accounts payable at January 31, 2004. There
were no other customer(s) responsible for more than 10.0% of total net sales
during Fiscal 2004.
During the year ended January 31, 2003, the Company had two separate customers
responsible for an aggregate of approximately 80.3% (68.2% and 12.1%,
respectively) of total sales. The largest customer is also a significant vendor
of raw materials. The largest key customer was responsible for approximately
57.2% of accounts receivable and 0.0% of accounts payable at January 31, 2003.
The second key customer was responsible for approximately 9.02% of accounts
receivable and 0.0% of accounts payable at January 31, 2003. There were no other
customer responsible for more than 10.0% of total net sales during Fiscal 2003.
These significant customer trends and anticipated to continue into future
periods.
(Remainder of this page left blank intentionally)
20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS
(1) CAUTION REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this quarterly filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-QSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
(2) RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES OR PLAN OF OPERATION
OVERVIEW
During the nine month periods ended October 31, 2004 and 2003, respectively, the
Company achieved revenues of approximately $2,007,000 and $2,713,000. These
revenues were derived primarily from the sale of tire products. Net loss for the
nine month periods ended October 31, 2004 and 2003 was approximately $(231,000)
and $(150,000), respectively. The net loss for each of these six-month periods
include a cumulative year-to-date charge of approximately $90,000 for
administrative services to the Company from KIK Tire Technologies Inc., the
Company's publicly-owned Canadian majority shareholder. The net loss per share
of common stock for the nine months ended October 31, 2004 and 2003,
respectively, was approximately $(0.01) and $0.00.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes.
Nine months ended October 31, 2004 as compared to the nine months ended October
31, 2003
The Company posted net sales of approximately $2,007,000 for the nine months
ended October 31, 2004 as compared to net sales of approximately $2,713,000 for
the nine months ended October 31, 2003. The Company has begun to experience flat
sales volumes and revenues as a result of the general decline in the U. S.
economy, as well as the effects of some seasonal trends and the pressures of
foreign competition.
The Company's cost of sales decreased by approximately $570,000 to approximately
$1,766,000 for the nine months ended October 31, 2004 as compared to
approximately $2,336,000 for the nine months ended October 31, 2003. While the
Company has experienced relatively flat sales volumes and revenues during the
first nine months of Fiscal 2005, the Company is consistently subjected to cost
increases in raw material and ancillary supplies which are not readily passed
through to it's customers via product price increases. As a direct result of
these market factors, the Company has experienced decline in it's gross profit
margin to approximately 12.04% (approximately $241,700) for the first nine
months of Fiscal 2005 as compared to approximately 13.88% (approximately
$376,000) for the first nine months of Fiscal 2004.
General and administrative expenses decreased from approximately $523,000 for
the nine months ended October 31, 2003 to approximately $467,000 for the nine
21
months ended October 31, 2004. To the extent possible, management monitors and
controls the variable expenditures related to the Company's administration.
Included in these costs is a $10,000 per month administrative charge to KIK Tire
Technologies Inc., the Company's publicly-owned Canadian majority shareholder.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $63,000, $81,000 and
$46,000 at October 31, 2004, January 31, 2004 and October 31, 2003,
respectively. The Company maintained business liquidity and capital resources
during the year adequate to fund all capital and operating expense requirements.
Operations were primarily funded from internally generated funds, line of credit
borrowings, and capital raised via a private placement of securities in previous
years.
For the nine months ended October 31, 2004 and 2003, net cash provided by (used
in) operating activities was approximately $1,600 and $70,000, respectively. Net
cash provided by operating activities consists of cash received from sales of
products to customers, less purchases of raw materials, payment of payroll and
payment of other general operating expenses, including interest.
Cash used in investing activities was approximately $(8,900) and $(48,000) for
each of the nine month periods ended October 31, 2004 and 2003, respectively.
These cash utilizations was due solely to the acquisition of equipment used in
the manufacturing process.
The Company used cash in financing activities of approximately $(10,000) and
$(2,800) during the first nine months of Fiscal 2005 and Fiscal 2004,
respectively. All of these expenditures were related to the reduction in
outstanding principal on the Company's $50,000 convertible note payable and the
Company's equipment capital lease payable.
The Company believes that sufficient cash will be generated internally to fund
its operations for the next twelve months.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 to the Consolidated Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of the Company's Consolidated Financial Statements. The following is
a brief discussion of the more significant accounting policies and methods used
by the Company.
REVENUE RECOGNITION
Our revenue recognition policy is significant because our revenue is a key
component of our results of operations. The Company recognizes revenue from
the sale of tires and accessories. Revenue is recognized upon shipment to,
or receipt by customers, depending upon contractual terms and when there is
no significant uncertainty regarding the consideration to be received and
the associated costs to be incurred. Additionally, the Company recognizes
reductions of recorded revenue for product returns from unsatisfied
customers and other billing adjustments or corrections, at the point that
the returned products are either received by the Company or upon the
completion of negotiations between the Company and it's customer.
ACCOUNTS RECEIVABLE
The Company continuously monitors collections and payments from its
customers and maintains an allowance for estimated uncollectible accounts
based upon historical experience and specific customer collections issues
that have been identified. Depending upon management's assessment of a
customer's creditworthiness and order size, certain shipments are made on
"COD" terms using common carriers.
Since accounts receivable are concentrated in a relatively few customers, a
significant change in the liquidity or financial position of any one of
these customers could have a material adverse impact on the collectibility
of the Company's accounts receivable and future operating results. In the
event of complete non-performance by any customer or customers, the maximum
exposure to the Company would be the recorded amount of trade accounts
receivable shown on the balance sheet at the date of non-performance.
22
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
principally on the average cost method. The Company regularly reviews
inventory quantities on hand and records, when necessary, a provision for
excess and obsolete inventory based primarily on the Company's estimated
forecast of product demand and production requirements for the next twelve
months. Demand for the Company's products can fluctuate significantly. A
significant increase in the demand for the Company's products could result
in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand. In addition, the Company's industry is
characterized by rapid technological change, frequent new product
development and rapid product obsolescence that could result in an increase
in the amount of obsolete inventory quantities on hand. Additionally, the
Company's estimate of future product demand may prove to be inaccurate, in
which case the Company may have understated or overstated the provision
required for excess and obsolete inventory. Therefore, although the Company
makes every effort to ensure the accuracy of its forecasts of future
product demand, any significant unanticipated changes in demand or
technological developments could have a significant impact on the Company's
inventory value and reported operating results.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, defines a fair-value based method of accounting for
stock-based employee compensation plans and transactions in which an entity
issues its equity instruments to acquire goods and services from
non-employees, and encourages but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value.
For periods prior to November 1, 2002, the Company has chosen to account
for employee stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25),
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, employee compensation cost for stock options and warrants is
measured as the excess, if any, of the market price of the Company's stock
at the date of the grant over the amount an employee must pay to acquire
the stock. This treatment was allowed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123).
In December 2002, FASB issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS 148). This statement amends SFAS 123 and provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. This
statement also amends the disclosure requirements of SFAS 123 to require
more prominent and frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for financial statements
issued for fiscal years ending after December 15, 2002. Effective November
1, 2003, the first day of the reporting quarter including the effective
date of SFAS 148, the Company's Board of Directors, in conjunction with
public opinion and SFAS 148, elected to expense the imputed compensation
cost related to any stock options granted during Fiscal 2003 and for future
periods. The Company did not issue any stock options during Fiscal 2003 and
the adoption of SFAS 148 did not have a material impact on our results of
operations or financial condition.
ITEM 3 - CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer.
Based upon that evaluation, the Company's President and Chief Executive Officer
along with the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There have been no significant
changes in the Company's internal controls or in other factors, which could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
23
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
Exhibits
--------
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 -
Chief Executive Officer
31.2 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 -
Chief Financial Officer
32.1 Certifications pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
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.
KIK TECHNOLOGY INTERNATIONAL, INC.
Dated: December 8, 2004 /s/ Kuldip C. Baid
---------------- ----------------------------
Kuldip C. Baid
Chief Financial Officer
and Director
24