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, 2007
|_| 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 Identification Number)
Incorporation or Organization)
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 May14, 2007
----------------------------------------- --------------------------
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 - March 31, 2007 (unaudited).....................................................2
Condensed consolidated statements of operations and comprehensive loss
- three month periods ended March 31, 2007 (unaudited) and March 31, 2006 (unaudited)............................3
Condensed consolidated statements of cash flows
- three month periods ended March 31, 2007 (unaudited) and March 31, 2006 (unaudited)............................4
Notes to condensed consolidated financial statements..................................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................9
Item 3. Controls and Procedures...............................................................................................11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .....................................................................................12
SIGNATURES ...................................................................................................................12
1
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ........................................................................ $ 70,664
Note receivable - net ....................................................... 4,500
Investment in security available-for-sale ................................... 16,060
-----------
Total current assets .................................................. $ 91,224
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 124,510
Accrued expenses ......................................................... 9,000
-----------
Total current liabilities ............................................. 133,510
-----------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $0.01 par value, 1,000,000 shares authorized,
issued and outstanding ................................................ 165,000
Common Stock, $0.01 par value, 24,000,000 shares authorized; 5,400,116
shares issued ......................................................... 54,001
Additional paid-in capital ............................................... 8,317,910
Accumulated other comprehensive income ................................... 13,760
Accumulated deficit ...................................................... (7,773,661)
Less: Treasury stock, 417,417 shares, at cost ........................... (819,296)
-----------
Total stockholders' deficit ................................................. (42,286)
-----------
Total liabilities and stockholders' deficit ........................ $ 91,224
===========
See the accompanying notes to condensed consolidated
interim financial statements.
2
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2007 2006
Revenues $ -- $ --
Other income 895 800
General and administrative expenses 11,787 12,388
----------- -----------
Net loss $ (10,892) $ (11,588)
=========== ===========
Comprehensive loss:
Net loss $ (10,892) $ (11,588)
Other comprehensive loss, unrealized holding gain (loss)
on available-for-sale security arising during the
period: (2,040) 6,240
----------- -----------
Comprehensive loss $ (12,932) $ (5,348)
=========== ===========
Net loss per common share -
basic and diluted $ (0.002) $ (0.002)
----------- -----------
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,982,699
----------- -----------
See the accompanying notes to condensed consolidated
interim financial statements.
3
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,892) $ (11,588)
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 8,308 (62,764)
--------- ---------
Net cash used in operating activities (2,584) (74,352)
CASH PROVIDED BY FINANCING ACTIVITIES
Gross proceeds from sale of convertible preferred securities -- 165,000
--------- ---------
Net increase (decrease) in cash (2,584) 90,648
CASH, beginning of period
73,248 1,360
--------- ---------
CASH, end of period $ 70,664 $ 92,008
========= =========
See the accompanying notes to condensed consolidated
interim financial statements.
4
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. PRIOR BUSINESS AND GOING CONCERN CONSIDERATION
Through August 2001, K2 Digital, Inc. (together with its wholly-owned
subsidiary, collectively, 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 an unrelated party, Integrated Information Systems, Inc. ("IIS")
and effectively became a "shell" company with no revenues and continuing general
and administrative expenses.
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 March 31, 2007, the
Company has an accumulated deficit of approximately $7.8 million, a minimal cash
balance and working capital and stockholders' deficits of approximately $42,300.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying condensed consolidated interim 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 has established a provision
for $9,000 for to amounts due after December 31, 2006.
On January 29, 2007, the Company signed a letter of intent with New Century
Structures, Inc. ("NCSI") a Florida corporation, whereby NCSI will merge with
the Company. K2 Acquisition Corp. ("Merger Sub") and NCSI intend to enter into a
merger agreement whereby Merger Sub will merge with and into NCSI. In connection
with the merger, the shareholders of NCSI will acquire a controlling interest in
K2. NCSI's designees will be appointed as directors of K2 and the Board and
shareholders will approve a 1 x 10 reverse split of K2 shares such that the
current shareholders of K2 own approximately 500,000 post merger shares
representing 10% of the post merger shares issued and outstanding. In connection
with this transaction, Avante Holding Group, Inc. has entered into an agreement
with NPOWR Digital Media, Inc. to acquire 1,000,000 shares of K2 preferred stock
which is convertible into 1,500,000 common shares.
The parties anticipate closing the merger transaction during K2's second fiscal
quarter. The transaction is subject to the normal conditions for closing,
including satisfactory due diligence by the parties.
5
Incorporated in Florida in July 2001, NCSI provides architectural/engineering,
manufacturing and construction services for modular facilities utilizing
concrete and structural insulated panels (SIPS) for use in commercial,
educational and municipalities and residential developments. The Company
utilizes processes that meet the scrutiny for classrooms as well as several
government agencies, including NASA and the Smithsonian.
The parties anticipate closing the merger transaction during K2's second fiscal
quarter. The transaction is subject to the normal conditions for closing,
including satisfactory due diligence by the parties. There is no assurance that
the merger will close. In such case, 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.
SUBSEQUENT EVENTS
Under the terms of the termination of the agreement with NPOWR, certain amounts
owed to K2 under the LOI were payable in the form of a note. With the
acquisition by Avante of the K2 preferred stock held by NPOWR, $13,500 due under
the note was assumed by Avante. The note was paid in full subsequent to March
31, 2007.
On April 27, 2007, the Company signed a Merger Agreement with New Century
Structures, Inc. ("NCSI") a Florida corporation, whereby NCSI will merge with
the Company. K2 Acquisition Corp. ("Merger Sub"). In connection with the merger,
the shareholders of NCSI will acquire a controlling interest in K2. NCSI's
designees will be appointed as directors of K2 and the Board and shareholders
will approve a 1 x 10 reverse split of K2 shares such that the current
shareholders of K2 own approximately 500,000 post merger shares representing 10%
of the post merger shares issued and outstanding. In connection with this
transaction, Avante Holding Group, Inc., an affiliate of NCSI, has acquired
1,000,000 shares of K2 preferred stock which is convertible into 1,500,000
common shares. Further, prior to closing of the transaction, K2 shall be
entitled to issue up to 500,000 stock options with an exercise price of $0.085
per share to its officers and directors.
6
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accompanying unaudited condensed consolidated interim 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 March 31, 2007
and the financial results for the three months ended March 31, 2007 and 2006, 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 months ended March 31, 2007 and 2006 are
not necessarily indicative of the results of operations to be expected for a
full fiscal year. These condensed consolidated interim financial statements
should be read in conjunction with the consolidated financial statements for the
fiscal year ended December 31, 2006, 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 interim 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 condensed consolidated interim 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 condensed consolidated interim 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
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 months ended March 31, 2007 and 2006 were the same.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company 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 months ended March 31,
2007 and 2006, the Company did not grant options pursuant to its stock option
plans.
7
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. These shares do not carry a dividend
and are not redeemable by the Company.
8
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.
On January 29, 2007, the Registrant signed a letter of intent with New Century
Structures, Inc. ("NCSI") a Florida corporation, whereby NCSI will merge with
the Company. K2 Acquisition Corp. ("Merger Sub") and NCSI intend to enter into a
merger agreement whereby Merger Sub will merge with and into NCSI. In connection
with the merger, the shareholders of NCSI will acquire a controlling interest in
K2. NCSI's designees will be appointed as directors of K2 and the Board and
shareholders will approve a 1 x 10 reverse split of K2 shares such that the
current shareholders of K2 own approximately 500,000 post merger shares
representing 10% of the post merger shares issued and outstanding. In connection
with this transaction, Avante Holding Group, Inc. has entered into an agreement
with NPOWR Digital Media, Inc. to acquire 1,000,000 shares of K2 preferred stock
which is convertible into 1,500,000 common shares.
The parties anticipate closing the merger transaction during K2's second fiscal
quarter. The transaction is subject to the normal conditions for closing,
including satisfactory due diligence by the parties.
On April 27, 2007, the Registrant signed a Merger Agreement with New Century
Structures, Inc. ("NCSI") a Florida corporation, whereby NCSI will merge with
the Company. K2 Acquisition Corp. ("Merger Sub"). In connection with the merger,
the shareholders of NCSI will acquire a controlling interest in K2. NCSI's
designees will be appointed as directors of K2 and the Board and shareholders
will approve a 1 x 10 reverse split of K2 shares such that the current
shareholders of K2 own approximately 500,000 post merger shares representing 10%
of the post merger shares issued and outstanding. In connection with this
transaction, Avante Holding Group, Inc., an affiliate of NCSI, has acquired
1,000,000 shares of K2 preferred stock which is convertible into 1,500,000
common shares.
Incorporated in Florida in July 2001, NCSI provides architectural/engineering,
manufacturing and construction services for modular facilities utilizing
concrete and structural insulated panels (SIPS) for use in commercial,
educational and municipalities and residential developments. The Company
utilizes processes that meet the scrutiny for classrooms as well as several
government agencies, including NASA and the Smithsonian.
9
RESULTS OF OPERATIONS
During the three ended March 31, 2007, the Company, operating as a "shell,"
incurred a net loss of approximately $10,900. During the three months ended
March 31, 2006, the Company incurred a net loss of approximately $11,600. The
Company's net loss for the three months ended March 31, 2007 consists primarily
of accounting, legal and other expenses related to maintaining the "shell"
corporation.
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 $70,664 at March 31, 2007 decreased by ($2,584) or
approximately 3.5% compared to the $73,248 cash balance at December 31, 2006.
This decrease is primarily due to the Company's ongoing expenses of operating a
"shell".
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.
10
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.
11
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*
32.1 Sarbanes-Oxley Act Section 302 Certification
32.2 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: May 14, 2007
By: /s/ Gary Brown
-----------------------------
Gary Brown
President
(Principal Financial and
Accounting Officer)
12