UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _________ to _________
Commission File Number: 0-27418
KINETIKS.COM, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 76-0478045
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
700 Rockmead, Suite 240, Kingwood, Texas 77339
(Address of principal executive offices) (Zip Code)
(713) 359-7638
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
As of June 30, 1996 there were 5,380,000 shares of Common Stock, par value
$0.001 per share, outstanding.
Transitional Small Business Disclosure Format
(Check One): YES [ ] NO [X]
<PAGE>
KINETIKS.COM, INC.
INDEX TO FORM 10-QSB
For the Quarter Ended June 30, 1996
Part I Financial Information
Item 1.Financial Statements (unaudited)
PAGE
Balance Sheet......................................................3
Statements of Operations...........................................4
Statements of Cash Flows...........................................5
Notes to Financial Statements......................................6
Item 2.Management's Discussion and Analysis or
Plan of Operation................................................8
Part IIOther Information
Signatures....................................................................12
Exhibit 11.01: Statement of Computation of earning per share.................13
2
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
KINETIKS.COM, INC.
BALANCE SHEET
(UNAUDITED)
June 30,
1996
------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 386,920
Short-term investments ..................................... 245,560
Accounts receivable ........................................ 67,870
Notes and advances due from officers and
employees .................................................. 36,501
Prepaid expenses and other current assets .................. 76,601
-----------
Total current assets .......................................... 813,452
Property and equipment, net ................................... 497,168
Prepaid stock offering cost ................................... 25,000
License agreement, net ........................................ 227,887
===========
Total assets .................................................. $ 1,563,507
===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Notes payable .............................................. $ 224,935
Note payable to shareholder ................................ 40,000
Accounts payable ........................................... 98,169
Accrued compensation ....................................... 36,994
Other accrued expenses ..................................... 27,390
Deferred revenue ........................................... 13,713
-----------
Total current liabilities ..................................... 441,201
Note payable to shareholder officer ........................... 220,351
Stockholders' equity:
Preferred stock, $.001 par value, 500,000
shares authorized; none issued .......................... --
Common stock, $.001 par value; authorized
shares -
20,000,000, 5,380,000 issued and
outstanding at June 30, 1996 ............................ 5,380
Additional paid-in capital ................................. 5,141,414
Accumulated deficit ........................................ (4,244,839)
-----------
Total stockholders' equity .................................... 901,955
-----------
Total liabilities and stockholders' equity .................... $ 1,563,507
===========
See accompanying notes.
3
KINETIKS.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Period from
January 18,
1995
Three months Three months Six months (inception)
ended ended ended to
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
----------- ----------- ----------- -----------
Revenue ............ $ 397,199 $ -- $ 642,408 $ --
Operating expenses:
Cost of revenue . 233,122 -- 513,081 --
Research and
development ..... 64,386 -- 102,125 --
Sales and
marketing ....... 1,024,586 -- 1,702,945 --
General and
administrative .. 436,951 74,444 856,536 103,526
----------- ----------- ----------- -----------
1,759,045 74,444 3,174,687 103,526
----------- ----------- ----------- -----------
Operating loss ..... (1,361,846) (74,444) (2,532,279) (103,526)
Other income
(expense):
Interest income . 8,880 -- 42,820 --
Other income .... 1,630 -- 3,312 --
Interest expense (13,278) -- (24,654) --
----------- ----------- ----------- -----------
Net loss ........... $(1,364,614) $ (74,444) $(2,510,801) $ (103,526)
=========== =========== =========== ===========
Net loss per
common and common
equivalent share $ (0.25) $ (0.01) $ (0.47) $ (0.02)
=========== =========== =========== ===========
Shares used in
computing net loss
per
common and
common
equivalent share 5,380,000 5,249,109 5,380,000 5,249,109
=========== =========== =========== ===========
See accompanying notes.
4
KINETIKS.COM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January 18,
Three Three 1995
months months Six months (inception)
ended ended ended to
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating
activities .......................................... $(1,204,223) $(61,368) $(2,565,428) $ (87,376)
INVESTING ACTIVITIES
Purchase of property and equipment .................. (78,823) (15,446) (377,072) (24,641)
Maturity of short term investments .................. 1,255,283 -- 1,255,283 --
----------- -------- ----------- ---------
Net cash provided by investing
activities .......................................... 1,176,460 (15,446) 878,211 (24,641)
FINANCING ACTIVITIES
Proceeds from notes payable ......................... -- 77,429 270,000 113,445
Repayment of note payable to
shareholder ......................................... (62,827) -- (92,827) --
----------- -------- ----------- ---------
Net cash provided by financing
activities .......................................... (62,827) 77,429 177,173 113,445
----------- -------- ----------- ---------
Net (decrease) increase in cash ..................... (90,590) 615 (1,510,044) 1,428
Cash and cash equivalents at
beginning
of period ....................................... 477,510 813 1,896,964 --
----------- -------- ----------- ---------
Cash and cash equivalents at end
of period ....................................... $ 386,920 $ 1,428 $ 386,920 $ 1,428
=========== ======== =========== =========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND FINANCING
TRANSACTIONS
Cash paid during the period for
interest ............................................ $ 8,011 $ -- $ 8,011 $ --
Property and equipment acquired
from
shareholder in exchange for a
note payable .................................... $ -- $ -- $ -- $ 73,422
</TABLE>
See accompanying note.
5
KINETIKS.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month and six month period ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-KSB
for the period ended December 31, 1995.
The Company began substantial initial operations during the first quarter of
1996. Prior to January 1, 1996, the Company had been considered to be in the
development stage. While the Company is operational, sales volumes have not yet
achieved the level necessary to sustain the Company's continuing operations.
This raises substantial doubt as to the Company's ability to continue as a going
concern. The Company must obtain sufficient long-term capital to fund its
growing operations and to recover the development costs incurred. The Company
raised equity funding through an initial public offering ("IPO") of shares of
its common stock to the public, which was completed on December 12, 1995, (See
Note 2). The Company is still expanding its product, The Internet Waterway(TM),
which became operational in November 1995. The Company's expected cash flow
continues to be negative and existing funds will not be sufficient to meet its
anticipated cash requirements during the third quarter of 1996. The Company is
actively exploring various short and long term financing alternatives in order
to meet its immediate cash requirements. Such alternatives may include, among
others, bank financing or the public or private issuance of debt or equity
securities. In May 1996, the Company signed a letter of intent for a second
public offering of common stock with an investment banker. Moreover, the Company
is in the process of pursuing a private placement of its common stock through a
placement agent. While the Company's management is optimistic that a financing
will succeed, there can be no assurance that the Company will be successful. The
foregoing shall not be deemed an offer of securities for sale. Any public
offering will only be made by means of a prospectus. Any private placement will
not be registered under the Securities Act of 1933 and such securities may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND COST OF REVENUE
Revenues from the sale of Internet Web Services is recognized ratably over the
period in which the web sites are produced on the Internet. Payments received in
advance of providing online web services and contract amounts that have been
billed but have not been earned are recorded as deferred revenue. All costs
related to revenue producing activities are expensed as incurred. Revenues for
the quarter ended June 30, 1996 include $269,482 for which payment was received
in the form of goods and services.
6
Management believes that the majority of costs associated with an online web
advertisement or creation of a web site are incurred in the set-up period and
intends to develop statistical information regarding the advertisement cost
cycle based upon experience. Once reliable historical experience is obtained,
the revenue recognition and the cost of revenue policies will be enhanced to
ensure that either web service revenue is recognized proportionately in the
period in which costs are incurred; or that costs in excess of earned revenue
are deferred, if such results significantly differ from the current method of
recognizing revenue ratably over the online placement period and expensing costs
as incurred.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
For the period from inception through August 14, 1995, RDS and RDS, L.L.C. were
organized as a sole proprietorship and a Texas Limited Liability Company,
respectively. As a result, the income benefits from operations during this
period passed directly to the sole proprietor and shareholders, respectively.
The expenditures incurred prior to the Company's merger with RDS, L.L.C. were
primarily start-up expenditures, which were capitalized by the owners for income
tax purposes, creating a deferred tax asset of approximately $136,000. This
asset was contributed to the Company in connection with the merger. Cumulative
losses since inception have created additional deferred tax assets of
approximately $1,225,000, resulting in a total deferred tax asset of $1,361,000.
A valuation allowance was established for the full amount of these deferred tax
assets because the future realization of the cumulative tax benefit is not
assured.
3. STOCK OPTION PLAN
In February 1996, the Board of Directors approved an amendment to the Plan
increasing the Company's total options available under the Plan to 1,600,000,
which was approved by shareholders at the stockholders meeting on June 12, 1996.
As of June 30, 1996, 1,583,050 shares covered by options are outstanding. The
options are generally exerciseable for up to ten years following the date of
grant (five years for 10 percent owners). As of June 30, 1996, 127,800 were
exerciseable and elections to exercise 1,550 options had been received.
4. FINANCIAL ADVISORY AND INVESTMENT BANKING SERVICES CONSULTING AGREEMENT
On April 2, 1996, the Company entered into a financial advisory and investment
banking services consulting agreement to assist the Company in its efforts to
locate and conclude an agreement for additional financing. The Company paid the
financial advisor stock options to purchase 50,000 shares of the Company's
common stock with 25,000 of the 50,000 shares exerciseable at $6.00 per share,
12,500 shares exerciseable at $6.50 per share, and 12,500 shares exerciseable at
$7.00 per share at any time between April 2, 1996 and April 2, 1999.
As required by FAS 123, "Accounting for Stock-based Compensation", the Company
has recorded the fair value of these options which were granted to a
non-employee as additional expense of the consulting agreement and as additional
paid-in capital in the amount of $ 91,250.
7
5. DEBT AGREEMENTS
In January 1996, the Company borrowed $225,000 from a commercial bank to
purchase property and equipment. The notes bear interest at an annual rate of
prime plus .5% and are due in 1996. The notes are secured by approximately
$246,000 in short-term investments .
6. PER SHARE AMOUNTS
For 1996, net loss per common and common equivalent share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
were excluded due to the fact that they are anti-dilutive. For 1995, net loss
per common and common equivalent shares is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 83, common stock and options to purchase common stock issued by the
Company within 12 months of the initial public offering date have been included
in the calculation of the weighted average number of common and common
equivalent shares outstanding (using the treasury stock method) as if they were
outstanding for the entire period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Management's Discussion and Analysis or Plan of Operation presents management's
view of the Company's financial performance and significant plans, trends or
situations which may impact future performance. The Management's Discussion and
Analysis should be read in conjunction with the financial statements of the
Company and the notes related thereto.
A significant portion of the Company's current revenue is derived from sales to
customers of advertising and web services on the Internet. The contract price
included in each web services contract covers various time periods and, except
for a mutually agreed upon setup fee which is non-refundable and recognized when
the web site is approved, the balance of the contract price is then recognized
as income apportioned equally over the number of months that the advertisements
and web services will be in effect and "on-line" as agreed in the contract.
Since the major component of the cost of these sales is incurred prior to the
time a web site is placed "online", matching of these costs with reported
revenue is not accomplished. The company has begun a study of the cost
associated with placing a web site "online", with the objective of more nearly
matching production cost with the revenue it produces. The Company anticipates
that changes resulting from these studies will be reflected in future accounting
periods.
The Company has also begun to construct other online service products based on
its "Internet Waterway" model. The Company plans to introduce these affinity
based products sometime later in 1996. Proposals for additional affinity market
based products based on the "Waterway" model are under consideration. In
addition, the Company plans to begin marketing its first commercial software
products and commercial transaction fee services in September 1996.
Comparison of the period from April 1, 1995 through June 30, 1995 operating
results to second quarter 1996 would provide no meaningful information because
during the period ended June 30, 1995, the Company was in the early stage of
development and had no revenue and had incurred approximately $74,444 in various
expenses.
8
RESULTS OF OPERATIONS
GROSS REVENUES
For the quarter ended June 30, 1996, recognized revenue from advertising and web
service sales was $126,751. In addition, during the quarter ended June 30, 1996,
the Company recognized additional revenue from Exchange of Services in the
amount of $269,482, and from Merchandise Sales of $966. Total recognized
operating revenue during the quarter ended June 30, 1996, was $397,199. For the
quarter ended March 31, 1996, total operating revenue was $245,209, including
$155,032 in Exchange of Service income. The increase in revenues was primarily
attributable to the growth of exchange of service contracts with industry
related media companies.
COST OF REVENUE
Cost of Revenue during the quarter ended June 30, 1996 was $233,122, compared to
$279,959 for the quarter ended March 31, 1996. This cost, in both quarters, is
composed primarily of payroll cost of the production staff and that portion of
payroll cost of the technical staff attributable to the online maintenance of
the Internet Waterway. This reduction is primarily due to reductions in
production payroll subsequent to the first quarter.
RESEARCH AND DEVELOPMENT
Research and Development costs during the period ended June 30, 1996, were
$64,386, compared to $37,739 for the quarter ended March 31, 1996. These costs
consist of payroll cost incurred related to the development of new products or
services. Payroll cost attributable to support and maintenance of the Internet
Waterway has been allocated to Cost of Revenue.
SALES AND MARKETING
During the quarter ended June 30, 1996, Sales and Marketing expenses totaled
$1,024,586, the comparable for quarter ended March 31, 1996 was $678,359. This
expense includes corporate identity advertising in major national circulation
industry and trade magazines of $481,748. This expense represents approximately
$213,000 in cash outlay and $269,000 of Expense in Exchange for Services plus
$91,250 in value of stock options granted to a non-employee. The marketing costs
for the quarter ended March 31, 1996 were $109,000 in cash and $155,032 in
exchange of service cost. In addition $47,590 was expended in fees to marketing
consultants. The balance of Sales and Marketing expense covered payroll
expenses, commissions, travel, and trade shows. During the remainder of 1996 the
Company plans to add to its current sales staff, if the financing discussed
under "Liquidity and Capital Resources" below is consummated.
GENERAL AND ADMINISTRATIVE
For the quarter ended June 30, 1996, General and Administrative expense totaled
$436,951, compared to $419,585 for the quarter ended March 31, 1996. These
expenses consisted primarily of fixed overhead expenses, payroll cost, fees for
professional services and all other expenses which were not identifiable as
being chargeable or allocable to the other areas.
9
OTHER INCOME (EXPENSE)
Other income (expense) is primarily composed of interest earned on Treasury
Bills, fees from sharing arrangements with certain advertisers and interest
expense associated with borrowing from the major shareholder and interest on
certain loans from the Company's bank related to major equipment purchases.
FACTORS AFFECTING OPERATING RESULTS
For the quarter ended June 30, 1996, new web sites and web services contracts
with a total contract value of $468,713 have been placed online. Income
recognition, which includes down payments received on new websites placed online
plus collections of monthly installments on sites previously placed online,
during the same period totals $397,199. Included in both the total contract
value and the income recognized, $269,482 represents exchange of service income
related to advertising or promotions. Equal amounts of advertising expenses have
been recorded relative to these exchange of service transactions. In addition to
the contracts mentioned above, a backlog of $250,307 in cash contracts have been
signed, but have not yet been placed online.
The exchange of service contracts referred to in the preceding paragraph
primarily relate to corporate identify advertising coverage by fifteen industry
related media outlets which publicize Internet Waterway advertisements, or to
valuable products or services contributed by vendors in exchange for advertising
on the Internet Waterway. Those products and services may be given as prizes in
online contests designed to draw viewers to the Company's site and to gain
demographic information to be used in advertising sales.
Because the Company has a very limited operating history, its 1996 budget is
based on its anticipated future revenues and utilization of capital. Significant
parts of these budgeted expense levels are fixed and cannot be quickly adjusted.
While total sales, including exchange of services income have been slightly less
than projections, expected cash sales have been significantly less than
projections.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations through the private sales of
equity securities, loans advanced by its president and others and an Initial
Public Offering of its common stock. During the six months ended June 30, 1996,
the Company spent $2,565,428 in its operating activities, and cash flow from
operations continues to be negative.
Therefore, the Company is actively exploring various short and long term
financing alternatives in order to meet its immediate cash requirements. Such
alternatives may include, among others, bank financing or the public or private
issuance of debt or equity securities. In May 1996, the Company signed a letter
of intent for a second public offering of common stock with an investment
banker. Moreover, the Company is in the process of pursuing a private placement
of its common stock through a placement agent. While Company management is
optimistic that a private placement of its common stock will succeed, there can
be no assurance that the Company will be successful in the sale of equity. While
the company has positive networth should sales not increase sufficiently, nor
new equity or debt proceeds occur, the Company would lack sufficient cash to
satisfy current liabilities in August, 1996.
The foregoing shall not be deemed an offer of securities for sale. Any public
offering will only be made by means of a prospectus. Any private placement will
not be registered under the Securities Act of 1933 and such securities may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
10
PART II - OTHER INFORMATION
a. Exhibits.
Exhibit 11.01:Statement Re: Computation of Per Share Earnings
11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
KINETIKS.COM, INC.
Date: August 14, 1996 __________________________
By: Gregory S. Carr
Chairman of the Board of
Directors, Chief Executive
Officer and President
Date: August 14, 1996 __________________________
By: James C. Waldrop
Treasurer, Vice President -
Finance and Chief
Financial Officer
12
EXHIBIT 11.01
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Three Six Six
months months months months
ended ended ended ended
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C>
Weighted average shares and common
equivalent shares outstanding ....................... 5,380,000 -- 5,380,000 --
Adjustment to give effect to shares issued
to a key employee to March 31, 1995
as outstanding since January 18,1995,
treasury stock method ............................... -- 4,000,000 -- 4,000,000
Adjustment to give effect to shares sold
pursuant to a private placement
subsequent to March 31, 1995 as
outstanding since January 18, 1995,
using treasury stock method ......................... -- 416,667 -- 416,667
Adjustment to give effect to shares issued
in connection with the bridge loans
as outstanding since January 18, 1995,
using treasury stock method ......................... -- 8,750 -- 8,750
Adjustment to effect to the shares optioned
to key employees, directors and
consultants prior to the initial public
offering as outstanding since January 18,
1995, using the treasury stock method .............. -- 823,692 -- 823,692
----------- ----------- ----------- -----------
Total .................................................. 5,380,000 5,249,109 5,380,000 5,249,109
=========== =========== =========== ===========
Net Loss ............................................... $(1,364,614) $ (74,444) $(2,510,801) $ (103,526)
=========== =========== =========== ===========
Per-share amount ....................................... $ (0.25) $ (0.01) $ (0.47) $ (0.02)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 386,920
<SECURITIES> 245,560
<RECEIVABLES> 104,371
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 813,452
<PP&E> 497,168
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,563,507
<CURRENT-LIABILITIES> 441,201
<BONDS> 0
0
0
<COMMON> 5,380
<OTHER-SE> 896,575
<TOTAL-LIABILITY-AND-EQUITY> 1,563,507
<SALES> 0
<TOTAL-REVENUES> 642,408
<CGS> 0
<TOTAL-COSTS> 3,174,687
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,654
<INCOME-PRETAX> (2,510,801)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,510,801)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
