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
September 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 September 30, 1996 there were 5,387,924 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
September 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 II Other Information
Signatures.................................................. 13
Exhibit 11.01: Statement of Computation of
earning per share......................... 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KINETIKS.COM, INC.
BALANCE SHEET
(UNAUDITED)
September 30, 1996
------------------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 10,435
Accounts receivable ................................. 63,058
Notes and advances due from
officers and employees .............................. 26,535
Prepaid expenses and other current
assets .............................................. 64,849
-----------
Total current assets .................................. 164,877
Property and equipment, net ........................... 450,547
Prepaid stock offering cost ........................... 25,000
License agreement, net ................................ 188,368
===========
Total assets .......................................... $ 828,792
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ....................................... $ 3,042
Note payable to shareholder ......................... 30,000
Accounts payable .................................... 532,327
Accrued compensation ................................ 87,917
Other accrued expenses .............................. 169,543
Deferred revenue .................................... 5,871
-----------
Total current liabilities ............................. 828,700
Note payable to shareholder officer ................... 224,853
Stockholders' equity:
Preferred stock, $.001 par value,
500,000 shares authorized; none
issued ............................................ --
Common stock, $.001 par value,
20,000,000 shares ................................... 5,388
authorized; 5,387,924 issued and
outstanding at September 30, 1996
Additional paid-in capital .......................... 5,162,354
Accumulated deficit ................................. (5,392,503)
-----------
Total stockholders' equity ............................ (224,761)
-----------
Total liabilities and stockholders' equity ............ $ 828,792
===========
See accompanying notes.
3
<PAGE>
KINETIKS.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Period from
January
Three 18, 1995
Three months months Nine months (inception)
ended ended ended to
September September September September
30, 1996 30, 1995 30, 1996 30, 1995
----------- ----------- ----------- -----------
Revenue ............ $ 369,397 $ -- $ 1,011,805 $ --
Operating
expenses:
Cost of
revenue ......... 248,877 -- 761,958 --
Research and
development ..... 117,827 137,699 219,952 164,004
Sales and
marketing ....... 660,887 139,171 2,363,832 165,530
General and
administrative .. 482,822 268,471 1,339,358 319,279
----------- ----------- ----------- -----------
1,510,413 545,341 4,685,100 648,813
----------- ----------- ----------- -----------
Operating loss ..... (1,141,016) (545,341) (3,673,295) (648,813)
Other income
(expense):
Interest
income ........... 2,108 -- 44,928 --
Other income ...... 3,313 -- 6,625 --
Interest
expense .......... (11,837) (9,340) (36,491) (9,394)
----------- ----------- ----------- -----------
Net loss ........... $(1,147,432) $ (554,681) $(3,658,233) $ (658,207)
=========== =========== =========== ===========
Net loss per
common and
common
equivalent
share ............. $ (0.21) $ (0.10) $ (0.68) $ (0.12)
=========== =========== =========== ===========
Shares used in
computing net
loss per
common and
common
equivalent
share ............. 5,387,924 5,337,193 5,383,962 5,313,541
=========== =========== =========== ===========
See accompanying notes.
4
<PAGE>
KINETIKS.COM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January
Three Three Nine 18, 1995
months months months (inception)
ended ended ended to
September September September September
30, 1996 30, 1995 30, 1996 30,1995
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating
activities .................................. $(364,234) $(453,197) $(2,929,662) $(513,752)
INVESTING ACTIVITIES
Purchase of property and
equipment ................................... -- (81,560) (377,072) (97,006)
Maturity of short term
investments ................................. 245,560 -- 1,500,843 --
--------- --------- ----------- ---------
Net cash provided by
investing activities ........................ 245,560 (81,560) 1,123,771 (97,006)
FINANCING ACTIVITIES
Proceeds from notes
payable ..................................... -- 76,196 270,000 153,625
Repayment of note payable
to shareholder .............................. (13,679) -- (106,506) --
Repayment of loan from bank .................. (244,131) (244,131) --
Proceeds from issuance of
common stock, net ........................... -- 462,314 -- 462,314
--------- --------- ----------- ---------
Net cash provided by (used
by) financing activities .................... (257,810) 538,510 (80,637) 615,939
--------- --------- ----------- ---------
Net (decrease) increase in
cash ........................................ (376,484) 3,753 (1,886,528) 5,181
Cash and cash equivalents
at beginning
of period ................................... 386,920 1,428 1,896,964 --
--------- --------- ----------- ---------
Cash and cash equivalents
at end
of period ................................... $ 10,436 $ 5,181 $ 10,436 $ 5,181
========= ========= =========== =========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING TRANSACTIONS
Cash paid during the
period for interest ......................... 5,668 437 13,679 437
Property and equipment
acquired from ............................... -- -- -- 73,422
shareholder in exchange
for a note payable
</TABLE>
See accompanying notes.
5
<PAGE>
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. 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. Cumulative losses
since inception have caused the Company's total assets and equity to
fall below the mandatory requirements of the Nasdaq, which resulted
in the Company's common stock being removed from registration and
trading by the Nasdaq Small Cap Market effective October 28, 1996.
The cumulative losses, removal of its listing from the Nasdaq
Market, along with the Company's inability to fund it's current
liabilities of approximately $830,000 at September 30, 1996 raises
substantial doubt as to the Company's ability to continue as a going
concern.
The Company has begun to implement an action plan to restructure its
operations in order to attempt to reduce expenses to approximate the
monthly cash flow from sales. This plan specifically addresses
reductions in payroll cost through layoffs, salary reductions for
the highest paid officers and employees, placing sales staff on
commission only, and termination of certain leased office space
which is not required under the new staffing.
During the time the forgoing plan is being implemented the Company
must still obtain sufficient capital to fund its operations and to
recover the development costs incurred. The Company raised equity
funding of $ 4,251,000 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). On November 8, 1996 the Company's
founder and Chief Executive Officer retired 400,000 of his personal
shares of the Company's Common Stock. Those shares were immediately
sold to an individual investor for $100,000 in order to satisfy
certain urgent cash needs. The Company's cash flow continues to be
negative through the date of this report and existing funds are
inadequate to meet the Company's cash requirements. The Company is
actively exploring various short and long term financing
alternatives in order to meet its immediate cash needs. Such
alternatives may include, among others, a strategic partnership or
private issuance of debt or equity securities. The Company has
temporarily postponed its plans to perform a second public offering
of its stock. While the Company's management is hopeful that a
financing or strategic partnership will succeed, there can be no
assurance that the Company will be successful.
6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND COST OF REVENUE
Revenues from the sale of Internet Web Services are recognized
ratably over the period in which the web sites are produced on the
Internet. All costs related to revenue producing activities are
expensed as incurred. Revenues for the quarter ended September 30,
1996 include $209,267 for which payment was received in the form of
goods and services.
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 services 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 cost 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.(predecessors entities to the Company) 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 $ 1,697,000, resulting in a
total deferred tax asset of $ 1,833,000 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 the stockholders at the
annual stockholders meeting on June 12, 1996. As of September 30,
1996, options with respect to 1,531,050 shares were outstanding. The
options are generally exerciseable for up to ten years following the
date of grant (five years for 10 percent owners). As of September
30, 1996, a total of 606,550 were exerciseable and elections to
exercise 1,550 options had been received.
4. DEBT AGREEMENTS
7
<PAGE>
In September 1996, the Company repaid a $242,000 commercial bank
loan. The Company remains liable on approximately $ 3,000 of accrued
and unpaid interest on that loan.
]5. 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.
6. SUBSEQUENT EVENT
On November 8, 1996 the founding shareholder and Chief Executive
Officer retired 400,000 shares of his personal holdings of the
Company's $.001 par value Common Stock. The Company immediately sold
those shares to an individual investor for $100,000. The sale was
concluded in order to fund critical cash requirements related to
operations of the Company. Additionally, in October, 1996, the
Company entered into an asset-based financing arrangement of up to
$200,000 with a merchant banking firm. As of the date of this report
approximately $ 130,000 has been borrowed under that arrangement.
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.
Effective October 28, 1996 the Company's Common Stock was removed
from trading on the Nasdaq Small Cap Market because as of June 20,
1996 the Company's net assets and stockholders equity fell below the
mandatory requirement for continued listing which are $2,000,000 and
$1,000,000 respectively. This was the result of the Company's
cumulative losses since inception. The Company has adopted a
restructuring plan to attempt to regain it's listing. No assurance
can be given that the plan will be successful. See "-Factors
Affecting Operating results" and "-Liquidity and Capital Resources."
While the Company is restructuring to reduce it's operating cost, it
has deferred its previously announced plan to construct other online
service products based on its "Internet Waterway" model. Additional
affinity market based products based on the "Waterway" model are
under consideration; however, the Company's ability to develop such
products is limited by its very limited financial resources. Because
of the serious cash flow constraints the Company completed, but did
not yet bring to market it's first software product, "E-dealer". The
Company's plans to begin marketing "E-dealer" in the fourth quarter
will be dependent on available funding. The Company has, instead,
concentrated it's efforts on more efficient production of websites
and web services where it has already created a niche.
8
<PAGE>
Comparison of the period from July 1, 1995 through September 30,
1995 operating results to the three and nine months ended September
30, 1996 would provide no meaningful information because during the
period ended September 30, 1995, the Company was in the early stage
of development and had no revenue and had incurred approximately
$545,341 in various expenses.
RESULTS OF OPERATIONS
GROSS REVENUES
For the quarter ended September 30, 1996, recognized revenue from
advertising and web service sales was $156,823. In addition, during
the quarter ended September 30, 1996, the Company recognized
additional revenue from exchange of services in the amount of
$209,267, and from merchandise sales of $3,307. Exchange of services
revenue is derived when the Company provides on line web services in
exchange for goods and services such as advertising. Total
recognized operating revenue during the quarter ended September 30,
1996, was $369,397. For the quarter ended June 30, 1996, total
operating revenue was $397,199, including $269,482 in exchange of
service income. The decrease in revenues from the quarter ended June
30, 1996, was primarily attributable to the decrease in exchange of
service contracts with industry related media companies.
COST OF REVENUE
Cost of Revenue during the quarter ended September 30, 1996 was
$248,877, compared to $233,122 for the quarter ended June 30, 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.
RESEARCH AND DEVELOPMENT
Research and Development costs during the period ended September 30,
1996, were $117,827, compared to $64,386 for the quarter ended June
30, 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. The increase from the quarter
ended June 30, 1996, was primarily attributable to the completion of
the E-Dealer software project.
SALES AND MARKETING
During the quarter ended September 30, 1996, Sales and Marketing
expenses totaled $660,887, the comparable amount the for quarter
ended June 30, 1996 was $1,024,586. This expense includes corporate
identity advertising in major national circulation industry and
trade magazines of $254,143. This expense represents approximately
$73,876 in cash outlay and $209,267 of Expense in Exchange for
Services. The marketing costs for the quarter ended June 30, 1996
were
9
<PAGE>
$213,000 in cash and $269,000 in exchange of service cost. In
addition, compensation expense of $91,250 was recognized during
quarter ended June 30, 1996 related to stock options granted to
non-employees. The balance of Sales and Marketing expense covered
payroll expenses, commissions, travel, and trade shows.
GENERAL AND ADMINISTRATIVE
For the quarter ended September 30, 1996, General and Administrative
expense totaled $482,822, compared to $436,951 for the quarter ended
June 30, 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.
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
shareholders and interest on certain loans from the Company's bank
related to major equipment purchases.
FACTORS AFFECTING OPERATING RESULTS
For the quarter ended September 30, 1996, new web sites and web
services contracts with a total contract value of $513,661 were
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 $369,396. Included in both the total contract value
and the income recognized was, $209,267 which represents amounts
related to providing web services in exchange for 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 $121,038 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 identity advertising
coverage by fifteen industry related magazines which publicize
Internet Waterway advertisements, or to 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.
The Company has recently revised its budgets in order to attempt to
bring its expenses more nearly in line with it's expected cash flow.
Parts of these budgeted expense levels are fixed and cannot be
quickly adjusted. Total cash sales have fallen short of anticipated
levels and therefore the Company has made major adjustments in its
expense structure, including staff layoffs, salary deferrals and
salary reductions for senior staff members. Such measures should
reduce monthly operating expenses to approximately $75,000. There is
no guarantee that such measures will be sufficient to enable the
Company to continue operations through the end of 1996. See
"-Liquidity and Capital Resources".
LIQUIDITY AND CAPITAL RESOURCES
10
<PAGE>
To date, the Company has financed its operations through the private
sales of equity securities, loans advanced by its Chief Executive
Officer and others and an initial public offering of its common
stock. In addition, on November 8, 1996, Gregory Carr, the Company's
founder and Chief Executive Officer retired 400,000 shares of his
personal holdings of Company common stock. The Company immediately
sold those same 400,000 shares of Common Stock to an individual
investor for $100,000. This sale was concluded in order to fund
immediate essential expenditure requirements related to operations.
In addition during October the Company entered into a asset-based
financing arrangement of up to $200,000 with a merchant banking firm
with whom it is exploring a broader financial relationship.
During the nine months ended September 30, 1996, the Company spent
$2,929,662 in its operating activities, and cash flow from
operations continues to be negative. As of November 14, 1996, the
Company is in severe financial distress and lacks sufficient cash to
satisfy its current liabilities.
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, strategic
partnerships, or private issuance of debt or equity securities. Such
measures may entail a substantial restructuring of the Company's
present capital structure, including the substantial dilution of the
current stockholders. There is no assurance that the Company will be
successful in completing any of these alternatives. If the Company
is unable to obtain sufficient capital in the short term in order to
satisfy its sever liquidity problems it is highly unlikely that the
Company will be able to continue operations through the end of
December 1996.
11
<PAGE>
PART II - OTHER INFORMATION
a. Exhibits.
Exhibit 11.01: Statement Re: Computation of Per Share Earnings
12
<PAGE>
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: November 14, 1996 By: Gregory S. Carr
Chairman of the
Board of
Directors, Chief
Executive
Officer and President
Date: November 14, 1996 By: James C. Waldrop
Treasurer, Vice President -
Finance and Chief
Financial Officer
EXHIBIT 11.01
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Period from
January 18,
1995
Three months Three months Nine months (inception)
ended ended ended to
September 30, September September September
1996 30, 1995 30, 1996 30, 1995
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Weighted average shares
and common equivalent
shares outstanding ..... 5,387,924 4,220,659 5,383,962 4,078,745
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 ................. 232,784 351,046
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 ........... 875,000 875,000
------------ ---------- ------------ ----------
Total 5,387,924 5,337,193 5,383,962 5,313,541
============ ========== ============ ==========
Net Loss $ (1,147,432) $ (554,681) $ (3,658,233) $ (658,207)
============ ========== ============ ==========
Per-share amount $ (0.21) $ (0.10) $ (0.68) $ (0.12)
============ ========== ============ ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,435
<SECURITIES> 0
<RECEIVABLES> 91,384
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 164,877
<PP&E> 450,547
<DEPRECIATION> 0
<TOTAL-ASSETS> 828,792
<CURRENT-LIABILITIES> 828,700
<BONDS> 0
0
0
<COMMON> 5,388
<OTHER-SE> (224,761)
<TOTAL-LIABILITY-AND-EQUITY> 828,792
<SALES> 0
<TOTAL-REVENUES> 374,818
<CGS> 0
<TOTAL-COSTS> 1,510,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,837
<INCOME-PRETAX> (1,147,432)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,147,432)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
