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 MARCH 31, 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 March 31, 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 March 31, 1996
Part I Financial Information
Item 1. Financial Statements (unaudited)
PAGE
Balance sheet ................................................... 3
Statement of operations ......................................... 4
Statement of cash flows ......................................... 5
Notes to Financial statements.................................... 6
Item 2. Management's Discussion and Analysis or
Plan of Operation .............................................. 9
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 12
Signatures .............................................................. 13
Exhibit 11.01: Statement of Computation of earnings per share ........... 14
Exhibit 27: Financial Data Schedule ..................................... 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Kinetiks.com, Inc.
Balance Sheet
(Unaudited)
March 31, 1996
--------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 477,510
Short-term investments ........................................ 1,523,719
Accounts receivable ........................................... 44,814
Notes and advances due from officers and employees ............ 43,271
Prepaid expenses and other current assets ..................... 28,049
-----------
Total current assets ............................................ 2,117,363
Property and equipment, net ..................................... 461,722
License agreement, net .......................................... 267,406
===========
Total assets .................................................... $ 2,846,491
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................. $ 270,000
Note payable to shareholder ................................... 70,000
Accounts payable .............................................. 32,818
Accrued compensation .......................................... 29,888
Other accrued expenses ........................................ 27,111
Deferred revenue .............................................. 24,061
-----------
Total current liabilities ....................................... 453,878
Note payable to shareholder officer ............................. 217,299
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 March 31, 1996 .......... 5,380
Additional paid-in capital ...................................... 5,050,164
Accumulated deficit ............................................. (2,880,230)
-----------
Total stockholders' equity ...................................... 2,175,314
-----------
Total liabilities and stockholders' equity ...................... $ 2,846,491
===========
See accompanying notes
3
<PAGE>
KINETIKS.COM, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
Period from
January 18, 1995
Three months ended (inception) to
March 31, 1996 March 31, 1995
------------------ ----------------
Revenue ................................. $ 245,209 $ 0
Operating expenses:
Cost of revenue .................... 279,959 0
Research and development ........... 37,739 0
Sales and marketing ................ 678,359 0
General and administrative ......... 419,585 29,082
----------- -----------
1,415,642 29,082
----------- -----------
Operating loss .......................... (1,170,433) (29,082)
Other income (expense):
Interest income .................... 33,940 0
Other income ....................... 1,682 0
Interest expense ................... (11,376) 0
----------- -----------
Net loss ................................ $(1,146,187) $ (29,082)
=========== ===========
Net loss per common and common
equivalent share ...................... $ (0.21) $ (0.01)
=========== ===========
Shares used in computing net loss per
common and common equivalent share ...... 5,380,000 5,249,109
=========== ===========
See accompanying notes
4
<PAGE>
Kinetiks.com, Inc.
Statements of Cash Flows
(Unaudited)
Period from
January 18, 1995
Three months ended (inception) to
March 31, 1996 March 31, 1995
------------------ ----------------
OPERATING ACTIVITIES
Net cash used in operating activities ....... $(1,361,205) $(26,008)
INVESTING ACTIVITIES
Purchase of property and equipment .......... (298,249) (9,195)
FINANCING ACTIVITIES
Proceeds from notes payable ................. 270,000 36,016
Repayment of note payable to shareholder .... (30,000)
----------- --------
Net cash provided by financing activities ... 240,000 36,016
----------- --------
Net decrease in cash ........................ (1,419,454) 813
Cash and cash equivalents at beginning of
period ..................................... 1,896,964 --
=========== ========
Cash and cash equivalents at end of period .. $ 477,510 $ 813
=========== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING TRANSACTIONS
Property and equipment acquired from
shareholder in exchange for a note payable . $ 0 $ 73,422
See accompanying note.
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.
Operating results for the three month period ending March 31, 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 it's premier product, The Internet
Waterway(TM) which became operational in November 1995. The Company believes
that its net expected cash flow plus the existing funds will not be sufficient
to meet its anticipated cash flow requirement for the next twelve months on a
basis which will allow the Company to meet competition and to continue to
aggressively develop its market as planned. Therefore, the Company will be
required to raise additional funds through selling additional equity or debt
securities. There can be no assurance that the Company would be successful in
the sale of equity or debt securities. Should sales not increase sufficiently,
nor new equity or debt proceeds occur, the Company has developed a standby plan,
if needed, intended to allow it to continue at a reduced level of operation with
significantly reduced expenses until the monthly cash flow, based on the standby
plan, turns positive. No assurance can be given that the standby plan, if
implemented, would result in sufficient cash flow to recover the development
costs incurred by the Company and sustain the Company's operations on a
long-term basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND COST OF REVENUE
Service revenues from the sale of advertising space is recognized ratably over
the period in which the advertisements are displayed on the Internet. Payments
received in advance of providing advertising 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
6
expensed as incurred. Revenues for the quarter ended March 31, 1996 include
$155,032 for which payment was received in the form of goods and services.
Management believes that the majority of costs associated with an 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 advertisement 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 advertisement 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 $850,000, resulting in a total deferred tax asset of $986,000. 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 is subject to shareholder approval. As of March 31, 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 March 31, 1996, no options were exerciseable.
4. LICENSE AGREEMENT
On February 10, 1996, the Company entered into an exclusive license agreement
with William Chen to acquire the rights to the use of the tradename "MarineNet"
and a five year non-compete agreement from Chen. In lieu of a royalty payment
the Company paid to William Chen stock options to purchase 70,000 shares of the
Company's common stock exercisable at $6.00 per share at any time between
December 12, 1997 and February 10, 2006. As required by FAS 121, "Accounting for
Stock-based Compensation", the Company has
7
recorded the fair value of these options which were granted to a non-employee as
additional cost of the license agreement and as additional paid in capital in
the amount of $289,800. Simultaneous with the execution of the License
Agreement, the Company entered into a consulting agreement with Chen to retain
Chen as a consultant from February 10, 1996 to July 11, 1997. The Company agreed
to pay Chen consulting fees of $200,000 payable over the term of the consulting
agreement.
5. DEBT AGREEMENTS
In January 1996 the Company borrowed $270,000 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 $500,000 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.
8
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 ad 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 "on-line", matching of these costs with reported
revenue is not accomplished. The company has begun a study of the standard cost
associated with placing a web site "on-line", 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 develop web services products based on its
"Internet Waterway" model. The Company plans to introduce these affinity based
products sometime later in 1996. Plans 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 1996.
Comparison of the period from January 18, 1995 (inception) to March 31, 1995
operating results to first quarter 1996 would provide no meaningful information
because during the period ended March 31, 1995, the Company was in the very
early stage of development and had no revenue and had incurred approximately
$29,000 in various expenses.
RESULTS OF OPERATIONS
GROSS REVENUES
For the period from inception (January 18, 1995) through December 31, 1995, the
Company recognized revenue from advertising sales of $16,367 which represented
two months revenue from 127 customers. For the quarter ended March 31, 1996,
recognized revenue from advertising sales was $88,719 from 116 customers. In
addition, during the quarter ended March 31, 1996, the Company recognized
additional revenue from Exchange of Services in the amount of $155,032, and from
Merchandise Sales of $1,458. Total recognized revenue during the quarter ended
March 31, 1996, was $245,209
9
COST OF REVENUE
Cost of Revenue during the quarter ended March 31, 1996 was $279,959. This cost
is composed primarily of payroll cost of the production staff and that portion
of payroll cost of the technical staff attributable to the on-line maintenance
of the Internet Waterway(TM).
RESEARCH AND DEVELOPMENT
Research and Development costs during the period ended March 31, 1996, were
$37,739 which 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(TM) has been allocated to Cost of Revenue.
SALES AND MARKETING
During the period ended March 31, 1996, Sales and Marketing expenses totaled
$678,359. This expense included corporate identity advertising in major national
circulation industry and trade magazines of $264,665. This expense represents
approximately $109,000 in cash outlay and $155,032 of Expense in Exchange for
Services. In addition $62,957 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 of 12 employees.
GENERAL AND ADMINISTRATIVE
For the period ended March 31, 1996, General and Administrative expense totaled
$419,585. 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 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 March 31, 1996, new web sites and web services contracts
with a total contract value of $452,557 have been placed on line. Income
recognition during the same period totals $245,209. Of each of the $452,557 and
$245,209 amounts previously mentioned, $155,032 represents barter income related
to advertising or promotions. Equal amounts of advertising expenses have been
recorded relative to these barter transactions.
10
The barter contracts referred to in the preceding paragraph primarily relate to
coverage by nine nationally circulated industry related magazines which carry
monthly full page, four color Internet Waterway advertisements, television,
radio and newspaper coverage of the Company's coverage of the Houston and Miami
Boat Shows, or to valuable products or services contributed by vendors in
exchange for advertising on the Internet Waterway, to be given as prizes in
contests designed to draw viewers to the Company's site and to gain demographic
information to be used in advertising sales. In addition to the contracts
mentioned above, $156,025 in non-barter contracts have been signed, but have not
yet been placed on line.
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.
Therefore, any significant shortfall of sales, relative to the Company's
expectations, would have a negative impact on the Company's business and
financial condition.
The Company expects to slow the rate of increase in its operating expenses,
while continuing to increase expenditures for sales and marketing opportunities,
and to meet sales growth with all necessary and appropriate support.
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. Cash provided by operating activities has
been minimal. Cash receipts related to sales contracts during the quarter ended
March 31, 1996,were $ 67,992.
The Company believes that its net expected cash flow plus the existing funds
will not be sufficient to meet its anticipated cash flow requirement for the
next twelve months on a basis which will allow the Company to meet competition
and to continue to aggressively develop its market as planned. Therefore, the
Company will be required to raise additional funds through selling additional
equity or debt securities. There can be no assurance that the Company would be
successful in the sale of equity or debt securities. Should sales not increase
sufficiently, nor new equity or debt proceeds occur, the Company has developed a
standby plan, if needed, intended to allow it to continue at a reduced level of
operation with significantly reduced expenses until the monthly cash flow, based
on the standby plan, turns positive. No assurance can be given that the standby
plan, if implemented, would result in sufficient cash flow to recover the
development costs incurred by the Company and sustain the Company's operations
on a long-term basis.
11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
Exhibit 11.01: Statement Re: Computation of Per Share Earnings
Exhibit 27: Financial Data Schedule
b. Reports on Form 8-K
In the first quarter of 1996, the Company filed a report on Form
8-K dated February 13, 1996 relating to the Exclusive License Agreement and
Consulting Agreement dated February 10, 1996 by and between Kinetiks.com, Inc.
and William Chen, a nonaffiliate.
12
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:
By: Gregory S. Carr
Chairman of the Board of
Directors, Chief Executive
Officer and President
Date:
By: James C. Waldrop
Treasurer, Vice President -
Finance and Chief
Financial Officer
EXHIBIT 11.01
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
PERIOD FROM
JANUARY 18,1995
QUARTER ENDING (INCEPTION) TO
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
Weighted average shares and common equivalent
shares outstanding ............................. 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
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
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
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
----------- -----------
Total ............................................ 5,380,000 5,249,109
=========== ===========
Net Loss ......................................... $(1,146,187) $ (29,082)
=========== ===========
Per-share amount ................................. $ (0.21) $ (0.01)
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM MARCH 31, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 477,510
<SECURITIES> 1,523,719
<RECEIVABLES> 88,085
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,117,363
<PP&E> 521,862
<DEPRECIATION> (60,140)
<TOTAL-ASSETS> 2,846,491
<CURRENT-LIABILITIES> 453,878
<BONDS> 0
0
0
<COMMON> 5,380
<OTHER-SE> 2,169,934
<TOTAL-LIABILITY-AND-EQUITY> 2,846,491
<SALES> 245,209
<TOTAL-REVENUES> 280,831
<CGS> 279,959
<TOTAL-COSTS> 279,959
<OTHER-EXPENSES> 1,135,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,376
<INCOME-PRETAX> (1,146,187)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,146,187)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,146,187)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
