UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MarkOne)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended March 31, 1997
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 150, Kingwood, Texas 77339
(Address of principal executive offices) (Zip Code)
(281) 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 NO x
As of March 31, 1997 there were 3,387,924 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
March 31, 1997
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 ..................................................9
Part II Other Information
Item 1. Legal Proceedings .........................................12
Item 2. Changes in Securities .....................................12
Item 3. Defaults Under Senior Secured Agreements ..................12
Item 4. Submission of Matters to a Vote of Securities Holders .....12
Item 5. Other .....................................................12
Item 6. Exhibits and Reports on Form 8-K ..........................13
Signatures ...................................................................14
Exhibit 1: Statement of Computation of earning per share ....................15
2
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Kinetiks.com, Inc.
Balance Sheet
(Unaudited)
March 31, 1997
--------------
Assets
Current assets:
Cash and cash equivalents $ -
Accounts receivable 135,538
Notes and advances due from officers and employees 6,431
Prepaid expenses and other current assets 55,474
-------------
Total current assets 197,443
Property and equipment, net 43,371
-------------
Total assets $ 240,814
=============
Liabilities and stockholders' equity
Current liabilities:
Notes payable $ 344,542
Note payable to shareholder 9,000
Accounts payable 806,702
Accrued compensation 10,000
Other accrued expenses 183,205
-------------
Total current liabilities 1,353,448
Note payable to shareholder officer 157,233
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized; none issued -
Common stock, $.001 par value, 20,000,000 shares 3,388
authorized; 3,387,924 issued and outstanding
at September 30, 1996
Additional paid-in capital 5,264,354
Accumulated deficit (6,537,609)
-------------
Total stockholders' equity (1,269,867)
-------------
Total liabilities and stockholders' equity $ 240,814
=============
See accompanying notes.
3
<PAGE>
Kinetiks.com, Inc.
Statements of Operations
(Unaudited)
Three months Three months
ended ended
March 31, 1997 March 31, 1996
-------------- --------------
Revenue $ 374,469 $ 245,209
Operating expenses:
Cost of revenue 73,213 279,959
Research and development 0 37,739
Sales and marketing 359,516 678,359
General and administrative 166,600 419,585
------------- -------------
599,329 1,415,642
------------- -------------
Operating loss (224,860) (1,170,433)
Other income (expense):
Interest income 0 33,940
Other income 12,638 1,682
Interest expense (4,965) (11,376)
------------- -------------
Net loss $ (217,187 $ (1,146,187)
============= =============
Net loss per common and common
equivalent share $ (0.06) $ (0.21)
============= =============
Shares used in computing net loss per
common and common equivalent share 3,387,924 5,380,000
============= =============
See accompanying notes.
4
<PAGE>
Kinetiks.com, Inc.
Statements of Cash Flows
(Unaudited)
Three months Three months
ended ended
March 31, 1997 March 31, 1996
-------------- --------------
Operating activities
Net cash used in operating activities $ (121,726) $ (1,361,205)
Investing activities
Purchase of property and equipment - (298,249)
Financing activities
Proceeds from notes payable - 270,000
Proceeds from notes payable 112,500
Repayment of note payable to shareholder (17,250) (30,000)
------------ ------------
Net cash provided by financing activities 95,250 240,000
------------ ------------
Net (decrease) increase in cash (26,476) (1,419,454)
Cash and cash equivalents at beginning
of period 26,476 1,896,964
------------ ------------
Cash and cash equivalents at end
of period $ 0 $ 477,510
============== ===========
Supplemental disclosure of noncash
investing and financing transactions
Cash paid during the period for interest 0 0
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 ended March 31,1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
Due to the inadequacy of funds to complete an audit, the company has not filed a
form 10-KSB for the period ended December 31, 1996 with the Securities and
Exchange Commission.
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 three months ended March 31, 1997 include $238,608 in tradeouts 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.
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. Cumulative losses since inception have created
a total deferred tax asset of $ 2,222,,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.
6
<PAGE>
3. Stock Option Plan
Under the Company's Plan 1,600,000 options were available. As of March 31, 1997,
1,339,175 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, 1997 a total of 905,475 ,were exerciseable and
elections to exercise 1,550 options had been received.
4. Warrants
As of March 31, 1997, 525,000 warrants to purchase shares of common stock on a
1:1 basis were outstanding. The warrants are generally exerciseable for up to
ten years following the date of grant. As of March 31, 1997 a total of 525,000
were exerciseable.
5. Debt Agreements
During the three months ended March 31, 1997, the company borrowed $112,500 from
various sources at 8 % to fund immediate essential expenditure requirements
related to operations. In an effort to reduce debt, the note payable to a
shareholder and a shareholder officer was reduced by 20,000 and $21,000,
respectively, in exchange for the company's boat and automobile. Both
transactions resulted in a gain.
The note payable to the shareholder officer of $157,235 including accrued
interest matured on January 2, 1997.
6. Per Share Amounts
For 1997 and 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.
7. Subsequent Events
On November 27, 1996, the Company entered into a letter of understanding
("Letter of Understanding") with Trader Publishing Company ("Trader") of
Norfolk, Virginia for the sale of substantially all of the assets of the Company
for $750,000 cash subject to the finalization of a definitive purchase agreement
to be completed by January 2, 1997. An earnest money deposit in the amount of
$110,000 was paid to the Company by Trader upon the execution of the Letter of
Understanding.
On December 19, 1996, the Company executed a Commercial Note in favor of Trader,
wherein Trader loaned the Company $110,000. This Commercial Note was subject to
a general security agreement ("Security Agreement") encumbering substantially
all of the assets of the Company and a Confession of Judgment provision in the
event of a default in the terms of the Commercial Note.
7
<PAGE>
As a result of the Company and Trader being unable to finalize a definitive
agreement pursuant to the Letter of Understanding, Trader, on March 31, 1997,
notified the Company that the earnest money deposit plus other consideration
advanced to the Company under the Letter of Understanding and the principal
amount of the Commercial Note plus interest, costs and expenses were due and
payable. Trader also notified the Company of its intention to exercise its
rights under the Security Agreement unless payment was made.
On April 9, 1997, Trader entered its confession of Judgment on the Commercial
Note in the Circuit Court of Norfolk, Virginia. On April 18, 1997, the Judgment
was entered in the District Court of Harris County, Texas, and a Notice of
Public Sale of the assets of the Company covered by the Security Agreement was
posted for May 13, 1997. In addition, on April 18, 1997, Trader filed an action
against the Company alleging a breach of the Letter of Understanding and
requesting a return of the earnest money deposit as well as the payment of
penalties and expenses.
In an effort to settle all disputes between the Company and Trader, the Company
entered into discussions with Wildwood Capital L.L.C., ("Wildwood"), a Texas
limited liability corporation. Wildwood agreed to pay Trader the sum of $228,000
in exchange for Trader transferring to Wildwood all rights, title and interest
it has in any claims, liens and security interest against the Company pursuant
to the Judgment on the Commercial Note, the litigation referred to above and the
Letter of Understanding and any liens securing the above. In addition, the
Company and Trader released each other from any claims, causes of action, debts
or other liabilities.
Wildwood and the Company then entered into a Settlement Agreement and Release on
May 19, 1997, under which the Company transferred to Wildwood the assets covered
by the Security Agreement consisting of substantially all of the Company's
assets in settlement of the Judgment on the Commercial Note and in lieu of
foreclosure by Wildwood. The Company and Wildwood agreed to release each other
from any claims, causes of action, debts and liabilities relating to the Letter
of Understanding and the Commercial Note and any judgments, litigation or causes
of action arising therefrom.
In addition, Wildwood has conditionally committed to purchase the obligations
owed by the Company to unsecured creditors. The offer to unsecured creditors is
to fund payment in full of ten percent of their claims by July 15, 1997 provided
a conditional release is executed by each creditor and returned no later than
July 3, 1997. The offer is also conditional upon the receipt of the conditional
releases from creditors holding a minimum of ninety percent of the gross amount
of the unsecured debt of the Company.
The auditors Ernst & Young are members of the unsecured creditor group being
asked to accept the ten percent settlement offer. Their acceptance conflicts
with necessary independence requirements and has required the auditors to submit
a resignation effective June 10, 1997.
8
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
General
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 has been 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.
Results of Operations
Gross Revenues
For the three months ended March 31, 1997, recognized revenue from advertising
and web service sales was $ 133,120. In addition, during the three months ended
March 31, 1997, the Company recognized additional revenue from Exchange of
Services in the amount of $238,608, and from Merchandise Sales of $2,741. Total
recognized operating revenue was $374,469.
Cost of Revenue
Cost of Revenue during the three months ended March 31, 1997 was $73,213. This
cost is composed primarily of payroll cost of the production staff and the
payroll cost of the technical staff attributable to the online maintenance of
the Internet Waterway.
Research and Development
The company has suspended research and development projects until such time as
future events indicate a profitable market for potential products.
Sales and Marketing
For the three months ended March 31, 1997, Sales and Marketing expenses totaled
$359,516. This expense includes corporate identity advertising in major national
circulation industry and trade magazines of $238,608. The balance of Sales and
Marketing expense covered payroll expenses, commissions, travel, and trade
shows.
9
<PAGE>
General and Administrative
For the three months ended March 31,1997, General and Administrative expense
totaled $166,600. 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, gain on sale of assets, 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
The Company is in severe financial distress. While the company has made progress
in its efforts to expand the business, the revenue side of the business has not
kept pace with expenses leading to in excess of six million dollars of
cumulative losses. The Company has not been able to meet the required
advertising revenues and direct online transaction revenues that were expected.
In addition, a significant portion of the revenue stream in 1996 has been trade
for service income.
Prior to 1996, the Company had no financial history on which to base planned
operating expense. Therefore, the Company's projected expense levels were based
primarily on its anticipated future revenues. In large part, the projected
expense levels were fixed and could not be quickly adjusted. Therefore,
shortfall of sales, relative to the Company's expectations, had a significant
negative impact on the Company's business and financial condition. To the extent
that these expenses did not produce increased revenues, the Company's business,
operating results and financial condition were significantly adversely affected.
The Company has revised its budgets in order to attempt to bring its expenses in
line with its expected cash flow. The Company has made major adjustments in its
expense structure, including staff layoffs, salary deferrals and salary
reductions for senior staff members. Such measures have reduced monthly
operating expenses to approximately $65,000 in May 1997.
Liquidity and Capital Resources
The Company has financed its operations through private and public sales of
equity securities and loans advanced by an officer and others. Cash provided by
operating activities has fallen far short of projections.
The net proceeds from the Initial Public Offering (December 1995), together with
cash flows generated from operations, have not been sufficient to meet the
Company's cash needs for working capital and capital expenditures. The Company
has attempted to sell additional equity and to obtain new credit facilities.
None of these efforts have proven successful.
10
<PAGE>
In November 1996, Gregory Carr, the Company's founder and then Chief
Executive Officer, retired 400,000 shares of his personal holdings of Company
Common Stock. The Company subsequently sold the 400,000 shares to an individual
investor for $100,000. In addition, during December 1996, Mr. and Mrs. Carr
retired an additional 2,000,000 of their personal shares in an attempt to
increase the value of the remaining shares held by stockholders and in hopes of
attracting additional investment in the Company. Mr. and Mrs. Carr subsequently
assigned voting rights by Proxy to the Board of Directors of 1,000,000
additional shares. Furthermore, Mr. and Mrs. Carr worked for the Company
full-time in 1996 at a one-third reduction in salary. Mr. Carr has worked
full-time for the Company in 1997 without any salary in attempt to further cut
costs and restructure the business.
As a result of significant and continuing negative cash flow, in the fourth
quarter of 1996 and the first quarter of 1997, the Company reduced personnel
costs by layoffs, salary reductions, reduced its overhead by restructuring its
office lease and suspended all research and development projects.
The Company is in severe financial distress and lacks sufficient cash to satisfy
its current liabilities. The lack of operating capital and negative cash flows
significantly impairs the Company's ability to operate and, in the absence of
completing a financing transaction the Company will be required to terminate its
operations. The Company continues to actively explore various financing
alternatives in order to meet its immediate cash requirements. Such measures may
entail a substantial restructuring of the Company's present capital structure,
including the substantial dilution of the current stockholders.
Wildwood has conditionally committed to purchase the obligations owed by the
Company to unsecured creditors. The offer to unsecured creditors is to fund
payment in full of ten percent of their claims by July 15, 1997 provided a
conditional release is executed by each creditor and returned no later than July
3, 1997. The offer is also conditional upon the receipt of the conditional
releases from creditors holding a minimum of ninety percent of the gross amount
of the unsecured debt of the Company. If the Company is not successful in
completing the described financial restructuring, the Company will have no
alternative but to consider terminating operations and may seek bankruptcy
protection.
As of June 20, 1997 approximately 55% of the unsecured creditor balance
representing approximately $690,000 have signed the acceptances and conditional
releases.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 1997, a legal action from creditor Staffware, Inc. had
been filed naming the Company as a defendant in a unsecured claim for
$24,365.
Reference Part 1, Item 2, Section 7 for the Subsequent Events
discussion of legal proceedings initiated by Trader Publishing
Company.
Item 2. Changes in Securities
None
Item 3. Defaults Under Senior Secured Agreements
As a result of the Company and Trader being unable to finalize a
definitive agreement pursuant to the Letter of Understanding, Trader,
on March 31, 1997, notified the Company that the earnest money deposit
plus other consideration advanced to the Company under the Letter of
Understanding and the principal amount of the Commercial Note plus
interest, costs and expenses were due and payable. Trader also
notified the Company of its intention to exercise its rights under the
Security Agreement unless payment was made.
On April 9, 1997, Trader entered its confession of Judgment on the
Commercial Note in the Circuit Court of Norfolk, Virginia. On April
18, 1997, the Judgment was entered in the District Court of Harris
County, Texas, and a Notice of Public Sale of the assets of the
Company covered by the Security Agreement was posted for May 13, 1997.
In addition, on April 18, 1997, Trader filed an action against the
Company alleging a breach of the Letter of Understanding and
requesting a return of the earnest money deposit as well as the
payment of penalties and expenses. The total secured claim made by
Trader was for $291,000.
In an effort to settle all disputes between the Company and Trader,
the Company entered into discussions with Wildwood Capital L.L.C.,
("Wildwood"), a Texas limited liability corporation. Wildwood agreed
to pay Trader the sum of $228,000 in exchange for Trader transferring
to Wildwood all rights, title and interest it has in any claims, liens
and security interest against the Company pursuant to the Judgment on
the Commercial Note, the litigation referred to above and the Letter
of Understanding and any liens securing the above. In addition, the
Company and Trader released each other from any claims, causes of
action, debts or other liabilities.
Item 4. Submission of Matters to a Vote of Securities Holders
None
12
<PAGE>
Item 5. Other
Resignation of Directors:
Peter Salus resigned as a Director of the Company on March 8, 1997 due
to a potential conflict with another assignment that he began at that
time.
Dyann Carr and Robert Newman resigned as a Directors on May 20, 1997
upon completion of the Wildwood Capital, LLC transaction stating that
the Company would no longer need the expertise that each had provided
in the past.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 1: Statement Re: Computation of Per Share Earnings
b. Reports on Form 8-K
Report filed on May 19, 1997 "Acquisition/Disposition of
Assets and Settlement"
Report filed on June 16, 1997 "Changes in Registrant's
Certifying Accountants"
13
<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: June 24, 1997 By: /s/ Charles Powell
------------------------------
Charles Powell
Acting Chief Executive
Officer and President
By: /s/ Gregory Carr
Date: June 24, 1997 ------------------------------
Gregory Carr
Secretary
14
EXHIBIT 11.01
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<S> <C> <C>
Period from
Three months January 18, 1995
ended (inception) to
March 31, 1997 December 31, 1995
-------------- -----------------
Weighted average shares and common
equivalent shares outstanding 3,387,924 5,380,000
---------- -----------
Total 3,387,924 5,380,000
========== ===========
Net Loss $ (217,187) $(1,146,187)
========== ===========
Per-share amount $ (0.06) $ (0.21)
========== ===========
</TABLE>
15
