FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition Period From ... to ...
Commission File No. 1-11873
K2 DESIGN, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3886065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
number)
55 BROAD STREET
NEW YORK, NEW YORK 10004
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (212) 614-0191
Check whether the issuer (1) has filed all reports required by
Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
CLASS OUTSTANDING AT JUNE
30, 1996
Common stock, par value $.01 3,495,482
Common stock redeemable purchase warrants 1,000,000
[10Q3-96]
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K2 DESIGN, INC. AND SUBSIDIARY
INDEX
Page
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - June 30, 1996
(unaudited) and December 31, 1995........................................3
Consolidated statements of operations - three
months and six months ended June 30, 1996 (unaudited)
and June 30, 1995 (unaudited)............................................4
Consolidated statements of cash flows -
six months ended June 30, 1996 (unaudited) and
June 30, 1995 (unaudited)................................................5
Notes to consolidated financial statements.................................7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.........................................8
PART II - OTHER INFORMATION
Items 1. - 5...............................................................12
Item 6. Exhibits and Reports on Form 8-K...................................12
SIGNATURES..................................................................12
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K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
ASSETS
<S> <C> <C>
(unaudited)
CURRENT ASSETS:
Cash $144,074 $17,756
Accounts receivable 287,609 133,694
Deferred offering costs 330,132 0
Prepaid and deferred expenses 123,138 0
Total current assets 884,953 151,450
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 161,514 67,603
RESTRICTED CASH 30,000 0
OTHER ASSETS 4,406 4,405
Total assets $1,080,873 $223,458
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $59,337 $45,770
Accounts payable 281,305 94,940
Accrued professional fees 78,348 22,000
Accrued compensation 30,344 23,952
Accrued taxes 19,653 3,727
Other accrued expenses 162,903 8,210
Customer advances 36,300 29,857
Total current liabilities 668,190 228,456
LONG-TERM DEBT AND CAPITAL LEASES 40,299 26,527
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 24,955 18,955
Additional paid-in capital 851,099 (62,376)
Retained earnings (deficit) (503,670) 11,896
Total stockholders' equity (deficit) 372,384 (31,525)
Total liabilities and stockholders' equity $1,080,873 $223,458
(deficit)
</TABLE>
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K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
<S> <C> <C> <C> <C>
1996 1995 1996 1995
(unaudited)
REVENUES $498,050 $383,423 $1,010,484 $417,062
DIRECT SALARIES AND COSTS 607,066 274,309 1,106,174 342,461
SELLING, GENERAL AND 260,626 72,296 386,583 84,745
ADMINISTRATIVE EXPENSES
DEPRECIATION 14,221 10,147 23,334 14,926
(383,863) 26,671 (505,607) (25,070)
Income (loss) from operations
INTEREST EXPENSE, net 6,780 82 7,762 401
PROVISION FOR INCOME TAXES 2,197 0 2,197 0
($392,840) $26,589 ($515,566) ($25,471)
Net income (loss)
($0.17) ($0.24)
NET LOSS PER COMMON SHARE
2,374,281 2,192,962
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
</TABLE>
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K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
<S> <C> <C>
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($515,566) ($25,471)
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation 23,334 14,926
Changes in-
Accounts receivable (153,915) (98,802)
Deferred offering costs (330,132) 0
Prepaid and deferred expenses (123,138) 0
Restricted cash (30,000) 0
Other assets 0 (1,497)
Accounts payable 186,365 78,107
Accrued professional fees 56,348 2,375
Accrued compensation 6,392 8,095
Accrued taxes 15,926 0
Other accrued expenses 154,693 21,732
Customer advances 6,443 18,250
Net cash (used in) provided by operating activities (703,250) 17,715
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchase of equipment (41,177) (6,193)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 6,000 10,000
Capital contribution 913,475 0
Principal payments on capital lease obligations (46,858) (11,596)
Payments on line of credit (1,872) 0
Net cash (used in) provided by financing activities 870,745 (1,596)
Net increase (decrease) in cash 126,318 9,926
CASH, beginning of period 17,756 3,326
CASH, end of period $144,074 $13,252
</TABLE>
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<TABLE>
<CAPTION>
Six Months Ended
<S> <C> <C>
1996 1995
(unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $7,774 $401
State income taxes 10,505 0
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Assets acquired under capital lease obligations $76,068 $34,639
</TABLE>
[10Q3-96]
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K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(1)BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company and reflect all adjustments, consisting
of only normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of financial results for the
three and six month periods ended June 30, 1996 and 1995, in accordance
with generally accepted accounting principles for interim financial
reporting and pursuant to Form 10-QSB and Regulation SB. Certain
information and footnote disclosures normally included in the Company's
annual audited consolidated financial statements have been condensed or
omitted pursuant to such rules and regulations.
The results of operations for the three and six month periods ended June
30, 1996 and 1995 are not necessarily indicative of the results of
operations to be expected for a full fiscal year. These interim condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the fiscal year ended
December 31, 1995, which are included in the Company's Registration
Statement on Form SB-2 filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and disclosures of
contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(2)NET LOSS PER COMMON SHARE:
Net loss per common share has been computed by dividing net loss by the
number of common shares outstanding. As required by the Securities and
Exchange Commission rules, all warrants, options and shares issued within
one year of the public offering at less than the public offering price
(see Note 3) are assumed to be outstanding for each period presented for
purposes of the per share calculation.
(3)SUBSEQUENT EVENT:
In July 1996, the Company completed its initial public offering in which
it sold 1,000,000 units for gross proceeds of $6 each. Each unit
consisted of one share of common stock and one redeemable common stock
purchase warrant (two of which entitle the holder to purchase one share of
common stock). Thereafter, the Company sold an additional 150,000 units
in connection with the exercise of the over-allotment option. The Company
received approximately $6,195,000 of net proceeds from the initial public
offering and the over-allotment option. The Company applied a portion of
the proceeds from its initial public offering to repay its then
outstanding bank loans and, accordingly, the Company currently has no
outstanding bank loans.
[10Q3-96]
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K2 DESIGN, INC. AND SUBSIDIARY
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
K2 Design, Inc. (the "Company") was founded in 1993 as a general
partnership and initially operated a traditional graphic design business. The
Company was hired to design a graphical user interface in March 1994 for Sierra
Magazine Online, a proprietary online service, and in August 1994 for NetMarket
Inc., the first company to perform a secure online transaction on the Internet,
at which time the Company shifted its principal business to Web site design and
creation. In January 1995, the Company was reorganized as a New York
corporation that elected to be treated as an S corporation for tax purposes.
In January 1996 the Company was reorganized as a Delaware holding company and
the New York corporation became a wholly-owned operating subsidiary thereof and
thus ceased to be an S corporation for tax purposes. For financial reporting
purposes, the Company's Consolidated Financial Statements include the Company
and its wholly-owned subsidiary.
Since the Company has engaged in its current primary line of business
only for approximately two years, the Company has a limited operating history
upon which an evaluation of the Company and its prospects can be based.
Management therefore believes that period-to-period comparisons of the
Company's results of operations are not indicative of future results. In
addition, operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
RESULTS OF OPERATIONS
General
Web site design and creation projects for which the Company has been
engaged have generally been completed within six to eight weeks, although
certain past, current and future projects have taken and are expected to take
longer to complete. Revenues are recognized on the completed contract method
on an individual project basis. Provisions for any estimated losses on
uncompleted projects are made in the period in which such losses are
determinable.
The Company has increased its expense levels to accommodate its past
growth and anticipated growth in its business, including substantially
increasing the number of employees, relocating its offices during the three
months ended June 30, 1996 and investing in equipment. The Company's failure
to expand its business in an efficient manner could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, there can be no assurance that the Company's revenues will
continue to grow at a rate that will support its increasing expense levels.
A substantial portion of the Company's revenues has been generated on a
fixed fee for service basis. In addition, revenues generated by certain
projects and anticipated projects are expected to be dependent on advertising
revenues generated by Web sites. The Company assumes greater financial risk
both on fixed-price contracts and contracts dependent upon advertising revenues
to pay the Company's fees than on either time-and-material or cost-reimbursable
contracts. Failure to anticipate technical problems, estimate costs accurately
or control costs during performance of a fixed-price contract, and failure to
generate advertising revenues in connection with contracts dependent thereon to
pay the Company's fees, which may be dependent upon the ability of the
Company's customer, may reduce the Company's profits or cause a loss.
The changes in the various line-items discussed below result from the
increase in the Company's revenues since it shifted its principal business to
Web site design and creation and the attendant increases in expenses.
Revenues
Revenues for the three months ended June 30, 1996 and 1995 were $498,050
and $383,423, respectively and for the six months ended June 30, 1996 and 1995
were $1,010,484 and $417,062, respectively. The increase in revenues in the
quarter ended June 30, 1996 as compared to that ended June 30, 1995 resulted
from the expansion of the Company's core Web site services business. The
increased revenues in the six months ended June 30, 1996 as compared to the
same period in 1995 also reflects the shift in the Company's business to Web
site design in the second quarter of 1995, as compared to the first quarter in
1995 in which substantially all of the Company's revenues were generated by
traditional graphic design services. The Company expects that the ratio of
revenues derived from Web site services as compared to revenues derived from
traditional graphic design services will continue to increase, since the
Company expects to continue to focus its resources on promoting its Web site
services and to limit its traditional graphic design services to those provided
in conjunction with Web site services. During the three months ended June 30,
1996, America Online Incorporated and Waterhouse Securities, Inc. accounted for
approximately 25% and 12% of the Company's revenues, respectively. During the
six months ended June 30, 1996, International Business Machines, Inc. and
America Online Incorporated accounted for approximately 24% and 14% of the
Company's revenues, respectively.
In addition, the increased loss on flat revenues in the three months
ended June 30, 1996 resulted primarily because (i) the Company's executive
management devoted substantially more time to sales and marketing in the prior
quarter as compared to the June 30, 1996 quarter, because of substantial
demands on their time during the June 30, 1996 quarter relating to the
Company's initial public offering and (ii) the Company continued to incur
increased expenses related to new personnel, the relocation of its offices and
research and development in the June 30, 1996 quarter.
Direct Salaries and Costs
Direct salaries and costs include all direct labor costs and other direct
costs related to project performance, such as independent contractors,
freelance labor, supplies, and printing and equipment costs. The Company's
direct salaries and costs for the three months ended June 30, 1996 and 1995
were $607,066, and $274,309, respectively, and consisted primarily of
approximately $327,000 and $51,000 paid as direct salaries, and secondarily of
approximately $151,000 and $95,000, paid to freelance artists and other
independent contractors (approximately $90,000 and $51,000 of which,
respectively, was paid to vendors of complex computer programming services
required for special features on Web sites). The Company expects that it will
hire additional programmers in anticipation of future projects and will
consequently incur increased direct costs in an effort to reduce reliance on
outside vendors of complex computer programming. Since the preceding sentence
is forward looking, there can be no assurance that the Company will
successfully achieve a net savings by bringing in-house more of the complex
programming required in its business. Among other things, the Company may not
be able to attract and retain personnel capable of performing these services at
a rate less than that provided by outside vendors and even if such persons can
be retained, their efforts may not entirely eliminate reliance on outside
vendors, especially if the Company's complex programming needs continue to
increase rapidly.
The Company's direct salaries and costs for the six months ended June 30,
1996 and 1995 were $1,106,175 and $342,461, respectively, and consisted
primarily of approximately $120,000 and $59,000 paid to freelance artists and
other independent contractors (approximately $241,000 and $45,000 of which,
respectively, was paid to vendors of complex computer programming services) and
approximately $515,000 and $58,000 paid as direct salaries.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
June 30, 1996 and 1995 were approximately $260,626 and $72,296, respectively,
and primarily consisted of professional fees, occupancy costs, travel, office
expenses and supplies and marketing and advertising, among other things.
Selling, general and administrative expenses for the six months ended June 30,
1996 and 1995 were approximately $368,584 and $84,745, respectively and
primarily consisted of occupancy costs, office expenses and supplies and
travel.
In addition, the Company expects to open additional sales offices,
including one in Germany and may also open one in Washington, D.C. As a result
of any such expansion, the Company's selling, general and administrative
expenses, particularly occupancy costs and office expenses and supplies, are
expected to increase.
Depreciation
Depreciation expense was $14,221 and $10,147 in the three months ended
June 30, 1996 and 1995, respectively, and $23,334 and $14,926 in the six months
ended June 30, 1996 and 1995, respectively, and related to depreciation of
equipment and leasehold improvements. The Company's depreciation expenses in
1996 have increased significantly as a result of depreciation of the Company's
equipment and leasehold improvements in connection with the relocation of its
offices.
Income Taxes
Effective January 1995, the Company elected to be treated as an S
Corporation for federal income tax purposes. As a result, the shareholders
were individually liable for federal income tax on the Company's taxable
income. In January 1996, the Company began to be treated as a C corporation
for federal and state income tax purposes. The Company is also liable for New
York state and city income taxes.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Quarterly revenues and operating results have fluctuated and will
fluctuate as a result of a variety of factors. These factors, some of which
have affected the Company and some of which are beyond the Company's control,
include the timing of the completion, material reduction or cancellation of
major projects, the loss of a major customer or the termination of a
relationship with a channel source, timing of the receipt of new business,
timing of the hiring or loss of personnel, changes in the pricing strategies
and business focus of the Company or its competitors, capital expenditures,
operating expenses and other costs relating to the expansion of operations,
general economic conditions and acceptance and use of the Internet. At the
present time, the Company has determined to increase expense levels, which to a
large extent are fixed, based in part on expectations as to future revenues and
will base future expense levels similarly. As a result, operating expenses as
a percentage of revenues have increased in the three and six months ended June
30, 1996 as compared to the same periods in 1995. Revenues and operating
results are difficult to forecast because of these fluctuations and because the
Company lacks historical financial data for a significant number of periods.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall.
Any significant shortfall of demand for the Company's services in
relation to the Company's expectations would have an adverse impact on the
Company's business, operating results and financial condition.
The Company's quarterly operating margins may also fluctuate from period
to period depending on the relative mix of lower cost full time employees
versus higher cost independent contractors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current primary focus is on increasing its Web site
business and the Company continues to hire additional personnel and to increase
expenses related to administration, production, technical resources, marketing,
customer support and infrastructure to enhance and expand its operations.
During the three months ended June 30, 1996, the Company hired 11 new
employees, consisting of four administrative personnel, three production
personnel, two sales and marketing personnel and two artists. In addition, the
Company had an operating cash flow deficit of $(530,675) and $(703,000) in the
three months and six months ended June 30, 1996, respectively, which reflected
the increased expenses incurred in connection with the Company's expansion.
The Company also finances the purchase of certain equipment through capital
leases. The principal balance of such leases was $82,265 at June 30, 1996 and
is payable in varying installments through the year 2001.
In July 1996, the Company completed its initial public offering in which
it sold 1,000,000 Units for gross proceeds of $6 each. Each Unit consisted of
one share of common stock and one redeemable common stock purchase warrant (two
of which entitle the holder to purchase one share of common stock).
Thereafter, the Company sold an additional 149,939 Units in connection with the
exercise of the over-allotment option. The Company received approximately
$6,195,926 of net proceeds from the initial public offering and the over-
allotment option. The Company applied a portion of the proceeds from its
initial public offering to repay its then outstanding bank loans and,
accordingly, the Company currently has no bank loans.
In addition, in May 1996, the Company sold 400,002 shares of its common
stock in a private placement for $1.75 each, or an aggregate of $700,000 gross
proceeds which yielded net proceeds of $619,400.
The Company is dependent on the proceeds of its initial public offering
and its prior private placements, together with operating revenues, for working
capital in order to be competitive, to meet the increasing demands for service,
quality and pricing and for any expansion of its business. The Company may
also require substantial alternative financing in order to satisfy its working
capital needs, which may be unavailable or prohibitively expensive since the
Company's only assets available to secure additional financing are accounts
receivable.
Since March 31, 1996, the Company has spent approximately $145,000 on
capital expenditures, consisting of furniture, fixtures and leasehold
improvements acquired and made in connection with the Company's recent
relocation of its principal offices. The Company expects to make additional
capital expenditures of approximately $60,000 during the quarter ending
September 30, 1996 consisting of furniture and computer equipment for its
principal offices. Additional capital expenditures may be made in connection
with the opening of additional sales offices.
[10Q3-96]
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K2 DESIGN, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Items 1.- 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
K2 DESIGN, INC.
Date: September 13, 1996 /S/ DAVID J. CENTNER
-------------------------------
David J. Centner
Chairman Of The Board,
Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer
[10Q3-96]
