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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended December 31, 1999.
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act for the
transition period from _________________ to _________________.
Commission file number 0-27587
CDKNET.COM, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3586087
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
595 Stewart Avenue, Suite 710
Garden City, N.Y. 11530
(516) 222-8800
WWW.CDKNET.COM
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(Address, including zip code, telephone number,
including area code, and web address of the principal
executive offices of the registrant)
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(Former name, former address and former fiscal year,
if changed since last report)
Applicable Only to Issuers Involved in Bankruptcy Proceedings During the
Preceding Five Years: Check whether the registrant filed all documents and
reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
Applicable Only to Corporate Issuers: State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practicable
date: February 11, 2000 18,576,157
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Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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<PAGE>
Table of Contents
Item No. Page
- -------- ----
Part I. Financial Information.
1. Financial Statements ....................................... F-1
Notes to Financial Statements .............................. F-6
2. Management's Discussion and Analysis ....................... 2
Part II. Other Information.
1. Legal Proceedings .......................................... II-1
2. Changes in Securities ...................................... II-1
3. Defaults Upon Senior Securities ............................ II-6
4. Submission of Matters to a Vote of Security Holders ........ II-6
5. Other Information .......................................... II-6
6. Exhibits and Reports on Form 8-K ........................... II-6
Signatures .......................................................... II-7
i
<PAGE>
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements
Consolidated Balance Sheets at December 31, 1999 (unaudited)
and June 30, 1999 F-1
Consolidated Statements of Operations for the three months ended December
31, 1999 and 1998, six months ended December 31, 1999 and 1998
(unaudited) F-2
Consolidated Statement of Stockholders' Equity for the period
July 1, 1999 to December 31, 1999 (unaudited) F-3
Consolidated Statements of Cash Flows for the six months
ended December 31, 1999 and 1998 (unaudited) F-4
Notes to Consolidated Financial Statements F-6 -F-8
</TABLE>
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1999 1999
------------ ------------
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 147,349 $ 231,347
Accounts receivable 27,754 19,000
Due from officer -- 11,600
Prepaid expenses and other current assets 1,594 9,907
------------ ------------
Total current assets 176,697 271,854
FURNITURE AND EQUIPMENT - at cost,
less accumulated depreciation and amortization of $217,982 and
$152,286 at December 31, 1999 and June 30, 1999, respectively 487,159 489,053
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED,
less accumulated amortization of $ 2,186,879 and $1,472,753
at December 31, 1999 and June 30, 1999, respectively 4,954,378 5,668,504
INTANGIBLE ASSETS, less accumulated amortization of $ 589,687 and
$452,467 at December 31, 1999 and June 30, 1999, respectively 782,516 919,736
OTHER ASSETS
Deferred financing costs, less accumulated amortization of $52,511
and $37,400 at December 31, 1999 and June 30, 1999, respectively 29,389 210,750
------------ ------------
$ 6,430,139 $ 7,559,897
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 67,000 $ 220,778
Accrued expenses and other current liabilities 739,376 415,334
Due to related party 102,519 125,000
Current portion of long-term debt and capitalized lease obligations 62,837 67,939
------------ ------------
Total current liabilities 971,732 829,051
LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS,
net of current portion 178,221 205,416
SUBORDINATED CONVERTIBLE DEBENTURES 275,000 1,671,000
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock - par value $.0001 per share; authorized
5,000,000 shares; (redemption value $1,500,000) 1,251,680 --
Common stock - par value $.0001, per share; authorized
40,000,000 shares; 17,360,979 and 14,046,906 shares issued and
outstanding at December 31, 1999 and June 30, 1999 1,736 1,405
Additional paid-in capital 13,947,412 12,232,100
Accumulated deficit (10,195,642) (7,379,075)
------------ ------------
5,005,186 4,854,430
------------ ------------
$ 6,430,139 $ 7,559,897
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-1
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended December 31, Six month ended December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
----------(unaudited)----------
<S> <C> <C> <C> <C>
Net revenues $ 16,491 $ 183,660 $ 40,154 $ 342,053
Cost of revenues 22,647 13,127 37,605 108,943
------------ ------------ ------------ ------------
Gross profit (6,156) 170,533 2,549 233,110
Selling, general and administrative expenses 1,128,048 638,288 1,815,081 1,423,019
Depreciation and amortization 459,106 468,953 942,403 998,538
------------ ------------ ------------ ------------
Loss from operations (1,593,310) (936,708) (2,754,935) (2,188,447)
Other expense
Interest expense, including interest relating to
beneficial conversion and debt discount 34,379 7,186 61,633 109,632
NET LOSS $ (1,627,689) $ (943,894) $ (2,816,568) $ (2,298,079)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (.10) $ (.08) $(.19 ) $(.19 )
============ ============ ============ ============
Weighted-average shares outstanding -
basic and diluted 16,085,979 11,945,424 15,216,376 11,912,924
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-2
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended December 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common stock
----------------------------- -----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1999 -- -- 14,046,906 $ 1,405
Issuance of common stock -- -- 2,782,000 278
Exercise of stock options -- -- 317,073 31
Compensation related to stock option
plan and donated services -- -- -- --
Common stock and stock warrants
issued for services -- -- 215,000 22
Conversion of 5.75% debentures to
5.75% preferred stock 1,500,000 1,251,680 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1999 (unaudited) 1,500,000 $ 1,251,680 17,360,979 $ 1,736
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Additional Total
paid-in Accumulated stockholders'
capital deficit equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance, June 30, 1999 $ 12,232,100 $ (7,379,075) $ 4,854,430
Issuance of common stock 1,301,722 -- 1,302,000
Exercise of stock options 11,737 -- 11,768
Compensation related to stock option
plan and donated services 123,875 -- 123,875
Common stock and stock warrants
issued for services 277,978 -- 278,000
Conversion of 5.75% debentures to
5.75% preferred stock -- -- 1,251,680
Net loss -- (2,816,567) (2,816,567)
------------ ------------ ------------
Balance, December 31, 1999 (unaudited) $ 13,947,412 $(10,195,642) $ 5,005,186
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-3
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
Six months December 31,
1999 1998
-----------(unaudited)-----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,816,568) $(2,298,079)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 970,755 1,101,167
Compensation related to stock option plan and
donated services 123,875 --
Common stock and stock warrants issued for services 278,000 117,150
Changes in assets and liabilities
(Increase) decrease in accounts receivable (8,754) 30,897
Decrease (increase) in due from officer 11,600 (9,229)
(Increase) decrease in prepaid expenses and other
current assets (8,313) 20,727
Decrease in accounts payable (153,778) (128,148)
Increase (decrease) in accrued expenses and other
current liabilities 301,561 (13,246)
----------- -----------
1,514,946 1,119,318
----------- -----------
Net cash used in operating activities (1,301,622) (1,178,761)
----------- -----------
Cash flows from investing activities
Purchase of furniture and equipment (63,802) (8,068)
----------- -----------
Net cash used in investing activities (63,802) (8,068)
----------- -----------
Cash flows from financing activities
Proceeds from notes payable -- 450,000
Proceeds from subordinated convertible debentures -- 300,000
Principal payments on long-term debt and capitalized
lease obligations (32,342) --
Proceeds from issuance of common stock 1,313,768 --
----------- -----------
Net cash provided by financing activities 1,281,426 750,000
----------- -----------
NET (DECREASE) INCREASE IN CASH (83,998) (436,829)
----------- -----------
Cash at beginning of period 231,347 469,266
----------- -----------
Cash at end of period $ 147,349 $ 32,437
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-4
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Six months December 31,
1999 1998
---------- ----------
----------(unaudited)---------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 7,602 $ 8,552
Noncash investing and financing transactions:
Common stock and stock warrants issued for purchase
of fixed assets 110,000 --
Common stock issued for purchase of minority interest 4,506,122
Debt discount -- 130,318
Issuance of stock upon conversion of subordinated
debentures -- 70,000
Common stock and stock warrants issued for financing
Costs and services 105,000 10,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying consolidated financial statements of CDKNET.COM, Inc. (the
"Company") and for the periods ended December 31, 1999 and the periods
ended December 31, 1998 are unaudited and include all adjustments which, in
the opinion of management have been prepared on the same basis as the
audited financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the financial information set forth therein have been included, in
accordance with generally accepted accounting principles. The results of
operations for the six months ended December 31, 1999 are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the annual financial statements for the year ended June
30, 1999 on Form 10-SB12/G.
NOTE 1 - EQUITY TRANSACTIONS
a. On August 1, 1999, the Company issued an aggregate of 1,030,000 stock
options to the subsidiary's CEO and an employee at an exercise price of
$1.00. The quoted market price of the Company's stock at the date of
grant ranged from $1.00 - $1.50.
b. On August 1, 1999, CDKnet entered into a two-year employment agreement
with its president. The agreement provides for a minimum annual salary
of $150,000 and the issuance of 750,000 stock options, expiring in five
years, with an exercise price of $1.00 vesting over the term of the
agreement or earlier if a change in control or CDKnet terminates the
agreement without cause. The quoted market value of the Company's stock
on the date of grant was $1.50. The agreement provides for six months
of severance pay. All payments under the agreement are guaranteed by
CDK. During the three months ended September 30, 1999 the Company
recorded compensation expense relating to the stock options of $46,875.
On August 1, 1999, CDKnet entered into a two-year employment agreement
with an executive vice president. The agreement provides for a minimum
annual salary of $150,000 and the issuance of 1,000,000 stock options,
expiring in five years, with an exercise price of $1.00 vesting over
the term of the agreement or earlier if a change in control or CDKnet
terminates the agreement without cause. The quoted market value of the
Company's stock on the date of grant was $1.50. The agreement provides
for severance payments, under certain conditions, for the unexpired
term of the agreement. All payments under the agreement are guaranteed
by CDK. During the three months ended September 30, 1999, the Company
recorded a compensation expense relating to the stock options of
$65,000.
F-6
<PAGE>
c. On October 1, 1999, the Company gave notice to the holders of the
$1,500,000 5.75% Subordinated Convertible Debentures and exercised its
right to call the outstanding Debentures in exchange for $1,500,000 of
5.75% Convertible Preferred Stock. Under the terms of the Debentures,
the Convertible Preferred Stock shall have: (1) liquidation preferences
equal to the principal amount of the Debenture, (2) a 5.75% cumulative
annual dividend payable quarterly, (3) rights to convert into shares of
Common Stock at the same conversion rate as the Debentures and (4) the
same redemption rights at the option of the Company.
d. On October 5, 1999, the Company obtained a sixty-day waiver from the
holders of the 6% and 5.75% Subordinated Convertible Debentures to
waive any event of default relating to the common stock of the Company
being suspended from an exchange or over-the-counter market.
e. During August and September 1999, the Company issued 332,000 shares of
common stock to an unrelated investor and received net proceeds of
$310,000. In connection with the transaction, the investor was given a
30-day option, which expired September 17, 1999 to purchase up to an
additional 2,668,000 shares of common stock for approximately
$3,410,000.
f. In August 1999, stock options to purchase 400,000 shares of common
stock were exercised, using cashless exercises pursuant to which
300,000 shares of common stock were issued.
g. An individual exercised options to purchase 17,073 shares of common
stock for $11,768 for the quarter ended September 30, 1999.
h. On November 1, 1999, pursuant to a securities purchase agreement, the
Company issued 1,000,000 shares of common stock and received net
proceeds of $500,000. Further, in connection with the agreement, the
Company issued 200,000 stock warrants, expiring May 2002, with an
exercise price of $1.25 per share and granted the purchasers the option
to purchase an additional 2,000,000 shares of common stock for $.50 per
share which were extended to February 15, 2000. In January 2000, the
Company received $500,000 from the exercise of 1,000,000 of the
aforementioned options.
i. On November 2, 1999, the Company issued 1,250,000 shares of common
stock and received net proceeds of $437,500. In connection with the
transaction, in which the Company's CEO and other shareholders
fulfilled a commitment to invest $200,000 in the Company, the Company
issued 125,056 stock warrants, expiring November 2, 2001, at an
exercise price of $.75 per share. The warrants include provisions for
cashless exercises and adjustments to the purchase price and the number
of shares, as defined. Further, the Company and the purchasers executed
a registration rights agreement which requires mandatory registration
of the shares issued within a specified period.
j. On November 16, 1999, the Company's CEO rescinded 750,000 options
granted on August 1, 1999 to purchase the Company's common stock for no
future consideration.
F-7
<PAGE>
k. On November 16, 1999, pursuant to a Subscription Agreement with a third
party, the Company issued 200,000 shares of common stock and received
net proceeds of $100,000. In connection with the agreement, the
investor agreed to purchase an additional 1.6 million shares of common
stock at $.50 per share through May 2000. In addition, the Company and
the investor entered into a Technology and Licensing Agreement which
will give the Company a 4.89% interest in the investor and additional
fees upon completion of specified services and further, grants a
license to use certain of CDK's technology. Another $150,000 has been
received for the sale of 300,000 shares of common stock through
February 3, 2000 pursuant to the aforementioned stock subscription
agreement.
NOTE 2 - VALUEFLASH.COM, INC. TRANSACTIONS
a. The Company recently completed the V-Flash software, a communication
module which provides a real-time, direct communication vehicle for
marketers to reach their customers, such software is to be distributed
through a separate newly formed subsidiary ValueFlash.com, Inc. The
Company has raised an additional $900,000 through the sale of stock and
options in the ValueFlash subsidiary.
F-8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
The following contains forward-looking statements based on current expectation,
estimates and projections about our industry, management's beliefs and
assumptions made by management. All statements, trends, analyses and other
information contained in this report relative to trends in our financial
condition and liquidity, as well as other statements, including, but not limited
to, words such as "anticipate," "believe," "plan," "intend," "expect,"
"predict," and other similar expressions constitute those statements. These
statements are not guarantees of future performance and are subject to risks and
uncertainties that are difficult to predict. Accordingly, actual results may
differ materially from those anticipated or expressed in the statements.
Potential risks and uncertainties include, among others, those set forth below.
Particular attention should be paid to the cautionary statements involving our
limited operating history, the unpredictability of its future revenues, the
unpredictable and evolving nature of our business model, the competitive online,
multimedia compact disc (CD) industry and the risks associated with capacity
constraints, systems development, management of growth and business expansion,
as well as other risk factors.
1. General
We expect to receive funds from the sale of our products and services, including
agreements, described below, including our agreement with Asia Pioneer.
We have also funded our operations through equity financing and convertible debt
financing and have had no lines of credit or other similar credit facility
available to us. Our recent efforts to raise capital through equity financing
have been successful, providing near-term operating capital.
We intend to reduce operating expenses through: (1) reallocating resources to
the continued development of our V-Flash product, described below, (2) our
continued policy of outsourcing of production, (3) reducing marketing costs, and
(4) reducing payroll.
Additionally, we have successfully accomplished the initial stages of our fiscal
2000 operating plan with: (1) the hiring of Tom Ross to head our Entertainment
Group in Los Angeles, California, and (2) the recent completion of V-Flash, our
new software based communication module which we are distributing through our
subsidiary, ValueFlash.com, Inc. The V-Flash product was initially developed by
our subsidiary, CDKnet, LLC, which transferred the V-Flash related software to
our new subsidiary, ValueFlash.com, in January 2000 for further development and
production. V-Flash provides a real-time, direct communication vehicle for
marketers to reach their customers using a PC desktop application. ValueFlash's
strategy is the first to utilize retail music CD sales as a distribution
strategy for software that will serve as a key marketing tool. ValueFlash's
operations are funded through separate equity financings achieved through
private placements.
We also continue to rely on our ability to raise money through equity financing
to finance all of our business endeavors. To date, we have focused our funds on
the development of CDKTM products (including CDKTM 1.0, CDKTM 2.0, and
Gameplayer 2.0 and our new E-commerce facility MixFactory.comTM), as well as
V-Flash, our new desktop direct marketing application.
2
<PAGE>
Our current business development efforts include both full-time employees as
well as outside consultants. Consultants are compensated on a performance basis.
We have had success at recent financing efforts although we have had a history
of operating losses which raised doubt about our ability to continue operations.
For example, we have a licensing agreement with Asia Pioneer that provides us
with $150,000 infusion of capital each month for six months until May 2000 and,
therefore, serves as a liquidity and capital resource. The parties are currently
renegotiating this agreement to extend the payments until June 30, 2000.
Additionally, the parties have entered into a technology and license agreement
which gives us a 4.89% interest in Asia Pioneer at the completion of the
underlying services in exchange for a license to use certain CDKTM technology.
Our ownership interest in Asia Pioneer can be sold in the event we need a cash
infusion. We have also successfully raised over $ 900,000 in private financings
through our subsidiary, ValueFlash.com, Inc. since December 31, 1999.
However, if we are unable to obtain significant additional financing or
otherwise obtain working capital to fund our operations, we may be obliged to
seek protection of the bankruptcy courts. Our former independent certified
public accountants added an emphasis paragraph to their report on our
consolidated financial statements as of June 30, 1999 and for the year ended
June 30, 1999, and in the period October 1, 1997 (date of inception) to June 30,
1998, relating to factors that substantial doubt about our ability to continue
as a going concern. The factors cited by them include the following: (1)
continued losses; (2) use of significant cash in operations and, and (3) lack of
sufficient funds to execute our business plan.
From a marketing standpoint, we continue to: (1) maintain a corporate Web site
which solicits feedback from potential clients; (2) appear at relevant trade
shows and seminars; and (3) retain a public relations firm to service corporate
announcements to the press. In the near term, we will continue to focus on
generating revenue from the sale of client-specific CDKs, MixFactory custom CD
services, and the V-Flash desktop, direct marketing application and
communications module.
Results of Operations - September 30, 1999 to December 31, 1999
- ---------------------------------------------------------------
During the quarter ending December 31, 1999, we incurred a net loss of
$1,627,689 on revenues of $16,491 compared to a net loss of $943,894 on revenues
of $ 183,660 in the prior period ended December 31, 1998. Revenues declined
$7,172.00 in the current period because our focus shifted to the enhancement of
our core technologies, such as the perfection of our MixFactoryTM technology and
CDKTM version 2.0 and Macintosh compatible CDKTM version 1.5, as well as the
penetration of core markets. From September 30, 1999 to December 31, 1999, we
have expended approximately $119,251 on research and development.
Liquidity and Capital Resources
- -------------------------------
3
<PAGE>
During the period July 1, 1999 to December 31, 1999, we raised a total of
$1,302,000 from the following private placements of equity:
o On August 9, 1999, we raised $155,000 from Y2G.com, Inc.
through the issuance of 216,000 shares of common stock. On
September 8, 1999, we sold Y2G an additional 116,000 shares of
common stock for $155,000.
o On November 1, 1999, we raised $500,000 from Erno and Rachel
Bodek through the issuance of 1,000,000 shares of common
stock, along with 30-month Warrants to purchase an additional
200,000 shares of common stock at $1.25 per share, and an
option to purchase another 2,000,000 shares of common stock at
$.50 per share which shall expire on December 31, 1999.
o On November 2, 1999, we raised $437,500 through the issuance
of 1,250,000 shares of common stock to four investors (The
Gross Foundation, Inc., Fox Distribution, Inc., Steven A.
Horowitz, and Michael Sonnenberg) along with two- year
warrants to these investors to purchase an additional 125,056
shares of common stock.
o On November 16, 1999, we entered into a Subscription Agreement
with Asia Pioneer where we raised $100,000 from Asia Pioneer
through the issuance of 200,000 shares of common stock, along
with six allotments to purchase an additional 300,000 shares
of common stock per month at $150,000 per allotment. The
allotments will be fulfilled in May 2000. The parties also
entered into a Technology and License Agreement on the same
day.
The proceeds from these issues have and will be used to (i) continue our ongoing
operations, (ii) development of CDKTM, V-Flash, Gameplayer, and MixFactory.comTM
product lines, and (iii) to repay our debt.
4
<PAGE>
Results of Operations - 1999 Compared to the Period Ended June 30, 1998.
- ------------------------------------------------------------------------
During the fiscal year ending June 30, 1999, we incurred a net loss of
$6,147,600 on revenues of $474,344 compared to a net loss of $1,184,475 on
revenues of $616,137 in the prior period ended June 30, 1998. Revenues resulted
from sales of products from our CDKnet product line. Revenues declined from
$616,137 in the prior period because our financial condition restricted its
ability to promote its products. Cost of revenues in fiscal 1999 were
approximately $288,762 or 61% compared to $415,769 or 67% in the prior period.
We believe this minor improvement is within normal variances and is not
material.
Research and development expenses incurred during the year ended June 30, 1999
related to the continued new development and enhancement of the CDKnet product
line, the creation of MixFactory.comTM, and making the E-commerce venue operate.
Selling, general and administrative expenses increased from $1,580,478 in the
prior period to $3,257,551 principally because the prior period was only nine
months and because of material increases in payroll, consulting and professional
fees related to expansion of our business, research and development activities
and operating as a public company.
Depreciation and amortization expenses increased from $133,776 in the prior
period to $1,981,130 principally because of amortization of goodwill related to
the purchase of minority interests of Kelly Music and Entertainment Corp. and
various shareholders of Kelly Music as well as increases due to increases in
fixed assets. Other significant expenses incurred during this period arose in
the form of the fair value charges for stock options and warrants granted
principally for consulting and legal services of $450,870, include in selling,
general and administrative expenses, and the discount on convertible debentures
and other loans of $1,038,008.
At year end June 30, 1999, cash amounted to $231,347 and current liabilities
were $829,051. We do not have sufficient funds to finance operations for the
next year. We expect to finance our operations through revenues from sales of
our products and services and through private placements of equity and debt
securities. If we are unable to raise additional financing, we may be unable to
continue operations.
In March 1999, we received approval by the United States Patent Office for
certain claims made in our patent application for CDKTM technology. Subsequent
to year ended June 30, 1999, a submission has been made to the United States
Patent Office for reconsideration of the unapproved claims and filing
publication and perfection of our claims.
We are now actively marketing and beginning to sell CDKnet products and have
launched the first of several MixFactoryTM sites.
Liquidity and Capital Resources
- -------------------------------
5
<PAGE>
During fiscal 1999, we raised a total of $2.1 million from the following private
placements of debt and equity:
o Between September 4, 1998 and January 21, 1999, we raised
$600,000 through the issuance of $600,000 in 6% Subordinated
Convertible Debentures and five- year warrants to purchase
60,000 shares of common stock at $3.00 per share.
o On February 2, 1999, we raised $1,500,000 through the issuance
of $1,500,000 in 5.75% Subordinated Convertible Debentures and
four-year warrants to purchase 100,000 shares of common stock
at $1.75 per share. During fiscal 1998, we raised a total of
$224,986 from the following private placements of debt and
equity:
o On May 21, 1998, our predecessor, International Pizza Group,
issued 2,999,985 common shares as consideration for $224,986
as part of a private placement. We issued 7,300,363 common
shares in connection with the acquisition of a combined 73.85%
of the equity interests in CDKnet, LLC.
The proceeds from these issues have and will be used to (i) continue our ongoing
operation, (ii) development of CDKTM, Gameplayer, and MixFactory.comTM product
lines, and (iii) to repay our debt.
Factors Affecting Future Results.
- --------------------------------
We do not provide forward looking financial information. However, from time to
time statements are made by employees that may contain forward looking
information that involve risks and uncertainties. In particular, statements
contained in this registration statement that are not historically containing
predictions and are made under the Safe Harbor Corporate Private Sector
Litigation Reform Act of 1995. Our actual result of operations and financial
condition have varied and may in the future vary significantly from those stated
in any predictions. Factors that may cause these differences include without
limitation the risk, uncertainties and other information discussed within this
registration statement, as well as the accuracy of our internal estimate of
revenue and operating expense levels. We face a number of risk factors which may
create circumstances beyond the control of management and adversely impact the
ability to achieve our business plan.
6
<PAGE>
Year 2000 Compliance
- --------------------
We did not experience any major "Year 2000" or "Y2K" problems January 1, 2000.
In 1999, we completed our testing and preparation for any potential Y2K problems
with our internal systems, computers and software, and the products and systems
of our critical vendors and suppliers. The costs associated with our review was
minimal, primarily because we utilized internal personnel to complete the
review, and because our systems are relatively new.
Despite the lack of disruptions in our peripheral operating systems or with
certain non-critical vendors, it is possible that our vendors may have Y2K
problems that will not be known until one full cycle of vendor orders has been
completed. Furthermore, the possibility that disruptions due to the ability of
our systems to recognize February 29, 2000 remains despite our preparation for,
and testing against, such potential problems.
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Incorporated by reference from our registration statement on
Form 10-SB filed on December 28, 1999.
Item 2. Changes in Securities
---------------------
Series A Preferred Stock Designation
------------------------------------
On October 6, 1999, we designated 1,500,000 shares of our
preferred stock as Series A Preferred Stock. The Series A Preferred Stock has
voting rights and ranks as follows with respect to dividend rights and rights
upon liquidation, winding up and dissolution: (1) senior to any other series of
Preferred Stock (except as established by the Board of Directors), (2) on parity
with any other series of Preferred Stock established by the Board of Directors,
and (3) prior to any other of our equity securities, including our common stock.
SB-2 Filing
-----------
On December 22, 1999, we filed a Registration Statement on
Form SB-2 with the Commission under the Securities Act of 1933 registering
4,125,056 shares of our common stock: (1) for sale by investors who purchased
1,500,000 shares of common stock in private placements by us, (2) issuable upon
exercise of warrants to purchase 125,056 shares of common stock, and (3)
2,500,000 shares of common stock issuable upon the conversion of preferred stock
held by Casa di Cura. As of February 14, 2000, that registration statement had
not been declared effective.
II-1
<PAGE>
Recent Sales of Unregistered Securities
---------------------------------------
During the last three years, we have issued or sold the
following securities without registering them under the Securities Act of 1933
in reliance upon the exemptions from registration provided by the Securities Act
as follows:
o 300,000 shares to Great Wizard Investments Limited on
February 14, 2000, pursuant to a subscription
agreement entered into between us and Asia Pioneer
Limited. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment
purposes.
o 50,000 shares to Energenic, LLC on February 7, 2000,
together with the issuance 50,000 one year options
exercisable at $1.00 per share for the purchase of
common stock for services and options valued at
$60,000 pursuant to the software Agreement between us
and Energenic, LLC. We issued stock to the purchaser
in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for
investment purposes.
o 125,000 shares of common stock of our subsidiary,
ValueFlash.com Inc., to Michael Vasinkevich for
$250,000 on February 7, 2000, together with 62,500 8
month options to purchase common stock of
ValueFlash.com Inc., at an exercise price of $2.00
per share. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for
investment purposes.
o 500,000 shares of common stock of our subsidiary,
ValueFlash.com Inc., to Amro International for
$500,000 on February 2, 2000, together with 250,000 8
month options to purchase common stock of
ValueFlash.com Inc., at an exercise price of $2.00
per share. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for
investment purposes.
o 75,000 shares of common stock of our subsidiary,
ValueFlash.com Inc. to Alvin Pock for $150,000 on
January 31, 2000, together with 75,000 8 month
options to purchase common stock of ValueFlash.com
Inc., at an exercise price of $2.00 per share. We
issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 2,500,000 5 year options to purchase common stock of
ValueFlash.com Inc., at an exercise price of $2.00
per share to Michael Vasinkevich on January 28,
II-2
<PAGE>
2000, in accordance of a Finder's Agreement between
ValueFlash.com, Inc. and Michael Vasinkevich.
o 2,500,000 5 year options to purchase common stock of
ValueFlash.com Inc., at an exercise price of $2.00
per share to Shai Bar Lavi on January 28, 2000, in
accordance of an Employment Agreement between
ValueFlash.com, Inc. and Shai Bar Lavi.
o 1,500,000 5 year options to purchase common stock of
ValueFlash.com Inc., at an exercise price of $2.00
per share to Steven A. Horowitz on January 28, 2000,
in accordance of a Finder's Agreement between
ValueFlash.com, Inc. and Steven A. Horowitz.
o 1,000,000 5 year options to purchase common stock of
ValueFlash.com Inc., at an exercise price of $2.00
per share to Shlomo Shur on January 28, 2000, in
accordance of an Employment Agreement between
ValueFlash.com, Inc. and Shlomo Shur.
o 20,000 shares of common stock to Cabaret Software,
Inc. on January 20, 2000 for services valued at
$20,000. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment
purposes.
o On January 6, 2000, we raised $500,000 through the
exercise of options by Erno and Rachel Bodek to
purchase 1,000,000 shares of common stock at the
exercise price of $0.50 per share. We issued stock to
the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the
stock for investment purposes.
o On November 16, 1999, we entered into a Subscription
Agreement with Asia Pioneer where we raised $100,000
from Asia Pioneer through the issuance of 200,000
share of common stock, along with six allotments to
purchase an additional 300,000 shares of common stock
per month at $150,000 per allotment. The allotments
will be fulfilled in May 2000. We issued stock to the
purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the
stock for investment purposes.
o 714,286 shares The Gross Foundation for $250,000 on
November 2, 1999 along with 71,486 two-year warrants
to purchase common stock for $.75 per share. We
issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
II-3
<PAGE>
o 142,857 shares Michael Sonnenberg for $50,000 on
November 2, 1999 along with 14,285 two-year warrants
to purchase common stock for $.75 per share. We
issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 107,143 shares Fox Distribution, Inc. for $37,500 on
November 2, 1999 along with 10,714 two-year warrants
to purchase common stock for $.75 per share. We
issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 285,714 shares to Steven A. Horowitz for $100,000 on
November 2, 1999 along with 28,571 two-year warrants
to purchase common stock for $.75 per share. We
issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 1,000,000 shares to Erno and Rachel Bodek for
$500,000 from Erno and Rachel Bodek on November 1,
1999 through the issuance of 1,000,000 shares of
common stock, along with 30-month Warrants to
purchase an additional 200,000 shares of common stock
at $1.25 per share, and an option to purchase another
2,000,000 shares of common stock at $.50 per share
which shall expire on December 31, 1999. We issued
stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased
the stock for investment purposes.
o 50,000 shares to Energenic, LLC for services valued
at $50,000 on October 29, 1999, in addition to an
agreement to issue 50,000 shares of common stock to
Energenic upon the completion of milestones pursuant
to the Software Agreement between us and Energenic
and the issuance of an additional 50,000 one-year
options exercisable at $1.00 per share for the
purchase of shares of common stock upon the
completion of the project as set forth in the
Software Agreement. We issued stock to the purchaser
in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for
investment purposes.
o 75,000 shares to Lawrence Adams Ltd. for services
valued at $75,000 on September 14, 1999. We issued
stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased
the stock for investment purposes.
II-4
<PAGE>
o 110,000 shares to Steven Wildstein through the
exercise of cashless options on September 14, 1999.
We issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 17,073 shares to Alexander Zemel through the exercise
of stock options. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for
investment purposes.
o 40,000 shares to Michael Sonnenberg through the
exercise of cashless options on September 14, 1999.
We issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 150,000 shares to Lawrence Adams Ltd. through the
exercise of cashless options on September 14, 1999.
We issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 216,000 shares to Y2G.com, Inc. for $155,000. On
September 8, 1999, the Company sold Y2G an additional
116,000 shares of common stock for $155,000. We
issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 30,000 shares to Cabaret Software, Inc. on August 10,
1999, and 10,000 shares on September 18, 1999 for
services valued at $30,000. We issued stock to the
purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the
stock for investment purposes.
o During the period from July 1, 1998 to June 30, 1999,
we issued 2,746,558 common shares, 600,000
Convertible Class A Debentures, 1,500,000 Convertible
Class B Debentures for cash of $2,100,000, net of
issuance costs of $248,150. During the year ended
June 30, 1999, we also issued 1,328,498 Warrants to
purchase common shares from the following
transactions: (1) 75,000 common shares and 100,000
Warrants were issued to Bandai Holdings USA for the
purchase of equipment used in our MixFactory.comTM
E-Commerce facility, and (2) 1,883,635 common shares
were issued to Kelly Music for the purchase of its
26.15% interest in CDKnet, LLC which resulted in
securing for us 100% of the equity interests of
CDKnet, LLC. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D
because the purchaser is an accredited investor who
purchased the stock for investment purposes.
II-5
<PAGE>
o During the period October 1, 1997 (date of inception)
to June 30, 1998, our predecessor, International
Pizza Group, issued 2,999,985 common shares $224,986
as part of a private placement. We issued 7,300,363
common shares in connection with the acquisition of
73.85% of the equity interests in CDKnet, LLC. We
issued stock to the purchaser in reliance upon the
exemption provided by Regulation D because the
purchaser is an accredited investor who purchased the
stock for investment purposes.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable.
Item 5. Other Information.
-----------------
On February 10, 2000, we dismissed Grant Thornton LLP ("Grant
Thornton"), our former independent certified public accountants. During the past
two years, Grant Thornton added an emphasis paragraph to their report on our
consolidated financial statements as of June 30, 1999 and for the year ended
June 30, 1999, and in the period October 1, 1997 (date of inception) to June 30,
1998, relating to factors that substantial doubt about our ability to continue
as a going concern. The factors cited by them included the following: (1)
continued losses; (2) use of significant cash in operations and, and (3) lack of
sufficient funds to execute our business plan. The decision to dismiss Grant
Thornton as our independent certified public accountants was approved by the
Board of Directors of the Company. During our two most recent fiscal years and
subsequent period up to February 14, 2000, there were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
On February 10, 2000, we engaged Radin, Glass & Co. to serve as our
independent certified public accountants.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
Exhibit 16. Letter from former accountant,
Grant Thornton LLP
Exhibit 27. Financial Disclosure Schedule *
(b) Forms 8-K
---------
No reports on Form 8-K were filed during the quarter
ended December 31, 1999.
- --------------
* Incorporated by reference from our report on Form 10-QSB filed on
February 14, 2000.
II-6
<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, thereunto duly
authorized.
CDKNET.COM, Incorporated
Date February 25, 2000 /s/ Steven A. Horowitz
------------------------
Chairman, Chief Executive Officer, Chief
Financial Officer, and Secretary
II-7
EXHIBIT 16
----------
GRANT THORNTON LLP
February 22, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Re: CDKNET.COM, INC.
File No. 000-27587
Dear Sir or Madam:
We have read the first paragraph of Item 5 in the Form 10-Q of CDKNET.COM, INC.
dated February 14, 2000 and agree with the statements contained therein.
Very truly yours,
/s/ Grant Thornton LLP
GRANT THORNTON LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS FOR 6 MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 147,349
<SECURITIES> 0
<RECEIVABLES> 27,754
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 176,697
<PP&E> 705,141
<DEPRECIATION> 217,982
<TOTAL-ASSETS> 6,430,139
<CURRENT-LIABILITIES> 971,732
<BONDS> 453,221
0
0
<COMMON> 1,736
<OTHER-SE> 5,003,450
<TOTAL-LIABILITY-AND-EQUITY> 6,430,139
<SALES> 40,154
<TOTAL-REVENUES> 40,154
<CGS> 37,605
<TOTAL-COSTS> 37,605
<OTHER-EXPENSES> 2,757,484
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,633
<INCOME-PRETAX> (2,816,568)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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<NET-INCOME> (2,816,568)
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