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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30, 2000.
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 West 57th Street
Suite 1101
New York, New York 10019
(212) 547-6050
WWW.CDKNET.COM
WWW.VFLASH.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)
400 Garden City Plaza, Suite 202, Garden City, New York 11530
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(Former name, former address and former fiscal year,
if changed since last report)
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: November 13, 2000 21,427,783
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Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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Table of Contents
Item No. Page
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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-2
4. Submission of Matters to a Vote of Security Holders ........ II-2
5. Other Information .......................................... II-2
6. Exhibits and Reports on Form 8-K ........................... II-2
Signatures .......................................................... II-3
i
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PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements.
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C O N T E N T S
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<CAPTION>
Page
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<S> <C>
Financial Statements
Consolidated Balance Sheet at September 30, 2000 (unaudited) F-1
Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 (unaudited) F-2
Consolidated Statements of Cash Flows for the three months
ended September 30, 2000 and 1999 (unaudited) F-3
Notes to Consolidated Financial Statements F-4
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<TABLE><CAPTION>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30,
2000
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<S> <C>
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 286,000
Accounts receivable 480,000
Inventory 164,000
Prepaid expenses and other current assets 55,000
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Total current assets 985,000
NOTES RECEIVABLE 255,000
FURNITURE AND EQUIPMENT - at cost,
less accumulated depreciation and amortization of $339,000 771,000
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED,
less accumulated amortization of $3,258,000 3,883,000
INTANGIBLE ASSETS, less accumulated amortization of $796,000 576,000
SOFTWARE DEVELOPMENT, less accumulated amortization of $62,000 375,000
OTHER ASSETS 393,000
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$ 7,238,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expense $ 1,547,000
Deferred Revenue 1,305,000
Due to related parties 86,000
Current portion of long-term debt and capitalized lease obligations 69,000
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Total current liabilities 3,007,000
LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS,
net of current portion 123,000
SUBORDINATED CONVERTIBLE DEBENTURES 240,000
MINORITY INTEREST 0
OTHER LIABILITIES 78,000
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible Preferred stock - par value $.0001 per share; authorized
5,000,000 shares; 1,450,000 shares outstanding (states value $1,500,000) 1,229,000
Common stock - par value $.0001, per share; authorized,
40,000,000 shares; 21,321,831; shares issued and outstanding 2,000
Additional paid in capital 21,119,000
Accumulated deficit (16,562,000)
Unearned compensation expense (1,998,000)
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3,790,000
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$ 7,238,000
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The accompanying notes are an integral part of this statement.
F-1
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<TABLE><CAPTION>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Three months
ended ended
September 30, September 30,
2000 1999
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<S> <C> <C>
Net revenues $ 1,848,000 $ 24,000
Cost of revenues 1,085,000 15,000
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Gross profit (loss) 763,000 9,000
Selling, general and administrative expenses 2,357,000 687,000
Depreciation and amortization 541,000 484,000
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Loss from operations (2,135,000) (1,162,000)
Other income and (expense)
Interest income 4,000
Interest expense, including interest (8,000) (27,000)
relating to beneficial conversion and
debt discount in 1999
Equity share of affiliated company's loss (200,000)
Minority interest in loss of subsidiary 211,000
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NET LOSS ($ 2,128,000) ($ 1,189,000)
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Preferred Dividend 28,000
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Net Loss to common Stockholders' ($ 2,156,000) ($ 1,189,000)
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Basic and diluted earnings (loss) per share ($ 0.10) ($ 0.08)
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Weighted-average shares outstanding-
basic and diluted 21,258,120 14,274,175
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The accompanying notes are an integral part of this statement.
F-2
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<TABLE><CAPTION>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Three months ended
September 30, September 30,
2000 1999
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<S> <C> <C>
Cash flows from operating activities
Net loss before preferred dividends $(2,156,000) $(1,189,000)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 541,000 483,000
Amortization of debt discount 3,000
Compensation related to stock option plan 35,000 124,000
Common stock and stock warrants issued for services 84,000 168,000
Common stock issued in lieu of cash interest
Minority interest in loss of consolidated subsidiary (211,000)
Equity share of affiliated company's loss 200,000
Changes in assets and liabilities
Accounts receivable (74,000) (5,000)
Inventory 166,000
Due from officer 62,000
Prepaid expenses and
other current assets 16,000 5,000
Notes Receivable (146,000)
Accounts payable and accrued expense 386,000 (5,000)
Due to related party (20,000)
Deferred Revenue 418,000
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Net cash used in operating activities (615,000) (500,000)
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Cash flows from investing activities
Purchase of furniture and equipment (148,000) (10,000)
Investment in affiliate (470,000)
Software development (114,000)
Other liabilities 38,000
Other assets 34,000
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Net cash used in investing activities (660,000) (10,000)
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Cash flows from financing activities
Proceeds from notes payable
Repayment of notes payable (6,000)
Proceeds from subordinated convertible debentures
Deferred financing costs
Principal payments on capitalized lease of obligations (17,000) (17,000)
Proceeds from issuance of common stock 310,000
Proceeds from exercise of stock warrants 12,000
Minority interest 137,000
Equity in ValueFlash 406,000
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Net cash provided by financing activities 526,000 299,000
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NET INCREASE (DECREASE) IN CASH (749,000) (211,000)
Cash at beginning of period 1,035,000 231,000
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Cash at end of period $ 286,000 $ 20,000
The accompanying notes are an integral part of this statement.
F-4
</TABLE>
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<TABLE><CAPTION>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS(continued)
(Unaudited)
Three months ended Three months ended
September 30, September 30,
2000 1999
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<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 8,000 $ 4,000
Noncash investing and financing transactions:
Stock issued upon conversion of subordinated debentures 17,000
Stock issued upon conversion of preferred stock 50,000
Preferred dividends 28,000
The accompanying notes are an integral part of this statement.
F-5
</TABLE>
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NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
CDKNET.com, Inc. ( the "Company") included herein have been prepared in
accordance with generally accepted accounting principles for interim period
reporting in conjunction with the instructions to Form 10-QSB. Accordingly,
these statements do not include all of the information required by generally
accepted accounting principles for annual financial statements, and are subject
to year-end adjustments. In the opinion of management, all known adjustments
(consisting of normal recurring accruals and reserves) necessary to present
fairly the financial position, results of operations and cash flows for the
three month periods ended September 30, 2000 and 1999 have been included. It is
suggested that these interim statements be read in conjunction with the
financial statements and related notes included in the Company's June 30, 2000
Form 10-KSB.
The operating results for the three months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. STOCKHOLDERS' EQUITY
During the quarter ended September 30, 2000 the Company executed the following
summarized equity transactions:
o The Company converted $15,000 of 6% convertible debentures and $50,000
in preferred stock and dividends in arrears into 26,841 and 79,605
shares of common stock, respectively.
o The Company's majority owned subsidiary (ValueFlash) sold 275,000
shares of common stock for $550,000. Such shares included one-year
warrants to purchase 500,000 shares of common stock at an exercise
price of $2.00 per share.
o In July, ValueFlash issued five year warrants to purchase 2,500,000
shares of common stock at an exercise price of $1.50 per share. Such
warrants are performance based and are unearned as of September 30,
2000.
o A service agreement under which 120,000 ValueFlash warrants were issued
at an exercise price of $.50 per share was amended. As a result, there
are now 240,000 warrants at an exercise price of $1.50 per share and no
warrants outstanding at $.50 per share.
NOTE 3. AGENCY AND MARKETING AGREEMENTS
In accordance with the agency agreement, ValueFlash acquired approximately 20%
of ValueFlash Japan for $470,000 in July.
NOTE 4. SUBSEQUENT EVENTS
In October 2000, $350,000 was advanced from Dan Roc Limited Partnership to the
Company which is due on demand. Definitive terms of the loan are being
negotiated.
F-6
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Item 2. Management's Discussion and Analysis of Financial Condition
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and Results of Operations
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The following contains forward-looking statements based on current expectations,
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 our 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.
Overview
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We have developed a multimedia technology, called CDK(TM), which integrates
audio, video and Internet connectivity on a standard compact disc. Our
technology enables users to create their own personalized compact discs simply
by visiting a Website. These custom compact discs play audio and display videos
on a full-screen, using high-quality videos and digital technology. The custom
compact discs also include software applications and targeted Web links.
We have also developed "VFlash(TM)," a software based communication module which
we are distributing through our subsidiary, ValueFlash. VFlash provides a real
time, direct communication vehicle for marketers to reach their customers using
a personal computer desktop application. Our subsidiary, CDKnet, LLC, initially
developed the VFlash(TM) product. The VFlash(TM) product was transferred to
ValueFlash in January 2000 for further development, production, marketing and
distribution. VFlash(TM) will be distributed by multimedia CDs that will be
produced by CDKnet, LLC and by downloads from the Internet.
The CDK(TM) product is targeted at the following industries: (1) entertainment
(music, movies, and TV); (2) travel and tourism; (3) professional sports; (4)
financial services; (5) education; (6) toys/games; (7) fashion; (8)
food/cooking; (9) automotive; and (10) healthcare. Its primary customers and/or
strategic partners include Central Park Media, CollegeMusic.com, Megaforce
Records, HappyPuppy.com, theglobe.com and SugarBeats.com.
In March 2000, the first VFlash(TM) messenger application was launched. In the
subsequent months, marketing alliances and/or contracts with Atlantic Records,
Impiric (formerly Wunderman Cato Johnson), J. Walter Thompson, RCA Records,
Blockbuster, NBC, EMI Christian Music Group and Artemis Records have been
announced.
We have a limited operating history. While historically we have generated
revenues primarily from development and use fees for client specific CD's and
the sale of custom CD's, most resources have been directed to developing and
marketing the VFlash(TM) product in accordance with our fiscal 2000 operating
plan. We anticipate that VFlash(TM) will be a major factor in our future revenue
and business growth. We expect our revenue growth to be generated from
international licensing agreements, hosting fees, advertising commissions and
e-commerce revenue splits related to the VFlash(TM) product.
2
<PAGE>
Significant expenditures have been incurred and will continue to be required for
marketing and advertising the product and to build the infrastructure to support
it.
From a marketing standpoint, we continue to: (1) maintain corporate and
ValueFlash Web sites which solicit 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 VFlash(TM) desktop, direct marketing application and
communications module.
Our current business development efforts include both full-time employees as
well as outside consultants. Consultants are compensated on a performance basis.
We receive funds from product sales and services. We also continue to rely on
our ability to raise money through equity financing to fund our business
endeavors. To date, we have focused our funds on the development of CDK(TM)
products (including CDK(TM)) 1.0, CDK(TM) 2.0, and Gameplayer 2.0 and our new
E-commerce facility MixFactory.com(TM), and VFlash(TM).
We have had success at recent financing efforts although we have had a history
of operating losses that raised doubts about our ability to continue operations.
We raised $3 million from the sale of our common stock in the year ended June
30, 2000. We also successfully raised $2.5 million in private financings through
our subsidiary, ValueFlash.com, Inc. through June 30, 2000. During the period
July 1, 2000 to September 30, 2000, we raised additional capital of $550,000 for
ValueFlash.
We will continue to explore various financings including private placements and
debt financings.
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 current and former independent certified public
accountants added an emphasis paragraph to their report on our consolidated
financial statements as of June 30, 2000 and 1999 and for each of the years then
ended, relating to factors that cast 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 (3) lack of
sufficient funds to execute our business plan.
As of November 13, 2000, we had 21,427,783 shares of common stock issued and
outstanding.
Recent Developments
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Stock Dividend
On April 12, 2000, we announced our intention to issue a stock dividend based
upon 10% of our holdings in our subsidiary, ValueFlash, subject to registration
and underwriter approval prior to distribution. Our board of directors is
committed to issuing such a dividend, pending underwriter approval.
3
<PAGE>
Stock Issuance
In July and August 2000 ValueFlash sold 275,000 shares of common stock for
$550,000 through private equity sales.
Agreements
In July 2000, ValueFlash acquired a 20% interest in ValueFlash Japan Ltd. for
$470,000.
Results of Operations - Quarter ended September 30, 2000
compared to Quarter ended September 30, 1999
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During the quarter ended September 30, 2000, we incurred a net loss of $2.1
million on revenues of $1.8 million compared to a net loss of $1.2 million on
revenues of $24,000 in the quarter ended September 30, 1999. Revenues in the
quarter ended September 30, 2000 included primarily ValueFlash international
licensing fees and advertising revenues. Additionally, revenues from the sale of
multimedia CDs increased from recent historical levels.
The cost of revenues for the quarter ended September 30, 2000 was $1.1 million
compared to $15,000 for the quarter ended September 30, 1999. The increased
costs are directly related to the increase in revenues noted above.
For the quarter ended September 30, 2000, we expensed approximately $136,000 on
research and development compared to $108,000 during the quarter ended September
30, 1999. Our research and development costs for the quarter ended September 30,
2000 reflect expenditures for the continued development of V-Flash, enhancements
to our core technology and further product development.
For the quarter ended September 30, 2000, other operating expenses were $2.9
million compared to $1.2 million during the year ended September 30, 1999 as
expenditures related to the marketing, advertising and infrastructure buildup to
support ValueFlash were incurred.
4
<PAGE>
Liquidity and Capital Resources
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As of September 30, 2000, we had $286,000 in cash and cash equivalents. Our
principal commitments are $240,000 in Subordinated Convertible Debentures and
$123,000 in long-term debt and operating and capital lease obligations. We have
no material commitments for capital expenditures, nor do we anticipate any. We
anticipate that we will experience growth in operating, marketing and
advertising expenses for the foreseeable future and that such expenses will be a
material use of our cash resources.
Our cash requirements have historically been financed primarily through the sale
of debentures and common stock. In the quarter ended September 30, 2000,
$550,000 has been raised from the sale of ValueFlash.com, Inc. common stock
through private equity sales to outside investors. We do not maintain credit
facilities with any financial institutions. Future financings will be necessary
to fund our operations in the form of additional debt and equity transactions.
There can be no assurances that we will be able to secure sufficient funding to
continue executing our operating plan, but management believes that we will be
able to secure sufficient financing for operations for the next twelve months.
Net cash used by operating activities equaled $615,000 for the quarter ended
September 30, 2000, compared to net cash used in operating activities of
$500,000 for the quarter ended September 30, 1999. Cash used by operations
resulted from net losses partly offset by non-cash depreciation and amortization
charges, compensation charges related to stock options and services paid in
common stock and warrants.
Net cash used in investing activities was $660,000 for the quarter ended
September 30, 2000, compared to $10,000 in the prior quarterly period. Net cash
used in investing activities in each of these periods was due to the
purchases of furniture and equipment. Additionally, in fiscal quarter ended
September 30, 2000, we spent $114,000 on software development, mostly on the
VFlash product, and $470,000 on an investment in VFlash Japan.
Net cash from financing activities was $526,000 for the quarter ended September
30, 2000, compared to $299,000 for the quarter ended September 30, 1999. Cash
provided by financing activities resulted from proceeds from the sale of
ValueFlash common stock and minority interest sale.
The proceeds from these financing activities have been and will be used to (i)
continue our ongoing operations, (ii) to further develop our CDK(TM), VFlash,
Gameplayer, and MixFactory.com(TM) product lines, and (iii) 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 annual report that do not historically contain predictions
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.
5
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PART II-- OTHER INFORMATION
Item 1. Legal Proceedings
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We have incorporated by reference from our Form 10-KSB, dated October
16, 2000 (File No. 0-27587), and amended on October 27, 2000, legal proceedings
against us which have been settled.
Item 2. Changes in Securities
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None
SB-2 Filings
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On March 17, 2000, we filed an Amendment to our Registration
Statement on Form SB-2 (File No. 333-93277) with the Commission under the
Securities Act of 1933 registering 7,610,578 shares of our common stock: (1) for
sale by investors who purchased 1,505,522 shares of our common stock in private
placements by us, (2) issuable upon the exercise of options to purchase
1,250,000 shares of our common stock, (3) issuable upon exercise of warrants to
purchase 1,855,056 shares of our common stock, and (4) 2,500,000 shares of our
common stock issuable upon the conversion of preferred stock. On March 27, 2000,
that registration statement was declared effective. It was amended on August 1,
2000 by our SB-2 (File No. 333-42696).
On August 1, 2000, we filed a Registration Statement on Form SB-2
(File No. 333-42696) with the Commission under the Securities Act of 1933
registering 1,540,000 shares of our common stock: for sale by investors who
purchased 780,000 shares of common stock in private placements by us, and (2)
issuable upon the exercise of options to purchase 760,000 shares of our common
stock. That Registration Statement has not been declared effective.
Recent Sales of Unregistered Securities
---------------------------------------
We have incorporated by reference from our Form 10-KSB, dated October
16, 2000 (File No. 0-27587), and amended on October 27, 2000, the list of recent
sales of unregistered securities. The following additional securities were
issued or sold without registering them under the Securities Act of 1933 in
reliance upon the exemption(s) from registration provided by the Securities Act
as follows:
o On November 3, 2000, we issued 79,605 shares of our common stock to the
Target Group pursuant to the conversion by the Target Group of 50,000
shares of our Series A Preferred Stock which we originally issued to
Casa di Cura Polispecialistica Dr. Pederzoli S.P.A. in October, 1999
and which was subsequently transferred to the Target Group. We issued
the 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-1
<PAGE>
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
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Not applicable.
Item 5. Other Information.
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Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
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Exhibit 27. Financial Disclosure Schedule.
(b) Forms 8-K
---------
No reports on Form 8-K were filed during the quarter
ended September 30, 2000.
II-2
<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, INC.
Date: November 14, 2000 /s/ Steven A. Horowitz
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Chairman, Chief Executive Officer, Chief
Financial Officer, and Secretary
II-3
