10QSB 1 g0628.txt QUARTERLY REPORT FOR THE QTR ENDED 7/31/04 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-QSB (Mark one) [X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the quarterly period ended July 31, 2004 [ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the transition period from ______________ to _____________ -------------------------------------------------------------------------------- Commission File Number: 000-30071 KIK Technology International, Inc. (Exact name of small business issuer as specified in its charter) California 91-2021602 (State of incorporation) (IRS Employer ID Number) 590 Airport Road, Oceanside CA 92054 (Address of principal executive offices) (760) 967-2777 (Issuer's telephone number) -------------------------------------------------------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [X] NO [ ] State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: September 13, 2004: 25,171,865 Transitional Small Business Disclosure Format (check one): YES [ ] NO [X] KIK TECHNOLOGY INTERNATIONAL, INC. Form 10-QSB for the Quarter ended July 31, 2004 Table of Contents Page ---- PART I - FINANCIAL INFORMATION Item 1 Financial Statements 3 Item 2 Management's Discussion and Analysis or Plan of Operation 21 Item 3 Controls and Procedures 23 PART II - OTHER INFORMATION Item 1 Legal Proceedings 24 Item 2 Changes in Securities 24 Item 3 Defaults Upon Senior Securities 24 Item 4 Submission of Matters to a Vote of Security Holders 24 Item 5 Other Information 24 Item 6 Exhibits and Reports on Form 8-K 24 SIGNATURES 24 2 PART I ITEM 1 - FINANCIAL STATEMENTS KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS July 31, 2004 and 2003
July 31, July 31, 2004 2003 ---------- ---------- ASSETS CURRENT ASSETS Cash on hand and in bank $ 33,247 $ 58,908 Accounts receivable Trade, net of allowance for doubtful accounts of approximately $14,230 and $13,300, respectively 260,644 517,178 Other 8,632 6,475 Inventories 328,345 339,574 ---------- ---------- TOTAL CURRENT ASSETS 630,868 922,135 ---------- ---------- PROPERTY AND EQUIPMENT - AT COST, NET OF ACCUMULATED DEPRECIATION 145,201 158,094 ---------- ---------- OTHER ASSETS Funds held in trust by officer 53,400 53,400 Refundable deposits 4,800 4,800 Deferred debt issuance costs, net of accumulated amortization of approximately $21,840 and $18,200, respectively -- 3,640 ---------- ---------- TOTAL OTHER ASSETS 58,200 61,840 ---------- ---------- TOTAL ASSETS $ 834,269 $1,142,069 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 3 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS - CONTINUED July 31, 2004 and 2003 (UNAUDITED)
July 31, July 31, 2004 2003 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to investors, net of accompanying warrant discount of approximately $-0- and $1,827, respectively $ 25,000 $ 73,173 Current maturities of long-term debt 28,308 3,738 Accounts payable - trade 263,868 400,869 Other accrued expenses 39,460 29,303 Management fee payable to majority shareholder 180,000 60,000 Advances from majority shareholder 16,000 16,000 ----------- ----------- TOTAL CURRENT LIABILITIES 552,636 583,083 ----------- ----------- LONG-TERM DEBT Notes payable to investors, net of current maturities 19,000 -- Capital lease payable 8,105 12,622 ----------- ----------- TOTAL LIABILITIES 579,741 595,705 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock - $0.001 par value 100,000,000 shares authorized 25,171,865 and 25,021,865 shares issued and outstanding 25,172 25,022 Additional paid-in capital 5,152,423 5,146,573 Accumulated deficit (4,923,067) (4,625,231) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 254,528 546,364 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 834,269 $ 1,142,069 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Six and Three months ended July 31, 2004 and 2003 (UNAUDITED)
Six months Six months Three months Three months ended ended ended ended July 31, July 31, July 31, July 31, 2004 2003 2004 2003 ----------- ----------- ----------- ----------- REVENUES - net of returns and allowances $ 1,302,831 $ 1,721,727 $ 511,720 $ 929,571 COST OF SALES (1,180,323) (1,461,695) (496,854) (791,754) ----------- ----------- ----------- ----------- GROSS PROFIT 122,508 260,032 14,866 137,817 ----------- ----------- ----------- ----------- OPERATING EXPENSES Selling, general and administrative expenses 317,447 355,944 155,502 177,897 Compensation expense related to common stock issuances at less than "fair value" -- 945 -- -- ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 317,447 356,889 155,502 177,897 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (194,939) (96,857) (140,636) (40,080) OTHER INCOME Interest and other income (expense) - net (3,626) (3,009) (1,828) 21 ----------- ----------- ----------- ----------- LOSS BEFORE PROVISION FOR INCOME TAXES (198,565) (99,866) (142,464) (40,059) PROVISION FOR INCOME TAXES -- -- -- -- ----------- ----------- ----------- ----------- NET LOSS (198,565) (99,866) (142,464) (40,059) OTHER COMPREHENSIVE INCOME -- -- -- -- ----------- ----------- ----------- ----------- COMPREHENSIVE LOSS $ (198,565) $ (99,866) $ (142,464) $ (40,059) =========== =========== =========== =========== Net loss per weighted-average share of common stock outstanding, calculated on Net Loss - basic and fully diluted $ (0.01) nil $ (0.01) nil =========== =========== =========== =========== Weighted-average number of shares of common stock outstanding 25,030,107 24,656,881 25,038,169 24,990,579 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 5 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended July 31, 2004 and 2003 (UNAUDITED)
Six months Six months ended ended July 31, July 31, 2004 2003 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the period $(198,565) $ (99,866) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 18,984 23,915 Amortization of warrant discount on notes payable -- 2,948 Expenses paid with common stock 6,000 6,780 Compensation expense related to common stock issuances at less than "fair value" -- 945 (Increase) Decrease in Accounts receivable - trade and other 110,474 (146,037) Inventory (5,282) (38,163) Prepaid expenses and other 2,671 436 Increase (Decrease) in Accounts payable (22,905) 303,823 Other accrued expenses (2,994) (42,717) Accrued management fees to parent company 60,000 60,000 --------- --------- NET CASH USED IN OPERATING ACTIVITIES (31,617) 72,064 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (6,632) (38,005) --------- --------- Net cash used in investing activities (6,632) (38,005) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on notes payable to investors (7,000) -- Payments on long-term capital lease (2,018) (1,843) Cash advanced by majority shareholder -- -- --------- --------- NET CASH USED IN FINANCING ACTIVITIES (9,018) (1,843) --------- --------- INCREASE (DECREASE) IN CASH (47,267) 32,216 Cash at beginning of period 80,514 26,692 --------- --------- CASH AT END OF PERIOD $ 33,247 $ 58,908 ========= ========= SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID Interest paid for the period $ 6,204 $ 1,249 ========= ========= Income taxes paid for the period $ -- $ -- ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Trade accounts payable settled with issuance of common stock $ -- $ 73,401 ========= =========
6 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS KIK Technology International, Inc. (KTII) was incorporated on February 1, 2000 under the laws of the State of California as Russian-Imports.com. Russian-Imports.com was initially founded to develop an internet e-commerce website which would sell handmade lacquer boxes, Matroshka dolls and crystal imported from Russia. This business plan was unsuccessful and, subsequently, terminated. The Company then adopted a business plan to locate and combine with an existing, privately-held company which is profitable or, in management's view, has growth potential, irrespective of the industry in which it is engaged. On September 4, 2001, KTII (formerly Russian-Imports.com) issued 16,700,000 shares of restricted, unregistered common stock to KIK Tire Technologies, Inc. (a publicly-owned Canadian corporation) (KTTI) for 100.0% of the issued and outstanding stock of KIK Technology, Inc. (a wholly-owned subsidiary of KTTI). By virtue of this transaction, KIK Technology, Inc. became a wholly-owned subsidiary of KTII and KTTI became an approximate 73.6% shareholder in KTII. Concurrent with this transaction, Russian-Imports.com changed it's corporate name to KIK Technologies International, Inc. At the transaction date, KTII was a "shell company" as the Company had no assets or liabilities, had generated no revenues since inception and had incurred total expenses of approximately $940,000 since its inception on February 1, 2000 through the September 4, 2001 transaction. KIK Technology, Inc (KTI) was incorporated in June 1988 under the laws of the State of California. KTI manufactures and markets an extensive and high quality line of off-highway micro-cellular polyurethane tires for the healthcare, light industrial, lawn and garden and recreational industries. KTI operates from a sole manufacturing plant and marketing offices located in Oceanside, CA. The Company's principal raw materials are purchased from a sole supplier who is also a major customer for the Company's products. In the event of any disruption in the availability of raw materials or a market for the Company's products purchased by this key supplier, the Company may experience a negative economic impact. The Company believes that suppliers of raw materials are available at comparable prices and management is seeking other avenues of distribution of the Company's products to consumers. Management is of the opinion that no interruption of either raw materials or product demand will occur. NOTE B - PREPARATION OF FINANCIAL STATEMENTS The acquisition of KIK Technology, Inc. (KTI), on September 4, 2001, by KTII effected a change in control of KTII and was accounted for as a "reverse acquisition" whereby KTI is the accounting acquiror for financial statement purposes. Accordingly, the historical consolidated financial statements of the Company are those of KTI from it's inception and those of the consolidated entity subsequent to the September 4, 2001 transaction date. The Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and has adopted a year-end of January 31. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - PREPARATION OF FINANCIAL STATEMENTS - CONTINUED Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented. During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements filed with the U. S. Securities and Exchange Commission on its Annual Report on Form 10-KSB/A for the year ended January 31, 2004. The information presented within these interim financial statements may not include all disclosures required by generally accepted accounting principles and the users of financial information provided for interim periods should refer to the annual financial information and footnotes when reviewing the interim financial results presented herein. In the opinion of management, the accompanying interim financial statements, prepared in accordance with the U. S. Securities and Exchange Commission's instructions for Form 10-QSB, are unaudited and contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective interim periods presented. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending January 31, 2005. For segment reporting purposes, the Company operated in only one industry segment during the periods represented in the accompanying financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole. These financial statements reflect the books and records of KIK Technology International, Inc. (formerly Russian-Imports.com) (KTII) and KIK Technology, Inc. (KTI) as of and for the periods ended July 31, 2004 and 2003, respectively. All significant intercompany transactions have been eliminated in consolidation. The consolidated entities are referred to as Company. NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. CASH AND CASH EQUIVALENTS For Statement of Cash Flows purposes, the Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. Cash overdraft positions may occur from time to time due to the timing of making bank deposits and releasing checks, in accordance with the Company's cash management policies. (Remainder of this page left blank intentionally) 8 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 2. ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION In the normal course of business, the Company extends unsecured credit to virtually all of its customers which are located throughout the United States and are principally concentrated in the Midwest region of the country. Depending upon management's assessment of creditworthiness and order size, certain shipments are made on "COD" terms using common carriers. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. The Company recognizes revenue from the sale of tires and accessories upon shipment to, or receipt by customers, depending upon contractual terms and when there is no significant uncertainty regarding the consideration to be received and the associated costs to be incurred. Additionally, the Company recognizes reductions of recorded revenue for product returns from unsatisfied customers and other billing adjustments or corrections, at the point that the returned products are received by the Company or upon the completion of negotiations between the Company and it's customer. 3. INVENTORY Inventory consists of raw materials, principally chemical feedstocks, and finished goods, principally tires and accessories manufactured by the Company and other minor miscellaneous items purchased from third-party vendors for resale as a component of the Company's products. Inventory is valued at the lower of cost or market value, using principally the average cost method. 4. PROPERTY AND EQUIPMENT Property and equipment are recorded at historical cost. These costs are depreciated over the estimated useful lives, generally two (2) to seven (7) years, of the individual assets using the straight-line method. Gains and losses from the disposition of property and equipment are included in operations as incurred. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company follows the policy of evaluating all property and equipment as of the end of each reporting quarter. For each of the years ended July 31, 2004 and 2003, no charges to operations were made for impairments in the future benefit of property and equipment. 5. DEFERRED DEBT ISSUE COSTS Deferred debt issue costs represent monies paid investment bankers and legal counsel in connection with the issuance of $75,000 in convertible notes payable. These costs were amortized as a component of operations over the life of the underlying debt instrument using the straight line method. (Remainder of this page left blank intentionally) 9 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 6. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. At July 31, 2004 and 2003, the deferred tax asset and deferred tax liability accounts, as recorded when material to the financial statements, are entirely the result of temporary differences. Temporary differences represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization, allowance for doubtful accounts and vacation accruals. As of July 31, 2004 and 2003, the deferred tax asset related to the Company's net operating loss carryforward is fully reserved. 7. ADVERTISING COSTS The Company does not conduct any direct response advertising activities. For non-direct response advertising, the Company charges the costs of these efforts to operations at the first time the related advertising is published. 8. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements. Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company's net income (loss) position at the calculation date. At July 31,2004 and 2003, all of the Company's issued and outstanding warrants, options and convertible debt are considered antidilutive due to the Company's net operating loss position. 9. EMPLOYEE STOCK OPTIONS For periods prior to November 1, 2002, the Company chose to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations. Accordingly, employee compensation cost for stock options and warrants is measured as the excess, if any, of the market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. This treatment was allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). In December 2002, FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148). This statement amends SFAS 123 and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. Effective November 1, 2003, the first day of the reporting quarter including the effective date of SFAS 148, the Company's Board of Directors, in conjunction with public opinion and SFAS 148, elected to expense the imputed compensation cost related to any stock options granted during Fiscal 2003 and for future periods. 10 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 9. EMPLOYEE STOCK OPTIONS - continued The Company did not issue any stock options during Fiscal 2004 or Fiscal 2003 and the adoption of SFAS 148 did not have a material impact on our results of operations or financial condition. 10. NEW AND PENDING ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standard (SFAS) No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002, with early adoption permitted. The Company adopted SFAS No. 143 effective February 1, 2003 and the adoption had no impact on its consolidated results of operations and financial position. SFAS No. 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS No. 144 superseded Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The Company adopted SFAS No. 144 effective February 1, 2002. The adoption of SFAS No. 144 had no material impact on Company's consolidated financial statements. In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement rescinds SFAS, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale- leaseback transactions. We do not expect the adoption to have a material impact to our financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material impact on the Company's financial position or results of operations. (Remainder of this page left blank intentionally) 11 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 10. NEW AND PENDING ACCOUNTING PRONOUNCEMENTS - continued In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of this statement did not have a material impact on our financial position or results of operations as we have not elected to change to the fair value based method of accounting for stock-based employee compensation. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Interpretation 46 changes the criteria by which one company includes another entity in its consolidated financial statements. Previously, the criteria were based on control through voting interest. Interpretation 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption did not have a material impact to our financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS No. 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our results of operations or financial position. (Remainder of this page left blank intentionally) 12 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions. Interest rate risk is the risk that the Company's earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any. Financial risk is the risk that the Company's earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The company does not use derivative instruments to moderate its exposure to financial risk, if any. NOTE E - CONCENTRATIONS OF CREDIT RISK KTII and KTI maintain their respective cash accounts in financial institutions subject to insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC). Under FDIC rules, both KTII and KTI are entitled to aggregate coverage of $100,000 per account type per separate legal entity per financial institution. During the years ended January 31, 2004 and 2003 and for the period through July 31, 2004, respectively, KTTI and KTI, from time-to-time, had deposits in a financial institution with credit risk exposures in excess of statutory FDIC coverage. The Company has incurred no losses as a result of any of these unsecured situations. NOTE F - INVENTORIES Inventories consist of the following at July 31, 2004 and 2003: July 31, July 31, 2004 2003 -------- -------- Raw materials $ 46,262 $114,012 Finished goods 282,083 225,562 -------- -------- Total $328,345 $339,574 ======== ======== NOTE G - PROPERTY AND EQUIPMENT Property and equipment consists of the following at July 31, 2004 and 2003: July 31, July 31, 2004 2003 Estimated Life --------- --------- -------------- Machinery and Equipment $ 594,512 $ 566,794 7 years Office furniture and fixtures 25,441 24,534 5 years Leasehold improvements 14,180 14,180 2 years Vehicles 9,279 9,279 5 years --------- --------- 643,412 614,787 Less accumulated depreciation (498,211) (456,693) --------- --------- Net property and equipment $ 145,201 $ 158,094 ========= ========= 13 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE G - PROPERTY AND EQUIPMENT - CONTINUED Total depreciation expense for the six month periods ended July 31, 2004 and 2003 was approximately $18,984 and $23,915, respectively. NOTE H - FUNDS HELD IN TRUST BY OFFICER In May 2001, the Company advanced $53,400 to its President to hold in trust as a contingency fund for the sole use of the Company in the event of a unanticipated cash shortfall. The advance bears interest at 4.0% annually and is unsecured. The original documentation required repayment of the advance and accrued, but unpaid, interest in May 2003. As of July 31, 2004, with the approval of the Company's Board of Directors, the Company's President continues to maintain these funds as trustee on behalf of the Company. NOTE I - NOTES PAYABLE TO INVESTORS Pursuant to the terms of a private placement agreement, the Company attempted to raise up to $600,000 through the placement of two-year senior notes bearing interest at 10% payable quarterly. This Private Placement Memorandum was terminated by the Company during the fiscal quarter ended October 31, 2002. In November 2001, the Company entered into an agreement with an investment banker whereby the investment banker would act as exclusive dealer-manager in this private placement of securities to be issued by the Company pursuant to Regulation D of the Securities Act of 1933, as amended. As compensation, the investment banker was paid $15,000 for professional fees, received a commission equal to 10% of the gross proceeds, an unaccountable expense allowance equal to 4% of the gross proceeds, and for every $500,000 raised, 150,000 shares of the Company's restricted, unregistered common stock. Such shares will be issued upon completion of the private placement. In addition, the investment banker will have the option to nominate one person to the Company's Board of Directors if at least $2,000,000 is raised. As of the termination of this Private Placement Memorandum, only $75,000 had been successfully raised. Note holders can elect, with the consent of the Company, to accept Company common stock in lieu of cash interest payments. Such payments in stock would be calculated at 50% of the daily average of the market price of the common stock for the 30-calendar days preceding the interest due date. After six months from the date of issue of the notes, the Company can convert the notes to common stock if the daily average market price of the Company's common stock for any 30-calendar days after the initial six-month period equals or exceeds $1.00. The conversion of the notes to common stock would also be calculated at 50% of the daily average market price for the 30 days prior to the Company giving notice of its plan to convert. In conjunction with the offering of the notes, each note holder was given one warrant for each $1.00 invested. Each warrant allows the holder to purchase one share of the Company's common stock at an initial exercise price of $0.60 per share, and is exercisable for two years. In March 2002, the Company repriced the outstanding warrants to an exercise price of $0.40 per share. (Remainder of this page left blank intentionally) 14 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - NOTES PAYABLE TO INVESTORS - CONTINUED Pursuant to the private placement, the Company sold a $50,000 convertible note on November 12, 2001 and a $25,000 convertible note on December 26, 2001 to two unrelated investors. Warrants to purchase a combined total of 75,000 shares of the Company's common stock at $0.60 per share were also issued to the investors. The warrants were valued at $11,789 using the Black-Scholes option-pricing model, and therefore $11,789 of the total debt proceeds of $75,000 was allocated to the warrants, resulting in a discount on the notes, was amortized to interest expense over the initial term of the underlying debt. During the years ended January 31, 2004 and 2003, approximately $9,100 and $5,900 of the discount was amortized to interest expense. The weighted average assumptions utilized to value the warrants using the Black-Scholes option-pricing model were as follows: Expected life of the option: The initial life of the corresponding option, generally two (2) years Expected volatility in the Company's stock price: 150.0%, which was based on fluctuations of the Company's stock price over the past Fiscal year. Expected dividends: Zero (0.00) based on past performance Anticipated risk free interest rate: Estimated to be 2.80%. The convertible notes contained a beneficial conversion feature valued at a combined total of approximately $63,000. However, because the conversion features were fully contingent upon the occurrence of certain future events, the Company did not record a discount resulting from the beneficial conversion feature. The notes matured on November 12, 2003 ($50,000) and December 26, 2003 ($25,000), respectively. On February 16, 2004, the Company restructured the $50,000 convertible note. Under the restructured terms, the Company paid all accrued interest and a $3,000 principal reduction on March 16, 2004, as of February 16, 2004. The Company is obligated to pay $2,000 per month, plus accrued interest, for the period from March 16, 2004 through August 16, 2004 and $1,000 per month, plus accrued interest, on the 16th of each month thereafter until all outstanding amounts are paid in full. The restructured note bears interest at 10.0% per annum. The $50,000 restructured note is convertible into shares of unregistered, restricted common stock at the discretion of the Noteholder with the Company's consent, provided that the daily average (calculated from the last sale price daily) of the market price of the Company's common stock for any 30 calendar day period equals or exceeds $1.00 per share, with the conversion being calculated at a 50% discount of such 30 day average. The $50,000 Noteholder also has the election to receive the monthly interest payments in restricted, unregistered common stock of the Company at the daily average (calculated from the last sale price daily) of the market price of the Company's common stock for the 30 calendar day period prior to the interest due date, with the number of shares to be issued calculated at a 50% discount of such 30 day average. Through July 31, 2004, the Company has paid approximately $7,000 in principal and $6,200 in cumulative accrued interest on the $50,000 restructured convertible note. The $25,000 convertible note is in default and no demand for payment has been made to the Company. The Company continues to accrue interest on this convertible note in accordance with the original terms and conditions. The aggregate maturities of the notes are as follows: Balance as of July 31, 2004 $ 68,000 Less current portion (49,000) -------- Long-term portion $ 19,000 ======== 15 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - NOTES PAYABLE TO INVESTORS - CONTINUED The Company recognized interest expense related to the all outstanding debt, including the convertible notes payable, equipment financing and trade accounts payable service charges of approximately $3,963 and $7,308 for the six month periods ended July 31, 2004 and 2003, respectively. NOTE J - CAPITAL LEASE PAYABLE Capital lease payable is as follows: July 31, July 31, 2004 2003 -------- -------- $21,080 capital lease payable to a finance corporation. Interest at 8.60%. Payable in monthly installments of approximately $432, including accrued interest. Final maturity due in April 2007. Collateralized by equipment $ 12,413 $ 16,360 Less current maturities (4,308) (3,738) -------- -------- Long-term portion $ 8,105 $ 12,622 ======== ======== Future annual maturities of long-term capital leases payable, as of January 31, 2004, for each of the following years ending January 31 are as follows: Year ending January 31, Amount ----------- ------ 2005 $ 4,095 2006 4,468 2007 4,872 2008 996 ------- Total $14,431 ======= NOTE K - INCOME TAXES The components of income tax (benefit) expense for the six months ended July 31, 2004 and 2003, respectively, are as follows: July 31, July 31, 2004 2003 ------- ------- Federal: Current $ -- $ -- Deferred -- -- ------- ------- -- -- ------- ------- State: Current -- -- Deferred -- -- ------- ------- -- -- ------- ------- Total $ -- $ -- ======= ======= 16 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - INCOME TAXES - CONTINUED The Company has a net operating loss carryforward of approximately $4,600,000 to offset future taxable income. Subject to current regulations, this carryforward will begin to expire in 2005. The amount and availability of the net operating loss carryforwards may be subject to limitations set forth by the Internal Revenue Code. Factors such as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of the carryforwards. The Company's income tax expense for the six months ended July 31, 2004 and 2003, respectively, are as follows: July 31 July 31, 2004 2003 -------- -------- Statutory rate applied to loss before income taxes $(67,500) $(34,000) Increase (decrease) in income taxes resulting from: State income taxes -- -- Other, including reserve for deferred tax asset 67,500 34,000 -------- -------- Income tax expense $ -- $ -- ======== ======== Temporary differences, consisting primarily of net operating loss carryforwards, statutory deferrals of expenses for organizational costs and accrued, but unpaid, accruals for officer compensation and statutory differences in the depreciable lives for property and equipment, between the financial statement carrying amounts and tax bases of assets and liabilities give rise to deferred tax assets and liabilities as of January 31, 2004 and 2003, respectively: January 31, January 31, 2004 2003 ----------- ----------- Deferred tax assets Net operating loss carryforwards $ 1,564,000 $ 1,496,000 Less valuation allowance (1,564,000) (1,496,000) ----------- ----------- Net Deferred Tax Asset $ -- $ -- =========== =========== During the Fiscal years ended January 31, 2004 and 2003, respectively, the valuation allowance for the deferred tax asset increased (decreased) by approximately $68,000 and $(204,000). (Remainder of this page left blank intentionally) 17 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - COMMON STOCK TRANSACTIONS Effective February 1, 2003 and May 1, 2003, the Company and the holders of the two convertible notes agreed for the payment of accrued interest in restricted, unregistered common stock. The Company issued an aggregate 206,987 shares of restricted, unregistered common stock in payment of accrued interest. These transactions were valued at an aggregate approximately $3,782. The convertible note terms allow for the payment of accrued interest with restricted, unregistered common stock using an average value of 50% of the daily average of the market price of the common stock for the 30 calendar days preceding the interest due date. In both instances, the closing stock price on the settlement date was in excess of the prescribed calculation. The differential between the discounted "fair value" and the settlement price resulted in a charge to operations of approximately $945 for compensation expense related to common stock issuances at less than "fair value". The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. In February 2003, the Company issued 150,000 restricted, unregistered shares of common stock in payment of a contract for marketing services. This transaction was valued at approximately $3,000, which was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. In April 2003, the Company issued 22,500 restricted, unregistered shares of common stock in settlement of a January 31, 2003 trade account payable in the amount of approximately $552. The value of this transaction was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. In May 2003, the Company issued 575,664 restricted, unregistered shares of common stock in payment of trade accounts payable to the Company's primary legal counsel in the amount of approximately $72,849. The value of this transaction was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. In July 2004, the Company issued 150,000 restricted, unregistered shares of common stock in payment of a contract for professional services. This transaction was valued at approximately $6,000, which was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. NOTE M - STOCK WARRANTS At January 31, 2004, the 75,000 warrants sold in conjunction with the convertible notes private placement had expired. In conjunction with the reverse acquisition, which was concluded in September 2001, The Company granted 2,300,000 warrants to certain shareholders of KTTI. These warrants have an exercise price of approximately $0.05 per share and expired in April 2004. (Remainder of this page left blank intentionally) 18 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - STOCK WARRANTS - CONTINUED The following table lists the issued and outstanding stock warrants as of July 31, 2004, January 31, 2004 and 2003, respectively: Warrants Issued Exercise Price ------ -------------- Balance at January 31, 2002 2,375,000 Granted -- Exercised -- Forfeited/Expired -- ---------- Balance at January 31, 2003 2,375,000 Granted -- Exercised -- Forfeited/Expired (75,000) $ 0.40 ---------- Balance at January 31, 2004 2,300,000 Granted -- Exercised -- Forfeited/Expired (2,300,000) ---------- Balance at July 31, 2004 -- ========== Warrants exercisable at July 31, 2004 -- ========== Weighted-average exercise price per warrant N/A ========== NOTE N - RELATED PARTY TRANSACTIONS During the six months ended July 31, 2004 and during the year ended January 31, 2004, the Company accrued approximately $60,000 and $120,000 in administrative service fees payable to KTTI, respectively. NOTE O - COMMITMENTS AND CONTINGENCIES LEASED FACILITIES The Company leases its facilities under a non-cancellable operating lease, which expires in May 2005. The lease requires monthly payments as follows: $8,307 for the first 12 months; $8,639 for the next 12 months and $8,984 for the next 12 months. Rent expense incurred under this lease was approximately $102,340 and $97,800 for each of the years ended January 31, 2004 and 2003, respectively. 19 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE O - COMMITMENTS AND CONTINGENCIES - CONTINUED LEASED FACILITIES - CONTINUED Future amounts due under this agreement are as follows: Year ending January 31, Amount ----------- ------ 2005 $106,428 2006 35,936 -------- Total $142,364 ======== EMPLOYMENT CONTRACT In May 2000, KIK entered into an employment agreement with William M. Knooihuizen, the Company's current President and Director. The term of the agreement is for a period of five (5) years. For such services, KIK agreed to pay Mr. Knooihuizen an annual salary in the amount of $143,000, to be paid weekly. NOTE P - SIGNIFICANT CUSTOMERS During the year ended January 31, 2004, the Company had two separate customers responsible for an aggregate of approximately 78.47% (69.06% and 9.41%, respectively) of total sales. The largest customer is also a significant vendor of raw materials. The largest key customer was responsible for approximately 48.95% of accounts receivable and 76.17% of accounts payable at January 31, 2004. The second key customer was responsible for approximately 1.72% of accounts receivable and 0.00% of accounts payable at January 31, 2004. There were no other customer(s) responsible for more than 10.0% of total net sales during Fiscal 2004. During the year ended January 31, 2003, the Company had two separate customers responsible for an aggregate of approximately 80.3% (68.2% and 12.1%, respectively) of total sales. The largest customer is also a significant vendor of raw materials. The largest key customer was responsible for approximately 57.2% of accounts receivable and 0.0% of accounts payable at January 31, 2003. The second key customer was responsible for approximately 9.02% of accounts receivable and 0.0% of accounts payable at January 31, 2003. There were no other customer responsible for more than 10.0% of total net sales during Fiscal 2003. These significant customer trends and anticipated to continue into future periods. (Remainder of this page left blank intentionally) 20 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1) CAUTION REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this quarterly filing, including, without limitation, statements containing the words "believes", "anticipates", "expects" and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings. Given these uncertainties, readers of this Form 10-QSB and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. (2) RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES OR PLAN OF OPERATION OVERVIEW During the six months ended July 31, 2004 and 2003, respectively, the Company achieved revenues of approximately $1,303,000 and $1,722,000. These revenues were derived primarily from the sale of tire products. Net loss for the three months ended July 31, 2004 and 2003 was approximately $(198,500) and $(100,000), respectively. The net loss for each of these six-month periods include a cumulative year-to-date charge of approximately $60,000 for administrative services to the Company from KIK Tire Technologies Inc., the Company's publicly-owned Canadian majority shareholder. The net loss per share of common stock for the three months ended July 31, 2004 and 2003, respectively, was approximately $(0.01) and $0.00. RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes. SIX MONTHS ENDED JULY 31, 2004 AS COMPARED TO THE SIX MONTHS ENDED JULY 31, 2003 The Company posted net sales of approximately $1,303,000 for the six months ended July 31, 2004 as compared to net sales of approximately $1,722,000 for the six months ended July 31, 2003. The Company has begun to experience flat sales volumes and revenues as a result of the general decline in the U. S. economy, as well as the effects of some seasonal trends and the pressures of foreign competition. The Company's cost of sales decreased by approximately $282,000 to approximately $1,180,000 for the six months ended July 31, 2004 as compared to approximately $1,462,000 for the six months ended July 31, 2003. While the Company has experienced relatively flat sales volumes and revenues during the first six months of Fiscal 2005, the Company is consistently subjected to cost increases in raw material and ancillary supplies which are not readily passed through to it's customers via product price increases. As a direct result of these market factors, the Company has experienced decline in it's gross profit margin to approximately 9.40% (approximately $122,500) for the first six months of Fiscal 2005 as compared to approximately 15.10% (approximately $260,000) for the first six months of Fiscal 2004. General and administrative expenses decreased from approximately $357,000 for the six months ended July 31, 2003 to approximately $317,000 for the six months 21 ended July 31, 2004. To the extent possible, management monitors and controls the variable expenditures related to the Company's administration. Included in these costs is a $10,000 per month administrative charge to KIK Tire Technologies Inc., the Company's publicly-owned Canadian majority shareholder. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of approximately $33,000, $81,000 and $59,000 at July 31, 2004, January 31, 2004 and July 31, 2003, respectively. The Company maintained business liquidity and capital resources during the year adequate to fund all capital and operating expense requirements. Operations were primarily funded from internally generated funds, line of credit borrowings, and capital raised via a private placement of securities in previous years. For the six months ended July 31, 2004 and 2003, net cash provided by (used in) operating activities was approximately $(31,600) and $72,000, respectively. Net cash provided by operating activities consists of cash received from sales of products to customers, less purchases of raw materials, payment of payroll and payment of other general operating expenses, including interest. Cash used in investing activities was approximately $(6,600) and $(38,000) for each of the six months ended July 31, 2004 and 2003, respectively. These cash utilizations was due solely to the acquisition of equipment used in the manufacturing process. The Company experienced cash used in financing activities of approximately $(9,000) and $(1,800) in the first six months of Fiscal 2005 and Fiscal 2004, respectively. All of these expenditures were related to the reduction in outstanding principal on the Company's $50,000 convertible note payable and the Company's equipment capital lease payable. The Company believes that sufficient cash will be generated internally to fund its operations for the next twelve months. CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the Company's Consolidated Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used by the Company. REVENUE RECOGNITION Our revenue recognition policy is significant because our revenue is a key component of our results of operations. The Company recognizes revenue from the sale of tires and accessories. Revenue is recognized upon shipment to, or receipt by customers, depending upon contractual terms and when there is no significant uncertainty regarding the consideration to be received and the associated costs to be incurred. Additionally, the Company recognizes reductions of recorded revenue for product returns from unsatisfied customers and other billing adjustments or corrections, at the point that the returned products are either received by the Company or upon the completion of negotiations between the Company and it's customer. ACCOUNTS RECEIVABLE The Company continuously monitors collections and payments from its customers and maintains an allowance for estimated uncollectible accounts based upon historical experience and specific customer collections issues that have been identified. Depending upon management's assessment of a customer's creditworthiness and order size, certain shipments are made on "COD" terms using common carriers. Since accounts receivable are concentrated in a relatively few customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of the Company's accounts receivable and future operating results. In the event of complete non-performance by any customer or customers, the maximum exposure to the Company would be the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. 22 INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined principally on the average cost method. The Company regularly reviews inventory quantities on hand and records, when necessary, a provision for excess and obsolete inventory based primarily on the Company's estimated forecast of product demand and production requirements for the next twelve months. Demand for the Company's products can fluctuate significantly. A significant increase in the demand for the Company's products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, the Company's industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, the Company's estimate of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess and obsolete inventory. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the Company's inventory value and reported operating results. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, defines a fair-value based method of accounting for stock-based employee compensation plans and transactions in which an entity issues its equity instruments to acquire goods and services from non-employees, and encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. For periods prior to November 1, 2002, the Company has chosen to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations. Accordingly, employee compensation cost for stock options and warrants is measured as the excess, if any, of the market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. This treatment was allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). In December 2002, FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148). This statement amends SFAS 123 and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. Effective November 1, 2003, the first day of the reporting quarter including the effective date of SFAS 148, the Company's Board of Directors, in conjunction with public opinion and SFAS 148, elected to expense the imputed compensation cost related to any stock options granted during Fiscal 2003 and for future periods. The Company did not issue any stock options during Fiscal 2003 and the adoption of SFAS 148 did not have a material impact on our results of operations or financial condition. ITEM 3 - CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer. Based upon that evaluation, the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange 23 Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES In July 2004, the Company issued 150,000 restricted, unregistered shares of common stock to The Compeller Group, LTD of Bayside, New York for payment of a contract for professional services related to an investor relations program. This transaction was invoiced by the service provider at $6,000, which was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of the respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares and no Underwriter was used by the Company. ITEM 3 - DEFAULTS ON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company has held no regularly scheduled, called or special meetings of shareholders during the reporting period. ITEM 5 - OTHER INFORMATION None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS 31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Chief Executive Officer 31.2 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Chief Financial Officer 32.1 Certifications pursuant to Section 906 of Sarbanes-Oxley Act of 2002. REPORTS ON FORM 8-K None -------------------------------------------------------------------------------- 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. KIK TECHNOLOGY INTERNATIONAL, INC. Dated: September 13, 2004 /s/ Kuldip C. Baid ---------------------------- Kuldip C. Baid Chief Financial Officer and Director 24