SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 March 31, 2004
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
for the transition period from __________ to __________.
Commission File Number: 000-31451
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CYBERADS, INC.
--------------
(Exact name of small business issuer as specified in its charter)
Florida 65-1000634
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21073 Powerline Road, Suit 57, Boca Raton, Florida 33433
--------------------------------------------------------
(Address of principal executive office) (Zip Code)
(561) 672 2193
----------------
(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 XX No
-------- --------
As of March 31, 2004 , the number of outstanding shares of the issuer's common
stock, $0.001 par value, was 18,325,777 shares.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes [ ] No [X]
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS ............................................... 3
Consolidated Unaudited Balance Sheet for the three months ended
March 31, 2004 and March 31, 2003................................... 3
Consolidated Unaudited Statements of Operations for the
three months ended March 31, 2004 and March 31, 2003....... 4
Consolidated Unaudited Statements of Cash Flows for the
three months ended March 31, 2004 and March 31, 2003....... 5
Notes to Consolidated Financial Statements.......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 12
ITEM 3. CONTROLS AND PROCEDURES............................................. 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K..................................... 15
SIGNATURES................................................................... 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CYBERADS, INC.
Consolidated Balance Sheets
March 31, December 31,
2004 2003
----------------- -----------------
Assets
------
Current asset -
Accounts receivable $ - $ 20,380
Property and equipment, net 14,171 14,171
Other assets:
Hold-to-maturity investments 10,700,000 10,700,000
Deposits 8,585 8,585
-------------- --------------
Total other assets 10,708,585 10,708,585
-------------- --------------
$ 10,722,756 $ 10,743,136
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Outstanding checks in excess of cash in bank $ 14,774 $ 1,207
Note payable 109,000 120,000
Accounts payable 669,448 697,748
Accrued liabilities 719,886 944,658
Unearned revenue 130,960 130,960
Payable to related parties 786,555 786,555
Loans payable - convertible debentures 60,000 60,000
-------------- --------------
Total current liabilities 2,490,623 2,741,128
Payable to stockholder 184,634 157,634
Stockholders' equity:
Preferred stock; $.001 par value; authorized 5,000,000 shares,
of which 1,000,000 shares has been designated as Series A
Convertible, issued and outstanding 835,660 shares 836 836
Common stock; $.001 par value; authorized 50,000,000
shares; issued and outstanding 18,325,777 shares 18,326 18,326
Common stock to be issued 11,140,000 11,140,000
Additional paid in capital 15,399,238 15,399,238
Retained deficit (18,510,901) (18,714,026)
-------------- --------------
Total stockholders' equity 8,047,499 7,844,374
-------------- --------------
$ 10,722,756 $ 10,743,136
============== ==============
See accompanying notes.
3
CYBERADS, INC.
Consolidated Statements of Operations
Three months ended March 31
-------------------------------------
2004 2003
------------------ -----------------
Revenues $ 303,120 $ 2,460,950
Cost of revenues - 996,147
---------- ------------
Gross profit 303,120 1,464,803
Selling expenses - 614,438
General and administrative expenses 104,842 1,135,738
---------- ------------
Net income (loss) from operations 198,278 (285,373)
Other income (expenses):
Other income 4,847 -
Impairment of property and equipment - (52,313)
Interest expense and financing costs, net - (17,597)
---------- ------------
Total other income (expenses) 4,847 (69,910)
----------- ------------
Net income (loss) before provision for income taxes 203,125 (355,283)
Provision for income taxes - -
---------- ------------
Net income $ 203,125 $ (355,283)
========== ============
Net income (loss) per common share $ .011 $ (.02)
========== ==============
See accompanying notes.
4
CYBERADS, INC.
Consolidated Statements of Cash Flows
Three months ended March 31
-------------------------------------
2004 2003
---------------- ------------------
Cash flows from operating activities:
Net income (loss) $ 203,125 $ (355,283)
Adjustment to reconcile net income (loss) to net cash used in
operating activities:
Provision for doubtful accounts - 364,991
Impairment of inventories - 120,879
Impairment of long-lived assets - 52,313
Depreciation - 9,997
Deferred financing costs - 5,000
Changes in assets and liabilities:
Receivables 20,380 605,386
Inventories - 10,500
Deposits and other assets - 9,896
Outstanding checks in excess of cash in bank 13,567 -
Accounts payable (28,300) (931,973)
Accrued liabilities (224,772) 17,919
----------- ----------
(16,000) (90,375)
Cash flows from investing activities -
Capital expenditures - (15,001)
Cash flows from financing activities:
Principal repayments of note payable (11,000) -
Advances received from stockholder 27,000 -
Cash overdraft - (87,213)
Principal repayments to related parties - (207,360)
Net borrowings from factor - 399,949
----------- ----------
16,000 105,376
----------- ----------
Net change in cash $ - $ -
=========== ==========
Cash paid during the period for interest $ - $ 13,604
=========== ==========
Supplemental disclosure of noncash financing activities -
Common stock issued in exchange for debt $ - $ 87,500
=========== ==========
See accompanying notes.
5
CYBERADS, INC.
Consolidated Notes to Financial Statements
March 31, 2004
1. Summary of significant accounting policies
------------------------------------------
BUSINESS: CyberAds, Inc. ("CyberAds") was incorporated in the state of
Florida on April 12, 2000. The Company earns commissions from selling
approved contracts to subscribers for cellular telephone service.
Commissions are received either from master dealers or cellular phone
service providers, not the subscriber. Applications for cellular
telephone services are obtained from advertising banners placed at
various websites. The Company does business with cellular phone service
providers as well as master dealers that have contracted with various
other carriers and with several website hosts, who receive a commission
for each completed contract for cellular phone service.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of CyberAds and its wholly owned
subsidiary IDS. All significant intercompany balances have been
eliminated in consolidation. The operations of IDS are currently
dormant.
INTERIM REPORTING: The Company's year-end for accounting and tax
purposes is December 31. In the opinion of Management, the accompanying
consolidated financial statements as of March 31, 2004 and 2003 and for
the three months then ended, consisting of only normal recurring
adjustments, except as noted elsewhere in the notes to the consolidated
financial statements, necessary to present fairly its financial
position, results of its operations and cash flows. The results of
operations for the three months ended March 31, 2004 and 2003 are not
necessarily indicative of the results to be expected for the full year.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided for over the
estimated useful life of the assets of five to seven years. Leasehold
improvements are amortized over the lesser of the original term of the
related lease or their estimated useful life.
INVESTMENTS: Investments are classified as trading securities,
available-for-sale securities, or hold-to-maturity securities. Trading
securities be reported at fair market value, with unrealized gains or
losses recognized as a component of operating results;
available-for-sale securities be reported at fair market value, with
unrealized gains and losses excluded from earnings but reported in a
separate component of shareholders' equity (net of the effects of
income taxes) until they are disposed of or sold; at the time of
disposal or sale, any gains or losses, calculated by the specific
identification method, are recognized as a component of operating
results; and hold-to-maturity securities be reported at amortized cost.
The Company's hold-to-maturity investments as of December 31, 2003
consisted of a 22% interest in a limited liability company that owns
real estate.
6
CYBERADS, INC.
Consolidated Notes to Financial Statements
March 31, 2004
1. Summary of significant accounting policies (continued)
------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS: The Company assess the recoverability
of long-lived assets under SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" by determining whether the depreciation
and amortization of the asset's balance over its remaining life can be
recovered through projected undiscounted future cash flows. The amount
of impairment, if any, is measured based on fair value and charged to
operations in the period in which the impairment is determined by
management. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value less cost to sell.
The Company recorded an impairment loss of $52,313 during the three
months ended March 31, 2003 for assets that became idle as a result of
staff reductions.
REVENUE RECOGNITION: In 2004 and 2003, the Company recorded revenue on
a "net" basis when contracts are submitted to master dealers. The
phones are shipped from the dealers to the subscriber and the Company
does not bear the risk of loss on the cellular phone. Revenue is
recognized when the master dealer ships the phones to the subscriber.
In 2003, the Company also recorded revenue on a "gross" basis when
contracts are submitted directly to cellular phone service providers.
The phones are shipped from the Company to the subscriber and the
Company bears the risk of loss on the cellular phone. Under the gross
method commission and related cost of goods sold for the cellular phone
is recognized when the Company ships the phones.
STOCK OPTIONS AND WARRANTS: The Company uses a fair value based method
of accounting for stock based compensation to employees. The Company
also accounts for stock options and warrants issued to non-employees
for services under the fair value method of accounting.
NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share
is computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. The weighted
average number of common stock shares outstanding was 18,325,777 for
the three months ended March 31, 2004 (14,914,615 for the three months
ended March 31, 2003).
USE OF ESTIMATES: The process of preparing financial statements in
conformity with accounting principles generally accepted in the United
States of America requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses.
Accordingly, upon settlement, actual results may differ from estimated
amounts.
7
CYBERADS, INC.
Consolidated Notes to Financial Statements
March 31, 2004
2. Operations
----------
Management of the Company plans to continue to restructure debt, seek
profitable products, reduce operating expenses, and seek additional
capital and debt financing until operations achieve profitability.
Management of the Company believes the above actions, along with other
plans, will allow them to continue operations and ultimately achieve
profitability. Until then, the Company is dependent upon its ability to
obtain additional capital and debt financing. The consolidated
financial statements as of March 31, 2004 do not reflect adjustments
relating to the recorded asset amounts, or the amounts of liabilities
that would be necessary should the Company not be able to continue in
existence.
3. Note payable
------------
The note payable was due in installments of $5,000 on January 15, 2004
and February 15, 2004, plus interest at the rate of 10% per annum.
Final payment was due March 15, 2004. The note is secured by all of the
Company's accounts receivable, inventories, and computer hardware and
software and is guaranteed by two former officers of the Company. The
Company is currently in default with respect to the agreement.
4. Accrued liabilities
-------------------
Accrued expenses consisted of the following at:
March 31, December 31,
2004 2003
------------- ----------------
Payroll and payroll related liabilities $ 612,136 $ 548,195
Commission charge-backs 72,750 361,463
Professional fees 35,000 35,000
---------- ----------
$ 719,886 $ 944,658
========== ==========
The Company is non-compliant with respect to certain federal and state
payroll related taxes. Included in accrued payroll and payroll related
liabilities for 2004 and 2003 is approximately $540,800 of unpaid
payroll taxes.
5. Payable to related parties
--------------------------
Advances from related parties consisted of the following at:
March 31, December 31,
2003 2002
------------- ----------------
Advance due to a corporation owned by a former
officer of the Company, bearing interest at 10% per
annum, due on demand and unsecured $ 54,000 $ 54,000
8
CYBERADS, INC.
Consolidated Notes to Financial Statements
March 31, 2004
5. Payable to related parties (continued)
--------------------------------------
Advance due to a former officer of the Company,
bearing interest at 10% per annum, due on demand
and unsecured 732,555 732,555
---------- ----------
$ 786,555 $ 786,555
========== ==========
6. Loans payable - convertible debentures
--------------------------------------
Loans payable - convertible debentures consists of unsecured loans from
two individuals whereby the principal of the note is convertible into
the Company's common stock at the option of the holder. Interest on
borrowings is payable quarterly at a rate of 20% per annum. The notes
were due in installments of $15,000 on November 13, 2003, $13,750 on
December 13, 2003 and January 13, 2004, with final payment due February
13, 2004. The Company is currently in default with respect to the
agreements. The notes are convertible into the Company's common stock
at a conversion rate of 75% of the closing bid price of the Company's
common stock one trading day prior to conversion.
7. Payable to stockholder
----------------------
The payable to stockholder consists of advances from Novanet Media,
Inc. for working capital purposes. The advances are unsecured,
non-interest bearing and due on demand; however, Novanet Media, Inc.
has agreed not to demand repayment of the advances before May 2005 and
unless cash is available from a merger, capital stock exchange, asset
acquisition, or other business combination, or from operations.
8. Capital stock transactions
--------------------------
On March 7, 2003, the Company issued 1,250,000 shares of its common
stock in exchange for debt of $87,500 owed to the provider of its
cellular phone service.
9. Stock options
-------------
The Company's stock option activity for options granted to employees
and non-employees is summarized as follows for the three months ended
March 31, 2004:
Weighted Weighted
average average
exercise Shares exercise
Shares price exercisable price
--------------- ----------- --------------- -----------
Outstanding at January 1, 2004 2,925,000 $ .48 2,925,000 $ .48
=========== =============== ===========
Expired (200,000) $ 1.00
------------- ===========
Outstanding at March 31, 2004 2,725,000 $ .44 2,725,000 $ .44
============= =========== ============= ===========
9
CYBERADS, INC.
Consolidated Notes to Financial Statements
March 31, 2004
9. Stock options (continued)
-------------------------
The Company's stock option outstanding and exercisable at March 31,
2004 is summarized as follows:
Options outstanding Options exercisable
-------------------------------------------------------------- -----------------------------------
Weighted average
----------------------------- Weighted
Range remaining exercise average
of prices Shares life price Shares exercise price
-------------- --------------- -------------- ------------- --------------- -----------------
$.04 - $.99 1,625,000 2 years $.21 1,625,000 $.21
============ ======= === ===
$.99 - $1.25 1,100,000 2 years $.90 1,100,000 $.90
============ ------------ ======= === --------- ===
$.04 - $1.25 2,725,000 2 years $.44 2,725,000 $.44
============ ============ ======= === ========= ===
10. Settlements
-----------
The Company entered into a consulting agreement in September 2002 for
advisory, investor relations and public relations services. The
consulting firm and the Company have taken the position that the other
is in default of the agreement. The Company and the consulting firm
reached a settlement in April 2004 whereby the Company will issue
100,000 shares of its common stock granted to the consulting firm under
the original consulting agreement; however, the consulting firm is
restricted from reselling the shares. Under the terms of the settlement
agreement the consulting firm may resell no more than 3,000 share of
the Company's common stock per week and no more than an aggregate of
50,000 shares over a period of 120 days from the date of the
settlement. They are further restricted from reselling the Company's
common stock until September 13, 2004 at which time they may resell no
more than 3,000 shares of the Company's common stock per week and no
more than an aggregate of 50,000 shares over a period of 120 days. The
settlement had no effect on the accompanying financial statements as
the stock options granted under the original consulting agreement where
previously reflected.
In April 2004, the Company agreed to indemnify a former officer of the
Company for any loss he sustained in a settlement reached with a
cellular phone service provider against IDS and him personally. Under
the indemnification, the Company is obligated to pay an aggregate of
$72,261 in installments of $5,000 each on or before August 1, 2004 and
September 1, 2004 with the balance due October 1, 2004. The
indemnification had no effect on the accompanying financial statements
as the amount owed to the cellular phone service provider was
previously recorded as accounts payable in the records of IDS.
In April 2004, the Company reached a settlement with a cellular phone
service provider whereby the Company has agreed to issue the provider
250,000 shares of common stock previously granted. However, the Company
and the cellular phone service provider are currently negotiating
mutually acceptable share resale terms.
10
CYBERADS, INC.
Consolidated Notes to Financial Statements
March 31, 2004
10. Settlements (continued)
-----------------------
The settlement had no effect on the accompanying financial statements
as the stock options granted to the cellular phone service provider
where previously reflected.
11
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis contains various forward-looking statements
within the meaning of the Securities and Exchange Act of 1934. These statements
consist of any statement other than a recitation of historical fact and can be
identified by the use of forward looking terminology such as "may", "expect",
"anticipate", "estimates", or "continue" or use of negative or other variations
of comparable terminology. We caution that these statements are further
qualified by important factors that could cause actual results to differ
materially from those contained in our forward looking statements, that these
forward looking statements are necessarily speculative, and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in our forward looking statements.
Management's discussion and analysis should be read in conjunction with the
financial statements and the notes thereto.
RESULTS OF OPERATIONS
---------------------
Three months ended March 31, 2004 compared to the three months ended March 31,
--------------------------------------------------------------------------------
2003:
-----
In March 2003, the Company changed their business model whereby
cellular phone service providers, or a fulfillment company, began shipping
cellular telephones directly to the Company's subscribers, rather than the
Company carrying cellular telephone inventories and shipping to the Company's
subscribers.
Also, effective September 9, 2003, all then-existing officers of the
Company resigned and were replaced with new management.
Revenues were $303,120 for the three months ended March 31, 2004
compared to $2,460,950 for the three months ended March 31, 2003. The $2,157,830
decrease reflects the impact of the change in the Company's business model.
Under the new model, the Company records revenue on a "net" basis when the
master dealers ship the phones to the subscriber. Under the previous business
model, the Company recorded revenue on a "gross" basis when the Company shipped
the phones. The decrease in revenues also reflects the impact of the elimination
of unprofitable products by new management.
There were no costs of revenues for the three months ended March 31,
2004 compared to $996,147 for the three months ended March 31, 2003. Under the
previous business model the Company no longer carries cellular telephone
inventories, rather than the Company bearing the risk of loss of the phones.
There were also no selling expenses for the three months ended March
31, 2004 compared to $614,438 for the three months ended March 31, 2003. The
decrease reflects the impact of the change in the Company's business model
whereby the service provider is now responsible for handling all order
fulfillment processes, customer service, verification and shipping.
General and administrative expenses were $303,120 for the three months
ended March 31, 2004 or 34.6% of revenues compared to $1,135,738 for the three
months ended
12
March 31, 2003 or 46.2% or revenues. The decrease reflects the impact of the
change in the Company's business model and the impact of new management reducing
overhead.
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
As of March 31, 2004 compared to December 31, 2003:
---------------------------------------------------
The Company had a working capital deficit of $2,490,623 as of March 31,
2004 compared to a working capital deficit of $2,720,748 as of December 31,
2003. The decrease in the Company's working capital deficit was a result of the
Company achieving profitable operations of $198,278 during the three months
ended March 31, 2004.
Since September 2003 when new management began operating the Company
approximately $1,483,200 of accounts payable and accrued liabilities have been
renegotiated into term debt or converted to capital stock of the Company. New
management expects to continue to improve its working capital by restructuring
debt, seeking profitable products, reducing overhead, and seeking additional
capital until debt can be satisfied and assets recovered through continued
profitable operations.
A major stockholder advanced an additional $27,000 to the Company for
working capital purposes during the three months ended March 31, 2004 and as of
that date has advanced the Company an aggregate of $184,634. This stockholder
has agreed not to demand repayment of the advances before May 2005 and unless
cash is available from a merger, capital stock exchange, asset acquisition, or
other business combination, or from operations. However, there can be no
assurances that this stockholder will continue to provide advances to the
Company.
13
ITEM 3. CONTROLS AND PROCEDURES
As of March 31. 204, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and President, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon
that eva1uation, these principal executive officers and principal financial
officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company, including its consolidated subsidiaries, required to be included in the
Company's periodic SEC filings. There have been no significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation.
14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits.
--------
Exhibit
Number Description of Document
3.1(a) Articles of Incorporation (Incorporated by reference)
3.1(b) Amendment to Articles of Incorporation (Incorporated by
reference)
3.2 ByLaws (Incorporated by reference)
4.0 Description of Series A Convertible Preferred Stock
(Incorporated by reference)
31 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the period covered by
this report.
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.
Date: June 4, 2004 CYBERADS, INC.
By: /s/ WALTER TATUM
--------------------------
Walter Tatum, President
15