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 June 30, 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.
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(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 June 30, 2004 , the number of outstanding shares of the issuer's common
stock, $.001 par value, was 18,925,777 shares.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes [ ] No [X]
1
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS ............................................... 3
Consolidated Unaudited Balance Sheet as of June 30, 2004............ 3
Consolidated Unaudited Statements of Operations for the
Quarters ended June 30, 2004 and June 30, 2003............. 4
Consolidated Unaudited Statements of Cash Flows for the
Quarter ended June 30, 2004................................ 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
June 30, 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 814,448 697,748
Accounts payable to cellular phone service provider 203,710 492,423
Accrued payroll and payroll related liabilities 614,143 548,195
Other accrued liabilities 38,993 35,000
Payable to related parties 786,555 786,555
Loans payable - convertible debentures 60,000 60,000
-------------- --------------
Total current liabilities 2,641,623 2,741,128
Payable to stockholder 204,634 157,634
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, shares issued and outstanding 835,660 836 836
Common stock; $.001 par value; shares authorized 50,000,000;
shares issued and outstanding 18,925,777 in 2004
(18,325,777 in 2003) 18,926 18,326
Common stock to be issued 11,140,050 11,140,000
Additional paid in capital 15,653,088 15,399,238
Retained deficit (18,936,401) (18,714,026)
-------------- --------------
Total stockholders' equity 7,876,499 7,844,374
-------------- --------------
$ 10,722,756 $ 10,743,136
============== ==============
See accompanying notes.
3
CYBERADS, INC.
Consolidated Statements of Operations
Three months ended June 30 Six months ended June 30
----------------------------------- ---------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ---------------
Revenues $ - $ 1,115,845 $ 303,120 $ 3,576,875
Cost of revenues - (9,611) - 986,616
---------- ------------ ----------- ------------
Gross profit - 1,125,456 303,120 2,590,259
Operating expenses:
Selling - 448,449 - 1,062,887
General and administrative 419,500 449,749 524,342 1,637,800
---------- ------------ ----------- ------------
Total operating expenses 419,500 898,198 524,342 2,700,687
---------- ------------ ----------- ------------
Net income (loss) from operations (419,500) 227,258 (221,222) (110,428)
Other income (expenses):
Other income - 1,965 4,847 2,972
Interest expense and financing
costs, net (6,000) (10,653) (6,000) (29,257)
---------- ------------ ----------- ------------
Total other expenses (6,000) (8,688) (1,153) (26,285)
---------- ------------ ----------- ------------
Net income (loss) before provision for
income taxes (425,500) 218,570 (222,375) (136,713)
Provision for income taxes - - - -
---------- ------------ ----------- ------------
Net Income (loss) $ (425,500) $ 218,570 $ (222,375) $ (136,713)
========== ============ =========== ============
Net income (loss) per common share $ (.023) $ .013 $ (.012) $ (.009)
============= ============ ============ ============
See accompanying notes.
4
CYBERADS, INC.
Consolidated Statements of Cash Flows
Three months ended June 30 Six months ended June 30
----------------------------------- ---------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (425,500) $ 218,570 $ (222,375) $ (136,713)
Adjustment to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Provision (benefit) for
doubtful accounts - - - 364,991
Impairment of inventories - - - 120,879
Impairment of long-lived assets - 46,332 - 98,645
Depreciation - 9,496 - 19,493
Deferred financing costs - 2,015 - 7,015
Common stock issued for in
exchange for compensation
and services 189,500 - 189,500 -
Changes in assets and liabilities:
Receivables - (35,679) 20,380 569,707
Inventories - 6,828 - 17,328
Deposits and other assets - 13,472 - 23,368
Outstanding checks in
excess of cash in bank - (25,436) 13,567 (112,649)
Accounts payable 145,000 216,260 (172,013) (717,747)
Accrued liabilities 6,000 (23,300) 69,941 (4,381)
---------- ----------- ----------- -----------
(85,000) 428,558 (101,000) 249,936
Cash flows from investing activities -
Capital expenditures - - - (13,967)
Cash flows from financing activities:
Principal repayments of note payable - - (11,000) -
Advances received from stockholder 20,000 - 47,000 -
Principal repayments to related parties - - - (207,360)
Proceeds from stock options exercised 65,000 - 65,000 -
Net borrowings from factor - (399,949) - -
---------- ----------- ----------- -----------
85,000 (399,949) 101,000 (207,360)
---------- ----------- ----------- -----------
Net change in cash 28,609 - 28,609
Cash at beginning of period - - - -
---------- ----------- ----------- -----------
Cash at end of period $ - $ 28,609 $ - $ 28,609
========== =========== =========== ===========
See accompanying notes.
5
CYBERADS, INC.
Notes to Consolidated Financial Statements
June 30, 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 it's 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 June 30, 2004 and 2003 and for
the three and six 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 and six months ended June 30, 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 are reported at fair market value, with unrealized gains or
losses recognized as a component of operating results;
available-for-sale securities are 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 are 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
June 30, 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 during the three months ended
June 30, 2003 of $46,332 and during the six months ended June 30, 2003
of $98,645 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 were submitted directly to cellular phone service providers.
The phones were shipped from the Company to the subscriber and the
Company bore the risk of loss on the cellular phone. Under the gross
method commission and related cost of goods sold for the cellular phone
was recognized when the Company shipped 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 18,799,403 for
the three months ended June 30, 2004 (16,532,469 for the three months
ended June 30, 2003) and 18,562,590 for the six months ended June 30,
2004 (15,822,843 for the six months ended June 30, 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
June 30, 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 June 30, 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. Cash flows
----------
Supplemental disclosure of cash flow information is as follows:
Three months ended Six months ended
June 30 June 30
---------------------- ----------------------
2004 2003 2004 2003
--------- ---------- ---------- ----------
Cash paid during the period for -
Interest $ - $ - $ - $ 13,604
======= ======== ======== ========
4. 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.
5. Payable to related parties
--------------------------
Advances from related parties consisted of the following at:
June 30, December 31,
2004 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
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
========== ==========
-8-
CYBERADS, INC.
Consolidated Notes to Financial Statements
June 30, 2004
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 August 2005
and unless cash is available from operations or a merger, capital stock
exchange, asset acquisition, or other business combination.
8. Contingencies
The Company is non-compliant with respect to certain federal and state
payroll related taxes. Included in accrued payroll and payroll related
liabilities at June 30, 2004 and December 31, 2003 is approximately
$540,800 of unpaid payroll taxes.
9. Stock options
The Company's stock option activity for options granted to employees
and non-employees is summarized as follows for the six months ended
June 30, 2004:
Fixed Plan
--------------------------------------------------------
Weighted Weighted
average average
exercise Shares exercise
Shares price exercisable price
------------ ----------- --------------- -----------
Outstanding at January 1, 2004 2,925,000 $ .48
=====
Exercised 500,000 .13
=====
Cancelled 225,000 .25
=====
Expired (300,000) 1.04
----------- ====
Outstanding at June 30, 2004 1,900,000 $ .51 1,900,000 $ .51
=========== ===== ============ ====
The Company's stock option outstanding and exercisable at June 30, 2004
is summarized as follows:
-9-
CYBERADS, INC.
Consolidated Notes to Financial Statements
June 30, 2004
9. Stock options (continued)
Fixed Plan
-----------------------------------------------------------------------
Options outstanding Options exercisable
-------------------------------------------- -------------------------
Weighted average
-------------------- Weighted
Range remaining exercise average
of prices Shares life price Shares exercise price
------------ --------- ----------- -------- --------- --------------
$.04 - $ .99 1,200,000 1 yr. 8 mo. $ .27 1,200,000 $ .27
=========== =========== ====== ======
$.99 - $1.25 700,000 1 yr. 5 mo. $ 1.03 700,000 $ 1.03
============ --------- =========== ==== --------- ====
$.04 - $1.25 1,900,000 1 yr. 6 mo. $ .51 2,725,000 $ .51
============ ========= =========== ====== ========= ======
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 agreed to 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
Company recorded settlement expenses aggregating $110,000 as a result
of the agreement. Management of the Company valued the shares issued at
$1.10 per share, the closing bid price of the Company's common stock on
the date of the agreement. Management of the Company estimated the
value of the Company's shares granted after considering the historical
trend of the trading prices for its common stock and the limited volume
of shares being traded.
On April 27, the Company issued 50,000 shares of its common stock in
accordance with the terms of the agreement. The Company has reserved an
additional 50,000 shares of its common stock for issuance under the
agreement.
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.
-10-
CYBERADS, INC.
Consolidated Notes to Financial Statements
June 30, 2004
11. Subsequent events
Effective August 1, 2004, the Company renegotiated $185,192 of accounts
payable to a cellular phone service provider to an unsecured promissory
note requiring the Company to repay the amount in two installments of
$92,596 each, plus interest at 1.5% per month on the outstanding
balance, due on December 1, 2004 and July 1, 2005.
-11-
ITEM 2 - MANAGEMENT'S DISCUSSION AND 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
Six months ended June 30, 2004 compared to the six months ended June 30, 2003
and three months ended June 30, 2004 compared to the three months ended June 30,
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 six months ended June 30, 2004 compared
to $3,576,875 for the six months ended June 30, 2003. The $3,273,755 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.
The Company had no revenues for the three months ended June 30, 2004
compared to $1,115, 845 for the three months ended June 30, 2003. Management of
the Company has devoted all of there efforts during the three months ended June
30, 2004 toward restructuring debt and settling claims.
There were no costs of revenues for the six months ended June 30, 2004
compared to $986,616 for the six months ended June 30, 2003. Under the new
business model the Company no longer carries cellular telephone inventories.
There were also no selling expenses for the six months ended June 30,
2004 compared to $1,062,887 for the six months ended June 30, 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 $524,342 for the six months
ended June 30, 2004 compared to $1,637,800 for the six months ended June 30,
2003. The decrease reflects the impact of the change in the Company's business
model and the impact of new management reducing overhead.
-12-
General and administrative expenses were $419,500 for the three months
ended June 30, 2004 compared to $449,749 for the three months ended June 30,
2003. Losses from settlements of claims against the Company aggregated $254,500
during the three months ended June 30, 2004 that the Company believes will not
reoccur along with legal costs of $37,000 relating to those settlements.
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004 compared to December 31, 2003:
The Company had a working capital deficit of $2,641,623 as of June 30,
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 of $79,125 was a
result of the Company raising $65,000 from the exercise of stock options and
$47,000 of advances from a stockholder.
Since September 2003 when new management began operating the Company
approximately $1,668,400 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 $20,000 to the Company for
working capital purposes during the three months ended June 30, 2004 and as of
that date has advanced the Company an aggregate of $204,634. This stockholder
has agreed not to demand repayment of the advances before August 2005 and unless
cash is available from operations or from a merger, capital stock exchange,
asset acquisition, or other business combination. There can be no assurances
that this stockholder will continue to provide advances to the Company.
13
ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2004 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: August 16, 2004 CYBERADS, INC.
By: /s/ WALTER TATUM
--------------------------
Walter Tatum, President
15