U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT for the
transition period from ___________________ to ___________________.
Commission File Number 0-33135
ADSOUTH PARTNERS, INC.
----------------------
(Name of small business issuer in its charter)
Nevada 68-0448219
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1515 N. Federal Highway, Suite 418, Boca Raton, FL 33432
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(561) 750-0410
(Registrant's telephone number, including area code)
Check whether the issuer (1) has 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 [ ]
As of November 10, there are 90,221,171 shares of the par value $.0001 common
stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Indicate by checkmark whether the Registrant is an accelerated filer
as defined in Rule 12b-2 of the Securities and Exchange Act of 1934.
Yes [ ] No [X]
Page 1
ADSOUTH PARTNERS, INC.
Index
Page
Part I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Unaudited Condensed Sector Statements of Operations
-Three Months Ended September 30, 2004 and the period
from July 8, 2003 (Date of Inception) to September 30, 2003 3
Unaudited Condensed Consolidated Statements of Operations
-Three Months Ended September 30, 2004 and the period
from July 8, 2003 (Date of Inception) to September 30, 2003 4
Unaudited Condensed Sector Statements of Operations
-Nine Months Ended September 30, 2004 and the period
from July 8, 2003 (Date of Inception) to September 30, 2003 5
Unaudited Condensed Consolidated Statements of Operations
-Nine Months Ended September 30, 2004 and the period
from July 8, 2003 (Date of Inception) to September 30, 2003 6
Unaudited Condensed Sector Balance Sheet - As of September 30, 2004 7-8
Unaudited Condensed Consolidated Balance Sheet - As of September 30, 2004 9
Unaudited Condensed Sector Statements of Cash Flows
-Nine Months Ended September 30, 2004 and the period
from July 8, 2003 (Date of Inception) to September 30, 2003 10
Unaudited Condensed Consolidated Statements of Cash Flows
-Nine Months Ended September 30, 2004 and the period
from July 8, 2003 (Date of Inception) to September 30, 2003 11
Unaudited Condensed Consolidated Statement of Changes in Stockholders'
Equity - For the nine Months Ended September 30, 2004 12
Notes to Unaudited Condensed Consolidated Interim Financial Statements 13-21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21-23
Item 3. Controls and Procedures 23
PART II OTHER INFORMATION 24
Item 1. Legal Proceedings 24
Item 2. Recent Sales of Unregistered Securities 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Sector Statements of Operations
For the Three Months Ended September 30, 2004
and the Period from July 8, 2003 (Date of Inception) to
September 30, 2003
- --------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------------------------------------------
ADVERTISING
Revenues $1,028,000 $136,000
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses
Media placement and production costs 214,000 71,000
Selling, administrative and other expense (includes $175,000 of non cash
stock based compensation for the three months ended September 30, 2004) 763,000 33,000
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 977,000 104,000
- -------------------------------------------------------------------------------------------------------------------
Operating income - Advertising 51,000 32,000
- -------------------------------------------------------------------------------------------------------------------
PRODUCTS
Revenues 922,000 -
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 432,000 -
Selling, administrative and other expense (includes $87,000 of non cash
stock based compensation for the three months ended September 30, 2004) 418,000 -
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 850,000 -
- -------------------------------------------------------------------------------------------------------------------
Operating income - Products 72,000 -
Interest expense (16,000) -
- -------------------------------------------------------------------------------------------------------------------
Net income - Products 56,000 -
- -------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Net income $107,000 $32,000
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 88,048,223 52,126,019
- -------------------------------------------------------------------------------------------------------------------
AMOUNTS PER SHARE OF COMMON STOCK
Basic net income $.00 * $.00 *
- -------------------------------------------------------------------------------------------------------------------
Diluted net income $.00 * $.00 *
- -------------------------------------------------------------------------------------------------------------------
* - less than $.01
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2004
and the Period from July 8, 2003 (Date of Inception) to
September 30, 2003
- --------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------------------------------------------
Revenues
Advertising $1,028,000 $136,000
Products 922,000 -
- -------------------------------------------------------------------------------------------------------------------
Revenues 1,950,000 136,000
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses
Media placement and production costs 214,000 71,000
Cost of sales 432,000 -
Selling, administrative and other expense (includes $262,000 of non cash
stock based compensation for the three months ended September 30, 2004) 1,181,000 33,000
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,827,000 104,000
- -------------------------------------------------------------------------------------------------------------------
Income from operations 123,000 32,000
Interest expense (16,000) -
- -------------------------------------------------------------------------------------------------------------------
Net income $107,000 32,000
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 88,048,223 52,126,019
- -------------------------------------------------------------------------------------------------------------------
AMOUNTS PER SHARE OF COMMON STOCK
Basic net income $.00 * $.00 *
- -------------------------------------------------------------------------------------------------------------------
Diluted net income $.00 * $.00 *
- -------------------------------------------------------------------------------------------------------------------
* - less than $.01
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Sector Statements of Operations
For the Nine Months Ended September 30, 2004
and the Period from July 8, 2003 (Date of Inception) to
September 30, 2003
- --------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------------------------------------------
ADVERTISING
Revenues $2,884,000 $136,000
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses
Media placement and production costs 973,000 71,000
Selling, administrative and other expense (includes $3,503,000 of non cash
stock based compensation for the nine months ended September 30, 2004) 4,673,000 33,000
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 5,646,000 104,000
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) - Advertising (2,762,000) 32,000
Loss on sale of marketable securities (10,000) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) - Advertising (2,772,000) 32,000
- -------------------------------------------------------------------------------------------------------------------
PRODUCTS
Revenues 928,000 -
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 433,000 -
Selling, administrative and other expense (includes $663,000 of non cash
stock based compensation for the nine months ended September 30, 2004) 1,234,000 -
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,667,000 -
- -------------------------------------------------------------------------------------------------------------------
Operating loss - Products (739,000) -
Interest expense (16,000) -
- -------------------------------------------------------------------------------------------------------------------
Net loss - Products (755,000) -
- -------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Net income (loss) ($3,527,000) $32,000
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 81,166,253 40,847,450
- -------------------------------------------------------------------------------------------------------------------
AMOUNTS PER SHARE OF COMMON STOCK
Basic net income (loss) ($.04) $.00 *
- -------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) ($.04) $.00 *
- -------------------------------------------------------------------------------------------------------------------
* - less than $.01
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 2004
and the Period from July 8, 2003 (Date of Inception) to
September 30, 2003
- --------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------------------------------------------
Revenues
Advertising $2,884,000 $136,000
Products 928,000 -
- -------------------------------------------------------------------------------------------------------------------
Revenues 3,812,000 136,000
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses
Media placement and production costs 972,000 71,000
Cost of sales 433,000 -
Selling, administrative and other expense (includes $4,166,000 of non cash
stock based compensation for the nine months ended September 30, 2004) 5,907,000 33,000
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 7,313,000 104,000
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (3,501,000) 32,000
Interest expense (16,000) -
Loss on sale of marketable securities (10,000) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) ($3,527,000) 32,000
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 81,166,253 40,847,450
- -------------------------------------------------------------------------------------------------------------------
AMOUNTS PER SHARE OF COMMON STOCK
Basic net income (loss) ($.04) $.00 *
- -------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) ($.04) $.00 *
- -------------------------------------------------------------------------------------------------------------------
* - less than $.01
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Sector Balance Sheet
As of September 30, 2004
- --------------------------------------------------------------------------------
ASSETS
ADVERTISING
Cash and cash equivalents (includes $100,000 restricted cash) $ 658,000
Accounts receivable 746,000
Prepaid expenses and other current assets 313,000
- --------------------------------------------------------------------------------
Total current assets 1,717,000
Property and equipment, net 57,000
Deposits 9,000
- --------------------------------------------------------------------------------
Total Advertising assets 1,783,000
- --------------------------------------------------------------------------------
PRODUCTS
Cash 1,000
Accounts receivable 269,000
Due from factor 104,000
Inventory 214,000
Prepaid expenses and other current assets 39,000
- --------------------------------------------------------------------------------
Total current assets 627,000
Property and equipment, net 22,000
Investment in product line rights 116,000
Deposits 4,000
- --------------------------------------------------------------------------------
Total Product assets 769,000
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 2,552,000
- --------------------------------------------------------------------------------
(continued)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 7
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Sector Balance Sheet
As of September 30, 2004
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
ADVERTISING
Accounts payable $ 147,000
Accrued salaries and payroll taxes 151,000
Deferred revenues 55,000
- --------------------------------------------------------------------------------
Total Advertising current liabilities 353,000
- --------------------------------------------------------------------------------
PRODUCTS
Accounts payable 477,000
Accrued salaries and payroll taxes 38,000
Accrued expenses 28,000
Notes payable 250,000
- --------------------------------------------------------------------------------
Total Products current liabilities 793,000
- --------------------------------------------------------------------------------
Contingencies and commitments (see Notes 10 and 14)
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; 5,000,000 shares
authorized, 3,500,000 designated as Series A
Convertible Preferred Stock, none issued and
outstanding as of September 30, 2004 -
Common stock, $.0001 par value; 500,000,000 shares
authorized, 90,221,171 issued and outstanding as
of September 30, 2004 9,000
Additional paid-in capital 5,290,000
Deferred compensation (321,000)
Notes receivable - stockholder (45,000)
Accumulated deficit (3,527,000)
- --------------------------------------------------------------------------------
Total stockholders' equity 1,406,000
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,552,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 8
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Consolidated Balance Sheet
As of September 30, 2004
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents (includes $100,000 restricted cash) $ 659,000
Accounts receivable 1,015,000
Due from factor 104,000
Inventory 214,000
Prepaid expenses and other current assets 352,000
- --------------------------------------------------------------------------------
Total current assets 2,344,000
Property and equipment, net 79,000
Investment in product line rights 116,000
Deposits 13,000
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 2,552,000
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 624,000
Accrued salaries and payroll taxes 189,000
Deferred revenues 55,000
Accrued expenses 28,000
Notes payable 250,000
- --------------------------------------------------------------------------------
Total current liabilities 1,146,000
- --------------------------------------------------------------------------------
Contingencies and commitments (see Notes 10 and 14)
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; 5,000,000 shares
authorized, 3,500,000 designated as Series A
Convertible Preferred Stock, none issued and
outstanding as of September 30, 2004 -
Common stock, $.0001 par value; 500,000,000 shares
authorized, 90,221,171 issued and outstanding
as of September 30, 2004 9,000
Additional paid-in capital 5,290,000
Deferred compensation (321,000)
Notes receivable - stockholder (45,000)
Accumulated deficit (3,527,000)
- --------------------------------------------------------------------------------
Total stockholders' equity 1,406,000
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,552,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 9
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Sector Statements of Cash Flows
For the Nine Months Ended September 30, 2004
and the Period from July 8, 2003 (Date of Inception) to
September 30, 2003
- --------------------------------------------------------------------------------
2004 2004 2003
Advertising Products Advertising
---------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss) $ (2,772,000) $ (755,000) $ 31,000
Adjustments to reconcile net loss to net cash
- - operating activities:
Non cash stock based compensation expense 3,503,000 663,000 -
Loss on sale of marketable securities 10,000 - -
Depreciation and amortization 5,000 11,000 -
Other operating adjustments 2,000 - -
Changes in assets and liabilities:
Accounts receivable (746,000) (269,000) -
Due from factor - (104,000) -
Inventory - (214,000) -
Prepaid expense and other current assets (313,000) (14,000) -
Accounts payable 129,000 477,000 29,000
Accrued salaries and payroll taxes 146,000 38,000 -
Deferred revenues 55,000 - 113,000
Accrued expenses - 27,000 -
- --------------------------------------------------------------------------------------------------------------------
Net cash - operating activities 19,000 (140,000) 173,000
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures (49,000) (24,000) (2,000)
Acquisition of marketable securities (246,000) -
Proceeds from sale of marketable securities 236,000 -
Deposits (8,000) (4,000) (1,000)
Investment in product line rights - (125,000)
- --------------------------------------------------------------------------------------------------------------------
Net cash - investing activities (67,000) (153,000) (3,000)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Proceeds from notes payable - 250,000 -
Proceeds from the exercise of stock options 130,000 - -
Proceeds from issuance of common stock 560,000 44,000 -
Capital distributions - - (143,000)
- --------------------------------------------------------------------------------------------------------------------
Net cash - financing activities 690,000 294,000 (143,000)
- --------------------------------------------------------------------------------------------------------------------
Net change in cash 642,000 1,000 27,000
Cash - beginning of period 16,000 - -
- --------------------------------------------------------------------------------------------------------------------
Cash - end of period $ 658,000 $ 1,000 $ 27,000
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ - $ 16,000 $ -
- --------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 10
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004
and the Period from July 8, 2003 (Date of Inception) to
September 30, 2003
- --------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss) $ (3,527,000) $ 31,000
Adjustments to reconcile net loss to net cash - operating activities:
Non cash stock based compensation expense 4,166,000 -
Loss on sale of marketable securities 10,000 -
Depreciation 16,000 -
Other operating adjustments 2,000 -
Changes in assets and liabilities:
Accounts receivable (1,015,000) -
Due from factor (104,000) -
Inventory (214,000) -
Prepaid expense and other current assets (327,000) -
Accounts payable 606,000 29,000
Accrued salaries and payroll taxes 184,000 -
Deferred revenues 55,000 113,000
Accrued expenses 27,000 -
- -------------------------------------------------------------------------------------------------------------------
Net cash - operating activities (121,000) 173,000
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures (73,000) (2,000)
Acquisition of marketable securities (246,000) -
Proceeds from sale of marketable securities 236,000 -
Deposits (12,000) (1,000)
Investment in product line rights (125,000) -
- -------------------------------------------------------------------------------------------------------------------
Net cash - investing activities (220,000) (3,000)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Proceeds from notes payable 250,000 -
Proceeds from the exercise of stock options 130,000 -
Proceeds from issuance of common stock 604,000 -
Capital distributions (143,000)
- -------------------------------------------------------------------------------------------------------------------
Net cash - financing activities 984,000 (143,000)
- -------------------------------------------------------------------------------------------------------------------
Net change in cash 643,000 27,000
Cash - beginning of period 16,000 -
- -------------------------------------------------------------------------------------------------------------------
Cash - end of period $ 659,000 $ 27,000
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 16,000 $ -
- -------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes $ - $ -
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 11
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiary
Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2004
- --------------------------------------------------------------------------------
Additional Note
Common Stock Paid-in Deferred Receivable - Accumulated
-------------------------
Shares Amount Capital Compensation Stockholder Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003
(see Note 2) 28,000,000 $3,000 $19,000 - - ($12,000) $10,000
Equity section of Zenith
Technology, Inc. 24,170,475 2,000 932,000 ($783,000) ($20,000) (131,000) -
Transfer to additional
paid-in capital upon
reorganization - - (131,000) - - 131,000 -
Capitalization of accumulated
deficit at the time of the
S-Corp revocation - - (12,000) - - 12,000 -
Stock issued pursuant to stock
grants (see Note 7) 30,050,944 3,000 3,622,000 (130,000) - - 3,495,000
Grant of stock options (see
Note 6) - - 78,000 (78,000) - - -
Exercise of stock options
(see Note 6) 2,250,000 * 130,000 - - - 130,000
Amortization of deferred
compensation (see Note 6) - - - 670,000 - - 670,000
Stock issued for note receivable
- related party (see Note 5) 5,000,000 1,000 1,001,000 - (650,000) - 352,000
Cancellation of note receivable
- related party upon return
of previously issued stock
(see Note 5) (2,180,451) * (635,000) - 635,000 - -
Interest on note receivable
- related party (see Note 5) - - 10,000 - (10,000) - -
Stock issued in lieu of cash
for interest expense 230,203 * 25,000 - - - 25,000
Sale of common stock 2,700,000 * 251,000 - - - 251,000
Net loss - - - - - (3,527,000) (3,527,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 90,221,171 $9,000 $5,290,000 ($321,000) ($45,000) ($3,527,00) $1,406,000
- ------------------------------------------------------------------------------------------------------------------------------------
* - less than $1,000.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 12
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Adsouth Partners, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2004
- --------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Adsouth Partners, Inc. and its wholly owned subsidiary Adsouth, Inc.,
(collectively the "Company") have been prepared in accordance with Regulation
S-B promulgated by the Securities and Exchange Commission and do not include all
of the information and footnotes required by generally accepted accounting
principles in the United States of America for complete financial statements. In
the opinion of management, these interim financial statements include all
adjustments necessary in order to make the financial statements not misleading.
The results of operations for such interim periods are not necessarily
indicative of results of operations for a full year. The unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto of Adsouth Partners, Inc. (formerly
Zenith Technology, Inc.), included as Exhibit 99.1 in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2003, Adsouth, Inc.,
included as Exhibit 99.2 in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2003 and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Annual Report on
Form 10-KSB for the year ended December 31, 2003.
2. Acquisition of Adsouth, Inc.
On January 4, 2004, the Company, the Tiger Fund, Adsouth, Inc., John P.
Acunto, Jr. and Angela E. Acunto entered into a share exchange transaction,
pursuant to which the Tiger Fund transferred 28,000,000 shares of Common Stock
it owned to Mr. John P. Acunto, Jr. and Ms. Angela E. Acunto, who were the two
shareholders of Adsouth, Inc., in exchange for their 100% equity ownership in
Adsouth, Inc. (the "Adsouth Acquisition"). Upon the completion of the Adsouth
Acquisition, control of the Company had changed whereby Mr. John P. Acunto, Jr.
and Ms. Angela Acunto owned more than 50% of the total issued and outstanding
Common Stock.
Because the Adsouth Acquisition resulted in the former owners of
Adsouth, Inc. gaining control of the Company, the transaction is accounted for
as a reverse acquisition. Effective on the acquisition date, the Company's
balance sheet includes the assets and liabilities of Adsouth, Inc. and its
equity accounts have been recapitalized to reflect the equity of Adsouth, Inc.
In addition, effective on the acquisition date, and for all reporting periods
thereafter, the Company's operating activities, including any prior comparative
periods, will include only those of Adsouth, Inc. However, because Adsouth, Inc.
commenced operations in July 2003, comparative operating results for the three
and nine months ended September 30, 2004 both include the period from July 8,
2003 (date of inception) to September 30, 2003 in this filing.
3. Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1
to the Adsouth Partners, Inc. (formerly Zenith Technology, Inc.), financial
statements included as Exhibit 99.1 in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2003, and in Note 1 to the Adsouth, Inc.,
financial statements included as Exhibit 99.2 in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2003.
Factored Receivables (Due from Factor)
On September 22, 2004 the Company and a factoring company executed an
Account Transfer and Purchase Agreement pursuant to the Company to sell up to
$2,000,000 of its qualified receivables on a non-recourse basis. The Company
pays a fixed discount of 1% of the gross amount of any receivables sold and is
advanced 80% of the gross amount of such receivables (the "Initial Advance") and
the remaining 20% of the gross amount of any receivables sold is held as a
reserve by the factoring company (the " Due from Factor") until such time as the
receivable is collected by the factoring company. The Company pays a
Page 13
variable discount of a base rate plus 2% on the Initial Advances for the period
of time that the Initial Advances remain outstanding. The effective rate as of
September 30, 2004 was 6.75%. For the three and nine months ended September 30,
2004, the total fixed and variable discounts were an aggregate of $6,000. The
amount due from factor as of September 30, 2004 was $104,000.
Bank Line of Credit
On July 9, 2004, the Company obtained a $100,000 bank line of credit.
The line of credit bears interest at prime and is collateralized by a $100,000
certificate of deposit. During the three and nine months ended September 30,
2004 the Company borrowed $100,000 on the line-of-credit all of which was repaid
and there remains no balance on the line-of-credit as of September 30, 2004.
During the three and nine months ended September 30, 2004, interest expense on
the line of credit approximated $1,000. The effective rate on the line of credit
was 4.5625% as of September 30, 2004.
Note Payable
On July 8, 2004, the Company issued a $250,000 promissory note to an
individual. The proceeds from the note payable were primarily used to purchase
product inventory. The note bears interest at 18% which is due and payable each
month that the note is outstanding. All principal and interest on the note is
due on January 8, 2005. The note is secured by the inventory of the Company and
a pledge by the chief executive officer, of 3,000,000 shares of the Company's
common stock owned by him. In addition, the Company issued to the individual
230,203 shares of its common stock, having a value of $25,000, which will reduce
the amount of interest that is payable in cash and the fair value of such stock
is treated as interest expense. During the three and nine months ended September
30, 2004 interest expense on the note payable approximated $10,000 and as of
September 30, 2004 the remaining unamortized value of the common stock issued in
lieu of cash for interest expense of $15,000 is included in prepaid expenses.
Revenue Recognition
During the three and nine months ended September 30, 2004, the Company
derived revenue from the placement of advertising, the production of
advertising, creative advertising consulting and public relations and from the
sale of products. The Company's advertising services revenue is derived from
billings that are earned when the media is placed, from fees earned as
advertising services are performed and from production services rendered. In
addition, incentive amounts may be earned based on qualitative and/or
quantitative criteria. In the case of media placements, revenue is recognized as
the media placements appear. During 2004, the Company was the primary obligor
and carried all of the credit risk for the media placements and accordingly,
recorded the full amount of such billings from the media placements as revenue
in accordance with Emerging Issues Task Force Issue No. 99-19. In the case of
consulting and production arrangements, the revenue is recognized as the
services are performed. The Company's creative consulting revenue is generally
earned on a fee basis, and in certain cases incentive amounts may also be
earned. As with fee arrangements in advertising, such revenue is recognized as
the work is performed. Incentive amounts for advertising and marketing services
are recognized upon satisfaction of the qualitative and/or quantitative
criteria, as set out in the relevant client contract. Deferred revenues are
recognized as a liability when billings are received in advance of the date when
revenues are earned. Revenues from the sale of products are recognized upon the
shipment of the goods being sold and are net of estimated returns allowances.
Basic and Diluted Income (Loss) Per Share
Basic and diluted per share results for the three and nine months ended
September 30, 2004 were computed based on the net income or (loss) allocated to
the common stock for the respective period. The weighted average number of
shares of common stock outstanding during the period was used in the calculation
of basic earnings (loss) per share. In accordance with FAS 128, "Earnings Per
Share," the weighted average number of shares of common stock used in the
calculation of diluted per share amounts is adjusted for the dilutive effects of
potential common shares including, (i) the assumed exercise of stock options
based on the treasury stock method; and (ii) the assumed conversion of
convertible preferred stock only if an entity records earnings from continuing
operations, as such adjustments would otherwise be anti-dilutive to earnings per
share from continuing operations. As a result of the Company recording a loss
Page 14
during the nine months ended September 30, 2004, the average number of common
shares used in the calculation of basic and diluted loss per share is identical
and have not been adjusted for the effects of 16,422,800 potential common shares
from unexercised stock options and warrants. Such potential common shares may
dilute earnings per share in the future. For the three months ended September
30, 2004 a portion of such potential common shares were dilutive and 1,722,800
were excluded as they were anti-dilutive. The following table presents a
reconciliation of basic earnings per common share to dilutive earnings per
common share.
Net
Income
Weighted Average Per
Three Months Ended September 30, 2004 Net Income Shares Outstanding Share
- ---------------------------------------------------------------------------------------------------
Basic earnings per common share $107,000 88,048,223 $.00 *
Effect of potential common shares - 3,310,322 $.00 *
- ---------------------------------------------------------------------------------------------------
Diluted earnings per common share $107,000 91,358,545 $.00 *
- ---------------------------------------------------------------------------------------------------
* - less than $.01
For the period from July 8, 2003 (date of inception) to September 30,
2003, there were no potential common shares.
Stock Based Compensation
The Company has elected to use the intrinsic value method of accounting
for stock options in accordance with APB Opinion No. 25 and related
interpretations issued to employees under its stock option plans whereby the
amount of stock-based compensation expense is calculated as the difference
between the fair market value and the exercise price on the date of issuance.
For purposes of pro forma disclosures the amount of stock-based compensation as
calculated using the fair value method of accounting for stock options issued to
employees is amortized over the options' vesting period. The Company's pro forma
information for the three and nine month periods ended September 30, 2004 is as
follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
2004 2004
- ---------------------------------------------------------------------------------------------------------
Net income (loss) as reported $ 107,000 $ (3,527,000)
Deduct: Amount by which stock- based employee compensation
as determined under fair value based method for all
awards exceeds the compensation as determined under the
intrinsic value method - (19,000)
- ---------------------------------------------------------------------------------------------------------
Pro forma net income (loss) under FAS No. 123 $ 107,000 $ (3,546,000)
- ---------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
2004 2004
- ---------------------------------------------------------------------------------------------------------
Amounts per share of common stock:
Basic:
As reported $.00* ($0.04)
Pro forma under SFAS No. 123 $.00* ($0.04)
Diluted:
As reported $.00* ($0.04)
Pro forma under SFAS No. 123 $.00* ($0.04)
* - less than $.01
Page 15
4. Supplemental Disclosure of Non Cash Investing and Financing Activities
On March 31, 2004, the Company sold 5,000,000 shares of common stock to
a related party for $1 million of which $650,000 was paid with the issuance of a
promissory note. On June 23, 2004, 2,180,451 of such shares were returned in
cancellation of $635,000 of the related promissory note (see Note 5).
5. Tiger Fund, Inc. Equity Investment
Pursuant to the Adsouth Acquisition, the Tiger Fund, Inc. committed to
provide the Company with a total of $1 million in equity funding during 2004.
Originally, the Tiger fund was to receive a warrant to purchase 2,000,000 shares
of Common Stock at $1 per share for its $1 million investment. On March 31, 2004
the Company and the Tiger Fund entered into an amended agreement pursuant to
which the Tiger Fund, Inc. purchased 5,000,000 shares of common stock for $1
million consisting of $350,000 cash and a promissory note in the amount of
$650,000. As of March 31, 2004, $280,000 of the cash payment was received and in
April 2004 the remaining $70,000 was received. The $650,000 promissory note
bears interest at 4% per annum and, beginning May 1, 2004, requires monthly
payments of approximately $96,000. On June 23, 2004, the Company accepted the
return of 2,180,451 share of Common Stock and agreed to cancel $635,000 of the
remaining note receivable balance due form the Tiger Fund, Inc.
6. Deferred Stock-based Compensation
Pursuant to a management agreement entered into on December 22, 2003
between Strategy Partners, Inc., a related party, and the Company then known as
Zenith Technology, Inc., the Company authorized the issuance of 5,217,000 shares
of Common Stock valued at approximately $.15 per share to Strategy Partners as
payment for the first twelve months of their management consulting services.
These shares had a fair value of $783,000 which is being amortized ratably over
2004.
On May 4, 2004, the Company granted to a consultant 625,000 shares of
Common Stock having a fair value of $100,000, which is being amortized over the
twelve month life of the underlying consulting agreement.
On July 12, 2004, the Company granted to a consultant a stock option to
purchase 2,000,000 shares of common stock for $.065 per share, all of which were
exercised on September 15, 2004. The fair value of the option was $30,000, which
is being amortized over the six month life of the underlying consulting
agreement.
On July 12, 2004, the Company granted to a consultant a stock option to
purchase 250,000 shares of common stock for $.0001 per share, all of which were
exercised on September 16, 2004 and an option to purchase 200,000 shares of
common stock for $.06 per share, all of which remain unexercised as of September
30, 2004. The fair value of the options was $24,000, which is being amortized
over the six month life of the underlying consulting agreement.
On August 25, 2004, the Company granted to a company 250,000 shares of
Common Stock having a fair value of $30,000, which is being amortized over the
three month life of the underlying contract.
On September 8, 2004, the Company granted to a consultant a stock
option to purchase 3,000,000 shares of common stock for $.092 per share, all of
which remain unexercised as of September 30, 2004. The fair value of the option
was $24,000, which is being amortized over the six month life of the underlying
consulting agreement.
The amortization for the stock and option grants described in the
preceding six paragraphs for the three and nine months ended September 30, 2004
is $262,000 and $670,000, respectively. The unamortized balance of deferred
stock based compensation as of September 30, 2004 of $321,000 is presented as a
separate component of stockholders' equity.
Page 16
7. Stock-based Compensation
Stock Grants
On January 4, 2004, the Company granted 10,040,000 shares of common
stock to employees including 10,000,000 shares issued to its executive officers.
The fair value of each share on January 4, 2004 was $.16 resulting in
stock-based compensation expense of $1.606 million.
On February 20, 2004, the Company granted 750,000 shares of common
stock to non-employee consultants. The fair value of each share on February 20,
2004 was $.13 resulting in stock-based compensation expense of $98,000.
On February 27, 2004, the Company granted 16,960,000 shares of common
stock to employees including 13,360,000 shares issued to its executive officers,
granted 400,000 shares of common stock to a non-employee consultant and
3,200,000 shares to the managing director of the Strategy Partners. The fair
value of each share on February 27, 2004 was $.09 resulting in stock-based
compensation expense of $1.526 million.
On March 1, 2004, the Company granted 400,000 shares of common stock to
an executive officer. The fair value of each share on March 1, 2004 was $.11
resulting in stock-based compensation expense of $44,000.
On March 18, 2004, the Company granted 525,944 shares of common stock
to employees including 492,611 shares issued to its executive officers. The fair
value of each share on March 18, 2004 was $.225 resulting in stock-based
compensation expense of $118,000.
On March 31, 2004, the Company granted 500,000 shares of common stock
to an executive officer. The fair value of each share on March 31, 2004 was
$.205 resulting in stock-based compensation expense of $103,000.
Stock Options
On February 27, 2004, the Company issued to executive officers, options
to purchase 11,500,000 shares of common stock at a price of $.09 per share, the
fair value of such shares on February 27, 2004, resulting in no stock-based
compensation expense.
On May 4, 2004, the Company issued to a consultant an option to
purchase 800,000 shares of common stock at a price of $.163 per share. The fair
value of each share on May 4, 2004 was $.13 per share resulting in no
stock-based compensation.
Warrants
On January 28, 2004, the Company issued warrants to purchase an
aggregate of 136,134 shares of common stock at a price of $2.00 per share. The
fair value of each share on January 28, 2004 was $.22 resulting in no
stock-based compensation expense.
On May 11, 2004, the Company issued a warrant to purchase an aggregate
of 786,666 shares of common stock at a price of $.20 per share. The fair value
of each share on May 11, 2004 was $.15 resulting in no stock-based compensation
expense.
8. Concentrations of Credit Risk
As of September 30, 2004, the Company's cash and cash equivalents that
are in excess of Federal Deposit Insurance Corporation limits was $536,000.
For the three months ended September 30, 2004, 52% of the Company's
total revenues were derived from one advertising sector customer and 37% of
total revenues were derived from one product sector customer. For the nine
months ended September 30, 2004, 70% of the Company's total revenues
Page 17
were derived from one advertising sector customer and 19% of total revenues were
derived from one product sector customer. As of September 30, 2004 73% of the
Company's accounts receivable is due from one advertising sector customer and
16% is due from one product sector customer.
9. Acquisition of DermaFresh Product
In February 2004, the Company acquired the DermaFresh product line from
an unaffiliated company for cash consideration of $125,000. The acquisition cost
is included in other long-term assets and is being amortized as an expense
against the sales of the DermaFresh product. For the three and nine months ended
September 30, 2004, such amortization expense was $9,000 and the unamortized
balance as of September 30, 2004 was $116,000.
10. Employment Agreements
Chief Executive Officer
John P. Acunto, Jr., is the controlling stockholder and Chief Executive
Officer of the Company (the "CEO") and through June 30, 2004, he was the
Company's sole Director. Substantially all of the revenues of the Company since
its inception are a direct result of his sales efforts and the CEO's
compensation through June 30, 2004 was based on an incentive that corresponds to
revenues calculated as 33% of the gross margin, which is defined as revenue less
direct costs. Due to budget constraints, during the first six months of 2004,
the CEO voluntarily limited his salary to $100,000. During the second and third
quarters, the Company paid commissions, approximating $435,000 to the CEO for
binding advertising sales orders approximating $3.4 million that have been
received by the Company. These orders, under the Company's revenue recognition
policies, will not be recognized as revenue until the underlying advertising
services are fulfilled. During the three months ended September 30, 2004,
$187,000 of such commissions were expensed to operations and the balance of
$248,000 of such commissions are classified as prepaid expenses as of September
30, 2004.
On July 1, 2004, the Company and the CEO executed a term sheet to enter
into an employment agreement which provides for: (i) a term of five and one-half
years; (ii) an annual base salary of $375,000 effective July 1, 2004, subject to
annual increases of 5% commencing January 1, 2006, (iii) an initial signing
bonus of $250,000, which is payable in quarterly installments through January 3,
2005; (iv) quarterly bonuses effective with the fourth quarter of 2004 of 5% of
gross profit, less executive compensation other than the quarterly bonus and an
annual bonus described in clause (v); (v) an annual bonus effective October 1,
2004 equal to 5% of net income before income taxes and before annual bonus if
such amount is at least $2,000,000; (vi) quarterly stock options to purchase
such number of shares as having a fair value that equals the quarterly bonuses
at an exercise price equal to the closing price on the last day of the quarter;
and' (vii) fringe benefits including a vehicle allowance and insurance coverage.
President
On March 18, 2004, the Company entered into an employment agreement
with its President pursuant to which effective April 5, 2004 he receives an
annual base salary of $175,000. In addition, the President received a one-time
signing bonus of $50,000 cash and shares of common stock valued at $100,000. The
President is entitled to a bonus of 5% of the product sales of the Company and
stock based incentives for revenues that are generated as a result of the direct
efforts of the President. No such incentives have been earned as of September
30, 2004. Finally, the President received 500,000 shares of common stock for
overseeing the establishment of a web-based advertising business, which such
web-site was completed and operational during the first quarter of 2004.
Chief Financial Officer
On July 1, 2004, the Company and its chief financial officer (the
"CFO") executed a term sheet to enter into an employment agreement which will
entitle the CFO to the following: (i) an initial term of eighteen months; (ii)
an annual base salary of $150,000 effective July 1, 2004, (iii) a signing bonus
of $24,000; (iv) quarterly bonuses effective October 1, 2004 of 5% of net income
before income taxes and quarterly bonus and annual bonus described in clause
(v), (v) an annual bonus effective October 1, 2004
Page 18
equal to 5% of net income before income taxes and the bonus for any annual
period in which such amount is at least $2,000,000; (iv) stock options to
purchase such number of shares as having a fair value that equals the bonuses in
(iv) and (v) above and having an exercise price equal to the closing price on
the last day of the quarter; and, (vi) fringe benefits including a vehicle
allowance and medical insurance coverage. In addition, in the event the CFO is
terminated without cause, he is entitled to the remaining value of his base pay.
11. Sale of Common Stock
On June 4, 2004, the Company sold 2,000,000 shares of its common stock
to an accredited investor pursuant to a private placement offering receiving
proceeds of $200,000.
On July 20, 2004, the Company sold 700,000 shares of its common stock
to an accredited investor pursuant to a private placement offering receiving
proceeds of $51,000.
12. Capital Stock
In April 2004, the Company's stockholders, by a consent of the holders
of a majority of the outstanding shares of common stock, consisting of the
Company's chief executive officer and his wife, approved an amendment to the
Company's certificate of incorporation, which (i) increases the number of
authorized shares of common stock, par value $.0001 per share, to 500,000,000
shares, and (ii) to authorize 5,000,000 shares of preferred stock, par value
$.0001 per share, of which 3,500,000 shares are designated as Series A
Convertible Preferred Stock.
The Series A Convertible Preferred Stock provides the holders of such
shares the right to convert each share into one hundred (100) shares of
fully-paid, validly issued and non-assessable shares of the Company's Common
Stock, without further consideration, upon any "change of control" of the
Company. For purposes of the Series A Convertible Preferred Stock, a "change of
control" shall be deemed to have occurred in the event that any person or entity
shall have acquired more than twenty-five percent (25%) of the aggregate number
of shares of the Company's issued and outstanding Common Stock in any single
transaction or series of transactions which is not approved by our Board of
Directors. While the Board of Directors has the ability to issue shares of
Series A Convertible Preferred Stock to any person, the primary purpose for the
authorization to issue a series of stock having the particular attributes of the
proposed Series A Convertible Preferred Stock is to serve as a deterrent to any
outside person taking control of the Company away from its existing controlling
stockholders.
As of September 30, 2004, the Company has no present arrangement,
obligation or specific intention to issue shares of our Preferred Stock to any
person, however the Board of Directors does have the express authority, without
further shareholder approval, to issue shares of Preferred Stock without the
further approval by, or prior knowledge of, the shareholders.
All remaining shares of Preferred Stock not so specifically designated
may be designated in the future by action of the Board of Directors of the
Corporation and otherwise in accordance with the applicable provisions of the
Nevada Revised Statutes of the State of Nevada.
On July 23, 2004, the Company's board of directors authorized the
repurchase of up to $500,000 of the company's common stock from time to time in
open market transactions. As of November 8, 2004, the Company has not purchased
any such shares.
On August 9, 2004, the Company registered an aggregate of 48,300,000
shares of its common stock on Form S-8 (file no. 333-118049) as filed with the
Securities and Exchange Commission. The registration statement covered
25,850,944 shares which are already issued and outstanding from stock grants,
12,300,000 shares underlying unexercised incentive stock options and 10,149,056
reserved for future issuance under the Company's stock incentive plans. The
terms on which the restricted stock grants were issued provide that the shares
cannot be sold until the last to occur of (i) the date stockholder approval of
these plans, which occurred in April 2004, (ii) the date the shares are
registered, which occurred on August 9, 2004, (iii) the date of the filing of a
Form 10-KSB annual report or Form 10-QSB quarterly report which reflects
profitable operations of the Company for one calendar quarter (iii) upon
Page 19
filing of the registration statement of which this prospectus is a part, and
(iv) the date of which the board of directors determines that the right to
transfer vests, except that, in any event, the right to transfer the shares
vests on the earlier of five years from the date of the restricted stock grant
or the date of a change of control, as defined in the plans. As of the date of
the filing of this Form 10-QSB, the right to transfer the shares issued pursuant
to the restricted stock grants has not vested.
13. Segment Information
The Company's operating activity consists of two operating segments,
Advertising and Products. Segment selection is based upon the organizational
structure that the Company's management uses to evaluate performance and make
decisions on resource allocation, as well as availability and materiality of
separate financial results consistent with that structure. The Advertising
sector consists of the placement of advertising, the production of advertising,
creative advertising consulting and public relations. The Products sector
includes all activities related to the sale of the DermaFresh product line.
Certain corporate and general expenses of the Company are allocated to the
Company's segments based on an estimate of the proportion that such allocable
amounts benefit the segments.
Advertising Products Total
- ---------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2004:
Revenues $ 1,028,000 $ 922,000 $ 1,950,000
Operating income $ 51,000 $ 72,000 $ 123,000
Nine Months Ended September 30, 2004:
Revenues $ 2,884,000 $ 928,000 $ 3,812,000
Operating loss $ (2,762,000) $ (739,000) $ (3,501,000)
The period from July 8, 2003 (Date of
Revenues $ 136,000 $ - $ 136,000
Operating income $ 32,000 $ - $ 32,000
Other Disclosures:
Total assets at September 30, 2004 $ 1,783,000 $ 769,000 $ 2,552,000
14. Subsequent Events
On October 6, 2004, the Company entered into a Joint Referral and
Services Utilization and Office Sharing Agreement with Manhattan Media, Inc.
("Manhattan Media"). The Company has agreed to exclusively use Manhattan Media
for all print media placement for its existing proprietary product lines, new
product lines and all existing and new clients of the Company who require print
media. Manhattan Media has agreed to refer all existing and new clients in need
of advertising and creative services to the Company. In addition, both the
Company and Manhattan Media have agreed to make office space available to each
other.
On October 18, 2004, the Company entered into a Distribution and
Marketing Agreement with Simon Cosmetics LLC ("Simon") to the be the exclusive
North American distributor of a skin care product which utilizes Pamela Anderson
as a spokes model and her likeness for marketing purposes. Each of the Company
and Simon Solutions has agreed to expend $125,000 for the initial advertising of
the product.
On or about November 5, 2004, Plan*It Strategic Marketing, Inc.
commenced an action in the Circuit Court, Palm Beach County, Florida against the
Company, its subsidiary Dermafresh, Inc., John Cammarano, and others, including
Think Tek, Inc., the company that sold Dermafresh, Inc. and the Dermafresh
microdermabrasion product to the Company, claiming that the sale to the Company
violated an agreement between the plaintiff and Think Tek, Inc. Mr. Cammarano is
president of the Company and was an officer, director and stockholder of
Dermafresh, Inc. at the time Dermafresh, Inc. was sold to the
Page 20
Company. The plaintiff is seeking monetary damages and equitable relief,
including a temporary and permanent injunction, rescission and the imposition of
an equitable trust. A hearing on plaintiff's request for a temporary injunction
is scheduled for November 15, 2004. The Company believes that the claim against
it is without merit.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statement Regarding Forward Looking Disclosure
This Quarterly Report of Adsouth Partners, Inc. ("us", "we" "our" or
the "Company") on Form 10-QSB, including this section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations," may
be "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, but are not
limited to, statements that express our intentions, beliefs, expectations,
strategies, predictions or any other statements relating to our future
activities or other future events or conditions. These statements are based on
current expectations, estimates and projections about our business based, in
part, on assumptions made by management. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may, and probably
will, differ materially from what is expressed or forecasted in the
forward-looking statements due to numerous factors, including those risks
discussed under "Risk Factors" in our Form S-8, which was filed with the SEC on
August 9, 2004, and in our Form 10-KSB annual report for the year ended December
31, 2003, those described in Management's Discussion and Analysis of Financial
Conditions and Results of Operations in our Form 10-KSB annual report for the
year ended December 31, 2003 and this Form 10-QSB quarterly report, and those
described and in any other filings which we make with the SEC. In addition, such
statements could be affected by risks and uncertainties related to our financial
conditions, the availability of financing, the ability to generate clients for
the direct response marketing business and the ability to successfully develop
Dermafresh business and other factors which affect the industries in which we
conduct business, market and customer acceptance, competition, government
regulations and requirements and pricing, as well as general industry and market
conditions and growth rates, and general economic conditions. Any
forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this report.
The important factors that could cause actual results to differ from
those in the forward-looking statements herein (the "cautionary statements") are
more fully described in our Form S-8, which was filed with the SEC on August 9,
2004, and Form 10-KSB for the year ended December 31, 2003
This Quarterly Report also contains certain financial information
calculated on a "pro forma" basis. Because "pro forma" financial information by
its very nature departs from traditional accounting conventions, this
information should not be viewed as a substitute for historical financial
information prepared in accordance with GAAP contained in the Company's
financial statements that are contained in this Quarterly Report and should be
read in conjunction therewith.
Investors should evaluate any statements made by the Company in light
of these important factors.
Results of Operations
Reverse Merger Acquisition
On January 4, 2004, our acquisition of Adsouth, Inc. ("Adsouth") was
completed, and on such date we became a direct response marketing company.
Beginning with the quarter ending March 31, 2004, and for all reporting periods
thereafter, our operating activities, including the prior period comparatives,
include only those of Adsouth. However, because Adsouth, Inc. commenced
operations in July 2003, comparative operating results for the three and nine
months ended September 30, 2004 both include the period from July 8, 2003 (date
of inception) to September 30, 2003 in this filing. During the first sixty days
after the acquisition of Adsouth we spent significant time and resources
developing and implementing our business model. Our most significant expense in
the first quarter of 2004 was $3.495 million of non-cash stock based
compensation expense representing the fair value of common stock that was
granted to
Page 21
employees and consultants during the first quarter of 2004. The stock grants
were used to obtain financial, legal and management consulting services and to
attract qualified employees to Adsouth. During the first quarter of 2004 we
added five new permanent employees including our president and our chief
financial officer. Our salaries and related costs during the first quarter of
2004 include signing bonuses of $50,000. The acquisition of Adsouth also
required the audit of both the holding company and Adsouth which services were
performed during the first quarter of 2004 and amounted in the aggregate to
$42,000.
Current Operations
The marketing communications business is highly competitive, with
agencies of all sizes and disciplines competing primarily on the basis of
quality of service to attract and retain clients and personnel. We intend to
develop a market niche by providing a full level of service quality that users
of direct marketing services may not receive from our larger competitors and to
become vertically integrated with the addition of new direct marketing products.
Our operating activity consists of two operating segments, Advertising and
Products. The Advertising sector consists of the placement of advertising, the
production of advertising, creative advertising consulting and public relations.
The Products sector includes all activities related to the sale of the
DermaFresh product line. Selected financial information of our operating
segments is presented in the following table.
Advertising Products Total
- ---------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2004:
Revenues $ 1,028,000 $ 922,000 $ 1,950,000
Operating income $ 51,000 $ 72,000 $ 123,000
Nine Months Ended September 30, 2004:
Revenues $ 2,884,000 $ 928,000 $ 3,813,000
Operating loss $ (2,762,000) $ (739,000) $ (3,501,000)
The period from July 8, 2003 (Date of
Revenues $ 136,000 $ - $ 136,000
Operating income $ 32,000 $ - $ 32,000
Advertising
During the third quarter of 2004 the Advertising segments revenues
increased $892,000, or 656%, from the comparative period. The Advertising
segment generated income during the third quarter of 2004 of $226,000 before the
deduction of non cash stock-based compensation expense of $175,000, resulting in
operating income of $51,000, compared to operating income of $32,000 in the 2003
period. Advertising revenues in the first nine months of 2004 increased $2.748
million when compared to the prior period, however, the prior period only
includes revenues from July 8, 2003 (the date of inception) to September 30,
2003. The Advertising segment generated income during the first nine months of
2004 of $731,000 before the deduction of $3.503 million of non cash stock-based
compensation expense, resulting in an operating loss of $2.762 million compared
to operating income of $32,000 in the 2003 period.
During the third quarter of 2004 and the first nine months of 2004, 99%
and 93%, respectively, of the Advertising segments revenues were generated from
one customer. We are continuing our efforts to broaden our customer base for the
Advertising segment. On October 6, 2004, we entered into an agreement with
Manhattan Media, Inc. pursuant to which they agreed to refer all existing and
new clients of theirs in need of advertising and creative services to us,
although it will be necessary for us to negotiate the terms of our relationship
with the prospective new client directly with the client, which may choose to
engage us or another party. We are seeking to use our advertising program for
our Product division as a promotion for our advertising services for other
potential new direct response marketing clients.
Page 22
Products
During the first quarter of 2004 we acquired the rights to the
DermaFresh product line. The second Quarter of 2004 was the first period in
which we started generating revenues from our Products segment amounting to
$6,000 for both the second quarter and first half of 2004. During the third
quarter of 2004 the revenues of the Product segment increased to $922,000 on
which income of $159,000 was generated before the deduction of non cash
stock-based compensation expense of $87,000, resulting in operating income of
$72,000. During the first nine months of 2004, Products segment revenues were
$928,000 on which a loss of $76,000 was incurred before the deduction of non
cash stock-based compensation expense of $663,000, resulting in an operating
loss of $739,000. During both the third quarter and the first nine months of
2004, 77% of the Product segments revenues were from one retail customer. On
October 18, 2004 we became the exclusive North American distributor for Simon
Cosmetics LLC which has a skin care product utilizing Pamela Anderson as a
spokes model and her likeness for marketing purposes. This product, a lip
plumper, represents an extension of the Dermafresh product line. Although no
sales of this product have been made to date, the Company is actively marketing
the product, initially to national and regional chain stores as well as local
outlets.
Financial Condition
As of September 30, 2004, our working capital assets were $2.3 million
and included $659,000 of cash and $1.015 million of accounts receivable. Our
current liabilities as of September 30, 2004 were $1.1 million including a note
payable of $250,000 due on January 5, 2005 of notes payable, $55,000 of deferred
revenue and $28,000 in accrued expenses. During the first nine months of 2004
our operating activities used $121,000 of cash. Non operating sources of cash
during the first nine months of 2004 included $604,000 from the sale of common
stock, $250,000 of proceeds form a note payable and $130,000 in proceeds from
the exercise of stock options. Our significant non operating uses of cash during
the first nine months of 2004 included $125,000 to acquire the rights to the
Dermafresh product line and $73,000 for capital expenditures. We expect that a
significant portion of our cash needs for the coming year will be generated from
our operations and the $100,000 that is available on our bank line-of-credit. We
may also seek to increase our cash through the private sale of our securities;
however, because of our stock price, we may have difficulty selling securities
on acceptable terms. We anticipate that we will require additional funding to
enable us to purchase additional products, including the lip plumper for which
we recently obtained exclusive distribution rights, in order to grow our product
segment revenues and to support the marketing effort of such products through
advertising and promotion. In addition, the $250,000 note payable is due on
January 8, 2005.
Our working capital was also affected by our compensation arrangement
with our chief executive officer whereby he received during the first nine
months of 2004, commissions of approximately $435,000 based on firm orders
placed with us. Under the terms of our agreement with the client, we did not
receive all of the money on which the commission was payable and the sale will
not be booked as revenue until the underlying advertising services are
performed.
Item 3. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, have
supervised and participated in an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
quarterly report, and, based on their evaluation, they believe that our
disclosure controls and procedures, as defined in Rule 13a-14(c) of the
Securities Exchange Act of 1934, as amended, are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
As a result of the evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect those controls
subsequent to the date of their evaluation.
Page 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On or about November 5, 2004, Plan*It Strategic Marketing, Inc.
commenced an action in the Circuit Court, Palm Beach County, Florida against the
Company, its subsidiary Dermafresh, Inc., John Cammarano, and others, including
Think Tek, Inc., the company that sold Dermafresh, Inc. and the Dermafresh
microdermabrasion product to the Company, claiming that the sale to the Company
violated an agreement between the plaintiff and Think Tek, Inc. Mr. Cammarano is
president of the Company and was an officer, director and stockholder of
Dermafresh, Inc. at the time Dermafresh, Inc. was sold to the Company. The
plaintiff is seeking monetary damages and equitable relief, including a
temporary and permanent injunction, rescission and the imposition of an
equitable trust. A hearing on plaintiff's request for a temporary injunction is
scheduled for November 15, 2004. The Company believes that the claim against it
is without merit.
Item. 2. Recent Sales of Unregistered Securities
On June 4, 2004, the Company sold 2,000,000 shares of its common stock
to an accredited investor pursuant to a private placement offering receiving
proceeds of $200,000. On July 20, 2004, the Company sold 700,000 shares of its
common stock to an accredited investor pursuant to a private placement offering
receiving proceeds of $51,000. These sales were made without an underwriter and
no discounts or commissions were paid. Pursuant to the offerings, the Company is
required to register the underlying shares within one year from the date that
the sales were made.
Item 5. Other Information
In lieu of filing a Current Report on Form 8-K, the Registrant is
disclosing the following reportable event herein:
On or about November 5, 2004, Plan*It Strategic Marketing, Inc.
commenced an action in the Circuit Court, Palm Beach County, Florida against the
Company, its subsidiary Dermafresh, Inc., John Cammarano, and others, including
Think Tek, Inc., the company that sold Dermafresh, Inc. and the Dermafresh
microdermabrasion product to the Company, claiming that the sale to the Company
violated an agreement between the plaintiff and Think Tek, Inc. Mr. Cammarano is
president of the Company and was an officer, director and stockholder of
Dermafresh, Inc. at the time Dermafresh, Inc. was sold to the Company. The
plaintiff is seeking monetary damages and equitable relief, including a
temporary and permanent injunction, rescission and the imposition of an
equitable trust. A hearing on plaintiff's request for a temporary injunction is
scheduled for November 15, 2004. The Company believes that the claim against it
is without merit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Chief Executive Officer Certification.
31.2 Chief Financial Officer Certification
32 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1) Current report filed on July 23, 2004 reporting the stock buy-back
program press release.
2) Current report filed on August 10, 2004 reporting the formation of the
compensation committee press release.
3) Current report filed on August 17, 2004 reporting the issuance of the
earnings release.
4) Current report filed on September 16, 2004 reporting the resignation of
Gary Hohman and the issuance of a press release.
Page 24
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.
ADSOUTH PARTNERS, INC.
/S/ Chief Executive Officer and Director November 12, 2004
John P. Acunto (Principal Executive and Accounting Officer)
/S/ Chief Financial Officer November 12, 2004
Anton Lee Wingeier Chief Accounting Officer)
Page 25
Exhibit 31.1
SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, John P. Acunto, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Adsouth
Partners, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control
over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the small business issuer's auditors and
the audit committee of the small business issuer's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business
issuer's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
November 12, 2004
By /S/John P. Acunto, Jr.
Chief Executive Officer
Page 26
Exhibit 31.2
SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Anton Lee Wingeier, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Adsouth
Partners, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control
over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the small business issuer's auditors and
the audit committee of the small business issuer's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business
issuer's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
November 12, 2004
By /S/ Anton Lee Wingeier
Chief Financial Officer
Page 27
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Adsouth Partners, Inc., (the
"Company") on Form 10-QSB for the period ending September 30, 2004, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned Chief Executive Officer and Chief Financial Officer of the
Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 that (based on their
knowledge): 1) the Report fully complies with the requirements of Section 13(a)
or 15 (d) of the Securities Exchange Act of 1934, and 2) the information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company as of and for the periods
covered in the Report.
/S/ John P. Acunto, Jr.
Chief Executive Officer
/S/ Anton Lee Wingeier
Chief Financial Officer
November 12, 2004
Page 28