UNITED STATES
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 March 31, 2005
[ ] 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 as specified 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 May 13, 2005 there are 7,960,931 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
Unaudited Condensed Sector Statements of Operations
-For the Three Months Ended March 31, 2005 and 2004 3
Unaudited Condensed Consolidated Statements of Operations
-For the Three Months Ended March 31, 2005 and 2004 4
Unaudited Condensed Sector Balance Sheet - As of March 31, 2005 5-7
Unaudited Condensed Consolidated Balance Sheet - As of March 31, 2005 8
Unaudited Condensed Sector Statements of Cash Flows
-For the Three Months Ended March 31, 2005 and 2004 9
Unaudited Condensed Consolidated Statements of Cash Flows
-For the Three Months Ended March 31, 2005 and 2004 10-11
Unaudited Condensed Consolidated Statement of Changes in Stockholders'
(Deficiency) Equity - For the Three Months Ended March 31, 2005 12-13
Notes to Unaudited Condensed Consolidated Interim Financial Statements 14-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-22
Item 3. Controls and Procedures 23
PART II OTHER INFORMATION 23
Item 6. Exhibits 23
SIGNATURES 24
Certifications 25-27
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Sector Statements of Operations
For the Three Months Ended March 31, 2005 and 2004
- ---------------------------------------------------------------------------------------------------------------------
2005 2004
- ---------------------------------------------------------------------------------------------------------------------
ADVERTISING
Revenues $415,000 $375,000
- ---------------------------------------------------------------------------------------------------------------------
Costs and expenses
Media placement and production costs 281,000 204,000
Selling, administrative and other expense (includes stock based
compensation expense for the three months ended March 31, 2005 and
2004 of $23,000 and $3,691,000, respectively) 263,000 4,047,000
- ---------------------------------------------------------------------------------------------------------------------
Total costs and expenses 544,000 4,251,000
- ---------------------------------------------------------------------------------------------------------------------
Operating loss - Advertising (129,000) (3,876,000)
Interest expense (24,000) -
Loss on sale of marketable securities - (10,000)
- ---------------------------------------------------------------------------------------------------------------------
Net loss - Advertising (153,000) (3,886,000)
- ---------------------------------------------------------------------------------------------------------------------
PRODUCTS
Revenues 1,306,000 -
- ---------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 545,000 -
Selling, administrative and other expense (includes stock based
compensation expense for the three months ended March 31, 2005 of
$47,000) 456,000 -
- ---------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,001,000 -
- ---------------------------------------------------------------------------------------------------------------------
Operating income - Products 305,000 -
Discount on receivables sold to factor (8,000) -
Interest expense (53,000) -
- ---------------------------------------------------------------------------------------------------------------------
Net income - Products 244,000 -
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Net income (loss) $91,000 ($3,886,000)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 6,983,627 4,588,781
- ---------------------------------------------------------------------------------------------------------------------
AMOUNTS PER SHARE OF COMMON STOCK
Basic net income (loss) $.01 ($.85)
- ---------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) $.01 ($.85)
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2005 and 2004
- ---------------------------------------------------------------------------------------------------------------------
2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Revenues
Advertising $415,000 $375,000
Products 1,306,000 -
- ---------------------------------------------------------------------------------------------------------------------
Revenues 1,721,000 375,000
- ---------------------------------------------------------------------------------------------------------------------
Costs and expenses
Media placement and production costs 281,000 204,000
Cost of sales 545,000 -
Selling, administrative and other expense (includes stock based
compensation expense for the three months ended March 31, 2005 and
2004 of $70,000 and $3,691,000, respectively) 719,000 4,047,000
- ---------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,545,000 4,251,000
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 176,000 (3,876,000)
Discount on receivables sold to factor (8,000) -
Interest expense (77,000) -
Loss on sale of marketable securities - (10,000)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $91,000 ($3,886,000)
Weighted average number of common shares 6,983,627 4,588,781
- ---------------------------------------------------------------------------------------------------------------------
AMOUNTS PER SHARE OF COMMON STOCK
Basic net income (loss) $.01 ($.85)
- ---------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) $.01 ($.85)
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Sector Balance Sheet
As of March 31, 2005
- --------------------------------------------------------------------------------
ASSETS
ADVERTISING
Cash $ 67,000
Certificate of deposit (restricted) 101,000
Accounts receivable, net 179,000
Marketable securities 138,000
Prepaid expenses and other current assets 13,000
- --------------------------------------------------------------------------------
Total current assets 498,000
Property and equipment, net 62,000
Deferred financing costs, net 86,000
Deposits 10,000
- --------------------------------------------------------------------------------
Total Advertising assets 656,000
- --------------------------------------------------------------------------------
PRODUCTS
Cash 27,000
Accounts receivable, net 890,000
Due from factor 35,000
Inventory 643,000
Prepaid expenses and other current assets 98,000
- --------------------------------------------------------------------------------
Total current assets 1,693,000
Property and equipment, net 12,000
Deferred financing costs, net 174,000
Investment in product line rights, net 183,000
Deposits 5,000
- --------------------------------------------------------------------------------
Total Product assets 2,067,000
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TOTAL ASSETS $ 2,723,000
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(continued)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Sector Balance Sheet
As of March 31, 2005
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
ADVERTISING
Accounts payable $ 270,000
Accrued salaries and payroll taxes 163,000
Accrued expenses 32,000
Current portion of capital lease obligation 3,000
Convertible notes (net of debt discount of $251,000) 20,000
- --------------------------------------------------------------------------------
Total Advertising current liabilities 488,000
Capital lease obligation 13,000
- --------------------------------------------------------------------------------
Total Advertising liabilities 501,000
- --------------------------------------------------------------------------------
PRODUCTS
Accounts payable 998,000
Accrued salaries and payroll taxes 108,000
Accrued expenses 126,000
Current portion of capital lease obligation 1,000
Bank line of credit 100,000
Notes payable 100,000
Convertible notes (net of debt discount of $500,000) 39,000
- --------------------------------------------------------------------------------
Total Products current liabilities 1,472,000
Capital lease obligation 3,000
- --------------------------------------------------------------------------------
Total Products liabilities 1,475,000
- --------------------------------------------------------------------------------
Total liabilities 1,976,000
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(continued)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Sector Balance Sheet
As of March 31, 2005
- --------------------------------------------------------------------------------
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 March 31, 2005 -
Common stock, $.0001 par value; 33,333,333 shares
authorized, 7,960,931 issued and outstanding as
of March 31, 2005 1,000
Additional paid-in capital 6,581,000
Notes receivable - stockholder (20,000)
Deferred compensation (60,000)
Accumulated deficit (5,720,000)
Accumulated other comprehensive loss:
Unrealized loss from available-for-sale securities (35,000)
- --------------------------------------------------------------------------------
Total stockholders' equity 747,000
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,723,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 7
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheet
As of March 31, 2005
- --------------------------------------------------------------------------------
ASSETS
Cash $ 94,000
Certificate of deposit (restricted) 101,000
Accounts receivable - net 1,069,000
Due from factor 35,000
Inventory 643,000
Marketable securities 138,000
Prepaid expenses and other current assets 111,000
- --------------------------------------------------------------------------------
Total current assets 2,191,000
Property and equipment, net 74,000
Deferred financing costs, net 260,000
Investment in product line rights, net 183,000
Deposits 15,000
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 2,723,000
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,268,000
Accrued salaries and payroll taxes 271,000
Accrued expenses 158,000
Current portion of capital lease obligation 4,000
Bank line of credit 100,000
Notes payable 100,000
Convertible notes (net of debt discount of $751,000) 59,000
- --------------------------------------------------------------------------------
Total current liabilities 1,960,000
Capital lease obligation 16,000
- --------------------------------------------------------------------------------
Total liabilities 1,976,000
- --------------------------------------------------------------------------------
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 March 31, 2005 -
Common stock, $.0001 par value; 33,333,333 shares
authorized, 7,960,931 issued and outstanding
as of March 31, 2005 1,000
Additional paid-in capital 6,581,000
Notes receivable - stockholder (20,000)
Deferred compensation (60,000)
Accumulated deficit (5,720,000)
Accumulated other comprehensive loss:
Unrealized loss from available-for-sale securities (35,000)
- --------------------------------------------------------------------------------
Total stockholders' equity 747,000
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,723,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 8
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Sector Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004
- ----------------------------------------------------------------------------------------------------------------------
2005 2005 2004
Advertising Products Advertising
----------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss) $ (153,000) $ 244,000 $ (3,886,000)
Adjustments to reconcile net income (loss) to net cash -
operating activities:
Amortization of deferred stock based compensation 23,000 47,000 196,000
Non cash stock based compensation expense - - 3,495,000
Amortization of deferred financing costs 4,000 8,000 -
Depreciation 3,000 1,000 -
Amortization of product line rights - 13,000 -
Amortization of debt discount on convertible notes 20,000 39,000 -
Bad debt expense 2,000 - -
Loss from sale of marketable securities - - 10,000
Changes in assets and liabilities:
Accounts receivable (181,000) (854,000) (242,000)
Inventory - (458,000) (75,000)
Prepaid expense and other current assets (13,000) (65,000) (48,000)
Accounts payable 166,000 631,000 176,000
Accrued salaries and payroll taxes (80,000) 90,000 61,000
Accrued expenses (20,000) 70,000 364,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash - operating activities (229,000) (234,000) 51,000
- ----------------------------------------------------------------------------------------------------------------------
continued
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 9
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Sector Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004
- ----------------------------------------------------------------------------------------------------------------------
2005 2005 2004
Advertising Products Advertising
----------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures (1,000) - (5,000)
Investment in product line rights - - (125,000)
Deposits (1,000) (1,000) -
Other investing activities - - (10,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash - investing activities (2,000) (1,000) (140,000)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Deferred financing costs (42,000) (85,000) -
Capital lease payments (1,000) - -
Repayments of notes payable - (150,000) -
Due from/to factor - (150,000) -
Proceeds from the exercise of stock options 33,000 107,000 -
Proceeds from private placement offerings - - 280,000
Proceeds from issuance of convertible notes 270,000 540,000 -
Other financing activities - - 51,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash - financing activities 260,000 262,000 331,000
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash 29,000 27,000 242,000
Cash - beginning of period 38,000 - 16,000
- ----------------------------------------------------------------------------------------------------------------------
Cash - end of period $ 67,000 $ 27,000 $ 258,000
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SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 1,000 $ 12,000 $ -
- ----------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES
In January 2005 the Company issued 63,333 shares of common stock valued
at $83,000 to acquire the assets of the Miko Brand.
In February 2005 the Company issued warrants as part of a fee paid in
connection with the issuance of convertible notes. The value of the warrants
approximated $145,000 and were capitalized as deferred financing costs.
Page 10
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004
- --------------------------------------------------------------------------------------------------------------------
2005 2004
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss) $ 91,000 $ (3,886,000)
Adjustments to reconcile net income (loss) to net cash - operating
activities:
Amortization of deferred stock based compensation 70,000 196,000
Non cash stock based compensation expense - 3,495,000
Amortization of deferred financing costs 12,000 -
Depreciation 4,000 -
Amortization of product line rights 13,000 -
Amortization of debt discount on convertible notes 59,000 -
Bad debt expense 2,000 -
Loss from sale of marketable securities - 10,000
Changes in assets and liabilities:
Accounts receivable (1,035,000) (242,000)
Inventory (458,000) (75,000)
Prepaid expense and other current assets (78,000) (48,000)
Accounts payable 797,000 176,000
Accrued salaries and payroll taxes 10,000 61,000
Accrued expenses 50,000 364,000
- --------------------------------------------------------------------------------------------------------------------
Net cash - operating activities (463,000) 51,000
- --------------------------------------------------------------------------------------------------------------------
continued
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 11
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004
- --------------------------------------------------------------------------------------------------------------------
2005 2004
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures (1,000) (5,000)
Investment in product line rights - (125,000)
Deposits (2,000) -
Other investing activities - (10,000)
- --------------------------------------------------------------------------------------------------------------------
Net cash - investing activities (3,000) (140,000)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Deferred financing costs (127,000) -
Capital lease payments (1,000) -
Repayments of notes payable (150,000) -
Due from/to factor (150,000) -
Proceeds from the exercise of stock options 140,000 -
Proceeds from private placement offerings - 280,000
Proceeds from issuance of convertible notes 810,000 -
Other financing activities - 51,000
- --------------------------------------------------------------------------------------------------------------------
Net cash - financing activities 522,000 331,000
- --------------------------------------------------------------------------------------------------------------------
Net change in cash 56,000 242,000
Cash - beginning of period 38,000 16,000
- --------------------------------------------------------------------------------------------------------------------
Cash - end of period $ 94,000 $ 258,000
- --------------------------------------------------------------------------------------------------------------------
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.
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES
In January 2005 the Company issued 63,333 shares of common stock valued
at $83,000 to acquire the assets of the Miko Brand.
In February 2005 the Company issued warrants as part of a fee paid in
connection with the issuance of convertible notes. The value of the warrants
approximated $145,000 and were capitalized as deferred financing costs.
Page 12
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Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Changes in Stockholders' (Deficiency) Equity
For the Three Months Ended March 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Loss
Common Stock Additional Note ----------
------------------- Paid-in Deferred Receivable Accumulated Marketable
Shares Amount Capital Compensation Stockholder Deficit Securities Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2004
(see Note 2(a) 6,002,214 * $5,274,000 - ($20,000) ($5,811,000) - ($557,000)
Comprehensive income:
Net income 91,000 91,000
Unrealized loss from
available-for-sale
securities - - - - - ($35,000) (35,000)
----------
Comprehensive income 56,000
Stock issued to acquire
the Miko Brand assets
(see Note 3) 63,333 * 83,000 - - - - 83,000
Securities issued in
conjunction with the
issuance of the
convertible notes
(see Note 2b) 1,620,200 1,000 925,000 - - - - 826,000
Grant of stock options
to consultants - - 130,000 ($130,000) - - - -
Grant of warrants for
placement fees (see
Note 2b) - - 29,000 - - - - 29,000
Exercise of stock
options and warrants 275,185 * 140,000 - - - - 140,000
Amortization of deferred
stock based compensation - - - 70,000 - - - 70,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
March 31, 2005 7,960,931 $1,000 $6,581,000 ($60,000) ($20,000) ($5,720,000) ($35,000) $747,000
- ------------------------------------------------------------------------------------------------------------------------------------
* - less than $1,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 13
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Adsouth Partners, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2005
- --------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Adsouth Partners, Inc. and its wholly owned subsidiaries Adsouth, Inc.,
Dermafresh, Inc. and Miko Distributors, 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, which include only normal
recurring 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.
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2004 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, 2004 and in this Quarterly Report on Form
10-QSB.
2. Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1
to the Adsouth Partners, Inc. financial statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2004.
(a) Reverse Split
On March 25, 2005, the Company effected a one-for-fifteen share reverse
split of the Company's common stock and a proportionate reduction of the
authorized shares outstanding. Contemporaneously with the reverse split, the
reverse split, the number of authorized shares of common stock, par value $.0001
per share was reduced 500,000,000 shares to 33,333,333 shares. All share
information and per share amounts presented in these consolidated financial
statements are presented as if the aforementioned reverse split was effective
for all periods presented.
(b) Convertible Debentures
On February 17 and 22, 2005, the Company completed a private placement
of its securities pursuant to subscription agreements with ten accredited
investors. Pursuant to the subscription agreements, the Company sold to the
investors, for $810,100, (i) its 10% convertible notes due December 2006 in the
aggregate principal amount of $810,100, (ii) 1,620,200 shares of Common Stock,
and (iii) warrants to purchase 675,083 shares of common stock at an exercise
price of $1.275 per share. Atlas Capital Services, LLC served as placement agent
for the financing. As compensation for its services as placement agent, the
Company paid Atlas a fee of $81,000 (10% of the gross proceeds raised in the
private placement), warrants to purchase 135,017 shares of common stock at an
exercise price of $.60 per share and a warrant to purchase 33,333 shares of
common stock at par value, which was exercised on February 17, 2005.
The notes are convertible into common stock at the fixed conversion
price of $.60 per share at any time. Commencing on the earlier of July 1, 2005
or the first business day of the calendar month following the date that a
registration statement covering the shares of Common Stock issued at the closing
and issuable upon conversion of the notes and exercise of the warrants, the
Company is required to redeem 1/18 of the principal amount of the notes. If the
market price of the common stock, computed as provided in the note, is at least
175% of the fixed conversion price, the Company is required to pay the note
holder in stock based on the fixed conversion price. If the market price for the
common stock is less than 175% of the fixed conversion price, the Company can
advise the holders of the notes whether the Company proposes to pay in stock or
in cash. If payment is made in cash, the Company is to pay 110% of the principal
amount
Page 14
of the note being redeemed, plus accrued interest. If payment is made in stock,
the stock is valued at the lesser of fixed conversion price or 80% of the market
price of the common stock. If the Company gives notice that it intends to pay
the monthly installment in cash, the holders may, nonetheless, convert their
notes based on the fixed conversion price. The Company has the right to prepay
the notes at 105% of the principal amount, plus accrued interest, however, the
holders have the right to convert until the date of payment. Any principal
amount converted by a note holder other than a conversion with respect to a
monthly installment is applied to the monthly installments next due. The holders
of the notes have anti-dilution rights with respect to certain sales of common
stock or convertible securities at a price or with a conversion price less than
the fixed conversion price.
The warrants entitle the holders to purchase shares of the Company's
common stock for a period of five years from the date of issuance at an exercise
price of $1.275 per share, except that the warrants issued to Atlas have an
exercise price of $.60 per share. The holders of the warrants have anti-dilution
rights with respect to certain sales of common stock or convertible securities
at a price or with a conversion price less than the exercise price.
The debt discount related to the convertible notes equaled the full
value of the convertible notes, which will be amortized over the life of the
convertible notes (twenty-two months). The debt discount represents an
allocation of the relative fair value of the common stock and warrants issued on
the closing of such notes plus the relative fair value of the beneficial
conversion feature embedded in the notes. The debt discount is amortized over
the twenty two month term of the convertible notes. In the event that the debt
is prepaid or more than the proportionate principal amount of the notes are
converted, the unamortized portion of the debt discount will be expensed at that
time.
Convertible Notes-Face value $810,100
Debt Discount at issuance ($810,100)
Amortization for the three months ended March 31, 2005 58,916 751,184
- --------------------------------------------------------------------------------
Convertible Notes-Net of unamortized debt discount $58,916
- --------------------------------------------------------------------------------
Pursuant to the subscription agreements, the Company also agreed to
file with the Securities and Exchange Commission, a registration statement
covering the shares of common stock issued at the closing, and the shares of
common stock issuable upon conversion of the notes and upon exercise of the
warrants. If the registration statement is not filed within 90 days from
February 17, 2005 or does not become effective within the required timeframe, or
does not remain effective for any 15 consecutive days, the Company has agreed to
make substantial payments as liquidated damages, and the investors have the
right to accept stock in respect of the Company's liquidated damage obligation.
The agreements provide for liquidated damages equal to 2% of the purchase price
of the unconverted notes per whole or partial month that the underlying shares
are not reqistered as required by the agreements. In addition, if the Company
does not deliver unlegended stock certificates in a timely manner, the Company
is required to pay as liquidated damages, an amount equal to 1% of the purchase
price of the shares that were to have been issued for each business day that the
certificates were not timely delivered. In addition, the Company is required to
reimburse the investors for any loss they may sustain if unlegended certificates
were not delivered in a timely manner and the investor's broker executed a
buy-in to cover the shares sold, plus interest on such loss at the rate of 15%
(c) Deferred Financing Costs
The closing costs related to the issuance of the convertible notes
approximated $272,000 including legal fees, broker fees and the value of broker
warrants issued pursuant to the convertible note offering. The deferred offering
costs are amortized over the twenty-two month term of the underlying convertible
notes and such amortization approximated $12,000 for the three months ended
March 31, 2005.
(d) Basic and Diluted Income (Loss) Per Share
Basic and diluted per share results for the three months ended March
31, 2005 were computed based on the net income 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 per
share. In accordance with FAS 128, "Earnings Per Share," the weighted average
number of
Page 15
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 notes only if an entity records earnings
from continuing operations, as such adjustments would otherwise be anti-dilutive
to earnings per share from continuing operations.
For the three months ended March 31, 2005 a portion of such potential
common shares were dilutive and 3,100,103 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
Weighted Income
Average Shares Per
Three Months Ended March 31, 2005 Net Income Outstanding Share
- ----------------------------------------------------------------------------------------------------
Basic earnings per common share $91,000 6,983,627 $.01
Assumed conversion of options and warrants - 80,012 *
- ----------------------------------------------------------------------------------------------------
Diluted earnings per common share $91,000 7,063,639 $.01
- ----------------------------------------------------------------------------------------------------
* - less than $.01
During the three months ended March 31, 2004, the Company recorded a
loss and as a result, 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 potential common shares from unexercised stock
options and warrants which were anti-dilutive for such time period.
(e) 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 month periods ended March 31, 2005 and 2004 is as
follows:
For the Three Months Ended March 31, 2005 2004
- -------------------------------------------------------------------------------------------
Net income (loss) as reported $ 91,000 $ (3,886,000)
Add: Stock-based employee compensation included
in the statement of operations - -
Deduct: Stock- based employee compensation as
determined under fair value based method (19,000) (19,000)
- -------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 72,000 $ (3,905,000)
- -------------------------------------------------------------------------------------------
Amounts per share of common stock:
Basic:
As reported $.01 ($.85)
Pro forma $.01 ($.85)
Diluted:
As reported $.01 ($.85)
Pro forma $.01 ($.85)
(f) Factored Receivables
On September 22, 2004, the Company and a factoring company executed an
Account Transfer and Purchase Agreement pursuant to which the Company may sell
qualified receivables without recourse to the Company. The Company pays a fixed
discount of 1% of the gross amount of any receivables sold and is
Page 16
advanced 80% of the gross amount of such receivables (the "Initial Payment") and
the remaining 20% of the gross amount of any receivables sold is held as a
reserve by the factoring company until such time as the receivable is collected
by the factoring company. The Company pays a variable discount of a base rate,
as quoted from time to time by the factoring company, plus 2% on the Initial
Payment for the period of time that the Initial Payment remains outstanding. The
effective rate of the variable discount as of March 31, 2005 was 7.75%. During
the three months ended March 31, 2005, the Company sold $320,000 of receivables
and the total fixed and variable discounts on receivables sold was $8,000.
(g) Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk include cash and accounts receivable.
As of March 31, 2005, all of the Company's cash is placed with high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk. As of March 31,
2005 the Company has no cash on deposit in excess of federally insured limits.
For the three months ended March 31, 2005, 23%, 23 % and 19% of the Company's
total revenues were derived from Wal-Mart Store, Inc., CVS Corporation and
SinoFresh Healthcare, Inc., respectively. For the three months ended March 31,
2004 99% of the Company's revenues were derived from Gameznflix, Inc. At March
31, 2005, 30%, 28%, 13% and 10% of the Company's accounts receivable were due
from Wal-Mart Store, Inc., CVS Corporation, SinoFresh Healthcare, Inc. and
Brooks Pharmacy, respectively. The Company does not require collateral to
support accounts receivable or financial instruments subject to credit risk.
3. Acquisition of Miko Brand
On January 13, 2005, the Company executed an asset purchase agreement
to acquire assets of Miko Brands, LLC. The Miko Brand products consist of a line
of marinade and dressing sauces. Pursuant to the asset purchase agreement, the
Company issued 63,333 shares of common stock having a fair value of $83,000 to
the sole member of Miko Brands, LLC. In conjunction with the acquisition of the
Miko Brand, the Company entered into a two year consulting agreement with Miko's
sole member pursuant to which the Company granted to him an option to purchase
26,667 shares of common stock for $1.31 per share, being the fair market value
on the date of grant. In addition, the Company entered into a manufacturing
license agreement with an entity formed by Miko's sole member which grants that
entity certain manufacturing rights for the Miko brand.
4. Deferred Compensation
As discussed in Note 3, on January 13, 2005, the Company granted an
option to the former owner of the Miko Brand to purchase 26,667 shares of common
stock for $1.31 per share, and on January 25, 2005, granted to a consultant,
pursuant to a three month financial services consulting agreement, an option to
purchase 185,185 shares of common stock for $.60, which was exercised on January
26, 2005. Using the Black-Scholes option valuation formula, these option grants
were valued at an aggregate of $130,000 of which $70,000 was expensed during the
three months ended March 31, 2005.
5. 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
and creative advertising consulting. The Products sector includes all activities
related to the sale of the Dermafresh product line and the sale of other
products for which the Company has obtained distribution rights. 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.
Page 17
6. Subsequent Events
On April 13, 2005 the Company's board of directors adopted the 2005
Stock Option Plan. The 2005 Stock Option Plan provides for the grant of stock
options and stock appreciation rights of up to 1,000,000 shares of common stock
and provides for the automatic grant of options to purchase 15,000 shares to
each non-employee director on April 1st of each year and upon the election of
each non-employee director an option to purchase 25,000 shares. All options
granted pursuant to the 2005 Stock Option Plan will have an exercise price equal
to the market price on the date of grant and a term of five years.
On April 13, 2005, the Company entered into a one year investors
relations consulting agreement with Alliance Advisors, LLC. Under the terms of
the investor relations consulting agreement the Company will pay Alliance
Advisors, LLC $7,000 per month and granted the firm an option to purchase
200,000 shares of common stock for $.788 per share, the market price on the date
of grant, pursuant to the 2005 Stock Option Plan. The value of the stock option
on the date of grant using the Black-Scholes option valuation formula
approximates $99,000 which will be amortized over the 12 month term of the
investor relations consulting agreement.
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. on Form 10-QSB,
including this section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," may contain "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 10-KSB annual report for the year ended December 31, 2004 and those
described in any other filings which we make with the SEC, as well as the
disclosure contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-KSB for 2004 and the Form
10-QSB for the quarter ended March 31, 2005. 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 and revenue for the
direct response marketing business and the ability to successfully develop our
products 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 10-KSB for the year ended December 31, 2004 and
in any other filings we make with the SEC.
Investors should evaluate any statements made by the Company in light
of these important factors.
Page 18
Introduction
We are in two distinct businesses, advertising and product sales. Our
advertising sector includes the placement of advertising in different media, the
production of direct marketing commercials, and the planning and implementation
of direct marketing programs for our clients. Both our revenue and our gross
margins reflect services in addition to those of a typical advertising agency
since the gross margin on advertising revenue is typically a percentage of the
amount paid for the advertisement. To the extent that we are able to provide
additional services, our margins can improve. Our advertising clients are
generally smaller companies, many of which may be undercapitalized, and that
require services in addition to those of a typical advertising agency.
In our products sector we sell, both through our direct marketing
operations and our sales to retail stores, a range of different products, some
of which are not related to the others and have different distribution channels.
During 2004, we generated revenue from only one product line, our Dermafresh
product line, which we acquired in February 2004 and introduced to the market in
June 2004. During the first three months of 2005, we have either acquired or
obtained marketing rights to a number of additional products and our strategy
contemplates that we will seek to acquire additional products. There is
typically a period of several months from the time that we acquire a product or
distribution rights to a product until we generate revenue from that product.
During this period, we are engaged in marketing activities and thus are
incurring costs before we can generate any revenue from a product. Before we
sell our products to retail accounts, we may use our direct marketing capability
to introduce the product to market.
We have no manufacturing or production facilities, and we purchase our
products from third parties. The price we pay for our products is affected by
the amount of our purchases. To the extent that we increase our volume we may be
able to take advantage of more favorable pricing for the products we sell. Other
than products that we own we have exclusive distribution rights for a short
term.
All of our present distribution agreements have terms of one or two
years, and some include extension rights if volume levels are reached. As a
result, if we are successful in selling a product, we may not be able to take
advantage of the good will that we have built up for the products unless we are
able to obtain an extension of our distribution rights. Because of the
short-term nature of our distribution rights, we must continually obtain rights
to new products and successfully market these products if we are to be
successful over the long term.
Critical Accounting Policies
Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires our
management to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We consider our critical
accounting policies to be those that are complex and those that require
significant judgments and estimates in the preparation of our financial
statements, including the following: recognition of revenues, including pass
through costs; the accounting for business combinations, accounting for expenses
in connection with the issuance of stock options; and, accounting for income
taxes. Management relies on historical experience and on other assumptions
believed to be reasonable under the circumstances in making its judgment and
estimates. Actual results could differ materially from those estimates. There
have been no significant changes in the assumptions, estimates and judgments in
the preparation of these financial statements from the assumptions, estimates
and judgments used in the preparation of our prior years audited financial
statements.
Page 19
2005 Compared with 2004
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 products for which we own or for which we have distribution rights. Selected
financial information of our operating segments is presented in the following
table.
Advertising Products Total
- ----------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2005:
Revenues $ 415,000 $ 1,306,000 $ 1,721,000
Operating income (loss) $ (129,000) $ 305,000 $ 176,000
Net loss $ (153,000) $ 244,000 $ 91,000
Three Months Ended March 31, 2004:
Revenues $ 375,000 $ - $ 375,000
Operating loss $ (3,876,000) $ - $ (3,876,000)
Net loss $ (3,886,000) $ - $ (3,886,000)
Advertising
Advertising revenues in the first three months of 2005 increased
$40,000, or 11%, to $415,000, compared to $375,000 for the first three months of
2004. We performed marketing consulting and media placement services for
SinoFresh Healthcare, Inc. representing 81% of the advertising revenues for the
first three months of 2005. The remaining 19% of advertising revenues were
generated from 9 customers for whom we placed media and provided graphic design
services. Substantially all of the advertising revenues for the first three
months of 2004 were from Gameznflix, Inc., who is no longer a client, for media
placement and direct response commercial production services. The principal cost
of revenue in the advertising segment is media placement and production costs,
which increased $77,000, or 38%, from $204,000 in the first three months of 2004
to $281,000 for the first three months of 2005. The advertising revenues in the
first three months of 2005 compared to the first three months of 2004 were more
heavily concentrated in media placement as compared to commercial production
which resulted in a lower overall return from 46% to 32%. We are continuing our
efforts to broaden our customer base for the advertising segment, and 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.
Advertising's selling, administrative and other expenses for the first
three months of 2005 were $263,000 compared to $4,047,000 for the first three
months of 2004, a decrease of $3,784,000. Advertising's operating expenses
during the first three months of 2004 include $3,691,000 of non-cash stock-based
compensation expense which resulted from the issuance to our officers and other
key employees of our common stock pursuant to stock grants, and stock options
that were granted to consultants. Significant components of advertising's
selling, general and other expenses for the first three months of 2005 includes
$114,000 of salaries and related payroll taxes, $39,000 of travel and
entertainment expense, $23,000 of occupancy costs, $22,000 from the amortization
of deferred stock-based compensation expense and $16,000 of legal and accounting
fees. Significant components of advertising's selling, general and other
expenses, other than the $3,691,000 of non-cash stock-based compensation
expense, for the first three months of 2004 includes $171,000 of salaries and
related payroll taxes, $42,000 of travel and entertainment expense, and $61,000
of legal and accounting fees.
Advertising's interest expense during the first three months of 2005
was $24,000 which relates to the convertible notes that were issued in February
2005 and includes $21,000 of amortized discount on the convertible note
issuance. Advertising did not have interest expense during the first three
months of 2004.
Advertising's net loss for the first three months of 2005 was $153,000
compared to $3,886,000 for the first three months of 2004.
Page 20
Products
Our first product was the Dermafresh microdermabrasion kit skin care
product, which we acquired in February 2004. During 2004 we expanded the
Dermafresh line to include a total of nine products and during the first three
months of 2005, we either acquired or obtained marketing rights to a number of
additional products. Our products sector did not begin generating revenues until
June 2004. Product revenues during the first three months of 2005 were
$1,306,000 of which 23% was derived from Wal-Mart Store, Inc. and 23% was
derived from CVS Corporation. Our cost of revenue for the first three months of
2005 was $545,000, which resulted in a gross margin of 58%. Our gross margin on
product sales during the first three months of 2005 was higher as a percentage
of revenues than they were during all of 2004. Our product shipments during the
first three months of 2005 included a higher concentration of direct response
sales than during 2004. We generate higher per unit sales prices on direct
response sales as compared to wholesale prices to our retail customers. In
additional, during 2004 we ran a greater level of direct response promotional
offers on our products compared to the first three months of 2005, which had a
negative impact on our margins for 2004.
The product sector's selling, administrative and other expense for the
first three months of 2005 was $456,000. Significant components of these
expenses include $193,000 of salaries and related payroll taxes, $43,000 of
sales commissions, $19,000 of advertising expense, $15,000 of occupancy costs,
$25,000, of indirect warehousing and order processing costs, $45,000 from the
amortization of deferred stock-based compensation expense and $42,000 of legal
and accounting fees.
The product sector's interest expense during the first three months of
2005 was $53,000, of which $45,000 relates to the convertible notes that were
issued in February 2005, including $39,000 of amortized discount on the
convertible note issuance and $6,000 relates to notes payable. Factoring
discounts during he first three months of 2005 were $8,000.
Product's net income for the first three months of 2005 was $244,000.
Overall
As a result of the foregoing, we generated consolidated net income for
the first three months of 2005 of $91,000, or $.01 (basic and diluted) earnings
per share, as contrasted with a net loss of $3,886,000, or $.85 per share (basis
and diluted) for the first three months of 2004.
Financial Condition
At March 31, 2005, we had available working capital of approximately
$231,000 compared to a working capital deficiency of $916,000 at December 31,
2004. The following table details changes in components of working capital
during the first three months of 2005.
March 31, December 31,
2005 2004 Change
- -------------------------------------------------------------------------------------------------------
Cash $ 94,000 $ 38,000 $ 56,000
Certificate of deposit (restricted) 101,000 100,000 1,000
Accounts receivable - net 1,069,000 36,000 1,033,000
Inventory 643,000 186,000 457,000
Marketable securities 138,000 - 138,000
Other current assets 146,000 34,000 112,000
Accounts payable (1,268,000) (475,000) (793,000)
Accrued salaries and payroll taxes (271,000) (261,000) (10,000)
Current debt (204,000) (354,000) 150,000
Convertible notes (net of debt discount) (59,000) - (59,000)
Other current liabilities (158,000) (220,000) 62,000
- -------------------------------------------------------------------------------------------------------
Working capital (deficiency) $ 231,000 $ (916,000) $ 1,147,000
- -------------------------------------------------------------------------------------------------------
Page 21
The most significant increase to working capital was accounts
receivable. At March 31, 2005, 30%, 28%, 13% and 10% of our accounts receivable
were due from Wal-Mart Store, Inc., CVS Corporation, SinoFresh Healthcare, Inc.
and Brooks Pharmacy, respectively. During the last three months of 2004 product
shipments were not significant and all but $36,000 of the invoices related to
2004 shipments had been collected as of December 31, 2004. During the first
three months of 2005 product shipments were $1,306,000 of which a substantial
portion was shipped in March of 2005 and were included in outstanding
receivables as of March 31, 2005. During April 2005 approximately $700,000 of
March 31, 2005 receivables were sold to our factor and the March 31, 2005
receivable of $178,000 due from SinoFresh Healthcare, Inc. was collected.
On September 22, 2004, we executed an Account Transfer and Purchase
Agreement pursuant to which the Company may sell qualified receivables without
recourse to the Company. We pay a fixed discount of 1% of the gross amount of
any receivables sold and are advanced 80% of the gross amount of such
receivables and the remaining 20% of the gross amount of any receivables sold is
held as a reserve by the factoring company until such time as the receivable is
collected by the factoring company. We pay a variable discount of a base rate,
as quoted from time to time by the factoring company, plus 2% on the amounts
that are initially advanced to us for the period of time that such remains
outstanding. The effective rate of the variable discount as of March 31, 2005
was 7.75%. During the first three months of 2005, we sold $320,000 of
receivables to the factor.
The terms that we have with the retailers for our product shipments
range from 30 to 60 days from shipment. Deposits that are received from our
advertising clients in advance of the airing or on-sale dates are included in
deferred revenues.
The increase in our inventory is due primarily to purchases of our Lip
Solution product which we sell pursuant to an exclusive distribution agreement
with Simon Cosmetics.
The significant increase in accounts payable is due to primarily to our
increased purchases of inventory as well as payments due to media placement
agencies for the advertising we placed for SinoFresh Healthcare, Inc. during the
first three months of 2005. Generally, our product and packaging purchases
require us to pay a deposit ranging from 25% to 50% of the purchase price with
the balance being due 30 to 60 days from the shipment date. Media placement
costs for television advertising generally require full payment in advance of
the airing dates. Media placement costs for print media require us to pay
deposits of 25% to 50% with the balance being due prior to the on-sale or
distribution date of the materials in which the ads are placed. Deposits which
are paid in advance to our vendors are included in prepaid and other assets.
Current debt decreased by $150,000. During the first three months of
2005 we made scheduled repayments of $150,000 on a promissory note which was
issued in July of 2004. The March 31, 2005 balance on this note of $100,000
requires repayment in the second quarter of 2005. As of March 31, 2005 the
outstanding balance on our bank line-of-credit is $100,000. The bank
line-of-credit expires on July 8, 2005, and is fully collateralized with a
$100,000 certificate of deposit held by the bank.
On February 17 and 22, 2005, we completed a private placement of our
securities pursuant to subscription agreements with ten accredited investors.
Pursuant to the subscription agreements, we sold to the investors, for $810,100,
(i) our 10% convertible notes due December 2006 in the aggregate principal
amount of $810,100, (ii) 1,620,200 shares of Common Stock, and (iii) warrants to
purchase 675,083 shares of common stock at an exercise price of $1.275 per
share.
Currently, our known sources of cash for the coming year will come from
operations. We also have a factoring arrangement pursuant to which we may sell
up to $7 million of eligible receivables. We may also seek to increase our cash
through an additional sale of our securities; however, because of our stock
price and the terms of our recent private placement we may have difficulty
selling securities on acceptable terms. We anticipate that we will require
additional funding to enable us to purchase additional products in order to grow
our product segment revenues and to support the marketing effort of such
products through advertising and promotion.
Page 22
Item 3. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer
evaluated the Company's disclosure controls and procedures as of the end of the
period covered by this quarterly report. Based upon the evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that it
files with the Securities and Exchange Commission.
During the quarterly period covered by this report, there were no
changes in our internal controls over financial reporting that materially
affected, or are reasonable likely to materially affect, our internal controls
over financial reporting.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
32 Certifications of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley
Act
Page 23
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 May 14, 2005
John P. Acunto (Principal Executive and Accounting Officer)
/S/ Chief Financial Officer May 14, 2005
Anton Lee Wingeier (Chief Accounting Officer)
Page 24