CYBD Cyber Digital Inc (CE)

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 December 31, 2007
[_]	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____ to _____.

 

Commission File No.: 0-13992

CYBER DIGITAL, INC.

(Name of small business issuer in its charter)

 

New York		11-2644640
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization )		Identification No.)

400 Oser Avenue, Hauppauge, New York		11788
(Address of principal executive offices)		(Zip Code)

Issuer's telephone number: (631) 231-1200

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]

No [_ ]

The number of shares of stock outstanding at February 12, 2008: 33,529,813 shares of Common Stock; par value $.006666 per share.

 

PART 1. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

CYBER DIGITAL, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
					December 31, 2007		March 31, 2007
ASSETS					(Unaudited)		(Audited)
Current Assets
	Cash and cash equivalents			$	198,499	$	33,506
	Marketable securities				189,880		0
	Accounts receivable, net				469,626		0
	Inventories				248,996		248,996
	Prepaid and other current assets				110,910		9,205
			Total Current Assets		1,217,911		291,707
Property and Equipment, net
	Equipment			$	405,393	$	339,932
	Furniture and Fixtures				64,355		64,355
	Vehicle				37,814		37,814
	Leasehold Improvements				4,786		4,786
				$	512,348	$	446,887
	Accumulated depreciation				454,461		418,127
			Total Property and Equipment	$	57,887	$	28,760
Other assets					73,267		34,267
Customer contracts					1,413,857		0
Other intangible assets					291,250		0
TOTAL ASSETS				$	3,054,172	$	354,734
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
	Accounts payable, accrued expenses, and taxes			$	1,859,907	$	308,168
	Accrued interest				610,236		458,352
	Officer/ shareholder notes payable				1,606,300		1,531,300
	Accrued dividend payable				41,719		32,344
	Equipment loan payable- current portion				7,108		7,108
	Convertible note payable-current portion				475,396		0
	Deferred revenue				97,302		0
			Total Current Liabilities		4,697,968		2,337,272
Long Term Liabilities
	Equipment loan payable				10,295		15,408
	Convertible note payable				831,942		0
	Other liabilities				600,604		0
Total Liabilities					6,140,809		2,352,680
Shareholders' Equity (Deficit)
Preferred stock - $.05 par value; cumulative, convertible and
	Participating; authorized 10,000,000 shares
	Series C; issued and outstanding - 310 shares at
	December 31, 2007 and March 31, 2007				16		16
	Series E; issued and outstanding -50 shares at
	December 31, 2007 and March 31, 2007				3		3
Common stock - $.0066667 par value; authorized 450,000,000 shares;
	issued and outstanding 33,529,813 and 33,504,813
	shares at December 31, 2007 and March 31, 2007, respectively				223,533		223,366
Additional paid-in-capital					19,105,445		19,090,089
Accumulated other comprehensive loss					(85,120)		0
Accumulated deficit					(22,330,514)		(21,311,420)
		Total Shareholders' Equity (Deficit)			(3,086,637)		(1,997,946)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY				$	3,054,172	$	354,734
The accompanying notes are an integral part of these statements.

CYBER DIGITAL, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
					(Unaudited)
							Three months ended December 31,
							2007			2006
Net Sales						$	1,160,649		$	0
Cost of Sales							865,630			0
			Gross Profit				295,019			0
Operating Expenses
	Selling, general and administrative expenses					$	626,223		$	117,135
	Research and development						10,769			5,769
	Depreciation and amortization						134,573			4,295
			Total Operating Expenses				771,565			127,199
			Loss from Operations				(476,546)			(127,199)
Other Income (Expense)
	Interest expense						(83,789)			(42,646)
	Other income						6,000			0
				Total Other Income (Expense )			(77,789)			(42,646)
Net Loss							(554,335)			(169,845)
Preferred Stock Dividend							3,125			3,125
Income Available to Common Shareholders						$	(557,460)		$	(172,970)
Net Loss Per Share of Common Stock
		Loss from Operations - Basic				$	(.016)		$	(.005)
		Diluted				$	(.016)		$	(.005)
		Net Loss - Basic				$	(.016)		$	(.005)
		Diluted				$	(.016)		$	(.005)
Weighted average number of common shares outstanding							33,521,868			33,504,813
The accompanying notes are an integral part of these statements.

CYBER DIGITAL, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
					(Unaudited)
							Nine months ended December 31,
							2007			2006
Net Sales						$	2,843,384		$	0
Cost of Sales							1,872,502			0
			Gross Profit				970,882			0
Operating Expenses
	Selling, general and administrative expenses					$	1,436,153		$	410,683
	Research and development						23,269			18,269
	Depreciation and amortization						316,893			10,552
			Total Operating Expenses				1,776,315			439,504
			Loss from Operations				(805,433)			(439,504)
Other Income (Expense)
	Interest expense						(209,950)			(123,250)
	Other income						14,000			0
				Total Other Income (Expense )			(195,950)			(123,250)
Net Loss							(1,001,383)			(562,754)
Preferred Stock Dividend							9,375			9,401
Income Available to Common Shareholders						$	(1,010,758)		$	(572,155)
Net Loss Per Share of Common Stock
		Loss from Operations - Basic				$	(.030)		$	(.017)
		Diluted				$	(.030)		$	(.017)
		Net Loss - Basic				$	(.030)		$	(.017)
		Diluted				$	(.030)		$	(.017)
Weighted average number of common shares outstanding							33,521,868			33,504,813
The accompanying notes are an integral part of these statements.

CYBER DIGITAL, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
		(Unaudited)
				Nine months ended, December 31,
				2007			2006
Cash Flows from Operating Activities
Net loss			$	(1,001,383)		$	(562,754)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation			18,454			5,885
	Amortization intangible assets			296,870			4,667
	Stock based compensation			7,190			185,067
	Accrued interest			151,884			122,036
	Other Assets			314			0
	Deferred revenue			(31,448)			0
	(Increase) decrease in operating assets:
	Accounts receivable			20,336			0
	Prepaid expenses			(77,031)			(155)
	Increase (decrease) in operating liabilities:
	Accounts payable, accrued expenses and taxes			535,644			39,909
	Settlement payable			0			(2,583)
	Net Cash Used in Operating Activities			(79,170)			(207,928)
Cash Flows from Investing Activities
	Purchase of equipment		$	(1,271)		$	0
	Cash portion of acquisition			175,547			0
	Net Cash Used in Investing Activities		$	174,276		$	0
Cash Flows from Financing Activities
	Issuance of common stock		$	0		$	2,470
	Equipment loan payable			(5,113)			(4,827)
	Issuance of options and warrants			0			0
	Proceeds from officer/ shareholder loan			75,000			240,000
	Net Cash Provided by Financing Activities			69,887			237,643
Net Increase (Decrease) in Cash and Cash Equivalents				164,993			29,715
Cash and Cash Equivalents at Beginning of Period				33,506			5,551
Cash and Cash Equivalents at End of Period			$	198,499		$	35,266
Supplemental Disclosures of Cash Flow Information
	Cash paid during the period for:
	Income taxes		$	0		$	0
Supplemental Disclosure of Non Cash Investing and Financing Activities
	Acquisition financed through issuance of convertible debt		$	1,307,338		$	0
The accompanying notes are an integral part of these statements.

CYBER DIGITAL, INC. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended December 31, 2007 are not necessarily indicative of the results that may be expected for the year ending March 31, 2008. For further information, refer to the financial statements and footnotes thereto included in the Company's Form 10-KSB, for the year ended March 31, 2007.

Note 2. Inventories

Inventory of purchased parts for eventual resale to customers are valued at the lower of cost or market, as determined by the first-in, first-out (FIFO) method and consisted of the following:

		December 31, 2007		March 31, 2007
Raw Materials	$	248,996	$	248,996
	$	248,996	$	248,996

Note 3. Stock Options and Warrants

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (SFAS No. 123R) which requires that stock options and warrants issued for compensation or services be recorded at their estimated fair value using option pricing models. The Company uses the Black-Scholes model to value its stock option and warrants. The Company used an interest rate of 4.31% and expected volatility of 4.6% in valuing its stock options.

A summary of option and warrant activity as of December 31, 2007 is as follows:

	Shares	Weighted Average Exercise Price $	Average Remaining Life
Outstanding, April 1, 2007	31,374,850	0.29	3.64
Granted options	1,815,000	0.21
Options exercised	25,000	0.33
Expired	733,720	0.83
Outstanding, December 31, 2007	32,431,130

Note 4. Stock Split

On June 6, 2006, the Company declared a 3-for-2 stock split to be paid in the form of a 50% stock dividend to the stockholders of record as of June 26, 2006. Accordingly, the financial statements reflect the adjustments to common stock, options and warrants outstanding.

Note 5. Intangible Assets

Intangible assets consists of the following:

	Useful Life	Carrying Amount	Accumulated Amortization	Net Amount
Customer contracts	4 years	$ 1,701,977	$ 288,120	$ 1,413,857
FCC and state licenses	20 years	300,000	8,750	291,250
Total		$ 2,001,977	$ 296,870	$ 1,705,107

Note 6. Acquisitions

Effective June 1, 2007, the Company acquired 100% of two telephone companies, New Rochelle Telephone Corp. (NRT) and Telecarrier Services, Inc. (TSI), from eLEC Communications Corp., ("Seller"). These companies were acquired on cashless basis through the issuance of approximately $1.3 million of secured convertible debt and the assumption of certain liabilities. The Company also received 808,000 restricted shares of common stock of the Seller. Both NRT and TSI provide services in the states of New York, New Jersey and Pennsylvania. The Company expects to benefit from operating synergies upon migrating NRT and TSI subscriber lines onto its network. The results of NRT and TSI for the period June 1 through December 31, 2007 are included in the results of operations.

Effective June 1, 2007, the Company issued a secured convertible term note in the principal amount of approximately $1,300,000. The note is due July 1, 2010 and bears interest at prime plus 2% but no less than 9%. The note is convertible at a fixed conversion price of $0.50 per share. The note and interest may be paid in cash or stock depending on the Company's stock price, as defined. In addition, there are limits on how much of the note may be converted based on trading volume, as defined. In addition, the Company entered into a Registration Rights Agreement with the purchaser that requires the Company to register its securities for resale to the purchaser. The Registration Rights Agreement was declared effective by Securities Exchange Commission on October 18, 2007. In addition, the Seller has indemnified the Company against certain liabilities of the acquired companies.

Pro forma results of operations for the current reporting period, including adjustments for the acquisitions, to the beginning of the period is as follows:

	Nine months ended, December 31,
	2007
Revenue	$ 2,857,384
Operating expenses	3,331,924
Amortization of intangibles	359,303
Interest expense	221,117
Net income (loss)	$ (1,054,960)

Purchase price assigned to each major asset and liability caption is presented in the following combined condensed balance sheet:

Current assets	$ 964,984
Fixed assets	39,826
Intangible assets and other assets	2,053,978
Total Assets	3,058,788
Accounts payable	$ 1,016,095
Pre-acquisition contingencies	606,605
Other liabilities	128,750
Convertible debt	1,307,338
Total Liabilities	$ 3,058,788

Note 7. Comprehensive Income

The Company has classified the marketable securities it received as part of its acquisition of NRT and TSI (see Note 6) as available for sale. In accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" unrealized holding gains and losses are excluded from earnings. Under SFAS No. 130, Reporting Comprehensive Income, unrealized holding gains and losses on the Company's available for sale equity securities are to be reported as components of comprehensive income.

The components of comprehensive (loss), net of related tax, are as follows:

	For the period ended December 31, 2007
	Three months	Nine months
Net (loss)	$ (554,335)	$ (1,001,383)
Change in unrealized gain (loss) on securities	12,120	(85,120)
Comprehensive (loss)	$ (542,215)	$(1,086,503)

The Company did not have any components of comprehensive income in prior periods. At December 31, 2007, accumulated other comprehensive loss consisted solely of unrealized holding losses on marketable securities.

Note 8. Recent Accounting Pronouncements

In June 2006, the FASB issued interpretation No. 48 ("FIN 48") "Accounting for Uncertainty in Income Taxes" which clarifies the accounting for uncertainties in income taxes. FIN48 establishes recognition thresholds for tax positions that may or may not be sustained by the relevant tax authorities and their recognition in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the effect of adopting FIN 48 and does not expect it to have a material effect on the Company's financial statements.

In June 2006, the Emerging Issues Task Force issued EITF issue 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement." A company may present taxes either gross or net basis, however, the amount of taxes collected on the gross basis must be disclosed. The Company presents revenue net of taxes collected. EITF 06-3 will not impact the Company's financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (as amended). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement. SFAS No. 157 is effective for periods beginning after November 15, 2007. The Company is currently evaluating the effects, if any, on the Company's financial statements.

PART 1

ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Statements contained in this Report on Form 10-QSB that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including without limitation, statements regarding industry trends, strategic business development, pursuit of new markets, competition, results from operations, and are subject to the safe harbor provisions created by that statute. A forward-looking statement may contain words such as "intends", "plans", "anticipates", "believes", "expect to", or words of similar import. Management cautions that forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, marketing success, product development, production, technological difficulties, manufacturing costs, changes in economic conditions, competition, the ability to obtain financing on acceptable terms, future profitability, future profitability of acquired businesses or product lines, and those included in our company's Annual Report of Form 10KSB for the fiscal year ended March 31, 2007. Our company undertakes no obligation to release revisions to forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

Overview

Cyber Digital, Inc. ("we" or "the Company" or "CYBD") is a designer, software developer and manufacturer of a range of unique distributed digital-voice-switching and Internet Protocol (IP) broadband infrastructure equipment as well as a competitive local exchange carrier ("CLEC") through its subsidiaries. Our technology division produces Class 5 local digital central office switches, Class 4 regional tandem digital central office switches, IP soft-switches, routers, gateways, firewalls, voice-over IP (VoIP) and virtual private network (VPN) systems for public-switched-telephone-network (PSTN) operators and Internet Service Providers (ISP) worldwide. Our recently acquired CLEC subsidiaries provide communication services to small businesses and residential subscribers in the states of New York, New Jersey and Pennsylvania.

With our latest generation of software based switching systems, we offer affordable voice and broadband data local switching services. Our mission is to become a leading alternative local switching service provider offering aggregated VoIP and digital broadband services in the United States. We expect to generate recurring revenues from selling aggregated VoIP and managed IP digital broadband services to small businesses and residential customers. We believe that we are one of the first companies to offer aggregated VoIP services on existing telephone lines without requiring any additional customer premise equipment (CPE) or any changes to current wiring or network connection.

Unlike our competitor's systems, our systems are neither labor nor capital intensive but are software intensive. This capability, in contrast to that of our competitor's, makes our systems more compact, less power consuming and more affordable. Our digital voice switching and Internet Protocol (IP) infrastructure systems are based on our proprietary operating system software, which provides high performance, reliability and functionality. We own the source code of our operating system. This allows us the flexibility to meet market demands without depending on third party operating systems. We believe that we are one of a very few companies in the world with proprietary hardware and software technology of distributed digital switching. We have expended over $20 million dollars on the development of our rock solid proprietary state-of-the-art technologies, which is built on 24 years of experience. Our systems are ideally suited for the U.S. pursuant to the recent Federal Communications Commission (FCC) rulings.

On June 1, 2007, we acquired two CLECs, New Rochelle Telephone Corp., ("NRT") and Telecarrier Services, Inc. ("TSI"), based in White Plains, New York for approximately $1.3 million. These acquisitions allow us to expand our market presence in the states of New York, New Jersey and Pennsylvania. It will allow us to become a facilities based provider of voice and data services as we build our network by deploying our proprietary network equipment. Upon migrating these customers on to our network, we significantly improve profitability through operating synergies.

Market Opportunity

Beginning March 2005, FCC decided to phase out UNE-P rules that forced the Bells to lease its local switching networks to competitive local exchange carriers (CLECs) at cut-rate prices. FCC further rules that CLECs must move all customers to non-Bell networks by March 2010 or pay exorbitant rates to the Bells for using their local switching facilities. Today, CLECs lease 17 million lines for $4.5 billion per year from the Bells, creating an immediate market opportunity. Moreover, the Bells own 173 million lines creating a huge migration services opportunity for many years to come. This ruling favors us to evolve as an alternative local switching network provider, and directly sell aggregated VoIP and digital broadband services to small businesses and residential customers.

We intend to deploy our vast array of local voice and IP broadband data switching infrastructure systems by co-locating our systems in various Bell central offices. In anticipation of this, we signed an agreement with Level 3 Communications who will provide for global voice and data termination services to all traffic originating on our local switching systems. In the U.S., providers of local switching networks retain substantial portion of the recurring revenues as call origination services, and payout smaller portion for call termination services. As we acquire more CLECs, we will be able to benefit from operating synergies by migrating the customer lines onto our network. We provide affordable local, long distance and international calls as well as broadband Internet access, aggregated VoIP and virtual private network (VPN) services.

Our Range of Digital Voice Switches and Broadband Internet Protocol Systems for 'Last Mile' Solutions and UNE-P Migration Services

Cyber Distributed Central Office (CDCO) is a Class 5 local switch with packet and circuit switching technologies providing aggregated VoIP enabled POTS, ISDN, analog trunks for PBXs - FX, DID, EM, T1, WSPSN, SS7, etc.

Cyber Tandem Exhange (CTSX) is a Class 4 switch with packet and circuit switching technologies providing numerous T1 carrier grade VoIP enabled voice and IP enabled data trunks for business users.

Cyber Internet Access Network (CIAN) is a high performance IP distribution softswitch/router providing numerous business customers simultaneous broadband access at multiple T1 speeds up to DS3 and Ethernet 10/100 Mbps.

Cyber Business Internet Gateway (CBIG) is a customer-end, enterprise-wide virtual private network (VPN). CBIG is an IP private line based multi-function gateway, featuring a router, network address translator, Ethernet-to-T1 converter, CSU/DSU, firewall equipment, e-mail server and web server.

Competition

The competition in both VoIP and digital broadband services is intense. Almost all VoIP service providers need a broadband connection through which they provide VoIP service. They cannot provide VoIP services on existing telephone lines unless converted to DSL, a costly network conversion process. Moreover, current VoIP deployments can handle one telephone line service and cannot serve small businesses with multi-line analog trunks. Our unique technology allows us to serve small businesses by enabling their analog trunk lines to be converted to an aggregated VoIP platform. Our aggregated VoIP technology can also serve mass markets comprising of residential users without requiring any changes to current wiring or network connection. Our aggregated VoIP service is provided on our managed secure private IP network and does not use the public Internet. We also intend to offer carrier grade managed IP broadband service on T1 or multi-T1s to small businesses at much lower prices than our competitors.

Key Advantages

- Exploit early entrance in metropolitan service areas, before the Bells raise their charges second time or virtually shut off service to non-facilities based CLECs in about 3 years.

- Ideally suited to establish market in high density areas covering Mass Market Switching for both residential and small businesses, including T1 carrier grade managed IP broadband services exclusively for businesses.

- Our unique technological advantage is 'No Truck-rolls'; service offered on 'Hot-cut' basis requiring no additional customer premise equipment (CPE). We require no service technician to be dispatched to customer site nor any CPE installed by customer. Unlike other VoIP providers that require an ATA adapter (CPE) to be installed by service technician or the customer. Such ATA adapters fail to operate without local power and suffer from low reliability.

- Minimal investment required by CYBD for marketing; customer acquisition cost estimated at $55 per line.

- We have not included additional high margin revenues from value added offerings in conjunction with our current product line such as managed IP VPN, IP MPLS, etc.

- One stop solution for voice, data and video, high-speed Internet access, broadband data for IP VPN, VoIP, etc.

- Typically, valuation of a non-facilities based CLEC is about $300 per line, while that of a facilities based is $3,500 to $4,000 per line. Hence, if we grow through acquisition of CLECs, we substantially increase valuation in addition to increasing profit margins.

Business Development and Strategic Plan

CYBD has determined that it can grow rapidly through acquisition of certain non-facilities based CLECs, who do not want to build their own local voice and broadband data switching facilities, despite the FCC's local switching (UNE-P) phase-out ruling. While these CLECs are, generally, excellent marketing companies and have already established a customer base, they lack the technical and network engineering aspects of owning and maintaining local voice and data switching facilities, which are among CYBD's core competences. Since, we are expecting to invest heavily in building the local voice and data switching facilities, we expect to acquire only profitable CLECs.

Effective June 1, 2007, we acquired NRT and TSI as an acquisition subsidiary wholly owned by CYBD. These profitable companies were acquired on a cashless basis through an assumption of approximately $1.3 million in debt with an accredited institutional investor. In addition, CYBD also received 808,000 restricted shares of common stock of eLEC Communications Corp, the seller. NRT is licensed to provide services in the states of NY, NJ, PA, MA, OH and FL. TSI is licensed to provide services in the states of NY, NJ, PA and MA. Both NRT and TSI have certificate of authority under Section 214 of the Communications Act of 1934, as amended, from FCC.

Upon gaining substantial scale in customer base through acquisitions of additional contemplated switch-less CLECs, we will be able to launch our network roll-out at a faster pace than that if we were to build the customer base from zero. Currently, NRT and TSI have a gross profit margin of 37%. Upon migration of the customer lines to our network, the gross margins improve to 56%, resulting in net income increasing over 250%. We intend to expand through acquisitions while, at the same time, migrating those customer lines that, in the aggregate, reach several hundred lines per co-location Bell central office. We will use NRT and TSI proven management, marketing and sales team, customer services and provisioning facilities as a platform to build our migration services business, while our technology development and manufacturing division supplies the requisite network equipment comprising of CDCO, CTSX, CIAN and CBIG.

Our overall strategy is to grow through acquisitions, as it provides for large-scale expansion and rapid deployment of our networks, with minimal cost of customer acquisition. We are in negotiations with a number of other profitable non-facilities based CLECs for potential acquisitions.

Results of Operations

For Three Months Ended December 31, 2007

Net sales

Net sales for the quarter ended December 31, 2007 was $1,160,649 as compared to $0 for the quarter ended December 31, 2006. Net sales consist of local and long distance telephone service provided by NRT and TSI from June 1, 2007, the date of acquisition. We are in early stages of developing the local voice and data migration services market in the U.S. due to the recent creation of the market opportunity. We were waiting for the FCC's deregulation policies on local voice and data switching in order to enter this lucrative market with our systems.

Cost of Sales

Cost of sales for the quarter ended December 31, 2007 was $865,630 as compared to $0 for the quarter ended December 31, 2006. Cost of sales predominantly consists of purchasing communication services from Verizon and Qwest on a resale basis. We also include in our cost of sales the materials and labor used, subcontractor costs and overhead incurred in the manufacture of our systems as well as any change in the valuation of our inventory, which was $0 and $0 for the quarters ended December 31, 2007 and 2006, respectively.

Gross Profit

Gross profit for the quarter ended December 31, 2007 was $295,019 as compared to $0 for the quarter ended December 31, 2006. Gross profit as a percentage of sales was 25% for the quarter ended December 31, 2007 as compared to 0% for the quarter ended December 31, 2006.

Selling, general and administrative

Selling, general and administrative expenses increased from $117,135 in the quarter ended December 31, 2006 to $626,223 in the quarter ended December 31, 2007, representing an increase of $509,088 or approximately 434%, principally due to selling, general and administrative expenses of NRT and TSI.

Research and development

Research and development expenses increased from $5,769 in the quarter ended December 31, 2006 to $10,769 in the quarter ended December 31, 2007, representing an increase of $5,000 or approximately 87%. All development costs are expensed in the period incurred.

Net Income (loss) from operations

Net loss from operations in the quarter ended December 31, 2007 was $(554,335) or $(.016) per share as compared with a loss of $(169,845) or $(.005) per share in quarter ended December 31, 2006.

Net income (loss) available to Common Stockholders

Preferred stock dividend was $3,125 and $3,125 in the quarters ended December 31, 2007 and 2006, respectively. As a result of the foregoing, the net loss available to common stockholders in the quarter ended December 31, 2007 was $(557,460) or $(.016) per share as compared to a net loss of $(172,970) or $(.005) per share in the quarter ended December 31, 2006.

For Nine Months Ended December 31, 2007

Net sales

Net sales for the period ended December 31, 2007 was $2,843,384 as compared to $0 for the period ended December 31, 2006. Net sales consist of local and long distance telephone service provided by NRT and TSI from June 1, 2007, the date of acquisition. We are in early stages of developing the local voice and data migration services market in the U.S. due to the recent creation of the market opportunity. We were waiting for the FCC's deregulation policies on local voice and data switching in order to enter this lucrative market with our systems.

Cost of Sales

Cost of sales for the period ended December 31, 2007 was $1,872,502 as compared to $0 for the period ended December 31, 2006. Cost of sales predominantly consists of purchasing communication services from Verizon and Qwest on a resale basis. We also include in our cost of sales the materials and labor used, subcontractor costs and overhead incurred in the manufacture of our systems as well as any change in the valuation of our inventory, which was $0 and $0 for the periods ended December 31, 2007 and 2006, respectively.

Gross Profit

Gross profit for the period ended December 31, 2007 was $970,882 as compared to $0 for the period ended December 31, 2006. Gross profit as a percentage of sales was 34% for the period ended December 31, 2007 as compared to 0% for the period ended December 31, 2006.

Selling, general and administrative

Selling, general and administrative expenses increased from $410,683 in the period ended December 31, 2006 to $1,436,153 in the period ended December 31, 2007, representing an increase of $1,025,470 or approximately 249%, principally due to selling, general and administrative expenses of NRT and TSI.

Research and development

Research and development expenses increased from $18,269 in the period ended December 31, 2006 to $23,269 in the period ended December 31, 2007. All development costs are expensed in the period incurred.

Net Income (loss) from operations

Net loss from operations in the period ended December 31, 2007 was $(1,001,383) or $(.03) per share as compared with a loss of $(562,754) or $(.017) per share in period ended December 31, 2006.

Net income (loss) available to Common Stockholders

Preferred stock dividend was $9,375 and $9,401 in the periods ended December 31, 2007 and 2006, respectively. As a result of the foregoing, the net loss available to common stockholders in the period ended December 31, 2007 was $(1,010,758) or $(.03) per share as compared to a net loss of $(572,155) or $(.017) per share in the period ended December 31, 2006.

Liquidity and Capital Resources

Our ability to generate cash adequate to meet our needs results primarily from sale of preferred and common stock, cash flow from operations, issuance of debt, and cash advances in the form of loan from our Chief Executive Officer and a shareholder.

Cash and cash equivalents were $198,499 and $35,266 for the periods ended December 31, 2007 and December 31, 2006, respectively.

Marketable securities were $189,880 and $0 for the periods ended December 31, 2007 and December 31, 2006, respectively.

Net cash used in operating activities was $79,170 and $207,928 for the periods ended December 31, 2007 and December 31, 2006, respectively.

Net cash provided by investing activities was $174,276 and $0 for the periods ended December 31, 2007 and December 31, 2006, respectively, principally due to cash portion of the acquisitions.

Net cash provided by financing activities was $69,887 and $237,643 for the periods ended December 31, 2007 and December 31, 2006, respectively.

On November 3, 2005, we entered into definitive agreement with an accredited institutional investor for a $10 million private equity line of credit to be drawn upon until December 8, 2008. At our discretion, we may draw down on the line up to $100,000 for each 7-day period, as defined. If we do not utilize the line of credit during the 7-day period, the line reduces by $100,000. As of December 31, 2007, approximately $3 million was available under the line of credit. The ability to draw down depends on a number of factors such as price, volume and liquidity of our shares of common stock traded.

As of the period ended December 31, 2007, our company has received cash advances of $ 1,256,300 and $350,000 from our Chief Executive Officer and a shareholder, respectively.

Effective June 1, 2007, we acquired two telephone companies, New Rochelle Telephone Corp. and Telecarrier Services, Inc., from eLEC Communications Corp. These profitable companies were acquired on cashless basis through the issuance of secured convertible debt of approximately $1,300,000 with an accredited institutional investor. We also received 808,000 restricted shares of common stock of eLEC Communications Corp., which is included as marketable securities for the period ended December 31, 2007.

Effective June 1, 2007, the Company issued a secured convertible term note in the principal amount of approximately $1,300,000. The note is due July 1, 2010 and bears interest at prime plus 2% but no less than 9%. The note may be paid in cash or common stock based on the Company's stock price, as defined. In addition, the Company entered into a Registration Rights Agreement with the purchaser that requires the Company to register its securities for resale to the purchaser. The Registration Rights Agreement was declared effective by Securities Exchange Commission on October 18, 2007.

Although, the acquisition of NRT and TSI provide earnings and positive cash flow resulting in reasonable growth, additional financing will be needed to support our growth plans through multiple acquisitions of CLECs. We are in negotiations with a number of other profitable non-facilities based CLECs for potential acquisitions.

Impact of Inflation

Inflation has historically not had a material effect on our operations.

ITEM 3. Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, our disclosure controls and procedures were designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms. In addition, based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-QSB.

PART II

ITEM 1 - Legal Proceedings

None.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A) Exhibits

31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

B) Reports on Form 8-K

1) Completion of Acquisitions of New Rochelle Telephone Corp., and Telecarrier Services, Inc. (incorporated herein by reference to Exhibits 10.1 through 10.7 to the Company's Current Report on Form 8K dated June 22, 2007).

2) Financial statements and pro forma financial information for the transaction (incorporated herein by reference to the Company's Current Report on Form 8-K/A, Amendment No. 1, dated June 22, 2007).

3) Promissory note with J.C. Chatpar dated October 1, 2007 (incorporated herein by reference to the Company's Current Report on Form 8-K dated October 1, 2007).

4) 1997 Stock Incentive Plan of Cyber Digital, Inc., as amended.

5) Amended and Restated By-Laws of Cyber Digital, Inc., effective December 20, 2007.

6) Certificate of Amendment of the Company's Certificate of Incorporation dated January 15, 2008.

 

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATED: February 13, 2008		CYBER DIGITAL, INC
		By: /s/ J.C. Chatpar Chairman of the Board, President Chief Executive Officer and Chief Financial Officer