Edgar Filing: CYPOST CORP

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2002

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from to
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Commission file number 000-26751
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CyPost Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)

Delaware 98-0178674
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)

900-1281 West Georgia St., Vancouver, British Columbia, Canada V6E 3J7
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(Address of Principal Executive Offices) (Zip Code)

(604) 904-4422
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(Issuer's Telephone Number, Including Area Code)

Not Applicable
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)

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 [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 23,189,525 as of March 31,
2002.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission ("Commission"). While these statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for fair presentation of the results of the interim period, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto, which are included in the Annual
Report on Form 10-KSB, as amended, of CyPost Corporation (the "Company"), for
the fiscal year ended December 31, 2001, previously filed with the Commission.

CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001

2002 2001
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(Unaudited)

ASSETS

CURRENT ASSETS
CASH $ 19,915 $ 73,124
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS of $76,687 & $76,405 RESPECTIVELY 131,959 138,311
PREPAID EXPENSES 39,879 45,982
NOTE RECEIVABLE & ACCRUED INTEREST 39,973 57,199
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TOTAL CURRENT ASSETS 231,726 314,616

PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION 433,378 501,565
GOODWILL AND OTHER INTANGIBLES, NET OF
ACCUMULATED AMORTIZATION of $4,426,060 & $4,134,376, RESPECTIVELY 1,069,483 1,361,167
DEPOSITS 92,876 92,609
OTHER ASSETS 8,462 8,483
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$ 1,835,925 $ 2,278,440
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
ACCOUNTS PAYABLE & ACCRUED LIABILITIES 1,520,112 1,275,586
DEFERRED REVENUE 486,781 448,548
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TOTAL CURRENT LIABILITIES 2,006,893 1,724,134
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COMMITMENTS AND CONTINGENCIES (NOTE 11)

STOCKHOLDERS' EQUITY (DEFICIT)
SHARE CAPITAL
AUTHORIZED
5,000,000 PREFERRED STOCK WITH A PAR VALUE OF $.001
200,000,000 COMMON STOCK WITH A PAR VAUE OF $.001

ISSUED AND OUTSTANDING
PREFERRED STOCK - NONE - -
COMMON STOCK 23,191,993 - 2002, 23,189,493 - 2001, RESPECTIVELY 23,193 23,190
PAID-IN CAPITAL 14,289,933 14,289,686
ACCUMULATED DEFICIT (14,493,577) (13,767,358)
CURRENCY TRANSLATION ADJUSTMENT 9,483 8,788
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (170,968) 554,306
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$ 1,835,925 $ 2,278,440
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See accompanying notes to the consolidated condensed financial statements.

CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)

2002 2001
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REVENUE $ 772,750 $ 1,063,823

DIRECT COSTS 466,998 428,671
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305,752 635,152
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EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 656,030 622,952
AMORTIZATION AND DEPRECIATION 372,286 518,857
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1,028,316 1,141,809
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LOSS FROM OPERATIONS (722,564) (506,657)
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OTHER INCOME (EXPENSE)

IMPAIRMENT LOSS OF LONG LIVED ASSETS (4,180) 0

INTEREST EXPENSE, NET 525 (41,326)
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TOTAL OTHER (EXPENSE) (3,655) (41,326)
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------------ ------------
NET LOSS $ (726,219) $ (547,983)
============ ============
BASIC LOSS PER SHARE $ (0.03) $ (0.03)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 23,191,576 21,559,521
============ ============

See accompanying notes to the consolidated condensed financial statements.

CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)

2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(726,219) $(547,983)
Adjustments to reconcile net loss to cash used by
operating activities:
Amortization and depreciation 372,286 518,857
Bad debt expense 282 2,143
Interest (income) expense (525) 41,326
Consulting fees offsetting note receivable 17,750 -
Impairment loss of long-live assets 4,180 -
Fair value of stock issued for services - 1,275

Changes in assets and liabilities
Accounts receivable 6,070 (125,967)
Insurance receivable - 19,504
Prepaid Expenses 6,104 83,695
Deposits (267) 21,386
Other assets 21 1,292
Accounts payable and accrued liabilities 244,526 (10,449)
Deferred revenue 38,233 (13,737)
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NET CASH USED IN OPERATING ACTIVITIES (37,559) (8,658)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (16,595) (21,928)
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NET CASH USED IN INVESTING ACTIVITIES (16,595) (21,928)
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CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 250 -
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NET CASH PROVIDED BY FINANCING ACTIVITIES 250 -
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EFFECT OF EXCHANGE RATE CHANGES 695 (34,234)
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NET DECREASE IN CASH (53,209) (64,820)
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CASH, BEGINNING OF YEAR 73,124 250,631
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CASH, END OF PERIOD $ 19,915 $ 185,811
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NON-CASH TRANSACTIONS
Common Stock issued for services and acquisitions - 1,275

OTHER CASH INFORMATION
Interest paid $ - $ -
========== ==========

Taxes paid $ - $ -
========== ==========

See accompanying notes to the consolidated condensed financial statements.

CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

GOING CONCERN

These financial statements have been prepared on the basis of accounting
principles applicable to a "going concern" which assume that CyPost Corporation
(the "Company") will continue in operation for at least one year and will be
able to realize its assets and discharge its liabilities in the normal course of
operations.

Several conditions and events cast doubt about the Company's ability to
continue as a going concern. The Company has incurred net losses of
approximately $14.5 million for the period from inception September 5, 1997 to
March 31, 2002, has a working capital deficit of approximately $1.8 million at
March 31, 2002, and requires additional financing for its business operations.

The Company's future capital requirements will depend on numerous factors
including, but not limited to, whether the Company wishes to recommence software
development activities, and market penetration of and profitable operations from
its Internet connection services. The Company does not believe that bank
borrowings are available under present circumstances, and there can be no
assurance that any financing could be obtained from other sources. Even if
funding were available, it might be available only on terms which would not be
favorable to the Company or which management would not find acceptable.
Meanwhile, the management is working on attaining cost and efficiency synergies
by consolidating the operations of the businesses acquired.

These consolidated financial statements do not reflect adjustments that
would be necessary if the Company were unable to continue as a going concern.
While management believes that the actions already taken or planned, as
described above, will mitigate the adverse conditions and events which raise
doubts about the validity of the "going concern" assumption used in preparing
these financial statements, there can be no assurance that these actions will be
successful.

If the Company were unable to continue as a going concern, then substantial
adjustments would be necessary to the carrying values of assets, the reported
amounts of its liabilities, the reported revenues and expenses.

BASIS OF PRESENTATION

The interim consolidated financial statements presented have been prepared
by the Company without audit and, in the opinion of the management, reflect all
adjustments of a normal recurring nature necessary for a fair statement of (a)
the consolidated results of operations for the three months ended March 31, 2002
and 2001, (b) the consolidated financial position at March 31, 2002 and (c) the
consolidated cash flows for the three months ended March 31, 2002 and 2001.
Interim results are not necessarily indicative of results for the entire year
ending December 31, 2002.

The consolidated balance sheet presented as of December 31, 2001 has been
derived from the consolidated financial statements that have been audited by the
Company's independent auditors. The consolidated financial statements and
notes are condensed as permitted by Form 10-QSB and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-KSB.

The preparation of financial statements in conformity with accounting
principals generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements, actual results may differ from those estimates.

CONSOLIDATION

The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. The subsidiaries include, NetroverUSA Online
Inc. (formerly known as ePost Innovations Inc.), NetRover Inc., NetRover Office
Inc., Hermes Net Solutions Inc., and Intouch.Internet Inc. Connect Northwest and
Internet Arena are DBA of CyPost Corporation. All significant inter-company
transactions and balances have been eliminated in consolidation.

The functional currency of the Company is U.S. dollars. Balance sheet
accounts of international self-sustaining subsidiaries, principally Canadian,
are translated at the current exchange rate as of the balance sheet date. Income
statement items are translated at average exchange rates during the period. The
resulting translation adjustment is recorded as a separate component of
stockholders' equity. Dollar values in this consolidated financial statements
are expressed in U.S. Dollars, unless indicated otherwise. On March 31, 2002 one
Canadian Dollar ("CDN") was exchangeable for .62650 U.S. Dollars.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Accounting
for Goodwill and Other Intangibles." Under SFAS 142 goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually (or
more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. Companies are required to immediately
adopt the amortization provisions of SFAS 142 as it relates to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt SFAS 142 in their fiscal year beginning after December 15, 2001. The
Company adopted SFAS 142 in accordance with the provisions of the statement.
SFAS 142 may not be applied retroactively.

The Company's goodwill prior to the adoption of SFAS 142 was being
amortized over three years. The impact of the adoption as it relates to existing
goodwill reduced amortization expense by $152,712 for the quarter ended March
31, 2002.

The Company amortizes its' customer list over three years.

As of March 31, 2002, Goodwill and other intangibles consisted of the
following:

Goodwill, net of amortization $ 453,895
Customer list, net of amortization 615,588
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$1,069,483
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3. NOTE RECEIVABLE

On October 1, 2001 the Company entered into a consulting agreement with
Pacific Gate Capital Corporation for a one year period in the amount of $27,750
minimum per month for providing certain services to the Company. This agreement
was subsequently cancelled. For the three months ended March 31, 2002 and for
the year ended December 31,2001 the consulting payments reduced the principal
amount owed by Mr. Montalban, a related party, as a result of the September 20,
2001 Settlement Agreement for $109,211 by $17,750 and $53,250, respectively.

The Company has accrued interest of $1,762 on its note receivable as of
March 31, 2002.

4. SHARE CAPITAL

AUTHORIZED STOCK

Due to an amendment to the Company's article of incorporation on January
29, 2002, the Company is now authorized to issue:

(a) 200,000,000 shares of common stock at a par value of $0.001 per share.

(b) 5,000,000 shares of preferred stock at a par value of $.001 per share.

STOCK OPTIONS

On January 10, 2001, the Company issued an option to purchase
1,000,000 shares of the Company's common stock to Robert Adams, who,
at such time, was serving as President, Chief Operating Officer,
Secretary and Treasurer of the Company. On that date, the Company also
issued an option to purchase 125,000 shares of the Company's common
stock to Tami Allan, who, at that time was serving as Vice President
of North American Operations of the Company. The exercise price of
each option is $.10 per share and vests over time. The options were
issued pursuant to the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), for transactions by an issuer not involving a
public offering. Mr. Adams and Ms. Allan are no longer employees of
the Company. On December 10, 2001, Mr. Adams gave notice to the
Company indicating that he wished to exercise 2,500 options pursuant
to the non-qualified stock option agreement. In 2002 the Company
reflected the issuance of these 2,500 shares to Mr. Adams. As of March
31, 2002 , these shares have not been issued, however for purposes of
financial statement presentation, all shares were deemed issued as of
March 31, 2002. Unvested options for Mr. Adams in the amount of
500,000 have been cancelled.

5. COMMITMENTS AND CONTIGENCIES

Berry Litigation
----------------

On March 31, 2000, the Company commenced suit in the Supreme Court of
British Columbia, Action #S001822, Vancouver Registry against Tia Berry (the
"Tia Action"), the wife of Steven Berry ("Berry"), the former President and
Chief Executive Officer of the Company. In the Tia Action, the Company claims
$42,516 (CDN) from Tia Berry on account of monies paid to her by the Company
which she was not entitled to receive. Tia Berry has filed a Statement of
Defense in the Tia Action in which she alleges that the payments which she
received from the Company were to reimburse her for business expenses which she
had charged to her credit cards on behalf of Berry. An Examination for Discovery
of Sandra Lynn Warren took place on February 19,2002 in conjunction with this
action. The Tia Action has not yet been set for trial.

Action"). In the New York Action, Berry claimed damages for alleged conversion,
fraud, breach of contract and breach of fiduciary duty all arising from the
alleged wrongful Stop Transfer Order which the Company placed relating to 75,000
shares of the Company's Common Stock registered in Berry's name and the
Company's cancellation of a further 600,000 shares (the "Contingent Shares").
The complaint in the New York Action claims damages in excess of $3,000,000 with
the precise amount to be determined at trial.

Berry received the 600,000 Contingent Shares upon condition that he would
remain in the Company's employ as Chief Executive Officer for at least two
years. Berry commenced his employment with the Company on January 4, 1999, and
resigned his employment with the Company on January 17, 2000. Following Berry's
resignation, the Company attempted to have a Stop Transfer Order issued with
respect to the 75,000 shares registered in Berry's name and cancel the 600,000
Contingent Shares. The Stop Transfer Order was not effective and Berry
subsequently sold the 75,000 shares.

On May 19, 2000 CyPost and ePost Innovations commenced suit in the Supreme
Court of British Columbia, Action #S002798, Vancouver Registry, against Berry
and his wife, Tia Berry (the "BC Action"). In the BC Action, the Company seeks
an order directing Berry to return the 600,000 Contingent Shares to the Company
for cancellation for an order entitling the Company to cancel the same on the
basis that Berry did not fulfill the employment conditions which were the
condition precedent to his becoming the beneficial owner of the Contingent
Shares.

In the BC Action, the Company also claims at least Cdn$800,000 from Berry
on account of breach of fiduciary duty, negligence, breach of statutory duties
and breach of contract arising from Berry's failure to properly carry out his
employment responsibilities. In the BC Action, the Company also claims
Cdn$34,013 from Berry and Tia Berry on account of conspiracy to defraud and
injure the Company and ePost Innovations by causing certain personal expenses to
be paid by the Company rather than by Berry and Tia Berry personally. The
Company also claims punitive and exemplary damages from Berry and Tia Berry in
the BC Action. The trial date has been set for Monday, January 20, 2003.

On May 25, 2000, the Company moved in the New York Action for an order
dismissing the action against the Company for lack of jurisdiction or, in the
alternative, on the basis of forum non conveniens. On September 5, 2000, the
court dismissed the New York Action on forum non conveniens grounds, subject to
the Company making certain stipulations in the New York Action. Those
stipulations have been made and the appeal period in the New York Action has
expired without Berry or any other party appealing the September 5, 2000 order.

The issues raised by Berry and the Company in the New York Action will be
litigated in the BC Action together with the further issues raised by the
Company in the BC Action. The Company feels that Berry's claims in the New York
Action were without merit and that the Company will be successful in obtaining
an order declaring that Berry's 600,000 Contingent Shares be cancelled and
further entitling the Company to substantial damages, although no assurance can
be given that this will be the case. The Company will vigorously pursue its
position in all respects.

On December 21, 2000, Berry and Tia Berry commenced suit in the Supreme
Court of British Columbia, Action #S006790, Vancouver Registry, against CyPost,
ePost Innovations, Kelly Shane Montalban, J. Thomas W. Johnston, Carl Whitehead
and Robert Sendoh (the "Berry Action"). Statements of Defense have been filed on
behalf of the Company and the other defendants.

The Plaintiffs in the Berry Action allege that the Tia Action, the BC
Action, and the action by Kelly Shane Montalban (Supreme Court of British
Columbia, Action #S002147, Vancouver Registry), against Berry for specific
performance of an option agreement (the "Montalban Action"), collectively,
amount to an abuse of process, malicious prosecution, unlawful interference with
the Plaintiffs' economic rights, or were commenced pursuant to a civil
conspiracy to injure the Plaintiffs.

In the Berry Action, the Plaintiffs seek a declaration that Berry is
entitled to the 600,000 Contingent Shares and claim unspecified damages which
are estimated at Cdn$2,000,000 based on the Statement of Claim. They also claim
punitive or aggravated damages and costs. The Company believes that the
allegations in the Berry Action are without merit and they will be vigorously
defended. An Examination for Discovery of Kelly Shane Montalban took place over
two days on January 31, 2002 and February 1, 2002 in conjunction with this
action.

The Tia Action, the BC Action and the Berry Action may be consolidated for
the purposes of trial due to the fact that there are numerous issues of fact and
law which are common to all of these actions.

A loss by the Company of the claim for monetary damages would have a
material adverse effect on the Company's future results of operations, financial
condition and liquidity; however, the Company does not expect to lose this
action and believes additionally that it would be able to negotiate reasonable
payment terms should it lose this suit.

The Company has entered into negotiations to settle outstanding litigation.
On February 5, 2002, counsel for Steven and Tia Berry presented to counsel for
the Company an offer to settle the Tia Action, the BC Action, the Berry Action
and the Montalban Action ("All Actions"). On March 4, 2002, counsel for the
Company sent to counsel for Steven and Tia Berry a counter-offer to settle All
Actions. On March 12, 2002, counsel for the Company received a letter for Steven
and Tia Berry rejecting the counter-offer to settle of March 2, 2002. The
Company has entered into settlement negotiations motivated by the best interests
of the Company but without any admission of liability.

DOMINION ACTION

On September 13, 2001, Dominion Information et al ("Dominion") commenced
suit in the Supreme Court of British Columbia, Action # S015127, Vancouver
Registry (the "Dominion Action") against Hermes Net Solutions, CyPost
Corporation and Stephen Choi, a former shareholder, director and secretary of
Hermes Net Solutions until June 30, 1999. As of June 30, 1999, Hermes was a
wholly owned subsidiary of CyPost Corporation. In the Dominion Action, Dominion
claims $19,339 (CDN) from the defendant Hermes Net Solutions pursuant to an
agreement whereby Dominion published advertisements on behalf Hermes Net
Solutions. In the alternative, Dominion claims that CyPost Corporation was
unjustly enriched by the amount claimed. The defendants Hermes Net Solutions
and CyPost Corporation filed a Statement of Defense in the Dominion Action in
which they state that the defendant Stephen Choi did not have authority to enter
any agreement on their behalf. Furthermore, the Statement of Defense denies the
existence of an agreement, any benefit from an agreement or any unjust
enrichment from an agreement.

On February 16, 2002, settlement terms were proposed by Dominion. Hermes
Net Solutions and CyPost Corporation decided it would be in their best interest
to settle this litigation by making a lump sum payment and twelve monthly
payments commencing April 1, 2002 and to March 1, 2003. When Hermes Net
Solutions has completed the payment schedule in March, 2003, Dominion will file
the Consent Dismissal Order, dismissing the Dominion Action.

CNW ACTION

On January 14, 2002, Connect Northwest Internet Services, LLC, a Washington
limited liability company, d/b/a Skagit County Networking LLC ("CNW") commenced
suit in the Superior Court of Washington for King County, Case No.
02-2-01906-4SEA, against CyPost Corporation (the "CNW Action"). In the CNW
Action, CNW claims $30,529 (U.S.) plus interest, costs and attorney's fees from
the Company on account of monies owing pursuant to an asset purchase agreement
of October 27, 1999.

On February 13, 2002, the Company was able to settle this litigation. The
Company agreed to make a lump sun payment of $6,000 U.S. to CNW by February 28,
2002 followed by payments of $4,000 U.S. on the 15th of each month thereafter
until August 15, 2002 for a total payment of $30,000 U.S. Once the Company has
made its final payment on August, 15, 2002, CNW will dismiss the action.

TAMI HELEN ALLAN

On November 2, 2001, Tami Helen Allan ("Allan") commenced suit in the
Ontario Superior Court of Justice of Chatham-Kent, against NetRover Inc., CyPost
Corporation, Robert Sendoh, Kelly Shane Montalban, Angela Belcourt and J. Thomas
W. Johnston (the "Allan Action"). In the Allan Action, Allan claims that as a
result of the wrongful termination of Allan's employment, Allan has sustained
damages including loss of salary in the amount of $600,000 (CDN).

On November 9, 2001 the Company filed a Notice of Defense.

The Company is also subject to routine litigation from time to time in the
operations of its business. None of such routine litigation is material to the
Company, its assets or results of operations.

Due to the inherent uncertainties of litigation, the Company cannot predict
the outcome of any litigation to which it is a party.

6. SUBSEQUENT EVENTS

On April 26, 2002, the Company issued 1,700,000 shares of its common stock
in an aggregate amount of $170,000 to two consultants and one lawyer at the
closing price of $0.10 per share in consideration for their providing consulting
and legal services to the Company.

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

The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Report. Historical results and percentage relationships among any amounts in
these financial statements are not necessarily indicative of trends in operating
results for any future period. The statements which are not historical facts
contained in this Report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Notes to the Consolidated
Financial Statements, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements are
based on currently available operating, financial and competitive information,
and are subject to various risks and uncertainties. Future events and the
Company's actual results may differ materially from the results reflected in
these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, dependence on existing and future key strategic
and strategic end-user customers, limited ability to establish new strategic
relationships, ability to sustain and manage growth, variability of operating
results, the Company's expansion and development of new service lines, marketing
and other business development initiatives, the commencement of new engagements,
competition in the industry, general economic conditions, dependence on key
personnel, the ability to attract, hire and retain personnel who possess the
technical skills and experience necessary to meet the service requirements of
its clients, the potential liability with respect to actions taken by its
existing and past employees, risks associated with international sales, and
other risks described herein and in the Company's other SEC filings.

Overview

The Company is engaged in the business of providing Internet service
provider ("ISP") services ("ISP Services") for business and personal use.
Previously, the Company was also involved in developing certain software
products, which activities the Company no longer pursues.

The Company was a development stage company until the first quarter of
1999, when it began to broaden its strategic focus through the acquisition of
six ISPs. Currently, providing ISP Services is the focus of the
Company's business. The Company's business operations are presently
conducted in the United States and Canada.

The Company derives virtually all of its revenues from its ISP Services. At
present, most of the revenue from ISP Services can be attributed to
connectivity, although the Company's network of ISP Services is moving towards
focusing on Web hosting and server co-location, anticipating a strong hold over
connectivity by the larger ISPs in a few years' time.

The Company continues to streamline and consolidate its ISP Services
operations to enhance efficiency and reduce operating expenses. The Company has
embarked on a program to centralize ISP Services to the greatest extent
possible, as follows:

o Customer Support. During 2001, the Company began consolidating all
aspects of customer support (including end user technical issues) for its
Oregon ISP customers into the Chatham, Ontario facility. The Washington
state ISP customer support is expected to be consolidated into the Chatham
facility by Q3 2002.

o Billing and Collections. In 2001 the billing and collections for the
Oregon ISP customers were consolidated into the Chatham facility, billing
and collections for the Washington ISP Services customers is expected to be
consolidated by Q3 2002.

o Network Operations. The Company has two regionally-based maintenance
and repair teams. A team based in Toronto provides primary monitoring and
repair of all servers and routers covering all Canadian ISP Services
customers and provides overflow assistance to the Pacific Northwest, while
a Seattle team provides primary monitoring and repair of all servers and
routers covering all of the US ISP Services customers and provides overflow
assistance to Canada.

The Company is also consolidating Web hosting and dedicated services into
Toronto, a process which began in late-2000 and is expected to be completed by
Q3 2002. Other ISP Services such as e-mail and user authentication (i.e.,
customer security) will continue to be handled from regional data centers.
Currently, all new Web hosting customers, wherever located geographically, are
hosted from Toronto. The Company is also considering implementing other
consolidated services to achieve greater efficiency and cost savings.

Results of Operations for the Three Months Ended March 31, 2002 Compared to the
Three Months Ended March 31, 2001

Substantially all of the Company's revenue was earned from its ISP
operations during the three months ended March 31, 2002. These revenues are
attributable virtually entirely to the operations of the Company's ISP
businesses (Hermes Net Solutions, Inc. and NetRover Inc., and the Connect
Northwest Internet Services and Internet Arena DBAs) which the Company acquired
beginning late in the second quarter of 1999. The Company generated net sales of
$772,750 for the three months ended March 31, 2002 compared to $1,063,823 for
the three months ended March 31, 2001. This decrease is primarily due to a
decrease in marketing related activities, and the prolonged softening of
technology related sector spending.

Direct costs, which consist primarily of telecommunications charges in
respect of providing Internet connection services to customers, of $466,998,
were incurred for the three months ended March 31, 2002, compared to $428,671
for the three months ended March 31, 2001. The increase in the above noted
expenses for the three months ended March 31, 2002 compared to the three months
ended March 31, 2001 results primarily from revised service level agreement
credits from certain telecommunication providers, which resulted in less credits
granted in the year 2002 compared to the credits granted for the same period in
2001.

Selling, general and administrative expenses were $656,030 for the three
months ended March 31, 2002 compared to $622,952 for the three months ended
March 31, 2001. The increase in the above noted expenses for the three months
ended March 31, 2002 compared to the three months ended March 31, 2001 results
primarily from an increase in professional fees; offset by a reduction in
advertising expenses and a reduction in office and general expenses due to the
consolidation of the operation of the Company's ISP businesses.

Amortization and depreciation expenses were $372,286 for the three months
ended March 31, 2002, compared to $518,857 for the three months ended March 31,
2001. The decrease in the above noted expenses for the three months ended March
31, 2002 compared to the three months ended March 31, 2001 is primarily due to
the Company conforming to the new Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS 142) provisions issued by
the Financial Accounting Standards Board. The provisions of this Statement are
required to be applied starting with fiscal years beginning after December 15,
2001. The Company has determined that the net goodwill assets in the amount of
$453,895 were not impaired. As a result, the Company did not amortize these
assets for the period ending March 31, 2002. Under the old rules, the Company
would have amortized $152,712 for a three month ended period.

The Company incurred net interest expense of $(525) for the three months
ended March 31, 2002, compared to $41,326 for the three months ended March 31,
2001. The decrease in interest expense is primarily the result of the Company
not borrowing any additional funds during the three months ended March 31, 2002;
and pursuant to the September 20, 2001 Montalban Settlement Agreement, the Blue
Heron loan balance was canceled and deemed to have been paid in full.

The Company had a net loss of $726,219, or $.03 per share, for the three
months ended March 31, 2002, compared to a net loss of $547,983, or $.03 per
share, for the three months ended March 31, 2001. The increase in net loss for
the three months ended March 31, 2002 was primarily a result of a decrease in
revenues, increases in direct costs, selling, general and administrative
expenses, offset by the decrease in amortization and depreciation of the assets
and interest expense.

Liquidity and Capital Resources

The accompanying financial statements have been prepared on a going concern
basis, which assumes that the Company will continue in operation for at least
one year and will be able to realize its assets and discharge its liabilities in
the normal course of business. The Company incurred a net loss for the three
months ended March 31, 2002 of $726,219, compared to a net loss for the three
months ended March 31, 2001 of $547,983. As of March 31, 2002, the Company had a
working capital deficit of $1,775,167, which is primarily due to the Company's
general operating activities and professional fees. These factors indicate that
the Company's continuation as a going concern is dependent upon its ability to
obtain adequate financing.

The Company has accrued interest of $1,762 on its' note receivable as of
March 31, 2002.

The Company's cash position as of March 31, 2002 was $19,915, compared to
$73,124 on December 31, 2001. This decrease is primarily due to a decrease in
revenues during the three months ended March 31, 2002.

The Company's net cash used in operating activities totaled $37,559 for the
three months ended March 31, 2002, compared to $8,658 for the three months ended
March 31, 2001. This increase is primarily due to an increase in professional
fees.

The Company's net cash used in investing activities totaled $16,595 for the
three months ended March 31, 2002, compared to $21,928 for the three months
ended March 31, 2001. This decrease is primarily due to the Company making fewer
purchases of property and equipment during the three months ended March 31,
2002.

The Company received $250 from the issuance of Common Stock during the
three months ended March 31, 2002. The Company did not have any proceeds from
financing activities during the three months ended March 31, 2001.

Since our inception, we have experienced negative cash flow from
operations. In the past, we have funded our operating losses and capital
expenditures borrowings of debt and convertible debt from private sources. We
continue to evaluate alternative means of financing to meet our needs on terms
that are attractive to us. We must either raise additional funds to support
aspects of our business for 2002 or we will be forced to curtail certain aspects
of our business operations, particularly in terms of the growth of and further
enhancements to our ISP Services business, or recommencing research and
development of Software Products. We need a minimum of $500,000 and a maximum of
$4,500,000 to support current operations, grow and further enhance our ISP
services business, and a minimum of $250,000 and a maximum of $500,000 to
recommence the research and development of the Software Products. If financing
were made available we would first apply the proceeds to the further enhancement
of our ISP services business. We cannot be certain that additional financing
will be available to us on favorable terms when required, or at all. If we are
unable to obtain sufficient additional capital when needed, we could be forced
to alter our business strategy, delay or abandon some of our expansion plans or
sell assets. Any of these events could have a material adverse effect on our
business, financial condition and results of operations. In addition, if we
raise additional funds through the issuance of equity, equity-linked or debt
securities, those securities may have rights, preferences or privileges senior
to those of the rights of our Common Stock and our stockholders may also
experience dilution.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. We believe the following critical accounting policies affect our more
significant estimates and assumptions used in the preparation of our financial
statements. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.

Carrying value of the intangible asset, customer list. As of March 31,
2002, the net book value of the customer list was approximately $615,500.
Management has estimated the useful life of this intangible asset to be three
years, however we have no means of identifying specific customers acquired as a
result of the purchased customer list. Should revenues associated with the
customer lists decrease, this asset could become partially or fully impaired.

Carrying value of the intangible asset, goodwill. As of March 31, 2002, the
net book value of goodwill was approximately $454,000. Management reviews the
unamortized goodwill associated with its various acquisitions, comparing the
unamortized goodwill to the estimated current acquisition costs. Should the
estimated current acquisition costs decrease, this asset could become partially
or fully impaired.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Berry Litigation
----------------

On March 31, 2000, the Company commenced suit in the Supreme Court of
British Columbia, Action #S001822, Vancouver Registry against Tia Berry (the
"Tia Action"), the wife of Steven Berry ("Berry"), the former President and
Chief Executive Officer of the Company. In the Tia Action, the Company claims
$42,516 (CDN) from Tia Berry on account of monies paid to her by the Company
which she was not entitled to receive. Tia Berry has filed a Statement of
Defense in the Tia Action in which she alleges that the payments which she
received from the Company were to reimburse her for business expenses which she
had charged to her credit cards on behalf of Berry. An Examination for Discovery
of Sandra Lynn Warren took place on February 19, 2002 in conjunction with this
action. The Tia Action has not yet been set for trial.

On April 4, 2000, Berry commenced an action in the Supreme Court of the
State of New York, County of New York (Index No. 601448/2000), against the
Company and Continental Stock Transfer Company ("Continental"), (the "New York
Action"). In the New York Action, Berry claimed damages for alleged conversion,
fraud, breach of contract and breach of fiduciary duty all arising from the
alleged wrongful Stop Transfer Order which the Company placed relating to 75,000
shares of the Company's Common Stock registered in Berry's name and the
Company's cancellation of a further 600,000 shares (the "Contingent Shares").
The complaint in the New York Action claims damages in excess of $3,000,000 with
the precise amount to be determined at trial.

DOMINION ACTION

On September 13, 2001, Dominion Information et al ("Dominion") commenced
suit in the Supreme Court of British Columbia, Action # S015127, Vancouver
Registry (the "Dominion Action") against Hermes Net Solutions, CyPost
Corporation and Stephen Choi, a former shareholder, director and secretary of
Hermes Net Solutions until June 30, 1999. As of June 30, 1999, Hermes was a
wholly owned subsidiary of CyPost Corporation. In the Dominion Action, Dominion
claims $19,339 (CDN) from the defendant Hermes Net Solutions pursuant to an
agreement whereby Dominion published advertisements on behalf Hermes Net
Solutions. In the alternative, Dominion claims that CyPost Corporation was
unjustly enriched by the amount claimed. The defendants Hermes Net Solutions and
CyPost Corporation filed a Statement of Defense in the Dominion Action in which
they state that the defendant Stephen Choi did not have authority to enter any
agreement on their behalf. Furthermore, the Statement of Defense denies the
existence of an agreement, any benefit from an agreement or any unjust
enrichment from an agreement.

CNW ACTION

TAMI HELEN ALLAN

On November 9, 2001 the Company filed a Notice of Defense. At the date of
this filing, the litigation remains at the pleadings stage. Management of the
Company intends to vigorously defend the case.

The Company is also subject to routine litigation from time to time in the
operations of its business. None of such routine litigation is material to the
Company, its assets or results of operations.

Due to the inherent uncertainties of litigation, the Company cannot predict
the outcome of any litigation to which it is a party.

Item 2. Changes in Securities

On March 31, 2002, the Company reflected the issuance of 2,500 shares
of its common stock in an aggregate amount of $250 to Mr. Robert Adams
at $0.10 per share pursuant to a stock option agreement. As of March
31, 2002, these shares have not been issued, however for purposes of
financial statement presentation, all shares were deemed issued as of
March 31, 2002

SUBSEQUENT EVENTS

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

May 9, 2002 the Company filed a Current Report on Form 8-K with the SEC,
informing the SEC of the resignation of Sandra Lynn Warren on April 24, 2002 as
President and Director of CyPost Corporation and all its' subsidiaries.

SIGNATURE

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.

"Registrant"

CYPOST CORPORATION

DATE: May 13, 2002 By: /s/ Javan Khazali
--------------------
Javan Khazali
Chief Executive Officer
(Principal Financial Officer)