UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
| | | |
| þ | | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
| | | |
| o | | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-15363
ADSTAR, INC.
(Exact name of small business issuer as specified in its charter)
| | | |
| Delaware | | 22-3666899 |
| | | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
4553 Glencoe Avenue, Suite 300, Marina del Rey, California 90292
(Address of principal executive offices)
Issuer’s telephone number (310) 577-8255
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. Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 10, 2007, the issuer had a total of 20,209,648 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yeso Noþ
ADSTAR, INC. AND SUBSIDIARY
Form 10-QSB Report
TABLE OF CONTENTS
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
2
AdStar, Inc. and Subsidiary
Consolidated Balance Sheet
As of March 31, 2007 (unaudited)
| | | | | |
| Assets | | | | |
| | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 2,631,000 | |
| Accounts receivable, net of allowance for doubtful accounts of $78,000 | | | 675,000 | |
| Notes receivable from officers – current portion | | | 9,000 | |
| Prepaid and other current assets | | | 198,000 | |
| | | | |
| Total current assets | | | 3,513,000 | |
| | | | | |
| Notes receivable from officers, net of current portion | | | 205,000 | |
| Property and equipment, net | | | 122,000 | |
| Capitalized and purchased software, net | | | 517,000 | |
| Intangible assets, net | | | 1,200,000 | |
| Goodwill | | | 2,132,000 | |
| Other assets | | | 36,000 | |
| | | | |
| | | | | |
| Total assets | | $ | 7,725,000 | |
| | | | |
| | | | | |
| Liabilities and Stockholders’ Equity | | | | |
| | | | | |
| Current liabilities: | | | | |
| Due to publications | | $ | 1,448,000 | |
| Accounts payable and accrued expenses | | | 631,000 | |
| Deferred revenue and customer deposits – current portion | | | 308,000 | |
| Capital lease obligations – current portion | | | 6,000 | |
| | | | |
| Total current liabilities | | | 2,393,000 | |
| Deferred revenues, net of current portion | | | 26,000 | |
| Capital lease obligations, net of current portion | | | 26,000 | |
| | | | |
| | | | | |
| Total liabilities | | | 2,445,000 | |
| | | | |
| Commitments and contingencies | | | | |
| | | | | |
| Stockholders’ equity: | | | | |
| Preferred Stock, par value $0.0001; authorized 5,000,000 shares; 0 issued | | | — | |
| |
| Common Stock, par value $0.0001; authorized 40,000,000 shares; 20,204,648 issued | | | 2,000 | |
| Additional paid-in capital | | | 26,740,000 | |
| Treasury stock; 67,796 shares | | | (68,000 | ) |
| Accumulated deficit | | | (21,394,000 | ) |
| | | | |
| Total stockholders’ equity | | | 5,280,000 | |
| | | | |
| Total liabilities and stockholders’ equity | | $ | 7,725,000 | |
| | | | |
The accompanying notes are an integral part of these consolidated financial statements.
3
AdStar, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three Months
Ended March 31, 2007 and 2006 (unaudited)
| | | | | | | | | |
| | | Three months ended | |
| | | March 31, | |
| | | 2007 | | | 2006 | |
| ASP, net | | $ | 459,000 | | | $ | 470,000 | |
| Licensing and software | | | 633,000 | | | | 605,000 | |
| Customization and other | | | 273,000 | | | | 199,000 | |
| | | | | | | |
| Net revenues | | | 1,365,000 | | | | 1,274,000 | |
| | | | | | | | | |
| Total cost of revenues | | | 579,000 | | | | 520,000 | |
| | | | | | | |
| | | | | | | | | |
| Gross profit | | | 786,000 | | | | 754,000 | |
| | | | | | | | | |
| General and administrative expense | | | 563,000 | | | | 479,000 | |
| Product maintenance and development costs | | | 319,000 | | | | 237,000 | |
| Selling and marketing expense | | | 885,000 | | | | 484,000 | |
| Amortization of customer list | | | 22,000 | | | | 22,000 | |
| | | | | | | |
| | | | | | | | | |
| Profit (loss) from operations | | | (1,003,000 | ) | | | (468,000 | ) |
| | | | | | | | | |
| Interest income | | | 10,000 | | | | 3,000 | |
| Interest expense | | | (2,000 | ) | | | (1,000 | ) |
| | | | | | | |
| | | | | | | | | |
| Loss before income taxes | | | (995,000 | ) | | | (466,000 | ) |
| | | | | | | | | |
| Provision for income taxes | | | 3,000 | | | | 2,000 | |
| | | | | | | | | |
| | | | | | | |
| Net loss applicable to common stockholders | | $ | (998,000 | ) | | $ | (468,000 | ) |
| | | | | | | |
| | | | | | | | | |
| Loss per share — basic and diluted | | $ | (0.05 | ) | | $ | (0.03 | ) |
| Weighted average number of shares — basic and diluted | | | 20,130,140 | | | | 18,729,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
4
AdStar, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months
Ended March 31, 2007 and 2006 (unaudited)
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| Cash flows from operating activities: | | | | | | | | |
| Net loss | | $ | (998,000 | ) | | $ | (468,000 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | |
| Depreciation and amortization | | | 130,000 | | | | 159,000 | |
| Stock based charges | | | 546,000 | | | | 70,000 | |
| Bad debt provision | | | (10,000 | ) | | | (3,000 | ) |
| Loss on disposal of equipment | | | 7,000 | | | | | |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (193,000 | ) | | | 29,000 | |
| Prepaids and other assets | | | 5,000 | | | | (25,000 | ) |
| Due to publications | | | 267,000 | | | | 335,000 | |
| Accounts payable and accrued expenses | | | (39,000 | ) | | | 31,000 | |
| Deferred revenue and customer deposits | | | 29,000 | | | | 22,000 | |
| | | | | | | |
| |
| Net cash provided by (used in) operating activities | | | (256,000 | ) | | | 150,000 | |
| | | | | | | |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Additions to capitalized and purchased software | | | (3,000 | ) | | | (5,000 | ) |
| Purchase of property, equipment and intangible assets | | | (17,000 | ) | | | (6,000 | ) |
| Repayment of officer note receivable | | | 2,000 | | | | 2,000 | |
| | | | | | | |
| |
| Net cash used in investing activities | | | (18,000 | ) | | | (9,000 | ) |
| | | | | | | |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from issuance of common stock | | | — | | | | 1,507,000 | |
| Proceeds from exercise of options and warrants | | | 361,000 | | | | 94,000 | |
| Principal repayments on capital leases | | | (1,000 | ) | | | (1,000 | ) |
| | | | | | | |
| |
| Net cash provided by financing activities | | | 360,000 | | | | 1,600,000 | |
| |
| | | | | | | |
| Net increase in cash and cash equivalents | | | 86,000 | | | | 1,741,000 | |
| Cash and cash equivalents at beginning of period | | | 2,545,000 | | | | 1,338,000 | |
| | | | | | | |
| Cash and cash equivalents at end of period | | $ | 2,631,000 | | | $ | 3,079,000 | |
| | | | | | | |
| | | | | | | | | |
| Supplemental cash flow disclosure: | | | | | | | | |
| | | | | | | | | |
| Taxes paid | | $ | 12,000 | | | $ | 12,000 | |
| | | | | | | | | |
| Interest paid | | $ | 2,000 | | | $ | 1,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
5
AdStar, Inc. and Subsidiary
Notes to Consolidated Financial Statements
| 1. | | General |
| |
| | | The interim financial statements for AdStar, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-QSB and Item 10 of Regulation S-B. Accordingly they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America 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 three and nine month periods ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006. |
| |
| | | The accompanying financial statements have been prepared assuming the Company will have liquidity to maintain its required minimum level of operations. At March 31, 2007, the Company’s accumulated deficit was $21,394,000, resulting from recurring net losses. For the years ended December 2005 and 2006, the net losses were $1,090,000 and $1,393,000 respectively, and for the three months ended March 31, 2006 and 2007, the net losses were $468,000 and $998,000 respectively. The 2006 and 2007 net losses were principally attributable to business development activities. At March 31, 2007, the Company had working capital of $1,120,000 compared to $1,100,000 at December 31, 2006. |
| |
| | | Revenues for the three month period ended March 31, 2007 have increased to $1,365,000 from $1,274,000 in the prior year. While the Company is currently adding customers and revenues, such increases in revenues may be mitigated by losses of certain revenues from customers who elect to utilize other applications for processing their web-based advertising placements. |
| |
| | | The Company may continue to incur losses until it is able to increase revenues significantly from fees derived from its advertising and payment processing services. Although there can be no assurance, Company management believes that the cash on hand of $2,631,000 at March 31, 2007, along with expected increases in cash flows from operations, will be sufficient to meet its anticipated working capital needs through at least March 31, 2008. Cash flows from operations are anticipated to increase as a result of an expected increase in revenues. |
| |
| | | Management believes that the Company is in a position to take advantage of strategic acquisitions and revenue sharing arrangements, and is actively seeking such arrangements. The growing ASP business continues to be adopted by new customers in the marketplace. However, the ability to sell ASP business products and service offerings during the current year may be hampered by the current unstable climate in the advertising market relating to newspaper publishers and state of the economy in general. These factors, coupled with possible competition from other vendors, the extended selling cycle in the industry, and customer delays in customization and implementations, could delay its ability to increase revenue to a level sufficient to cover expenses. There is no assurance that management will be successful with its operating plan and, if events and circumstances occur such that they do not meet the plan as expected, and they are unable to raise additional financing; they may be required to further reduce certain discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. |
6
| 2. | | Summary of Significant Accounting Policies |
| |
| | | Principles of Consolidation |
| |
| | | The accompanying consolidated financial statements include the accounts of AdStar, Inc. and its wholly owned subsidiary, Edgil Associates, Inc. All intercompany transactions and balances have been eliminated in consolidation. |
| |
| | | Concentration of Credit Risk and Major Customers |
| |
| | | Financial instruments that potentially subject the Company to significant concentrations of credit risk are principally comprised of trade accounts receivable. |
| |
| | | The Company generally contracts with individual publication customers for its services, however, a number of publication customers fall under common enterprise ownership. For the three months ended March 31, 2007 three groups of customers, under common ownership, accounted for 20% and 11% and 11% of the Company’s revenues, as compared to 19% and 13%, respectively, in the prior year. At March 31, 2007, three groups of customers, under common ownership, accounted for 21%, 12% and 16% of the Company’s accounts receivable, respectively. |
| |
| | | The majority of the Company’s customers have historically consisted of newspapers and publishers of classified advertisements. |
| |
| | | Earnings (Loss) Per Share |
| |
| | | Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. |
| |
| | | For the three months ended March 31, 2007 and March 31, 2006 the weighted average shares outstanding as used in the calculation of diluted loss per share does not include options and warrants to purchase 2,485,583 and 2,547,617 shares of common stock, respectively, as their inclusion would be antidilutive. |
| |
| | | Accounting for Stock-Based Compensation |
| |
| | | During the first quarter of fiscal 2006, the Company adopted the provisions of, and accounting for stock-based compensation in accordance with, the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123 — revised 2004 (“SFAS 123(R)”, “Share-Based Payment” which replaced` Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” |
| |
| | | Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which often approximates the vesting period. |
| |
| | | The adoption of SFAS 123(R) had a material impact on the Company’s consolidated financial position, results of operations and cash flows. See Note 4 for further information regarding stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if the Company had recorded stock-based compensation expense. |
7
| 3. | | Common Stock |
| |
| | | On February 16, 2006, the Company entered into a Securities Purchase Agreement to sell to a single accredited institutional investor one million (1,000,000) shares of its Common Stock at an aggregate purchase price of $1,650,000. The Company received the proceeds of the sale on February 17, 2006. Pursuant to the agreement, and a Registration Rights Agreement entered into on the same date, the Company filed a registration statement covering the resale of those shares on April 7, 2006, and caused the registration statement to be effective on May 18, 2006. The Company paid the placement agent a cash placement fee of 5½ % of the amount raised, and warrants, exercisable for three years, to purchase 25,000 shares of its Common Stock at a price of $4.00 per share. Net proceeds from the sale were $1,440,000. The issuance was acquired for investment by an accredited investor and was issued without registration under the Securities Act of 1933, as amended, pursuant to the exemptions provided under sections 4(6) and 4(2) thereof and the exemption provided by Regulation D. |
| |
| 4. | | Stock Based Compensation |
| |
| | | The Company’s stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, the Company grants options from either the 1999 Stock Option Plan or the 2004 Stock Option Plan (the “Plans”), under which options could be granted to all employees, including executive officers and non-employee directors of the Company. |
| |
| | | The Plans provide for issuance of nonqualified and incentive stock options to officers, key employees, consultants and non-employee directors to the Company. Each nonqualified stock option shall have an exercise price not less than 100% of the fair value of the Common Stock on the date of grant, unless as otherwise determined by the committee that administers the Plans. Incentive stock options shall have an exercise price equal to or greater than the fair value of the Common Stock on the date of grant provided that incentive stock option granted to a 10% holder of the Company’s voting stock shall have an exercise price equal to or greater than 110% of the fair market value of the Common Stock on the date of grant. Each option generally has a term of five years from the date of grant unless otherwise determined by the committee that administers the Plans. Option vesting periods are generally three years, and have five-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plans). |
| |
| | | The Company currently uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. |
| |
| | | The Company estimates the expected term of options granted by taking an average of the mid-point between the vesting date and the expiration date of the option. The volatility of its common stock is determined by using historical volatility. The risk-free rate for periods within the contractual life of the option is based on the United States Treasury yield curve in effect at the time of grant. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. Estimated forfeitures are required at the time of grant and those estimates are revised in subsequent periods if actual forfeitures differ from those estimates. The estimate of forfeitures is based on historical rates, adjusted for expected activity in the future. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. |
| |
| | | As of March 31, 2007, there was $366,000 of unrecognized compensation cost, net of forfeitures, related to unvested share-based compensation arrangements. This compensation expense is expected to be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately three years. At March 31, 2007, there were 738,000 shares available for future grants under the Plans. |
8
| | | The assumptions used to value option grants for the three months ended March 31, 2007 are as follows: |
| | | | | |
| Risk-free interest rate | | | 4.69 | % |
| Expected lives (years) | | | 3.5 | |
| Dividend yield | | | 0.0 | % |
| Expected volatility | | | 77.06 | % |
| | | During the three months ended March 31, 2007, the Company issued 236,000 options to its employees and 250,000 options to a consultant in connection with services to be rendered, amortized over the service period. Total stock-based compensation recognized on the Company’s consolidated statement of operations for the quarter ended March 31, 2007 is $330,000. |
| |
| | | The following table summarizes all stock option activity for the three months ended March 31, 2007 and includes all options currently outstanding under the Plans and 530,000 non-qualified options issued outside the Plans. |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Weighted | | | | |
| | | | | | | Weighted | | | Average | | | Aggregate | |
| | | | | | | Average | | | Remaining | | | Intrinsic | |
| | | | | | | Exercise | | | Contractual | | | Value | |
| | | Shares | | | Price | | | Term | | | ($000) | |
| Outstanding at December 31, 2006 | | | 2,209,844 | | | $ | 1.80 | | | | | | | | | |
| Granted | | | 486,000 | | | | 2.32 | | | | | | | | | |
| Exercised | | | (545,597 | ) | | | .63 | | | | | | | | | |
| Forfeited | | | (5,000 | ) | | | 1.05 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Outstanding at March 31, 2007 | | | 2,145,247 | | | $ | 2.21 | | | | 3.84 | | | $ | 881 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options exercisable at March 31, 2007 | | | 1,604,918 | | | $ | 2.24 | | | | 3.98 | | | $ | 708 | |
| | | | | | | | | | | | | |
| | | The following table summarizes information about stock options outstanding at March 31, 2007: |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Options Exercisable at | |
| | | Options Outstanding at March 31, 2007 | | | March 31, 2007 | |
| | | | | | | Weighted Average | | | Weighted | | | | | | | |
| | | Number of | | | Remaining | | | Average | | | Number of | | | Weighted | |
| Range of | | Shares | | | Contractual Life | | | Exercise | | | Shares | | | Average | |
| Exercise Price | | Outstanding | | | (years) | | | Price | | | Exercisable | | | Exercise Price | |
| $0.01 - $0.99 | | | 226,590 | | | | 3.21 | | | $ | 0.80 | | | | 160,592 | | | $ | 0.76 | |
| $1.00 - $1.99 | | | 396,656 | | | | 3.58 | | | $ | 1.36 | | | | 391,324 | | | $ | 1.35 | |
| $2.00 - $2.99 | | | 1,072,001 | | | | 4.12 | | | $ | 2.40 | | | | 603,002 | | | $ | 2.45 | |
| $3.00 - $4.50 | | | 450,000 | | | | 3.73 | | | $ | 3.25 | | | | 450,000 | | | $ | 3.25 | |
| | | | | | | | | | | | | | | | | | | |
| | | | 2,145,247 | | | | | | | | | | | | 1,604,918 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Aggregate Intrinsic value | | $ | 881,000 | | | | | | | | | | | $ | 708,000 | | | | | |
| | | | | | | | | | | | | | | | | | | |
During the quarter ended March 31, 2007, 545,597 stock options were exercised, with net cash receipts of $347,000. The total intrinsic value of options exercised during the quarter ended March 31, 2007 was $1,015,000.
9
Warrants
In connection with a contract agreement with Nokia Corporation, fully-vested warrants were granted on February 13, 2007 to purchase 100,000 shares of the Company’s common stock at a price of $2.45 with a ten year life. The company recognized the cost of these warrants in the amount of $216,000. The warrants were granted in connection with a contract with Nokia Corporation to develop a pilot program for processing advertisements placed on cellular phones. During the quarter ended March 31, 2007, 20,000 warrants were exercised, with net cash receipts of $15,000.
The following table summarizes activity for the three months ended March 31, 2007.
| | | | | | | | | |
| | | | | | | Weighted | |
| | | | | | | Average Exercise | |
| | | Shares | | | Price | |
| Outstanding at December 31, 2006 | | | 261,134 | | | $ | 2.60 | |
| | | | | | | | | |
| Issued | | | 100,000 | | | | 2.45 | |
| Exercised | | | (20,000 | ) | | | 0.75 | |
| Forfeited | | | (798 | ) | | | 0.75 | |
| | | | | | | |
| Outstanding at March 31, 2007 | | | 340,336 | | | $ | 2.67 | |
| | | | | | | | |
| | | | | | | | | |
| Warrants exercisable at March 31, 2007 | | | 340,336 | | | $ | 2.67 | |
The following table summarizes the outstanding warrants, all of which are currently exercisable, to purchase Common Stock at March 31, 2007:
| | | | | | | |
| Number | | Exercise Price | | Expiration Date |
| 15,336 | | $ | 1.87 | | | March 2009 |
| 120,000 | | $ | 2.58 | | | April 2011 |
| 80,000 | | $ | 2.80 | | | April 2011 |
| 25,000 | | $ | 4.00 | | | February 2009 |
| 100,000 | | $ | 2.45 | | | February 2017 |
10
Item 2. Management’s discussion and analysis or plan of operation
Results of Operations
The following table sets forth the results of operations expressed as a percentage of net revenues.
| | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | 2007 | | 2006 |
| ASP, net | | | 34 | % | | | 37 | % |
| Licensing and software | | | 46 | % | | | 47 | % |
| Customization and other | | | 20 | % | | | 16 | % |
| | | |
| Net revenues | | | 100 | % | | | 100 | % |
| Cost of revenues | | | 42 | % | | | 41 | % |
| | | |
| Gross Profit | | | 58 | % | | | 59 | % |
| | | | | | | | | |
| General and administrative expense | | | 41 | % | | | 38 | % |
| Product maintenance and development costs | | | 23 | % | | | 19 | % |
| Selling and marketing expense | | | 65 | % | | | 38 | % |
| Amortization of customer list | | | 2 | % | | | 2 | % |
| | | | | | | | | |
| Income (loss) from operations | | | (73 | %) | | | (37 | %) |
| Interest income | | | — | | | | — | |
| Interest expense | | | — | | | | — | |
| | | |
| Loss before taxes | | | (73 | %) | | | (37 | %) |
| Provision for taxes | | | — | | | | — | |
| | | |
| Net loss | | | (73 | %) | | | (37 | %) |
| | | |
Three month periods ended March 31, 2007 and 2006
Revenues
Net revenues for the three months ended March 31, 2007 increased to $1,365,000 from $1,274,000 during the three months ended March 31, 2006, a net increase of $91,000. The net revenues for 2007 increased by $28,000 in Licensing and Software revenues and $74,000 in Customization & Other revenues; offset by a decrease of $11,000 in ASP revenues.
The increase in Licensing and Software revenues is primarily due to increased software license upgrade sales on our payment processing software. The increase in Customization & Other Revenues is due to more customization projects in 2007, as compared to 2006, primarily for interfaces to new software systems adopted by certain customers for their publishing; and to revenues from the development of prototypes for cellular device advertising. The overall decrease in ASP revenues during the 2007 three month period is primarily due to one-time revenues from payment processing fees in 2006 that did not recur in 2007, resulting in a $23,000 decrease; offset by an increase in ASP transaction and hosting revenues of $12,000 in 2007, as compared to the prior year.
11
Cost of revenues
Cost of revenues consists primarily of the costs to customize and install software applications, configure end-user software, install Web-based ad-taking software, provide technical customer training and end-user support, amortization of internally developed application modules, depreciation of production servers and related software, royalties, and co-location costs.
Cost of revenues increased to $579,000 in the three months ended March 31, 2007 from $520,000 during the three months ended March 31, 2006, a net increase of $59,000 or 11%. Our gross profit margin for the three months ended March 31, 2007 decreased to 58% from 59% in 2006. The increase in costs during the 2007 three month period, when compared to the prior year period, is primarily due to labor costs associated with installation projects and customer support, which increased by $63,000 in 2007, and an increase in stock option compensation expense of $33,000. Cost of revenue increases were offset by a decrease in amortization of capitalized software development costs and depreciation of $27,000, as compared to the prior year period, and a decrease in facilities and insurance costs of $10,000.
General and administrative expense
General and administrative expense consists primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased to $563,000 during the three months ended March 31, 2007 from $479,000 during the three months ended March 31, 2006, a net increase of $84,000 or 18%. The increase in 2007 is primarily due higher stock compensation expense in the quarter ended March 31, 2007, an increase of $109,000 over the prior year. Office facilities costs increased by $24,000 in the 2007 quarter, over the prior year. Such increases were offset by a decrease in professional fees of $38,000 and a decrease in compensation costs of $11,000 during the 2007 quarter, over the prior year
We believe that our existing executive staffing levels are sufficient to allow for moderate growth without the need to add personnel and related costs for the foreseeable future. However, the impact of complying with and maintaining compliance with Sarbanes-Oxley provisions has not been fully analyzed at this time and may require the addition of personnel and/or systems to adequately meet the requirements.
Selling and marketing expenses
Selling and marketing expenses consist primarily of direct charges for advertising, sales promotion, marketing and trade shows, as well as the cost of business development. Selling and marketing costs increased to $885,000 in the three months ended March 31, 2007 from $484,000 in 2006, a net increase of $401,000 or 83%. The increase during the quarter, as compared to the prior year, is primarily due to increases in compensation and travel costs of $212,000; an increase in stock compensation expense of $262,000; an increase in legal fees in connection with the development of a contract, of $29,000; and an increase in allocated facilities costs of $7,000. Such increases were offset by a decrease in advertising and trade show costs of $109,000 in the 2007 quarter, over the prior year. Stock compensation expense includes the cost of warrants issued to the Nokia Corporation, in connection with a contract, in the amount of $216,000. The warrants were issued to Nokia Corporation in connection with a agreement to develop a pilot program for placing advertisements on cellular phones.
During 2007, we conducted significant business development activities with the general purpose of expanding the scope of our service offerings to various digital media publishers who are developing advertising channels in connection with their content, and to international expansion of our services. We also conducted enterprise-level marketing activities, designed to encompass multiple publishers. The incremental costs of business development activities, designed to expand our services beyond our existing web-based ad sales and payment processing services, was approximately $672,000 during the quarter ended March 31, 2007, including $309,000 of stock compensation expense. We believe that these costs have resulted in a number of potential partnership or joint venture opportunities for our Company.
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Product maintenance and development costs
Product maintenance and development expenses consist of expenses to identify functional requirements, to plan, identify and conceptually design the required technical infrastructure, and to perform other general routine fixes. The costs consist primarily of personnel-related expenses for technical and design functions including outside consultants. Product maintenance and development expenses increased to $319,000 during the three months ended March 31, 2007 from $237,000 during the prior year, a net increase of $82,000. The increase in 2007, as compared to the 2006 period, is primarily due to an increase in stock compensation expense of $72,000 and an increase in compensation related costs of $23,000; offset by a decrease in facilities costs of $13,000.
We monitor technical staffing levels closely and believe that our current level of technical staffing will be sufficient for the near future. If we are able to accelerate the attraction of new customers, we may need to increase technical staffing in the short term for customization projects. However, such an increase in technical staffing costs would be generally offset by increased revenues for such services.
Provision for Income Taxes
The provision for income taxes is comprised primarily of state taxes. Federal income taxes are consolidated and we are currently in a loss carry-forward position for federal income taxes, due to the operating losses incurred through December 31, 2006. The federal net operating loss carry-forward balance as of December 31, 2006 was approximately $18,288,000, compared to $16,946,000 in the prior year. The net operating loss carry-forward is available to offset future taxable income through 2026. Some of the losses begin to expire in 2018.
Liquidity and Capital Resources
At March 31, 2007, we had an accumulated deficit of $21,394,000. We have incurred significant recurring net losses. For the years ended December 2005 and 2006, the net losses were $1,090,000 and $1,393,000 respectively, and for the three months ended March 31, 2006 and 2007, the net losses were $468,000 and $998,000 respectively. The 2006 and 2007 net losses were principally attributable to business development activities. We anticipate that we will continue to incur losses until we are able to increase revenues significantly from fees for advertising placement using our ASP and payment processing services.
Although there can be no assurance, we believe that the cash on hand of $2,631,000 at March 31, 2007 will be sufficient to meet our anticipated working capital needs through at least March 31, 2008. In addition, we will continue to seek additional financings as needed.
We believe that we are in a position to take advantage of strategic acquisitions and revenue sharing arrangements and we are actively seeking such arrangements. We are optimistic that our growing ASP business will continue to be accepted in the marketplace. However, our ability to sell ASP business products and service offerings during the current year may be hampered by the current unstable climate in the advertising market relating to newspaper publishers and state of the economy in general. These factors, coupled with possible competition from other vendors, the extended selling cycle in our industry, and customer delays in customization and implementations, could delay our ability to increase revenues to a level sufficient to cover our expenses. There is no assurance that we will be successful with our operating plan and, if events and circumstances occur such that we do not meet our plan as expected, and we are unable to raise additional financing, we may be required to further reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve intended business objectives.
We have historically financed our business through a combination of cash generated from services rendered and debt and equity financings. At March 31, 2007, we had working capital of $1,120,000 compared to working capital of $1,100,000 at December 31, 2006, a $20,000 improvement. The
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improvement in working capital is primarily a result of the exercise of 565,597 stock options and warrants during the quarter ended March 31, 2007, for net proceeds of $361,000.
As of March 31, 2007, we had cash and cash equivalents of approximately $2,631,000 compared to $2,545,000 as of December 31, 2006, a net increase of $87,000. The net increase in cash and cash equivalents was the result of $360,000 provided by financing activities; offset by $256,000 used in operating activities and $18,000 used in investing activities.
Net cash used in operations during the quarter ended March 31, 2007 was approximately $256,000 compared with $150,000 provided by operations during the quarter March 31, 2006. Due to the timing of billing and cash receipts on significant one-time projects, the cash collections on accounts receivable were $193,000 lower than revenues in 2007, as compared to $29,000 cash provided by accounts receivable collections in 2006. The increased cash used in operations during 2007 was also impacted by the increased loss in the 2007 period, as compared to the prior year.
Net cash used in investing activities was $18,000 during the quarter ended March 31, 2007 compared with $9,000 during the prior year period. The increase of $9,000 is primarily the result of increased spending on capitalized and purchased software.
Net cash provided by financing activities was $360,000 during the quarter ended March 31, 2007 compared with $1,600,000 during the prior year period. In 2006, we sold one million (1,000,000) shares of our Common Stock for net proceeds of $1,507,000 during the quarter. Net proceeds from the exercise of stock options and warrants were $361,000 in the quarter ended March 31, 2007, as compared to $94,000 in the prior year period.
We currently have no additional borrowings available to us under any credit arrangement. We will continue to look for additional financing when it may be required. Adequate funds may not be available or may not be available on terms favorable to us. If additional funds are raised through the issuance of equity securities, dilution to existing stockholders may result. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our financial position, results of operations and cash flows.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited Consolidated Condensed Financial Statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, percentage completion on certain contracts, and income taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
AdStar believes there have been no significant changes, during the three month period ended March 31, 2007, to the items disclosed as critical accounting policies and estimates in Management’s Discussion and Analysis or Plan of Financial Condition and Results of Operations in their Annual Report on Form 10-KSB for the year ended December 31, 2006.
New accounting pronouncements
In June, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement,
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classification, interest, and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 as of January 1, 2007 and the adoption did not have a material impact on our consolidated financial statements or effective tax rate and did not result in any unrecognized tax benefits.
Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in our consolidated financial statements. For the three months ended March 31, 2007 and 2006, we did not recognize any interest or penalty expense related to income taxes. It is determined not to be reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months. The Company is currently subject to a three year statute of limitations by major tax jurisdictions. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The application of SFAS 157 has not had a material effect on our results of operations and financial position.
Contractual Obligations, Commitments and Contingencies
We have contractual obligations and commitments primarily with regards to employment agreements for three of our current executives, certain non-cancelable operating lease obligations for office space, and a capital lease obligation for office equipment and furnishings.
The following table aggregates our expected contractual obligations and commitments subsequent to March 31, 2007:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Interest on | | | | |
| Contractual | | | | | | | | | | | | | | | | | | | | | | Capital | | | | |
| Obligations | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | Leases | | | Total | |
| Employment agreements | | $ | 586,000 | | | $ | 404,000 | | | $ | 405,000 | | | $ | 303,000 | | | $ | — | | | $ | — | | | $ | 1,698,000 | |
| Operating lease commitments | | | 189,000 | | | | 202,000 | | | | 123,000 | | | | 67,000 | | | | 38,000 | | | | — | | | | 619,000 | |
| Capital lease commitments | | | 10,000 | | | | 10,000 | | | | 10,000 | | | | 10,000 | | | | 11,000 | | | | (9,000 | ) | | | 32,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 785,000 | | | $ | 616,000 | | | $ | 538,000 | | | $ | 380,000 | | | $ | 39,000 | | | $ | (9,000 | ) | | $ | 2,349,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
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Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
AdStar’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of AdStar’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, AdStar’s disclosure controls and procedures are effective to ensure that information required to be disclosed by them in the reports that they file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to their management, including the Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
There were no changes in AdStar’s internal controls over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, AdStar’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 6. Exhibits
Exhibits:
| | | |
| Exhibit No. | | Description |
| 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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.
| | | | | |
| | AdStar, Inc.
(Registrant)
| |
| Date: May 15, 2007 | /s/ Leslie Bernhard | |
| | Leslie Bernhard | |
| | President and Chief Executive Officer | |
| |
| | | |
| Date: May 15, 2007 | /s/ James Linesch | |
| | James Linesch | |
| | Chief Financial Officer (Principal Financial Officer) | |
| |
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