Adstar 10QSB 2007 Q2 Quarterly report (small business)

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 June 30, 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. Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of August 14, 2007, the issuer had a total of 20,209,648 shares of Common Stock outstanding.

Transitional Small Business Disclosure Format (Check one): Yes o No þ

ADSTAR, INC. AND SUBSIDIARY
Form 10-QSB Report

TABLE OF CONTENTS


	Page

PART I — FINANCIAL INFORMATION

Item 1. Interim condensed consolidated financial Statements (unaudited)

Balance Sheet — June 30, 2007		3

Statements of Operations for the three and six month periods ended June 30, 2007 and 2006		4

Statements of Cash Flows for the six month periods ended June 30, 2007 and 2006		5

Notes to Interim Financial Statements		6

Item 2. Management’s discussion and analysis or plan of operation		11

Item 3. Controls and Procedures		17

PART II — OTHER INFORMATION

Item 6. Exhibits		18

Signatures		19
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I — FINANCIAL INFORMATION

AdStar, Inc. and Subsidiary
Consolidated Balance Sheet
As of June 30, 2007 (unaudited)


Assets

Current assets:
Cash and cash equivalents	$	2,528,000
Accounts receivable, net of allowance for doubtful accounts of $78,000		506,000
Notes receivable from officers — current portion		9,000
Prepaid and other current assets		180,000

Total current assets		3,223,000

Notes receivable from officers, net of current portion		202,000
Property and equipment, net		121,000
Capitalized and purchased software, net		427,000
Intangible assets, net		1,177,000
Goodwill		2,132,000
Other assets		42,000


Total assets	$	7,324,000


Liabilities and Stockholders’ Equity

Current liabilities:
Due to publications	$	1,654,000
Accounts payable and accrued expenses		684,000
Deferred revenue and customer deposits — current portion		195,000
Capital lease obligations — current portion		6,000

Total current liabilities		2,539,000
Deferred revenues, net of current portion		25,000

Capital lease obligations, net of current portion		24,000


Total liabilities		2,588,000

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; 20,209,648 issued		2,000
Additional paid-in capital		26,826,000
Treasury stock; 67,796 shares		(68,000	)
Accumulated deficit		(22,024,000	)

Total stockholders’ equity		4,736,000

Total liabilities and stockholders’ equity	$	7,324,000

The accompanying notes are an integral part of these consolidated financial statements.

AdStar, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three and Six Months
Ended June 30, 2007 and 2006 (unaudited)


	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
ASP, net	$	492,000		$	496,000		$	951,000		$	967,000
Licensing and software		554,000			599,000			1,188,000			1,204,000
Customization and other		122,000			146,000			394,000			344,000

Net revenues		1,168,000			1,241,000			2,533,000			2,515,000

Total cost of revenues		528,000			560,000			1,107,000			1,081,000


Gross profit		640,000			681,000			1,426,000			1,434,000

General and administrative expense		518,000			378,000			1,082,000			856,000
Product maintenance and development costs		286,000			181,000			604,000			418,000
Selling and marketing expense		468,000			283,000			1,353,000			768,000
Amortization of customer list		22,000			22,000			44,000			44,000


Loss from operations		(654,000	)		(183,000	)		(1,657,000	)		(652,000	)

Interest income		28,000			3,000			38,000			7,000
Interest expense		(1,000	)		(1,000	)		(3,000	)		(2,000	)


Loss before income taxes		(627,000	)		(181,000	)		(1,622,000	)		(647,000	)

Provision for income taxes		3,000			5,000			6,000			7,000


Net loss applicable to common stockholders	$	(630,000	)	$	(186,000	)	$	(1,628,000	)	$	(654,000	)


Loss per share — basic and diluted	$	(0.03	)	$	(0.01	)	$	(0.08	)	$	(0.03	)
Weighted average number of shares — basic and diluted		20,208,714			19,523,846			20,169,644			19,128,392

The accompanying notes are an integral part of these consolidated financial statements.

AdStar, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Six Months
Ended June 30, 2007 and 2006 (unaudited)


	2007			2006
Cash flows from operating activities:
Net loss	$	(1,628,000	)	$	(654,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		259,000			311,000
Stock based charges		633,000			134,000
Bad debt provision		(10,000	)		3,000
Loss on disposal of equipment		7,000			—
Changes in assets and liabilities:
Accounts receivable		(24,000	)		(7,000	)
Prepaids and other assets		17,000			(62,000	)
Due to publications		473,000			610,000
Accounts payable and accrued expenses		14,000			(122,000	)
Deferred revenue and customer deposits		(85,000	)		(31,000	)

Net cash provided by (used in) operating activities		(344,000	)		182,000

Cash flows from investing activities:
Additions to capitalized and purchased software		(5,000	)		(8,000	)
Purchase of property, equipment and intangible assets		(30,000	)		(14,000	)
Repayment of officer note receivable		5,000			4,000

Net cash used in investing activities		(30,000	)		(18,000	)

Cash flows from financing activities:
Proceeds from issuance of common stock		—			1,442,000
Proceeds from exercise of options and warrants		360,000			256,000
Principal repayments on loans		—			(10,000	)
Principal repayments on capital leases		(3,000	)		(1,000	)

Net cash provided by financing activities		357,000			1,687,000

Net increase (decrease) in cash and cash equivalents		(17,000	)		1,851,000
Cash and cash equivalents at beginning of period		2,545,000			1,338,000

Cash and cash equivalents at end of period	$	2,528,000		$	3,189,000


Supplemental cash flow disclosure:

Taxes paid	$	12,000		$	17,000

Interest paid	$	3,000		$	2,000

The accompanying notes are an integral part of these consolidated financial statements.

AdStar, Inc. and Subsidiary
Notes to Consolidated Financial Statements

1.		General

		AdStar, Inc. (the “Company”) provides classified advertising technology services to publishers, primarily within the newspaper industry. Our services are provided using proprietary software that electronically connects the advertiser with the publisher. We enable professional advertising agencies, businesses and individuals to send ads to publishers electronically. This gives publishers the ability to receive classified advertising insertions directly into their sophisticated newspaper publishing systems, as well as their website or other publication channel. Our solutions are available in an application service provider (“ASP”) model whereby we contract with publishers or third parties to design, implement, host, and manage the on-line ad-taking capabilities of their websites. We provide all the technical and application expertise, customer support, and security measures that are needed to connect with our platform, and with the publisher system. Our services afford publishers the ability to increase revenue and reduce costs by automating the process of composing and formatting, pricing, scheduling, and electronically sending classified ads into the publishing systems. Additionally, we enable credit card payment processing for ad placement, using our proprietary EdgCapture software.

		The interim financial statements for 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 six month periods ended June 30, 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 June 30, 2007, the Company’s accumulated deficit was $22,024,000, 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 six months ended June 30, 2006 and 2007, the net losses were $654,000 and $1,628,000 respectively. The 2006 and 2007 net losses were principally attributable to business development activities. At June 30, 2007, the Company had working capital of $684,000 compared to $1,100,000 at December 31, 2006.

		Revenues for the six month period ended June 30, 2007 have increased to $2,533,000 from $2,515,000 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 $2,528,000 at June 30, 2007, will be sufficient to meet its anticipated working capital needs through at least June 30, 2008. Cash flow uses from operations are anticipated to decrease 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 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.

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 June 30, 2007 three groups of customers, under common ownership, accounted for 17%, 14% and 12% of the Company’s revenues. For the six months ended June 30, 2007 three groups of customers, under common ownership, accounted for 18%, 12% and 12% of the Company’s revenues. At June 30, 2007, three groups of customers, under common ownership, accounted for 20%, 17% and 9% 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 periods ended June 30, 2007 and June 30, 2006 the weighted average shares outstanding as used in the calculation of diluted loss per share does not include options and warrants to purchase 2,674,583 and 2,332,617 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.

3.		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 June 30, 2007, there was $360,000 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 June 30, 2007, there were 544,000 shares available for future grants under the Plans.

The assumptions used to value option grants are as follows:


	Three Months Ended			Six Months Ended
	June 30, 2007			June 30, 2007
Risk-free interest rate		4.6	%		4.5	%
Expected lives (years)		5.0			3.3
Dividend yield		0.0	%		0.0	%
Expected volatility		83.2	%		74.6	%

During the three and six months ended June 30, 2007, the Company issued 244,000 and 465,000 options to its employees, respectively; and during the six months ended June 30, 2007 265,000 options were granted to consultants 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 June 30, 2007 is $87,000, and for the six months ended June 30, 2007 is $417,000.

During the three and six months ended June 30, 2007, 5,000 and 550,597 stock options were exercised, with net cash receipts of $5,000 and $345,000, respectively. The total intrinsic value of options exercised during the three and six months ended June 30, 2007 was $6,000 and $882,000, respectively.

The following table summarizes all stock option activity for the six months ended June 30, 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		730,000			2.06
Exercised		(550,597	)		.64
Forfeited		(55,000	)		1.92

Outstanding at June 30, 2007		2,334,247		$	2.15		3.93	$	134


Options exercisable at June 30, 2007		1,646,084		$	2.23		3.50	$	193

The following table summarizes information about stock options outstanding at June 30, 2007:


							Options Exercisable at
	Options Outstanding at June 30, 2007						June 30, 2007
			Weighted Average		Weighted
	Number of		Remaining		Average		Number of		Weighted
	Shares		Contractual Life		Exercise		Shares		Average
Range of Exercise Price	Outstanding		(years)		Price		Exercisable		Exercise Price

$0.01 — $0.99		226,590		2.96	$	0.80		172,925	$	0.77
$1.00 — $1.99		630,656		4.75	$	1.42		387,657	$	1.36
$2.00 — $2.99		1,027,001		3.95	$	2.41		635,502	$	2.44
$3.00 — $4.50		450,000		3.48	$	3.25		450,000	$	3.25

		2,334,247						1,646,084

Aggregate Intrinsic value							$	193,000

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 six months ended June 30, 2007, 20,000 warrants were exercised, with net cash receipts of $15,000. There were no warrants exercised during the three months ended June 30, 2007.

The following table summarizes activity for the six months ended June 30, 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 June 30, 2007		340,336		$	2.67


Warrants exercisable at June 30, 2007		340,336		$	2.67

The following table summarizes the outstanding warrants, all of which are currently exercisable, to purchase Common Stock at June 30, 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

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						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
ASP, net		42	%		40	%		38	%		38	%
Licensing and software		47	%		48	%		47	%		48	%
Customization and other		10	%		12	%		16	%		14	%

Net revenues		100	%		100	%		100	%		100	%
Cost of revenues		45	%		45	%		44	%		43	%

Gross Profit		55	%		55	%		56	%		57	%

General and administrative expense		44	%		30	%		43	%		34	%
Product maintenance and development costs		24	%		15	%		24	%		17	%
Selling and marketing expense		40	%		23	%		53	%		31	%
Amortization of customer list		2	%		2	%		2	%		2	%

Income (loss) from operations		(56	%)		(15	%)		(65	%)		(26	%)
Interest income		2	%		—			2	%		—
Interest expense		—			—			—			—

Loss before taxes		(54	%)		(15	%)		(64	%)		(26	%)
Provision for taxes		—			—			—			—

Net loss		(54	%)		(15	%)		(64	%)		(26	%)

Business development costs

During 2007, we have conducted significant business development activities with the general purpose of expanding the scope of our service offerings to include mobile advertising and to address the needs of other digital media publishers who are developing advertising channels in connection with their content, as well as the expansion of our international services. We also conducted enterprise-level marketing activities, designed to encompass multiple publishers. The incremental direct costs of business development activities, designed to expand our services beyond our existing web-based ad sales and payment processing services, was approximately $300,000 during the quarter ended June 30, 2007 and approximately $950,000 during the six months ended June 30, 2007, which includes $313,000 of stock compensation expense. Such expenses were primarily for compensation and travel expenses related to marketing, project management, technical employees and consultants. Additionally, we utilized a significant portion of our permanent technical and management resources to develop prototypes, product demonstrations and general business development. These costs were not directly related to the revenues earned during the three and six month periods ended June 30, 2007. We believe that these costs have resulted in a number of potential customer, partnership or joint venture opportunities for our company.

Three month periods ended June 30, 2007 and 2006

Revenues

Net revenues for the three months ended June 30, 2007 decreased to $1,168,000 from $1,241,000 during the three months ended June 30, 2006, a net decrease of $73,000. The net revenues for 2007 decreased by $45,000 in Licensing and Software revenues, $24,000 in Customization & Other revenues, and $4,000 in ASP revenues.

The decrease in Licensing and Software revenues is primarily due to decreased software license upgrade sales on our payment processing software. The decrease in Customization & Other Revenues is due to less customization projects in 2007, as compared to 2006.

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 decreased to $528,000 in the three months ended June 30, 2007 from $560,000 during the three months ended June 30, 2006, a net decrease of $32,000 or 6%. Our gross profit margin for the three months ended June 30, 2007 remained constant at 55% compared to the same period in 2006. The decrease in costs during the 2007 three month period, when compared to the same prior year period, is primarily due to decreased amortization of capitalized software development costs and depreciation of $28,000 and a decrease in facilities and insurance costs of $28,000. Such decreases were offset by an increase in labor costs associated with installation projects and customer support, of $24,000.

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 $518,000 during the three months ended June 30, 2007 from $378,000 during the three months ended June 30, 2006, a net increase of $140,000 or 37%. The increase in 2007 is primarily due higher stock compensation expense in the quarter ended June 30, 2007, an increase of $59,000 over the same prior year period; and to an increase in professional fees of $50,000, an increase in office facilities costs of $17,000, and an increase in compensation costs of $14,000 during the 2007 quarter, over the same prior year period.

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. We have hired a consultant to assist in documenting and testing our internal controls, so that we can maintain full compliance with current provisions relating to Sarbanes-Oxley, which will increase our professional fees in the future.

Selling and marketing expenses

trade show costs of $29,000; which were offset by a decrease in stock compensation expense of $40,000 in the 2007 quarter, over the same prior year period.

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. Our development activities have also included the development of prototypes for new service offerings. The costs consist primarily of personnel-related expenses for technical and design functions including outside consultants. Product maintenance and development expenses increased to $286,000 during the three months ended June 30, 2007 from $181,000 during the same prior year period, a net increase of $105,000. The increase in 2007, as compared to the same 2006 period, is primarily due to an increase in compensation related costs of $105,000.

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 June 30, 2007 was approximately $20.1 million. The net operating loss carry-forward is available to offset future taxable income through 2026. Some of the losses begin to expire in 2018.

Six month periods ended June 30, 2007 and 2006

Revenues

Net revenues for the six months ended June 30, 2007 increased to $2,533,000 from $2,515,000 during the six months ended June 30, 2006, a net increase of $18,000. The net revenues for 2007 increased by $50,000 in Customization & Other revenues; offset by a decrease in Licensing and Software revenues of $16,000 and $16,000 in ASP revenues.

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 decrease in Licensing and Software revenues is primarily due to decreased software license upgrade sales on our payment processing software, in 2007 as compared to the same prior year period. The decrease in ASP revenues during the 2007 six month period is primarily due to a lower volume of transactions from a few publications.

Cost of revenues

Cost of revenues increased to $1,107,000 in the six months ended June 30, 2007 from $1,081,000 during the six months ended June 30, 2006, a net increase of $26,000 or 2%. Our gross profit margin for the six months ended June 30, 2007 decreased to 56% from 57% in 2006. The increase in costs during the 2007

six 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 $91,000 in 2007, and an increase in stock option compensation expense of $29,000. Cost of revenue increases were offset by a decrease in amortization of capitalized software development costs and depreciation of $55,000, as compared to the same prior year period, and a decrease in facilities and insurance costs of $39,000.

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 $1,082,000 during the six months ended June 30, 2007 from $856,000 during the six months ended June 30, 2006, a net increase of $226,000 or 26%. The increase in 2007 is primarily due higher stock compensation expense in the period ended June 30, 2007, an increase of $168,000 over the same prior year period. Office facilities costs increased $40,000, and professional fees and compensation costs increased $18,000, in the 2007 period over the same prior year period.

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 $1,353,000 in the six months ended June 30, 2007 from $768,000 in the same period in 2006, a net increase of $585,000 or 76%. The increase during the 2007 period, as compared to the same prior year period, is primarily due to increases in compensation, travel and facilities costs of $454,000 and an increase in stock compensation expense of $203,000; offset by a decrease in advertising and trade show costs of $72,000 in the 2007 period, over the same prior year period. 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 an agreement to develop a pilot program for placing advertisements on cellular phones.

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 $604,000 during the six months ended June 30, 2007 from $418,000 during the same prior year period, a net increase of $186,000. The increase in 2007, as compared to the same period in 2006, is primarily due to an increase in compensation related costs of $124,000 and an increase in stock compensation expense of $80,000, offset by a decrease in facilities costs of $18,000.

Liquidity and Capital Resources

At June 30, 2007, we had an accumulated deficit of $22,024,000. 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 six months ended June 30, 2006 and 2007, the net losses were $654,000

and $1,628,000 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 $2,528,000 at June 30, 2007 will be sufficient to meet our anticipated working capital needs through at least June 30, 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 June 30, 2007, we had working capital of $684,000 compared to working capital of $1,100,000 at December 31, 2006, a $416,000 decrease. The decrease in working capital is primarily a result of losses from operations, which were offset by the exercise of 570,597 stock options and warrants during the six months ended June 30, 2007, for net proceeds of $367,000.

As of June 30, 2007, we had cash and cash equivalents of approximately $2,528,000 compared to $2,545,000 as of December 31, 2006, a net decrease of $17,000. The net decrease in cash and cash equivalents was the result of $357,000 provided by financing activities; offset by $344,000 used in operating activities and $30,000 used in investing activities.

Net cash used in operations during the six months ended June 30, 2007 was approximately $345,000 compared with $182,000 provided by operations during the six months ended June 30, 2006. The increased cash used in operations during 2007 was primarily due to the increased loss in the 2007 period, as compared to the same prior year period.

Net cash used in investing activities was $30,000 during the six months ended June 30, 2007 compared with $18,000 during the same prior year period. The increase of $12,000 is primarily the result of increased purchases of equipment.

Net cash provided by financing activities was $357,000 during the six months ended June 30, 2007 compared with $1,687,000 during the same prior year period. In 2006, we sold one million (1,000,000) shares of our Common Stock for net proceeds of $1,442,000 during the six month period. Net proceeds from the exercise of stock options and warrants were $360,000 in the six months ended June 30, 2007, as compared to $256,000 in the same 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 six month period ended June 30, 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, 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 six months ended June 30, 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 will not have a material effect on our results of operations and financial position.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of SFAS No. 115” (“FAS 159”). The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact of FAS 159 on its financial position and results of operations

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 June 30, 2007:


			Less than
ContractualObligations	Total		1 year		1 to 3 Years		3 to 5 Years
Employment agreements	$	1,597,000	$	586,000	$	809,000	$	202,000
Operating lease commitments		739,000		252,000		398,000		89,000
Capital lease commitments		30,000		6,000		15,000		9,000

	$	2,366,000	$	844,000	$	1,222,000	$	300,000

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 it in the reports that it files or submits 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 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.

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.

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: August 14, 2007	/s/ Leslie Bernhard
	Leslie Bernhard
	President and Chief Executive Officer (Principal Executive Officer)


Date: August 14, 2007	/s/ James Linesch
	James Linesch
	Chief Financial Officer (Principal Financial Officer)

Adstar (ADST) Inactive 10QSB2007 Q2 Quarterly report (small business)

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