UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2001
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number 333-90649
AdStar, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-3666899
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292
(Address of principal executive offices)
(310) 577-8255
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of July 31, 2001 the Issuer had
outstanding 6,653,048 shares of its common stock.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
TABLE OF CONTENTS
FORM 10-QSB REPORT
June 30, 2001
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
(Unaudited)
Balance Sheet-June 30, 2001 3
Statements of Operations
Three-Month and Six-Month Periods
Ended June 30, 2000 and 2001 4
Statements of Cash Flows
Six-Month Periods Ended
June 30, 2000 and 2001 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
AdStar, Inc.
Balance Sheet
As of June 30, 2001 (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 640,522
Restricted cash 100,000
Accounts receivable, net of allowance for
doubtful accounts of $20,000 439,004
Prepaid and other current assets 131,531
------------
Total current assets 1,311,057
Property and equipment, net 1,857,338
Intangible assets, net 105,743
Other assets 29,812
------------
Total assets $ 3,303,950
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 387,338
Accrued expenses 249,144
Deferred revenue 381,804
Capital lease obligations 4,858
------------
Total current liabilities 1,023,144
Capital lease obligations 11,132
------------
Total liabilities 1,034,276
Commitments and contingencies --
Stockholders' equity:
Preferred stock, par value $0.0001; authorized 5,000,000 shares;
none issued and outstanding --
Common stock, par value $0.0001; authorized 10,000,000 shares;
issued and outstanding 6,647,776 shares at June 30, 2001 665
Additional paid-in capital 10,427,678
Shareholder receivable (46,351)
Accumulated deficit (8,112,318)
------------
Total stockholders' equity 2,269,674
------------
Total liabilities and stockholders' equity $ 3,303,950
============
The accompanying notes are an integral part of these interim financial
statements.
3
AdStar, Inc.
Statements of Operations
For the three-month and six-month periods
Ended June 30, 2000 and 2001 (unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Revenues $ 321,338 $ 531,551 $ 713,186 $ 971,794
Cost of revenues 229,992 196,495 537,723 371,647
----------- ----------- ----------- -----------
Gross profit 91,346 335,056 175,463 600,147
Selling expenses 309,678 170,255 554,821 337,929
Development costs 460,339 91,407 760,804 293,850
Administrative expenses 643,480 446,160 1,174,295 1,021,669
----------- ----------- ----------- -----------
Loss from operations (1,322,151) (372,766) (2,314,457) (1,053,301)
Interest income (expense), net 13,120 15,564 32,297 18,965
----------- ----------- ----------- -----------
Loss before taxes (1,309,031) (357,202) (2,282,160) (1,034,336)
Provision for income taxes 200 518 400 2,050
----------- ----------- ----------- -----------
Net loss $(1,309,231) $ (357,720) $(2,282,560) $(1,036,386)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (0.46) $ (0.06) $ (0.81) $ (0.17)
Weighted average number of shares - basic and
diluted 2,832,150 6,269,210 2,829,673 6,050,754
The accompanying notes are an integral part of these interim financial
statements.
4
AdStar, Inc.
Statements of Cash Flows
For the six-month periods ended June 30, 2000 and 2001 (unaudited)
2000 2001
----------- -----------
Cash flows from operating activities:
Net loss $(2,282,560) $(1,036,386)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 80,656 147,188
Stock based charges 136,922 54,520
Loss on disposal of fixed assets -- 16,833
Changes in assets and liabilities:
Accounts receivable 272,780 (153,653)
Prepaids and other assets (5,775) 35,548
Accounts payable (859,247) 88,791
Accrued expenses (211,717) (206,758)
Deferred revenue (29,531) 148,776
Interest payable 45,532 --
----------- -----------
Net cash used in operating activities (2,852,940) (905,141)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (402,041) (412,217)
Proceeds from disposal of fixed assets -- 25,661
Repayment of shareholder note receivable -- 4,500
----------- -----------
Net cash used in investing activities (402,041) (382,056)
----------- -----------
Cash flows from financing activities:
Proceeds from leasing of property and equipment 68,303 --
Net proceeds from sale of stock -- 365,333
Repayment of note payable (749,466) --
Principal repayments on capital leases (3,358) (44,613)
----------- -----------
Net cash from (used in) financing activities (684,521) 320,720
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,939,502) (966,477)
Cash and cash equivalents at beginning of period 5,602,493 1,606,999
----------- -----------
Cash and cash equivalents at end of period $ 1,662,991 $ 640,522
=========== ===========
Supplemental cash flow disclosure:
Taxes paid 5,096 4,565
Interest paid 9,413 2,645
Noncash investing and financing activities:
Conversion of notes payable and accrued interest to common stock -- 1,186,965
The accompanying notes are an integral part of these interim financial
statements.
5
AdStar, Inc.
Notes To Interim Financial Statements
(Unaudited)
1. General
Effective July 11, 2001, AdStar.com, Inc filed an amendment to the
Certificate of Incorporation to change its name to AdStar, Inc. (the
"Company"). The Company's shareholders and board of directors previously
approved the name change. The interim financial statements for the Company
have been prepared in accordance with generally accepted accounting
principles 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 generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. For further information, refer to the
company's Annual Report on Form 10-KSB for the year ended December 31,
2000.
2. Summary of Significant Accounting Policies
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts
receivable. Also, at times, cash balances held in financial institutions
are in excess of FDIC insurance limits.
For the three months and six months ended June 30, 2001 and 2000, no
customer accounted for more than 10% of the Company's revenues. At June
30, 2001 three customers in the aggregate accounted for 29% of the
Company's accounts receivable. The majority of the Company's customers
have historically consisted of newspapers and publishers of classified
advertisements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue from the sale of its software upon delivery
and customer acceptance and when collection of the resulting receivable is
probable. Maintenance, license fees and user support fees are recognized
ratably over the period to which they relate. To the extent that customers
make advance payments for installation fees, license fees, user support
6
or maintenance fees, the amount received is deferred until the revenue has
been earned. Revenues are recorded net of any discounts.
In June 1999, the Company introduced a web-based product that permits
advertisers to plan, schedule, compose and purchase advertising from many
print and on-line publishers. The Company recognizes revenues on a
per-transaction basis, when the ad is placed through the Company's system
and the collection from the advertiser of the resulting receivable is
probable.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin ("SAB) No. 101, "Revenue Recognition" and in July
2000, the Emerging Issues Task Force ("EITF") issued EITF Abstract No.
99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent"
("EITF 99-19") which provided further guidance to SAB 101 on revenue
recognition in certain circumstances. Prior to the introduction of EITF
99-19 the manner in which the Company recognized revenues depended on the
service sold. With respect to ads composed directly on the Company's web
site, and where the Company had a contract with the publisher to process
the transactions and deliver the ads, the amount billed to the customer by
the Company was recognized if, and when, the Company accepted the
customer's ad and charged the customer's credit card. The customer was
charged for the cost of the ad, which was then remitted to the publisher,
less a transaction fee of up to 35% for the Company's service. The Company
in these instances recognized revenue on the gross amount billed to the
customer. Credit card and debit card processing fees and amounts remitted
to the publisher on these transactions were recognized as a cost of sale.
With respect to ads placed through the Company's web site, and where the
Company had a contract with the publisher for delivery of the ads only,
the publisher collected the revenues and remitted a transaction fee to the
Company. In these instances, these net transaction fees were recognized
when the ad was placed through the Company's system and the collection
from a publisher of the resulting receivable was probable. In addition,
where the Company created a private label site for a publisher, the
Company would recognize revenue based on the amount received from the
advertiser and remit the amount collected from the customer less
transaction fees to the publisher. Following the introduction of the EITF
99-19, management believes that the Company is required to change the
manner in which they recognize revenue from transactions on a gross basis
to a net basis. Management now believes that under the provisions of EITF
99-19, the Company is in substance acting as an agent for the publisher
and should recognize all transaction revenues on a net basis, based on the
net transaction fees. In the fourth quarter of 2000, the comparative
financial statements were reclassified to reflect a net basis of
presentation. The reclassification did not affect net loss for the periods
presented.
The impact on the Company's quarterly financial statements for the
three-month and six-month periods ended June 30, 2000 is summarized below:
For the three months ended For the six months ended
June 30, 2000 June 30, 2000
------------------------------- --------------------------------
As Previously As Previously
Reported As Reclassified Reported As Reclassified
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- --------------- -------------- ---------------
Net Revenues 621,364 321,338 1,192,093 713,186
Cost of Revenues 530,018 229,992 1,016,630 537,723
------- ------- --------- -------
Gross Margin 91,346 91,346 175,463 175,463
7
Research and Development Costs
Costs incurred in the research and development of products are expensed as
incurred.
Computation of Earnings Per Share
Basic earnings (loss) per share is computed by dividing the net income
(loss) 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) 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-month and six-month periods ended June 30, 2000 and 2001,
diluted earnings (loss) per share does not include 1,788,164 and 2,472,453
options and warrants to purchase common stock, as their inclusion would be
antidilutive.
Reclassifications
Certain reclassifications have been made to prior period amounts to
conform to current period presentation.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe
that the adoption of SFAS 141 will have a significant impact on its
financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the identification of reporting
units for purposes of assessing potential future impairments of goodwill.
SFAS 142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is
presently evaluating the impact of adopting SFAS 142 on its financial
statements.
8
3. Notes Payable
On February 16, 2001, the Company issued 593,483 of its authorized
but unregistered shares of common stock in payment of principal and
accrued interest totaling $1,186,965 to satisfy a Note, dated
October 21, 1999, payable to Paulson Capital Corporation.
4. Issuance of Common Stock
On April 6, 2001, the Company sold 400,000 units at a price of $1.00
per unit. Each unit comprises two shares of the Company's authorized
common stock and one warrant to purchase an additional share of
common stock at $1.07 per share. The warrants expire on April 5,
2006 and have anti-dilution protection against capital changes.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and related notes to
the financial statements included elsewhere in this quarterly report. Certain
statements in this discussion and elsewhere in this report constitute
forward-looking statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934 and are subject to the "Risk Factors" included in our
Annual Report on Form 10-KSB for our fiscal year ended December 31, 2000 and in
our registration statement on form SB-2 filed with the Securities and Exchange
Commission on September 25, 2000. Because this discussion involves risk and
uncertainties, our actual results may differ materially from those anticipated
in these forward-looking statements.
Overview
Our second quarter 2001 results continue to demonstrate
quarter-over-quarter growth as both our revenue and gross profit increased
significantly. We are beginning to see our high margin web-based products
demonstrate acceptance in the marketplace, which translates to greater revenue
and margins. Revenue from our web-based Application Service Provider ("ASP")
business is continuing to grow through both increases in the number of
publications served and an increase in the volume of transactions handled for
those publications. During the second quarter 2001, we processed in excess of
25,000 transactions through our web site generating gross billings in excess of
$1,992,000. For the similar quarter in 2000, a total of 14,600 transactions were
processed through our web site generating gross billings in excess of
$1,234,000. For the six-month period ended June 30, 2001 a total of 41,000
transactions were processed through our web site generating gross billings in
excess of $3,310,000. For the similar six-month period in 2000, a total of
21,000 transactions were processed through our web site generating gross
billings in excess of $1,798,000.
Given the initial success of our ASP product, we began focusing on
developing new, complementary products as an adjunct to our core software.
During this past quarter we successfully began testing and deploying the
software we developed for eBay, Inc. which provides the technology behind their
new "eBay Seller Classifieds" program. We are continuing to develop additional
products that we believe have the potential to become significant revenue
generating lines of business in future
9
quarters. All of these activities substantiate the business plan developed
earlier this year. We are confident that we will be able to capitalize on our
proprietary software products, extensive industry knowledge, and unique position
within the marketplace to achieve profitability.
To ensure sufficient working capital is available, in April 2001, we
closed an equity agreement with four accredited investors for the sale, in the
aggregate, of 400,000 units at a price of $1.00 per unit. Each unit comprises
two shares of the Company's authorized but unregistered common stock and one
warrant to purchase an additional share of Common Stock at a per share price of
$1.07. The warrants expire on April 5, 2006 and have anti-dilution protection
against capital changes.
We are now focusing our resources in the areas we believe will provide the
greatest short-term revenue opportunities. We feel that offering the web-based
software engine that we developed for our portal, on a "private label" basis, to
print publications offers a great opportunity to generate additional revenue.
This product is being offered as an ASP, and therefore we will host and manage
web-based classified ad-taking for major metropolitan newspapers. This product
is a private label version of Advertise123.com for individual publications and
will allow these publications to generate revenue from their web sites.
Prior to the development of our web business, revenues had been generally
sufficient to support our historic business. In developing our web-based system
we began to incur expenses in 1998 that could not be offset by the revenues
generated by our historic business. These expenses caused us to incur losses in
1998, 1999, 2000 and the six months ended June 30, 2001. Our future success is
dependent upon our ability to substantially grow revenues to the point where we
can fund the current level of operations. To this end, our plans include
expanding the products and services offered to our customers by building on our
(i) proprietary software processes, (ii) established customer relations, and
(iii) unique position within the industry. We feel that there is significant
opportunity to increase revenues by offering the web software and customer
support services that we had initially developed for ourselves, to print
publications.
In addition to actively developing new revenue sources, we have also
reduced our operating costs and significantly curtailed any capital investments
during 2001. In January 2001, we further reduced our workforce from 36 to 23,
decreased expenditures associated with developing new web-based products, and
implemented operating efficiencies to further reduce costs. We continue to
curtail expenditures on additional web development, except for targeted service
offerings that will generate additional revenue. Given these initiatives, we
expect to systematically reduce our monthly burn rate through December 2001,
however there can be no assurance that we will be successful in these plans.
Description of Business
We began operations in 1986, and have since grown into the largest
provider of remote entry for classified ads into newspapers in the United
States. Our historical business provided licensed software, maintenance and
customer support to major metropolitan newspapers that enables advertising
agencies and resellers ("professional advertisers") to electronically input,
format and price ads. It is based on a software system that we developed and
installed in more than 30 newspapers and more than 1,400 advertising agencies.
Using this system, we have become the largest provider of remote entry software
services for classified ads into newspapers in the United States. We have
estimated that in 2000, more than $300 million of classified ads were placed
using our historical system. We believe we have enjoyed a leadership position in
our historical business because of the extremely difficult process of properly
formatting, pricing and scheduling an ad and finding a way to send this ad to a
print classified system without seriously impeding the processing demands of
both the automated systems and human processes involved.
10
In 1998, we identified technological innovations available through the
Internet and internet technology that could greatly enhance our software tools
and services. In addition, this same technology would allow us to open up the
process we support so as to make it available to the general public. Over the
last two years we have designed, developed and marketed our web-based product,
Advertise123.com, a one-stop marketplace on the web for advertisers to buy
classified ads. We enable advertisers to plan, schedule, compose and purchase
classified advertising from over 120 print and on-line publishers, using one
simple interface. Our service permits professional advertisers and the general
public, to create and submit to one or multiple publishers any number of ads, 24
hours a day, seven days a week, using any recognized web browser. In 1999 we
began the transition from a software tools provider to an Internet marketplace
for print and on-line classified advertising. We received our first transaction
fee from this Internet business in June 1999. At that time we had one
publication available on our site. We now have over 300 print publications and
newspaper networks, and 30 on-line publications available on the site, and have
coverage in the top 100 designated market areas (DMAs) in the US.
The web-based services that we have developed permit us to enhance the
services available to newspapers and other publishers and to professional
advertisers, while at the same time allowing us to expand our market to include
the general public. For publishers, the web-based ASP offers them the ability to
generate incremental revenue through their web sites. As an ASP, we contract
with publishers to design, implement, host, and manage the on-line ad-taking
capabilities of that newspaper's web sites, thus allowing our customers to
generate incremental transactional revenue from web-site visitors. We provide
all the technical and application expertise, support, and security measures that
the publisher needs to get an application up and generating revenue for them in
a short time. For professional advertisers, our web-based service broadens
substantially the range of publishers accessible through our system while
continuing to support the direct access provided by our historical business. For
the general public, our web-based system offers a complete, interactive and easy
to use method to plan, schedule, compose, price and pay for ads in a broad range
of print and on-line publications.
Results of Operations
The following table sets forth the results of operations expressed as a
percentage of revenues:
Three months ended Six months ended
June 30, June 30,
--------------------------------------------
2000 2001 2000 2001
---- ---- ---- ----
Revenues 100% 100% 100% 100%
Cost of revenues 72% 37% 75% 38%
--- --- --- ---
Gross profit 28% 63% 25% 62%
Selling expense 96% 32% 78% 35%
Administrative expenses 200% 84% 165% 105%
Development expenses 143% 17% 107% 30%
--- --- --- ---
Loss from operations -411% -70% -325% -108%
Interest income (expense) 4% 3% 5% 2%
--- --- --- ---
Loss before taxes -407% -67% -320% -106%
Provision for income taxes -- -- -- --
--- --- --- ---
Net loss -407% -67% -320% -106%
11
Three-Month and Six-Month Periods Ended June 30, 2001 and 2000
Revenues. Net revenues for the second quarter 2001 increased 65% to $532,000
compared to second quarter 2000 net revenues of $321,000. This increase resulted
from growth in the number of publications utilizing our web-based infrastructure
and an increase to the number of completed new software installations and
modifications. Net revenues for the six-month period ended June 30, 2001
increased 36% to $972,000 compared to $713,000 for the six-month period ended
June 30, 2000. Our fee-based revenues grew 64% to $404,000 during the second
quarter 2001, from $247,000 in the second quarter 2000. This increase includes
$68,000 in revenue from our new web-based ad-taking ASP product launched during
the first quarter 2001, $60,000 in revenue from new remote ad entry software
customers, and $29,000 from increased activity at our web-based portal,
Advertize123.com. Fee-based revenues for the six-month period ended June 30,
2001 grew 55% to $748,000 from $482,000 for the six-month period ended June 30,
2000. This increase includes $105,000 in revenue from our new web-based
ad-taking ASP product launched during the first quarter 2001, $80,000 in revenue
from new remote ad entry software customers, and $81,000 from increased activity
at our web-based portal, Advertize123.com. Revenue from completed software
installations and hardware sales increased 71% during the second quarter 2001 to
$128,000 from $75,000 in the second quarter 2000. For the six-month period ended
June 30, 2001, revenue from completed software installations and hardware sales
was down 3% to $223,000 compared to $231,000 for the six-month period ended June
30, 2000. This decrease is attributable to a decline in our low margin hardware
re-sale activity which declined by $33,000 during the first half of the year. We
expect that revenue from our fee-based ASP product will continue to increase as
we increase the number of papers for which we manage their web-based ad taking
function and as transaction volumes on those web sites increase.
Cost of Revenues. Cost of revenue consists primarily of the costs to configure
and install the AdStar software into the publishing systems of newspapers, costs
to configure end-user software for the newspaper's advertiser clients, cost to
install our web-based ad-taking software, costs associated with operating our
web site and web-based products, and costs to provide customer training and
end-user support. These costs decreased to approximately $196,000 for the second
quarter of 2001 compared with $230,000 for the second quarter 2000. Cost of
revenues for the six-month period ended June 30, 2001 decreased to $372,000 from
$538,000 for the six-month period ended June 30, 2000. Our Gross Margin
increased to 63% during the second quarter 2001, from 28% during the second
quarter 2000. For the six-month period ended June 30, 2001, our Gross Margin
increased to 62% from 25% for the six-month period ended June 30, 2000. This
large decrease in cost of revenue is a direct result of system efficiencies
instituted during the first quarter of 2001 that allowed us to reduce staffing
levels in the web-site support and customer support areas. We were able to
reduce staffing levels by streamlining the web-based ad-taking software,
automating several processes that had been manually performed during 2000, and
instituting operating efficiencies for software installation. Personnel expenses
associated with costs of revenue decreased 38% to $133,000 during the second
quarter 2001 from $182,000 for the second quarter 2000. For the six-month period
ended June 30, 2001, personnel expenses associated with costs of revenue
decreased 35% to $254,000 from $393,000 for the six-month period ended June 30,
2000. Given our current level of web automation, we will be able to manage
significantly greater transaction volumes with limited increases to our current
staffing levels. Accordingly, we expect a corresponding increase to our gross
margin as our revenues increase.
Selling Expense. Selling expense consists primarily of direct charges for
advertising, sales promotion, marketing, and trade shows, as well as the cost
for business development. Selling expense decreased 45% during the second
quarter 2001 to $170,000 from $310,000 during the second quarter 2000. For the
six-month period ended June 30, 2001, selling expense decreased 39% to $338,000
from $555,000 for the six-month period ended June 30, 2000. As a result of staff
reductions, the personnel related expenses decreased 17% to $134,000 during the
second quarter 2001 from $161,000 for the second quarter 2000. For the six-month
period ended June 30, 2001, personnel related expenses
12
decreased 16% to $280,000 from $334,000 for the six-month period ended June 30,
2001. Direct charges decreased 75% to $36,000 during the second quarter 2001
from $149,000 during the second quarter 2000. For the six-month period ended
June 30, 2001, direct charges decreased to $58,000 from $221,000 for the
six-month period ended June 30, 2000. Direct charges consisted mainly of print
and on-line advertising and trade shows. The significant decrease is a direct
result of our shift in product line emphasis. As our selling focus is no longer
on our web portal business, we no longer target our advertising and promotions
towards the general public. Consequently, direct advertising and promotional
costs decreased significantly during the first two quarters of 2001, because we
now to focus our advertising efforts on activities that target the publishing
trade. We do not anticipate the need to increase selling expenses significantly
in future quarters, as we will no longer target our advertising towards the
general public.
Development Expenses. Development expenses consist of expenses to identify
functional requirements, to create content, and to populate databases for our
Advertise123.com web site and the private label sites, and to plan, identify and
conceptually design the required technical infrastructure. The costs consist
primarily of personnel related expenses for technical and design personnel and
consultants. Development expense for the second quarter 2001 decreased 80% to
$91,000 from $460,000 during the second quarter 2000. For the six-month period
ended June 30, 2001, development expenses decreased 61% to $294,000 from
$761,000 for the six-month period ended June 30, 2000. The overall decrease
resulted from our shift in focus from performing the conceptual design and
feasibility studies for new web site functionality to actually creating this
functionality and performing site maintenance and routine fixes. The personnel
related expenses decreased 51% during the second quarter 2001 to $86,000 from
$175,000 during the second quarter 2000. For the six-month period ended June 30,
2001, personnel related expenses decreased 4% to $286,000 from $298,000 for the
six-month period ended June 30, 2000, and we eliminated $344,000 of expenses
incurred in 2000 related to the cost of outside consultants, which are no longer
utilized. We eliminated the use of design consultants, and instead have hired
technical staff who are able to perform the same functions, as needed, at a
reduced cost, as well as perform the maintenance and routine fixes required by
the web site.
Administrative Expenses. Administrative expense consists primarily of the cost
of executive, administrative, technical operations, accounting and finance
personnel. Administrative expenses decreased 31% during the second quarter 2001
to $446,000 from $643,000 during the second quarter 2000. For the six-month
period ended June 30, 2001, administrative expenses decreased 13% to $1,022,000
from $1,174,000 for the six-month period ended June 30, 2000. Personnel related
expenses incurred during the second quarter 2001 decreased 42% to $163,000
compared with $281,000 for the second quarter 2000. For the six-month period
ended June 30, 2001, personnel related expenses decreased 19% to $461,000 from
$571,000 for the six-month period ended June 30, 2000.
Interest Income (Expense), Net. Interest income decreased 47% during the second
quarter 2001 to $16,000 from $30,000 during the second quarter 2000. For the
six-month period ended June 30, 2001, interest income decreased 59% to $30,000
from $74,000 for the six-month period ended June 30, 2000. The decrease for the
quarter and six-month period is attributable to AdStar's having less excess cash
available to invest in short-term time deposits and money market accounts at
commercial banks, as well as a reduction in short-term interest rates. Interest
expense decreased 94% during the second quarter 2001 to $1,000 from $17,000
during the second quarter 2000. For the six-month period ended June 30, 2001,
interest expense decreased 74% to $11,000 from $42,000 for the six-month period
ended June 30, 2000. The decrease for the quarter and the six-month period
resulted from retiring the 6% $1,100,000 note payable through issuing common
stock in February 2001.
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Liquidity and Capital Resources
As of June 30, 2001, we had cash and cash equivalents of approximately
$641,000. Net cash used in operations was approximately $905,000 for the
six-month period ended June 30, 2001 compared with $2,853,000 for the comparable
2000 period. The favorable difference is due primarily to a smaller net loss
from operations during the six-month period ended June 30, 2001, combined with
an increase in deferred revenue. To provide working capital, in April 2001 we
raised a net of $365,000 through the private placement discussed below. Also
during the six-month period ended June 30, 2000, cash of $688,000 was used to
reduce accounts payable and accrued expenses largely attributable to the costs
related to our initial public offering completed in December 1999. Net cash used
in investing activities decreased to $382,000 in the six-month period ended June
30, 2001 compared with $402,000 in the same period in 2000. Expenditures for
creating increased functionality for our online business and web site
infrastructure were partially offset by the proceeds from a sale of excess
office furniture. Net cash from financing activities was approximately $321,000
during the six-month period ended June 30, 2001 compared to net cash used in
financing activities of $685,000 in the comparable period in 2000. The activity
in the six-month period ended June 30, 2001 reflects $43,000 in repayment of the
equipment financing and $365,000 in net proceeds from the private placement
discussed below. In January 2000, the Company paid in full a note in the
principal amount of $749,466 bearing interest at 10% per annum.
On April 6, 2001, we sold 400,000 units at a price of $1.00 per unit to
four accredited investors. Each unit comprises two shares of the Company's
authorized but unregistered common stock and one warrant to purchase an
additional share of common stock at a per share price of $1.07. The warrants
expire on April 5, 2006 and have anti-dilution protection against capital
changes. The common stock issued as part of the units sold was exempt from
registration, as it was a nonpublic offering made pursuant to Section 4(2) of
the Act.
Although through various expense cutbacks we had reduced our monthly burn
rate (revenues less total cash expenditures) to $150,000 by the end of first
quarter 2001, our burn rate averaged $167,000 per month during the second
quarter 2001 due to a delay in the anticipated launch date of our on-line job
posting service. The launch delay postponed the timing of revenues associated
with this new service. By generating increased revenue from our ASP business and
new products such as the on-line job posting service, we plan to further reduce
our monthly burn rate though the third and fourth quarters of 2001.
We anticipate that our revenues will trend upward as we deploy our new
products, sign-up additional publications for our ASP business, and continue to
experience growth in web-site transaction volume. Increases in revenue may not
occur in a timely manner and may not be sufficient to cover our working capital
needs. Adequate funds may not be available when needed 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 and adverse effect on
our financial position, results of operations and cash flows.
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PART II
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities.
The Company established a vendor compensation plan whereby it may
compensate vendors in shares of its common stock in lieu of cash. Under the
plan, 200,000 shares are available for issuance. In the three-month period ended
June 30, 2001, 21,412 shares were issued to vendors under the plan relying upon
the exemption under section 4(2) of the Securities Act of 1933 and which
represented compensation for the period of $18,030. The vendors have taken the
shares for investment.
On February 16, 2001, the Company issued 593,483 of its authorized but
unregistered shares of its common stock to satisfy a Note, dated October 21,
1999, payable to Paulson Capital Corporation in payment of principal and accrued
interest totaling $1,186,965. The issuance was exempt from registration, by
reason of it being a nonpublic offering, made pursuant to Section 4(2) of the
Act.
On April 6, 2001, the Company entered into an agreement with four
accredited investors for the sale, in the aggregate, of 400,000 units at a price
of $1.00 per unit. Each unit comprises two shares of the Company's authorized
but unregistered common stock and one warrant to purchase an additional share of
Common Stock at a per share price of $1.07. The warrants expire on April 5, 2006
and have anti-dilution protection against capital changes. The common stock
issued as part of the units sold was exempt from registration, as it was a
nonpublic offering, made pursuant to Section 4(2) of the Act.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Shareholders Meeting on June 7, 2001 in which
the holders of 5,964,358 votes were present in person or by proxy. At the
meeting, the following matters were submitted to a vote of the shareholders:
1) The election of directors. The following candidates were nominated for
election to the Company's Board of Directors:
Leslie Bernhard
Eli Rousso
Jeffrey Baudo
Arthur Salzfass
Thomas Taulli
Chris A. Karkenny
All six nominees were elected to the Board. Each nominee received
5,964,358 votes for and no votes were withheld. Those individuals represent the
entire Board of Directors as no other directors had terms continuing after the
meeting.
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2) The approval of the Company's Auditors for the year ending December 31,
2001. The shareholders approved PricewaterhouseCoopers, LLP as the Company's
auditors with 5,964,358 votes for and no votes against or abstaining.
3) The approval of an amendment to the Company's certificate of
incorporation to increase the number of authorized shares of the Company's
common stock from 10,000,000 to 20,000,000. The shareholders approved the
amendment with 5,956,708 votes for, 4,650 votes against and 3000 votes
abstaining.
4) The approval of an amendment to the Company's certificate of
incorporation to change the Company's name from "AdStar.com, Inc." to "AdStar,
Inc." The shareholders approved the amendment with 5,964,358 votes for and no
votes against or abstaining.
No other matter was submitted to a vote of security holders.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
None.
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, 2001 /s/ LESLIE BERNHARD
--------------- ----------------------------------------
President & CEO
Date August 14, 2001 /s/ CRIS HOPKINS
--------------- ----------------------------------------
Vice President, Finance & CAO
16