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 September 30, 2001
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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) (IRS Employer Identification No.)
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 October 31, 2001 the Issuer had
outstanding 6,668,726 shares of its common stock, including 20,950 shares
issuable pursuant to its vendor compensation plan.
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
September 30, 2001
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
(Unaudited)
Balance Sheet -September 30, 2001 3
Statements of Operations
Three-Month and Nine-Month Periods
Ended September 30, 2000 and 2001 4
Statements of Cash Flows
Nine-Month Periods Ended
September 30, 2000 and 2001 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 10
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8K 17
SIGNATURES 17
2
ADSTAR, INC.
BALANCE SHEET
SEPTEMBER 30, 2001 (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 377,537
Restricted cash 10,520
Accounts receivable, net of $20,000
allowance for doubtful accounts 427,971
Prepaid and other current assets 78,687
------------
Total current assets 894,715
Property and equipment, net 2,013,039
Intangible assets, net 96,728
Other assets 24,863
------------
TOTAL ASSETS $ 3,029,345
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 363,813
Accrued expenses 228,825
Deferred revenue 381,592
Capital lease obligations 5,008
------------
Total liabilities 979,238
Total current liabilities 9,823
------------
Total liabilities 989,061
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 20,000,000 shares;
6,663,296 shares issued and outstanding 666
Additional paid-in capital 10,439,947
Stockholder receivable (44,823)
Accumulated deficit (8,355,506)
------------
Total stockholders' equity 2,040,284
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,029,345
============
The accompanying notes are an integral part of these interim financial
statements.
3
ADSTAR, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2000 AND 2001 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Revenues $ 360,420 $ 640,462 $ 1,073,606 $ 1,612,257
Cost of revenues 204,760 205,113 742,483 576,761
----------- ----------- ----------- -----------
GROSS PROFIT 155,660 435,349 331,123 1,035,496
Selling expenses 432,306 174,056 1,119,301 511,984
Administrative expenses 440,080 411,991 1,482,940 1,433,661
Development costs 281,533 98,175 1,042,337 392,025
----------- ----------- ----------- -----------
Loss from operations (998,259) (248,873) (3,313,455) (1,302,174)
Interest income (expense), net (771) 7,173 32,265 26,138
----------- ----------- ----------- -----------
Loss before taxes (999,030) (241,700) (3,281,190) (1,276,036)
Provision for income taxes 200 1,489 600 3,539
----------- ----------- ----------- -----------
NET LOSS $ (999,230) $ (243,189) $(3,281,790) $(1,279,575)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (0.34) $ (0.04) $ (1.14) $ (0.20)
Weighted average number of shares -
basic and diluted 2,962,110 6,654,985 2,874,141 6,254,378
The accompanying notes are an integral part of these interim financial
statements.
4
ADSTAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 2001 (UNAUDITED)
2000 2001
----------- -----------
Cash flows from operating activities:
Net loss $(3,281,790) $(1,279,575)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 115,864 237,238
Stock-based charges 198,327 66,909
Loss on disposal of fixed assets -- 20,814
Changes in assets and liabilities:
Accounts receivable 246,989 (142,083)
Prepaid and other assets 1,381 93,483
Accounts payable (942,969) 65,264
Accrued expenses 137,016 (227,073)
Deferred revenue (12,218) 147,164
----------- -----------
Net cash used in operating activities (3,537,400) (1,017,859)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (894,744) (653,935)
Proceeds from disposal of fixed assets -- 26,661
Repayment of shareholder note receivable -- 6,750
----------- -----------
Net cash used in investing activities (894,744) (620,524)
----------- -----------
Cash flows from financing activities:
Decrease in restricted cash -- 89,480
Proceeds from leasing of property and equipment 68,303 --
Proceeds from secondary public offering 2,836,230 365,214
Repayment of notes payable (749,466) --
Principal repayments on capital leases (8,733) (45,773)
----------- -----------
Net cash from financing activities 2,146,334 408,921
----------- -----------
Net decrease in cash and cash equivalents (2,285,810) (1,229,462)
Cash and cash equivalents at beginning of period 5,602,493 1,606,999
----------- -----------
Cash and cash equivalents at end of period $ 3,316,683 $ 377,537
=========== ===========
Supplemental cash flow disclosures:
Taxes paid 5,096 4,565
Interest paid 12,673 2,645
Non cash 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") and increase the number of shares of authorized common stock to
20 million from 10 million. The Company's shareholders and board of
directors previously approved the name change and the increase in the
number of shares of authorized common stock. 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 nine-month
periods ended September 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 nine months ended September 30, 2001 and 2000, no
customer accounted for more than 10% of the Company's revenues. At
September 30, 2001 three customers in the aggregate accounted for 48% 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 customization and installation of
its software on a percentage of completion method when collection of the
resulting receivable is probable. Maintenance, license fees and user
support fees are recognized ratably over the period to
6
which they relate. To the extent that customers make advance payments for
customization and installation work, license fees, user support 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.
7
The impact on the Company's quarterly financial statements for the
three-month and nine-month periods ended September 30, 2000 is summarized
below:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------------------------ ------------------------------------
AS PREVIOUSLY AS RECLASSIFIED AS PREVIOUSLY AS RECLASSIFIED
REPORTED REPORTED
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------------------------ ------------------------------------
NET REVENUES $776,985 $360,420 $1,969,078 $1,073,606
COST OF REVENUES 621,325 204,760 1,637,955 742,483
-------- -------- ---------- ----------
GROSS MARGIN $155,660 $155,660 $ 331,123 $ 331,123
======== ======== ========== ==========
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 nine-month periods ended September 30, 2000 and
2001, diluted earnings (loss) per share do not include the effect of
2,036,838 and 2,472,453 options and warrants to purchase common stock,
respectively, as their inclusion would be antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to
conform with 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
8
("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 does not believe that
the adoption of SFAS 142 will have a significant impact on its financial
statements.
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 and received net proceeds of $365,000. 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.
5. SUBSEQUENT EVENTS
On October 3, 2001, the Company initiated a small private placement
offering whereby accredited investors may purchase shares of its
authorized but unregistered common stock at $0.50 per share, with minimum
purchases of 50,000 shares or $25,000 per investor. The Company is
offering up to 1,000,000 shares but may sell a lesser number. The common
stock to be issued will be exempt from registration, as it is a nonpublic
offering, made pursuant to Sections 4(2) and 4(6) of the Act.
On October 23, 2001, the Company entered into a loan and security
agreement with a financial institution to establish a line of credit. The
maximum revolving credit line is $500,000 and is secured by the Company's
accounts receivable. The Company may borrow up to 80% of the eligible
accounts receivable as defined in the terms of the agreement. Interest is
payable on the balance at a rate of 3 percentage points above the Prime
Rate.
9
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 S-3 FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON MAYT 10, 2000. BECAUSE THIS DISCUSSION INVOLVES RISK AND
UNCERTAINTIES, OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
Our third quarter 2001 results continue to demonstrate
quarter-over-quarter growth as both our revenue and gross profit increased
significantly. Revenue from our higher margin web-based Application Service
Provider ("ASP") business is continuing to expand through both increases in the
number of publications served and increases in the volume of transactions
processed for each publication. In July 2001, we entered into an ASP agreement
with Knight-Ridder Corporation to install and manage the web-based classified ad
taking process for several of their newspaper properties. We immediately focused
our efforts on customizing and installing web abilities for the selected
newspapers, which we will then launch by the end of this year. During the third
quarter 2001, we processed 26,000 transactions through our web site generating
gross billings on behalf of our customers in excess of $2,145,000. For the same
quarter in 2000, a total of 22,000 transactions were processed through our web
site generating gross billings on behalf of our customers in excess of
$1,740,000. For the nine-month period ended September 30, 2001 a total of 65,000
transactions were processed through our web site generating gross billings on
behalf of our customers in excess of $5,350,000. For the same nine-month period
in 2000, a total of 42,000 transactions were processed through our web site
generating gross billings on behalf of our customers in excess of $3,400,000.
Given the initial success of our ASP product, we are continuing the
research efforts to identify additional product offerings that we believe have
the potential to become significant revenue generating lines of business in
future quarters. 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.
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 nine months ended September 30, 2001.
Our future success is dependent upon our ability to substantially grow revenues
to the point where we can fund our 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 capital investments
during 2001. We recently reduced our workforce to 20,
10
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 June 2002, 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 software for delivering classified ads into newspapers
in the United States. Our historical business product included licensing our
proprietary software, providing associated maintenance and supplying customer
support to major metropolitan newspapers. Our software has enabled advertising
agencies and resellers ("professional advertisers") to electronically input,
format and price classified ads. We have installed our software in more than 30
US newspapers and more than 1,400 advertising agencies. Using this system, we
have become the largest provider of remote entry software services for placing
classified ads into newspapers in the United States. We estimated that in 2000,
more than $300 million of classified ads were placed using our historical
system. We believe we enjoy a leadership position in our historical business
because our software addresses the extremely difficult process of properly
formatting, pricing and scheduling a classified ad and finding a way to send
this ad to a publishing classified system without seriously impeding the
processing demands of both the newspaper's automated systems and the associated
human processes involved.
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 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 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.
11
RESULTS OF OPERATIONS
The following table sets forth the results of operations expressed as a
percentage of revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 2001 2000 2001
---- ---- ---- ----
Revenues 100% 100% 100% 100%
Cost of revenues 57% 32% 69% 36%
---- ---- ---- ----
Gross profit 43% 68% 31% 64%
Selling expense 120% 27% 104% 32%
Administrative expenses 122% 64% 138% 89%
Development costs 78% 15% 97% 24%
---- ---- ---- ----
Loss from operations -277% -39% -309% -81%
Interest income (expense) -- 1% 3% 2%
---- ---- ---- ----
Loss before taxes -277% -38% -306% -79%
Provision for taxes -- -- -- --
---- ---- ---- ----
Net loss -277% -38% -306% -79%
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
REVENUES. Net revenues for the third quarter 2001 increased 78% to $640,000
compared to third quarter 2000 net revenues of $360,000. This increase resulted
from the addition of 8 publications that utilize our web-based infrastructure
and an increase in the number of new software installations, platform upgrades,
and customized software modifications. Net revenues for the nine-month period
ended September 30, 2001 increased 50% to $1,612,000 compared to $1,074,000 for
the nine-month period ended September 30, 2000. Our fee-based revenues grew 51%
to $439,000 during the third quarter 2001, from $290,000 in the third quarter
2000. This increase includes $70,000 in revenue from our new web-based ad-taking
ASP product launched during the first quarter 2001, $83,000 in revenue from new
remote ad entry software customers, offset by a decrease of $4,000 from
decreased activity at our web-based portal, Advertise123.com. Fee-based revenues
for the nine-month period ended September 30, 2001 grew 54% to $1,187,000 from
$773,000 for the nine-month period ended September 30, 2000. This increase
includes $151,000 in revenue from our new web-based ad-taking ASP product
launched during the first quarter 2001, $178,000 in revenue from new remote ad
entry software customers, and $86,000 from increased activity at our web-based
portal, Advertise123.com. Revenue from software installations and hardware sales
increased 188% during the third quarter 2001 to $201,000 from $70,000 in the
third quarter 2000. For the nine-month period ended September 30, 2001, revenue
from software installations and hardware sales was up 41% to $425,000 compared
to $301,000 for the nine-month period ended September 30, 2000. 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 customize,
configure, and install the AdStar software into the publishing systems of
newspapers, costs to customize and configure end-user software for the
newspaper's advertiser clients, costs 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
remained flat at approximately $205,000 for the third quarter
12
of 2001 compared with the third quarter 2000. Cost of revenues for the
nine-month period ended September 30, 2001 decreased to $577,000 from $742,000
for the nine-month period ended September 30, 2000. Our Gross Margin increased
to 68% during the third quarter 2001, from 43% during the third quarter 2000.
For the nine-month period ended September 30, 2001, our Gross Margin increased
to 64% from 31% for the nine-month period ended September 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 32% to $130,000 during the third quarter 2001
from $192,000 for the third quarter 2000. For the nine-month period ended
September 30, 2001, personnel expenses associated with costs of revenue
decreased 34% to $384,000 from $585,000 for the nine-month period ended
September 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 60% during the third quarter
2001 to $174,000 from $432,000 during the third quarter 2000. For the nine-month
period ended September 30, 2001, selling expense decreased 54% to $512,000 from
$1,119,000 for the nine-month period ended September 30, 2000. As a result of
staff reductions, the personnel related expenses decreased 31% to $163,000
during the third quarter 2001 from $236,000 for the third quarter 2000. For the
nine-month period ended September 30, 2001, personnel related expenses decreased
24% to $443,000 from $584,000 for the nine-month period ended September 30,
2001. Direct charges decreased 94% to $11,000 during the third quarter 2001 from
$196,000 during the third quarter 2000. For the nine-month period ended
September 30, 2001, direct charges decreased 87% to $69,000 from $535,000 for
the nine-month period ended September 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 three quarters of
2001, as we focused 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.
ADMINISTRATIVE EXPENSES. Administrative expense consists primarily of the cost
of executive, administrative, technical operations, accounting and finance
personnel. Administrative expenses decreased 6% during the third quarter 2001 to
$412,000 from $440,000 during the third quarter 2000. For the nine-month period
ended September 30, 2001, administrative expenses decreased 3% to $1,434,000
from $1,483,000 for the nine-month period ended September 30, 2000. Personnel
related expenses incurred during the third quarter 2001 decreased 1% to $320,000
compared with $323,000 for the third quarter 2000. For the nine-month period
ended September 30, 2001, personnel related expenses decreased 12% to $1,139,000
from $1,301,000 for the nine-month period ended September 30, 2000. Direct costs
during the third quarter 2001 decreased 21% to $92,000 from $117,000 during the
third quarter 2000. Direct costs during the nine-month period ended September
30, 2001 increased 62% to $295,000 from $182,000 during the nine-month period
ended September 30, 2000. This increase is due to non-cash vendor compensation
incurred beginning in November 2000.
DEVELOPMENT COSTS. 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
13
primarily of personnel related expenses for technical and design personnel and
consultants. Development expense for the third quarter 2001 decreased 65% to
$98,000 from $282,000 during the third quarter 2000. For the nine-month period
ended September 30, 2001, development expenses decreased 62% to $392,000 from
$1,042,000 for the nine-month period ended September 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 68% during the third quarter 2001 to $91,000 from
$280,000 during the third quarter 2000. For the nine-month period ended
September 30, 2001, personnel related expenses decreased 35% to $371,000 from
$567,000 for the nine-month period ended September 30, 2000, and we eliminated
$475,000 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.
INTEREST INCOME (EXPENSE), NET. Interest income decreased 60% during the third
quarter 2001 to $8,000 from $20,000 during the third quarter 2000. For the
nine-month period ended September 30, 2001, interest income decreased 60% to
$38,000 from $95,000 for the nine-month period ended September 30, 2000. The
decrease for the quarter and nine-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 95% during the third quarter 2001 to
$1,000 from $21,000 during the third quarter 2000. For the nine-month period
ended September 30, 2001, interest expense decreased 83% to $11,000 from $63,000
for the nine-month period ended September 30, 2000. The decrease for the quarter
and the nine-month period resulted from retiring the 6% $1,100,000 note payable
through the issuance of common stock in February 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, we had cash and cash equivalents of
approximately $378,000. Net cash used in operations was approximately $1,018,000
for the first nine months of 2001 compared with $3,537,000 for the comparable
2000 period. The difference is due primarily to a smaller net loss from
operations during the nine-month period ended September 30, 2001, combined with
an increase in deferred revenue. Also during 2000, cash of $805,000 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 $621,000 in the first nine months of 2001
compared with $895,000 in the same period in 2000. Expenditures for creating
additional functionality in our online businesses and website infrastructure
were partially offset by proceeds from the sale of excess office furniture. Net
cash provided from financing activities was approximately $409,000 during the
nine-month period in 2001 compared to $2,146,000 provided by financing
activities in the comparable period in 2000. The activity in the nine-month
period ended September 30, 2001 reflects $46,000 in repayment of the equipment
financing, the reduction in restricted cash of $89,000, 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. Also in 2000 we received $2,836,000 in net proceeds from a
secondary public offering and $60,000 in net proceeds from an equipment lease
that was part of a $100,000 line of credit. At September 30, 2001, we had no
material commitments for capital expenditures.
On April 6, 2001, we sold 400,000 units at a price of $1.00 per unit to
four accredited investors. Net of issuance costs, we received proceeds of
$365,000. 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
14
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. Additionally, on October 3, 2001, we initiated a
small private placement offering whereby accredited investors may purchase
shares of our authorized but unregistered common stock at $0.50 per share, with
minimum purchases of 50,000 shares or $25,000 per investor. We are offering up
to 1,000,000 shares but may sell a lesser number. The common stock to be issued
will be exempt from registration, as it is a nonpublic offering, made pursuant
to Sections 4(2) and 4(6) of the Act.
On October 23, 2001, we entered into a loan and security agreement
with a financial institution to establish a line of credit. The maximum
revolving credit line is $500,000 and is secured by the Company's accounts
receivable. The Company may borrow up to 80% of the eligible accounts receivable
as defined in the terms of the agreement. Interest is payable on the balance at
a rate of 3 percentage points above the Prime Rate.
We are continuing to increase revenues and reduce expenses. Our monthly
burn rate (revenues less total cash expenditures) has improved from $150,000 at
the end of first quarter 2001, to an average of $115,000 per month during the
third quarter 2001. We anticipate that our revenues will trend upward as web
transactions associated with the Knight-Ridder newspapers begin, we sign-up
additional publications for our ASP business, and we continue to experience
growth in web-site transaction volume. However, 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 forced to curtail our existing
services, not be able to develop or enhance our products or services, and not be
able to 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.
RISK OF LOW-PRICED SECURITIES
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be an equity security that has a market price,
as defined, of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions, including an exception of an equity
security that is quoted on The Nasdaq Stock Market. If our shares of common
stock are removed or delisted from The Nasdaq Small Cap Market, the security may
become subject to rules that impose additional sales practice requirements on
broker-dealers who sell these securities. For transactions covered by these
rules, the broker-dealer must make a special suitability determination for the
purchaser of such securities and have received the purchaser's written consent
to the transactions prior to the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior to
the transaction, of a disclosure schedule prepared by the Securities and
Exchange Commission relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered underwriter, current quotations for the securities and, if the
broker-dealer is the sole market maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally among
other requirements, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. As such, the "penny stock" rules, in the event
the company's securities are delisted from The Nasdaq Small Cap Market, may
restrict the ability of stockholders to sell our common stock and warrants in
the secondary market.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ
Shares of our common stock are
15
currently included on the Nasdaq Small Cap Market. However, there can be no
assurance that in the future we will meet the criteria for continued listing.
Continued listing on the Nasdaq Small Cap Market generally requires that (i) we
maintain at least $2,000,000 in net tangible assets, or $35,000,000 in market
capitalization, or $500,000 in net income for either the last fiscal year, or
two out of the last three fiscal years, (ii) the minimum bid price of the common
stock be $1.00 per share, (iii) there be at least 500,000 shares in the public
float valued at $1,000,000 or more, (iv) the common stock have at least two
active market makers, and (v) the common stock be held by at least 300 holders.
On July 2, 2001, we received a letter from Nasdaq putting us on notice that the
bid price of our common stock had fallen below their $1.00 per share minimum. On
September 27, 2001, Nasdaq implemented a moratorium on the minimum bid price and
market value of public float continued listing requirements. Under this
moratorium, in effect until January 2, 2002, they have withdrawn the July 2,
2001 letter. As a result, Nasdaq will not consider our closing bid prices or
market value of public float before January 2, 2002, the date on which Nasdaq
will resume enforcement of the maintenance requirements. Currently, our common
stock is trading below $1.00. If we are unable to satisfy Nasdaq's maintenance
requirements for minimum bid price and market value of public float, for 30
consecutive days, our securities may be delisted from the Nasdaq Small Cap
Market within 90 days from the receipt of notification of such deficiency from
Nasdaq. In that event, trading, if any, in the common stock and warrants would
be conducted in the over the counter market in the so-called "pink sheets" or
the NASD's "OTC Bulletin Board." Consequently the liquidity of our securities
could be impaired, not only in the number of securities which could be bought
and sold, but also through delays in the timing of transactions, reduction in
security analysts and new media coverage of AdStar, and lower prices for our
securities than might otherwise be obtained.
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
September 30, 2001, 15,520 shares were issued to vendors under the plan relying
upon the exemption under sections 4(2) and 4(6) of the Securities Act of 1933
and which represented compensation for the period of $12,390. 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 its 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 sections 4(2) and 4(6) of the Act.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
No. Description
------- -----------
3(i) Amendment to Certificate of Incorporation, filed on July 11,
2001 with the Delaware Secretary of State
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 November 14, 2001 /s/ LESLIE BERNHARD
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President & CEO
Date November 14, 2001 /s/ CRIS HOPKINS
----------------------- -----------------------------------
Vice President, Finance & CAO
17