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 March 31, 2002
|_| 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 (IRS Employer
incorporation or organization) 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 May 9, 2002 the Issuer had
outstanding 8,249,603 shares of its common stock, including 12,425 shares
issuable pursuant to the 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
March 31, 2002
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
(Unaudited)
Balance Sheet - March 31, 2002 3
Statements of Operations
For the Three-Month Periods
Ended March 31, 2001 and 2002 4
Statements of Cash Flows
For the Three-Month Periods Ended
March 31, 2001 and 2002 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 8-K 16
SIGNATURES 17
2
AdStar, Inc.
Balance Sheet
March 31, 2002 (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,849,424
Restricted cash 45,457
Accounts receivable, net 561,383
Prepaid and other current assets 146,274
------------
Total current assets 2,602,538
Property and equipment, net 1,878,859
Intangible assets, net 77,039
Other assets 26,463
------------
Total assets $ 4,584,899
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 646,761
Accrued expenses 331,727
Deferred revenue 295,589
Capital lease obligations 5,803
------------
Total current liabilities 1,279,880
Capital lease obligations 8,907
------------
Total liabilities 1,288,787
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.0001; authorized 5,000,000 shares; 1,443,457
shares issued and outstanding; liquidation preference
of $1,795,000 144
Common stock, par value $0.0001; authorized 20,000,000 shares;
8,249,603 shares issued and outstanding 825
Additional paid-in capital 12,865,938
Stockholder receivable (41,354)
Accumulated deficit (9,529,441)
------------
Total stockholders' equity 3,296,112
------------
Total liabilities and stockholders' equity $ 4,584,899
============
The accompanying notes are an integral part of these
interim financial statements.
3
AdStar, Inc.
Statements of Operations
For the three-month periods
Ended March 31, 2001 and 2002 (unaudited)
Three months ended
March 31,
--------------------------
2001 2002
----------- -----------
Revenues $ 440,243 $ 500,210
Cost of revenues 175,152 225,716
----------- -----------
Gross profit 265,091 274,494
Selling expenses 167,674 156,202
Administrative expenses 575,509 469,589
Development expenses 202,443 219,621
----------- -----------
Loss from operations (680,535) (570,918)
Interest income (expense), net 3,401 3,673
----------- -----------
Loss before taxes (677,134) (567,245)
Provision for income taxes 1,532 1,765
----------- -----------
Net loss $ (678,666) $ (569,010)
=========== ===========
Loss per share - basic and diluted $ (0.12) $ (0.07)
Weighted average number of shares -
basic and diluted 5,510,599 8,101,789
The accompanying notes are an integral part of these
interim financial statements.
4
AdStar, Inc.
Statements of Cash Flows
For the three-month periods
Ended March 31, 2001 and 2002 (unaudited)
2001 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (678,666) $ (569,010)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 70,991 135,197
Stock-based charges 36,489 21,052
Interest on stockholder receivable -- (483)
Loss on disposal of fixed assets 16,833 --
Changes in assets and liabilities:
Accounts receivable (112,616) (351,013)
Prepaid and other assets 26,159 26,512
Accounts payable 39,642 292,493
Accrued expenses (287,373) (114,890)
Deferred revenue 172,444 142,376
----------- -----------
Net cash used in operating activities (716,097) (417,766)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (164,937) (86,482)
Proceeds from disposal of fixed assets 25,661 --
Repayment of stockholder receivable 2,250 2,250
----------- -----------
Net cash used in investing activities (137,026) (84,232)
----------- -----------
Cash flows from financing activities:
Proceeds from leasing of property and equipment -- 2,345
Net proceeds from sale of common stock -- 156,649
Net proceeds from sale of preferred stock -- 1,782,159
Principal repayments on capital leases (43,263) (1,270)
----------- -----------
Net cash provided by (used in) financing activities (43,263) 1,939,883
----------- -----------
Net increase (decrease) in cash and cash equivalents (896,386) 1,437,885
Cash and cash equivalents at beginning of period 1,606,999 411,539
----------- -----------
Cash and cash equivalents at end of period $ 710,613 $ 1,849,424
=========== ===========
Non cash investing and financing activities
Conversion of note payable and accrued interest to
common stock 1,186,966 --
Conversion of accounts payable to common stock -- 62,469
The accompanying notes are an integral part of these
interim financial statements.
5
AdStar, Inc.
Notes To Interim Financial Statements
(Unaudited)
1. General
The interim financial statements for AdStar, Inc. (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 period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002. 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/A for the year ended December
31, 2001.
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 ended March 31, 2002 and 2001, no customer accounted
for 10% of the Company's revenues. At March 31, 2002 six customers in the
aggregate accounted for 40% 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 derives revenue from several products and services as follows:
Technology services revenue - The Company receives revenue from technology
service contracts that generally contain multiple elements such as
software customization services, monthly fees and post-contract customer
support (PCS). Revenue from these arrangements is recognized in accordance
with Statement of Position ("SOP") 97-2, "Software Revenue Recognition",
and SOP 98-9, "Software Revenue Recognition with Respect to Certain
Transactions". Accordingly, revenue is allocated to each element
6
within the contract based on the relative fair values of those elements
using vendor specific objective evidence. Revenue from monthly fees and
PCS under software maintenance arrangements is based upon renewal rates
and is recognized ratably over the term of the arrangement. Revenue from
software customization services is recognized as the services are
performed, using a percentage of completion methodology based on labor
hours. The Company also provides customization services at the customers'
request and recognizes revenue as the services are performed, using a
percentage of completion methodology based on labor hours.
Areas requiring management's judgment include revenue recognition and cost
estimation on the fixed fee software customization element of the
contracts. Revenue is recognized on these contracts using a
percentage-of-completion methodology, based upon labor input measures and
an estimate of time to completion. Monthly, technical management reviews
the estimate of labor hours required to complete the customization and the
effect of any change in estimate is reflected in the period in which the
change is first known. Such changes in estimates have not been material to
our quarterly results of operations. The corresponding cost of revenue
charge is derived based upon the same labor input measurements and our
existing cost structure. If the Company does not accurately estimate the
resources required under the contract or the scope of the work to be
performed, or if the Company does not manage its projects properly within
the prescribed timeframe, future margins may be significantly and
adversely affected. If increases in projected costs-to-complete are
sufficient to create a loss contract, the entire estimated loss is charged
to operations in the period the loss first becomes known. The complexity
of the estimation process and uncertainties inherent in software
customization activities may affect the percentages derived under the
percentage-of-completion accounting method, which in turn may affect the
amounts reported in the financial statements.
ASP revenue - The Company receives revenue from providing an application
service provider ("ASP") product that allows customers to use the
Company's software applications on a "shared system" over the Internet.
This technology is a publisher-specific ad-taking Web site service that
offers visitors to a newspaper's Web page the opportunity to buy
classified ads, for both the print and/or on-line editions of the
newspaper, in real-time, on a 24/7 basis. The Company receives monthly
fees for hosting the transactions and providing customer support, and
recognizes the fees ratably over the contract period.
Web site revenue - The Company receives revenue from fees charged to
customers who transact business on the Advertise123.com Web site. This
site permits the general public to plan, schedule, compose and purchase
advertising from many print and on-line publishers. Under the guidance
provided by the Securities Exchange Commission Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition" and the Emerging Issues Task Force
("EITF") Abstract No. 99-19 "Reporting Revenue Gross as a Principal versus
Net as an Agent" ("EITF 99-19"), the Company is, in substance, acting as
an agent for the publishers and therefore recognizes as revenue only the
net fees realized on the transactions. The Company recognizes revenues on
a per-transaction basis when the ad is placed through their system and
collection from the customer is probable.
Research and Development Costs
Costs incurred in the research and development of products are expensed as
incurred.
7
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. Potential common shares are excluded from the computation
when their effect is antidilutive. For the three months ended March 31,
2001 and 2002, diluted loss per share does not include 1,925,976 and
3,226,730, respectively, of options and warrants to purchase common stock
and 0 and 1,443,457, respectively, of shares issuable upon the
conversion of Series A preferred stock to common stock, as their inclusion
would be antidilutive.
3. Significant Contracts
On March 18, 2002, the Company entered into a series of agreements with
Tribune Company ("Tribune"). In accordance with these agreements, the
Company sold 1,443,457 shares of Series A convertible preferred stock to
the Tribune Company for approximately $1.8 million. The Company has
recorded the $1.8 million investment in the Series A convertible preferred
stock at cost which approximated fair value. The rights and preferences of
the Series A preferred stock are described in Note 4 below. Additionally,
the Company agreed to develop and customize a version of its web software
applications to Tribune specifications in exchange for earning
volume-based transaction fees in the future by providing Web-based
recruitment ad sales technology to all major market Tribune newspapers and
on-line services. This customization will provide a platform that allows
Tribune owned newspapers, together with a Tribune affiliated company,
CareerBuilder, Inc. (www.careerbuilder.com), to receive recruitment
advertising from agencies, corporate customers, and the general public.
After the Company completes the development and customization effort, it
will manage the related transactions and receive a volume-based ASP fee
with a guaranteed monthly minimum. As the Company incurs cost associated
with the customization effort, amounts will be reflected as deferred
contract costs in the balance sheet. Through March 31, 2002, $21,000 in
development and customization costs have been deferred. The Company will
amortize the cost of the development and customization effort over the
expected period of the agreement, currently estimated to be five years
from completion of the development and customization effort. The Company
currently believes that the cost of the development and customization
effort will not exceed the anticipated monthly minimum payments under the
agreement totaling $450,000. Should it be determined that the costs to
develop and customize the software applications under the agreement exceed
such minimum fees, the estimated loss will be charged to cost of revenues
in the period the loss first becomes known. The Company will recognize in
revenue the minimum monthly fees under the agreement on a straight-line
basis commencing on the completion of the development and customization
effort. To the extent that transaction based fees exceed the monthly
minimum payments, the Company will record the excess in revenue when
earned.
4. Series A Convertible Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, par value
$0.0001 per share, of which 1,443,457 shares have been designated as
Series A convertible preferred stock ("Series A preferred stock"). The
remaining authorized shares have not been designated. At March 31, 2002,
the Company has reserved 1,443,457 shares of common stock for issuance
upon the conversion of the Series A preferred stock. The Series A
preferred stock has the following characteristics:
8
Voting Rights - Each holder of the Series A preferred stock is entitled to
the number of votes equal to the number of shares of common stock into
which such holder's shares are convertible. The Company cannot amend its
certificate of incorporation amending the rights of the Series A preferred
stockholders, enter into any capital stock or equity agreements with
rights ranking the same or above the rights of the Series A preferred
stock or liquidate the Company without the approval of at least a majority
of the holders of the Series A preferred stock then outstanding.
Liquidation Preference - In the event of any liquidation, dissolution or
winding up of the affairs of the Company, the holders of the Series A
preferred stock will be entitled to receive in preference to the holders
of the common stock, an amount per share equal to $1.244 plus accrued and
unpaid dividends. After such payment, the Series A preferred stockholders
share equally with the common stockholders in any remaining assets or
funds of the Company.
Conversion - Each share of the Series A preferred stock is convertible at
anytime at the option of the holder into shares of common stock pursuant
to a ratio of one share of common stock for each share of Series A
preferred stock, subject to certain stock split and stock dividend
adjustments. In addition, the conversion ratio is subject to adjustment,
as defined in the agreement, in the event that the Company issues common
stock at a per share price less than $1.244 per share. All Series A
preferred stock will automatically convert to common stock on the first
day after March 18, 2004 for which the market price of the Company's
common stock exceeds $2.25 per share.
Dividends - Dividends on the Series A preferred stock shall accrue at 7%
per annum through the date of liquidation or conversion. In the event of
conversion all accrued and unpaid dividends will be waived.
5. Issuance of Common Stock
In January 2002, the Company sold an additional 300,000 shares of common
stock at a price of $0.50 per share. These shares were sold as part of a
1,300,000 share private placement made pursuant to Sections 4(2) and 4(6)
of the Act, of which 1,000,000 shares were sold prior to December 31,
2001. In connection with this offering the Company issued warrants to
purchase 130,000 shares of its common stock, at a per share price of
$0.75, as part of the placement agent fees. The warrants expire on January
16, 2007.
In January 2002, the Company issued 114,545 of its authorized but
unregistered shares of common stock in full settlement of a $62,500
liability, payable to Morse, Zelnick, Rose & Lander, LLP.
In February 2002, AdStar sold 100,000 shares of its common stock at $0.50
per share. In connection with this sale, the Company issued warrants to
purchase 10,000 shares of its common stock, at a per share price of $0.75,
as part of the placement agent fees. The warrants expire on January 31,
2007.
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/A for our fiscal year ended December 31, 2001 and
in our registration statement on form S-3 filed with the Securities and Exchange
Commission on January 24, 2002. Because this discussion involves risk and
uncertainties, our actual results may differ materially from those anticipated
in these forward-looking statements.
Overview
During the first quarter of 2002, we focused our efforts on raising equity
capital and completing the development and customization arrangements with the
Tribune Company. In January 2002, we completed the private placement that had
been in process at year-end, raising an additional $150,000 in gross proceeds.
In February 2002, we raised an additional $50,000 in gross proceeds from a
subsequent private placement. Combined, these two transactions raised
approximately $157,000 in net proceeds. In March 2002, we entered into a series
of significant contracts with the Tribune Company. Under these agreements, we
sold 1,443,457 shares of Series A preferred stock to the Tribune Company for
$1,800,000. Additionally, we agreed to develop and customize a version of our
web software applications to provide for Web-based technology for recruitment
classified advertising sales to all major market Tribune newspapers and on-line
services in exchange for earning volume-based ASP fees for ads placed through
the web using our customized software. This customization will provide a
platform that allows Tribune owned newspapers, together with a Tribune
affiliated company, CareerBuilder, Inc. (www.careerbuilder.com), to receive
recruitment advertising from agencies, corporate customers, and the general
public. From a practical standpoint, the customization work will need to be
substantially completed before they will be able to begin processing the
recruitment advertising and perform the related transactions. Therefore, we will
incur significant expenditures to complete the customization effort prior to the
point in time when we begin to earn the ASP fees from this arrangement. We
believe that the value we will realize from these arrangements far exceeds the
up-front expenditures required to complete the customization effort and also
enhances our position in the marketplace.
Our new ASP business is continuing to demonstrate approval in the
marketplace. During the quarter we experienced large increases in web-based
transaction volumes on behalf of our existing customers as well as substantial
volume from the new Knight-Ridder publications set up during the fourth quarter
2001. Revenue earned from our new ASP business improved substantially quarter
over quarter, increasing 80% this quarter from the fourth quarter 2001. We
expect this increase to continue throughout the year. During the first quarter
2002, on behalf of our customers we processed a total of 32,000 transactions
through our Web site generating gross billings in excess of $2,207,000. For the
similar quarter in 2001, on behalf of our customers we processed a total of
16,000 transactions through our web site generating gross billings in excess of
$1,318,000. We are delighted with the level of incremental revenue our customers
are able to generate using our software applications and we believe that this
success gives us the opportunity to enter into arrangements to provide Web-based
ad-taking technology for new customers. This early success serves to confirm
that we have developed a viable foundation that exploits our proprietary
software products, extensive industry knowledge,
10
and unique position within the marketplace. As we are early in the life cycle of
our ASP business, we are continuing to critically evaluate all products, their
profit contributions, and potential line extensions that may be of benefit to
our existing customers as well as our potential customers. Customization
services, which traditionally had been a large percentage of our revenue, were
virtually nonexistent during the first quarter 2002. This reflects reduced
capital spending at newspapers due to the economic downturn they experienced
during the fourth quarter 2001 and first quarter 2002 as a result of lower
revenue from advertising. As we continue to add more newspapers as ASP
customers, we will be better positioned to weather economic downturns.
Description of Business
Under our ASP business model we developed a new e-business application
suite that is an enterprise class software solution allowing print and on-line
publications to electronically receive completed classified advertising copy
using the Internet as the communication channel. This new application suite was
developed in conjunction with our existing customers, and in response to their
need for a software solution supporting both business-to-business (B-to-B)
operations and business-to-customer (B-to-C) operations. These software
solutions enable our customers to expand the relationships with their customers
using a single integrated platform, while increasing sales volumes at reduced
costs. Our software allows newspapers to turn their on-line presence into an
e-commerce-enabled, revenue generating web site. We believe that our ASP product
and services provide our customers an opportunity to generate incremental
revenue from their on-line business while increasing the number of visitors to
their Web site.
Our new e-business application suite includes two main products that can
be purchased separately or as a fully integrated software solution:
o Professional software ("Professional Product") - This technology is
designed for use by the professional marketplace. Specifically, our
software allows publishers to receive transmissions from classified
advertising agencies and corporations using advanced Web-based
technology. The software includes sophisticated pricing algorithms
to provide for maximum flexibility and intricate design resources to
provide unlimited creative capabilities. The recently released Web
version of this software has been favorably received. This software
solution utilizes the Internet as the communication method, which
significantly improves the intuitive nature of the application and
allows the advertiser to increase the speed of each transmission by
utilizing existing high-speed Internet connections. Should a
high-speed Internet connection not be available, the advertiser can
install a desktop version of this software that utilizes modem
communication.
o ASP Web site technology ("ASP Product") - This technology is a
publisher-specific ad-taking Web site service designed to enhance a
publication's Web site by allowing the general public to execute
transactions to purchase classified advertising. Specifically, it is
an integrated application suite that offers visitors to a
newspaper's Web page the opportunity to buy classified ads, for both
the print and/or on-line editions of the newspaper, in real-time, on
a 24/7 basis. This product allows a publication to completely
outsource the classified ad-taking power of their Web site whereby
the publication receives incremental revenue at a very low
incremental cost. We handle all functions associated with this
revenue source. We furnish and host the application suite, run the
technology, monitor the transactions throughout the session, handle
the payment authorization and settlement process, electronically
deliver the ad text to the newspaper, and provide customer service
support to the newspaper's customers. We provide all the technical
and application expertise, customer support, and security measures
that the publication needs to get an application up and running in a
short time. Typically, we are able to process many more ads and do
so much more quickly and
11
affordably than the publisher could do internally. In addition, this
software solution provides tools to evaluate performance, provide
additional customer care, and increase future revenue opportunities.
We provide the means to deliver highly personalized email
communications to existing customers for the purpose of creating
additional revenues and creating a profitable, long-term
relationship.
Both software products allow transactions to be executed through the
Internet. Our application suite is designed to be quickly integrated into our
customer's existing publishing software and readily expands as our customer's
needs and business grows. Our products use a single platform to connect and
integrate transmissions between multiple browsers and multiple technology
standards. In continually ensuring that our AdStar software solution works with
all available technology standards, we solve the problems created for our
customers because advertisers create and deliver content using ever changing
technology with multiple standards, multiple browsers and evolving network
infrastructures. By bridging disparate technologies in a way that seamlessly
allows for communication and transmission of advertising copy, we alleviate this
obstacle for our customers, freeing them to focus on their business.
Both lines of business require fees to customize the AdStar software
solution to the technical specifications for each publication. In addition, we
charge ongoing monthly fees to manage the ad-taking process, provide technical
support, supply a customer service phone room, and manage the entire e-commerce
function. The monthly fees include a small hosting fee plus a fee based on
transaction volumes and structured in such a way that we are, in essence
partnering with our customers. Therefore, when our customer's revenue increases,
our revenue will also increase. With this structure, we are able to offer
superior service in a manner that is cost effective for publishers of all sizes.
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, 2001 and first quarter, 2002. 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 relationships, 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 our national portal,
Advertise123.com, to print publications under the ASP business model.
In addition to the AdStar software solution, we have also developed a
one-stop marketplace on the Web for the general public to buy classified ads.
Through this Web-based national portal, Advertise123.com, the general public
can, on a 24/7 basis, compose professional looking classified ads using one of
several pre-programmed templates, schedule the ad to run in one or several of
over 200 newspapers and 50 state newspaper associations, and purchase the ad
using a credit card. We receive a small fee for this service. The number of ads
processed through this site continues to increase, although we do not believe
that it will reach a critical mass in the foreseeable future.
12
Results of Operations
The following table sets forth the results of operations expressed as a
percentage of revenues:
Three months ended
March 31,
------------------------
2001 2002
----- -----
Revenues 100% 100%
Cost of revenues 40% 45%
----- -----
Gross profit 60% 55%
Selling expense 38% 31%
Administrative expenses 131% 94%
Development expenses 46% 44%
----- -----
Loss from operations -155% -114%
Interest income (expense) 1% 1%
----- -----
Loss before taxes -154% -113%
Provision for income taxes -- 1%
----- -----
Net loss -154% -114%
Three-Month Periods Ended March 31, 2002 and 2001
Revenues. - Net revenues for the first quarter 2002 increased 14% to $500,000
compared to first quarter 2001 net revenues of $440,000. This increase resulted
from growth in the number of publications utilizing our remote ad entry software
services and web-based infrastructure, offset by a decline in revenue received
from new software services contracts. Fees from our ASP Product, launched during
the first quarter 2001, grew 528% to $178,000 during the first quarter 2002,
from $28,000 in the first quarter 2001. Fees from our established Professional
Product grew 10% to $274,000 during the first quarter 2002 from $248,000 during
the first quarter 2001. This increase reflects the addition of two customers as
well as a general price increase instituted in January 2002. Revenue from
software customization services decreased 98% during the first quarter 2002 to
$2,000 from $83,000 in the first quarter 2001, and revenue from miscellaneous
and non-recurring items decreased 38% during the first quarter 2002 to $50,000
from $81,000 in the first quarter 2001. We expect that revenue from our
fee-based ASP product will continue to increase as we increase both the number
customers and the transaction volume we process on behalf of those customers.
Cost of Revenues. - Cost of revenue consists primarily of the costs to customize
and install the AdStar software applications at the newspapers, costs to
configure end-user software for the newspaper's advertiser clients, costs to
maintain this software, costs to install our web-based ad-taking software, costs
associated with operating our web site and web-based products, costs to create
content and to populate databases for our Advertise123.com web site and the
private label sites, and costs to provide customer training and end-user
support. These costs increased to approximately $225,000 for the first quarter
of 2002 compared with $175,000 for the first quarter 2001. Our gross profit
margin decreased to 55% during the first quarter 2002, from 60% during the first
quarter 2001. This increase to cost of revenue resulted from an increase in the
amortization of software development costs (a non-cash item) to $86,000 in the
first quarter 2002 from $32,000 in the first quarter 2001. The cost of
developing application modules that provide for increases to revenue or allow us
to decrease costs are deferred and expensed to cost of revenue ratably over the
expected life
13
of the benefit. Personnel expenses associated with costs of revenue decreased
14% to $103,000 during the first quarter 2002, from $120,000 for the first
quarter 2001. Royalty expense increased 74% to $12,000 during the first quarter
2002 from $7,000 during the first quarter 2001 due to an increase in fax
licensing fees. 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 profit 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 7% during the first quarter
2002 to $156,000 from $168,000 during the first quarter 2001. Personnel related
expenses increased 3% to $151,000 during the first quarter 2001 from $146,000
for the first quarter 2001. Direct charges decreased 77% to $5,000 during the
first quarter 2002 from $22,000 during the first quarter 2001. Direct charges
consisted mainly of print and on-line advertising. The decrease is a direct
result of our critical evaluation of all expenditures and the elimination of
non-essential items.
Administrative Expenses. - Administrative expense consists primarily of the cost
of executive, administrative, technical operations, accounting and finance
personnel. Administrative expenses decreased 18% during the first quarter 2002
to $470,000 from $576,000 during the first quarter 2001. Personnel related
expenses incurred during the first quarter decreased to $95,000 as compared with
$298,000 for the first quarter 2001. This is as a result of staff reductions
made during the first and third quarters of 2001. Non-personnel related expenses
increased to $375,000 in the first quarter 2002 from $278,000 in the first
quarter 2001. This is primarily due to a significant one-time expense in out-
side legal expenses during the first quarter 2001 related to our
Tribune/CareerBuilder agreements. We expect that quarterly administrative
expenses will be lower during the remainder of 2002.
Development Expenses. - Development expenses consist of expenses to identify
functional requirements, to plan, identify and conceptually design the required
technical infrastructure, and to perform Web-site maintenance and other general
routine fixes. The costs consist primarily of personnel related expenses for
technical and design personnel and consultants. Development expense for the
first quarter 2002 increased 8% to $220,000 from $202,000 during the first
quarter 2001. The overall increase resulted from considerable effort by outside
consultants to create the conceptual design and undertake the feasibility study
for the Tribune requirements. The personnel related expenses remained flat in
the first quarter 2002 as compared to the first quarter 2001.
Interest Income (Expense), Net. - Interest income decreased 71% during the first
quarter 2002 to $4,000 from $14,000 during the first quarter 2001. This decrease
is attributable to a substantial decrease in 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 96%
during the first quarter 2002 to $400 from $11,000 during the first quarter
2001. This decrease resulted from $8,400 in interest expense for first quarter
2001 related to a 6% $1,100,000 note payable that was converted to common stock
in February 2001, as well as interest expense related to capital leases that
expired in 2001.
Liquidity and Capital Resources
As of March 31, 2002, we had cash and cash equivalents of approximately
$1,849,000. Net cash used in operations was approximately $418,000 for the first
quarter 2002 compared with $716,000 for the comparable 2001 period. The
favorable difference is due primarily to a smaller net loss from
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operations during the first quarter 2002. Also during the first quarter of 2002,
non-cash amortization expense increased to $135,000 from $71,000 in the
comparable 2001 period, because we launched various software applications
relating to new product offerings during the last six months of 2001. Net cash
used in investing activities decreased to $84,000 in the first quarter 2002
compared with $137,000 in the same period in 2001. This is a result of the
reduction in expenditures to develop increased functionality for our on-line
business and Web site infrastructure to $86,000 in first quarter 2002 from
$165,000 in first quarter 2001. The reduction is due to a shift in focus from
software development activity that adds functionality to our existing product
offerings and web site infrastructure to activity that includes conceptual and
design work for new product offerings. Net cash provided by financing activities
was approximately $2,002,000 during the first quarter 2002 compared to net cash
used of $43,000 in the comparable period in 2001. The activity in the first
quarter of 2002 reflects net proceeds of $157,000 raised through the issuance of
common stock in private placements, as well as net proceeds of $1,782,000 raised
through the issuance of preferred stock.
As a result of the equity raised during the first quarter 2002, we expect our
available funds, combined with the cash generated from existing operations and
new customers, will be sufficient to meet our anticipated working capital needs
through March 31, 2003. We have generated operating losses during the past four
years, and we cannot guarantee that the assumed increases in revenue will occur
in a timely manner, that we will be able to contain expenditures in accordance
with our plans, nor that we have accurately estimated the resources required to
fulfill our obligations to the Tribune Company. Although we are optimistic that
our new ASP business will be accepted in the marketplace and we will fulfill our
obligations to the Tribune Company in a timely manner, the timing is not
assured. Our ability to sell these new ASP business products and service
offerings during the current year may be hampered by the current downturn in the
advertising market and state of the economy in general. These factors, coupled
with the extended time frame required for software sales, customization, and
implementation, could delay our ability to increase revenue to a level
sufficient to cover our expenses.
We currently have no additional borrowings available to us under any credit
arrangement, and we are continuing to look for additional debt and equity
financing. 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.
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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, 400,000 shares are available for issuance. In the three-month period ended
March 31, 2002, 5,207 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 $3,750. The vendors have taken the
shares for investment.
In January 2002, AdStar completed a private placement of 1,300,000 shares
of its common stock at a price of $0.50 per share, through the sale of the
remaining 300,000 shares. 1,000,000 shares were sold during the period of
October 2001 through December 2001. These shares were sold to accredited
investors, as defined under Rule 215 of the Securities Act of 1933, and required
a minimum investment of $25,000. In connection with this offering AdStar issued
warrants to purchase 130,000 shares of its common stock, at $0.75 per share, as
part of the placement agent fees. The warrants expire on January 16, 2007 and
have anti-dilution protection against capital changes. In addition, AdStar
issued to Morse, Zelnick, Rose and Lander LLP, AdStar's legal counsel, 114,545
shares of restricted common stock, issued at fair market value in full
settlement of a $62,500 liability. These offerings were exempt from registration
made pursuant to Sections 4(2) and 4(6) of the Act.
In February 2002, AdStar sold to an accredited investor (as previously
defined) 100,000 shares of its common stock at a price per share equal to 85% of
its per share closing price on January 31, 2002 ($0.50). In connection with this
sale AdStar issued warrants to purchase 10,000 shares of its Common Stock, at
$0.75 per share, as part of the placement agent fees. The warrants expire on
January 31, 2007 and have anti-dilution protection against capital changes. This
sale was exempt from registration made pursuant to Sections 4(2) and 4(6) of the
Act.
In March 2002, AdStar sold 1,443,457 shares of its Series A Preferred
Stock to Tribune Company for an aggregate purchase price of $1.8 million. These
shares currently convert on a 1:1 basis. Shareholders of Series A Preferred
Stock are entitled to vote on all matters submitted to the stockholders for vote
and as a single class with the common stock. The holders of Series A Preferred
Stock are entitled to one vote for each share of common stock issuable upon
conversion.
Item 6. Exhibit and Reports on Form 8-K
a. Exhibits:
None
b. Reports on Form 8-K:
On March 25, 2002, AdStar filed a Current Report on Form 8-K
pursuant to Item 5 - "Other Events" of such report.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AdStar, Inc.
------------------------
(Registrant)
Date May 14, 2002
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/s/ LESLIE BERNHARD
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President & CEO
Date May 14, 2002
----------------------------
/s/ CRIS HOPKINS
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Acting Chief Financial Officer
17