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, 2000
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number 333-90649
AdStar.com, 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 ororganization)
4553 Glencoe Avenue, Suite 300, 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, 2000 the Issuer had
outstanding 5,143,074 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]
<PAGE>
TABLE OF CONTENTS
FORM 10-QSB REPORT
September 30, 2000
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
(Unaudited)
Balance Sheet -September 30, 2000 3
Statements of Operations
Three-Month and Nine-Month Periods
Ended September 30, 1999 and 2000 4
Statements of Cash Flows
Nine-Month Periods Ended
September 30, 1999 and 2000 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 15
SIGNATURES 16
2
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AdStar.com, Inc.
Balance Sheet
September 30, 2000 (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,316,683
Accounts receivable 213,488
Prepaid and other current assets 123,446
-----------
Total current assets 3,653,617
Property and equipment, net 1,229,744
Intangible assets, net 136,739
Other assets 34,572
-----------
Total assets $ 5,054,672
===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 185,845
Accrued expenses 528,402
Deferred revenue 94,782
Capital lease obligations 15,342
-----------
Total current liabilities 824,371
Note payable 1,100,000
Interest payable 62,032
Capital lease obligations 49,192
-----------
Total liabilities 2,035,595
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 5,139,850 shares at September 30, 2000 514
Additional paid-in capital 8,818,069
Deferred compensation (70,593)
Accumulated deficit (5,728,913)
-----------
Total stockholders' equity 3,019,077
-----------
Total liabilities and stockholders' equity $ 5,054,672
===========
The accompanying notes are an integral part of these interim financial
statements.
3
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AdStar.com, Inc
Statements of Operations
For the three-month and nine-month periods
Ended September 30, 1999 and 2000 (unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 431,250 $ 776,985 $ 1,212,293 $ 1,969,078
Cost of revenues 330,963 621,325 820,780 1,637,955
----------- ----------- ----------- -----------
Gross Profit 100,287 155,660 391,513 331,123
Selling expenses 192,947 432,306 486,536 1,119,301
Administrative expenses 439,524 440,080 808,560 1,482,940
Development costs 140,745 281,533 140,745 1,042,337
Abandoned offering costs, net 171,854 0 171,854 0
----------- ----------- ----------- -----------
Loss from operations (844,783) (998,259) (1,216,182) (3,313,455)
Interest income (expense), net (144,350) (771) (190,150) 32,265
----------- ----------- ----------- -----------
Loss before taxes (989,133) (999,030) (1,406,332) (3,281,190)
Provision for income taxes 1,680 200 2,080 600
----------- ----------- ----------- -----------
Net loss $ (990,813) $ (999,230) $(1,408,412) $(3,281,790)
=========== =========== =========== ===========
Loss per share - basic and
diluted $ (0.69) $ (0.34) $ (0.96) $ (1.14)
Weighted average number of
shares - basic and diluted 1,443,211 2,962,110 1,464,696 2,874,141
</TABLE>
The accompanying notes are an integral part of these interim financial
statements.
4
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AdStar.com, Inc.
Statements of Cash Flows
For the nine-month periods ended September 30, 1999 and 2000 (unaudited)
1999 2000
----------- -----------
Cash flows from operating activities:
Net loss $(1,408,412) $(3,281,790)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 57,530 115,864
Amortization of debt discount 70,099 --
Stock-based charges 97,000 198,327
Changes in assets and liabilities:
Accounts receivable (238,351) 246,989
Prepaid and other assets (554,488) 1,381
Accounts payable 520,555 (942,969)
Accrued expenses (64,343) 137,016
Deferred revenue (28,894) (12,218)
----------- -----------
Net cash used in operating activities (1,549,304) (3,537,400)
Cash flows from investing activities:
Purchase of property and equipment (335,294) (894,744)
----------- -----------
Net cash used in investing activities (335,294) (894,744)
Cash flows from financing activities:
Proceeds from issuance of convertible notes
payable 1,050,000 --
Proceeds from issuance of note payable 850,000 --
Proceeds from leasing of property and -- 68,303
equipment
Proceeds from secondary public offering -- 2,836,230
Repayment of notes payable (12,678) (749,466)
Principal repayments on capital leases (5,125) (8,733)
Proceeds from sale of stock 26,300 --
Dividends paid (9,773) --
----------- -----------
Net cash from financing activities 1,898,724 2,146,334
----------- -----------
Net increase (decrease) in cash and cash
equivalents 14,126 (2,285,810)
Cash and cash equivalents at beginning of period 90,007 5,602,493
----------- -----------
Cash and cash equivalents at end of period $ 104,133 $ 3,316,683
=========== ===========
Supplemental cash flow disclosures:
Taxes paid 2,563 5,096
Interest paid 65,285 12,673
Non cash investing and financing activities
Purchase of intangible assets, cancellation 751,710
of an option and repayment of accrued
liability by issuance of a note payable
Issuance of redeemable shares in connection 137,536
with note payable
The accompanying notes are an integral part of these interim financial
statements.
5
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AdStar.com, Inc.
Notes To Interim Financial Statements
(Unaudited)
1. General
The interim financial statements for AdStar.com, 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 and nine-month periods ended September 30,
2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. For further information, refer to
AdStar.com's Registration Statement No. 333-43408 on Form SB-2, dated
August 10, 2000.
Secondary Public Offering
In September 2000, the Company completed a secondary public offering and
raised net proceeds of approximately $2,836,000, through the issuance of
2.3 million shares of common stock.
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 and nine months ended September 30, 2000 and September 30,
1999, no customer accounted for 10% of the Company's revenues. At
September 30, 2000 three customers in the aggregate accounted for 37% of
the Company's accounts receivable. The majority of the Company's customers
have historically consisted of newspapers and publishers of classified
advertisements. The Company's customers on its Web site are classified
advertisers. In the three months and nine months ended September 30, 2000,
22% and 26%, respectively, of the Company's revenues have been received
with respect to ads posted by advertisers on CareerPath.
6
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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 or
maintenance fees, the amount received is deferred until the revenue has
been earned. Revenues are recorded net of any discounts. For the three-
and nine-month periods ended September 30, 2000, revenue from software
related sales totaled approximately $286,000 and $954,000, respectively.
For the three- and nine-month periods ended September 30, 1999, revenue
from software related sales totaled approximately $302,000 and $950,000,
respectively.
In June 1999, the Company introduced a Web-based product that permits
advertisers to compose, schedule and purchase advertising from many print
and online publishers. The Company recognizes revenues on a
per-transaction basis. The manner in which these transaction revenues are
recognized depends on the service sold. With respect to ads composed
directly on the Company's Web site, and where the advertiser does not have
a contract with the publisher, the amount billed to the customer by the
Company is recognized if, and when, the Company accepts the customer's ad
and charges the customer's credit card. In these transactions, the Company
is responsible for the resulting credit risk. Credit card and debit card
processing fees and amounts remitted to the publisher on these
transactions are recognized as a cost of sale. With respect to ads placed
through the Company's Web site, where the customer has a contract with the
publisher, the publisher collects the revenues and remits the transaction
fee to the Company. In these instances, these transaction fees are
recognized when the ad is placed through the Company's system and the
collection from a publisher of the resulting receivable is probable. For
the three- and nine-month periods ended September 30, 2000, Internet
revenues totaled approximately $491,000 and $1,015,000, respectively. For
the three- and nine-month periods ended September 30, 1999, Internet
revenues totaled approximately $145,000 and $198,000, respectively.
7
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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 and nine months ended September 30, 1999 and 2000, diluted
earnings (loss) per share does not include 212,101 and 2,036,838 options
and warrants to purchase common stock and 228,430 and 0 shares issuable on
the conversion of notes payable, as their inclusion is antidilutive.
Reclassifications
Certain reclassifications have been made to prior period amounts to
conform with current period presentation.
3. Notes Payable
The Company paid in full in January 2000 notes payable in the principal
amount of $15,000, bearing interest at 10% per annum. In addition the
Company paid in full in January 2000, a note payable in the principal
amount of $734,446, bearing interest at 10% per annum .
At September 30, 2000, the Company had outstanding a note payable bearing
interest at 6% per annum, due in full in October 2001 in the principal
amount of $1,100,000.
4. Capital Transactions
Warrants
In March 2000, the Company granted to a consultant warrants to purchase an
aggregate of 40,000 shares of common stock at an exercise price of $10.00
per share. The warrants expire in March 2005 and are exercisable upon
vesting. 25,000 of the warrants vested immediately and 15,000 vest when
the consultant achieves certain performance goals or, if not then vested,
on the fifth anniversary of the date of grant, provided the consultant is
still providing services to the Company. In connection with the 25,000
warrants, the Company recorded deferred compensation of $157,408
8
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representing the fair value of the warrants using the Black-Scholes
option-pricing model. For the three-month and nine-month periods ended
September 30, 2000, $39,400 and $91,900, respectively, of the deferred
compensation were charged to expense. The Company records additional
non-cash charges for the 15,000 warrants over the service period. To date
such charges have not been significant.
Equity Compensation to Vendors
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
and nine-month periods ended September 30, 2000, 6,665 shares and 19,586
shares, respectively, were issued to vendors under the plan. The Company
recognized compensation expense of approximately $19,000 and $106,500,
respectively.
5. Subsequent Events
In October 2000, CareerBuilder.com acquired CareerPath.com, the Company's
largest single source of revenue generated from Internet advertiser
traffic. In the three months and nine months ended September 30, 2000, 22%
and 26%, respectively, of the Company's revenues were generated from ads
posted by advertisers on CareerPath. The Company is currently in
negotiations with CareerBuilder, and the outcome of these negotiations and
the impact on the Company's financial statements are not known.
In November 2000, the Company entered into a strategic alliance with
Eastman Kodak Company whereby the Kodak Picture Ready application will be
integrated into AdStar's online classified ad placement service. Under
this agreement, Eastman Kodak was issued 67,796 shares of the Company's
common stock.
9
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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, 1999 and in
our registration statement on form SB-2 filed with the Securities and Exchange
Commission on August 10, 2000. Because this discussion involves risk and
uncertainties, our actual results may differ materially from those anticipated
in these forward-looking statements.
Overview
We have developed a one-stop marketplace on the Web to buy classified ads. By
accessing our Web site, advertisers are able to compose, schedule and purchase
classified advertising from a large number of print and online publishers. Our
service permits both professional and non-professional advertisers, including
the general public, to create and submit any number of ads to one or many
publications, 24 hours a day, seven days a week, using any standard Web browser.
This Web-based service is an outgrowth of our historical business that, since
1986, has offered professional advertisers the ability to place ads
electronically with a number of the largest newspapers in the United States.
Using this system, we had become the leading providers of remote entry
capabilities when placing classified ads into newspapers in the United States.
In 1999 we commenced our transition from software provider to an Internet
marketplace for print and online classified advertising. We received our first
transaction fee from Internet business in June 1999 with one online publication
available on the site. By the end of 1999 we had five print publications and one
online service available on our site. For the year ended December 31 1999, we
processed approximately $550,000 of classified advertising through our Web site
and private label sites, generating $267,000 in internet revenues, or 16% of our
total 1999 revenues.
During the first nine months of 2000 we moved rapidly to build a critical mass
of publications on our Web site. By October 2000 we achieved our target coverage
in the top 100 designated market areas (DMAs) in the US. We reached this
benchmark two months earlier than anticipated in our business plan. We now have
over 140 newspapers and 30 online publications available to advertisers using
our Web site. During the first nine months of 2000, we processed more than
$3,400,000 in classified advertising through our classified advertising
marketplace, Advertise123.com, and private label sites. This activity generated
$1,015,000 in revenue and comprised 50% of our total year-to-date revenues.
Now that we are able to offer advertisers a critical mass of publications, we
are focusing our efforts on increasing transaction volume through the Web site.
At the same time, we have become an application service provider (ASP) in the
classified advertising industry. In the near term, we shall shift our focus from
Web marketplace development to expand our role as an ASP in order to accelerate
revenue generation while we build traffic through our Web site. This shift
10
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in focus is a natural extension of our overall experience in that industry
coupled with the online expertise we have recently developed through operations
of our own Web site. In the role of an ASP, we support publishers' current needs
by offering Web-based solutions for their classified ad functions.
Revenues from our existing software and ASP business consists of license fees
and fees for advertiser service and support functions. In our Web-based service
our charges are currently based on the advertising fee charged by the publisher.
In certain cases we receive a percentage of the advertising fee charged by the
publisher and in others we mark-up the advertising fee and are paid by the
advertiser. We expect that in the future some of our revenues could be based on
a fixed transaction fee as well.
As our business continues its transition from a software service fee model to a
transaction fee based model, there are likely to be material changes in our
financial statements. These changes could include modifications in revenue
sources, revenue arrangements with existing customers, gross margins, timing of
cash flows and volume of accounts receivable as a percentage of revenues.
Our level of revenues through 1998 had generally been 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 and 1999 and in the
first nine months of 2000. During the fourth quarter 2000, as part of our shift
in focus, we have put measures into place that will significantly reduce
expenditures in expanded infrastructure as it relates to our Web site. These
measures enable us to lower our expenditures while we focus on increasing
revenues. We will resume expanded Web infrastructure spending on our own behalf
at such time as we are able to generate sufficient cash from operations to meet
our requirements. As such, we have reduced our employed and contract workforce
expenditures by 30%, including senior officers in product development, business
development, and operations, all of whom focused on our internet marketplace
infrastructure. Each of these departments will be directed by the managers who
have had the day-to-day responsibility for the operations of their departments.
Business development will be merged into an expanded sales and marketing
department. As a result, we believe that we will reduce our cash burn rate
(revenues less cash expenditures) from approximately $300,000 per month at
September 30, 2000, to $150,000 per month by the end of the first quarter 2001.
We will also significantly reduce our capital investments during 2001. These
reductions do not take into account any increase in the level of revenues, which
we are working to produce.
We will continue to incur operating losses and negative cash flows from
operations before the build-up in revenues from our ASP business, Internet
business, and service revenues are sufficient to meet our cash needs. Because we
have limited Internet experience, we are not able accurately to forecast the
source, magnitude or timing of our future revenues and therefore cannot forecast
if or when we will return to profitability.
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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,
------------------ -----------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues 100% 100% 100% 100%
Cost of revenues 77% 80% 68% 83%
----- ----- ----- -----
Gross profit 23% 20% 32% 17%
Selling expense 45% 56% 40% 57%
Administrative expenses 101% 57% 67% 75%
Development costs 33% 36% 12% 53%
Abandoned offering expenses, net 40% -- 14% --
----- ----- ----- -----
Loss from operations -196% -129% -100% -168%
Interest income (expense) -33% -- -16% 2%
----- ----- ----- -----
Loss before taxes -229% -129% -116% -166%
Provision for taxes -- -- -- --
----- ----- ----- -----
Net loss -229% -129% -116% -166%
Three-Month and Nine-Month Periods Ended September 30, 2000 and 1999
Revenues. Revenues for the third quarter 2000 increased 80% to $777,000 compared
to third quarter 1999 revenues of $431,000. Revenues increased to approximately
$1,969,000 for the nine-month period ended September 30, 2000 from $1,212,000 in
the comparable 1999 period, representing 62% growth. These increases resulted
from Internet revenue growth in the 2000 periods to levels of approximately
$491,000 for the quarter and $1,015,000 for the nine months versus $112,000 and
$142,000 in the comparable periods in 1999. We earned our first Internet
revenues in June 1999. Internet revenues represented approximately 63% of our
total revenues in the third quarter of 2000 and 52% of our total revenues in the
first nine months of 2000. As we shifted our focus in 1999 to our Web site, we
also shifted resources from building our software service business.
Consequently, software installation, license and end-user support revenues
(referred to as "service revenues") were down 6% to $286,000 for the third
quarter 2000 from $302,000 in third quarter 1999, and flat with prior year at
$903,000 for the first nine months of 2000 compared with $950,000 for the
comparable 1999 period. While we expect to continue to recognize service
revenues from existing software license contracts and from new ASP business, we
expect that Internet related revenues will continue to build as our principal
source of revenues. We had no hardware sales in the third quarter 2000 and
approximately $51,000 during the nine-month 2000 period compared with $14,000
for the third quarter 1999 and $102,000 for the nine-months ended 1999.
Cost of Revenues. Cost of revenues consists primarily of the costs of ads
processed through our Web site, credit card processing expenses, 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, costs to provide customer training and end-user support, and payments
for hardware and for royalty fees. These costs increased to approximately
$621,000
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for the third quarter of 2000 compared with $331,000 for third quarter 1999, and
to approximately $1,638,000 for the first nine months of 2000 compared with
$821,000 for the first nine months of 1999. Cost of revenues increased as a
percentage of revenues because our Web business is a higher volume, lower margin
business than our service business. Cost of Revenue for the third quarter 2000,
as a percent of Revenue, was lower than the previous two quarters of 2000 as we
develop operating efficiencies. We are not able to predict if this trend will
continue.
Cost of Internet transactions was $417,000 for third quarter 2000 and $941,000
for the nine-month period ended September 2000. These amounts represent payments
to publications and credit card processors. Cost of Internet transactions was
$96,000 for third quarter 1999 and $123,000 for the nine-month period ended
September 1999. Personnel costs associated with cost of revenues decreased 13%
in the third quarter 2000 to $204,000 compared with $235,000 in the third
quarter 1999. For the nine months ended September 30, 2000 these personnel costs
stayed flat at $697,000 compared with $698,000 in the comparable 1999 period.
The decrease over the comparable three-month periods is the result of an effort
to make ourselves more efficient as our added staff became more knowledgeable
about our systems. We had no hardware expense for the third quarter 2000 and
$46,000 for the first nine months for 2000 compared with $11,000 for the 1999
third quarter and $89,000 for the nine-month 1999 period. We view our hardware
sales as an accommodation to our clients coincident to the installation of our
software in the front-end publishing systems of newspapers.
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, sales and marketing. The personnel related expenses
increased to $229,000 and $567,000 for the three months and nine months ended
September 30, 2000, respectively, from $160,000 and $412,000 for the comparable
periods in 1999. Direct charges increased to $257,000 and $552,000 for the three
months and nine months ended September 30, 2000 from $33,000 and $74,000 for the
comparable periods in 1999. Our personnel additions were made primarily during
July 1999 in business development and sales. Direct charges also increased as we
stepped up our effort to create awareness for our Web site.
Administrative Expenses. Administrative expense consists primarily of the cost
of executive, administrative, technical operations and accounting personnel. The
personnel related expenses increased to $323,000 and $1,301,000 for the three
months and nine months ended September 30, 2000, respectively, from $194,000 and
$356,000 for the comparable periods in 1999. Our personnel additions occurred in
mid 1999 and were primarily in technical operations and accounting/finance.
Development Costs. Development costs consist of expenses to identify the
functional requirements and to create content and populate databases for our Web
site and private label sites, and to plan, identify, and conceptually design the
required technical infrastructure. The costs consist primarily of technical and
design consultants as well as personnel costs. The personnel related expenses
increased to $280,000 and $567,000 for the three months and nine months ended
September 30, 2000, respectively. We have scaled back our use of design
consultants in the third quarter of 2000. For the nine months ended September
1999 all development activities were handled by outside technical consultants.
The increase in development expenses were a direct result of design changes and
enhancements to the operations of our online business and Web site
infrastructure.
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Abandoned Offering Expenses, Net In September 1999, a proposed public offering
of our securities was declared effective but did not close. In connection with
that offering we incurred expenses of approximately $672,000. We also received
$500,000 in reimbursement of expenses from the representative of the
underwriters, which was recorded net of the actual expenses incurred.
Interest Income (Expense), Net. Interest income was $20,000 in the third quarter
of 2000 and $95,000 in the first nine months of 2000 attributable to investment
of available cash in short-term time deposits and money market accounts at
commercial banks. Interest expense was $19,000 in the third quarter 2000 and
$63,000 in the first nine months of 2000 compared with 1999 expenses of $144,000
for the third quarter and $190,000 for the nine-month period. The interest
expense in 1999 pertained to 12% convertible notes, totaling $1,050,000
(principal amount) issued in March and April 1999, a 10% note in the amount of
$752,000 issued in March 1999, and a 14% note for $850,000 issued in July 1999.
We also amortized $70,000 of debt discount related to the issuance of the
$850,000 note in the nine-month period ended September 30, 1999. The 12%
convertible notes were converted into common stock in December 1999 when we
closed our initial public offering and the 14% and 10% notes were repaid from
the proceeds of that offering in December 1999 and January 2000, respectively.
The interest expense in 2000 related to our 6% note payable, issued in October
1999, and our equipment leasing arrangement with Imperial Bank.
Liquidity and Capital Resources
As of September 30, 2000, we had cash and cash equivalents of approximately
$3,317,000. Net cash used in operations was approximately $3,537,000 for the
first nine months of 2000 compared with $1,549,000 for the comparable 1999
period. The difference is due primarily to the sizable net loss from operations
to date in 2000 as we built out our Web presence compared to the smaller net
loss in 1999 when we were developing our Web site for its initial commercial
application. 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 increased to $895,000 in the first nine-months of 2000 compared with
$335,000 in the same period in 1999. These expenditures were for computer
equipment purchases and the development of increased functionality for our
online business and Web site infrastructure. Net cash provided from financing
activities was approximately $2,146,000 during the nine-month period in 2000
compared to $1,899,000 provided by financing activities in the comparable period
in 1999. The activity in 2000 reflects $2,836,000 in net proceeds received from
our secondary public offering and $60,000 net received from an equipment lease.
The equipment lease financing is part of a $100,000 line of credit. These
amounts are partially offset by the repayment in January 2000 of notes payable
of $750,000. In March and April 1999, we sold $1,050,000 of our 12% convertible
notes in a private placement. These notes converted to common stock in December
1999 upon the closing of our initial public offering. In July 1999, we borrowed
$850,000 from Inter Equity Capital Partners at 14%, which was repaid in December
1999. At September 30, 2000, we had no material commitments for capital
expenditures.
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As part of our shift to an ASP, during the fourth quarter we reduced our
employed and contract workforce expense by 30%, and took steps to reduce other
costs. As a result, the Company aims to reduce its monthly cash burn rate
(revenues less total cash expenditures) to $150,000 by the end of first quarter
2001. The projected cash burn rate does not take into account additional
revenues, which the Company is working to achieve. The company also intends to
take a one-time charge during the fourth quarter of 2000 of $160,000 for
severance payments.
We expect that as we re-focus our near-term sales effort to take advantage of
our position as an ASP in the classified advertising industry, our revenues will
trend upward. Additionally, by monitoring our costs closely, we expect our
available funds will be sufficient to meet our anticipated working capital needs
through 2001. We cannot guarantee, however, that the assumed increases in
revenue will occur in a timely manner nor that we will be able to contain our
costs in accordance with our plans. 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.
Recently Issued Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101")
"Revenue Recognition in Financial Statements" which contain the SEC Staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. We do not expect the impact of SAB 101 on our financial
statements to be significant.
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 and nine-month periods ended September 30, 2000,
6,665 shares and 19,586 shares, respectively, 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 respective periods of $19,000 and
$106,500. The vendors have taken the shares for investment.
Recent Sales of Registered Securities. On September 22, 2000, we completed our
secondary public offering of 2,300,000 shares of our common stock. The offering
was lead managed by Paulson Investment Company, Inc. The shares were sold
pursuant to a registration statement filed with the Securities and Exchange
Commission. The price of each share was $1.50. After deducting expenses of
$614,000 incurred in connection with the offering, our net proceeds from the
offering were approximately $2,836,000.
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Use of Proceeds. On December 22, 1999, we completed our initial public offering
of 1,150,000 units, each comprised of one share of our common stock and one
warrant to purchase one share. The offering was lead managed by Paulson
Investment Company, Inc. The Units were sold pursuant to a registration
statement filed with the Securities and Exchange Commission (Reg. No. 333-90649)
and declared effective December 16, 1999. The price of each unit was $6.00.
After deducting expenses of $1,509,000 incurred in connection with the offering,
our net proceeds from the offering were approximately $5,391,000. From our net
proceeds, we repaid three items of indebtedness, which aggregated approximately
$1,600,000, as follows:
Note payable bearing interest at 10% per annum, repayable in monthly
installments of $8,333 comprising principal and interest.
Repaid in January 2000 $ 734,466
Note payable bearing interest at 14% per annum, repayable in
54 equal installments commencing February 2000. Repaid in
December 1999 850,000
Notes payable bearing interest at 10% per annum, repayable on
demand. Repaid in January 2000 15,000
----------
Total $1,599,466
==========
From January 1, 2000 through September 30, 2000, we expended approximately
$1,937,000 in development and expansion of our Web site and further product
development and site maintenance and approximately $2,602,000 toward marketing,
sales and administrative expenses. The balance of the net proceeds from both the
initial and secondary public offerings will be used for development and
expansion of our products and for working capital.
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.com, Inc
---------------
(Registrant)
Date November 14, 2000 /s/ LESLIE BERNHARD
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President & CEO
Date November 14, 2000 /s/ BENJAMIN J. DOUEK
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Senior Vice President & CFO
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