Adstar Inc - Quarterly Report (10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008


o		TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-15363

ADSTAR, INC.

(Exact name of small business issuer as specified in its charter)


Delaware		22-3666899

(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

4553 Glencoe Avenue, Suite 300, Marina del Rey, California 90292

(Address of principal executive offices)

Issuer’s telephone number (310) 577-8255

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were a total of 20,391,852 shares of Common Stock outstanding as of May 9, 2008.

ADSTAR, INC. AND SUBSIDIARY
Form 10-Q Report
TABLE OF CONTENTS


	Page
PART I — FINANCIAL INFORMATION

Item 1. Interim condensed consolidated financial Statements

Balance Sheet — March 31, 2008 (unaudited) and December 31, 2007		3

Statements of Operations for the three month periods ended March 31, 2008 and 2007 (unaudited)		4

Statements of Cash Flows for the month periods ended March 31, 2008 and 2007 (unaudited)		5

Notes to Interim Financial Statements (unaudited)		6

Item 2. Management’s discussion and analysis of financial condition and results of operations		11

Item 3. Quantitative and qualitative disclosures about market risk		15

Item 4 T. Controls and procedures		15

PART II — OTHER INFORMATION

Item 2. Unregistered sales of equity securities and use of proceeds		17

Item 6. Exhibits		17

Signatures		18
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FORWARD-LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The terms “we”, “our”, “us”, or any derivative thereof, as used herein shall mean AdStar, Inc., a Delaware corporation, and subsidiary.

PART I — FINANCIAL INFORMATION

AdStar, Inc. and Subsidiary
Consolidated Balance Sheets


	March 31,			December 31,
	2008			2007
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	511,000		$	717,000
Accounts receivable, net of allowance for doubtful accounts of $71,000 for both periods		570,000			571,000
Notes receivable from officers — current portion		10,000			9,000
Prepaid and other current assets		144,000			126,000

Total current assets		1,235,000			1,423,000

Notes receivable from officers, net of current portion		195,000			197,000
Property and equipment, net		99,000			109,000
Capitalized and purchased software, net		179,000			261,000
Intangible assets, net		1,110,000			1,133,000
Goodwill		2,132,000			2,132,000
Other assets		35,000			40,000


Total assets	$	4,985,000		$	5,295,000


Liabilities and Stockholders’ Equity

Current liabilities:
Due to publications	$	1,419,000		$	1,223,000
Accounts payable and accrued expenses		593,000			630,000
Deferred revenue and customer deposits — current portion		143,000			113,000
Capital lease obligations — current portion		6,000			6,000

Total current liabilities		2,161,000			1,972,000

Deferred revenues, net of current portion		24,000			24,000
Capital lease obligations, net of current portion		18,000			20,000


Total liabilities		2,203,000			2,016,000


Commitments and contingencies
Stockholders’ equity:
Preferred Stock, par value $0.0001; authorized 5,000,000 shares; 0 issued and outstanding		—			—
Common Stock, par value $0.0001; authorized 40,000,000 shares; 20,459,648 and 20,209,648 issued and outstanding, respectively		2,000			2,000
Additional paid-in capital		27,331,000			27,051,000
Treasury stock; 67,796 shares, at cost, respectively		(68,000	)		(68,000	)
Accumulated deficit		(24,483,000	)		(23,706,000	)

Total stockholders’ equity		2,782,000			3,279,000

Total liabilities and stockholders’ equity	$	4,985,000		$	5,295,000

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

AdStar, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)


	Quarter ended
	March 31,
	2008			2007
ASP, net	$	421,000		$	459,000
Licensing and software		551,000			633,000
Customization and other		80,000			273,000

Net revenues		1,052,000			1,365,000

Cost of revenues		435,000			579,000


Gross profit		617,000			786,000

General and administrative expense		645,000			563,000
Product maintenance and development costs		387,000			319,000
Selling and marketing expense		342,000			885,000
Amortization of customer list		22,000			22,000


Loss from operations		(779,000	)		(1,003,000	)

Interest income		6,000			10,000
Interest expense		(1,000	)		(2,000	)


Loss before income taxes		(774,000	)		(995,000	)

Provision for income taxes		3,000			3,000


Net loss	$	(777,000	)	$	(998,000	)


Loss per share — basic and diluted	$	(0.04	)	$	(0.05	)
Weighted average number of shares — basic and diluted		20,286,571			20,130,140

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

AdStar, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)


	Quarter ended
	March 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(777,000	)	$	(998,000	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		122,000			130,000
Loss on disposal of equipment		—			7,000
Stock based charges		280,000			546,000
Bad debt recovery		—			(10,000	)
Changes in assets and liabilities:
Accounts receivable		1,000			(193,000	)
Prepaids and other assets		(13,000	)		5,000
Due to publications		196,000			267,000
Accounts payable and accrued expenses		(37,000	)		(39,000	)
Deferred revenue and customer deposits		30,000			29,000

Net cash used in operating activities		(198,000	)		(256,000	)

Cash flows from investing activities:
Additions to capitalized and purchased software		(3,000	)		(3,000	)
Purchase of property, equipment and intangible assets		(4,000	)		(17,000	)
Repayment of officer receivable		1,000			2,000

Net cash used in investing activities		(6,000	)		(18,000	)

Cash flows from financing activities:
Proceeds from exercise of options and warrants		—			361,000
Principal repayments on capital leases		(2,000	)		(1,000	)

Net cash (used in) provided by financing activities		(2,000	)		360,000

Net (decrease) increase in cash and cash equivalents		(206,000	)		86,000
Cash and cash equivalents at beginning of period		717,000			2,545,000

Cash and cash equivalents at end of period	$	511,000		$	2,631,000

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

AdStar, Inc. and Subsidiary

Notes to Consolidated Financial Statements (unaudited)

1.		General

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

		The interim financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007.

		The accompanying financial statements have been prepared assuming the Company will have liquidity to maintain its required minimum level of operations. At March 31, 2008, the Company’s accumulated deficit was $24,483,000, resulting from recurring net losses. For the years ended December 2007 and 2006, the net losses were $3,310,000 and $1,393,000 respectively, and for the three months ended March 31, 2008, the net losses were $777,000. At March 31, 2008, the Company had a working capital deficit of $926,000, compared to a working capital deficit of $549,000 at December 31, 2007.

		Revenues for the three month period ended March 31, 2008 have decreased to $1,052,000 from $1,365,000 in the prior year. The Company has been notified of the termination of one of its largest customer publications, representing approximately 12% of its revenues in 2007 and 11% of its revenues during the quarter ended March 31, 2008.

		The Company may continue to incur losses until it is able to increase revenues significantly from fees derived from its advertising intake and payment processing services. The ability to increase revenues from ASP service offerings during the next 12 months may be hampered by the current unstable climate in the advertising market relating to newspaper publishers and state of the economy in general. These factors, coupled with possible competition from other vendors, the extended selling cycle in the industry, and customer delays in customization and implementations, could delay its ability to increase revenue to a level sufficient to cover expenses.

		The continuation of AdStar’s business is dependent upon achieving a break even or profitable level of operations or on obtaining further financing. To the extent that funds generated from operations are insufficient, the Company will have to raise additional working capital from private placements, public offerings and/or bank financing. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available

		the Company may be required to further reduce certain discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives.

		These conditions raise doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

2.		Summary of Significant Accounting Policies

		Principles of Consolidation

		The accompanying consolidated financial statements include the accounts of AdStar, Inc. and its wholly owned subsidiary, Edgil Associates, Inc. All intercompany transactions and balances have been eliminated in consolidation.

		Concentration of Credit Risk and Major Customers

		Financial instruments that potentially subject the Company to significant concentrations of credit risk are principally comprised of trade accounts receivable.

		The Company generally contracts with individual publication customers for its services, however, a number of publication customers fall under common enterprise ownership. For the three months ended March 31, 2008, three groups of customers, under common ownership, accounted for 19%, 12% and 12% of the Company’s revenues. For the three months ended March 31, 2007, three groups of customers, under common ownership, accounted for 20%, 11% and 11% of the Company’s revenues. At March 31, 2008, three groups of customers, under common ownership, accounted for 18%, 15% and 12% of the Company’s accounts receivable, respectively. At December 31, 2007, three groups of customers, under common ownership, accounted for 25%, 13% and 13% of the Company’s accounts receivable, respectively.

		The majority of the Company’s customers have historically consisted of newspapers and publishers of classified advertisements.

		Earnings (Loss) Per Share

		Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive.

		For the period ended March 31, 2008 and March 31, 2007 the weighted average shares outstanding as used in the calculation of diluted loss per share does not include options and warrants to purchase 2,588,583 and 2,485,583 shares of common stock, respectively, as their inclusion would be antidilutive.

		Accounting for Stock-Based Compensation

		During the first quarter of fiscal 2006, the Company adopted the provisions of, and accounting for stock-based compensation in accordance with, the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123 — revised 2004 (“SFAS 123(R)”, “Share-Based Payment” which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”),

		“Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.”

		Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which often approximates the vesting period.

3.		Stock Based Compensation

		The Company’s stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, the Company grants options from either the 1999 Stock Option Plan or the 2004 Stock Option Plan (the “Plans”), under which options could be granted to all employees, including executive officers and non-employee directors of the Company.

		The Plans provide for issuance of nonqualified and incentive stock options to officers, key employees, consultants and non-employee directors of the Company. Each nonqualified stock option shall have an exercise price not less than 100% of the fair value of the Common Stock on the date of grant, unless as otherwise determined by the committee that administers the Plans. Incentive stock options shall have an exercise price equal to or greater than the fair value of the Common Stock on the date of grant provided that incentive stock option granted to a 10% holder of the Company’s voting stock shall have an exercise price equal to or greater than 110% of the fair market value of the Common Stock on the date of grant. Each option generally has a term of five years from the date of grant unless otherwise determined by the committee that administers the Plans. Option vesting periods are generally three years, and have five-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plans).

		The Company currently uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

		The Company estimates the expected term of options granted by taking an average of the mid-point between the vesting date and the expiration date of the option. The volatility of its common stock is determined by using historical volatility. The risk-free rate for periods within the contractual life of the option is based on the United States Treasury yield curve in effect at the time of grant. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. Estimated forfeitures are required at the time of grant and those estimates are revised in subsequent periods if actual forfeitures differ from those estimates. The estimate of forfeitures is based on historical rates, adjusted for expected activity in the future. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

		As of March 31, 2008, there was $211,000 of unrecognized compensation cost, net of forfeitures, related to unvested share-based compensation arrangements. This compensation expense is expected to be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately two years. At March 31, 2008, there were 628,000 shares available for future grants under the Plans.

The assumptions used to value option grants are as follows:


	Three Months Ended
	March 31, 2008
Risk-free interest rate		2.2	%
Expected lives (years)		3.5
Dividend yield		0.0	%
Expected volatility		90.6	%

		During the three and three months ended March 31, 2008, the Company issued 4,000 options to its employees. On March 3, 2008, the Company repriced 1,488,581 employee and director options to an exercise price of $0.32. Such options had previously been issued at exercise prices between $0.62 per share and $3.50 per share. The total increase in stock compensation expense, as a result of the repricing, was $149,000; of which $145,000 was recognized in the quarter ended March 31, 2008. Total stock-based compensation recognized on the Company’s consolidated statement of operations for the three months ended March 31, 2008 was $280,000, which includes $80,000 of shares issued to a consultant and $200,000 of stock option expense. There were no stock options exercised in the three months ended March 31, 2008.

		The following table summarizes all stock option activity for the three months ended March 31, 2008 and includes all options currently outstanding under the Plans and 530,000 non-qualified options issued outside the Plans.


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at December 31, 2007		2,302,247		$	2.11
Granted		4,000			0.33
Exercised		—			—
Forfeited		(58,000	)		1.23

Outstanding at March 31, 2008		2,248,247		$	2.13		3.02	$	0

Options exercisable at March 31, 2008		1,995,916		$	0.84		2.95	$	0

The following table summarizes information about stock options outstanding at March 31, 2008:


							Options Exercisable at
	Options Outstanding at March 31, 2008						March 31, 2008
			Weighted Average		Weighted
	Number of		Remaining		Average		Number of		Weighted
Range of	Shares		Contractual Life		Exercise		Shares		Average
Exercise Price	Outstanding		(years)		Price		Exercisable		Exercise Price
$0.01 — $0.99		1,503,914		2.89	$	0.32		1,401,582	$	0.32
$1.00 — $1.99		296,666		2.97	$	1.45		196,667	$	1.42
$2.00 — $2.99		447,667		3.49	$	2.44		397,667	$	2.37
$3.00 — $4.50		—		—		—		—	—

		2,248,247						1,995,916

		Warrants

		During the three months ended March 31, 2008, there were no warrants granted, exercised or forfeited. At March 31, 2008, there were 340,336 warrants outstanding and exercisable at a weighted average price of $2.67 per share.

		The following table summarizes the outstanding warrants, all of which are currently exercisable, to purchase Common Stock at March 31, 2008:


Number	Exercise Price	Expiration Date
15,336	$1.87	March 2009
120,000	$2.58	April 2011
80,000	$2.80	April 2011
25,000	$4.00	February 2009
100,000	$2.45	February 2017

4.		Subsequent Event

		On April 7, 2008, the Company granted 750,000 stock options to a consultant as compensation for his services. These options expire five years from the grant date and are exercisable one year from the grant date at an exercise price of $0.21 per share, the per share market value on the grant date.

Item 2. Management’s discussion and analysis of financial condition and results of operations

Results of Operations

The following table sets forth the results of operations expressed as a percentage of net revenues.


	Three Months Ended
	March 31,
	2008			2007

ASP, net		40	%		34	%
Licensing and software		52	%		46	%
Customization and other		8	%		20	%

Net revenues		100	%		100	%
Cost of revenues		41	%		42	%

Gross Profit		59	%		58	%

General and administrative expense		61	%		41	%
Product maintenance and development costs		37	%		23	%
Selling and marketing expense		33	%		65	%
Amortization of customer list		2	%		2	%

Income (loss) from operations		(74	%)		(73	%)
Interest income		—			—
Interest expense		—			—

Loss before taxes		(74	%)		(73	%)
Provision for taxes		—			—

Net loss		(74	%)		(73	%)

Three month periods ended March 31, 2008 and 2007

Revenues

Net revenues for the three months ended March 31, 2008 decreased to $1,052,000 from $1,365,000 during the three months ended March 31, 2007, a net decrease of $313,000. The net revenues for 2008 decreased by $193,000 in Customization & Other revenues, $82,000 in Licensing and Software revenues, and $38,000 in ASP revenues.

The decrease in Customization & Other Revenues is due to less customization and installation projects in 2008, as compared to 2007. The decrease in Licensing and Software revenues is primarily due to decreased software license upgrade sales on our payment processing software. The decrease in ASP revenues is primarily due a reduced volume of ASP transactions processed and to the cancellation of several customers.

Cost of revenues

Cost of revenues consists primarily of the costs to customize and install software applications, configure end-user software, install Web-based ad-taking software, provide technical customer training and

end-user support, amortization of internally developed application modules, depreciation of production servers and related software, royalties, and co-location costs.

Cost of revenues decreased to $435,000 in the three months ended March 31, 2008 from $579,000 during the three months ended March 31, 2007, a net decrease of $144,000 or 25%. Our gross profit margin for the three months ended March 31, 2008 increased to 59%, as compared to 58% in the same prior year period. The decrease in costs during the 2008 three month period, when compared to the same prior year period, is primarily due to decreased compensation costs, resulting from staffing reductions, and to reduced stock compensation costs. These cost reductions also caused the increase in profit margin percentage, as compared to the prior year.

General and administrative expense

General and administrative expense consists primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased to $645,000 during the three months ended March 31, 2008 from $563,000 during the three months ended March 31, 2007, a net increase of $82,000 or 15%. The increase in 2008 is primarily due to an increase in stock compensation expense of $61,000 and to an increase in professional fees and listing fees of $40,000; offset by a decrease in compensation costs of $19,000, over the same prior year period. The increase in professional fees is primarily due to consulting fees incurred in connection with compliance with the current provisions relating to Sarbanes-Oxley legislation. We believe that our existing executive and administrative staffing levels are sufficient to allow for moderate growth without the need to add personnel and related costs for the foreseeable future.

Product maintenance and development costs

Product maintenance and development expenses consist of expenses to identify functional requirements, to plan, identify and conceptually design the required technical infrastructure, and to perform other general routine fixes. Our development activities have also included the development of prototypes for new service offerings. The costs consist primarily of personnel-related expenses for technical and design functions including outside consultants. Product maintenance and development expenses increased to $387,000 during the three months ended March 31, 2008 from $319,000 during the same prior year period, a net increase of $68,000. The increase in 2008, as compared to the same 2007 period, is primarily due to an increase in compensation related costs. Such cost increases were primarily due to staffing increases related to the development of new order entry applications related to mobile advertising.

We monitor technical staffing levels closely and believe that our current level of technical staffing will be sufficient for the near future. If we are able to accelerate the attraction of new customers, we may need to increase technical staffing in the short term for customization projects. However, such an increase in technical staffing costs would be generally offset by increased revenues for such services.

Selling and marketing expenses

Selling and marketing expenses consist primarily of direct charges for advertising, sales promotion, marketing and trade shows, as well as the cost of business development. Selling and marketing costs decreased to $342,000 in the three months ended March 31, 2008 from $885,000 for the same period in 2007, a net decrease of $543,000 or 61%. The decrease during the quarter, as compared to the same prior year period, is primarily due to decreases in compensation and travel costs of $239,000, decreases in stock compensation costs of $232,000, and to decreases in legal, trade show and office costs of $72,000. Such decreases were primarily a result of reduced business development activities.

Provision for Income Taxes

The provision for income taxes is comprised primarily of state taxes. Federal income taxes are consolidated and we are currently in a loss carry-forward position for federal income taxes, due to the

operating losses incurred through December 31, 2007. The federal net operating loss carry-forward balance as of March 31, 2008 was approximately $22 million. The net operating loss carry-forward is available to offset future taxable income through 2028. Some of the losses begin to expire in 2017.

Liquidity and Capital Resources

At March 31, 2008, we had an accumulated deficit of $24,483,000. We have incurred significant recurring net losses. For the years ended December 2007 and 2006, the net losses were $3,310,000 and $1,393,000 respectively, and for the three months ended March 31, 2008 and 2007, the net losses were $777,000 and $998,000 respectively. The 2008 and 2007 net losses were principally attributable to business development activities and corporate costs that were not sufficiently supported by contributions from operations. We anticipate that we will continue to incur losses until we are able to increase revenues significantly from fees for advertising placement using our ASP and payment processing services.

Revenues for the three month period ended March 31, 2008 have decreased to $1,052,000 from $1,365,000 in the prior year period. Revenue decreases may continue in future periods, primarily as a result of the cancellation of one of our largest customer publications, representing approximately 12% of our revenues in 2007 and 11% in the quarter ended March 31, 2008, and to decreases in classified advertisement placements throughout the newspaper industry.

We have historically financed our business through a combination of cash generated from services rendered and from debt and equity financings. At March 31, 2008, we had negative working capital of $926,000 compared to negative working capital of $549,000 at December 31, 2007, a $377,000 decrease.

As of March 31, 2008, we had cash and cash equivalents of approximately $511,000 compared to $717,000 as of December 31, 2007, a net decrease of $206,000. The net decrease in cash and cash equivalents was the result of $171,000 used in operating activities, $6,000 used in investing activities, and $29,000 used in financing activities.

Net cash used in operations during the three months ended March 31, 2008 was $198,000 compared with $256,000 used in operations during the three months ended March 31, 2007. The decreased cash used in operations during 2008 was primarily due to the decreased loss in the 2008 period and to an increase in accounts receivable collections, as compared to the same prior year period.

Net cash used in investing activities was $6,000 during the three months ended March 31, 2008 compared with $18,000 during the same prior year period. The increase of $12,000 is primarily the result of reduced equipment purchases during the quarter ended March 31, 2008.

Net cash used in financing activities was $2,000 during the three months ended March 31, 2008 compared with cash provided by financing activities of $360,000 during the same prior year period. Net proceeds from the exercise of stock options and warrants were $361,000 in 2007, with no proceeds from the exercise of stock options and warrants in the 2008 period.

We may continue to incur losses until we are able to increase revenues significantly from fees derived from our advertising intake and payment processing services. Operational cash expenditures are anticipated to decrease as a result of continuing cost cutting strategies. However, our ability to increase revenues from our ASP service offerings during the next 12 months may be hampered by the current unstable climate in the advertising market relating to newspaper publishers and state of the economy in general. These factors, coupled with possible competition from other vendors, the extended selling cycle in the industry, and customer delays in customization and implementations, could delay our ability to increase revenue to a level sufficient to cover expenses.

The continuation of our business is dependent upon achieving a break even or profitable level of operations or on obtaining further financing. To the extent that funds generated from operations are insufficient, we will have to raise additional working capital from private placements, public offerings and/or

debt financing. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. If adequate working capital is not available we may be required to further reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives.

These conditions raise doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern.

On March 18, 2008, we received a staff determination notice from the NASDAQ Stock Market (“NASDAQ”) indicating that the Company failed to regain compliance with the $1.00 minimum closing bid price per share requirement for continued listing or demonstrate that it meets the criteria for initial listing, during the compliance period of 180 calendar days. As a result, our securities were delisted from the Nasdaq Capital Market at the opening of business on March 27, 2008. Our securities continue trading on the OTC Bulletin Board under the same trading symbol “ADST”.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited Consolidated Condensed Financial Statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, percentage completion on certain contracts, and income taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

We believe there have been no significant changes, during the three month period ended March 31, 2008, to the items disclosed as critical accounting policies and estimates in Management’s Discussion and Analysis or Plan of Financial Condition and Results of Operations in their Annual Report on

Form 10-KSB for the year ended December 31, 2007.

New accounting pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, the year beginning January 1, 2008 for AdStar. The adoption of SFAS No. 157 did not have a material impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on our financial statements.

In December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS 141(R) provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS 141(R) also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS 141(R) is effective for business combinations occurring in fiscal

years beginning after December 15, 2008, which will require us to adopt these provisions for business combinations occurring in fiscal 2010 and thereafter. Early adoption of SFAS 141(R) is not permitted.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. This Statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement changes the way the consolidated income statement is presented by requiring net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and to disclose those amounts on the face of the income statement. SFAS 160 is effective for fiscal years beginning after December 15, 2008. Early adoption of SFAS 160 is not permitted. The Company is currently evaluating the impact that SFAS 160 will have on our financial statements and disclosures.

Contractual Obligations, Commitments and Contingencies

We have contractual obligations and commitments primarily with regards to employment agreements for three of our current executives, certain non-cancelable operating lease obligations for office space, and a capital lease obligation for office equipment and furnishings.

The following table aggregates our expected contractual obligations and commitments subsequent to March 31, 2008:


				Less than			1 to 3
Contractual Obligations	Total			1 year			Years			3 to 5 Years
Employment agreements	$	1,932,000		$	617,000		$	1,007,000		$	308,000
Operating lease commitments		550,000			260,000			252,000			38,000
Capital lease commitment		31,000			10,000			20,000			1,000
Less: Interest on capital lease		(6,000	)		(3,000	)		(3,000	)		—

	$	2,507,000		$	884,000		$	1,276,000		$	347,000
Less: Sublease income		(94,000	)		(58,000	)		(36,000	)		—

	$	2,413,000		$	826,000		$	1,240,000		$	347,000

Item 3. Quantitative and qualitative disclosures about market risk.

A smaller reporting company is not required to provide the information required by this Item.

Item 4T. Controls and procedures.

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and our chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, our chief executive officer and our chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 2. Unregistered sales of equity securities and use of proceeds

In March 2008, we issued 250,000 shares of restricted Common Stock to an accredited investor for consulting services rendered. The shares had an approximate fair market value of $80,000. The issuance of these shares was pursuant to an exemption from registration provided under section 4(2) and 4(6) of the Securities Act of 1933, as amended (the “Act”). The stock certificate issued for the shares were imprinted with a legend restricting transfer unless pursuant to an effective registration statement or an available exemption under the Act.

Item 6. Exhibits

Exhibits:


Exhibit No.		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.