Unassociated Document
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,
2007.
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OR
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o |
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
for
the transition period from _______ to
_______.
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Commission
file number: 333-54822
DealerAdvance,
Inc.
(f/k/a
Stronghold Technologies, Inc.)
(Exact
name of small business issuer as specified in its charter)
Nevada
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20-5717448
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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16801
Addison Road, Suite 310, Addison, TX 75001
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(Address
of principal executive offices)
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(214)
866-0606
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(Issuer’s
telephone number)
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N/A
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(Former
name, former address and former fiscal year, if changed since last
report)
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Check
whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities 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
o
APPLICABLE
ONLY TO CORPORATE ISSUERS
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 11, 2007, 50,567,393
shares
of the Registrant’s common stock, (par value, $0.0001), were
outstanding.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes o
No
x
Transitional
Small Business Disclosure Format: (Check One): Yes o No
x
TABLE
OF CONTENTS
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Page
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PART
I - Financial Information
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Item
1.
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Financial
Statements
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2
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Condensed
Consolidated Balance Sheet as of March 31, 2007
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3
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Condensed
Consolidated Statements of Operations For the Three Months Ended
March 30
2007 and 2006
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4 |
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Condensed
Consolidated Statements of Cash Flows for the Three Months Ended
March 31,
2007 and 2006
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5 |
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Notes
to Condensed Consolidated Financial Statements
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6 |
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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10
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Item
3.
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Controls
and Procedures
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24
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Part
II - Other Information
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25
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Item
1
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Legal
Proceedings
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25
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Item
2
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Unregistered
Sales of Equity Securities and Use of Proceeds
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26
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Item
3
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Defaults
upon Senior Securities
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27
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Item
4
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Submission
of Matters to a Vote of Security Holders
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27
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Item
5
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Other
Information
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27
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Item
6.
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Exhibits
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28
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PART
I -
FINANCIAL INFORMATION
DealerAdvance,
Inc. and Subsidiary
Condensed
Consolidated Balance Sheet
DealerAdvance,
Inc. and Subsidiary, formerly Stronghold Technologies,
Inc.
CONSOLIDATED
BALANCE SHEET
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March
31,
2007
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ASSETS
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Current
assets
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Cash
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$
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78,284
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Accounts
receivable
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10,775
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Notes
receivable, related party
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58,587
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Prepaid
expenses
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14,885
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Total
current assets
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162,531
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Property
and equipment, net
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3,495
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Other
assets
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Deferred
charge, loan acquisition costs, net of amortization
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2,848
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Other
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1,000
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Total
other assets
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3,848
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$
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169,874
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LIABILITIES
AND STOCKHOLDERS' DEFICIT
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Current
liabilities
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Accounts
payable
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$
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418,583
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Interest
payable, stockholders
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1,335,814
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Notes
payable, stockholders, current portion
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875,000
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Callable
secured convertible notes, current portion
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3,341,542
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Deferred
revenue
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57,445
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Liquidated
damages payable
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2,353,483
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Accrued
expenses and other current liabilities
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1,322,808
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Total
current liabilities
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9,704,677
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Long-term
liabilities
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Notes
payable, stockholders, convertible debt, net of imputed interest
of
$608,671
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198,238
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Callable
secured convertible notes, less current portion
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3,679,787
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Total
long term liabilities
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3,878,024
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Commitments
and contingencies
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Stockholders'
deficit
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Preferred
stock, Series A, $.0001 par value; authorized 5,000,000
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shares,
2,002,750 issued and outstanding (aggregate liquidation preference
of
$3,004,125)
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and
preferred stock, Series B, $.0001 par value; 2,444,444 shares authorized,
issued and
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outstanding
(aggregate liquidation preference $2,200,000) and preferred stock,
Series
D,
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$.01
par value; authorized 10,000 shares authorized, issued and outstanding
(aggregate
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liquidation
preference $1,989,200)
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545
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Common
stock, $.0001 par value, authorized 8,500,000,000
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shares,
48,207,393 issued and outstanding
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4,821
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Additional
paid-in capital
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10,854,946
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Accumulated
deficit
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(24,273,140
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)
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Total
stockholders' deficit
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(13,412,828
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)
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$
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169,874
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DealerAdvance,
Inc. and Subsidiary
Condensed
Consolidated Statements of Operations
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Three
months ended March
31,
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2007
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2006
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Sales
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$
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59,254
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$
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143,729
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Cost
of sales
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19,198
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15,803
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Gross
profit
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40,056
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127,926
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Selling,
general and
administrative
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508,186
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705,631
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Research
and development
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62,890
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Loss
from operations
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(531,020
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)
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(577,705
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)
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Interest
expense
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217,887
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183,350
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Liquidated
damages
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361,895
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270,135
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Net
loss applicable to common
stockholders
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$
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(1,110,802
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)
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$
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(1,031,190
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)
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Basic
and diluted loss per common
share
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$
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(0.02
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)
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$
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(0.03
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)
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Weighted
average number of common
shares outstanding
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45,801,382
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29,250,083
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See
accompanying notes to condensed consolidated financial
statements
DealerAdvance,
Inc. and Subsidiary
Condensed
Consolidated Statements of Cash Flows
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Three
months ended March 31,
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2007
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2006
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Cash
flows from operating activities
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Net
loss
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$
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(1,110,802
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)
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$
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(1,031,190
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)
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Adjustments
to reconcile net loss to net cash used in operating activities:
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-
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-
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Depreciation
and amortization
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7,169
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125,555
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Interest
payable, stockholders
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148,726
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182,494
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Liquidated
damages payable
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361,896
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270,135
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(4,494
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)
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(21,781
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)
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Inventories
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-
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2,350
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Prepaid
expenses
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54,224
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8,756
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Accounts
payable
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37,331
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(58,128
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)
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Accrued
expenses and other current liabilities
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72,488
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(58,527
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Deferred
Revenue
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(36,838
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)
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(65,842
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)
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Other
Assets
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(7,021
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)
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-
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Net
cash used in operating activities
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(477,320
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)
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(646,178
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)
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Cash
flows from financing activities
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Proceeds
from issuance of common stock, net of financing costs
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150,000
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Proceeds
from notes payable, convertible debt
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450,000
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430,000
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Net
cash provided by financing activities
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450,000
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580,000
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Net
increase in cash
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(28,272
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)
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(66,178
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)
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Cash,
beginning of period
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106,556
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67,060
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Cash,
end of period
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$
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78,284
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$
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882
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Supplemental
disclosure of cash flow information,
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cash
paid during the period for interest
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$
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-
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$
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856
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See
accompanying notes to condensed consolidated financial statements
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The
accompanying consolidated financial statements have been prepared pursuant
to
the rules and regulations of the Securities and Exchange Commission (the “SEC”).
These statements are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments and accruals) necessary
to present fairly the results for the periods presented. Certain information
and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America have been omitted pursuant to applicable SEC rules and regulations.
Operating results for the three month period ended March 31, 2007 is not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007. These financial statements should be read in conjunction
with
the financial statements and the notes thereto included in the Company’s Annual
Report on Form 10-KSB for the fiscal year ended December 31,
2006.
Loss
per
common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, “Earnings Per Share,” which
requires dual presentation of basic and diluted earnings (loss) per share.
Basic
earnings (loss) per share excludes dilutions and is computed by dividing net
loss applicable to common stockholders by the weighted average number of common
shares outstanding for the year. Diluted earnings (loss) per share reflects
the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Since
the effect of the outstanding options and warrants are anti-dilutive, they
have
been excluded from the Company’s computation of diluted loss per common
share.
|
2.
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RECENTLY
ISSUED ACCOUNTING
PRONOUNCEMENTS
|
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Accounting for Stock-based Compensation (Revised).” SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award the requisite service period (usually the vesting period). No compensation
costs are recognized for equity instruments for which employees do not render
the requisite service. The grant-date fair value of employee share options
and
similar instruments will be estimated using option-pricing models adjusted
for
the unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available). If an equity award is
modified after the grant-date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification.
In
May
2005, the FASB SFAS No. 154, “Accounting Changes and Error Corrections, a
Replacement of APB Opinion No. 20 and FASB Statement No. 3”. This statement
requires retrospective application to prior periods’ financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. It carries
forward without change the previous guidance for reporting the correction of
an
error and a change in accounting estimate. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
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3.
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STOCK-BASED
COMPENSATION
|
In
December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment,
which
is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation.
SFAS
No. 123(R) requires all share-based payments to employees and directors,
including grants of stock options, to be recognized in the financial statements
based on their fair values. We adopted SFAS No. 123(R) on January 1, 2006,
under
the modified prospective method, in which the requirements of SFAS No. 123(R)
are to be applied to new awards and to previously granted awards that are not
fully vested on the effective date. The modified prospective method does not
require restatement of previous years’ financial statements.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. Since the beginning of the fiscal
year, the Company has incurred a net loss of $1,110,802 and has negative cash
flows from operations of $477,320 for the three months ended March 31, 2007,
and
has a working capital deficit of $9,542,146 and a stockholders’ deficit of
$13,412,828 as of March 31, 2007. These conditions raise substantial doubt
about
the Company’s ability to continue as a going concern. During 2007, management of
the Company will rely on raising additional capital to fund its future
operations. If the Company is unable to generate sufficient revenues or raise
sufficient additional capital, there could be a material adverse effect on
the
consolidated financial position, results of operations and cash flows of the
Company. The accompanying consolidated financial statements do not include
any
adjustments that might be necessary if the Company is unable to continue as
a
going concern.
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5.
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ACCRUED
EXPENSES AND OTHER CURRENT
LIABILITIES
|
Accrued
expenses and other current liabilities consist of the following at March 31,
2007:
Accrued
Expenses
|
|
|
|
Sales
tax
|
|
$
|
106,524
|
|
Payroll
taxes, including penalties and interest
|
|
|
530,355
|
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Compensation
|
|
|
113,084
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Commissions
|
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120,339
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Settlements
of litigation
|
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345,856
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Other
|
|
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106,650
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Total
|
|
$
|
1,322,808
|
|
Payroll
Tax Payment Agreement with IRS
On
April
30, 2004, the Company’s predecessor, Stronghold Technologies, Inc., (the
“Subsidiary”) a New Jersey corporation and a wholly owned subsidiary of Dealer
Advance, Inc., entered into an installment agreement with the United States
Internal Revenue Service (“IRS”) to pay overdue payroll taxes and penalties of
totaling $1,233,101 under the terms of which the Company will pay a minimum
of
$35,000 each month, commencing June 28, 2004, until it has paid the withholding
taxes due in full, to be completed in thirty-six month period by April 30,
2007.
If the Subsidiary is unable to fulfill this agreement, the IRS could take
possession of the Subsidiary’s assets. The Subsidiary defaulted on the agreement
in September, 2006 with an unpaid balance of approximately
$285,000.
|
6.
|
NOTES
PAYABLE, STOCKHOLDERS
|
At
March
31, 2007, notes payable, stockholders consists of the following:
Note
payable bearing interest at 8% and due in May, 2007
|
|
$
|
875,000
|
|
Non
interest bearing convertible notes payable, net of interest imputed
at
|
|
|
|
|
15%
per annum of $608,671
|
|
|
198,238
|
|
|
|
|
1,073,238
|
|
Less
current portion
|
|
|
(875,000
|
)
|
Long-term
portion
|
|
$
|
198,238
|
|
The
convertible notes mature on August 13, 2016 and are convertible at the option
of
the stockholder at the market price of the company’s common stock on the day of
the conversion.
7. COMMITMENTS
AND CONTINGENCIES
Callable
Secured Convertible Notes
Callable
secured convertible notes bear interest at a rate ranging from
8% to
12%
|
|
|
|
(weighted
average 10.22%) and are due at various dates from April 2006
to
|
|
|
|
December
15, 2009. The notes are secured by the company’s assets
|
|
$
|
7,021,329
|
|
(Less)
current portion
|
|
|
3,341,542
|
|
|
|
$
|
3,679,787
|
|
The
notes
are convertible into our common stock, at the investors’ option, at a conversion
price, equal to the lower of (i) $0.05 or (ii) 25% of the average of the three
lowest intraday trading prices for our common stock during the 20 trading days
before, but not including, the conversion date.
On
December 15, 2006 the Company entered into an agreement with a group of
investors for the sale of $900,000 of callable secured convertible notes and
5,000,000 common stock purchase warrants. As of March 31, 2007, the Company
sold
$700,000 of the notes and issued 3,938,000 warrants.
In
April,
2007 the company sold an additional $150,000 of notes and issued 850,000
warrants.
|
8.
|
RELATED
PARTY TRANSACTIONS
|
Transactions
with Officers and Directors of DealerAdvance, Inc.
The
Company and/or the Company’s sole executive officer and director and CEO may be
subject to fines, sanctions and/or penalties of an indeterminable nature as
a
result of violations of the Sarbanes Oxley Act of 2002 in connection with loans
made to the sole executive officer and director.
In
2006
the Company loaned its sole executive officer and director, and a company
controlled by him, $114,141. During this same period, $68,000 of the loans
were
repaid. In January and February 2007, the Company loaned an additional $24,050.
During this same period, $18,500 of the loans were repaid. These loans violate
Section 402 of the Sarbanes Oxley Act of 2002. As a result, despite the fact
that a portion of such loans were repaid, the company and/or the Company’s
sole executive officer and director may be subject to fines, sanctions
and/or penalties. At this time, we are unable to determine the amount of such
fines, sanctions and/or penalties that may be incurred by our company and/or
the
officer.
9.
SUBSEQUENT EVENTS
In
connection with the callable secured convertible notes (see note 7 above),
in
April, 2007 the company sold an additional $150,000 of notes and issued 850,000
warrants to purchase common stock.
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
Definitions
All
references to “we,” “us,” “our,” the “Company” or similar terms used herein
refer to DealerAdvance, Inc., a Nevada corporation, formerly known as TDT
Development, Inc. and its wholly-owned subsidiary, Stronghold Technologies,
Inc., a New Jersey corporation. All references to “Stronghold” used herein refer
to just our wholly-owned subsidiary, Stronghold Technologies, Inc., a New Jersey
corporation. All references to the “Predecessor Entity” refer to the New Jersey
corporation we acquired on May 16, 2002, Stronghold Technologies, Inc.,
which was merged with and into Stronghold.
Our
History
SAFE
HARBOR STATEMENT
The
statements contained in this Annual Report on Form 10-KSB that are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 ("the Securities Act"), as amended
and the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
In particular, our statements regarding the anticipated growth in the markets
for our technologies, the continued development of our products, the approval
of
our Patent Applications, the successful implementation of our sales and
marketing strategies, the anticipated longer term growth of our business, and
the timing of the projects and trends in future operating performance are
examples of such forward-looking statements. The forward-looking statements
include risks and uncertainties, including, but not limited to, the timing
of
revenues due to the uncertainty of market acceptance and the timing and
completion of pilot project analysis, and other factors, including general
economic conditions, not within our control. The factors discussed herein and
expressed from time to time in our filings with the SEC could cause actual
results to be materially different from those expressed in or implied by such
statements. The forward-looking statements are made only as of the date of
this
filing and we undertake no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
We
were
incorporated as a Nevada corporation on September 8, 2000, under the name
TDT Development, Inc. On May 16, 2002, we acquired Stronghold Technologies,
Inc., a New Jersey corporation referred to herein as our “Predecessor Entity”,
pursuant to a merger of the Predecessor Entity into our wholly-owned subsidiary,
TDT Stronghold Acquisition Corp., referred to herein as “Acquisition Sub”. As
consideration for the merger, we issued 7,000,000 shares of our common stock,
par value $0.0001 per share, to the stockholders of the Predecessor Entity
in
exchange for all of the issued and outstanding shares of the Predecessor Entity.
Following the merger, Acquisition Sub, the survivor of the merger, changed
its
name to Stronghold Technologies, Inc. (NJ) and remains our only wholly-owned
subsidiary. On July 11, 2002, we changed our name from TDT Development,
Inc. to Stronghold Technologies, Inc. On July 19, 2002, we exchanged all of
the shares that we held in our two other wholly-owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc., which conducted an import and
distribution business specializing in truffle-based food product, for 75,000
shares of our common stock held by Mr. Pietro Bortolatti, our former president.
In October 2006, we changed our name to DealerAdvance, Inc.
Overview
of our Handheld Technology Business
On
May 16, 2002, we entered the handheld wireless technology business via our
acquisition by merger of the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 to develop proprietary handheld wireless
technology for the automotive dealer software market. Since the merger of the
Predecessor Entity into our subsidiary, In 2006 we ceased from continuing to
conduct the Predecessor Entity's handheld wireless technology business and
have
developed a new web based platform called WEB DA and currently offer the
wireless technology created by the predecessor as an option.
Our
Revenues Moving Forward
Beginning
with the 4th
Quarter
of 2006 the Company’s revenue model will change. Rather than being hardware
driven, the Company will become software driven and will move its DealerAdvance
product from a server based platform to a web based application, thus
eliminating the high cost of maintaining inventory and installation costs.
Our
revenues, moving forward will be primarily generated from a one-time up-front
payment and monthly recurring fees covering software licenses. Our license
agreements will be provided in twelve, twenty-four and thirty-six month terms.
A
$2,500 down payment and a monthly fee of $1,500 over a twelve month term will
be
booked as revenue at an average annual fee of $20,500, inclusive of the down
payment.
The
Company currently has approximately 30 user contracts at dealerships throughout
the United States. Management believes that the majority of those contracts,
of
which all are to expire in the next 12 months, will be renewed at the
above-mentioned rates however it cannot provide any guarantee regarding these
renewals.
Additionally,
many of the Company’s client customer base are part of dealer groups comprised
of three or more dealerships. Up until now the Company has not been successful
in leveraging its relationships with these dealers enabling the Company to
place
the DealerAdvance product into those additional group stores. Management now
believes that because of the its new web based product and its newly developed
client relationships, there is an opportunity to add an additional 20 to 25
client contracts over the next 12 to 18 months through these
groups.
GENERAL
AND ADMINISTRATIVE OPERATING EXPENSES
Our
general operating expenses are primarily comprised of:
· Marketing
and
Selling;
· General
and
Administrative; and
· Development
&
Operations.
Our
marketing and selling expenses include all labor, sales commissions and
non-labor expenses of selling and marketing of our products and services.
Our
general and administrative expenses include expenses for all facilities,
insurance, benefits, telecommunications, legal and auditing expenses are
included as well as the executive management group wage expense.
Our
development & operations expenses include costs for software development and
the support group, which advises and supports the installations of our Dealer
Advance™ clients.
RESEARCH
AND DEVELOPMENT
Moving
forward, the company’s primary focus is the development of WebDA™, the new
web-based version of DealerAdvance™. The initial release of WebDA™ will take the
existing DealerAdvance™ software with a few added enhancements and move the
product to the web, thus eliminating the high cost of equipment required by
the
current product. The new product will not feature the hand-held wireless
technology offered with DealerAdvance™, however, should a dealer desire the
benefit of the technology, it will be provided at an additional cost. In the
first month of each quarter moving forward, a new release will be provided
to
dealers of WebDA™, beginning with 1.0.
SALES
DEVELOPMENT
In
March
2006, the Company entered into a consulting agreement with Humphries Marketing
Group (HMG), a Texas based automotive exclusive advertising agency. As per
that
agreement Steven Humphries, the CEO of HMG, is to serve as President of the
Company, and provide an individual to serve as the Vice President of Sales.
In
July 2006, Mr. Humphries appointed David Scaturro (HMG’s Chief Operating
Officer) as the Vice President of Sales.
As
part
of Mr. Humphries’ operating sales strategy, the Company has split the country
into two regions (East and West). The Company and hired two Regional Sales
Managers; an Eastern Manager serving dealers east of Texas and a California
based Western Region Manager serving dealers Texas west. The Regional Managers
are based in DealerAdvances’s Texas and California offices, respectfully. The
primary focus of the new sales team is to re-establish the Company’s
relationships with its remaining customers and develop new contacts in
preparation of the release of WebDA™. The company will employ additional Sales
Managers as it implements the launch of its new WebDA™ product early in the
2nd
quarter
of 2007.
THREE
MONTHS ENDED MARCH 31, 2007 AND THREE MONTHS ENDED MARCH 31,
2006.
Revenue
For
the
quarter ended March 31, 2007, we had revenue of $59,254 compared with revenue
of
$143,729 for the quarter ended March 31, 2006 for a decrease of 59% Revenue
is
generated from software license and system installation, maintenance support
and
service revenues. Revenues for the three months ended March 31, 2007 and March
31, 2006 are broken down as follows:
|
|
2007
|
|
2006
|
|
$
Change
|
|
%
Change
|
|
Software
License & System Installation
|
|
$
|
3,000
|
|
$
|
13,944
|
|
$
|
(10,944
|
)
|
|
-78
|
%
|
Support
& Maintenance
|
|
$
|
53,734
|
|
$
|
123,585
|
|
$
|
(69,851
|
)
|
|
-57
|
%
|
Services
|
|
$
|
2,520
|
|
$
|
6,200
|
|
$
|
(3,680
|
)
|
|
-59
|
%
|
Total
Revenue
|
|
$
|
59,254
|
|
$
|
143,729
|
|
$
|
(84,475
|
)
|
|
-59
|
%
|
Software
license and system installation revenue decreased $10,944 in the three months
ended March 31, 2007 to $3,000 as compared to $13,944 in the three months ended
March 31, 2006 for a decrease of 78%. The primary reasons for the decrease
in
revenue can be attributed to (1) our decision to stop selling our DealerAdvance™
software product and devote our resources to the development of our new
web-based product, WebDA™, (2) expiration of 36 service and support contracts
and (3) repeated concerns in the marketplace about the Company’s ability to
continue as a going concern.
Although
we cannot provide guarantees, we do believe that our revenues will increase
dramatically in the upcoming months due to the new “Web DA” product release.
Cost
of Sales
Cost
of
sales on a percentage basis increased to 32.4% of revenue for the three months
ended March 31, 2007 as compared to 11% of revenue for the three months ended
March 31, 2006 for a net decrease of 21.4%. The table below shows the Cost
of
Sales and percentage by category and the comparison in dollars and percentage
for the three months ended March 31, 2007 and three months ended March 31,
2006.
The decrease in Cost of Sales as a percentage of revenue of 21.4% is primarily
attributed to an increase in labor costs associated with improved customer
support.
|
|
Q1
2007
|
|
Q1
2006
|
|
Q1
2007
|
|
Q1
2006
|
|
|
|
Cost
of Sales
|
|
Dollars
|
|
Dollars
|
|
%
of Revenue
|
|
%
of Revenue
|
|
%
Change
|
|
Hardware
Components
|
|
$
|
1,178
|
|
$
|
1,680
|
|
|
1.99
|
%
|
|
1.17
|
%
|
|
0.82
|
%
|
Client
Software & Licensing
|
|
|
1,500
|
|
$
|
3,675
|
|
|
2.53
|
%
|
|
2.56
|
%
|
|
-0.03
|
%
|
Distribution
Fees
|
|
|
950
|
|
$
|
951
|
|
|
1.60
|
%
|
|
-
|
|
|
1.60
|
%
|
Subcontractors
|
|
|
-
|
|
$
|
0
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Misc
Installation Costs
|
|
|
-
|
|
|
($590
|
)
|
|
0.00
|
%
|
|
-0.41
|
%
|
|
0.41
|
%
|
Installations/Travel
|
|
|
-
|
|
$
|
0
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Repairs
|
|
|
-
|
|
$
|
0
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Shipping
|
|
|
178
|
|
$
|
47
|
|
|
0.30
|
%
|
|
0.03
|
%
|
|
0.27
|
%
|
Labor
|
|
|
15,392
|
|
$
|
10,042
|
|
|
25.98
|
%
|
|
6.99
|
%
|
|
18.99
|
%
|
Inventory
Adjustment
|
|
|
-
|
|
$
|
0
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Total
Cost of Sales
|
|
$
|
19,198
|
|
$
|
15,805
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Sales % of Revenue
|
|
|
32.40
|
%
|
|
11.00
|
%
|
|
|
|
|
|
|
|
21.40
|
%
|
Gross
Profits
We
generated $40,056 in gross profits from sales for the quarter ended March 31,
2007, which was a decrease of $87,870 from the quarter ended March 31, 2006,
when we generated $127,927 in gross profits. Our gross profit margin percentage
decreased by 24.05% in the quarter ended March 31, 2007 to 67.6%. The decrease
in gross profit is primarily attributable to the reduction of monthly recurring
maintenance revenue due to the expiration of 32 service and support contracts
during the period March 31, 2006 to March 31, 2007.
Selling,
General and Administrative Expenses
Total
Selling, General and Administrative expenses in the quarter ended March 31,
2007
were $508,186, a decrease of 27.98% or $197,445 from the quarter ended March
31,
2006 of $705,631. The reduction in expense is attributable to decreases of
approximately $125,000 in executive compensation and $45,000 in costs associated
with financing.
Our
research and development expense increased from nil in the quarter ended March
31, 2006 to $62,890 in the quarter ended March 31, 2007. This increase is
directly attributable to the development of our new WebDA™ product.
Our
interest and penalty expense increased from $183,350 in the quarter ended March
31, 2006 to $217,887 in the quarter ended March 31, 2007.This increase of
$34,537 is primarily due to interest expense attributed to the
Convertible Notes. Liquidated damages associated with the Convertible Notes
increased from $270,135 in the quarter ended March 31, 2006 to $361,895 in
the
quarter ended September 30, 2006. The $91,760 increase is due to an additional
$1.1 million in Convertible Notes issued and subject to liquidated damages
during the period March 31, 2006 through March 31, 2007.
Operating
Loss
The
Company’s operating losses decreased by $46,685 in comparing the quarter ended
March 31, 2007 to the quarter ended March 31, 2006, which were $531,020 and
$577,705 respectively.
Net
Loss
We
had a
net loss of $1,110,802 for the quarter ended March 31, 2007 compared to
$1,031,190 for the quarter ended March 31, 2006, resulting in an increase in
net
losses of $79,612. This increase in net losses of 7.72% is primarily
attributable to an increase in liquidated damages associated with the
Convertible Notes. In comparing the quarter ended March 31, 2006 to the quarter
ended March 31, 2007, liquidated damages were $270,135 and $361,895,
respectively. Interest expense, also associated with the Convertible Notes,
increased by $34,537 from $183,350 to $217,887 for the three months ended March
31, 2006 and March 31, 2007, respectively.
Our
loss
per share was $0.02 with a weighted average of 45,801,382 shares outstanding
in
the quarter ended March 31, 2007 as compared to $0.03 loss per share in the
quarter ended March 31, 2006 with a weighted average of 29,250,083 shares
outstanding.
We
have
never declared or paid any cash dividends on our common stock. We anticipate
that any earnings will be retained for development and expansion of our business
and we do not anticipate paying any cash dividends in the foreseeable future.
Our board of directors, subject to any restrictions or prohibitions that may
be
contained in our loan or preferred stock agreements, has sole discretion to
pay
dividends based on our financial condition, results of operations, capital
requirements, contractual obligations and other relevant factors.
Liquidity
and Capital Resources
Overview
As
of
March 31, 2007, our cash balance was $78,284. We had a net loss of $1,110,802
for the quarter ended March 31, 2007. We had a net operating loss of
approximately $18,000,000 for the period from May 17, 2002 through March
31, 2007 to offset future taxable income. Losses incurred prior to May 17,
2002 were passed directly to the shareholders and, therefore, are not included
in the loss carry-forward. There can be no assurance, however, that we will
be
able to take advantage of any or all tax loss carry-forwards, in future fiscal
years. Our accounts receivable as of March 31, 2007 was $10,775 and $125,218
as
of the quarter ended March 31, 2006 less allowance for returns of $60,000.
The
reason for the decrease in accounts receivable of $114,443 as of March 31,
2007
to March 31, 2006 was due to the decrease in revenues and write-off of bad
debts. Accounts receivable balances represent amounts owed to us for maintenance
and support.
As
of
March 31, 2007, the Company had the following financing
arrangements:
Debt
Liability Summary Table
|
|
|
|
Current
Debt liabilities
|
|
|
|
Interest
payable, stockholders
|
|
$
|
1,335,814
|
|
Notes
payable, stockholder, current portion
|
|
|
875,000
|
|
Callable
secured convertible notes, current portion
|
|
|
3,341,542
|
|
Total
Debt current liabilities
|
|
$
|
6,058,256
|
|
|
|
|
|
|
Long-term
Debt liabilities
|
|
|
|
|
Notes
payable, stockholders, convertible debt, net of deferred interest
of
$608,671
|
|
$
|
198,238
|
|
Callable
secured convertible notes
|
|
|
3,679,787
|
|
Total
long term Debt liabilities
|
|
$
|
3,878,025
|
|
Financing
Needs
To
date,
we have not generated revenues in excess of our operating expenses. We have
not
been profitable since our inception; we expect to incur additional operating
losses in the future and will require additional financing to continue the
development and commercialization of our technology. We have incurred a net
loss
of approximately $1,111,000 and have negative cash flows from operations of
approximately $477,000 for the three months ended March 31, 2007, and have
a
working capital deficit of approximately $9,540,000 and a stockholders’ deficit
of approximately $13,412,000 as of March 31, 2007. These conditions raise
substantial doubt about our ability to continue as a going concern. During
2007,
our management will rely on additional capital to fund its future operations.
If
we are unable to generate sufficient revenues or raise sufficient additional
capital, there could be a material adverse effect on the consolidated financial
position, results of operations and we may be unable to continue our operations.
We
entered into a fifth Securities Purchase Agreement with the Investors on
December 17, 2006 for the sale of (i) $900,000 in callable secured convertible
notes (the “December 2006 Notes”) and (ii) stock purchase warrants (the
“December 2006 Warrants”) to buy 5,000,000 shares of our common stock.
We
expect
that the funds raised in connection with the December 2006 Securities Purchase
Agreement will provide the necessary cash to support operations through the
end
of May, 2007. We have a verbal commitment for an additional Securities Purchase
Agreement with the Investors for $950,000. We expect these funds will carry
us
through the end of the first quarter of 2008. Since we do not have further
financing commitments and may need to raise additional funds after the first
quarter of 2008, this condition raises doubt about our ability to continue
as a
going concern. In the event that the company is unable to build its sales
volume, collect current receivables or raise additional funds, we may be
unable
to continue operations. Additionally, in the event that the Investors fail
to
close on, or invoke their right to terminate additional purchases with 30
days
notice during the financing period of the additional $950,000 mentioned above,
the Company could find itself without cash to support operations and unable
to
perform regular business.
We
expect
our capital requirements to increase significantly over the next several years
as we continue to develop and market the WebDATM
suite
and as we increase marketing and administration infrastructure and develop
capabilities and facilities. Our future liquidity and capital funding
requirements will depend on numerous factors, including, but not limited to,
the
levels and costs of our research and development initiatives, the cost of hiring
and training additional sales and marketing personnel and the cost and timing
of
the expansion of our marketing efforts.
Financings
The
Company has entered into the following financing transactions:
Loans
from Christopher J. Carey, an Executive Officer, Director and Shareholder of
the
Company
On
July 31, 2000, the Predecessor Entity entered into a line of credit with
Mr. Chris Carey, our President and Chief Executive Officer and the President
and
Chief Executive Officer of Stronghold. The terms of the line of credit made
available $1,989,500, which the Predecessor Entity could borrow from time to
time, until August 1, 2001. The outstanding amounts accrued interest at the
per annum rate equal to the floating base rate, as defined therein, computed
daily, for the actual number of days elapsed as if each full calendar year
consisted of 360 days. The first interest payment under the line of credit
was
due on August 1, 2001. On such date, the parties agreed to extend the line
of credit for one more year, until August 1, 2002.
On
April 22, 2002, the Predecessor Entity issued 500,000 shares of its common
stock to Mr. Carey (which converted into 1,093,750 shares of our common stock
when we acquired the Predecessor Entity on May 16, 2002) in exchange for
cancellation of $1 million of outstanding indebtedness under the July 31,
2000 line of credit from Mr. Carey.
On
May 16, 2002, the total amount outstanding under the July 31, 2000
line of credit with Mr. Carey was $2.2 million. On such date, we issued 666,667
shares of our common stock to Mr. Carey in exchange for the cancellation of
$1
million of the then outstanding amount under the line of credit. We agreed
to
pay Mr. Carey the remaining $1.2 million according to the terms of a
non-negotiable promissory note, which was issued on May 16,
2002.
On
September 30, 2002, we renegotiated the $1,200,000 promissory note with Mr.
Carey pursuant to a requirement contained in the promissory note with PNC Bank.
According to the new terms of the loan, Mr. Carey extended the repayment of
the
principal amount until December 1, 2005. Until such time as the principal
is paid, we will pay an interest only fee of 12% per year. Mr. Carey’s
promissory note is expressly subordinated in right of payment to the prior
payment in full of all of the Company’s senior indebtedness. Subject to the
payment in full of all senior indebtedness, Mr. Carey is subrogated to the
rights of the holders of such senior indebtedness to receive principal payments
or distribution of assets. As of June 30, 2006, $359,600 was outstanding under
the promissory note issued to Mr. Carey. On August 10, 2006, Mr. Carey agreed
to
extend the term of his loan to August 31, 2006.
On
March 18, 2003, we entered into a bridge loan agreement with Christopher J.
Carey, for a total of $400,000. The agreement stipulates that the Company
will
pay an 8% interest rate on a quarterly basis until the loan becomes due and
payable on June 30, 2004. We also issued to Mr. Carey 391,754 warrants
exercisable for common stock for 10 years at a price of $0.97 per share.
On
December 30, 2003, Christopher J. Carey agreed to extend the term of the
promissory note to June 30, 2004. As of December 31, 2003, $360,000
was outstanding under this bridge loan agreement. On May 1, 2004, Christopher
J.
Carey agreed to extend the term of the loan to June 1, 2005. On April 11,
2006,
Christopher J. Carey agreed to extend the term of the loan to May 31, 2006.
On
August 10, 2006, Mr. Carey agreed to extend the term of the loan to August
31,
2006.
On
April
24, 2003, our President and Chief Executive Officer, Christopher J. Carey,
agreed to convert outstanding loans of $543,000 to 603,333 shares of our common
stock at a price of $.90 per share in conjunction with the Series B Convertible
Stock Financing detailed below.
On
August
14, 2006, Mr. Carey entered into a Settlement Agreement with the Company
pursuant to which Mr. Carey waived all rights to the following:
· accrued
salary in the amount of $781,369;
· a
bridge
loan in the amount of $262,000;
· a
bridge
loan in the amount of $360,000;
· auto
allowance payable in the amount of $25,600; and
· accrued
interest in the amount of $370,299.
In
consideration of this waiver, the Company has agreed to pay Mr. Carey $8,000
a
month over a period of 15 months, issue Mr. Carey a convertible note in the
amount of $661,369 (the "Carey Note") and issue Mr. Carey 5,117 shares of Series
D Convertible Preferred Stock with an aggregate stated value of $1,017,899.
The
Carey Note matures on August 13, 2016, bears no interest and is convertible
at
the option of Mr. Carey at the market price of the Company's common stock.
The
shares of Series D Preferred Stock are convertible by dividing the stated value
by the closing bid price on the day immediately prior to
conversion.
On
September 30, 2002, we entered into a loan agreement with CC Trust Fund to
borrow an amount up to $355,128. Christopher Carey Jr., Mr. Carey’s son, is the
beneficiary of the trust, and Mary Carey, Mr. Carey’s wife, is the trustee of
the trust. This bridge loan was for a period of twelve months, with all
principal due and payable on September 30, 2003. The 12.5% interest on the
outstanding principal is due each year. At the end of the loan period, the
CC
Trust Fund will be entitled to exercise 25,000 warrants at $1.50 per share.
On
September 30, 2003, the CC Trust Fund agreed to extend the term of their
loan to December 30, 2003. On December 30, 2003, the CC Trust Fund
agreed to extend the term of their loan to June 30, 2004. On March 30,
2004, the CC Trust Fund agreed to extend the term of their loan to
March 31, 2005. On May 1, 2005, the CC Trust Fund agreed to extend the term
of their loan to November 1, 2005. On April 11, 2006, the AC Trust Fund agreed
to extend the term of their loan to May 31, 2006. On August 10, 2006, the CC
Trust Fund agreed to extend the term of their loan to August 31, 2006. As of
June 30, 2006, $355,128 was outstanding under the CC Trust Fund loan agreement.
On August 14, 2006, the CC Trust Fund (the "CC Fund") entered into a Settlement
Agreement with the Company pursuant to which the CC Fund waived all rights
to a
loan made to the Company in the amount of $473,594 including interest. In
consideration of this waiver, the Company has agreed issue the CC Trust Fund
2,381 shares of Series D Convertible Preferred Stock with an aggregate stated
value of $473,594. The shares of Series D Preferred Stock are convertible by
dividing the stated value by the closing bid price on the day immediately prior
to conversion.
On
September 30, 2002, we entered into a loan agreement with AC Trust Fund to
borrow an amount up to $375,404. Amie Carey, Mr. Carey’s daughter, is the
beneficiary of the trust, and Mary Carey, Mr. Carey’s wife, is the trustee of
the trust. This bridge loan is for a period of twelve months, with all principal
due and payable on September 30, 2003. The 12.5% interest on the
outstanding principal is due each year. At the end of the loan period, the
Fund
will be entitled to exercise 25,000 warrants at $1.50 per share. On
September 30, 2002, the AC Trust Fund agreed to extend the term of their
loan to December 30, 2003. On December 30, 2003, the AC Trust Fund
agreed to extend the term of their loan to June 30, 2004. On March 30,
2004, the AC Trust Fund agreed to extend the term of their loan to
March 31, 2005. On May 1, 2005, the AC Trust Fund agreed to extend the term
of their loan to November 1, 2005. On April 11, 2006 the AC Trust Fund agreed
to
extend the term of their loan to May 31, 2006. On August 10, 2006, the AC Trust
Fund agreed to extend the term of their loan to August 31, 2006. As of June
30,
2006, $375,404 was outstanding under the AC Trust Fund loan agreement. On August
14 2006, the AC Trust Fund (the "AC Fund") entered into a Settlement Agreement
with the Company pursuant to which the AC Fund waived all rights to a loan
made
to the Company in the amount of $497,691 including interest. In consideration
of
this waiver, the Company has agreed issue the AC Fund 2,502 shares of Series
D
Convertible Preferred Stock with an aggregate stated value of $497,691. The
shares of Series D Preferred Stock are convertible by dividing the stated value
by the closing bid price on the day immediately prior to
conversion.
Financings
from PNC Bank (Formerly United Trust Bank)
On
November 1, 2001, the Predecessor Entity entered into a line of credit with
Bank (now PNC Bank) pursuant to which the Predecessor Entity borrowed $1.5
million. This line of credit was due to expire by its terms, and all outstanding
amounts were due to be paid, on September 30, 2002. On September 30,
2002, the line of credit came due and the bank granted a three-month extension.
On September 30, 2002, we converted the outstanding line of credit with
Bank into a $1,500,000 promissory note. Such promissory note is to be paid
in 36
monthly installments, which commenced in February 2003 and is due to terminate
on January 1, 2006. Interest accrues on the note at the prime rate,
adjusted annually, which is the highest New York City prime rate published
in
The Wall Street Journal. The initial prime rate that applied to the promissory
note was 4.750%.
On
August 7, 2003, we entered into a modification of the loan agreement with
Bank, of which the principal balance was $1,291,666 at the time of closing
of
the modification. Pursuant to the modification agreement, Bank agreed to
subordinate its lien against our assets to a new lender and reduce the monthly
payments from $41,666 per month principal plus accrued interest as follows:
(a)
from the date of closing through December 15, 2003, $10,000 per month plus
accrued interest (b) from January 15, 2004 through December 15, 2004,
$15,000 per month plus accrued interest, (c) from January 15, 2005 through
December 15, 2005, $20,000 per month plus interest and (d) on the maturity
date of January 1, 2006, a balloon payment equal to all the outstanding
principal and accrued interest. We are current with our payment of $15,000
per
month.
On
January 9, 2004, we were served with a notice of an event of default by
United Trust Bank, now PNC Bank, a successor by merger effective January 2004
with United Trust Bank, (“the Bank”), under its Loan Agreement. Pursuant to
section 6.01(d) of the Loan Agreement, an Event of Default exists due to the
Company’s failure to pay Payroll Tax Obligations aggregating in the amount of
$1,089,897 as of December 31, 2003 (including estimated penalties and
interest). The Company continues to make timely scheduled payments pursuant
to
the terms of the loan and is in forbearance negotiations with the Bank with
respect to the default. On April 1, 2004, the Company received a second Notice
of Event of Default stating that the Bank had accelerated the maturity of the
Loan and declared all principal, interest, and other outstanding amounts due
and
payable.
Because
we were in default under the terms of the loan due primarily to our payroll
tax
default, the Bank has instituted the default rate of interest which is 5% above
the “highest New York City prime rate” stated above. We have entered into an
installment agreement with the United States Internal Revenue Service to pay
the
withholding taxes, under the terms of which we will pay $100,000 by May 31,
2004
and $35,000 each month, commencing June 28, 2004, until we have paid the
withholding taxes due in full.
On
April
27, 2004, PNC Bank, N.A., as successor by merger to Bank filed a complaint
in
the Superior Court of New Jersey, Law Division, Union County (Docket No.
UNN-L_001522-04) against our company and Christopher J. Carey, in his capacity
as guarantor, to collect the sums outstanding under the Loan Agreement, dated
as
of September 30, 2002.
On
July
15, 2004, we entered into a fully executed forbearance agreement with PNC Bank,
N.A. We made an initial principal payment of $420,000 with the execution of
the
forbearance. Additionally, we are required to make four consecutive monthly
installments of $50,000.00 on August 15, 2004, September 15, 2004, October
15,
2004 and November 15, 2004 followed by the remaining principal on or before
December 15, 2004. Failure to adhere to this schedule may cause the suit to
be
reinstated and PNC Bank may resume collection of the sum under the
suit.
On
November 12, 2004, the Company and PNC Bank agreed upon terms of an amendment
to
the forbearance agreement whereby by the payment schedule will change to include
interest only payments on November 15, 2004, December 15, 2004 and January
15,
2005 with the final principal payment being made on or before January 31,
2005.
The
company failed to make the final principal payment on or before January 31,
2005
and was subsequently put into default under the note. On March 31, 2005 the
Company made the final scheduled payment and was released from all potential
claims by PNC Bank.
Financings
by Stanford Venture Capital Holdings, Inc.
On
May 15, 2002, we entered into a Securities Purchase Agreement with Stanford
Venture Capital Holdings, Inc., referred to herein as Stanford, in which we
issued to Stanford (i) such number of shares of our Series A $1.50 Convertible
Preferred Stock, referred to herein as Series A Preferred Stock, that would
in
the aggregate equal 20% of the total issued and outstanding shares of our common
stock, and (ii) such number of warrants for shares of our common stock that
would equal the number of shares of Series A Preferred Stock issued to Stanford.
The total aggregate purchase price for the Series A Preferred Stock and warrants
paid by Stanford was $3,000,000. The issuance of the Series A Preferred Stock
and warrants took place on each of four separate closing dates from May 16,
2002 through and July 19, 2002, at which we issued an aggregate of 2,002,750
shares of our Series A Preferred Stock and warrants for 2,002,750 shares of
our
common stock to Stanford. . The warrants issued in 2002 were valued at $294,893
using the black-scholes model using the following assumptions and a stock price
of $1.50:
·
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Conversion
price $1.50;
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·
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expected
volatility of 0%;
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·
|
expected
dividend yield rate of 0%;
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·
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expected
life of 5 years; and
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·
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a
risk-free interest rate of 4.91% for the period ended June 30,
2002.
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In
connection with our Series B financing, as partial consideration for the funds
received pursuant to the Series B financing, we agreed to decrease the exercise
price to $.25. With respect to the decrease in the exercise price and the
warrants being treated as a cost of the series B financing, the reduction of
series A warrants was written in to the Series B preferred stock agreements
as
part of the negotiation. At the end of fiscal 2003, Stanford exercised the
warrants for 2,002,750 shares of our common stock.
On
April 24, 2003, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc. for the issuance of 2,444,444 shares
of
our Series B $0.90 Convertible Preferred Stock. The issuance of the Series
B
Preferred Stock took place on six separate closing dates beginning on
May 5, 2003 through September 15, 2003. In connection with the
Securities Purchase Agreement, we agreed to modify the previously issued
five-year warrants to purchase 2,002,750 shares of our common stock: (i) to
reduce the exercise price to $.25 per share; and (ii) to extend the expiration
date through August 1, 2008. In addition, our President and Chief Executive
Officer, Christopher J. Carey, agreed to convert outstanding loans of $543,000
to 603,333 shares of our common stock at a price of $.90 per share. In addition,
the Company and Stanford entered into a Registration Rights Agreement, dated
April 30, 2003, in which the Company agreed to register the shares of the
Company’s common stock issuable upon conversion of the Series A and Series B
Preferred Stock with the Securities and Exchange Commission, no later than
November 15, 2003. The Company and Stanford agreed to extend the date of
the filing requirements of the Registration Rights Agreement to March 14,
2004. We have not yet filed a registration statement, and are in negotiations
with Stanford regarding an extension of the registration filing
date.
On
March 3, 2004 and March 15, 2004 we received loans in the amount of
$437,500 each from Stanford. We have agreed to pay Stanford an 8% annual
dividend on the funds invested and to redeem the securities not later than
three
years from the date of funding. As of March 31, 2005 the accrued interest on
the
loan was $74,411. On March 7, 2005, the Company and Stanford agreed to settle
the accrued interest through March 31, 2005 of $74,411 for 826,788 shares of
restricted common stock. The price per share on March 7, 2005 was
$.09/share.
Additionally,
on March 7, 2005, the Company issued Stanford 373,212 shares as consideration
for their consent to amending the agreement the Company entered into on June
18,
2004 with respect to the Callable Secured Convertible Notes Issuance (see the
appropriate section below), changing
the conversion price of the convertible notes to the lower of (i) $0.70 or
(ii)
25% of the average of the three lowest intraday trading prices for our common
stock during the 20 trading days before, but not including, the conversion
date.
The original agreement had the conversion price as the lower of (i) $0.70 or
(ii) 50% of the average of the three lowest intraday trading prices for our
common stock during the 20 trading days before, but not including, the
conversion date.
Private
Placements with Accredited Private Investors
During
August and September 2002, we entered into 9 subscription agreements with
accredited private investors, as defined in Rule 501 of the Securities Act,
pursuant to which we issued an aggregate of 179,333 shares of our common stock
at $1.50 per share. These private investments generated total proceeds to us
of
$269,000.
In
October 2003, the Company commenced offerings to accredited investors in private
placements of up to $3,000,000 of the Company’s common stock. In the period of
October 2003 through January 9, 2004 the Company raised $225,000 under the
terms of these private placements. The shares offered in the private placement
are priced at the 5 trading day trailing average closing price of the common
stock on the OTCBB, less 20%. For each share purchased in the private
placements, purchasers received a warrant to purchase one half (0.5) share
of
common stock at 130% of the purchase price. A minimum of $25,000 was required
per investor. The number shares issued under this placement total 509,559,
at an
average price of $0.44/share.
Warrants
On
June
16, 2004, in connection with the issuance of the 12% callable secured
convertible notes (the “AJW Notes”)the Company issued to Stanford a warrant (the
“Stanford Warrants”) to purchase 2,000,000 shares of Common Stock, expiring in
five years, at an exercise price of $.0001,in consideration i) agreeing to
a
waiver of existing registration rights that included a lock up period for one
year after the effective date of a registration statement prohibiting the
registration and sale of Stanford’s securities and ii) agreeing as holder of
Stronghold’s Series A $1.50 Convertible Preferred Stock (“Series A Stock”) and
Series B $.90 Convertible Preferred Stock (“Series B Stock”), to waive any
dilution issuances required by the Series A Stock and the Series B Stock as
a
result of the conversion of the AJW Notes or exercise of the Stanford Warrants
into the Company’s common stock. This issuance of the Stanford Warrants has been
accounted for as an adjustment of capital for the waiving of the dilution
protection for the Series A and Series B preferred stock. The Stanford Warrants
were valued at approximately $360,000 using the Black-Scholes option pricing
model including the following assumptions: exercise price of $0.0001, expected
volatility of 2.06%, expected dividend yield rate of 0%, expected life of 5
years, and a risk- free interest rate of 4.73%.
Callable
Secured Convertible Notes
To
obtain
funding for its ongoing operations, the Company entered into various Securities
Purchase Agreements with the Investors for the sale of callable convertible
secured notes and stock purchase warrants.
To
date,
the Investors purchased $6,480,000 in notes, and received warrants to purchase
an aggregate of 13,418,500 shares of the companies stock, in twenty-two
different traunches dated June 18, 2004 for $1,500,000, July 21, 2004 for
$500,000, October 22, 2004 for $350,000, March 18, 2005 for $650,000, March
31,
2005 for $350,000, May 4, 2005 for $300,000, July 18, 2005 for $282,500, August
30, 2005 for $100,000, October 6, 2005 for $210,000, November 9, 2005 for
$150,000, December 31, 2005 for $107,480, February 6, 2006 for $180,000, March
17, 2006 for $250,000, April 12, 2006 for $200,000, on May 12, 2006 for
$200,000, on June 8, 2006 for $200,000, on July 12, 2006 for $200,000 and on
August 14, 2006 for $150,000, on September 13, 2006 for $150,000, on December
17, 2006 for $250,000, on January 11, 2007 for $150,000, on February 12, 2007
for $150,000, on March 15, 2007 for $150,000 and on April 13, 2007 for $150,000.
On December 20, 2005, the Investors converted $1,297 of the convertible notes
into 172,873 shares of common stock. During the year ended December 31, 2006
the
investors converted $5,027 of convertible notes into 4,698,600 shares of common
stock. During the three months ended March 31, 2007 the investors converted
$2,135 of convertible notes into 4,620,000 shares of common stock.
The
Notes
bear interest at a rate ranging from 8% to 12%, mature two years from the date
of issuance, and are convertible into our common stock, at the Investors'
option, at the lower of (i) $0.70 or (ii) 75% of the average of the three lowest
intraday trading prices for the Company's common stock during the 20 trading
days before, but not including, the conversion date. The Company may prepay
the
Notes in the event that no event of default exists, there are a sufficient
number of shares available for conversion of the Notes and the market price
is
at or below $0.57 per share. The full principal amount of the Notes is due
upon
default under the terms of Notes. In addition, the Company has granted the
investors a security interest in substantially all of its assets and
intellectual property as well as registration rights.
CRITICAL
ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial
Reporting Release No. 60, recently released by the Securities and Exchange
Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
The notes to the consolidated financial statements include a summary of
significant accounting policies and methods used in the preparation of our
Consolidated Financial Statements. In addition, Financial Reporting Release
No.
61 was recently released by the SEC requires all companies to include a
discussion which addresses, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
The
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements in accordance with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
including the recoverability of tangible and intangible assets, disclosure
of
contingent assets and liabilities as of the date of the financial statements
and
the reported amounts of revenues and expenses during the reported
period.
On
an
on-going basis, we evaluate our estimates. The most significant estimates relate
to our recognition of revenue and the capitalization of our software
development.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements:
Revenue
Recognition Policy
Under
the
new revenue model, the Company will book revenue upon contract consummation,
as
an initial payment is due upon execution of the Agreement. The contract terms
are for twelve, twenty-four and thirty-six month terms at an average monthly
fee
of $1,500. Additional fees may be charged to clients and collected by the
company for training and wireless technology.
Software
Development Capitalization Policy
Software
development costs, including significant product enhancements incurred
subsequent to establishing technological feasibility in the process of software
production, are capitalized according to Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." Costs incurred prior to the establishment of
technological feasibility are charged to research and development expenses.
During 2006 we fully amortized and expensed the balance of capitalized software
development cost. The determination for amortizing the balance was made in
recognition of the Company’s decision to stop marketing the
DealerAdvanceTM
software
which had reached the end to its life cycle and commence marketing of the new
WebDATM
ITEM
3. CONTROLS
AND PROCEDURES
As
of the
end of the period covered by this report, our sole executive officer who serves
as our principal executive and principal financial officer conducted an
evaluation of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act
of
1934, as amended (the “Exchange Act”)). Based upon this evaluation, our sole
executive officer concluded that 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 are recorded, processed,
summarized and reported, within the time periods specified in the Securities
and
Exchange Commission's rules and forms.
In
addition, no change in our internal control over financial reporting occurred
during the fiscal quarter ended March 31, 2007 that has materially affected,
or
is reasonably likely to materially affect, our internal control over financial
reporting.
Other
Information
ITEM
1. LEGAL PROCEEDINGS.
From
time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except for the following,
we
are currently not aware of any such legal proceedings or claims that we believe
will have, individually or in the aggregate, a material adverse affect on our
business, financial condition or operating results:
The
Company is engaged in arbitration proceedings with Lenard Berger (the
“Claimant”), a former officer, with regard to a claim against the Company’s
predecessor, Stronghold Technologies, Inc. a New Jersey corporation and a wholly
owned subsidiary of Dealer Advance, Inc. for damages for the Company’s failure
to remove a restrictive legend from 437,500 shares of common stock of the
Company, additional unpaid salary accrued during his term of employment and
pre-judgment interest on all amounts owing to the Claimant. On May 18, 2006,
Mr.
Berger was awarded the sum of $214,361.52. As of March 31, 2007, a total of
$27,030 has been paid against the claim.
During
the course of doing business the Company made certain guarantees to prospective
clients as an inducement to contract for services. These guarantees, although
limited, provided that the Company would pay off client third party equipment
leases after the first 12 months of service if the client was not satisfied
with
the product. As of June 30, 2006, two judgments have been entered against the
Company for failure to honor such guarantees to Wilson-Cornelius Ford and Great
Lakes Ford - Muskegon. Two additional guarantees have been called by Graff
Chevrolet and Zumwalt Ford. Graff has filed a suit against the Company in Texas
and Zumwalt has made a demand to the Company.
All
Legal
Proceedings noted under this Item 1 were made against the Company’s predecessor,
Stronghold Technologies, Inc. a New Jersey corporation and a wholly owned
subsidiary of Dealer Advance, Inc. On January 25, 2007, Stronghold Technologies,
Inc. filed a voluntary petition for relief under Chapter 7 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of Texas, Case No. 07-30322-sgj7. In connection with the filing, the Subsidiary
has ceased all business activity and operations. The Subsidiary determined
that
it does not have sufficient resources to continue its operations. The
court has appointed a bankruptcy trustee who will be responsible for
the liquidation of the business through the bankruptcy case.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
To
obtain
funding for its ongoing operations, we entered into a Securities Purchase
Agreement (the “Agreement”) with the investors on December 15, 2006 for the sale
of (i) $900,000 in callable secured convertible notes (the “Notes”) and (ii)
stock purchase warrants (the “Warrants”) to buy 5,000,000 shares of our common
stock.
The
following closings have occurred under the Agreement:
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·
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On
December 15, 2006, the Investors purchased $250,000 in December 2006
Notes
and received December 2006 Warrants to purchase 1,388,500 shares
of the
Company’s common stock
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On
January 16, 2007 the Investors purchased $150,000 in December 2006
Notes
and received December 2006 Warrants to purchase 850,000 shares of
the
Company’s common stock
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On
February 12, 2007 the Investors purchased $150,000 in December 2006
Notes
and received December 2006 Warrants to purchase 850,000 shares of
the
Company’s common stock
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·
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On
March 15, 2007 the Investors purchased $150,000 in December 2006
Notes and
received December 2006 Warrants to purchase 850,000 shares of the
Company’s common stock
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·
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On
April 13, 2007 the Investors purchased $150,000 in December 2006
Notes and
received December 2006 Warrants to purchase 850,000 shares of the
Company’s common stock
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In
addition, provided that all of the conditions in the Securities Purchase
Agreement are satisfied, on the final business day of each month until the
full
amount under the Agreement has been purchased, the Company will issue to the
Investors and the Investors will purchase $125,000 in Notes and related
Warrants. The Company or a majority in interest of the Investors may terminate
the obligation to issue additional Notes and Warrants upon 30 days
notice.
The
Notes
bear interest at 8%, mature two years from the date of issuance, and are
convertible into our common stock, at the Investors' option, at a conversion
price, equal to the lower of (i) $0.05 or (ii) 25% of the average of the three
lowest intraday trading prices for our common stock during the 20 trading days
before, but not including, the conversion date. As of February 13, 2007, the
average of the three lowest intraday trading prices for our common stock during
the preceding 20 trading days as reported on the Over-The-Counter Bulletin
Board
was $.003 and, therefore, the conversion price for the secured convertible
notes
was $.00075. Based on this conversion price, the Notes in the amount of $150,000
issued on February 12, 2007 were convertible into 200,000,000 shares of our
common stock.
We
may
prepay the Notes in the event that no event of default exists, there are a
sufficient number of shares available for conversion of the callable secured
convertible notes and the market price is at or below $.08 per share. The full
principal amount of the Notes is due upon default under the terms of Notes.
In
addition, we have granted the Investors a security interest in substantially
all
of our assets and intellectual property as well as registration rights.
The
Warrants are exercisable until five years from the date of issuance at a
purchase price of $0.05 per share. In addition, the exercise price of the
Warrants is adjusted in the event we issue common stock at a price below
market.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
31.1
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Certification
of Chief Executive and Financial Officer pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
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32.1
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Certification
of Chief Executive and Financial Officer pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002, 18 U.S.C.
1350.
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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 this 15th
day of
May, 2007.
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DEALERADVANCE,
INC. |
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BY: |
/s/ Steven
E.
Humphries |
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Name: |
Steven
E. Humphries, |
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Title: |
President
and
Chief Executive Officer
(principal executive and
financial/accounting
officer)
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