Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
|
x
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QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended September 30,
2007.
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OR
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¨
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT for
the transition period from _______ to
_______.
|
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
|
|
20-5717448
|
(State
or other jurisdiction of incorporation or organization)
|
|
(IRS
Employer Identification No.)
|
16801
Addison Road, Suite 310, Addison, TX 75001
(Address
of principal executive offices)
(214)
866-0606
(Issuer’s
telephone number)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
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
¨
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 November 1, 2007, 100,415,389 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 ¨
No
x
Transitional
Small Business Disclosure Format: (Check One): Yes ¨
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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Condensed
Consolidated Balance Sheet as of September 30, 2007
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2
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Condensed
Consolidated Statements of Operations For the Three Months Ended
September 30 2007 and 2006
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3
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Condensed
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2007 and 2006
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4
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Notes
to Condensed Consolidated Financial Statements
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5
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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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23
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Part
II - Other Information |
24
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Item
1
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Legal
Proceedings
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24
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Item
2
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Unregistered
Sales of Equity Securities and Use of Proceeds
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25
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Item
3
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Defaults
upon Senior Securities
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26
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Item
4
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Submission
of Matters to a Vote of Security Holders
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26
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Item
5
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Other
Information
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26
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Item
6.
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Exhibits
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26
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PART
I -
FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
DealerAdvance,
Inc. and Subsidiary
Condensed
Consolidated Balance Sheet
September
30, 2007
ASSETS
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Current
Assets
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Cash
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$
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65,856
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Accounts
receivable
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37,110
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Inventories
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0
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Notes
receivable, related party
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39,411
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Prepaid
expenses
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47,912
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Total
current assets
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190,289
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Property
and equipment, net
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4,443
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Other
Assets
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Other
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1,000
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Total
Other Assets
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1,000
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$
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195,732
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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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491,283
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Interest
payable, stockholders
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1,793,871
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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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4,014,481
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Deferred
revenue
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10,006
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Liquidated
damages payable
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3,211,306
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Accrued
expenses and other current liabilities
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1,276,690
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Total
current liabilities
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11,672,636
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Long-term
liabilities
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Notes
payable, stockholders
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Notes
payable, stockholders, convertible debt, net of imputed interest
of
$593,331
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213,578
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Callable
secured convertible notes, less current portion
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3,946,954
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Total long-term liabilities
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4,160,532
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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 shares, 2,002,750
issued and outstanding (aggregate liquidation preference of $3,004,125)
and preferred stock, Series B, $.0001 par value; 2,444,444 shares
authorized, issued and outstanding (aggregate liquidation preference
$2,200,000) and preferred stock, Series D, $.01 par value; authorized
10,000 shares authorized, issued and outstanding (aggregate liquidation
preference $1,989,200)
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545
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Common
stock, $.0001 par value, authorized 8,500,000,000 shares, 100,415,389
issued and outstanding
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10,042
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Additional
paid-in capital
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10,859,620
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Accumulated
deficit
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(26,507,643
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)
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Total
stockholders' deficit
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(15,637,436
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)
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$
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195,732
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DealerAdvance,
Inc. and Subsidiary
Condensed
Consolidated Statements of Operations
September
30, 2007
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YTD
2007
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3rd
Qtr 2007
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YTD
2006
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3rd
Qtr 2006
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Sales
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$
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182,940
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$
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54,843
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$
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380,344
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$
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110,806
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Cost
of sales
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30,095
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7,206
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56,912
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25,915
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Gross
profit
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152,845
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47,637
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323,432
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84,891
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Selling,
general and administrative
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1,522,182
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484,294
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1,729,660
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510,351
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Research
and development
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62,930
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(4,760
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)
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-
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Loss
from operations
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(1,432,268
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)
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(431,898
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)
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(1,406,228
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)
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(425,460
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)
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Interest
expense
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689,499
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241,887
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693,720
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232,326
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Bad
Debt expense
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3,822
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3,822
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-
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-
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Loss
from Operation
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(2,125,588
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)
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(677,606
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)
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(2,099,948
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)
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(657,786
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)
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Liquidated
Damages
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1,219,717
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589,147
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867,234
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315,718
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Net
loss applicable to common stockholders
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$
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(3,345,305
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)
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$
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(1,266,753
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)
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$
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(2,967,182
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)
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$
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(973,504
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)
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Basic
and diluted loss per common share
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$
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(0.08
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)
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$
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(0.02
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)
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$
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(0.08
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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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44,313,182
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76,899,891
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35,031,948
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37,927,676
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See
accompanying notes to condensed consolidated financial
statements
DealerAdvance,
Inc. and Subsidiary
Condensed
Consolidated Statements of Cash Flows
September
30, 2007
Nine
months ended September 30, 2007
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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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($3,345,305
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)
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($2,967,182
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)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Allowance
for returns and doubtful accounts
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-
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20,000
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Depreciation
and amortization
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11,010
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310,462
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Interest
payable, stockholders
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606,783
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(58,043
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)
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Liquidated
damages payable
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1,219,719
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867,234
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Changes
in operating assets and liabilities:
|
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Accounts
receivable
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30,829
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(30,394
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)
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Inventories
|
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|
-
|
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18,093
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Prepaid
expenses
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21,197
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4,711
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Accounts
payable
|
|
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110,032
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(128,412
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)
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Accrued
expenses and other current liabilities
|
|
|
3,474
|
|
|
589,539
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Deferred
Revenue
|
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(84,277
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)
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(188,009
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)
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Other
Assets
|
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(14,162
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)
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31,223
|
|
Net
cash used in operating activities
|
|
|
(1,440,700
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)
|
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(1,530,778
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)
|
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Principal
repayments of notes payable
|
|
|
-
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-
|
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Proceeds
from notes payable, convertible debt
|
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|
1,400,000
|
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1,530,000
|
|
|
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Net
cash provided by financing activities
|
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|
1,400,000
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1,530,000
|
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|
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|
|
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Net
increase / (decrease) in cash
|
|
|
(40,700
|
)
|
|
(779
|
)
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|
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Cash,
beginning of period
|
|
|
106,556
|
|
|
67,060
|
|
|
|
|
|
|
|
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Cash,
end of period
|
|
$
|
65,856
|
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$
|
66,281
|
|
|
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|
|
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Supplemental
disclosure of cash flow information,
|
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Cash
paid during the period for interest
|
|
|
-
|
|
|
33,995
|
|
|
|
|
|
|
|
|
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Non-cash
financing activity
|
|
|
|
|
|
|
|
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 September 30, 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.
|
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 $3,345,305 and has negative cash
flows from operations of $1,440,700, and has a working capital deficit of
$11,482,347 and a stockholders’ deficit of $15,637,436 as of September 30, 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.
|
4.
|
ACCRUED
EXPENSES AND OTHER CURRENT
LIABILITIES
|
Accrued
expenses and other current liabilities consist of the following at September
30,
2007:
Accrued
expenses and other current liabilities:
|
Sales
Taxes Payable
|
|
$
|
106,524
|
|
Accrued
Paid-Time-Off (PTO) Pay
|
|
|
13,903
|
|
PR
Taxes Payable
|
|
|
395,829
|
|
Accrued
Employee Compensation
|
|
|
46,135
|
|
Accrued
Commissions
|
|
|
110,526
|
|
Accrued
Officer's Compensation
|
|
|
25,845
|
|
Other
Accrued Expense
|
|
|
478,432
|
|
Accrued
Interest Other
|
|
|
63,391
|
|
IRS
Payment Plan
|
|
|
36,107
|
|
TOTAL
|
|
$
|
1,276,690
|
|
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.
|
5.
|
NOTES
PAYABLE, STOCKHOLDERS
|
At
September 30, 2007, notes payable, stockholders consists of the
following:
Notes
payable, stockholders:
|
|
|
|
|
Notes
payable interest 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 $593,331
|
|
|
213,578
|
|
|
|
|
1,088,578
|
|
Less:
current portion
|
|
|
(875,000
|
)
|
Long-term
portion
|
|
$
|
213,578
|
|
The
8%
interest bearing notes due in May 2007 are currently in default.
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.
|
6. |
COMMITMENTS
AND CONTINGENCIES
|
Callable
Secured Convertible Notes
|
|
|
|
|
Calable
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.
|
|
$
|
7,961,435
|
|
Less:
Current position
|
|
|
4,014,481
|
|
|
|
$
|
3,946,954
|
|
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
5,071,833 common stock purchase warrants. As of September 30, 2007, the Company
has sold a total of $750,000 of additional notes, issuing an additional
4,250,000 common stock purchase warrants, for a total of $1,650,000 and issued
9,321,833 warrants.
In
October, 2007 the company sold an additional $150,000 of notes and issued
850,000 warrants.
|
7.
|
RELATED
PARTY TRANSACTIONS
|
Transactions
with Officers and Directors of DealerAdvance, Inc.
The
Company and/or the Company’s director and Chief Executive Officer 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 Chief Executive Officer and director.
In
2006
the Company loaned its sole executive officer (at that time), Chief 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, and during this same period,
$18,500 of the loans were repaid. In June 2007 an additional $20,250 of the
loans were repaid. In 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 Chief 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. The balance of these
loans outstanding as of September 30, 2007 are $33,173 related to the Chief
Executive Officer and director, and $6,238 related to the company controlled
by
the Chief Executive Officer and director.
In
connection with the callable secured convertible notes (see note 7 above),
in
October, 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 WebDA™
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 changed. Rather than being hardware driven,
the Company has become software driven. In April 2007 the Company released
its
new web based platform WebDA™,
moving
the company from a server based platform operation, thus eliminating the high
cost of maintaining inventory and installation costs. Our revenues are now
generated from a one-time up-front payment and monthly recurring fees covering
software licenses. Our license agreements are provided in twelve, twenty-four
and thirty-six month terms. Typically, a $2,500 down payment, booked upon
agreement of the contract, and a monthly fee of $1,500 over a twelve month
term
(these are approximate amounts, since exact amounts are negotiated between
the
Company and the customer) is booked monthly as revenue at an average annual
fee
of $20,500, inclusive of the down payment.
The
Company currently has approximately 20 user contracts utilizing the Company’s
previous product (DealerAdvance™)
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
resigned to the new WebDA™
contracts 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 50 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:
|
·
|
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 and 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
In
April
2007, the company released its new web based product, WebDA1.0 with a few added
enhancements and moved the product to the web, thus eliminating the high cost
of
equipment required by the current product. Moving forward, the company’s primary
focus is the development of quarterly releases enhancing the new web based
product. In July 2007 the company began installing its first new clients on
WebDA™.
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. Moving forward in subsequent quarters
the company will provide new releases which will feature new product
enhancements.
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 hired two 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 all based
in DealerAdvances’s Texas offices. Moving forward in the fourth quarter,
facilitating the launch of WebDA the company will split the country into three
regions (Eastern, Central and Western) and hire additional personnel to help
in
this strategy. The primary focus of the sales team is to re-establish the
Company’s relationships with its remaining customers in an effort to move the
customers from the previous product to the new web based product while also
and
developing new customers.
THREE
MONTHS ENDED SEPTEMBER 30, 2007 AND THREE MONTHS ENDED September 30,
2006.
New
Client Contracts
From
July
to September 2007 the company was successful in signing WebDA™
contracts with customers whose contracts had previously expired, representing
$288,000 in new business. This revenue will be billed out monthly over the
next
12-36 months, which represents the terms of the contracts signed.
Revenue
For
the
quarter ended September 30, 2007, we had revenue of $54,843
compared
with revenue of $110,806 for the quarter ended September 30, 2006 for a decrease
of 51%.
Revenue
is generated from software license and system installation, maintenance support
and service revenues. Revenues for the three months ended September 30, 2007
and
September 30, 2006 are broken down as follows:
Revenues:
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
WebDA
|
|
$
|
20,550
|
|
$
|
0
|
|
$
|
20,550
|
|
|
|
|
Software
license and system installation
|
|
|
1,500
|
|
|
9,720
|
|
|
(8,220
|
) |
|
-85
|
%
|
Support
& maintenance
|
|
|
32,793
|
|
|
97,086
|
|
|
(64,293
|
) |
|
-66
|
%
|
Services
|
|
|
0
|
|
|
4,000
|
|
|
(4,000
|
)
|
|
-100
|
%
|
Total
revenues
|
|
$
|
54,843
|
|
$
|
110,806
|
|
$
|
(55,963
|
) |
|
-51
|
%
|
New
sales
of WebDA were $20,550
in the
three months ended September 30, 2007. Software license and system installation
revenue decreased $8,220
in the
three months ended September 30, 2007 as compared to $9,720 in the three months
ended June 30, 2006 for a decrease
of
85%.
The
primary reasons for the decrease in revenue can be attributed to cancellation
of
contracts that reached their termination date for both Software license and
system installation and Support & Maintenance.
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 decreased to 13.14% of revenue for the three months
ended September 30, 2007 as compared to 20.60% of revenue for the three months
ended September 30, 2006 for a net decrease of 7.46%. The table below shows
the
Cost of Sales and percentage by category and the comparison in dollars and
percentage for the three months ended September 30, 2007 and three months ended
September 30, 2006. The decrease in Cost of Sales as a percentage of revenue
of
-7.46% is primarily attributed to a decrease in labor costs associated with
reduced customer support due to improvements in the overall product, reduction
of client software & licensing expenses, and use of subcontractors in
product development.
Cost
of Sales:
|
|
Q3
2007
|
|
Q3
2006
|
|
Q3
2007
|
|
Q3
2006
|
|
|
|
|
|
Dollars
|
|
Dollars
|
|
%
of
Revenues
|
|
%
of
Revenues
|
|
%
Change
|
|
Hardware
components
|
|
$
|
3,437
|
|
$
|
7,350
|
|
|
48
|
%
|
|
28
|
%
|
|
19
|
%
|
Client
software & licensing
|
|
|
2,000
|
|
|
6,022
|
|
|
28
|
%
|
|
23
|
%
|
|
5
|
%
|
Distribution
fees
|
|
|
0
|
|
|
951
|
|
|
0
|
%
|
|
4
|
%
|
|
-4
|
%
|
Subcontractors
|
|
|
0
|
|
|
875
|
|
|
0
|
%
|
|
3
|
%
|
|
-3
|
%
|
Misc.
installation costs
|
|
|
274
|
|
|
0
|
|
|
4
|
%
|
|
0
|
%
|
|
4
|
%
|
Installations/travel
|
|
|
0
|
|
|
0
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Repairs
|
|
|
0
|
|
|
0
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Shipping
|
|
|
170
|
|
|
0
|
|
|
2
|
%
|
|
0
|
%
|
|
2
|
%
|
Labor
|
|
|
1,325
|
|
|
1,675
|
|
|
18
|
%
|
|
6
|
%
|
|
12
|
%
|
Inventory
adjustment
|
|
|
0
|
|
|
9,043
|
|
|
0
|
%
|
|
35
|
%
|
|
-35
|
%
|
Total
cost of sales
|
|
$
|
7,206
|
|
$
|
25,916
|
|
|
|
|
|
|
|
|
|
|
Total
cost of sales % of revenue
|
|
|
13.14
|
%
|
|
20.60
|
%
|
|
|
|
|
|
|
|
-7.46
|
%
|
Gross
Profits
We
generated $47,637 in gross profits from sales for the quarter ended September
30, 2007, which was a decrease of $37,254 from the quarter ended September
30,
2006, when we generated $84,891 in gross profits. Our gross profit margin
percentage increased by 10.05% in the quarter ended September 30, 2007 to
86.66%. The increase in gross profit is primarily attributable to the renewal
of
monthly recurring maintenance revenue due to the expiration and renewal of
service and support contracts during the period September 30, 2006 to September
30, 2007, as well as increased sales in the new WebDA product.
Selling,
General and Administrative Expenses
Total
Selling, General and Administrative expenses in the quarter ended September
30,
2007 were $484,294, a decrease of 5.4% or $26,057 from the quarter ended
September 30, 2006 of $510,351. The decrease in expense is attributable to
a
more efficient application of resources and re-alignment of personnel to enhance
greater efficiencies.
Our
research and development expense decreased from nil in the quarter ended
September 30, 2006 to a credit balance of $4,760 in the quarter ended September
30, 2007, although it has experienced and overall increase for 2007. The overall
increase is directly attributable to the development of our new WebDA™ product,
but the decrease for the 3rd
Quarter
2007 was primarily due to the crediting of a duplicate invoice entered in the
1st
Quarter
2007 for contract consulting work done related to the development of the WebDA™
product.
Our
interest and penalty expense increased from $232,326 in the quarter ended
September 30, 2006 to $241,887 in the quarter ended September 30, 2007.This
increase of $9,561 is primarily due to interest expense attributed to the
Convertible Notes. Liquidated damages associated with the Convertible Notes
increased from $351,718 in the quarter ended September 30, 2006 to $589,147
in
the quarter ended September 30, 2007. The $273,429 increase is due to an
approximate $2.9 million increase in Convertible Notes issued and subject to
liquidated damages during the period September 30, 2006 through September 30,
2007.
During
the quarter ended June 30, 2007, the Company contracted with two independent
firms for financial consulting services which accounted for approximately
$38,000 of the Selling, General and Administration Expenses for the quarter.
Both of these firms have advised the Company regarding investment relations
and
other management and marketing techniques ostensibly to increase business
revenues.
Operating
Loss
The
Company’s operating losses increased by $6,438 in comparing the quarter ended
September 30, 2007 to the quarter ended September 30, 2006, which were $431,898
and $425,460, respectively.
Net
Loss
We
had a
net loss from
operations
of
$677,606 for the quarter ended September 30, 2007 compared to $657,786 for
the
quarter ended September 30, 2006, resulting in an increase in net losses of
$19,820. This
increase in net losses of 3.01% is primarily attributable to a decrease in
sales.
Comparing the quarter ended September 30, 2006 to the quarter ended September
30, 2007, liquidated damages were $589,147,381 and $315,718,
respectively.
Our
loss
per share was $0.02 with a weighted average of 76,899,891 shares outstanding
in
the quarter ended September 30, 2007 as compared to $0.03 loss per share in
the
quarter ended September 30, 2006 with a weighted average of 37,927,676 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
September 30, 2007, our cash balance was $65,856. We had a net loss of
$1,266,753 for the quarter ended September 30, 2007. We had a net operating
loss
of approximately $20,000,000 for the period from May 17, 2002 through
September 30, 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 September 30, 2007 was
$37,110, and $53,831 as of the quarter ended September 30, 2006 less allowance
for returns of $80,000. The reason for the decrease in accounts receivable
of
$16,721 as of September 30, 2007 from September 30, 2006 was due to a relative
difference in revenues. Accounts receivable balances represent amounts owed
to
us for maintenance and support and new sales of the WebDA
product.
As
of
September 30, 2007, the Company had the following financing
arrangements:
Debt
liability summary table:
|
|
|
|
Current
Debt liabilities
|
|
|
|
|
Interest
payable, stockholders
|
|
$
|
1,793,871
|
|
Notes
payable, stockholder, current position
|
|
|
875,000
|
|
Callable
secured convertible notes, current portion
|
|
|
4,014,481
|
|
Total
debt current liabilities
|
|
$
|
6,683,352
|
|
|
|
|
|
|
Long-term
debt liabilities
|
|
|
|
|
Notes
payable, stockholders, convertible debt, net of deferred interest
of
$601,144
|
|
$
|
213,578
|
|
Callable
secured convertible notes
|
|
|
3,946,954
|
|
Total
long-term debt liabilities
|
|
$
|
4,160,532
|
|
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 $3,350,000 and have negative cash flows from operations of
approximately $1,267,000 for the three months ended September 30, 2007, and
have
a working capital deficit of approximately $11,482,000 and a stockholders’
deficit of approximately $15,637,000 as of September 30, 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 May 2007 Securities Purchase
Agreement will provide the necessary cash to support operations through the
end
of end of November, 2007. Since we have not closed on further financing
commitments and may need to raise additional funds by the end of the
4th
quarter
2007, 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 invoke their
right to terminate additional purchases with 30 days notice during the financing
period of the $900,000 detailed 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 12, 2007, the Company revised the repayment schedule to Mr. Carey
on
the remaining balance owed to him as of that date, or $28,000, as follows:
$2,155 per month on the twentieth day of each month (commencing on September
20,
2007) until such time as $28,000 has been paid in full (13 months), with a
final
thirteenth payment of $2,140.
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:
|
·
|
Conversion
price $1.50;
|
|
·
|
expected
volatility of 0%;
|
|
·
|
expected
dividend yield rate of 0%;
|
|
·
|
expected
life of 5 years; and
|
|
·
|
a
risk-free interest rate of 4.91% for the period ended June 30,
2002.
|
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.
The
current liability Notes payable to stockholders, current portion for $875,000,
represents the above Stanford financings, which were due in May 2007, but are
currently in default. Subsequently, communication between the Company and
Stanford have been initiated by the Company regarding this issue, but
determination and settlement of this issue between Stanford and the Company
have
not been made as of the date of this filing.
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 $7,531,575 in notes, and received warrants to purchase
an aggregate of 15,727,273 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, on April 13, 2007 for $150,000,
May 11, 2007 for $50,000, May 30, 2007 for $150,000, on June 20, 2007 for
$150,000, on July 25, 2007 for $150,000, on August 10, 2007 for $150,000, and
September 17, 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 June 30,
2007 the investors converted $1,481.20 of convertible notes into 6,235,800
shares of common stock. During the three months ended September 30, 2007 the
investors converted $8,079.84 of convertible notes into 45,972,196 shares of
common stock.
The
Notes
bear interest at a rate ranging from 8% to 15%, mature three years from the
date
of issuance, and are convertible into our common stock, at the Investors'
option, at the lower of (i) the Fixed Conversion Price of $.05 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,
and there are a sufficient number of shares available for conversion of the
Notes. 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, 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:
Consolidation
of Subsidiary Entities Policy
Currently,
our Consolidated Financial Statements includes Stronghold Technologies, Inc.
a
New Jersey corporation and a wholly owned subsidiary of Dealer Advance, Inc.,
which subsidiary is maintained on a completely segregated basis from the
Company, Dealer Advance, Inc. The Company filed for Chapter 7 bankruptcy of
this
subsidiary on January 25, 2007. The Chapter 7 bankruptcy has yet to be resolved
or closed as of the date of this filing, but it is anticipated to be concluded
soon. The estimated remaining Stronghold Technologies assets available to
liquidate in order to offset liabilities segregated and owed by the subsidiary
entity and subject to the bankruptcy that are a part of the consolidated
financial statements do not represent a material amount.
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, and as revenue is
earned per month. 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 and other
technology as required.
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 chief executive officer and chief
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 chief executive officer and chief financial 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 September 30, 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 September 30, 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:
|
o
|
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
|
|
o
|
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
|
|
o
|
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
|
|
o
|
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
|
|
o
|
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
|
|
o
|
On
May 11, 2007 the Investors purchased $50,000 in December 2006 Notes
and
received December 2006 Warrants to purchase 283,333 shares of the
Company’s common stock
|
To
obtain
funding for its ongoing operations, we entered into a Securities Purchase
Agreement (the “Agreement”) with the investors on May 25, 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:
|
o
|
On
May 30. 2007 the Investors purchased $150,000 in May 2007 Notes and
received May 2007 Warrants to purchase 850,000 shares of the Company’s
common stock
|
|
o
|
On
June 20. 2007 the Investors purchased $150,000 in May 2007 Notes
and
received May 2007 Warrants to purchase 850,000 shares of the Company’s
common stock
|
|
o
|
On
July 25. 2007 the Investors purchased $150,000 in May 2007 Notes
and
received May 2007 Warrants to purchase 850,000 shares of the Company’s
common stock
|
|
o
|
On
August 31. 2007 the Investors purchased $150,000 in May 2007 Notes
and
received May 2007 Warrants to purchase 850,000 shares of the Company’s
common stock
|
|
o
|
On
September 21. 2007 the Investors purchased $150,000 in May 2007 Notes
and
received May 2007 Warrants to purchase 850,000 shares of the Company’s
common stock
|
|
o
|
On
October 11. 2007 the Investors purchased $150,000 in May 2007 Notes
and
received May 2007 Warrants to purchase 850,000 shares of the Company’s
common stock
|
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 September 21, 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 $.001 and, therefore, the conversion price for the secured convertible
notes
was $.00017. Based on this conversion price, the Notes in the amount of $150,000
issued on September 21, 2007 were convertible into approximately 882,353,000
shares of our common stock.
Also,
as
of October 11, 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 $.001 and, therefore, the conversion price
for the secured convertible notes was $.00013. Based on this conversion price,
the Notes in the amount of $150,000 issued on October 11, 2007 were convertible
into approximately 1,153,846,000 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. 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
|
Certification
of Chief Executive and Financial Officer pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of Chief Executive and Financial Officer pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002, 18 U.S.C.
1350.
|
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 14th day of November,
2007.
|
|
|
BY:
|
/s/
Steven E. Humphries
|
Name:
|
Steven
E. Humphries,
|
Title:
|
President
and Chief Executive Officer
(principal
executive officer)
|
|
|
BY:
|
/s/
David L. Wange
|
Name: |
David
L. Wange
|
Title: |
|
Dated:
As
of November 14, 2007