Form 10-Q for DEALERADVANCE, INC.
19-Aug-2008
Quarterly Report
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Plan of Operation for 2008
Our operating activities have not yet generated a positive cash flow. We do not expect that they will generate a positive cash flow by the end of 2008 because our expenses far exceed sales. We will require financing in excess of $1,200,000 from external sources during the remainder of 2008 in order to be able to continue in operation as a going concern and we would like to obtain additional financing for a proposed acquisition of a software company to complement our operations. There can be no assurance that we can attract financing in order to fulfill our requirements.
In 2004, we entered into an agreement that has to date provided $9,904,807 from the sale of convertible notes to an investment group. The proceeds were used to develop our previous product, our new web-based software, and as working capital for operating expenses and accounts payable. We do not expect the investment group to provide additional financing. As of the date hereof, the investment group has converted to stock $126,808 of the notes. The balance due on the remaining convertible notes is $9,779,528.
We believe without assurance that the investment group will attempt to convert the new convertible notes to stock. However, the rate of conversion has slowed as a result of the decrease in our stock price, to which the rate of conversion is tied. It does not appear likely that all the new convertible notes will be converted when they become due, and we will be required to pay a significant portion of the then remaining indebtedness or to refinance it.
In the second half of 2006, we relocated to our present officers and new executive, financial and sales management was installed. We redirected our development and marketing efforts to our new web-based application software for conventional desktop and laptop computers and, beginning in March 2007, to Ultra Mobile Personal Computers. For that purpose, we added a Chief Information Officer, a development and technical support staff, and a marketing and sales staff. That increased our selling, general and administrative expenses. Notwithstanding these changes, there has been a decline in sales, and Web DA™ has not yet achieved broad market acceptance, although we expect that it will in 2008-9. We believe, without assurance, that we are gaining position with the appropriate product, marketing network and approach, management, and other personnel to attain a niche in the CRM software market for auto dealers. However, sales have been negligible compared with expenses. New sales agreements from this year have not produced significant revenue, and publicly-announced estimates of anticipated revenues from these agreements will not be achieved in 2008. Given our vulnerable financial condition, there can be no assurance that during this turnaround we can retain our key personnel, implement our business plan and become profitable.
Our plan of operation for the remainder of fiscal 2008 is as follows:
To increase sales of Web DA™, in part by supplementing our internal sales force with outside distribution arrangements;
To complete development of Web DA™ 1.5 for release;
To acquire other complimentary software companies; and,
To obtain additional debt and equity financing to fund our working capital deficiency.
To date our operations have not been self-sustaining. Additional liquidity and capital resources will be necessary to defray our ongoing expenses that have risen significantly, while revenue decreased in 2007 and for the year to date. In the event we are unable to refinance our indebtedness, obtain additional liquidity through the sale of additional convertible notes or stock, and, ultimately, to repay, refinance or restructure our indebtedness, we may be unable to continue in operation as a going concern. Should we be unable to continue in operation, we will be forced to sell our business, seek a reverse merger or file for protection under the federal bankruptcy laws.
Our independent registered public accounting firm issued a report to the effect that certain conditions raise substantial doubt about our ability to continue as a going concern because we incurred recurring losses and had substantial working capital and stockholder's deficits and negative cash flow from operations. We continue to have net losses. Should we be unable to implement our plan of operation, our expansion plans may be curtailed, and we may not be able to continue in operation.
Financial condition at June 30, 2008 and December 31, 2007
The consolidated balance sheets raise concerns about our solvency. Stockholders' deficit increased to $19,411,137 from $16,950,266. We had a large increase in working capital deficiency, $12,210,247 as of June 30, 2008 compared with $12,152,857 at year-end 2007. Most of the increase in working capital deficiency results from the reclassification as current liabilities of $1,053,988 in convertible debt that is nearing its due date, and a $506,855 increase in interest payable. Principal sources of liquidity in 2008 included $880,000 from the sale of convertible notes to an investor group and the issuance of $321,185 in company common shares for compensation and services. The current shortage of liquidity severely hampers our ability to pay our debts as they become due and may have an undermining effect on our continued operations.
Results of operation - six months ending June 30, 2008 and 2007
Loss from operations increased to $2,889,225 from $2,078,553 as a result of decreased revenue and increases in general and administrative expenses. Revenue decreased to $65,335 from $128,097. The expiration of contracts for our old non-web based product accounted for most of the decrease. Selling, general and administrative expenses increased to $1,273,038 from $1,037,888. We incurred no research and development expense in 2008, this expense was $67,690 in 2007.
Interest expense increased to $522,764 from $447,612. Interest expense resulted mainly from the issuance of additional convertible notes and the conversion of convertible notes. Liquidated damages increased to $1,140,853 from $630,570. Overall net loss increased from $2,078,553 to $2,889,225 as a result of the increases in liquidated damages, interest expense and loss from operations.
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