See accompanying notes to condensed consolidated financial statements.
5
Network Dealer Services Holding Corp.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2011 and 2010
(Unaudited)
| | | | |
| | For the Nine Months Ended September 30, |
| | 2011 | | 2010 |
Cash flows from operating activities: | | | | |
Net loss | $ | (421,730) | $ | (287,888) |
Adjustments to reconcile net loss to net cash from operating activities: | | | | |
Depreciation expense | | 13,117 | | 35,969 |
Imputed interest on related party loan | | 41,008 | | - |
Gain on sale of assets | | (4,844) | | - |
Shares issued for services | | 7,257 | | - |
Gain on settlement | | (10,633) | | - |
Changes in operating assets and liabilities: | | | | |
(Increase) decrease in accounts receivable | | 31,454 | | (32,591) |
(Increase) decrease in accounts receivable related party | | - | | 59,656 |
(Increase) decrease in inventory | | 5,294 | | (3,953) |
(Increase) decrease in prepaid assets | | 113 | | 1,509 |
Increase (decrease) in accounts payable | | 70,047 | | 41,007 |
Increase (decrease) in accounts payable - related party | | 33,758 | | 69,294 |
Increase (decrease) in accrued liabilities | | (30,008) | | 36,891 |
Increase (decrease) in unearned revenue | | (13,299) | | - |
Net cash from operating activities | | (278,466) | | (80,106) |
| | | | |
Cash flows from investing activities: | | | | |
Purchase of property and equipment | | (1,942) | | (4,395) |
Proceeds from sale property and equipment | | 10,055 | | - |
Net cash from investing activities | | 8,113 | | (4,395) |
| | | | |
Cash flows from financing activities: | | | | |
Shares issued for cash | | 200,000 | | - |
Payments on notes payable and capital leases | | (18,555) | | (34,814) |
Proceeds from notes payable-related party | | - | | 140,831 |
Proceeds from shareholder loan | | 98,658 | | - |
Net cash from financing activities | | 280,103 | | 106,017 |
| | | | |
Net change in cash | | 9,750 | | 21,516 |
| | | | |
Cash, beginning of period | | 5,937 | | 8,398 |
| | | | |
Cash, end of period | $ | 15,687 | $ | 29,914 |
Supplemental disclosure of cash flow information: | | | | |
Income taxes | $ | - | $ | - |
Interest | $ | 4,528 | $ | 2,679 |
Supplemental disclosure of non-cash items: | | | | |
Stock issued to settle accrued liabilities | $ | 1,750 | $ | - |
See accompanying notes to condensed consolidated financial statements.
6
Network Dealer Services Holding Corp.
Notes to Condensed Consolidated Financial Statements
September 30, 2011
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary to present a fair statement of the results for the period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The results of operations for the period ended September 30, 2011, are not necessarily indicative of the operating results for the full year.
NOTE 2 LIQUIDITY/GOING CONCERN
The Company has accumulated losses since inception and has not yet been able to generate profits from operations. Operating capital has been raised through the sale of common stock or through loans from stockholders. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans are to further develop new and innovative products and services that target the auto industry and raise additional capital. If management is unsuccessful in these efforts, discontinuance of operations is possible. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 RELATED PARTY TRANSACTIONS
Related party transactions consist of sales and receivables to Great Western Holding Co., Inc. (Great Western) or to J and P Holding, LLC (J&P). Great Western and J&P have common ownership with Network Dealer Services. Network Dealer Services contracts for and provides services to these related parties for advertising, printing, marketing and some internet solutions. These services constitute sales revenues which are subsequently paid by the related parties. As of September 30, 2011 the Company was owed $0 by related parties.
For the nine month period ending September 30, 2011, payables to related party shareholders (“Shareholders” or “Shareholder”) increased by $33,758, and the Company repaid $0. These amounts are commissions due to the Shareholders under contractual agreements for products sold by the Shareholders at their automobile dealerships. As of September 30, 2011, the Company owed $72,613 for such commissions to the Shareholders.
During the nine month period ending September 30, 2011, Shareholders loaned the Company $73,500. As of September 30, 2011, the Company owed $73,500 to the Shareholders on a note in that amount. The note is due on demand and has no stated interest. For the nine months ended September 30, 2011, the Company imputed $3,128 of interest on this note.
During the prior year, a related party (JS Investments, a company owned by Shareholders Joshua A. Griffin and R. Shane Griffin), loaned $20,000 to the Company to support operations and executed a note in that amount. The note is due on demand and has no stated interest. For the nine months ended September 30, 2011, the Company imputed $1,978 of interest on this note.
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Network Dealer Services Holding Corp.
Notes to Condensed Consolidated Financial Statements
September 30, 2011
(Unaudited)
NOTE 3 RELATED PARTY TRANSACTIONS (Continued)
Also during the nine month period ended September 30, 2011, Great Western loaned $25,158 to the Company to support operations for which the Company executed a note. As of September 30, 2011, the total note balances due on loans from Great Western was $356,906. The note is due on demand and has no stated interest. For the nine month period ended September 30, 2011, the Company imputed $35,902 of interest on this note.
NOTE 4 COMMON STOCK
On December 20, 2010 the Company granted 1,400,000 restricted shares of common stock to employees. One third of the shares vested immediately and the remaining two thirds vest after one year. The Company recognizes compensation over the requisite service period, one year. During the nine month period ended September 30, 2011 the Company recognized stock compensation of $7,257.
During the quarter ended March 31, 2011, the Company issued 175,000 shares of restricted stock, valued at $0.01 per share, to a former employee and a non-employee to settle claims accrued in previous years.
During the quarter ended June 30, 2011, the Company issued 800,000 shares of common stock to an officer/director of the Company for $200,000 cash.
NOTE 5 SETTLEMENT / SUBSEQUENT EVENT
During the quarter the company entered into a settlement agreement with one of its vendors to release the Company from its obligations associated with a lease agreement. The settlement mutually releases, acquits, and forever discharges both parties (the company and the vendor) and its respective successors, assigns, officers, employees, shareholders or other equity owners, directors, and attorneys from any and all claims, demands, or causes of action of any kind in connection with the lease agreement. Under this original settlement agreement the Company agreed to pay the settlement amount of $265,000 to the vendor in 30 consecutive payments. Under the agreement the company agreed to surrender the leased equipment to the vendor. At the time of the settlement agreement the company had accrued $99,466.
Subsequent to the date of the balance sheet, the Company entered into a new settlement agreement with the vendor, which modifies and replaces the settlement agreement entered into between such parties as described above. This new settlement agreement, dated November 18, 2011, releases the Company from all its obligations to the vendor in exchange for a one-time lump sum payment of $80,000. The Company determined that this was a recognized subsequent event and has reflected it in the financial statements dated September 30, 2011. The Company recognized a gain on settlement of $10,633.
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Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Plan of Operations
The Company continues to seek sources of funding to begin to roll out its plan to acquire franchised, new automobile dealerships in small-to-medium markets. We are also engaged in the business of providing aftermarket sales, marketing, servicing and underwriting channels for various extended service contracts and added value insurance products to the new and used automobile segments of the automobile industry. Using a prudent mix of cash, stock and debt, management believes that significant value exists in the acquisition of under-valued and under-performing franchised, new automobile small-to-mid-market dealerships. We believe that significant unrealized value is obtainable through the integration of demonstrated Company sales and marketing strategies, dealership management policies and the consolidation of operations. We have selected a segment of the market that is well established, profitable and growing and that has a low barrier to entry for consolidation. The low barrier to entry is largely due to the fact that we have selected markets and dealerships that are generally not targeted for acquisition markets or dealership size by the established competition. Instead, the small-to-medium sized dealer remains a largely fragmented segment of the larger retail sales industry. In many such markets, the price to purchase a dealer may be depressed due to a relatively few amount of bidders.
Consolidating branded and franchised automobile dealerships has the demonstrated and quantifiable result of providing for greater operational efficiency, management controls, increased sales revenue and higher profit margins, with greater customer retention and satisfaction. Consolidation produces increased capacity through integrating centralized management and systems, while providing a consistent platform for growth through planned and controlled acquisitions. Our dealership acquisition model will allow us to expand the offering of our current products to all newly acquired dealerships.
We believe that consolidating branded and franchised automobile dealerships will have the result of providing for greater operational efficiency, management controls, increased sales revenue and higher profit margins, and when combined with our in-house marketing, printing and retention programs, greater customer retention and satisfaction. Consolidation has the potential to produce increased capacity through integrating centralized management and systems while providing a consistent platform for growth through planned and controlled acquisitions. We are engaged in researching this market landscape with the intention of identifying three operating and profitable automobile dealerships in our target market to purchase as part of our initial dealership acquisitions.
Our acquisition target is a franchised automobile dealership in a rural or small-to-medium, non-metropolitan market, with an initial focus on acquiring under-performing, small-business dealerships from a single owner/operator or a small dealer group. As we acquire dealerships, we will use our current offering of aftermarket sales, marketing, printing, servicing and underwriting channels for various extended service contracts and added value insurance and vehicle maintenance products. This integration will add revenues to all our current business lines and allow us to capture profits that are usually paid out to third-party providers.
9
Our current product offerings are marketed and offered by us to consumers through new and used retail automobile dealership Finance and Insurance (“F&I”) representatives employed by the dealerships to sell F&I products at the point of sale or delivery of the automobile, on a fee and/or commission basis, and are sold by us through automobile dealerships we contract with to facilitate their F&I business services. It is anticipated in the future that our product offerings will be serviced and primarily underwritten by us through wholly-owned or controlled entities; however, F&I representatives will continue to be employees of the respective dealerships with whom we contract. Currently, all of our products offered for sale through dealership F&I sales representatives are third-party products administered and underwritten through the third-party providers. Our future product development plans include the creation of our own underwriting and administration companies and the offering of our own products directly to the end user. We believe the F&I portion of an automobile dealership’s business is, by far, the most profitable sector. Our business model consolidates a very stable and profitable segment of the automobile purchase process. Our products are tied specifically to the purchase of new or used vehicles. As a result, we believe that we are able to plan and create stable revenue and very predictable mid and long term costs and expenses to our business platform because there is substantially and readily publicly available industry data and trends analysis specific to the purchasing, selling and maintaining of new and used automobiles. Such a strategy should allow us to accurately forecast and adjust our business model with full scalability for maximum return on investment and efficient use of our capital, while increasing shareholder value and, most importantly, managing sustained controlled growth with a real benefit to the customer.
To fully implement our planned future business operations, we estimate that we will need approximately $10,000,000 in additional funding. These funds would be primarily utilized to purchase existing franchised, new automobile dealerships, which are anticipated to include the purchase of related party automobile dealerships. As we acquire automobile dealerships, we will introduce and integrate our full array of aftermarket sales, marketing, and printing products and services into the new dealership, providing greater efficiencies at the new dealership and generating new revenues for all divisions of the Company. We do not currently have any firm commitments from which to raise these funds. We cannot assure that we will be successful in raising these funds. We believe that even without the planned funding, our current and planned business operations will continue to grow, but at a much slower pace. If we are successful in raising our proposed funds, the following is a present estimate of the use of these proceeds, net of cost of raising these funds:
| | | |
Working Capital: | | | |
| Working Capital for initial acquisitions | $2,600,000 | |
| NDS Loan - Retirement | $400,000 | |
| Reserve | $100,000 | |
| | | |
| Total proceeds for working capital: | | $3,100,000 |
| | | |
Capital Expenditures: | | |
| Initial Dealer Acquisition (3 dealerships) | $3,100,000 | |
| Dealer Acquisition Reserve | $3,300,000 | |
| Office Equipment | $60,000 | |
| Acquisition fees, costs, setup, IT | $100,000 | |
| Continued Product Development, Software | $240,000 | |
| Reserve | $100,000 | |
| | | |
| Total proceeds for Capital Expenditures: | | $6,900,000 |
| | | |
Total Use of Proceeds: | | $10,000,000 |
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Presently, there are three automobile dealerships that have customary contractual arrangements with us, which are owned by related parties (such dealerships are owned by the Griffins [Great Western Holding Company, Inc. and its subsidiaries or “Great Western”]), and we provide our products and services to approximately 4 other dealerships and two marketing agencies. Most of the products and services that we currently provide are marketing/media, data mining/management, web-site development/support and the insurance products and services that we now offer.
The Company has discontinued its in-house printing operation as a result of terminating its printer lease in conjunction with a settlement agreement described in the Notes to the Condensed Consolidated Financial Statements. However, the Company continues to offer the same services to its customers by outsourcing the printing while continuing to provide other services in-house. We believe that outsourcing the print operation will create greater operational efficiencies and reduce our overall cost of printing, as our current business was not sufficient to operate the printer at a level to justify its cost.
As expected, we did not see a substantial increase in sales during the three months ended September 30, 2011 and we do not expect to see a substantial increase until we are able to obtain the funding we are seeking. While we continue to seek funding to implement our planned future operations, we have not been able to secure any commitments from investors.
Results of Operations
For the three month periods ended September 30, 2011 and 2010
Total revenue during the quarter ended September 30, 2011, of $214,575, compared to the quarter ended September 30, 2010, of $287,367 decreased. However, revenues from unrelated parties decreased from $113,135 for the quarter ended September 30, 2010 to $54,143 for the quarter ended September 30, 2011. This decrease is a result in the loss of customers as a result of our focus on using our limited resources and reduced labor force to service our larger clients. Cost of goods sold during the quarter ended September 30, 2011, was $179,218, for a gross profit of $35,357, compared to the cost of goods sold during the quarter ended September 30, 2010, of $267,889, for a gross profit of $19,478. Gross profit percentage increased from 7% to 16%. We had a net loss of $98,833 for the quarter ended September 30, 2011, compared to a net loss of $107,720 for the quarter ended September 30, 2010. During the quarter ended September 30, 2011 the company entered into an agreement with one of its vendors to release the Company from a lease agreement and associated obligations. As part of the agreement the Company surrendered the equipment associated with the lease agreement to the vendor. The portion of the settlement amount that affected other income was $10,633. The Company strategically negotiated the settlement agreement in an effort to reduce fixed costs associated with a long-term printer lease. As a result the Company now outsources its printing operations. By doing so, the Company expects to achieve greater efficiency and a continued trend of profit margin increases.
Revenues for the three month periods ended September 30, 2011, and 2010, attributable to related parties, were, respectively, $160,432 or approximately 75% of total revenues; and $174,232 or approximately 61% of total revenues.
For the nine month periods ended September 30, 2011 and 2010
Total revenue increased by $95,263 during the nine month period ending September 30, 2011 over the nine month period ending September 30, 2010. That increase comes from revenues to related parties rather than other revenues and occurred mostly during the quarter ended March 31, 2011. This increase is attributed to the addition of a new related party dealership client during the quarter ended March 31, 2011 and a substantial increase in sales at the related-party client dealerships. The increased sales to our clients results in increased revenues to the Company from commissions due upon the sale of certain product and increased advertising budgets for our clients. The increased revenues resulted in a larger percentage increase in gross profit over the same period.
The Company also experienced a sharp increase in Operating Expenses during the nine month period ended September 30, 2011 over the nine month period ended September 30, 2010. This increase came both in the form of Professional Fees (an increase of $51,350), General and Administrative expenses (an increase of $137,727). The increase in outside Professional Fees is due to the continuing compliance and reporting requirements of the Securities and Exchange Commission, largely related to the annual 10-K report. General and administrative expenses increased during this period due primarily to the increased employee wages and insurance costs for such employees and an increase in real estate rents. The gain on settlement of $10,633 was the result of a settlement entered into during the period between the Company and one of its
11
vendors to release the Company from a lease agreement and associated obligations. The amount of the settlement that affected Other Income was $10,633.
Revenues for the six month periods ended September 30, 2011, and 2010, attributable to related parties, were, respectively, approximately 75% of total revenues; and approximately 62% of total revenues.
Liquidity
We had cash of $15,687 as of September, 2011.
Our operating losses continued through the third quarter of 2011. The increased losses are generally the result of decreased revenues from the loss of certain customers and increased wages. We are seeking new means of obtaining cash and capital for operations through outside investors. We have identified and are in discussions with an investor to secure the capital commitment that we are seeking to implement our planned future operations, though we have not entered into any firm commitment or other arrangements or understandings.
During the nine months ended September 30, 2011, related parties loaned $98,658 to the Company to support operations. The Company did not receive any other loans from shareholders or other related parties. As of September 30, 2011, the total note payable balance to Great Western was $356,906 and an additional $93,500 to other related parties and shareholders. The notes are due on demand and have no stated interest. For the nine months ended September 30, 2011, the Company imputed $41,008 of interest on these loans. These loans were used for our working capital.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2011, our disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
Our management, with the participation of the chief executive officer and chief financial officer, has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None; not applicable.
Item 1A. Risk Factors.
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On April 13, 2011, our Board of Directors resolved to issue 800,000 shares of our common stock that were “restricted securities” to R. Lynn McCoy, an officer of the Company, in consideration of the sum of $200,000. The Company received the $200,000 from Mr. McCoy and issued him 800,000 shares of common stock during the quarter ended June 30, 2011.
We issued these securities to persons who were either “accredited investors,” or “sophisticated investors,” as those terms are respectively defined in Rules 501 and 506 of the SEC; and each person had prior access to all material information about us. We believe that the offer and sale of these securities was exempt from the registration requirements of the Securities Act pursuant to Sections 4(2) and 4(6) thereof, and Rule 506 of Regulation D of the Securities Exchange Commission. Section 18 of the Securities Act preempts state registration requirements for sales to these classes of persons, save for compliance with state notice and fee requirements, as may be applicable.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None; not applicable.
Item 6. Exhibits.
Exhibit No. Identification of Exhibit
| |
31.1 31.2 32 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act provided by Joshua A. Griffin, President and Director. Certification Pursuant to Section 302 of the Sarbanes-Oxley Act provided by Paul D. Stevens, Chief Financial Officer, Vice President, Treasurer and Director Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided by Joshua A. Griffin, President and Paul D. Stevens, Chief Financial Officer, and Director. |
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
NETWORK DEALER SERVICES HOLDING CORP.
| | | | |
Date: | November 18, 2011 | | By: | /s/Joshua A. Griffin |
| | | | Joshua A. Griffin |
| | | | President and Director |
| | | | |
Date: | November 18, 2011 | | By: | /s/Paul D. Stevens |
| | | | Paul D. Stevens |
| | | | Chief Financial Officer, Vice President, Treasurer and Director |
| | | | |
Date: | November 18, 2011 | | By: | /s/R. Lynn McCoy |
| | | | R. Lynn McCoy |
| | | | Chief Operating Officer, Secretary and Director |
14
