58
As filed with the Securities and Exchange Commission on September 23, 2004
An Exhibit List can be found on page II-6.
Registration No. 333-_____
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
STRONGHOLD TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
NEVADA 4841 22-3762832
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
106 ALLEN ROAD
BASKING RIDGE, NJ 07920
(908) 903-1195
(Address and telephone number of principal executive offices and principal
place of business)
CHRISTOPHER CAREY, CHIEF EXECUTIVE OFFICER
STRONGHOLD TECHNOLOGIES, INC.
106 ALLEN ROAD
BASKING RIDGE, NJ 07920
(908) 903-1195
(Name, address and telephone number of agent for service)
Copies to:
GREGORY SICHENZIA, ESQ.
STEPHEN M. FLEMING ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
(212) 930-9725 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- ------------------ --------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) MAXIMUM MAXIMUM REGISTRATION FEE
OFFERING AGGREGATE
PRICE PER OFFERING PRICE
SHARE
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $.0001 par 80,000,000 (2) $.25(3) $20,000,000.00 $2,534.00
value issuable upon
conversion of Callable
Secured Convertible Notes
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.0001 par 6,000,000 (4) $.57 $3,420,000.00 $433.31
value issuable upon exercise
of Warrants
------------------------------- -------------------- ---------------- ------------------ --------------------
Total 86,000,000 $23,420,000.00 $2,967.31*
------------------------------- -------------------- ---------------- ------------------ --------------------
*$830.33 has been previously paid.
(1) Includes shares of our common stock, par value $0.0001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of callable secured convertible notes and the exercise of
warrants held by the selling stockholders. In addition to the shares set forth
in the table, the amount to be registered includes an indeterminate number of
shares issuable upon conversion of the callable secured convertible notes and
exercise of the warrants, as such number may be adjusted as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The number of shares of common stock registered hereunder represents a good
faith estimate by us of the number of shares of common stock issuable upon
conversion of the callable secured convertible notes and upon exercise of the
warrants. For purposes of estimating the number of shares of common stock to be
included in this registration statement, we calculated a good faith estimate of
the number of shares of our common stock that we believe will be issuable upon
conversion of the callable secured convertible notes and upon exercise of the
warrants to account for market fluctuations, and antidilution and price
protection adjustments, respectively. Should the conversion ratio result in our
having insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should that
become necessary. In addition, should a decrease in the exercise price as a
result of an issuance or sale of shares below the then current market price,
result in our having insufficient shares, we will not rely upon Rule 416, but
will file a new registration statement to cover the resale of such additional
shares should that become necessary.
(2) Includes a good faith estimate of the shares underlying the callable secured
convertible notes to account for market fluctuations.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
September 16, 2004, which was $.25 per share.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $.57 per share to account for antidilution and price protection adjustments.
(5) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the exercise
price of $.57.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
3
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 2004
STRONGHOLD TECHNOLOGIES, INC.
86,000,000 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up
to 86,000,000 shares of our common stock, including up to 80,000,000 shares of
common stock underlying secured convertible notes in a principal amount of
$3,000,000 and up to 6,000,000 issuable upon the exercise of common stock
purchase warrants. The secured convertible notes are convertible into our common
stock at the lower of $0.70 or 50% of the average of the three lowest intraday
trading prices for the common stock on a principal market for the 20 trading
days before but not including the conversion date. The selling stockholders may
sell common stock from time to time in the principal market on which the stock
is traded at the prevailing market price or in negotiated transactions. The
selling stockholders may be deemed underwriters of the shares of common stock
which they are offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "SGHT.ob". The last reported sales price per share of our common
stock as reported by the Over-The-Counter Bulletin Board on September 16, 2004,
was $.25.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is September 23, 2004.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Stronghold Technologies, Inc. with the Securities and Exchange Commission. The
selling stockholders may not sell these securities until the registration
statement becomes effective. This Prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the sale is not permitted.
4
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the secured convertible notes to
the financial statements.
STRONGHOLD TECHNOLOGIES, INC.
We are a Customer Relationship Management ("CRM") solutions provider
for the retail automotive industry. Our DealerAdvance(TM) Sales Solution is
designed to streamline dealership sales operations using software that
integrates existing technology systems.
For the six months ended June 30, 2004, we generated $1,343,928 in
revenue and a net loss of $1,034,642. In addition, for the year ended December
31, 2003, we generated revenue of $2,996,344 and a net loss of $4,258,007. As a
result of recurring losses from operations and a net deficit in both working
capital and stockholders' equity, our auditors, in their report dated March 17,
2004, have expressed substantial doubt about our ability to continue as going
concern.
Our principal offices are located at 106 Allen Road, Basking Ridge, NJ
07920, and our telephone number is (908) 903-1195. We are a Nevada corporation.
The Offering
Common stock offered by selling
stockholders...................... Up to 86,000,000 shares, including the
following:
-- up to 80,000,000 shares of common
stock underlying secured
convertible notes in the principal
amount of $3,000,000 (includes a
good faith estimate of the shares
underlying the callable secured
convertible notes to account for
market fluctuations antidilution
and price protection adjustments,
respectively), and
-- up to 6,000,000 shares of common
stock issuable upon the exercise of
common stock purchase warrants at
an exercise price of $.57 per share
(includes a good faith estimate of
the shares underlying warrants to
account for antidilution and price
protection adjustments).
This number represents 85.33% of
our current outstanding stock.
Common stock to be outstanding after
the offering...................... Up to 100,776,655 shares
Use of proceeds..................... We will not receive any proceeds from
the sale of the common stock. However,
we will receive the sale price of any
common stock we sell to the selling
stockholder upon exercise of the
warrants. We expect to use the proceeds
received from the exercise of the
warrants, if any, for general working
5
capital purposes. However, the selling
stockholders will be entitled to
exercise the warrants on a cashless
basis if the shares of common stock
underlying the warrants are not then
registered pursuant to an effective
registration statement. In the event
that the selling stockholder exercises
the warrants on a cashless basis, then
we will not receive any proceeds. In
addition, we have received gross
proceeds $2,000,000 from the sale of the
secured convertible notes and the
investors are obligated to provide us
with an additional $1,000,000 within
five days of this registration statement
being declared effective. The proceeds
received from the sale of the callable
secured convertible notes will be used
for business development purposes,
working capital needs, payment of
consulting and legal fees and borrowing
repayment.
Over-The-Counter Bulletin Board
Symbol ............................ SGHT
The above information regarding common stock to be outstanding after
the offering is based on 14,776,655 shares of common stock outstanding as of
September 16, 2004 and assumes the subsequent conversion of our issued secured
convertible notes and exercise of warrants by our selling stockholders.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC on June 18,
2004 for the sale of (i) $3,000,000 in callable secured convertible notes and
(ii) stock purchase warrants to buy 3,000,0000 shares of our common stock. This
prospectus relates to the resale of the common stock underlying these callable
secured convertible notes and warrants.
On June 18, 2004, the investors purchased $1,500,000 in callable
secured convertible notes and received warrants to purchase 1,500,000 shares of
our common stock and on July 27, 2004 the investors purchased $500,000 in
callable secured convertible notes and received warrants to purchase 500,000
shares of our common stock. In addition, provided that all of the conditions in
the Securities Purchase Agreement are satisfied, the investors are obligated to
provide us with additional funds as follows:
o $1,000,000 will be funded within five business days of the
effectiveness of the registration statement.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible into our common stock, at
the investors' option, at the lower of (i) $0.70 or (ii) 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. As of July 16,
2004, 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 $.15 and, therefore, the conversion price for the secured
convertible notes was $.092. Based on this conversion price, the $3,000,000
callable secured convertible notes, excluding interest, were convertible into
40,000,000 shares of our common stock.
We may prepay the callable secured convertible notes in the event that
no event of default exists, there are a sufficient number of shares available
for conversion of the callable secured convertible notes and the market price is
at or below $.57 per share. The full principal amount of the callable secured
6
convertible notes is due upon default under the terms of callable secured
convertible 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 $0.57 per share. In addition, the exercise price of the
warrants is adjusted in the event we issue common stock at a price below market.
The investors have contractually agreed to restrict their ability to
convert the callable secured convertible notes and exercise the warrants and
receive shares of our common stock such that the number of shares of our common
stock held by them and their affiliates after such conversion or exercise does
not exceed 4.99% of our then issued and outstanding shares of our common stock.
See the "Selling Stockholders" and "Risk Factors" sections for a
complete description of the secured convertible notes.
7
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR BUSINESS:
WE HAVE A HISTORY OF INCURRING NET LOSSES; WE EXPECT OUR NET LOSSES TO CONTINUE
AS A RESULT OF PLANNED INCREASES IN OPERATING EXPENSES; AND, THEREFORE, WE MAY
NEVER ACHIEVE PROFITABILITY WHICH MAY CAUSE US TO SEEK ADDITIONAL FINANCING OR
TO CEASE OPERATIONS.
We have a history of operating losses and have incurred significant net
losses in each fiscal quarter since our inception. We had a net loss of
$4,258,007 and $4,528,803 for the fiscal years ended December 31, 2003 and
December 31, 2002, respectively. We have an accumulated net operating loss of
approximately $7,531,007 for the period from May 17, 2002 through December 31,
2003 to offset future taxable income. Losses prior to May 17, 2002 were passed
directly to the shareholders and, therefore, are not included in the loss
carry-forward. We expect to continue to incur net losses and negative cash flows
for the foreseeable future. We will need to generate significant additional
revenue to achieve profitability. Our ability to generate and sustain
significant additional revenues or achieve profitability will depend upon
numerous factors outside of our control, including:
o Competing products that are more effective or less costly than ours;
o Our ability to develop and commercialize our own products and
technologies; and
o Our ability to increase sales of our existing products and any new
products.
It is possible that we may never achieve profitability and, even if we
do achieve profitability, we may not sustain or increase profitability in the
future. If we do not achieve sustained profitability, we may be unable to
continue our operations.
WE HAVE RECENTLY ENTERED A FOREBEARANCE AGREEMENT WITH A LENDER IN CONNECTION
WITH A LOAN AGREEMENT IN WHICH WE ARE PRESENTLY IN DEFAULT. IF WE ARE UNABLE TO
COMPLY WITH THE TERMS OF PAYMENT IN THE FORBEARANCE AGREEMENT, THE LENDER COULD
ACCELERATE THE MATURITY DATE OF THE LOAN OR ATTEMPT TO SEIZE THE ASSETS OF OUR
COMPANY PLEDGED AS SECURITY FOR THE LOAN.
On November 1, 2001, we entered into a line of credit with United Trust
Bank (now PNC Bank) pursuant to which the Predecessor Entity borrowed $1.5
million. On September 30, 2002, we converted the outstanding line of credit with
UnitedTrust Bank into a $1,500,000 promissory note. As of December 31, 2003,
$1,231,667 was outstanding under the promissory note.
On January 9, 2004, we were served with a Notice of an Event of Default
by United Trust Bank under its Loan Agreement stating that pursuant to section
6.01(d) of the Loan Agreement, an Event of Default exists due to our failure to
pay Payroll Tax Obligations aggregating in the amount of $1,089,897 as of
December 31, 2003 (including estimated penalties and interest). On April 1,
2004, we 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. On April 27, 2004, PNC Bank, N.A., as
successor by merger to UnitedTrust 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 as well as payments of $50,000 on August 15, 2004
and September 15, 2004. Additionally, we are required to make two consecutive
monthly installments of $50,000.00 on October 15, 2004 and November 15, 2004
followed by the remaining principal on or before December 15, 2004. Failure to
adhere to this schedule will cause the suit to be reinstated and PNC Bank will
resume collection of the sum under the suit. If the bank is successful in a
lawsuit, it could seize our assets which may cause us to cease our operations.
8
WE HAVE RECENTLY ENTERED AN INSTALLMENT AGREEMENT WITH THE UNITED STATES
INTERNAL REVENUE SERVICE AND IF WE DEFAULT UNDER SUCH INSTALLMENT AGREEMENT, THE
IRS COULD ATTEMPT TO SEIZE OUR ASSETS FOR PAYMENT OF TAXES OWED.
On April 30, 2004, we entered into an installment agreement with the IRS to pay
withholding taxes due in the amount of $1,233,101.35, under the terms of which
we will pay $35,000 each month, commencing June 28, 2004, until we have paid the
withholding taxes due in full. We estimate that at the rate of $35,000 per
month, we will make 36 monthly payments to the IRS. If we violate the
installment agreement, the IRS could take possession of our assets and we may be
forced to cease operations and/or to file for bankruptcy protection.
WE HAVE A LIMITED OPERATING HISTORY, THEREFORE IT IS DIFFICULT TO EVALUATE OUR
FINANCIAL PERFORMANCE AND PROSPECTS.
We were formed in September 2000 to import and market truffle oil
products. As of May 16, 2002, our business purpose focus shifted to the
development and marketing of handheld wireless technology for the automotive
dealer software market. We entered the handheld wireless technology business
through the acquisition of an entity with a 23-month operating history. We are,
therefore, subject to all of the risks inherent in a new business enterprise.
Our limited operating history makes it difficult to evaluate our financial
performance and prospects. We cannot assure you that in the future we will
operate profitably or that we will have adequate working capital to meet our
obligations as they become due. Because of our limited financial history, we
believe that period-to-period comparisons of our results of operations will not
be meaningful in the short term and should not be relied upon as indicators of
future performance.
WE MAY FAIL TO GAIN MARKET ACCEPTANCE OF OUR PRODUCTS, THEREFORE OUR BUSINESS
AND RESULTS OF OPERATIONS COULD BE HARMED.
We are still in the early marketing stages of our DealerAdvance(TM)
suite of products. Our first pilot system for DealerAdvance Sales Solution(TM)
was installed in April 2001 and our sixth and final pilot system was installed
in September 2001. We implemented a total of 33 additional sites in 2002. As of
December 31, 2003, a total of 69 Dealerships were using the DealerAdvance Sales
Solution(TM) in 13 states. We expect to introduce our DealerAdvance Service
Solution(TM) over the next two years. This solution is still in the development
stages and is not yet ready for testing. While we have received positive
feedback of DealerAdvance Sales Solution(TM) by the test sites, sixty-nine
systems is a small number and results in such sites may not be indicative of the
overall market acceptance and success of DealerAdvance Sales Solutions(TM) or
our entire DealerAdvance(TM) suite of products. We may experience design,
marketing, and other difficulties that could delay or prevent our development,
introduction, or marketing of these and other new products and enhancements. In
addition, the costs of developing and marketing our products may far outweigh
the revenue stream generated by such products. Finally, our prospects for
success will depend on our ability to successfully sell our products to key
automobile dealerships that may be inhibited from doing business with us because
of their commitment to their own technologies and products, or because of our
relatively small size and lack of sales and production history.
The nature of our handheld product and technology requires us to market
almost exclusively to automobile dealerships. Should any particular dealership
or group of dealerships decide not to utilize our services to the extent
anticipated, our business may be adversely affected. Large and costly consumer
products such as automobiles are sensitive to broad economic trends. Therefore,
our business could suffer if automobile dealerships are affected by poor
economic conditions. If dealer sales are trending downward, capital
expenditures, like those associated with our DealerAdvance (TM) suite of
products, may be delayed or abandoned.
WE DEPEND ON ATTRACTING AND RETAINING KEY PERSONNEL TO MAINTAIN OUR COMPETITIVE
ADVANTAGE, THEREFORE THE LOSS OF THEIR SERVICES MAY SIGNIFICANTLY DELAY OR
PREVENT THE ACHIEVEMENT OF OUR STRATEGIC OBJECTIVES.
We are highly dependent on the principal members of our management,
research and sales staff. The loss of their services might significantly delay
9
or prevent the achievement of our strategic objectives. Our success depends on
our ability to retain key employees and to attract additional qualified
employees. Competition for personnel is intense, and we cannot assure you that
we will be able to retain existing personnel or attract and retain additional
highly qualified employees in the future.
Our subsidiary, Stronghold, has an employment agreement in place with
its President and Chief Executive Officer, Christopher J. Carey, which provides
for vesting of options exercisable for shares of our common stock based on
continued employment and on the achievement of performance objectives defined by
the board of directors. Stronghold does not have similar retention provisions in
its employment agreements with other key personnel. If we are unable to hire and
retain personnel in key positions, our business could be significantly and
adversely affected unless qualified replacements can be found.
Our success is dependent on the vision, technological knowledge,
business relationships and abilities of our president, Mr. Carey. Any reduction
of Mr. Carey's role in our business would have a material adverse effect on us.
Mr. Carey's employment contract expires on December 31, 2004. He has not,
however, expressed any intention or desire to leave.
RISKS CONCERNING OUR HANDHELD TECHNOLOGY:
WE OBTAIN PRODUCTS AND SERVICES FROM THIRD PARTIES, THEREFORE AN INTERRUPTION IN
THE SUPPLY OF THESE PRODUCTS AND SERVICES COULD CAUSE A DECLINE IN SALES OF OUR
PRODUCTS AND SERVICES.
We are dependant upon certain providers of software, including
Microsoft Corporation and their Pocket PC software, to provide the operating
system for our applications. If there are significant changes to this software,
or if this software stops being available or supported, we will experience a
disruption to our product and development efforts.
In designing, developing and supporting our wireless data services, we
rely on mobile device manufacturers, content providers, database providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our products and services, unless
and until we are able to replace the functionality provided by these products
and services. We also depend on third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes.
COMPETITION IN THE WIRELESS TECHNOLOGY INDUSTRY IS INTENSE AND TECHNOLOGY IS
CHANGING RAPIDLY, THEREFORE WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST OUR
CURRENT AND FUTURE COMPETITORS IN THE FUTURE.
Many wireless technology and software companies are engaged in research
and development activities relating to our range of products. The market for
handheld wireless technology is intensely competitive, rapidly changing and
undergoing consolidation. We may be unable to compete successfully against our
current and future competitors, which may result in price reductions, reduced
profit margins and the inability to achieve market acceptance for our products.
Our competitors in the field are major international car dealership service
companies, specialized technology companies, and, potentially, our joint venture
and strategic alliance partners. Many of our competitors have substantially
greater financial, marketing, sales, distribution and technical resources than
us and have more experience in research and development, sales, service,
manufacturing and marketing. We anticipate increased competition in the future
as new companies enter the market and new technologies become available. Our
technology may be rendered obsolete or uneconomical by technological advances
developed by one or more of our competitors.
WE MAY NOT HAVE ADEQUATELY PROTECTED OUR INTELLECTUAL PROPERTY RIGHTS, THEREFORE
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS.
Our success depends on our ability to sell products and services for
which we do not currently have intellectual property rights. We currently do not
10
have patents on any of our intellectual property. We have filed for a patent
which protects a number of developments pertaining to the management of
information flow for automotive dealer-based software. We plan to file an
additional patent application which will address certain proprietary features
pertaining to our systems components, related equipment and software modules. We
cannot assure you we will be successful in protecting our intellectual property
right through patent law.
We rely primarily on trade secret laws, patent law, copyright law,
unfair competition law and confidentiality agreements to protect our
intellectual property. To the extent that these avenues do not adequately
protect our technology, other companies could develop and market similar
products or services, which could adversely affect our business.
WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS,
THEREFORE WE MAY INCUR DEFENSE COSTS AND POSSIBLY ROYALTY OBLIGATIONS OR LOSE
THE RIGHT TO USE TECHNOLOGY IMPORTANT TO OUR BUSINESS.
The wireless technology and software industries are characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. Any intellectual
property claims, whether with or without merit, could be time consuming and
expensive to litigate or settle and could divert management attention from the
administration of our business. A third party asserting infringement claims
against us or our customers with respect to our current or future products may
adversely affect us.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CALLABLE SECURED CONVERTIBLE
NOTES, AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE
SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of September 16, 2004, we had 14,776,655 shares of common stock
issued and outstanding and callable secured convertible notes outstanding or an
obligation to issue callable secured convertible notes that may be converted
into an estimated 30,000,000 shares of common stock at current market prices,
and outstanding warrants or an obligation to issue warrants to purchase
3,000,000 shares of common stock. In addition, the number of shares of common
stock issuable upon conversion of the outstanding callable secured convertible
notes may increase if the market price of our stock declines. All of the shares,
including all of the shares issuable upon conversion of the notes and upon
exercise of our warrants, may be sold without restriction. The sale of these
shares may adversely affect the market price of our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CALLABLE SECURED
CONVERTIBLE NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF
SHARES, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our callable secured
convertible notes is essentially limitless. The following is an example of the
amount of shares of our common stock that are issuable, upon conversion of the
Notes (excluding accrued interest), based on market prices 25%, 50% and 75%
below the current twenty day average, as of September 16, 2004 of $0.075.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
----- --------- ------------- ----------- -----------
25% $.1125 $.0563 53,333,333 78.30%
50% $.0750 $.0375 80,000,000 84.41%
75% $.0375 $.0188 160,000,000 91.55%
11
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CALLABLE SECURED
CONVERTIBLE NOTES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON
STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The callable secured convertible notes are convertible into shares of
our common stock at a 50% discount to the trading price of the common stock
prior to the conversion. The significant downward pressure on the price of the
common stock as the selling stockholder converts and sells material amounts of
common stock could encourage short sales by investors. This could place further
downward pressure on the price of the common stock. The selling stockholder
could sell common stock into the market in anticipation of covering the short
sale by converting their securities, which could cause the further downward
pressure on the stock price. In addition, not only the sale of shares issued
upon conversion or exercise of notes, warrants and options, but also the mere
perception that these sales could occur, may adversely affect the market price
of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CALLABLE SECURED CONVERTIBLE NOTES
AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL
DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the callable secured
convertible notes and exercise of warrants may result in substantial dilution to
the interests of other stockholders since the selling stockholders may
ultimately convert and sell the full amount issuable on conversion. Although the
selling stockholders may not convert their callable secured convertible notes
and/or exercise their warrants if such conversion or exercise would cause them
to own more than 4.99% of our outstanding common stock, this restriction does
not prevent the selling stockholders from converting and/or exercising some of
their holdings and then converting the rest of their holdings. In this way, the
selling stockholders could sell more than this limit while never holding more
than this limit. There is no upper limit on the number of shares that may be
issued which will have the effect of further diluting the proportionate equity
interest and voting power of holders of our common stock, including investors in
this offering.
IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE CALLABLE SECURED CONVERTIBLE NOTES AND REGISTERED PURSUANT
TO THIS PROSPECTUS MAY NOT BE ADEQUATE AND WE MAY BE REQUIRED TO FILE A
SUBSEQUENT REGISTRATION STATEMENT COVERING ADDITIONAL SHARES. IF THE SHARES WE
HAVE ALLOCATED AND ARE REGISTERING HEREWITH ARE NOT ADEQUATE AND WE ARE REQUIRED
TO FILE AN ADDITIONAL REGISTRATION STATEMENT, WE MAY INCUR SUBSTANTIAL COSTS IN
CONNECTION THEREWITH.
Based on our current market price and the potential decrease in our
market price as a result of the issuance of shares upon conversion of the
callable secured convertible debentures, we have made a good faith estimate as
to the amount of shares of common stock that we are required to register and
allocate for conversion of the convertible debentures. As we do not currently
have the required amount of shares available, we may be required to file an
additional registration statement after we have increased our authorized common
stock. Accordingly, subject to obtaining an increase in our authorized shares of
common stock, we will allocate and register approximately 86,000,000 shares to
cover the conversion of the callable secured convertible debentures. In the
event that our stock price decreases, the shares of common stock we have
allocated for conversion of the callable secured convertible debentures and are
registering hereunder may not be adequate. If the shares we have allocated to
the registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
IF WE FAIL TO OBTAIN STOCKHOLDER APPROVAL TO INCREASE OUR AUTHORIZED SHARES OF
COMMON STOCK, WE MAY BE REQUIRED TO REPAY THE CALLABLE SECURED CONVERTIBLE
DEBENTURE AS WELL AS VARIOUS PENALTIES.
We presently do not have an adequate amount of authorized and unissued
shares of common stock to issue in connection with the financing entered into
with the selling stockholders in June 2004. In the near future we intend to hold
a meeting for the purpose of obtaining stockholder approval to increase our
authorized shares of common stock of which we can provide no assurance that we
will be able to obtain. In the event that we are unable to obtain an increase in
our authorized common stock, we will be required to repay the callable secured
convertible debenture and we will be subject to prepayment penalties.
12
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CALLABLE SECURED
CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF
AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CALLABLE SECURED
CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH
COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
In June 2004, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $3,000,000 principal amount of callable secured
convertible notes. The callable secured convertible notes are due and payable,
with 12% interest, two years from the date of issuance, unless sooner converted
into shares of our common stock. Although we currently have $1,500,000 callable
secured convertible notes outstanding, the investor is obligated to purchase
additional callable secured convertible notes in the aggregate amount of
$1,500,000. In addition, any event of default such as our failure to repay the
principal or interest when due, our failure to issue shares of common stock upon
conversion by the holder, our failure to timely file a registration statement or
have such registration statement declared effective, breach of any covenant,
representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgment,
writ or similar process against our company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against our company and the delisting of our common stock could
require the early repayment of the callable secured convertible notes, including
a default interest rate of 15% on the outstanding principal balance of the notes
if the default is not cured with the specified grace period. We anticipate that
the full amount of the callable secured convertible notes will be converted into
shares of our common stock, in accordance with the terms of the callable secured
convertible notes. If we are required to repay the callable secured convertible
notes, we would be required to use our limited working capital and raise
additional funds. If we were unable to repay the notes when required, the note
holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
RISKS RELATING TO OUR COMMON STOCK:
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be
reporting issuers under Section 12 of the Securities Exchange Act of 1934, as
amended, and must be current in their reports under Section 13, in order to
maintain price quotation privileges on the OTC Bulletin Board. If we fail to
remain current on our reporting requirements, we could be removed from the OTC
Bulletin Board. As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
13
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
14
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders. We will not
receive any proceeds from the sale of shares of common stock in this offering.
However, we will receive the sale price of any common stock we sell to the
selling stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholders will be entitled to exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event that the selling stockholder exercises the warrants on a
cashless basis, then we will not receive any proceeds. In addition, we have
received gross proceeds $1,500,000 from the sale of the callable secured
convertible notes and the investors are obligated to provide us with an
additional $500,000 within five days of the filing of this registration
statement and $1,000,000 within five days of this prospectus being declared
effective. The proceeds received from the sale of the callable secured
convertible notes will be used for business development purposes, working
capital needs, pre-payment of interest, payment of consulting and legal fees and
repayment of debt.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the OTC Bulletin Board, referred to
herein as the OTCBB, under the symbol "SGHT.ob". The following table sets forth
the high and low bid prices of our Common Stock, as reported by the OTCBB for
each quarter since January 1, 2002. The quotations set forth below reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
2002 High Low
---- ---- ---
January 1, 2002 - March 31, 2002 $0.14 $0.14
April 1, 2002 - June 30, 2002 $1.15 $0.14
July 1, 2002 - September 30, 2002 $1.60 $0.25
October 1, 2002 - December 31, 2002 $2.25 $1.25
2003 High Low
---- ---- ---
January 1, 2003 - March 31, 2003 $1.70 $0.25
April 1, 2003 - June 30, 2003 $1.01 $0.59
July 1, 2003 - September 30, 2003 $0.98 $0.47
October 1, 2003 - December 31, 2003 $0.70 $0.30
2004 High Low
---- ---- ---
January 1, 2004 - March 31, 2004 $1.15 $0.45
April 1, 2004 - June 30, 2004 $0.70 $0.24
July 1, 2004 - September 16, 2004 $0.25 $0.11
As of September 16, 2004, there were approximately 73 holders of record
of our common stock.
We have appointed Continental Stock Transfer & Trust Company, 17
Battery Place, New York, New York 10004, as transfer agent for our shares of
Common Stock.
EQUITY COMPENSATION PLAN INFORMATION
We currently do not have any equity compensation plans.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
EXECUTIVE OVERVIEW
We are a Customer Relationship Management ("CRM") solutions provider
for the retail automotive industry. Our DealerAdvance(TM) Sales Solution is
designed to streamline dealership sales operations using software that
integrates existing technology systems.
Our strategic focus since our entry into the automotive retail market
on May 2002 has been:
o Applying wireless technology, leveraging the Internet, providing
software and process improvement methods to improve buying and
servicing satisfaction at retail automobile dealerships.
o Establishment and growth of customer base.
o Geographic diversification to penetrate large national markets.
o Development of user friendly CRM applications.
o Development of a best-of-breed seamless software solution that
replaces multiple applications that typically are not designed to
work together as seamlessly as DealerAdvance(TM).
Our current initiatives include the following:
o Leveraging existing clients to generate new and recurring revenues
through the introduction of new products and services.
o Developing and refining products through internal research and
development, strategic partnerships and acquisitions that target
synergistic applications surrounding the dealership accounting
systems (DMS - Dealer Management System). The goal of these efforts
is to become a leading, single source solution provider to
automobile dealerships.
o new products and concepts (or product candidates) include: in-coming
call management; advertising effectiveness reporting; Internet lead
management; services marketing; online credit reporting; and
compliance with Do Not Call regulations.
o Making strategic acquisitions.
16
OUR HISTORY
We were incorporated as a Nevada corporation on September 8, 2000,
under the name TDT Development, Inc. On May 16, 2002, our predecessor entity
entered into a merger agreement with our wholly-owned subsidiary, TDT Stronghold
Acquisition Corp. 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 our
predecessor entity in exchange for all of the issued and outstanding shares of
Stronghold-NJ, which such shares were valued at $.75 per share. The stockholders
of the predecessor entity continue to hold these shares of our common stock.
Following the merger, TDT Stronghold Acquisition Corp., 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, which such shares were valued at $.75 per share.
Our principal executive offices are located at 106 Allen Road, Basking
Ridge, NJ 07920. Our telephone number at that location is 908-903-1195 and our
Internet address is www.strongholdtech.com. Our Annual Report on Form 10-KSB,
Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934 are available on our website (www.strongholdtech.com under
the "For Investors-SEC Filings" caption) as soon as reasonably practicable after
we electronically file such reports with the Securities and Exchange Commission
("SEC"). Our annual, quarterly and current reports, and, if applicable,
amendments to those reports, filed or furnished pursuant to Section 13(a) of the
Exchange Act are also available at the website maintained by the SEC at
http://www.sec.gov. The information contained on our website is not incorporated
by reference herein.
OVERVIEW OF OUR HANDHELD TECHNOLOGY BUSINESS
On May 16, 2002, we entered the handheld wireless technology business
via our acquisition by merger of our 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, we continue to conduct the predecessor
entity's handheld wireless technology business.
DESCRIPTION OF PRODUCTS
Our DealerAdvance(TM) suite of Customer Relationship Management ("CRM")
software, has been designed to maximize revenues and reduce operating expenses
of automobile dealerships. We have completed the development of its
DealerAdvance Sales Solution(TM), a software suite designed to increase sales by
effectively capturing a greater percentage of unsold customer prospects and
maximizing customer "be-back" rates. We are in various stages of development of
complimentary CRM systems for our handheld devices, including the DealerAdvance
Service Solution(TM), which we believe is designed to further increase our
clients' revenues and profits by managing dealer service operations, customer
information and vehicle inventory. We are designing products to be functionally
equivalent to the devices used by automobile rental agencies in which automobile
return and checkout is automated using scanning and other point of sale
technology.
We generally grant a 60-day performance guarantee period for each new
installation. If performance goals are met, the contracts become noncancellable
for its term, usually 36 months. As of March 31, 2004, a total of 78 dealers
were using the DealerAdvance Sales Solution(TM), of which approximately 70 had
reached or exceeded the 60-day performance period.
OUR REVENUES
Our revenues are primarily received from system installation, software
licenses and system maintenance. The approximate average selling package price
of the system and installation also is $70,000. Additional revenues are derived
from monthly system maintenance agreements that have a monthly fee of $850 per
month and a total contract value of $30,600. The revenues derived from these
categories are summarized below:
17
o Software License Revenues: This represents the software license
portion of the Dealer Advance Service Solution purchased by
customers of our company. The software and intellectual property of
Dealer Advance has been developed and is owned by us.
o System Installation Revenues: This represents the installation and
hardware portion of the Dealer Advance Service Solution. All project
management during the installation is performed by us. The
installation and hardware portions include cable wiring
subcontracting services and off the shelf hardware and handheld
computers ("PDA"s).
o Monthly Recurring Maintenance Revenue: This represents the
maintenance and support contract for the Dealer Advance Service
Solution that the customer executes with the system installation.
The typical maintenance contract is for 36 months. In our three year
operating history, approximately 50% of all our customers have
prepaid the maintenance fees through a third party leasing finance
company. These prepaid maintenance fees have provided additional
cash flow to us and have generated a deferred revenue liability on
or balance sheet.
Cost of sales for software licensing with the installation are
estimated at 10% of revenue for reproduction, minor customer specific
configurations and the setup cost of interface with the customers' DMS. Cost of
sales for the system installation includes direct labor and travel,
subcontractors and third party hardware.
GENERAL AND ADMINISTRATIVE OPERATING EXPENSES
Our general operating expenses are primarily comprised of:
o Marketing and Selling;
o General and Administrative;
o 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.
These include the salaries of two Vice Presidents of Sales and the Business
Development Manager ("BDM") staff.
Our general and administrative expenses include expenses for all
facilities, insurance, benefits, telecommunications, legal and auditing expenses
are included as well as the executive management group wage expense.
Our development & operations expenses include the expenses for the
Client Consultant group which advises and supports the installations of our
Dealer Advance(TM) clients.
RESULTS OF OPERATIONS
We entered the handheld wireless technology business through the
acquisition of the Predecessor Entity, which had only twenty-two months of
operating history. We are subject to all of the risks inherent in a new business
enterprise. Our limited operating history makes it difficult to evaluate our
financial performance and prospects. We cannot make assurances at this time that
we will operate profitably or that we will have adequate working capital to meet
our obligations as they become due. Because of our limited financial history, we
believe that period-to-period comparisons of our results of operations will not
be meaningful in the short term and should not be relied upon as indicators of
future performance.
DIVIDEND POLICY
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.
18
INDUSTRY TRENDS
The automotive industry has identified sales productivity tools and CRM
systems as high priorities. Many consolidators and independent dealership owners
have begun to explore and pilot some of these solutions to determine the most
effective means for managing and exploiting prospects and customers to increase
car sales. To date, only a small number of the 22,600-dealership sites in the
United States have implemented CRM systems. There remains substantial
uncertainty as to the type of systems that will be implemented as well as the
pace at which implementation will take place.
Since large consumer purchases are sensitive to broad economic trends,
our operations may be affected by general economic conditions. For example, if
dealer sales are trending downward, capital expenditures like those associated
with our DealerAdvance(TM) suite of products may be delayed or abandoned.
OUR CUSTOMERS
As of December 2003, the U.S. retail automotive industry consisted of
approximately 22,150 franchise dealerships covering all domestic and foreign
brands. These franchises are granted for specific geographic territories and
allow the franchisee to pursue sales within that territory. In many cases, a
franchisee with two or more brands will operate at one location or property
(e.g., Honda/Acura or Lincoln/Mercury).
Over the last 10 years, the industry has experienced some consolidation
of ownership with large consolidators (large public and private companies)
buying up independently owned retail sites and dealer groups. However, the
market is still highly fragmented with the 100 top consolidators operating 1,689
dealerships, or only 7.6% of total dealerships.
THE AUTOMOBILE DEALER SOFTWARE MARKET
The automotive dealer software industry began as a spin-off of
companies providing accounting and business forms to dealerships. Today, two
major and two minor providers control the market for DMS, which is primarily an
accounting and business system. The major providers are ADP Dealer Services, a
unit of ADP, Inc. (33% market share) and Reynolds & Reynolds, an $850 million
(in revenue) public company (35% market share). The minor players are Universal
Computer Systems (UCS), a privately held company with approximately $150 million
in revenues (1% market share) and a division of Electronic Data Services (EDS),
the public company originally formed by H. Ross Perot (1% market share).
Approximately 98% of dealerships utilize some form of DMS.
THREE MONTHS ENDED JUNE 30, 2004 AND THREE MONTHS ENDED JUNE 30, 2003.
REVENUE
For the quarter ended June 30, 2004, we had revenue of $700,250 compared with
revenue of $626,779 for the quarter ended June 30, 2003. This modest increase in
revenue of $73,471 or 11.7% is primarily attributed to steps we made to address
our limited funding. Our decision to conserve capital and reduce head count
through the first quarter and into the second quarter of 2004 limited our
ability to generate significant revenue growth for the quarter ended June 30,
2004 as compared to the quarter ended June 30, 2003.
Revenue is comprised of one-time charges to the dealerships for hardware
(including server, wireless infrastructure, desktop PCs, printers,
interior/exterior access points/antennas and handheld devices), software
licensing fees and installation/training services. Other sources of revenue
include monthly support and maintenance contracts (required with purchase of
DealerAdvance(TM)) and fee-based business development consulting and sales
training services. Depending upon the dealership arrangement, the support and
maintenance contracts are either billed monthly and recorded as revenue monthly,
or are paid up front and recorded to unearned maintenance fees at the present
value of the 36-month revenue stream and amortized monthly to revenue.
19
GROSS PROFITS
We generated $484,892 in gross profits from sales for the quarter ended June 30,
2004, which was an increase of $135,297 from the quarter ended June 30, 2003,
when we generated $349,595 in gross profits. Our gross profit margin percentage
increased from 55.8% in the quarter ended June 30, 2003 to 69.2% in the quarter
ended June 30, 2004 for an improvement of 13.5%. This significant improvement in
gross profit margin is primarily attributable to the following increases in
efficiency:
o a decrease in client data acquisition costs achieved through
implementation of an interface developed by the Company; and
o a reduction in the number of staff members required to service the
client base.
These improvements in efficiency present us with the opportunity to consider
alternative pricing and delivery methods in the future targeted to increasing
the adoption rate of our product.
GENERAL AND ADMINISTRATIVE EXPENSES
Total Selling and General and Administrative expenses in the quarter ended June
30, 2004 were $868,446, a decrease of 27.27% or $325,594 from the quarter ended
June 30, 2003 of $1,194,040. The significant reduction in expense is primarily
attributable to efficiencies gained through the reduction of staff from 41 in
June 30, 2003 to 23 in the quarter ended June 30, 2004. Total operating expenses
for the quarter ended June 30, 2004 and June 30, 2003 were comprised primarily
of general and administrative expenses (which includes research and development
expenses, consulting and professional costs, recruiting fees, office rent and
investor relations expenses), professional salaries, benefits, stock
compensation and bad debt write-off expense.
Our interest and penalty expense decreased from $90,220 in the quarter ended
June 30, 2003 to $67,358 in the quarter ended June 30,2004. This decrease of
$22,862 was primarily based on the forgiveness of interest on stockholder loans
for the quarter.
NET LOSS
We had a net loss of $450,913 for the quarter ended June 30, 2004 compared to
$934,665 for the quarter ended June 30, 2003, a decrease in net losses of
$483,752. This significant reduction of net losses of 51.75% despite the modest
increase of revenue reflects the effects of our reduction in overhead and
improvement of gross profit percentage.
Our loss per share also reduced to $.03 loss per share with a weighted average
of 13,438,277 shares outstanding in the quarter ended June 30, 2004 as compared
to $.09 loss per share in the quarter ended June 30, 2003 with a weighted
average of 10,301,212 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.
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 AND YEAR ENDED DECEMBER 31, 2002
For the fiscal year ended December 31, 2003, we had total revenue of
$2,996,344. Revenue for the year ended December 31, 2002 was $2,802,483,
representing an increase of 7%. Sustained revenue levels are due to increased
installation of our DealerAdvance(TM) products in 63 new dealerships from
January 1, 2002 through December 31, 2003, compared with six dealerships
implemented in the twelve-month period ended in 2001.
Revenue is comprised of one-time charges to the dealerships for
hardware (including server, wireless infrastructure, desktop PCs, printers,
interior/exterior access points/antennas and handheld devices), software
licensing fees and installation/training services. Average installation cost is
$70,000. The most significant variable in pricing is the number of handheld
devices. Other sources of revenue include monthly support and maintenance
contracts (required with purchase of DealerAdvance(TM)) and fee-based business
development consulting and sales training services. Depending upon the
20
dealership arrangement, the support and maintenance contracts are either billed
monthly and recorded as revenue monthly, or are paid up front and recorded to
unearned maintenance fees at the present value of the 36-month revenue stream
and amortized monthly to revenue.
Total operating expenses for the fiscal years ended December 31, 2003
and December 31, 2002 were comprised primarily of general and administrative
expenses (which includes research and development expenses, consulting and
professional costs, recruiting fees, office rent and investor relations
expenses), professional salaries, benefits, stock compensation and bad debt
write-off expense. Operating expenses for the year ended December 31, 2003 and
December 31, 2002 were $5,512,042 and $5,490,419. The increase in operating
expenses is primarily attributable to one time non-cash expense items that
included in $269,500 of stock based compensation and $539,630 of bad debt
write-off expense.
We generated $1,766,170 in gross profits from sales for the year ended
December 31, 2003, an increase of $591,107 from the year ended December 30,
2002. We were able to improve our gross profit margin from 42% in the year ended
December 30, 2002 to 59% in the year ended December 30, 2003. The higher gross
profit as a percentage of revenue reflects our ability to increase sales prices
based upon performance of prior installations and continued efforts to reduce
cost of services. Additional factors are attributed to better buying of third
party services, lower software and information licensing costs, lower costs for
materials, and better negotiated prices with customers.
After all operating expenses and interest costs, we reported a loss of
$4,258,007 for the fiscal year ended December 31, 2003. This compares with a
loss for the fiscal year ended December 31, 2002 of $4,528,803, a decrease of
$270,796, or 6%.
Our business operations and financial results for prior periods were
representative of a start-up company and, therefore, not in a position to
generate significant revenue. As we moved out of our start-up phase and into a
marketing and sales position, our revenues have become more predictable as
dealerships install our DealerAdvance(TM) suite of products. We can offer no
assurance, however, that future revenues will be maintained or increase.
Notwithstanding the gross profit growth, we have yet to generate a profit in any
accounting period.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As of June 30, 2004, our cash balance was $726,544. We had a net loss of
$450,913 for the quarter ended June 30, 2004. We had a net operating loss of
approximately $9,046,000 for the period from May 17, 2002 through June 30, 2004
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 June 30, 2004 was $825,534 (less allowances for
doubtful accounts of $210,318), and $1,519,788 (less allowances for doubtful
accounts of $196,284) for the quarter ended June 30, 2003. Accounts receivable
balances represent amounts owed to Stronghold for new installations and
maintenance, service, training services, software customization and additional
systems components.
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 $451,000 and have negative cash flows from operations of
approximately $1,067,000 for the six months ended June 30, 2004, and have a
working capital deficit of approximately $2,753,000 and a stockholders' deficit
of approximately $5,352,000 as of June 30, 2004. These conditions raise
substantial doubt about our ability to continue as a going concern. During 2004,
our management will rely on raising 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.
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We expect our capital requirements to increase significantly over the next
several years as we continue to develop and market the DealerAdvance(TM) 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
On July 31, 2000, Stronghold, Inc., a New Jersey corporation (the "Predecessor
Entity" or Stronghold-NJ") 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 November 1, 2001, the Predecessor Entity entered into a line of credit with
UnitedTrust 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 June 30, 2002. On June 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 UnitedTrust
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
UnitedTrust Bank, of which the principal balance was $1,291,666 at the time of
closing of the modification. Pursuant to the modification agreement, UnitedTrust
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).
We continue 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, we 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. However, if we are
unable to reach a forbearance agreement with the Bank, we may be required to pay
off the amounts outstanding under the loan, and if we are unable to pay off the
amounts outstanding, the Bank could seize our assets pledged as security for the
Loan. If either of these actions occur, we may be unable to continue our
operations.
Because we are 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 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
22
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 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.
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.
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.
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
UnitedTrust 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 December 31, 2002, $970,749 was outstanding
under the promissory note issued to Mr. Carey.
On September 30, 2002, we entered into a loan agreement with CC Trust Fund to
borrow an amount up to $355,128. 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. As of
December 31, 2003, $355,128 was outstanding under the CC Trust Fund loan
agreement. 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.
On September 30, 2002, we entered into a loan agreement with AC Trust Fund to
borrow an amount up to $375,404. This bridge loan is for a period of twelve
months, with all principal due and payable on September 30, 2003. The 12.5%
23
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. As of
December 31, 2003, $375,404 was outstanding under the AC Trust Fund loan
agreement. 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.
In October 2002, in connection with a loan to the Company in the amount of
$165,000, we issued a promissory note to Christopher J. Carey for $165,000. Such
promissory note was due on or before December 31, 2003. On December 30, 2003,
Mr. Carey agreed to extend the term of his loan to June 30, 2004. On March 30,
2004, Mr. Carey agreed to extend the term of his loan to March 31, 2005. As of
December 31, 2003, the amount outstanding on this promissory note was $10,000.
Until such time as the principal is paid, interest on the note will accrue at
the rate of 12.5% per year.
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, $380,000 was
outstanding under this bridge loan agreement.
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.
On March 3, 2004 and March 15, 2004 we received loans in the amount of $437,500
each from Stanford. The final terms of the investment are to be determined but
the Company expects 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.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 18, 2004 for the sale
of (i) $3,000,000 in callable secured convertible notes and (ii) warrants to buy
3,000,000 shares of our common stock. This prospectus relates to the resale of
the common stock underlying these secured convertible notes and warrants.
Provided that the terms and conditions of the Securities Purchase Agreement are
satisfied, the investors are obligated to provide us with an aggregate of
$3,000,000 as follows:
o $1,500,000 was disbursed on June 18, 2004;
o $500,000 was disbursed on July 27, 2004; and
o $1,000,000 will be disbursed within five days of this prospectus
being declared effective.
Accordingly, we have received a total of $2,000,000 pursuant to the Securities
Purchase Agreement. The funds from the sale of the callable secured convertible
notes will be used for business development purposes, business acquisitions,
working capital needs, pre-payment of interest, payment of consulting and legal
fees and borrowing repayment.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.70 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on a principal market
for the 20 trading days before but not including the conversion date. The full
principal amount of the callable secured convertible notes is due upon default
under the terms of secured convertible notes. The warrants are exercisable until
24
five years from the date of issuance at a purchase price of $0.57 per share. In
addition, the conversion price of the secured convertible notes and the exercise
price of the warrants will be adjusted in the event that we issue common stock
at a price below the fixed conversion price, below market price, with the
exception of any securities issued in connection with the Securities Purchase
Agreement. The conversion price of the callable secured convertible notes and
the exercise price of the warrants may be adjusted in certain circumstances such
as if we pay a stock dividend, subdivide or combine outstanding shares of common
stock into a greater or lesser number of shares, or take such other actions as
would otherwise result in dilution of the selling stockholder's position. The
selling stockholders have contractually agreed to restrict their ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
Since the conversion price will be less than the market price of the common
stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
callable secured convertible notes during the quarter in which they are issued,
including the second quarter of fiscal 2004 when $1,500,000 of secured
convertible notes were issued.
We will still need additional investments in order to continue operations to
cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60, recently released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
The notes to the consolidated financial statements include a summary of
significant accounting policies and methods used in the preparation of our
Consolidated Financial Statements. In addition, Financial Reporting Release No.
61 was recently released by the SEC requires all companies to include a
discussion which addresses, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of financial statements in accordance with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, including the recoverability of tangible and intangible assets,
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period.
On an on-going basis, we evaluate our estimates. The most significant estimates
relate to our recognition of revenue and the capitalization of our software
development.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
REVENUE RECOGNITION POLICY
Revenue related to the sale of products is comprised of one-time charges to
dealership customers for hardware (including server, wireless infrastructure,
25
desktop PCs, printers, interior/exterior access points/antennas and handheld
devices), software licensing fees and installation/training services. Stronghold
charges DealerAdvance Sales Solution(TM) dealers for all costs associated with
installation. The most significant variable in pricing is the number of handheld
devices purchased. Stronghold has not determined pricing for DealerAdvance
Service Solution(TM).
Once DealerAdvance Sales Solution(TM) is installed, Stronghold provides hardware
and software maintenance services for a yearly fee equal to approximately 10% of
the one-time implementation fees. All dealerships are required to purchase
maintenance with installations and pay maintenance fees on a monthly basis.
Stronghold provides our customers with services, including software and report
customization, business and operations consulting, and sales training services
on an as needed basis and typically are charged on a time and expenses basis.
Stronghold offers all new customers a sixty-day performance trial period during
which time performance targets are set. Stronghold installs the system and
agrees to remove the system at no charge if the performance targets are not met.
If performance is met, a large portion of the dealerships enter into a third
party lease generally with lessors introduced by us. We have entered into a
number of relationships with leasing companies in which the leasing company
finances the implementation fees for the dealership in a direct contractual
relationship with the dealership. The lease is based solely on the
creditworthiness of the dealership without recourse to us. The leasing company
receives an invoice from us, and remits funds upon acceptance by the dealership.
We receive all funds as invoiced, with interest costs passed to the dealership.
These leases typically run 36 months in duration, during which time we contract
for service and maintenance services. Stronghold charges separately for future
software customization after the initial installation, for additional training,
and for additions to the base system (e.g., more handheld devices for additional
sales people). Depending upon the dealership arrangement, the support and
maintenance contracts are either billed monthly and recorded as revenue monthly,
or are recorded up front to unearned maintenance fees at the present value of
the 36-month revenue stream and amortized monthly to revenue over the life of
the agreement.
REVENUE RESTATEMENT
On December 26, 2002, we reclassified our consolidated financial statements for
the first three quarters of 2002. This step was taken on the advice of
Rothstein, Kass & Company, P.C., our accounting firm, to reflect accounting
changes in accordance with revenue recognition guidelines released by the SEC.
Accordingly, our revenue was reclassified such that it may be recognized in
future quarters. For the nine months ended September 30, 2002, revenue was
reclassified from $2,952,076 to $1,898,884 with the difference treated as
deferred revenue.
Historically, we recorded revenue as a three-stage process: at the time the
equipment and software were delivered, installed and the personnel trained. We
will now recognize each sale with an additional stage as outlined in the
analysis provided by our accounting firm, which includes a fourth stage defined
as, "the system is handed over to the customer to run on their own." This
four-stage delivery process results in current sales revenues being carried into
future quarters. We estimate that this change delays our recognition of revenue
by approximately 20-50 days.
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. For
the quarter ended June 30 ,2004, we capitalized $134,326 of development costs in
developing enhanced functionality of our DealerAdvance(TM) products.
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BUSINESS
OUR HISTORY
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 Stronghold Technologies into our
wholly-owned subsidiary, TDT Stronghold Acquisition Corp., referred to herein as
"Acquisition Sub". Our company, formerly TDT Development, Inc., was a reporting
entity at the time. Its principals were Pietro Bortolatti, President, CEO and
Chairman, Tiziana DiRocco, Vice-President and Director of European Operations
and David Rector, Director. The merger was an arms length transactions and none
of the parties had a prior existing relationship. As consideration for the
merger, we issued 7,000,000 shares of our common stock valued at $.75 per share
to the stockholders of the Predecessor Entity in exchange for all of the issued
and outstanding shares of the Predecessor Entity. No fairness opinion was issued
in connection with this merger. 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. We approved the transaction as the
sole shareholder of the Acquisition Sub as did the shareholders of the
Predecessor Entity.
On July 11, 2002, we changed our name from TDT Development, Inc. to
Stronghold Technologies, Inc. (NV). 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.
Our principal executive offices are located at 106 Allen Road, Basking
Ridge, NJ 07920. Our telephone number at that location is 908-903-1195 and our
Internet address is www.strongholdtech.com.
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 by Christopher J. Carey, our current Chief
Executive Officer and President, and Lenard J. Berger, Chief Technology Officer
and Salvatore F. D'Ambra, Vice President, Product Development, of our
wholly-owned subsidiary. This founding group has substantial expertise in
systems design, software development, wireless technologies and automotive
dealer software applications. The Predecessor Entity was founded to develop
proprietary handheld wireless technology for the automotive dealer software
market. Since the merger of the Predecessor Entity into our subsidiary, we
continue to conduct the Predecessor Entity's handheld wireless technology
business.
Our DealerAdvance(TM) suite of Customer Relationship Management ("CRM")
software, has been designed to maximize revenues and reduce operating expenses
of automobile dealerships. We completed the development of our DealerAdvance
Sales Solution(TM), a software suite designed to increase sales by effectively
capturing a greater percentage of unsold customer prospects and maximizing
customer "be-back" rates. We are in various stages of development of
complimentary CRM systems for our handheld devices, including the DealerAdvance
Service Solution(TM), which is designed to further increase our clients'
revenues and profits by managing dealer service operations, customer information
and vehicle inventory. We are designing our products to be functionally
equivalent to the devices used by automobile rental agencies in which automobile
return and checkout is automated using scanning and other point of sale
technology.
DESCRIPTION OF PRODUCTS
Most auto dealerships rely on a paper based process to capture its
prospects and track their progress to purchasing a vehicle. This paper process
is difficult to manage due to high turnover and skills of the typical sales
force. Management does not have the tools to determine how many opportunities
have been generated and if they are receiving follow up after leaving the
dealership. DealerAdvance prompts the salesperson to capture more information
about each prospect and advises them of the appropriate follow up. When a
customer is ready to purchase a vehicle, the system aids the dealership in
completing the sales through features such as forms printing. Management is able
27
to view dealership traffic in real-time, by salesperson, and can easily pinpoint
deficiencies in the capture and follow up process.
We install an Intel based server in a dealership site. The server holds
all of the customer data and connects to other services used by the dealership.
These services include the legacy IT system used by the dealer (known as the
Dealer Management System), Internet based services such as Internet Customer
leads, telephony management services, and customer address lookup services. We
provide an administrative workstation which includes a driver license scanning
station, a printer for negotiation and purchase forms, letters and reports, and
wireless handheld PDA's for each of the sales people. The company installs a
wireless antennae network (Wi-Fi) with communications coverage of the building
and most of the car lot. The DealerAdvance client application is installed, on
the handhelds, on the administrative workstation and on the existing
workstations in the sales department.
The DealerAdvance Sales Solution(TM) provides certain advantages to
automobile dealerships, including:
o convenient use associated with handheld mobile communications;
o access to competitive and proprietary industry information from a
variety of sources, such as convenient access to vehicle
identification numbers, drivers license numbers and reverse
telephone number information which provides home and business
addresses;
o employee access to sales contracts as well as access to sales and
performance reports; and
o allows integration with existing automotive dealer accounting and
business systems such as ADP and Reynolds and Reynolds.
The DealerAdvance Sales Solution(TM) has been designed to be a
comprehensive CRM system implemented through the use of a wireless handheld
device connected to a server that distributes the functional applications to the
units. Sales associates can also maintain on the handheld units a personal
calendar and instructions on follow-up tasks. Sales associates, using the
handheld units, collect customer contact information and other data relevant to
the customer's automotive needs. The handheld, using the DealerAdvance Sales
Solution technology aids automobile dealerships in making sales transactions
quicker and more efficient.
The DealerAdvance Sales Solution(TM) offers features that aid in
automobile sales and service such as:
o enabling a high sales capture rate on walk-in customers;
o streamlining and simplifying sales and follow-up processes;
o providing current and comprehensive information and data for new and
used car inventory, including information regarding competing
products, and customer history with the dealership;
o providing performance data and analysis on each member of a sales
team; and
o providing management with valuable and relevant transaction
information on a real-time basis.
A user can enter data via the DealerAdvance application running on any
desktop or handheld units. Data can be entered into the system typed by the
user, through drivers license scanning, or via a DealerAdvance Import tool. Data
entered by the user is transmitted to the server in real time.
The system contains a "rules" engine which is triggered at different
points in the sales process. The rules engine updates the activities scheduled
for each customer based on business rules defined by the dealer. For example,
when a new customer is entered by a user, the system will schedule a letter to
be sent to the customer and a follow up phone call for the next day. If that
same customer buys a vehicle, the system will remove the letter and follow up
call and replace it with activities appropriate for follow up.
Users also have the ability to manually schedule activities with a
customer. All activities are displayed on the user's workplan in chronological
order. The user may select any activity, view the details of the activity and
customer information and complete the activity.
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The system will prompt the user to schedule additional activities when
completing follow up with a customer. For example, if the user completes a
follow up call the system will prompt the user to set an appointment. The user
can enter a date and time for the appointment, schedule an additional follow up
call or indicate that no additional activities are required at this time.
The system offers a variety of reports to management to show the volume
of traffic at the dealership and if those prospects are receiving follow up in a
timely fashion.
The DealerAdvance Suite includes Master Server Software, which manages
all customer data and access to third party services. One copy of server
software is required for each dealership. DealerAdvance Desktop Application,
which used to access customer data, present workplans, reports and logs, scan
drivers licenses, and manage user access to the system. This application must be
installed on each desktop in the dealership. Dealership receives a license to
install an unlimited number of desktops associated with a particular
Dealeradvance Server. DealerAdvance Handheld Application, which is used to
access customer data, present workplans, product comparison, available
inventory. Each dealership must purchase a license of this application for each
handheld in use at the dealership.
The system has the following features:
o Prospect capture and profiling, which allows the user to input the
required information, reverse phone lookup, duplicate record
checking, eletronic guest sheet and capture signatures
electronically for credit card processing.
o The system tracks compliance with National Registry and Dealership
specific DNC list. Customers marked "DNC" have phone number hidden
to avoid accidental calling. In addiiton, the dealer can print a
report to insure compliance.
o The system can scan and authenticate driver licenses.
o Provides a call management system for follow ups.
o Provides daily workplan and appointment scheduling which
appointments and calls for salespeople.
o Generate prospect reports, scoreboard, appointment calendar and
activity reports sorted by salesperson.
o Receive leads from all internet lead sources and manage follow up
from DA. Features include: route leads to a specific user based on
lead source, auto responders, templates, customers using multiple
lead sources, lead protection.
DEALERADVANCE is compatiable with and works with:
o Intel Based Server running Red Hat Linux
o Wireless Network Access Points (802.11 - WiFi). We supply a model
made by Vivato but any 802.11b compliant Access Point will work.
o Windows 98, 2000, XP.
o Magnetic Stripe Reader or 2D Bar Code Scanner.
We primarily use commercially available off the shelf products
primarily purchased from Dell and Compaq. All these products are typically
available on demand within reasonable ordering and receipt cycles that range
from one to ten days.
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We installed Version 1.0 of the DealerAdvance Sales Solution(TM) in six
pilot dealerships during 2001 in New Jersey, California and Connecticut. The
initial release contained the ability to capture and display information about a
prospective customer, search the dealership inventory, display competitive
product information, a financial calculator, and paging functionality from a
wireless handheld. Drivers license scanning, from a desktop station, was
introduced for the State of California. Stronghold introduced Version 2.0 of
DealerAdvance Sales Solution(TM) at all of its sites by the end of September
2001. Version 2.0 offered an electronic desk log, email and internet access from
the handheld, printing of correspondence (forms letters) , a reporting engine,
the printing of sales forms, and the ability to import prospect records from 3rd
party sources.
We introduced Version 3.0 of our software and installed another 3
dealership sites in the quarter ended March 31, 2002, adding customers in New
York. Version 3.0 introduced the CRM rules engine, which allowed the system to
automatically schedule and manage customer follow up activities for salespeople
based on rules established by the dealership management. Other features included
DMS deal creation (allowing a user to pass information from DealerAdvance to the
DMS), management reporting, and the expansion of drivers license scanning to
include 39 states (through a partnership with Intellicheck).
In the quarter ended June 30, 2002, through our wholly owned
subsidiary, we installed another 7 sites, adding customers in Arizona, Southern
California and South Carolina and introduced Version 3.1 of its software to
improve the communication protocol between the handheld and the DealerAdvance
Server. In the quarter ended September 30, 2002, through our wholly owned
subsidiary, we implemented another 10 sites, adding customers in Virginia,
Florida, South Carolina and Central California. In the fourth quarter ending
December 31, 2002, through our wholly owned subsidiary, we installed an
additional 13 dealerships, adding customers in Texas, Indiana and Michigan.
Overall, in 2002, through our wholly owned subsidiary, we installed
DealerAdvance Sales Solution(tm), in a total of 33 dealerships sites
representing Toyota, Honda, Ford, Chevrolet, Nissan, Volkswagen, Buick, Pontiac,
Cadillac, Chrysler, Dodge, Kia and Hyundai.
In the first quarter of 2003, we installed in 11 dealerships and
released Version 3.2. New features included reverse phone lookup (via
partnership with Axicom), searches for duplicate customer records, wireless PDA
trade appraisal, electronic buyers order, nightly download of sold customers
from the DMS, and customer search. Additional functionality was added to the
rules engine, forms printing, management functions were added to the PDA, 3rd
party data imports, and customer tracking. In the quarter ended June 30, 2003,
we installed another 11 systems in 9 dealerships in California, Nevada, Indiana,
Washington, Ohio, and Michigan. We implemented our goal to expand our direct
sales network and operational support personnel for coverage of 14 major cities
from nine at the end of 2002. Additionally, in the second quarter we realigned
our sales force into geographic markets and hired several experienced industry
veterans as regional business development managers.
We plan to utilize our direct sales force to market the DealerAdvance
Sales Solution(tm) on a national basis. We have established a strong presence in
most regions of the United States, and are continuing to add business
development and operations offices pursuant to an organized growth plan. As of
December 31, 2003, we had employees in Northern New Jersey, San Francisco,
Washington, DC, Atlanta, Los Angeles, Phoenix, Miami, Seattle, Cleveland, and
Dallas.
Version 3.3, released in August 2003 introduced the concept of a
work-plan, which assists the user in prioritizing follow up for prospective
customers. The work-plan generates a simple daily "to-do" list for each
salesperson, which can be viewed and updated on the handheld. Version 3.3 also
introduced the concept of "prompted follow up" to guide the salesperson through
best of breed follow up processes. The salesperson is prompted to indicate the
action taken to complete an activity and to enter a next activity for the
customer with the goal of scheduling a next activity for a prospective customer
until they either purchase a vehicle or indicate they are no longer in the
market.
As of December 31, 2003, a total of 70 dealers were using the
DealerAdvance Sales Solution(tm), of which approximately 40 had reached or
exceeded the 60-day performance period generally associated with installation.
In January 2004 we installed systems in 2 dealerships in Oregon.
Version 3.4 released in January 2004 introduced integration with
WhosCalling and Call Bright, the two leading providers of phone call management
services. The dealer is assigned several toll free numbers to place in a
specific advertising outlet (newspaper, tv, radio, etc). When the customer dials
the toll free number, the call management service identifies the callers
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information (name, address, demographics) and records the call. The call
information and a link to the call recording is passed by the call management
service to DealerAdvance. Version 3.4 introduced the ability to receive Internet
leads in DealerAdvance. An Internet Manager can view leads and follow up via
email with prospective customers that view the dealer's web site or are passed
by 3rd party lead providers. Through a subscription service, in Version 3.4, the
dealer can maintain their compliance with the National Do Not Call Regulations
managed by the FTC. DealerAdvance will automatically determine which customers
are safe to call based on the "established business relationship" rules defined
in the regulations. The system can produce the documentation required to
demonstrate compliance.
We generally grant a 60-day performance guarantee period for each new
installation. If performance goals are met, the contracts become noncancellable
for their terms, usually 36 months. As of December 30, 2003, a total of 69
dealers were using the DealerAdvance Sales Solution(TM), of which approximately
55 had reached or exceeded the 60-day performance period. In the year ended
December 31, 2003, approximately 7 dealers cancelled after the 60-day
performance guarantee period.
NEW PRODUCT DEVELOPMENTS
We have identified five major prospect and customer sources within an
auto dealership that can be leveraged for revenue and profit: walk in showroom
traffic, call-in prospects, internet based leads, the existing owner base of
customers and service prospects. The vision for
DealerAdvance(TM) is to provide a single solution to attack all of
these groups to increase profitability and improve customer service in the
dealership. DealerAdvance(TM) provides information captured from prospects, and
provides automobile dealerships with the ability to manage prospects and
customers through a disciplined follow-up process.
The development plan includes the addition of the following
applications and functions:
o With Version 3.4 introduced in January 2004, we introduced a Call
Management application that is expected to allow dealerships to
automatically capture and track prospects that contact the
dealership via phone. This new program allows salespeople to
retrieve customer information while talking to the customer and to
conduct a needs analysis for handling prospect phone calls. The Call
Management application automatically generates management logs and
reports designed to identify sales associates that need phone skills
training. In addition, we have partnered with the two leading Call
Management Systems providers, Call Bright and Who's Calling, who
provide 800 number and web based system forwarding functions to
DealerAdvance(TM). We have created a software to poll the web sites
for incoming caller ID and provide prospect assignment, and
comparative analysis relating to follow up activities. This
application is expected to significantly increase the conversion of
call-in prospects to customers.
o In Version 3.4 we expanded our offerings to include an initial
application for Internet Lead Management. Most dealerships secure
Internet leads through multiple sources including their own web
site, manufacturers' forwarded leads, and subscription services
including Autobytel and others. These lead sources are received
through DealerAdvance(TM), which processes a quick response via
email, and then passes qualified leads to sales associates for phone
follow-up leading to appointment setting. We plan several
enhancements to this application.
o In January 2004, we also introduced an application that lessens
potential violations of the 2003 federal Do Not Call regulations.
Our system automatically and regularly compares the prospect and
customers within the system to the Do Not Call registry data base.
The application also allows the dealership personnel to log prospect
and customer requests not to be contacted. The system deletes from
the database telephone numbers that match numbers in the Do Not Call
database.
o In February 2004, we introduced Services Marketing. Services
Marketing is offered in partnership with Market One, LLC. Through
Market One, we offer services in database marketing, data
warehousing, predictive modeling, marketing consulting, campaign
fulfillment, direct mail, telemarketing and surveys, and Internet
communications services. During 2004, we intend to combine the
Services Marketing application from Market One with follow-up and
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reporting capabilities within DealerAdvance(TM), to provide
activities reporting for increasing repeat sales to dealership
customers.
o In the third quarter of 2004 we plan to introduce online consumer
credit reporting to our customers through an ASP web hosted model
integrated to inquiries from DealerAdvance(TM). The service accesses
credit reports from Experian, Equifax and Transunion.
o DealerAdvance(TM) Service Solution, a handheld wireless tablet for
Service Advisors in a dealership is under development. This system
is designed to improve customer service and reduced vehicle check in
time by allowing dealer representatives to scan a vehicle
identification number from the windshield or door. DealerAdvance(TM)
Service Solution also is designed to provide instant client and
vehicle history including warrantee and service advice, all to the
service technicians' wireless tablet. We expect this product will
add premium-pricing to increase repair order revenue and to add
service marketing through the DealerAdvance CRM application.
OUR REVENUES
Our revenues are primarily received from system installation, software
licenses and system maintenance. The approximate average selling package price
of the system and installation also is $70,000. Additional revenues are derived
from 36 month system maintenance agreements that have a monthly fee of $850 per
month and a total contract value of $30,600. The revenues derived from these
categories are summarized below:
o Software License Revenues: This represents the software license
portion of the Dealer Advance Service Solution purchased by our
customers. The software and intellectual property of Dealer Advance
has been developed and is owned by us. The average upfront license
cost to the customer is approximately $35,000.
o System Installation Revenues: This represents the installation and
hardware portion of the Dealer Advance Service Solution. All project
management during the installation is performed by us. The
installation and hardware portions include cable wiring
subcontracting services and off the shelf hardware and handheld
computers ("PDA"s). The average upfront installation cost to the
customer is approximately $35,000.
o Monthly Recurring Maintenance Revenue: This represents the
maintenance and support contract for the Dealer Advance Service
Solution that the customer executes with the system installation.
The typical maintenance contract is for 36 months and is $850.00 per
month. The average total 36 month maintenance portion of the contact
is $30,600. In our three year operating history, approximately 50%
of all our customers have prepaid the maintenance fees through a
third party leasing finance company. These prepaid maintenance fees
have provided additional cash flow to us and have generated a
deferred revenue liability on or balance sheet.
The average gross profit and cost of sales for the revenues associated with
software licenses and systems installation are summarized in the following
table:
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Average Gross Profit per Installation
Software License Revenue $35,000
System Installation Revenue $35,000
--------------------------- -------
Gross Revenue per Installation: $70,000
Gross Profit GP $ GP %
---- ----
Software License Revenue $31,500 90%
System Installation Revenue $12,600 36%
---------------------------
Gross Revenue per Installation: $44,100 63%
Cost of Sales
Software License Revenue $3,500 10%
System Installation Revenue $22,400 64%
---------------------------
Gross Revenue per Installation: $25,900 37%
Cost of sales for software licensing with the installation are minimal
and are estimated at 10% of revenue for reproduction, minor customer specific
configurations and the setup cost of interface with the customers' DMS. Cost of
sales for the system installation includes direct labor and travel,
subcontractors and third party hardware. The average gross profit and cost of
sales for the revenues from recurring maintenance of software is approximately
$850.00 per system which includes Auto Research (approximately $27.5), Driver
License data (approximately $12.50), Legacy System Interface (approximately
$161.00), CDI integration (approximately $ 54.00), with total cost of sales of
$255.00, gross profit of $595.00 or 70%.
GENERAL AND ADMINISTRATIVE OPERATING EXPENSES
Our general operating expenses are primarily comprised of:
o Marketing and Selling;
o General and Administrative; and
o 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.
These include the salaries of two Vice Presidents of Sales and the Business
Development Manager ("BDM") staff. The sales commission plan compensates the
sales force at the rate of 6% and is broken down in the following table:
BDM per contract 3.5%
Regional VP 1.5%
Management Override 1.0%
-----
6.00%
Our general and administrative expenses include expenses for all
facilities, insurance, benefits, telecommunications, legal and auditing expenses
are included as well as the executive management group wage expense.
Our development & operations expenses include the expenses for the
Client Consultant group which advises and supports the installations of our
Dealer Advance(TM) clients.
RESEARCH AND DEVELOPMENT
Since our inception in September 2000, we have spent approximately
$3,612,685 on research and development activities. While we have been successful
in meeting planned goals in the development and introduction of DealerAdvance
Sales Solution(TM), there can be no assurance that our research and development
efforts will be successful with respect to additional products, or if
successful, that we will be able to successfully commercially exploit such
additional products.
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COMPETITION RELATED TO HANDHELD TECHNOLOGY BUSINESS
We do not believe that we have direct competition for our handheld
product. However, we expect competitors in the wireless handheld solutions
market in the future. We compete with the traditional CRM providers and the
emerging new CRM providers in the retail automotive dealer software market.
Some of our potential competitors include:
o Automotive Directions, a division of ADP Dealer Services, and a
provider of PC-based customer relationship management systems as
well as marketing research and consulting services;
o Higher Gear, a provider of client server based front-end sales and
customer relationship management software which serves the retail
automotive industry exclusively;
o Autobase, a provider of PC based front-end software which serves the
retail automotive industry exclusively;
o Cowboy Corporation, recently acquired by Cobalt Corporation, and a
provider of ASP sales prospect management systems and customer
relationship management systems which services the retail automotive
industry exclusively; and
o Autotown, a provider of PC and web-based front-end sales systems,
which services the retail automotive industry exclusively.
We believe that our proprietary technology is unique and, therefore,
places us at a competitive advantage in the industry. However, there can be no
assurance that our competitors will not develop a similar product with
properties superior to our own or at greater cost-effectiveness.
MARKETING AND SALES
We have identified a target market of approximately 12,000 automobile
dealerships in the United States that meet the base criteria for our system.
More specifically, we target a primary market of 6,500 dealerships that sell a
minimum of 75 new and used cars each month and do not currently have CRM
systems. Generally, our target market consists of midline dealerships, including
brands such as Chevrolet, Ford, Nissan, Volkswagen, Toyota, Honda, Buick,
Pontiac, GMC Trucks, Chrysler, Dodge, versus high line or luxury dealerships
such as BMW, Mercedes, Jaguar, and Porsche. The reason for this is that midline
dealers typically have high prospect and customer traffic, which makes for large
untapped prospect opportunities that the client can leverage through the
follow-up process from DealerAdvance. In addition, these dealers often have not
made significant investments in sales automation and in Customer Relationship
Management systems.
The Company further qualifies its market as dealerships with over $15
million in annual revenue. Obviously, a larger dealership has more traffic, more
customer transactions, more sales people, and can more easily justify the
investment. Finally, the Company limits its market to dealerships in those parts
of the country where it has sales and support coverage.
We have both a direct and an indirect selling strategy, with a four
person direct sales force selling in California, Oregon, Nevada, Washington,
Georgia, North Carolina, South Carolina, Virginia, Delaware, Maryland, New
Jersey, and Florida. We presently have distribution agreements with various
third parties with sales people covering Texas, Oklahoma, Louisiana, Arkansas,
New Mexico, Arizona, Illinois, Indiana, Michigan, Wisconsin, Missouri,
Minnesota, Kentucky, New York, Connecticut, Massachusetts, and Rhode Island.
With these partners in place, and in conjunction with our direct sales force, we
are covering 29 states.
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OUR INTELLECTUAL PROPERTY
We have a trademark for "DealerAdvance(TM)" and have patent
applications pending to protect a number of information management software
programs. We also plan to file to protect certain proprietary processes
pertaining to systems components, related equipment and software modules.
SUMMARY OF DISCONTINUED TRUFFLE BUSINESS OPERATIONS
From our inception on September 8, 2000, through July 19, 2002, we
imported, marketed and distributed specialized truffle-based food products,
including fresh truffles, truffle oils, truffle pates, truffle creams and
truffle butter, through our former wholly-owned subsidiaries, Terre di Toscana,
Inc. and Terres Toscanes, Inc. Our target market included retailers such as
restaurants, specialty food stores, delicatessens and supermarkets. We imported
products directly from Italian producers and marketed our products in the
specialty food industry primarily in Florida, South Carolina, North Carolina and
California, and also earned commissions on sales made in Belgium, Holland and
Germany. On July 19, 2002, we exchanged all of the shares that we held in our
wholly-owned subsidiaries for 75,000 shares of our Common Stock held by Mr.
Pietro Bortolatti, our former president. As a result of our transfer of our
interest in the truffle business to Mr. Bortolatti him, we are no longer
involved in the truffle business. The sale of these subsidiaries was part of our
effort to focus on the handheld technology business.
EMPLOYEES
As of March 31, 2004, we had a total of 29 full-time employees, of
which 20 are dedicated to marketing and sales and regional customer support. As
of March 31, 2004, we had 1 employee in Arizona, 8 in California, 1 in Florida,
1 in Georgia, 2 in North Carolina, 6 in New Jersey, 1 in Texas, and 9 in
Virginia.
We have no collective bargaining arrangements with our employees. We
believe that our relationship with our employees is good.
DESCRIPTION OF PROPERTIES
We do not currently own any real property. We lease a 6,000 square foot
development facility in Sterling, Virginia, which is staffed with 11 development
and field support personnel. The lease for the Sterling, Virginia facility
expires on May 31, 2006. We also operate and lease business development and
operations offices in Basking Ridge, New Jersey, and Lafayette, California. The
lease for the Basking Ridge, New Jersey facility expires on February 28, 2007
and the lease for the Lafayette, California facility expires on November 30,
2004. We carry insurance for each of these properties. These facilities are
suitable for our current operations.
We are obligated under these leases through August 2007. In addition to
the base rent, one lease requires us to pay a proportionate share of operating
costs and other expenses.
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
Year ended December 31,
2004 $186,000
2005 $192,000
2006 $100,000
2007 $95,000
2008 $34,000
TOTAL $607,000
Rent expenses were approximately $165,000 for the year ended December
31, 2003.
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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 as
disclosed below, 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.
On April 27, 2004, PNC Bank, N.A., as successor by merger to
UnitedTrust 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 and we paid $50,000 on September 15, 2004 and October 15, 2004.
Additionally, we are required to make four consecutive monthly installments of
$50,000.00 on October 15, 2004 and November 15, 2004 followed by the remaining
principal on or before December 15, 2004. Failure to adhere to this schedule
will cause the suit to be reinstated and PNC Bank will resume collection of the
sum under the suit.
36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors and their respective ages and positions as
of December 31, 2003 are as follows:
Name Age Position(s)
--------------------------------------------------------------------------------
Christopher J. Carey.... 51 President, Chief Executive Officer and Director
Lenard Berger........... 34 Chief Technology Officer and Vice President
Robert Nawy............. 43 Chief Financial Officer
Robert J. Corliss*...... 50 Director
William Lenahan*........ 52 Director
Luis Delahoz*........... 43 Director
* Member of audit, compensation and governance/nominating committees.
The business address for each executive officer and director is 106 Allen Road,
Basking Ridge, NJ 07920.
Christopher J. Carey has served as our President and Chief Executive Officer
since May 2002. Mr. Carey is also the founder, President and Chief Executive
Officer of Stronghold, our wholly-owned subsidiary. Since founding Stronghold in
2000, Mr. Carey has set the strategic direction and corporate vision for
Stronghold, drawing on over 25 years of experience building technology-focused
businesses. From 1976 until 1996, Mr. Carey was President and Chief Executive
Officer of Datatec Industries, Inc., which specialized in the rapid deployment
of network and computing systems. After negotiating a merger with Glasgal
Communications in 1996, Mr. Carey became President of Datatec Systems, Inc., the
combined entity until May 2002. Mr. Carey is currently a member of Board of
Trustees of The Albert Dorman Honors College, New Jersey Institute of
Technology, and a past Chairman of the New Jersey Chapter of the Young
President's Organization.
Lenard Berger has served as our Chief Technology Officer and Vice President
since May 2002. Mr. Berger is also the Chief Technology Officer and Vice
President of our company. Prior to the founding of our predecessor entity in
2000, Mr. Berger was the President of eBNetworks, a division of Computer
Horizons, Inc. From 1990 until 1999, Mr. Berger was the Vice President of RPM
Consulting, Inc.
Robert Nawy joined Stronghold on July 22, 2003 and is responsible for financial
management, with emphasis on strategic planning and day-to-day financial
operations of the business. Mr. Nawy became the Chief Financial Officer in the
fourth quarter of 2003. Mr. Nawy is a CPA, holds an MBA and is financial
management veteran in the information technology industry, with over 19 years of
experience in both public and privately held companies. Prior to joining us, Mr.
Nawy served as CFO of Exenet Technologies, Inc. from 2001 through 2003 Prior to
Exenet, Mr. Nawy served as CFO for Maden Technologies, Inc. 1998 to 2001.
Robert J. Corliss has been a director since May 2002. Mr. Corliss has been,
since 1998, the President and Chief Executive Officer of the Athlete's Foot
Group, Inc., a privately owned, 800-store retail chain with operations in 50
countries. Since 1999, Mr. Corliss has been a member of the board of Kahala
Corporation, a publicly traded franchising corporation dedicated to the design,
development and marketing of quick service restaurants serving nutritious
37
products. From 1996 until 1998, Mr. Corliss was the President and Chief
Executive Officer of Infinity Sports, Inc., a manufacturer, distributor and
licensor of athletic products primarily under the brand Bike Athletic. Prior to
founding Infinity Sports, Inc., Mr. Corliss was the Chief Executive Officer and
President of Hermann's Sporting Goods retail chain. Mr. Corliss serves on the
Advisory Council for the Sporting Goods Manufacturers Association's recently
announced Physical Education for Progress (P.E.P.) initiative. Additionally, Mr.
Corliss serves as a Director and Executive Committee member of the National
Retail Federation and the National Retail Foundation and serves on the board of
directors for The World Federation of the Sporting Goods Industry and serves on
the board of directors of The Athlete's Foot Group, Inc. He is also an Advisor
for Emory University's Goizueta Business School.
William Lenahan has been a director since May 2002. Mr. Lenahan has been the
Chief Executive Officer of KMC Telecom Holdings, Inc. since 2000. KMC is a $500
million nationwide provider of next generation telecommunications, including
outsourcing services, consulting and financing for metro access and advanced
voice, data and Internet services to business customers. Mr. Lenahan was the
President and CEO of BellSouth Wireless Data (currently Cingular Wireless) from
1984 to 2000 and was responsible for financial performance and nationwide
wireless data strategy for this division of BellSouth Corporation. Mr. Lenahan
has served nearly 30 years in the information technology, telecommunications and
data industries. He presently serves on the board of directors of Broadbeam
Corporation.
Luis Delahoz has been a director since May 2002. Mr. Delahoz is the current
President and Chief Executive Officer of TWS International, Inc., a leading
provider of professional technical consulting services to the rapidly growing
telecommunications industry. From 1998 until 2001, Mr. Delahoz was the Executive
Vice President of Client Soft, Inc., a provider of e-business solutions. In
1996, Mr. Delahoz co-founded TOC Global Communications, Inc., where he served as
Vice President until 1998. Currently, Mr. Delahoz is a member of the board of
directors of TWS, Inc. and TWS International, Inc.
EXECUTIVE OFFICERS
Christopher J. Carey, Lenard Berger and Robert Nawy each have employment
contracts with our company. The remaining officers serve at the discretion of
our board of directors and holds office until his successor is elected and
qualified or until his earlier resignation or removal. There are no family
relationships among any of our directors or executive officers.
BOARD COMMITTEES
Our board of directors has an audit committee, compensation committee
and governance/nominating committee. The audit committee reviews the results and
scope of the audit and other services provided by our independent public
accountant. The audit committee does not currently have an "audit committee
financial expert", as defined by the SEC, due to our status as an
early-development stage company. We are in the process of identifying an audit
committee financial expert to join its board of directors and audit committee.
The compensation committee establishes the compensation policies
applicable to our executive officers and administers and grants stock options
pursuant to our stock plans. The governance/nominating committee oversees board
procedures and nominates prospective members of the board should a vacancy
arise. The current members of each of the audit, compensation and
governance/nominating committees are Messrs. Corliss, Cox, Lenahan and Delahoz.
CODE OF ETHICS
Because we are an early-development stage company with limited
resources, we have not yet adopted a "code of ethics", as defined by the SEC,
that applies to our Chief Executive Officer, Chief Financial Officer, principal
accounting officer or controller and persons performing similar functions. We
are in the process of drafting and adopting a Code of Ethics.
38
DIRECTOR COMPENSATION
We have granted an initial one-time option grant to purchase 40,000
shares of common stock to each non-employee board member upon election to our
board of directors. This one-time grant was awarded to the current non-employee
board members on October 7, 2003. The options will vest 50% on each of the first
and second anniversaries of the date of grant. In addition, each non-employee
director will be granted, on an annual basis, an option to purchase 30,000
shares of our common stock, which will vest 50% on each of the first and second
anniversaries of the date of grant. We have not yet granted the annual option
grants to our board of directors, but intend to do so as soon as reasonably
practicable after the filing of this Form 10-KSB. All stock options granted to
members of our board of directors will have exercise prices equal to the fair
market value of the Common Stock on the date of grant. We also reimburse
directors for reasonable out-of-pocket expenses incurred in attending meetings
of the board of directors and any meetings of its committees.
39
EXECUTIVE COMPENSATION
The following table sets forth executive compensation for fiscal years
ended December 31, 2003, 2002 and 2001. We have not paid any salaries or bonuses
to any of our officers from our inception through the date hereof. All of our
executive officers also serve as officers of and are paid by our operating
subsidiary. The following table shows compensation paid during the fiscal years
ended December 31, 2002 and 2001 by our wholly owned subsidiary to our former
president and other former executive officers. The table also provides
information regarding executive compensation for our wholly owned subsidiary's
current president and three other most highly compensated executive officers. We
refer to all of these officers collectively as our "named executive officers."
SUMMARY COMPENSATION TABLE
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
------------------------------------------ ---- -------- ------- ------------ ------------
Former Officers and Directors
------------------------------------------
Pietro Bortolatti 2003 -- -- -- --
President, Chief Executive Officer and
Chairman of the Board
2002 -- 20,500(1) -- --
2001 -- -- -- --
Tiziana DiRocco 2003 -- -- -- --
Vice President Director of 2002 -- -- -- --
European Operations 2001 -- -- 15,370(1) --
David Rector 2003 -- -- -- --
Director 2002 -- -- -- --
2001 -- -- -- 16,244(2)
Current Officers(3)
------------------------------------------
Christopher J. Carey(4) 2003 300,000 9,600
President, Chief Executive Officer and 2002 264,000 -- -- 9,601
And Chairman of the Board 2001 165,000 -- -- 9,602
Lenard Berger(5) 2003 175,000 -- 29,963 7,200
Vice President and Chief Technology 2002 160,416 22,558 28,025 7,100
Officer 2001 150,000 -- 2,804 7,150
Salvatore D'Ambra(6) 2003 134,375 -- 27,135 5,912
Vice President - Development 2002 121,397 -- 8,000 6,600
2001 106,782 -- 2,818 6,600
Robert Nawy(8) 2003 82,967 -- -- 2,398
Chief Financial Officer 2002 -- -- -- --
2001 -- -- -- --
(1) Commissions of sales from Terre Di Toscana, Inc., and Terres Toscanas, Inc.
(2) Includes consulting service fees paid to the David Stephen Group, of which
David Rector, our former director, is a principal.
(3) On May 16, 2002, our wholly-owned subsidiary merged with a New Jersey
corporation, Stronghold Technologies, Inc. Our wholly-owned subsidiary survived
and changed its name to Stronghold Technologies, Inc. ("Stronghold").
(4) Christopher J. Carey became our President and Chief Executive Officer on May
16, 2002, following the merger. Mr. Carey also remains the President, Chief
Executive Officer and the sole Director of Stronghold. Mr. Carey's base salary
from May 15, 2002 until December 31, 2002 was $260,000, as set forth in his
Employment Agreement with Stronghold. The terms of Mr. Carey's Employment
Agreement are more fully set forth below. "All Other Compensation" consists
solely of the reimbursement of automobile expenses. All of Mr. Carey's salary
for 2002 has been deferred and accrued.
40
(5) Lenard Berger has been our Vice President and Chief Technology Officer since
the merger, and holds the same positions with our wholly owned subsidiary. Mr.
Berger's base salary for the period of July 2001 through July 2002 was $112,000,
as set forth in his Employment Agreement. As of July 2002, Mr. Berger's salary
increased to $122,000. The terms of Mr. Berger's Employment Agreement are more
fully set forth below. "Other Annual Compensation" consists solely of sales
commissions. "All Other Compensation" consists solely of the reimbursement of
automobile expenses.
(6) Salvatore D'Ambra has been our Vice President - Development of our wholly
owned subsidiary from the merger until November 12, 2003. Mr. D'Ambra's base
salary for the period of August 2001 through August 2002 was $150,000, as set
forth in his Employment Agreement. As of August 2002, Mr. D'Ambra's salary
increased to $175,000. Mr. D'Ambra resigned from his position with our wholly
owned subsidiary in November 2003.
(7) James J. Cummiskey has been our Vice President - Sales of our wholly owned
subsidiary from the merger until January 27, 2003. Mr. Cummiskey's base salary
for the period of August 2001 through August 2002 was $192,000, as set out in
his Employment Agreement. As of August 2002, Mr. Cummiskey's salary increased to
$195,763. Mr. Cummiskey resigned from Stronghold on January 27, 2003.
(8) Robert Nawy joined Stronghold on July 22, 2003 as Assistant Chief Financial
Officer and became the Chief Financial Officer in November 2003. Mr. Nawy's base
salary for the period of June 2003 through July 2004 is $180,000, as set out in
his Employment Agreement.
OPTIONS GRANTS
The following table sets forth information concerning individual grants of stock
options under the 2002 Stock Incentive Plan during the fiscal year ended
December 31, 2003 to each of the named executive officers.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2003
% of Total Options Granted Exercise or
Number of Securities to Employees Base
Name Underlying Options in 2002 Price ($/Sh) Grant Date
-------------------- --------------------- --------------------------- ------------- -----------
Lenard Berger 153,100 10.7% $0.60 7/22/03
Robert Nawy 50,000 3.5% $0.60 7/22/03
Robert Nawy 200,000 14% $0.03 12/19/03
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
CHRISTOPHER J. CAREY
On May 15, 2002, we assumed the employment agreement that was in place
between Christopher J. Carey and the Predecessor Entity. Under the terms of the
agreement, Mr. Carey's employment as Chairman of the Board, President and Chief
Executive Officer of will continue until December 31, 2004, unless terminated
sooner. The agreement may be renewed through mutual agreement of the parties.
Mr. Carey receives a base salary of $260,000 per year. Such base salary was
increased effective January 1, 2003, to the annualized rate of $300,000 and
increased, effective January 1, 2004, to the annualized rate of $350,000. Such
salary will be reviewed annually and is subject to increase as determined by our
board of directors or the Compensation Committee in its sole discretion.
The employment agreement provides that each fiscal year after fiscal
year 2002, Mr. Carey will be eligible to receive an annual bonus based upon our
meeting and exceeding our annual budget, as same has been reviewed and approved
by the board of directors for earnings before interest, taxes, depreciation and
amortization, referred to as EBITDA. This bonus will be earned according to the
41
following: (i) if we achieve 90-100% of budgeted EBITDA, Mr. Carey will receive
a bonus of 10% of his then current annual base salary; (ii) if we achieve
101-110% of budgeted EBITDA, Mr. Carey will receive a total bonus of 20% of his
then current annual base; and (iii) if we achieve 111-120% of budgeted EBITDA,
Mr. Carey will receive a total bonus of 30% of his then current annual base
salary; (iv) if we achieve 121-130% of budgeted EBITDA, Mr. Carey will receive a
total bonus of 40% of his then current annual base salary; (v) if we achieve
131-140% of budgeted EBITDA, Mr. Carey will receive a total bonus of 50% of his
then current annual base salary; (vi) if we achieve 141-150% of budgeted EBITDA,
Mr. Carey will receive a total bonus of 55% of his then current annual base
salary; and (vii) if we achieve 151% or more of budgeted EBITDA, Mr. Carey will
receive a total bonus of 60% of his then current annual base salary. The bonus,
if any, shall be paid in one lump sum within sixty (60) days after the close of
the fiscal year for which it was earned. To date, Mr. Carey has not been awarded
a bonus.
In accordance with the agreement, the Predecessor Entity granted to Mr.
Carey stock options under the 2000 Stock Option Plan for the purchase of an
aggregate of 200,000 shares of the Predecessor Entity's common stock at an
option exercise price equal of $1.50 per share, the fair market value of the
underlying common stock on the date of the grant. Such option converted into an
option to purchase 437,500 shares of our Common Stock when we merged with the
Predecessor Entity and our wholly-owned subsidiary, Stronghold, assumed the 2000
Stock Option Plan. While Mr. Carey is employed by our comapny, the option will
become exercisable on the earlier of: (i) the seventh anniversary of May 15,
2002; or (ii) the achievement of the performance goals set forth above in the
paragraph above.
Upon a change in control of our company, the unvested portion of the
options shall immediately vest and become exercisable by Mr. Carey. If we
terminate Mr. Carey's employment (i) after the expiration of the term of
employment; or (ii) with cause; or if Mr. Carey resigns for no good reason, he
will receive all accrued compensation and vested benefits. If we terminate his
employment without cause, Mr. Carey will receive all unpaid accrued
compensation, vested benefits and a severance benefit equal to his base salary
until the earlier of the balance of the term of his agreement, the renewal term
or twelve months following the date of termination.
Mr. Carey's agreement contains a confidentiality provision and further
provides that Mr. Carey may not work for, or hold 1% or more of the outstanding
capital stock of a publicly traded corporation, which is a competing business
anywhere in the world for one year after the conclusion of his employment. Mr.
Carey has not expressed a desire to leave.
LENARD BERGER
On August 1, 2000, the Predecessor Entity entered into an employment
agreement with Lenard Berger, which we assumed. Under the terms of the
agreement, Mr. Berger's employment as Vice President, Chief Technology Officer
will continue until July 31, 2005 unless sooner terminated. The agreement may be
renewed through mutual agreement of the parties. Mr. Berger received a base
salary of $10,500 per month during the first six months of the term of the
agreement and $12,500 per month commencing February 1, 2001. During the second
year of the term of the agreement, Mr. Berger's base salary will be $150,000,
but may increase to $175,000 if the our Net Sales achieved in the first year of
the term of the agreement equal or exceed $2,000,000. During the third year of
the term of the agreement, Mr. Berger's base salary will be $175,000, but may
increase to $200,000 if our Net Sales achieved in the second year of the term of
the agreement equal or exceed $10,000,000. During the fourth and fifth years of
the term of his agreement, Mr. Berger's base salary will be increased annually
by a percentage determined by the Consumers Price Index. Beginning his second
year of employment, Mr. Berger is eligible for a commission not to exceed
$50,000 for any year during the balance of the term of the agreement. The
commission is equal to 1% of net sales, which is determined by subtracting
certain costs from the gross sales of products and services. To date, Mr. Berger
has not been awarded a commission. Mr. Berger is also eligible to receive extra
compensation at the discretion of our board of directors, a car allowance and
any insurance and 401(k) plans provided by the employer.
Pursuant to his employment agreement, Mr. Berger received an option
grant to purchase 100,000 shares of the Predecessor Entity's common stock. Such
option converted into an option to purchase 218,750 shares of our common stock
when we merged with the Predecessor Entity. The vesting schedule for such grant
is set forth above under the section entitled "Option Grants". Upon a change of
control of our company, 50% of any unvested options shall become vested and
exercisable immediately. If we register shares of common stock in an initial
public offering, Mr. Berger has the right to include any shares of common stock
that he owns in the registration.
42
If we terminate Mr. Berger's employment without cause, he will receive
payment of his base salary in effect at the time of his termination for a period
of one month. If Mr. Berger resigns for good reason after the first full year of
employment, Mr. Berger shall receive as his severance pay the lesser of (x) base
salary payable for the balance of the then existing term of the agreement or (y)
two months' base salary, plus one week's base salary for each full or part year
worked after the first year of employment.
Mr. Berger's agreement provides that all rights to discoveries,
inventions, improvements, and innovations related to our business that
originates during the term of Mr. Berger's employment will be the exclusive
property of our company. Mr. Berger's agreement also contains a confidentiality
provision and further provides that Mr. Berger may not work for or hold 5% or
more of the outstanding capital stock of a publicly traded corporation, which is
a competing business anywhere in the world for one year after the conclusion of
his employment. Mr. Berger has not expressed a desire to leave our company.
ROBERT NAWY
On June 23, 2003, we entered into an employment agreement with Robert
Nawy. Under the terms of the agreement, Mr. Nawy's employment as Chief Financial
Officer will continue until July 31, 2006, unless terminated sooner. The
agreement may be renewed through mutual agreement of the parties. Mr. Nawy
receives a base salary at an annualized rate of $180,000 from July 28, 2003
until July 31, 2004. From August 1, 2004 to July 31, 2006, Mr. Nawy's salary
will be increased annually by a percentage determined by the Consumers Price
Index. Such salary will be reviewed annually and is subject to increase as
determined by the board of directors or the Compensation Committee in its sole
discretion.
The employment agreement provides that each fiscal year after fiscal
year 2003, Mr. Nawy will be eligible to receive an annual bonus based upon our
meeting and exceeding its annual budget, as same has been reviewed and approved
by the board of directors for earnings before interest, taxes, depreciation and
amortization, referred to as EBITDA. This bonus will be earned according to the
following: (i) if we achieve 65-99% of budgeted EBITDA, Mr. Nawy will receive a
bonus of 10% of his then current annual base salary; (ii) if we achieve 100-124%
of budgeted EBITDA, Mr. Nawy will receive a total bonus of 20% of his then
current annual base; and (iii) if we achieve 125% or more of budgeted EBITDA,
Mr. Nawy will receive a total bonus of 30% of his then current annual base
salary The bonus, if any, shall be paid in one lump sum within sixty (60) days
after the close of the fiscal year for which it was earned. To date, Mr. Nawy
has not been awarded a bonus.
In accordance with the agreement, we granted to Mr. Nawy stock options
under the 2002 Stock Option Plan for the purchase of an aggregate of 200,000
shares of our common stock at an option exercise price equal to $0.80 per share,
the fair market value of the underlying common stock on the date of the grant.
While Mr. Nawy is employed by us, the options will become exercisable at the
rate of 25,000 options on July 28, 2003, 60,000 options on July 31, 2004, 60,000
options on July 31, 2005 and 55,000 options on July 31, 2006.
Upon a change in control of our company, an additional 50% of the
unvested portion of the options shall immediately vest and become exercisable by
Mr. Nawy.
If we terminate Mr. Nawy's employment without cause within one year
following a change of control, or Mr. Nawy resigns after one year following a
change of control, he will receive all accrued compensation and vested benefits.
If we terminate his employment without cause, Mr. Nawy will receive a severance
benefit equal to: one month salary if termination occurs within the first six
months of employment; two months salary if termination occurs within the second
six months of employment; and the lesser of the balance of the term of the
agreement and three months if termination occurs after completion of one full
year of employment.
Mr. Nawy's agreement contains a confidentiality provision and further
provides that Mr. Nawy may not work for, or hold 1% or more of the outstanding
capital stock of a publicly traded corporation, which is a competing business
anywhere in the world for one year after the conclusion of his employment. Mr.
Nawy has not expressed a desire to leave.
43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stronghold Technologies, Inc., the Predecessor Entity, became our
wholly-owned subsidiary on May 16, 2002 pursuant to a merger with and into
Acquisition Sub. Pursuant to the merger, the Predecessor Entity's stockholders
surrendered all of their outstanding shares of the Predecessor Entity's common
stock in exchange for a total of 7,000,000 shares of our common stock. Of these
shares, Christopher J. Carey, our current President, and his wife received a
total of 3,937,500 shares held jointly, and Mr. Carey received an additional
1,093,750 shares individually.
Pursuant to a Securities Purchase Agreement which we entered into on
May 15, 2002, with Stanford, a major shareholder of our company, Pietro
Bortolatti, a former officer and director of our company, and Mr. Carey, we
agreed to issue to Stanford such number of shares of our Series A Preferred
Stock that would in the aggregate equal 20% of the total issued and outstanding
shares of our common stock, and a warrant to purchase an equal number of shares
of our common stock. The aggregate purchase price for the Series A Preferred
Stock and warrants purchased by Stanford was $3,000,000. The Series A Preferred
Stock and warrant purchase took place on four separate closing dates from May
16, 2002 through July 19, 2002, in which we issued an aggregate of 2,002,750
shares of our Series A Preferred Stock to Stanford and warrants for 2,002,750
shares of our common stock. So long as any shares of Series A Preferred Stock
are outstanding and held by Stanford, Stanford had the right to maintain its
percentage ownership with respect to any additional securities we may issue,
with certain exceptions under the Series A Securities Purchase Agreement.
Pursuant to a Securities Purchase Agreement which we entered into on
April 24, 2003, we agreed to issue to Stanford a total of 2,444,444 shares of
our Series B $0.90 Convertible Preferred Stock ("Series B Preferred Stock"). The
issuance of the Series B Preferred Stock occurred on six separate closing dates
beginning on April 24, 2003 and closing on September 15, 2003. In connection
with the Purchase Agreement, we modified the warrants issued in connection with
the Series A offering to reduce the exercise price to $0.25 per share and extend
the expiration date to August 1, 2008. Stanford was also granted the right to
maintain its percentage ownership with respect to any additional securities we
may issue, with certain exceptions under the Series B Securities Purchase
Agreement. In addition, we agreed to convert all outstanding loans and
unreimbursed expenses to certain stockholders of our company for 603,000 shares
of our common stock at a price of $0.90 per share. The value of the warrant
modification was treated as additional costs associated with raising capital and
was shown as a reduction of additional paid-in capital of approximately $557,000
(computed using the Black-Scholes model with the following assumptions: 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 September 30, 2003).
In connection with the Series B Purchase Agreement, we entered into a
Registration Rights Agreement with Stanford, dated April 30, 2003, in which we
agreed to register the shares of common stock issuable upon conversion of the
Series B Preferred Stock, no later than November 15, 2003. Stanford has agreed
to extend the date to register the common stock issuable upon conversion of the
Series B Preferred Stock until March 15, 2004, which was further extended in
June 2004.
In connection with the Series B Purchase Agreement, we entered into a
Consulting Agreement with Stanford, pursuant to which Stanford has agreed to
perform certain financial consulting and advisory services, in exchange for
which we agreed to pay Stanford a fee of $50,000 per year for two years, payable
quarterly in equal installments of $12,500, with the first such installment due
on July 1, 2003. Pursuant to the terms of the Consulting Agreement, we may, at
our sole option, choose to issue shares of our common stock to Stanford in lieu
of such payments.
On November 11, 2003, we agreed with Stanford to modify the terms of
the Series A and Series B Preferred Stock to facilitate acquisitions and other
company actions. The basic terms of the modification are: (i) waiver Section
2(e)(iii) of the Series A Certificate of Designation, which provides for
anti-dilution protection if we shall issue securities which are convertible into
shares of our common stock for an exercise price of less than $1.50; (ii) waiver
of any rights of Stanford to Default Warrants (as defined in the Series A
Registration Rights Agreement) due to our failure to register our shares of
common stock; and (iii) modification of the warrants previously issued to
Stanford and its assigns to purchase 2,002,750 shares of our common stock to
reduce the initial exercise price to $0.25 per share and to extend the
expiration date to August 1, 2008.
44
Pursuant to the Amended and Restated Series A Certificate of
Designation and Series B Certificate of Designation, dated November 11, 2003, by
and between our company and Stanford and a Written Notice, Consent, and Waiver
Among The Holders Of Series A $1.50 Convertible Preferred Stock, Series B $.90
Convertible Preferred Stock and Warrants, our company and Stanford agreed to
certain amendments and restatements including:
(a) the filing of an Amended and Restated Certificate of Designation for Series
A $1.50 Convertible Preferred Stock substantially in the form attached hereto
("Amended and Restated Series A Certificate of Designation") pursuant to which
Stanford will (x) waive dilution adjustments for certain issuances of Common
Stock and Common Stock equivalents, (y) reduce for an eighteen month period the
Stated Value and Conversion Price (each as defined therein) to $0.50 and to
$0.87 thereafter and (z) forego certain rights to approve acquisitions of fixed
assets, capital stock or capital expenditures, credit facilities and sales of
shares of our securities. The authorized shares of Series A Preferred Stock was
reduced from 2,017,200 to 2,002,750 shares.
(b) the filing of an Amended and Restated Certificate of Designation Series B
$0.90 Convertible Preferred Stock substantially in the form attached hereto
pursuant to which Stanford will (x) waive dilution adjustments for certain
issuances of Common Stock and Common Stock equivalents, (y) reduce for an
eighteen month period the Stated Value and Conversion Price (each as defined
therein) to $0.50 and to $0.87 thereafter and (z) forego certain rights to
approve acquisitions of fixed assets, capital stock or capital expenditures,
credit facilities and sales of shares of our securities.
In connection with the Series B Purchase Agreement, our company and Stanford
also entered into a Registration Rights Agreement, dated April 30, 2003, in
which we agreed to register the shares of our common stock issuable upon
conversion of the Series B Preferred Stock, no later than November 15, 2003.
Stanford has agreed to extend dare of the filing requirements of the
Registration Rights Agreement to March 14, 2004, which was subsequently
extended.
(c) In consideration of the Notice and the granting of the Consents and Waivers,
we reduced the exercise price of the Stanford Warrants from $0.25 per share to
$.001. On November 11, 2003, Stanford exercised in full the Stanford Warrant
purchasing 2,002,750 shares of common stock for the purchase price of $2,002.75.
Pursuant to a Stockholders' Agreement which we entered into on May 16,
2002 with Stanford, Mr. Carey and his wife, if either Stanford or the Careys
should ever want to sell any shares of our Series A Preferred Stock or common
stock, the other party has a right of first refusal regarding such sale and, if
such non-selling party does not want to exercise its right of first refusal, we
have the right to purchase such shares, and a right of co-sale under the same
terms and for the same type of consideration. In the case of a material adverse
event related to our company, the Careys agreed to vote their shares as directed
by Stanford, including removing and replacing the members of the board with
designees nominated by Stanford. Finally, Stanford has the right to nominate one
member to our board of directors and the Carey's have agreed to vote for such
nominee.
Stanford is an affiliate of Stanford Financial Group, which is the
majority stockholder of TWS International, Inc. Luis Delahoz, one of our outside
directors, is the president and chief executive officer of TWS International,
Inc. and is Stanford's representative on our board of directors.
On July 31, 2000, the Predecessor Entity entered into a line of credit
loan arrangement with our President, Christopher Carey, who is also president of
Stronghold. Mr. Carey made available $1,989,500, which the Predecessor Entity
could borrow from time to time until August 1, 2001. Outstanding amounts accrued
interest at the rate of interest per annum equal to the floating Base Rate,
computed daily, for the actual number of days elapsed as if each full calendar
year consisted of 360 days. Overdue amounts accrued interest at an annual rate
of 2% greater than the base rate, which is 2% above the floating base rate
announced from time to time by Citibank, N.A. Under the agreement, the first
payment was due on August 1, 2001. On such date, the line of credit was extended
for one more year, until August 1, 2002. On April 22, 2002, the Predecessor
Entity issued 500,000 shares of its common stock (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 debt under such
line of credit. On May 16, 2002, the total amount outstanding under the line of
credit was $2.2 million. On such date, we issued 666,667 shares of our Common
Stock to Mr. Carey in exchange for cancellation of $1 million of the then
outstanding amount. We will pay Mr. Carey the remaining $1.2 million according
45
to the terms of a non-negotiable promissory note, which was issued on May 16,
2002, and amended and restated in September 2002. The terms of the amended and
restated note stipulate that the Company may not make principle payments to Mr.
Carey until the retirement of the United Trust Bank loan. 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 our senior indebtedness.
On September 14, 2002, we issued 5,000,000 shares of our common stock
to our former president, Pietro Bortolatti, in exchange for the transfer from
Mr. Bortolatti of all of the outstanding shares of Terre di Toscana, Inc. to us.
The assets of Terre di Toscana, Inc. included rights in several customer
agreements. We valued the 5,000,000 shares issued to Mr. Bortolatti at par
value, $.0001 per share. As part of our merger with the Predecessor Entity and
the exchange of shares for our truffle business, Mr. Bortolatti has surrendered
or exchanged all of such shares.
In August 2002, one of our outside directors, Robert Cox, purchased
60,000 shares of our common stock at a purchase price of $1.50 per share for
aggregate proceeds to us of $90,000. Such purchase was pursuant to a
Subscription Agreement in which Mr. Cox made certain investment representations
and warranties. The price paid by Mr. Cox had been negotiated by third parties
in an arms-length transaction. The third parties who negotiated the transaction
purchased a number of shares concurrently with Mr. Cox.
In January 2004, our outside director, Robert Cox, purchased an
additional 147,059 shares and a warrant to purchase 73,529 shares at
$0.59/share. The price of $0.59/share was based on 130% of the trailing five day
closing price of our common stock on the effective purchase date of January 9,
2004.
Lenard Berger, our Chief Technology Officer and Vice President and
James Cummiskey, our Vice President of Sales and Marketing, received 200,000
shares of common stock from the Predecessor Entity as founders of such entity,
at a per share price of $0.005. Such shares converted into 437,400 shares of our
Common Stock.
On September 30, 2002, we entered into a loan agreement with CC Trust
Fund to borrow an amount up to $355,128. 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. As of March 31, 2003, $355,128 was outstanding under the CC
Trust Fund loan agreement. 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 March 31, 2004. On March
30, 2004, the CC Trust Fund agreed to extend the term of their loan to March 31,
2005. As of December 31, 2003, $355,128 was outstanding under the CC Trust Fund
loan agreement. 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.
On September 30, 2002, we entered into a loan agreement with AC Trust
Fund to borrow an amount up to $375,404. 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 AC Trust 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 March 31, 2004. On March 30, 2004,
the AC Trust Fund agreed to extend the term of their loan to March 31, 2005. As
of December 31, 2003, $375,404 was outstanding under the AC Trust Fund loan
agreement. 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.
In October 2002, in connection with a loan to our company in the amount of
$165,000, we issued a promissory note to Christopher J. Carey for $165,000. Such
promissory note was due on or before December 31, 2003. On March 30, 2004, Mr.
Carey agreed to extend the term of his loan to March 31, 2005. Until such time
as the principal is paid, interest on the note will accrue at the rate of 12.5%
per year.
46
We believe that the terms of all of the above transactions are
commercially reasonable and no less favorable to us than we could have obtained
from an unaffiliated third party on an arm's length basis. Our policy requires
that all related parties recuse themselves from negotiating and voting on behalf
of our company in connection with related party transactions.
47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 16, 2004. The information in this
table provides the ownership information for:
o each person known by us to be the beneficial owner of more than 5%
of our Common Stock;
o each of our directors;
o each of our executive officers; and
o our executive officers and directors as a group.
Beneficial ownership has been determined in accordance with the rules
and regulations of the SEC and includes voting or investment power with respect
to the shares. Unless otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to the number of shares
indicated as beneficially owned by them. Common Stock beneficially owned and
percentage ownership is based on 14,776,655 shares outstanding on September 16,
2004, and assuming the exercise of any options or warrants or conversion of any
convertible securities held by such person, which are presently exercisable or
will become exercisable within 60 days after September 16, 2004.
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned Outstanding
--------------------------------------- ------------------ -----------
5% Stockholders
---------------------------------------
Christopher J. Carey
450 Claremont Road
Bernardsville, NJ 07924 5,131,250(1) 34.72
Stanford Venture Capital Holdings, Inc.
6075 Poplar Avenue
Memphis, TN 38119 7,447,194(2) 34.88
Other Executive Officers and Directors
---------------------------------------
Lenard Berger 437,600 2.96
Robert J. Corliss -- --
William Lenahan -- --
Luis Delahoz -- --
Robert Nawy 200,000(3) 1.35
------------------ -----------
Executive Officers and Directors as a
group (7 people) 5,975,909 40.44
(1) 3,937,500 of these shares are owned by Christopher J. Carey and his wife,
Mary Carey, as Joint Tenants with Right of Survivorship.
(2) The total beneficial ownership of Stanford Venture Capital Holdings, Inc. is
7,447,194 shares which consists of: (i) 2,002,750 shares of Common Stock
48
issuable upon the conversion of 2,002,750 shares of our Series A Preferred
Stock; and (ii) 2,444,444 shares of Common Stock issuable upon the conversion of
2,444,444 shares of our Series B Preferred Stock, (iii) 1,000,000 shares of
Common Stock issued upon exercise of warrants, (iv) 875,000 of Common Stock and
(v) 2,000,000 shares of Common Stock issuable upon the exercise of warrants.
James M. Davis has voting and investment control over the securities held by
Stanford Venture Capital Holdings, Inc., but he disclaims beneficial ownership
of such securities, except to the extent of any pecuniary interest therein.
(3) Includes an option grant to purchase 200,000 shares of Common Stock which
was immediately exercisable on the date of grant.
EQUITY COMPENSATION IN FISCAL 2003
The following table provides information about the securities
authorized for issuance under our equity compensation plans as of December 31,
2003.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of outstanding options under equity compensation plans (2)
outstanding options (1)
--------------------------------------------------------------------------------------------------------------------
Equity compensation plans 1,909,309 $0.86 638,450
approved by security holders
Equity compensation plans not -- -- --
approved by security holders
Total 1,909,309 $0.86 638,450
(1) Issued pursuant to our 2002 Stock Incentive Plan, our 2002 California Stock
Incentive Plan, and our 2000 Stock Option Plan.
(2) 625,950 shares are available for future issuance pursuant to the 2002 Stock
Incentive Plan and 12,500 shares are available for future issuance pursuant to
the 2002 California Stock Incentive Plan. We do not intend to issue any
additional options under our 2000 Stock Option Plan.
49
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
We are authorized to issue up to 250,000,000 shares of common stock,
par value $.0001. As of September 16, 2004, there were 14,776,655 shares of
common stock outstanding. Holders of the common stock are entitled to one vote
per share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have appointed Continental Stock Transfer & Trust Company, 17
Battery Place, New York, New York 10004, as transfer agent for our shares of
Common Stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest
extent permitted by Nevada law, our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of our
Articles of Incorporation, as amended, is to eliminate our rights and our
shareholders (through shareholders' derivative suits on behalf of our company)
to recover damages against a director or officer for breach of the fiduciary
duty of care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain situations
defined by statute. We believe that the indemnification provisions in our
Articles of Incorporation, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
50
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the
box, puts and calls and other transactions in our securities or derivatives of
our securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
51
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
52
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will receive proceeds from the exercise of the warrants unless the selling
stockholders exercise the warrants on a cashless basis. Assuming all the shares
registered below are sold by the selling stockholders, none of the selling
stockholders will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants* Conversion (1) Offering** Offering** (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Offshore, Ltd. 15,480,000 67.46% Up to 776,082 (2) 4.99% -- --
(3) 30,960,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Qualified 17,630,000 54.40% Up to 776,082 (2) 4.99% -- --
Partners, LLC (3) 35,260,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Partners, LLC 8,170,000 35.60% Up to 776,082 (2) 4.99% -- --
(3) 16,340,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
New Millennium 1,720,000 0.75% Up to 776,082 (2) 4.99% -- --
Capital Partners 3,440,000
II, LLC (3) shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
* This column represents an estimated number based on a conversion price as of a
recent date of September 16, 2004 of $.075, divided into the principal amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.99% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion of
the secured convertible notes and exercise of warrants, based on current market
prices. Because the number of shares of common stock issuable upon conversion of
the secured convertible notes is dependent in part upon the market price of the
53
common stock prior to a conversion, the actual number of shares of common stock
that will be issued upon conversion will fluctuate daily and cannot be
determined at this time. Under the terms of the secured convertible notes, if
the secured convertible notes had actually been converted on September 16, 2004,
the conversion price would have been $.075.
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and exercise of the
related warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholders have contractually
agreed to restrict their ability to convert their secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed below owned by AJW Partners, LLC. AJW Offshore, Ltd., formerly
known as AJW/New Millennium Offshore, Ltd., is a private investment fund that is
owned by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by AJW Offshore, Ltd. AJW Qualified
Partners, LLC, formerly known as Pegasus Capital Partners, LLC, is a private
investment fund that is owned by its investors and managed by AJW Manager, LLC,
of which Corey S. Ribotsky and Lloyd A. Groveman are the fund managers, have
voting and investment control over the shares listed below owned by AJW
Qualified Partners, LLC. New Millennium Capital Partners II, LLC, is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by New
Millennium Capital Partners II, LLC. We have been notified by the selling
stockholders that they are not broker-dealers or affiliates of broker-dealers
and that they believe they are not required to be broker-dealers.
(4) Assumes that all securities registered will be sold.
TERMS OF SECURED CONVERTIBLE NOTES
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on June 18, 2004
for the sale of (i) $3,000,000 in callable secured convertible notes and (ii)
warrants to buy 3,000,000 shares of our common stock. This prospectus relates to
the resale of the common stock underlying these secured convertible notes and
warrants. The investors are obligated to provide us with an aggregate of
$3,000,000 as follows:
o $1,500,000 was disbursed on June 18, 2004;
o $500,000 was disbursed on July 27, 2004; and
o $1,000,000 will be disbursed within five days of this prospectus
being declared effective.
Accordingly, we have received a total of $2,000,000 pursuant to the
Securities Purchase Agreement. The funds from the sale of the callable secured
convertible notes will be used for business development purposes, business
acquisitions, working capital needs, pre-payment of interest, payment of
consulting and legal fees and borrowing repayment.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible into our common stock, at
the investors' option, at the lower of (i) $0.70 or (ii) 50% of the average of
54
the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including the conversion date. The
full principal amount of the callable secured convertible notes is due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.57 per share. In addition, the conversion price of the secured convertible
notes and the exercise price of the warrants will be adjusted in the event that
we issue common stock at a price below the fixed conversion price, below market
price, with the exception of any securities issued in connection with the
Securities Purchase Agreement. The conversion price of the callable secured
convertible notes and the exercise price of the warrants may be adjusted in
certain circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the selling
stockholder's position. The selling stockholders have contractually agreed to
restrict their ability to convert or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
and their affiliates after such conversion or exercise does not exceed 4.99% of
the then issued and outstanding shares of common stock. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.57 per share. The selling stockholders will be
entitled to exercise the warrants on a cashless basis if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the callable
secured convertible notes issued pursuant to the Securities Purchase Agreement,
dated June 18, 2004.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreement and related
documents are filed with the SEC as exhibits to our Form SB-2 relating to this
prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
notes is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $3,000,000 of notes on July 14, 2004, a conversion price of $0.10
per share, the number of shares issuable upon conversion would be:
$3,000,000/$.075 = 40,000,000 shares
55
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the Notes (excluding accrued interest),
based on market prices 25%, 50% and 75% below the current twenty day average as
of September 16, 2004 of $0.10.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
------- --------- ------------- ----------- -----------
25% $.1125 $.0563 53,333,333 78.30%
50% $.0750 $.0375 80,000,000 84.41%
75% $.0375 $.0188 160,000,000 91.55%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Rothstein Kass - Certified Public Accountants, have audited, as set
forth in their report thereon appearing elsewhere herein, our financial
statements at December 31, 2003 and 2002 and for the years then ended that
appear in the prospectus. The financial statements referred to above are
included in this prospectus with reliance upon the independent registered public
accounting firm's opinion based on their expertise in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of Stronghold
Technologies, Inc., filed as part of the registration statement, and it does not
contain all information in the registration statement, as certain portions have
been omitted in accordance with the rules and regulations of the Securities and
Exchange Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
56
INDEX TO FINANCIAL STATEMENTS
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
For the Three Months Ended June 30, 2004 and June 30, 2003
Consolidated Balance Sheets June 30, 2004 (Unaudited)
and December 31, 2003 F-1
Consolidated Statements of Operations for the three
months ended June 30, 2004 and 2003 (Unaudited) F-2
Consolidated Statements of Cash Flows For the three months
ended June 30, 2004 and 2003 (Unaudited) F-3
Notes to the Consolidated Financial Statements (Unaudited) F-4 to
F-9
For the Years Ended December 31, 2003 and December 31, 2002
Report of Independent Registered Public Accounting Firm F-10
Consolidated Balance Sheets F-11
Consolidated Statement of Operations F-13
Consolidated Statement of Deficiency in Stockholders Equity F-14
Consolidated Statement of Cash Flows F-16
Notes to Consolidated Financial Statements F-18 to
F-30
57
CONSOLIDATED BALANCE SHEET
Stronghold Technologies, Inc. and Subsidiary June 30, 2004 (Unaudited)
ASSETS
Current assets
Cash $ 726,544
Accounts receivable, less allowance for returns and
doubtful accounts of $210,318 615,216
Other receivables 16,222
Inventories 100,161
Prepaid expenses 154,773
------------
Total current assets 1,612,916
------------
Property and equipment, net 124,111
------------
Other assets
Software development costs, net of amortization 885,594
Other 124,900
------------
Total other assets 1,010,494
------------
$ 2,747,521
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 568,143
Accrued expenses and other current liabilities 1,331,084
Interest payable, stockholders 421,756
Notes payable, stockholders, current portion 360,000
Notes payable, current portion 1,186,667
Deferred revenue 452,455
Obligations under capitalized leases, current portion 45,827
------------
Total current liabilities 4,365,932
------------
Long-term liabilities
Notes payable, stockholders, less current portion 1,860,131
Notes payable, net of debt issuance costs of $245,000 1,255,000
Obligations under capitalized leases, less current portion 13,384
Other long term accrued liabilities 605,000
------------
Total long term liabilities 3,733,515
------------
Commitments and contingencies
Stockholders' deficit
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; authorized 2,444,444 shares, 2,444,444 issued and
outstanding (aggregate liquidation preference $2,200,000) 445
Common stock, $.0001 par value, authorized 50,000,000
shares, 13,438,277 issued and outstanding 1,344
Additional paid-in capital 7,740,816
Stock subscription receivable (3,000)
Accumulated deficit (13,091,531)
------------
Total stockholders' deficit (5,351,926)
------------
$ 2,747,521
============
F-1
Stronghold Technologies, Inc. and Subsidiary Consolidated Statements of
Operations
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
Sales $ 700,250 $ 626,779 $ 1,343,928 $ 1,545,789
Cost of sales 215,358 277,184 451,866 600,888
------------ ------------ ------------ ------------
Gross profit 484,892 349,595 892,062 944,901
Selling, general and
administrative 868,446 1,194,040 1,832,448 2,302,854
------------ ------------ ------------ ------------
Loss from operations (383,554) (844,445) (940,386) (1,357,953)
Interest expense 67,359 90,220 94,255 197,866
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders $ (450,913) $ (934,665) $ (1,034,642) $ (1,555,819)
============ ============ ============ ============
Basic and diluted loss per
common share $ (0.03) $ (0.09) $ (0.08) $ (0.15)
============ ============ ============ ============
Weighted average number of
common shares outstanding 13,438,277 10,301,212 13,390,104 10,080,333
============ ============ ============ ============
F-2
Stronghold Technologies, Inc. and Subsidiary Consolidated Statements of Cash
Flows
Six months ended June 30,
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $(1,034,642) $(1,555,819)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for returns and allowances (recoveries) (8,128) 41,259
Depreciation and amortization 202,399 60,108
Non-cash interest expense for issuance of warrants 47,500
Changes in operating assets and liabilities:
Accounts receivable (20,300) (172,312)
Inventories 71,585 173,176
Prepaid expenses (145,860) 2,359
Other receivables (8,487) (67,048)
Accounts payable (113,180) (470,292)
Interest payable, stockholders 13,852 112,557
Accrued expenses and other current liabilities (76,191) 565,454
Deferred revenue 110,034 80,894
Other (58,428) (877)
----------- -----------
Net cash used in operating activities (1,067,346) (1,183,041)
----------- -----------
Cash flows from investing activities,
Payments for purchase of property and equipment (4,983) (6,707)
Payments for software development costs (273,361) (328,063)
----------- -----------
Net cash used in investing activities (278,344) (334,770)
Cash flows from financing activities
Proceeds from issuance of preferred stock, net of financing costs 1,242,968
Proceeds from issuance of common stock, net of financing costs 32,037
Proceeds from notes payable, stockholders 899,500 606,200
Principal repayments of notes payable, stockholders (56,519) (92,089)
Proceeds from notes payable 1,255,000
Principal repayments of notes payable, net of debt issuance costs (45,000) (208,333)
Principal payments for obligations under capital leases (20,945) (9,736)
----------- -----------
Net cash provided by financing activities 2,064,073 1,539,010
----------- -----------
Net increase in cash 718,383 21,199
Cash, beginning of period 8,161 13,384
----------- -----------
Cash, end of period $ 726,544 $ 34,583
=========== ===========
Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 46,333 $ 114,859
=========== ===========
F-3
DEFINITIONS
All references to "we," "us," "our," the "Company" or similar terms used herein
refer to Stronghold Technologies, 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.
F-4
Stronghold Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
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 and six month periods
ended June 30, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. These financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report of Form 10-KSB for the fiscal
year ended December 31, 2003.
2. INVENTORIES
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
3. LOSS PER COMMON SHARE
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..
4. STOCK-BASED COMPENSATION
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123, "Accounting
for Stock-Based Compensation." This Statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. It also amends the disclosure provisions to
require more prominent disclosure about the effects on reported net income
(loss) of an entity's accounting policy decisions with respect to stock-based
employee compensation. As permitted by the Statement, the Company does not plan
to adopt the fair value recognition provisions of SFAS No. 123 at this time.
However, the Company has adopted the disclosure provisions of the Statement.
F-5
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized in the accompanying consolidated statements of operations, as
all options granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock at the date of grant.
Had compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company's net loss and net loss per
common share would have been the following pro forma amounts for the three-month
and six-month periods ended June 30, 2004 and 2003.
--------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
--------------------------------- -------------------------------------
2004 2003 2004 2003
-------------- ------------------ ---------------- --------------------
Net loss applicable to common
stockholders, as reported $ (450,913) $ (934,665) $ (1,034,642) $ (1,555,819)
--------------------------------------------------------------------------------------------------------------------
Deduct
--------------------------------------------------------------------------------------------------------------------
Total stock-based compensation
expense determined under fair
value method for all awards,net
of related tax effect 10,882 20,572 23,701 39,603
--------------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (461,795) $ (955,237) $ (1,058,343) $ (1,595,422)
--------------------------------------------------------------------------------------------------------------------
Basic and diluted EPS
--------------------------------------------------------------------------------------------------------------------
As reported $ (0.03) $ (0.09) $ (0.08) $ (0.15)
--------------------------------------------------------------------------------------------------------------------
Pro forma $ (0.03) $ (0.09) $ (0.08) $ (0.16)
--------------------------------------------------------------------------------------------------------------------
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of 2.06%, expected dividend yield rate of 0%, expected life
of 10 years, and a risk-free interest rate of 4.73% and 3.33% for June 30, 2004
and 2003, respectively.
5. GOING CONCERN
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 approximately $1,035,000 and
has negative cash flows from operations of approximately $1,067,000 for the six
months ended June 30, 2004, and has a working capital deficit of approximately
$2,753,000 and a stockholders' deficit of approximately $5,352,000 as of June
30, 2004. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. During 2004, 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.
F-6
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at June
30, 2004:
--------------------------------------------------------------------------------
Sales tax $ 83,670
--------------------------------------------------------------------------------
Payroll taxes 456,359
--------------------------------------------------------------------------------
401(k) withholding 9,925
--------------------------------------------------------------------------------
Compensation 402,767
--------------------------------------------------------------------------------
Commissions 165,673
--------------------------------------------------------------------------------
Other accrued expenses 212,690
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Total $1,331,084
==========
--------------------------------------------------------------------------------
PAYROLL TAX PAYMENT AGREEMENT WITH IRS
On April 30, 2004, the Company entered into an installment agreement with the
United States Internal Revenue Service ("IRS") to pay overdue payroll taxes,
under the terms of which the Company will pay $35,000 each month, commencing
June 28, 2004, until it has paid the withholding taxes due in full. The Company
has posted the portion of the payroll taxes to be paid in the monthly periods of
13 through 29 of the payment plan to the "Other long term accrued liabilities"
section of the balance sheet.
7. NOTES PAYABLE, STOCKHOLDERS
On March 15, 2004, the Company entered into a note payable with one of its
stockholders for approximately $900,000. The note bears interest at 8% per annum
and is due on March 15, 2007. The balance of this note is located in the
long-term portion of notes payable, stockholders.
8. COMMITMENTS AND CONTINGENCIES
WARRANTS
On June 16, 2004, in consideration of and as an inducement to Stanford for the
Company to enter into the issuance of the 12% callable secured convertible notes
(the "NIR Notes") referenced below, Stanford has been issued a warrant (the
"Stanford Warrants") to purchase an additional 2,000,000 shares of Common Stock,
expiring in five years, at an exercise price of $.0001 in exchange for 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 protection which would otherwise accrue to the Series A Stock
and the Series B Stock pursuant to the respective certificates of designation
filed with the Secretary of State of the State of Nevada, as amended, as a
result of the conversion of the NIR 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% for June 30 ,2004
F-7
CALLABLE SECURED CONVERTIBLE NOTES
To obtain funding for its ongoing operations, Stronghold Technologies, Inc. (the
"Company") entered into a Securities Purchase Agreement (the "Securities
Purchase Agreement") with New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (collectively, the
"Investors") on June 18, 2004 for the sale of (i) $3,000,000 in callable
convertible secured notes (the "Notes") and (ii) stock purchase warrants to buy
3,000,000 shares of the Company's common stock (the "Warrants").
On June 18, 2004, the Investors purchased $1,500,000 in Notes and received
Warrants to purchase 1,500,000 shares of the Company's common stock. In
addition, provided that all of the conditions in the Securities Purchase
Agreement are satisfied, the Investors are obligated to provide the Company with
additional funds as follows:
o $500,000 will be funded within five business days of filing a registration
statement registering shares of the Company's common stock underlying the Notes
and the Warrants; and
o $1,000,000 will be funded within five business days of the effectiveness of
the registration statement.
The Notes, which are shown net of debt issuance costs of $245,000, bear interest
at 12%, mature two years from the date of issuance, and are convertible into our
common stock, at the Investors' option, at the lower of (i) $0.70 or (ii) 50% of
the average of the three lowest intraday trading prices for the Company's common
stock during the 20 trading days before, but not including, the conversion date.
The Company may prepay the Notes in the event that no event of default exists,
there are a sufficient number of shares available for conversion of the Notes
and the market price is at or below $0.57 per share. The full principal amount
of the Notes is due upon default under the terms of Notes. In addition, the
Company has granted the investors a security interest in substantially all of
its assets and intellectual property as well as registration rights.
F-8
The Warrants are exercisable until five years from the date of issuance at a
purchase price of $0.57 per share. In addition, the exercise price of the
Warrants is adjusted in the event the Company issues common stock at a price
below market. Since the Company does not intend to issue common stock at below
market price the warrants were valued at $NIL using the Black-Scholes option
pricing model including the following assumptions: exercise price of $0.57,
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% for June 30 ,2004
The Investors have contractually agreed to restrict their ability to convert the
Notes and exercise the Warrants and receive shares of the Company's common stock
such that the number of shares of the Company's common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of the Company's common stock.
All shares of the Company's common stock associated with this private placement
are restricted securities in accordance with Rule 144 as promulgated under the
of the Securities Act of 1933.
9. SUBSEQUENT EVENTS
CALLABLE SECURED CONVERTIBLE NOTES
On July 21, 2004, the Company filed the required SB-2 registration statement
registering shares of the Company's common stock issuable in connection with the
sale of (i) $3,000,000 in callable convertible secured notes (the "NIR Notes")
and (ii) stock purchase warrants to buy 3,000,000 shares of the Company's common
stock (the "Warrants"). The Company received $500,000 from the investors in
connection with this filing.
FOREBEARANCE AGREEMENT WITH PNC BANK
On April 27, 2004, PNC Bank, N.A., as successor by merger to UnitedTrust Bank
filed a complaint in the Superior Court of New Jersey, Law Division, Union
County (Docket No. UNN-L_001522-04) against the 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 ($1,186,667 at June 30, 2004).
On July 15, 2004, the Company entered into a fully executed forbearance
agreement with PNC Bank, N.A. The Company made an initial principal payment of
$420,000 with the execution of the forbearance. Additionally, the Company is
required to make four consecutive monthly installments of $50,000 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 will cause the suit to be reinstated and PNC Bank will resume
collection of the sum under the suit.
F-9
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders Stronghold Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Stronghold
Technologies, Inc. and Subsidiary as of December 31, 2003, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years ended December 31, 2003 and 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stronghold
Technologies, Inc. and Subsidiary as of December 31, 2003, and the results of
their operations and their cash flows for the years ended December 31, 2003 and
2002, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company's
ability to continue in the normal course of business is dependent upon the
success of future operations. The Company has recurring losses, substantial
working capital and stockholders' deficit and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters are
also described in NOTE 2. THESE CONSOLIDATED FINANCIAL STATEMENTS DO NOT INCLUDE
ANY ADJUSTMENTS that might result from the outcome of this uncertainty.
/s/Rothstein, Kass & Company, P.C.
----------------------------------
Roseland, New Jersey
March 17, 2004
F-10
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2003
ASSETS
Current assets
Cash $ 8,161
Accounts receivable, less allowance for doubtful
accounts of $218,446 586,788
Inventories 171,746
Prepaid expenses 11,641
----------------
Total current assets 778,336
----------------
Property and equipment, net 162,808
----------------
Other assets
Software development costs 770,952
Other 74,207
----------------
Total other assets 845,159
----------------
$ 1,786,303
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 681,323
Accrued expenses and other current liabilities 2,354,696
Interest payable, stockholders 407,904
Notes payable, stockholders, current portion 390,000
Note payable, current portion 1,231,667
Obligations under capital leases, current portion 45,827
----------------
Total current liabilities 5,111,417
----------------
Long-term liabilities
Notes payable, stockholders, less current portion 986,905
Obligations under capital leases, less current portion 34,329
----------------
Total long-term liabilities 1,021,234
----------------
See accompanying notes to consolidated financial statements.
F-11
Commitments and contingencies
Stockholders' deficit
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) 201
Preferred stock, series B, $.0001 par value;
authorized 2,444,444 shares, 2,444,444 issued and
outstanding (aggregate liquidation preference of
$2,200,000) 244
Common stock, $.0001 par value, authorized
50,000,000 shares, 13,291,218 issued and outstanding 1,329
Additional paid-in capital 7,711,767
Stock subscription receivable (3,000)
Accumulated deficit (12,056,889)
----------------
Total stockholders' deficit (4,346,348)
----------------
$ 1,786,303
================
See accompanying notes to consolidated financial statements.
F-12
CONSOLIDATED STATEMENTS OF OPERATION
Years Ended December 31, 2003 2002
------------------------------------------ ------------ ------------
Sales $ 2,996,344 $ 2,802,483
Cost of sales 1,230,174 1,627,420
------------ ------------
Gross profit 1,766,170 1,175,063
Selling, general and administrative 5,512,042 5,490,419
------------ ------------
Loss from operations (3,745,872) (4,315,356)
Interest expense 512,135 213,447
------------ ------------
Net loss (4,258,007) (4,528,803)
Dividends (294,843)
------------ ------------
Net loss applicable to common stockholders $ (4,258,007) $(4,823,646)
============ ============
Basic and diluted loss per
common share $ (0.38) $ (0.55)
============ ============
Weighted average number of
common shares outstanding 11,304,347 8,834,730
============ ============
See accompanying notes to consolidated financial statements.
F-13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2003 AND 2002
Preferred Stock Preferred Stock
Series A Series B Common Stock Additional
------------------- ------------------ -------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
-------------------------------- --------- --------- --------- --------- ---------- ---------- -----------
Balances, December 31, 2001 $ -- $ -- 5,906,250 $ 591 $ 12,909
Issuance of preferred stock, net
of costs 2,002,750 201 2,264,778
Warrants issued as dividends 294,843
Issuance of common stock 2,190,333 219 267,281
Conversion of stockholder loan
to common stock 1,760,417 176 1,999,824
Net loss
--------- --------- --------- --------- ---------- ---------- -----------
Balances, December 31, 2002 2,002,750 201 -- 9,857,000 986 4,839,635
Stock Total
Subscription Accumulated Stockholders'
Receivable Deficit Deficit
-------------------------------- ------------- ------------- -------------
Balances, December 31, 2001 $ (3,000) $ (2,975,236) $(2,964,736)
Issuance of preferred stock, net
of costs 2,264,778
Warrants issued as dividends (294,843) -
Issuance of common stock 267,500
Conversion of stockholder loan
to common stock 2,000,000
Net loss (4,528,803) (4,528,803)
------------- ------------- -------------
Balances, December 31, 2002 (3,000) (7,798,882) (2,961,060)
See accompanying notes to consolidated financial statements.
F-14
YEARS ENDED DECEMBER 31, 2003 AND 2002
Preferred Stock Preferred Stock
Series A Series B Common Stock Additional
------------------- ------------------ -------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
-------------------------------- --------- --------- --------- --------- ---------- ---------- -----------
Issuance of preferred stock,
net of costs 2,444,444 244 1,897,649
Warrants issued with debt 95,000
Issuance of common stock 362,500 36 174,964
Conversion of warrants to common
stock 2,002,750 201
Stock issued for services 465,635 46 161,579
Conversion of stockholder loan
to common stock 603,333 60 542,940
Net loss
--------- --------- --------- --------- ---------- ---------- -----------
Balances, December 31, 2003 2,002,750 $ 201 2,444,444 $ 244 13,291,218 $ 1,329 $ 7,711,767
Stock Total
Subscription Accumulated Stockholders'
Receivable Deficit Deficit
-------------------------------- ------------- ------------- -------------
Issuance of preferred stock,
net of costs 1,897,893
Warrants issued with debt 95,000
Issuance of common stock 175,000
Conversion of warrants to common
stock 201
Stock issued for services 161,625
Conversion of stockholder loan
to common stock 543,000
Net loss (4,258,007) (4,258,007)
------------- ------------- -------------
Balances, December 31, 2003 $ (3,000) $(12,056,889) $(4,346,348)
See accompanying notes to consolidated financial statements.
F-15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003 2002
------------------------------------------------------------------------------ ---------------- ----------------
Cash flows from operating activities
Net loss $ (4,258,007) $ (4,528,803)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for doubtful accounts 489,205 200,000
Depreciation and amortization 222,678 61,905
Warrants issued with debt 95,000
Stock issued for services 161,625
Increase (decrease) in cash attributable to changes in operating assets and
liabilities:
Accounts receivable 116,458 (1,110,091)
Inventories 56,667 (147,065)
Prepaid expenses 8,265 (15,021)
Other receivables 250,139
Accounts payable (170,337) 794,019
Accrued expenses and other current liabilities 1,512,979 645,923
Interest payable, stockholders 214,786 58,715
---------------- ----------------
Net cash used in operating activities (1,550,681) (3,790,279)
---------------- ----------------
Cash flows from investing activities
Payments for purchase of property and equipment (19,574) (94,585)
Payments for software development costs (683,052) (223,224)
Payments of security deposits (47,132)
---------------- ----------------
Net cash used in investing activities (749,758) (317,809)
---------------- ----------------
Cash flows from financing activities
Proceeds from notes payable, stockholders 712,968 1,781,000
Principal repayments of notes payable, stockholders (209,000) (222,000)
Principal repayments of notes payable (268,333)
Proceeds from issuance of preferred stock, net of financing costs 1,897,893 2,264,979
Proceeds from issuance of common stock 175,201 267,500
Principal payments for obligations under capital leases (13,513) (8,274)
---------------- ----------------
Net cash provided by financing activities 2,295,216 4,083,205
---------------- ----------------
See accompanying notes to consolidated financial statements.
F-16
Years Ended December 31, 2003 2002
------------------------------------------------------------------------------ ---------------- ----------------
Cash flows from operating activities
Net decrease in cash (5,223) (24,883)
Cash, beginning of year 13,384 38,267
---------------- ----------------
Cash, end of year $ 8,161 $ 13,384
================ ================
Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 202,349 $ 154,732
================ ================
Supplemental disclosures of noncash investing and financing activities
During the year ended December 31, 2002, the Company entered into two separate
agreements to convert $2,000,000 of notes payable, stockholders into 1,760,417
shares of common stock.
On May 15, 2002, the Company consolidated the outstanding amounts due to the
majority stockholder into a promissory note of approximately $1,200,000
classified as a note payable, stockholder. Approximately $262,000 of accrued
expenses has been classified to notes payable, stockholders.
On June 30, 2002, the Company converted their outstanding line of credit with a
non-affiliated bank into a note payable of $1,500,000.
During the year ended December 31, 2002, obligations under capital leases
aggregating $45,099 were incurred when the Company entered into various leases
for computer equipment.
During the year ended December 31, 2003, obligations under capital leases
aggregating $56,845 were incurred when the Company entered into various leases
for computer equipment.
During the year ended December 31, 2003, the Company entered into an agreement
to convert $543,000 of notes payable, stockholders into 603,333 shares of common
stock.
See accompanying notes to consolidated financial statements.
During the year ended December 31, 2003, the Company reclassed $329,812 of notes
payable, stockholder to accrued expenses.
See accompanying notes to consolidated financial statements.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations
Stronghold Technologies, Inc. (the "Company") was incorporated in the state of
New Jersey on August 1, 2000. The Company is engaged principally as a developer
of wireless and internet-based systems for auto dealers in the United States.
On May 15, 2002, the Company entered into a Merger Agreement (the "Merger
Agreement") with Stronghold Technologies, Inc. a Nevada corporation (formally
known as TDT Development, Inc. ("Parent")) whereby Parent issued 7,000,000
shares of its common stock in exchange for all of the Company's outstanding
shares in a transaction accounted for as a reverse purchase acquisition. As a
result, the Company is considered for accounting purposes, to be the acquiring
company since the stockholders of the Company acquired more than 50% of the
issued and outstanding stock of Parent. Pursuant to this Merger Agreement, the
outstanding options of the Company were also converted into options to purchase
Parent common stock based on a conversion rate of 2.1875 as defined in the
Merger Agreement. Prior to the merger, Parent's operations were comprised solely
of a business that sold truffles imported from Italy through its wholly owned
subsidiaries, Terre di Toscana, Inc. and Terres Toscanes, Inc. (the
"Subsidiaries"). The Subsidiaries were sold on July 19, 2002 and had virtually
no material operations for the period of May 16, 2002 through July 19, 2002.
Since this transaction resulted in a change in reporting entity, the historical
financial statements prior to May 16, 2002 are those of the Company. The
stockholders' deficit of the Company has been retroactively restated.
2. Going concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred a
net loss of approximately $4,258,000 and has negative cash flows from operations
of approximately $1,551,000 for the year ended December 31, 2003, and has a
working capital deficit of approximately $4,333,000 and a stockholders' deficit
of approximately $4,346,000 as of December 31, 2003. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During 2004, 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.
F-18
3. Summary of significant accounting policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company provides for depreciation and amortization as follows:
Estimated
Asset Useful Life Principal Method
----------------------------------- ----------------- ------------------------
Computer equipment 5 Years Declining-balance
Computer software 3 Years Declining-balance
Furniture and fixtures 7 Years Declining-balance
Leasehold improvements 4 Years Straight-line
ACCOUNTS RECEIVABLE
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
Accounts are written off as uncollectable at the discretion of management.
INVENTORIES
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs, including significant product
enhancements, incurred subsequent to establishing technological feasibility in
the process of software development and production, are capitalized according to
Statement of Financial Accounting Standards (SFAS) 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. The capitalized software is amortized over a
three year period using the straight-line method. For the years ended December
31, 2003 and 2002 the amount of software development costs incurred that were
not capitalized were approximately $nil and $1,322,000, respectively.
F-19
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments held by the Company include cash, accounts receivable,
notes payable and accounts payable. The book value of cash, accounts receivable
and accounts payable are considered to be representative of fair value because
of the short maturity of these instruments. The fair values of the notes payable
approximate book values primarily because the contractual interest rates
approximate prevailing market rates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the recoverability of the carrying amounts of
long-lived assets, including intangible assets. A loss is recognized when
expected undiscounted future cash flows are less than the carrying amount of the
asset. The impairment loss is the difference by which the carrying amount of the
asset exceeds its fair value.
RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal Revenue
Code ("the Plan"), which covers all eligible employees. The Plan provides for
voluntary deduction of the employee's salary, subject to Internal Revenue Code
limitations. The Company can make a matching contribution to the Plan, which is
at the discretion of the Company and is determined annually. There were no
matching contributions for the years ended December 31, 2003 and 2002.
INCOME TAXES
The Company complies with SFAS No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
which amended SFAS No. 123, "Accounting for Stock-Based Compensation." This
Statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. It also
amends the disclosure provisions to require more prominent disclosure about the
effects on reported net income (loss) of an entity's accounting policy decisions
with respect to stock-based employee compensation. As permitted by the
Statement, the Company does not plan to adopt the fair value recognition
provisions of SFAS No. 123 at this time. However, the Company has adopted the
disclosure provisions of the Statement.
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized in the
F-20
accompanying consolidated statements of operations, as all options granted under
those plans had an exercise price equal to or in excess of the market value of
the underlying common stock at the date of grant (see Note 10).
Had compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company's net loss and net loss per
common share would have been the following pro forma amounts for the years ended
December 31, 2003 and 2002.
2003 2002
------------------------------------ ------------------- --------------------
Net loss applicable to common
shareholders, as reported $ (4,258,007) $ (4,823,646)
Deduct
Total Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effect 55,857 73,329
------------------- --------------------
Pro Forma $ (4,313,864) $ (4,896,975)
=================== ====================
Basic and diluted EPS
As reported $ (0.38) $ (0.55)
Pro Forma $ (0.38) $ (0.55)
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of 2.06%, expected dividend yield rate of 0%, expected life
of 10 years, and a risk-free interest rate of 4.27% and 4.03% for the years
ended December 31, 2003 and 2002, respectively.
REVENUE RECOGNITION
Revenue is recognized under the guidelines of SFAS No. 48 "Revenue Recognition
When Right of Return Exists" and has a four step process that must be met prior
to the recording of revenue. The steps consist of the following: signing of
sales contract, installation of hardware, completion of the training period and
a signed contract from the customer stating they accept the product for the
sixty-day trial period. Payment is due upon the completion of the trial period.
The sales revenue and cost of sales reported in the consolidated statements of
operations is reduced to reflect estimated returns. Service revenue is
recognized when earned.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent
F-21
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
LOSS PER COMMON SHARE
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 exclude dilutions and are 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 loss per common share.
NEW ACCOUNTING PRONOUNCEMENTS
During 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities" and No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 150 requires certain
freestanding financial instruments, such as mandatory redeemable preferred
stock, to be measured at fair value and classified as liabilities. The
implementation of SFAS Nos. 149 and 150 did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
4. Property and equipment
Property and equipment at December 31, 2003 consists of the following:
Computer equipment $ 187,732
Computer software 18,493
Furniture and fixtures 21,717
Computer equipment recorded under capital leases 113,491
Leasehold improvements 7,982
----------------
349,415
Less accumulated depreciation and amortization,
including $28,709 relating to computer equipment
recorded under capital leases (186,607)
----------------
$ 162,808
================
F-22
5. Software development costs
Software development costs consist of the following at December 31, 2003:
Carrying amount $906,276
Less accumulated amortization 135,324
------------
$770,952
============
For the years ended December 31, 2003 and 2002, amortization of capitalized
software development costs charged to operations was $135,324 and nil,
respectively.
Estimated amortization expense for the five years subsequent to December 31,
2003 is approximately as follows:
Year ending December 31,
---------------------------------------------------------
2004 $ 292,000
2005 302,000
2006 177,000
6. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following at
December 31, 2003:
Deferred maintenance fees $ 342,421
Commissions 166,210
Compensation 228,028
Payroll taxes, withholding and penalties 1,156,103
Accrued officer's compensation 329,812
Other 132,122
-----------------
$ 2,354,696
=================
F-23
7. Notes payable, stockholders
At December 31, 2003, notes payable, stockholders consists of the following:
Note payable, stockholder bearing interest at 12.5% per annum and due on March
31, 2005, collateralized by the assets of the Company. Up to $375,404 can be
borrowed by the Company. $ 375,403
Note payable, stockholder bearing interest at 12.5% per annum and due on March
31, 2005, collateralized by the assets of the Company. Up to $355,128 can be
borrowed by the Company. 355,127
Note payable, stockholder bearing interest at 12.5% is subordinated to the note
payable of $1,500,000 (Note 8) and is due after the terms of that note in 2006
(except
for $10,000 which is current). 266,375
Note payable, stockholder bearing interest at 8% per
annum and due on June 30, 2004. Up to $300,000 can
be borrowed by the Company. (Note 12) 300,000
Note payable, stockholder bearing interest at 8% per
annum and due on June 30, 2004. Up to $100,000 can
be borrowed by the Company. (Note 12) 80,000
-------------
1,376,905
Less current portion 390,000
-------------
$ 986,905
=============
8. Note payable
At June 30, 2002, the Company converted its outstanding line of credit into a
note payable of $1,500,000. The note bears interest at a variable rate equal to
the prime rate (4.00% at December 31, 2003), and is due in variable monthly
installments plus interest to PNC Bank (formerly known as "United Trust Bank"),
commencing in February 2003 through January 1, 2006. The principal payments are
due monthly in the following amounts; $15,000 a month plus accrued interest from
January 15, 2004 through December 15, 2004, $20,000 a month plus accrued
interest from January 15, 2005 through December 15, 2005, and a balloon payment
for the balance due on all outstanding principal and accrued interest on January
1, 2006. The note is collateralized by substantially all the assets of the
Company and is guaranteed by the majority stockholder of the Company. The note
payable, stockholder, of $266,375 is subordinated to this
F-24
note. Interest expense on the note payable for the year ended December 31, 2003
was approximately $215,000. As of December 31, 2003 this note payable was in
default of its covenants and as a result, is classified as current.
9. Stock subscription receivable
The stock subscription receivable represents 600,000 shares of the Company's
original common stock (restated to 1,312,500 as defined in the Agreement) due
from two key employees and one stockholder.
10. Stock option plans
The Company has adopted three stock option plans ("Plans") providing for
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs"). The
Company has reserved 1,985,938 shares of common stock for issuance upon the
exercise of stock options granted under the Plans. The exercise price of an ISO
or NQSO will not be less than 100% of the fair market value of the Company's
common stock at the date of the grant. The exercise price of an ISO granted to
an employee owning greater than 10% of the Company's common stock will not be
less than 110% of the fair market value of the Company's common stock at the
date of the grant. The Plans further provide that the maximum period in which
stock options may be exercised will be determined by the board of directors,
except that they may not be exercisable after ten years from the date of grant.
All of the stock option plans vest over a three year period with each year
earning 1/3 of total options granted as long as the employee is in employment
with the Company upon the anniversary date.
F-25
The status of the Company's restated stock options per the Plans are summarized
below:
Restated Per
Share Exercise Weighted Average
Plan Options Price Exercise Price
------------------------------------------- -------------- ------------------ -------------------
Outstanding at
January 1, 2002 562,187 $0.10-$0.69 $0.11
Granted in the year ended
December 31, 2002 1,090,900 $0.25-$2.25 $1.53
Terminated in the year ended
December 31, 2002 (288,240) $0.10-$2.00 $0.69
--------------
Outstanding at
December 31, 2002 1,364,847 $0.10-$2.25 $0.50
Granted in the year ended
December 31, 2003 1,426,600 $0.45-$0.88 $0.59
Terminated in the year ended
December 31, 2003 (882,138) $0.10-$2.25 $0.82
--------------
Outstanding at
December 31, 2003 1,909,309 $0.10-$2.25 $0.86
==============
The exercise price ranges for options outstanding and exercisable at December
31, 2003 were:
Number of Shares Number of Shares
Outstanding as of Exercisable at Weighted Weighted Average
December 31, December 31, Average Remaining
Exercise Price Range 2003 2003 Exercise Price Contractual Life
--------------------------- ------------------------ ------------------------ ----------------- --------------------
$.10 through $.50 355,850 240,682 $0.36 9 Years
$.51 through $1.50 1,531,459 69,532 $0.98 10 Years
$1.51 through $2.25 22,000 8,000 $1.67 10 Years
------------------------ ------------------------
1,909,309 318,214
======================== ========================
11. Income taxes
Until May 15, 2002, the date of the Merger Agreement, the Company operated as an
"S" corporation and, as a result, the earnings and losses were included in the
personal income tax returns of the respective stockholders. From the date of the
Merger Agreement through December 31, 2002, the Company operated as a "C"
corporation and had net operating losses of approximately $3,273,000. At
December 31, 2003, the Company had net operating losses of approximately
$7,483,000 that will expire between 2009 and 2023.
F-26
The components of the Company's deferred tax asset at December 31, 2003 is
approximately as follows:
Net operating loss carry forwards $ 3,033,000
Allowance for doubtful accounts 89,000
Interest payable, stockholder 165,000
Accrued compensation 226,000
Deferred maintenance fees 139,000
-----------------
3,652,000
Less valuation allowance (3,652,000)
-----------------
Net deferred income tax asset $ --
=================
The components of the Company's income tax benefit for the year ended December
31, 2003 are approximately as follows:
2003 2002
----------------- ------------------
Deferred
Federal $ 1,738,000 $ 1,373,000
State 302,000 239,000
----------------- ------------------
2,040,000 1,612,000
Change invaluation allowance (2,040,000) (1,612,000)
----------------- ------------------
$ - $ -
================= ==================
A reconciliation of the statutory federal income tax rate and the effective tax
rate follows:
2003 2002
----------------- ---- -----------------
Federal statutory rate 34 % 34 %
State income taxes, net of federal effect 7 7
S-Corporation earnings passes to shareholders and other (4)
Change in valuation allowance and other (41) (37)
----------------- ---- -----------------
Effective income tax rate 0 % 0 %
12. Commitments and contingencies
SECURITIES PURCHASE AGREEMENTS
The Company, along with Parent, and certain stockholders of the Company
(together the "Parties"), entered into a Securities Purchase Agreement (the
"Series A Purchase Agreement") dated and executed on May 15, 2002, with Stanford
Venture Capital Holdings, Inc. ("Stanford"). Pursuant to the Series A Purchase
Agreement, the Parties agreed to issue to Stanford a total of 2,002,750 shares
of the Company's Series A $1.50 Convertible Preferred Stock ("Series A
F-27
Preferred Stock"), plus five-year warrants purchasing 2,002,750 shares of the
Company's common stock at an exercise price of $1.50 for the first 1,001,375
shares and $2.25 for the remaining shares. The value of the warrants was treated
as a dividend for approximately $295,000 (computed using the Black-Scholes model
with the following assumptions: expected volatility of 0%, expected dividend
yield rate of 0%, expected life of 5 years, and a risk-free interest rate of
4.03% for December 31, 2002) on May 15, 2002, the date of issuance. Pursuant to
the Series A Purchase Agreement, the issuance of the Series A Preferred Stock
and Warrants took place on four separate closing dates beginning on May 16, 2002
and closing on July 19, 2002.
The Parties entered into an additional Securities Purchase Agreement (the
"Series B Purchase Agreement") dated and executed on April 30, 2003 with
Stanford. Pursuant to the Series B Purchase Agreement, the Parties agreed to
issue to Stanford a total of 2,444,444 shares of the Company's Series B $.90
Convertible Preferred Stock ("Series B Preferred Stock"). Pursuant to the Series
B Purchase Agreement, the issuance of the Series B Preferred Stock took place on
six separate closing dates beginning on April 30, 2003 and closing on September
15, 2003. In connection with the issuance of the Series B Preferred Stock, the
Series B Purchase Agreement also required the Company to lower the exercise
price of the 2,002,750 warrants that were issued with the Series A Purchase
Agreement. The conversion price for these warrants was reduced to $0.25 from the
original conversion prices of $1.50 and $2.25, and was accounted for as a cost
of issuance of the Series B Purchase Agreement.
In connection with both the Series A and Series B Purchase Agreements, certain
stockholders of the Company entered into a Lock-Up Agreement in which the
Parties agreed not to sell, assign, transfer, pledge, mortgage, encumber or
otherwise dispose of their shares of the Company's capital stock for a period of
two years, with certain exceptions, as defined in the Lock-Up Agreement.
WARRANTS
The 2,002,750 warrants issued to Stanford were modified again on December 15,
2003 for the waiver of Stanford's anti-dilution rights that were associated with
the Series A Purchase Agreement. The conversion price of the warrants were
reduced from the modified $0.25 to $.0001 and were exercised on December 15,
2003 for 2,002,750 shares of common stock. The modification of warrants were
accounted for as a cost of issuance of the common shares. There are no
additional outstanding warrants with Stanford.
During the year ended December 31, 2003, an aggregate of 391,753 warrants were
issued in conjunction with the stockholder notes payable of $300,000 and $80,000
(Note 7). The fair value of the warrants issued in connection with the debt was
$95,000 and it was fully expensed as additional interest. The warrants have an
exercise price of $0.97 and expire on March 18, 2013. All 391,753 warrants have
been assigned from the Stockholder to unrelated third parties as of March 2003.
F-28
LEASES
The Company rents facilities under leases in New Jersey, Virginia and
California. The Company is obligated under these leases through January 2008. In
addition to the base rent, one lease provides for the Company to pay a
proportionate share of operating costs and other expenses. Future aggregate
minimum annual rent payments under these leases are approximately as follows:
Years ending December 31,
2004 $ 199,000
2005 180,000
2006 100,000
2007 81,000
2008 7,000
-----------------
$ 567,000
=================
Rent expense was approximately $165,000 and $128,000 for the years ended
December 31, 2003 and 2002, respectively.
OBLIGATIONS UNDER CAPITAL LEASES
At December 31, 2003, the Company has computer equipment recorded under capital
leases expiring at various dates through 2006. The assets and liabilities under
capital leases are recorded at the lower of the present values of the minimum
lease payments or the fair values of the assets. The assets are included in
property and equipment and are depreciated over their estimated useful lives.
As of December 31, 2003, minimum future lease payments are approximately as
follows:
Years ending December 31,
2004 $ 56,000
2005 38,000
2006 4,000
-----------------
Total minimum lease payments 98,000
Less amounts representing interest 18,000
-----------------
Present value of net minimum lease payments 80,000
Less current portion 46,000
-----------------
Long-term portion $ 34,000
=================
13. Stockholders' deficit
On April 22, 2002 and May 16, 2002, the majority stockholder converted and
exchanged an aggregate of $2,000,000 of borrowings that were outstanding under a
line of credit agreement for an aggregate of 1,093,750 and 666,667 shares of the
Company's common stock, at a conversion
F-29
price of $0.914 and $1.50, respectively. The remaining amounts outstanding under
the line of credit, plus accrued interest, accrued officer compensation and
un-reimbursed expenses were converted into a promissory note for approximately
$1,200,000 on May 15, 2002 (Note 7). On April 30, 2003, the same stockholder
converted $543,000 of note payable, stockholder into 603,333 shares of common
stock at a conversion price of $0.90.
14. Subsequent events
During the period of January 1, 2004 through March 15, 2004 the Company received
two separate loans from Stanford in the aggregated amount of $875,000. The final
terms of the loans are to be determined but the Company expects to pay Stanford
an 8% annual coupon on the funds and to redeem the loan no later than three
years from the date of funding.
During January 2004 the Company sold approximately 150,000 shares of common
stock for $50,000 to a related party.
F-30
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest
extent permitted by Nevada law, our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of our
Articles of Incorporation, as amended, is to eliminate our right and our
shareholders (through shareholders' derivative suits on behalf of our company)
to recover damages against a director or officer for breach of the fiduciary
duty of care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain situations
defined by statute. We believe that the indemnification provisions in its
Articles of Incorporation, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 2,333.81
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
----------
TOTAL $52,333.81*
==========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
OPTIONS
From the Company's inception through May 16, 2002, the Company did
not grant any stock options. In connection with the Company's acquisition of the
Predecessor Entity on May 16, 2002, the Company assumed the Predecessor Entity's
2000 Stock Option Plan so that all of its issued and outstanding options would
remain intact. No further options will be issued under the assumed Predecessor
Entity's plan. Each outstanding option was automatically converted into an
option to acquire, on the same terms and conditions as were applicable under the
original option, such number of shares of the Company's common stock as was
equal to the number of options outstanding multiplied by 2.1875. The exercise
price was also adjusted to the exercise price that was equal to the existing
exercise price divided by 2.1875. The total number of the Predecessor Entity's
options that the Company assumed was 543,500 (after cancellations) at a weighted
average exercise price per share of $.78, which converted into options to
purchase 1,188,907 shares of the Company's common stock at a weighted average
exercise price of $.36. 253,750 of the assumed outstanding options vest
according to a three-year vesting schedule, 913,281 vest according to the
achievement of certain performance goals, and the remaining 21,875 options were
fully vested upon grant.
In addition to the above employee options of the Predecessor Entity,
the Company assumed certain outstanding options that were granted, or committed
to be granted, by the Predecessor Entity to automobile dealerships. On May 16,
2002, the Company assumed a total of 77,500 options, which the Predecessor
Entity granted, or committed to grant, to three automobile dealerships for
services rendered, including providing the Predecessor Entity with consulting
services. These options converted into options for a total of 169,531 shares of
the Company's common stock. Certain of the options vest upon the achievement of
certain performance goals. Each of the dealerships is an accredited investor.
On July 17, 2002 the Company's board of directors adopted, and on
July 31, 2002 the Company's approved, the adoption of the 2002 Stock Incentive
Plan. Under such plan the Company has granted 141,550 options to certain
employees at a weighted average exercise price of $1.50. Of the employee
options, 10,550 were fully vested upon grant, 61,000 vest according to a
three-year vesting schedule, and 70,000 vest according to the achievement of
certain performance goals.
On August 20, 2002, the Company's board of directors and
stockholders approved the adoption of the 2002 California Stock Incentive Plan.
Under such plan the Company has granted 69,600 options to certain employees at a
weighted average exercise price of $1.50. 15,600 of such options were fully
vested upon grant, 34,000 vest according to a three-year vesting schedule, and
20,000 vest according to the achievement of certain performance goals.
COMMON STOCK
In September 2000, the Company issued 5,000,000 shares of its common
stock to its founder and former president, Pietro Bortolatti, in exchange for
all of the outstanding shares of Terre di Toscana, Inc.
From November 2000 to January 2001, the Company issued 3,351,000
shares of its common stock at $.10 per share. This sale was part of its private
placement offering. In October 2000, the Company issued 30,000 shares of its
common stock to KGL Investments, Ltd, the beneficial owner of which is Kaplan
Gottbetter & Levenson, LLP, counsel to the Company, in exchange for legal
services rendered. These shares were valued at $.10 per share. All purchasers
represented in writing that they acquired the securities for their own accounts.
On May 16, 2002, the Company issued 7,000,000 shares of its common
stock to the stockholders of Stronghold Technologies, Inc., a New Jersey
corporation, in exchange for all of the issued and outstanding shares of such
entity. All of the recipients were either accredited investors or had alone, or
together with a purchaser representative, such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in securities in general and of an investment in the
Company in particular. Each recipient had sufficient access to information about
the Company necessary to make an informed investment decision.
II-2
On May 16, 2002, the Company issued 666,667 shares of its common
stock to Christopher J. Carey, President of the Company, in exchange for the
cancellation in full of $1 million owed to Mr. Carey by the Company's
wholly-owned subsidiary, Stronghold Technologies, Inc. Mr. Carey is an
accredited investor.
During August and September 2002, the Company entered into eight
subscription agreements with accredited and/or sophisticated investors, pursuant
to which the Company issued an aggregate of 344,333 shares of its common stock
at $1.50 per share. These private investments generated total proceeds to the
Company of $513,500.
During the first quarter of 2003, the Company and Mr. Carey agreed
to convert $543,000 of the outstanding debt owed to Christopher J. Carey by the
Company into 603,333 shares of Common Stock of the Company at a price of $0.90
per share.
PREFERRED STOCK AND WARRANTS
On each of May 16, July 3, July 11, and July 19, 2002, the Company
issued (i) 500,000, 500,000, 500,000 and 502,750 shares, respectively, of its
Series A $1.50 Convertible Preferred Stock and (ii) warrants to purchase
500,000, 500,000, 500,000 and 502,750 shares, respectively, of its common stock,
to Stanford Venture Capital Holdings, Inc. for an aggregate purchase price of $3
million. Stanford subsequently assigned warrants for a total of 1,001,376 shares
of common stock to four of its affiliates. Stanford is an accredited investor.
Pursuant to a Securities Purchase Agreement, referred to herein as
the Series B Purchase Agreement, dated as of April 30, 2003, by and between the
Company and Stanford Venture Capital Holdings, Inc., the Company agreed to issue
to Stanford 2,444,444 shares of our Series B $0.90 Convertible Preferred Stock,
$.0001 par value per share. The aggregate purchase price for the Series B
Preferred Stock will be $2,200,000.
According to the terms of the Series B Purchase Agreement, the
issuance of the aforementioned Series B Preferred Stock shall take place on each
of six separate closing dates. At the first closing, which occurred on May 5,
2003, the Company received $500,000 from Stanford and issued to Stanford 555,556
shares of Series B Preferred Stock. At each of the second and third closings,
which are scheduled for May 15, 2003 and June 13, 2003, the Company will issue
555,556 shares of Series B Preferred Stock, and Stanford will pay $500,000 upon
each closing for same. On the fourth closing date, which was on July 15, 2003,
the Company issued 333,332 shares of Series B Preferred Stock, and Stanford paid
$300,000. At each of the fifth and sixth closings, which were on for August 15,
2003 and September 15, 2003, the Company issued 222,222 shares of Series B
Preferred Stock, and Stanford will pay $200,000 upon each closing. For so long
as any shares of the Series B Preferred Stock are outstanding and held by
Stanford, if the Company issues additional shares of the Company's Common Stock,
or common stock equivalents, Stanford has the right to participate in the
issuance such that immediately after the subsequent issuance, Stanford's
ownership of the total number of outstanding shares of the Company's Common
Stock (assuming the conversion of all common stock equivalents into the
Company's Common Stock) equals the same percentage of the total shares of the
Company's Common Stock (assuming conversion of all common stock equivalents into
the Company's Common Stock) as Stanford held immediately prior to the subsequent
issuance.
In connection with the Series B Purchase Agreement, the Company and
Stanford also 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 B Preferred Stock with the
Securities and Exchange Commission, not later than November 15, 2003.
In connection with the Series B Purchase Agreement, the Company and
Stanford entered into a Consulting Agreement, pursuant to which Stanford has
agreed to perform certain financial consulting and advisory services, in
exchange for which the Company has agreed to pay Stanford a fee of $50,000 per
year for two years.
In addition, in connection with the Series B Purchase Agreement, the
Company and Stanford have: (i) waived Section 2(e)(iii) of the Series A
Certificate of Designation, which provides for anti-dilution protection if the
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Company shall issue securities which are convertible into shares of the
Company's Common Stock for an exercise price of less than $1.50; (ii) waived any
rights of Stanford to Default Warrants (as defined in the Series A Registration
Rights Agreement) due to the Company's failure to register its shares of Common
Stock; and (iii) modified the warrants previously issued to Stanford and its
assigns to purchase 2,002,750 shares of the Company's Common Stock to reduce the
initial exercise price to $0.25 per share and to extend the expiration date to
August 1, 2008.
JUNE 2004 CONVERTIBLE DEBENTURE FINANCING
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on June 18, 2004
for the sale of (i) $3,000,000 in callable secured convertible notes and (ii)
warrants to buy 3,000,000 shares of our common stock. This prospectus relates to
the resale of the common stock underlying these secured convertible notes and
warrants. The investors are obligated to provide us with an aggregate of
$3,000,000 as follows:
o $1,500,000 was disbursed on June 18, 2004;
o $500,000 was disbursed on July 27, 2004; and
o $1,000,000 will be disbursed within five days of this prospectus
being declared effective.
Accordingly, we have received a total of $1,500,000 pursuant to the
Securities Purchase Agreement. The funds from the sale of the callable secured
convertible notes will be used for business development purposes, business
acquisitions, working capital needs, pre-payment of interest, payment of
consulting and legal fees and borrowing repayment.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible into our common stock, at
the investors' option, at the lower of (i) $0.70 or (ii) 50% of the average of
the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including the conversion date. The
full principal amount of the callable secured convertible notes is due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.57 per share. In addition, the conversion price of the secured convertible
notes and the exercise price of the warrants will be adjusted in the event that
we issue common stock at a price below the fixed conversion price, below market
price, with the exception of any securities issued in connection with the
Securities Purchase Agreement. The conversion price of the callable secured
convertible notes and the exercise price of the warrants may be adjusted in
certain circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the selling
stockholder's position. The selling stockholders have contractually agreed to
restrict their ability to convert or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
and their affiliates after such conversion or exercise does not exceed 4.99% of
the then issued and outstanding shares of common stock. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.57 per share. The selling stockholders will be
entitled to exercise the warrants on a cashless basis if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the callable
secured convertible notes issued pursuant to the Securities Purchase Agreement,
dated June 18, 2004.
* All of the above offerings and sales were deemed to be exempt under
rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of our company or
executive officers of our company, and transfer was restricted by our company in
accordance with the requirements of the Securities Act of 1933. In addition to
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representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to
whom we issued securities as indicated in this section of the registration
statement are unaffiliated with us.
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ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
References to "the Company" in this Exhibit List mean Stronghold Technologies,
Inc., a Nevada corporation.
Exhibit
Number Description
------- -----------
2.1 (1)(4) Merger Agreement and Plan of Merger, dated May 15, 2002, by
and among TDT Development, Inc., Stronghold Technologies,
Inc., TDT Stronghold Acquisition Corp., Terre Di Toscana,
Inc., Terres Toscanes, Inc., certain stockholders of TDT
Development, Inc. and Christopher J. Carey.
2.2 (5) Stock Purchase Agreement, dated July 19, 2002, by and between
TDT Development, Inc. and Mr. Pietro Bortolatti.
3.1 (2) Articles of Incorporation, as amended on July 11, 2002.
3.2 (3) By-Laws.
4.1 (2) Certificate of Designations filed on May 16, 2002.
4.2 (5) Specimen Certificate of Common Stock.
4.3 (8) Promissory Note for $300,000, dated March 18, 2003, made by
Stronghold Technologies, Inc. in favor of Christopher J.
Carey.
4.4 (8) Promissory Note for $100,000, dated March 18, 2003, made by
Stronghold Technologies, Inc. in favor of Christopher J.
Carey.
4.5 (8) Form of Warrant with Christopher J. Carey.
4.6 (10) Amended and Restated Certificate of Designation of Series A
$1.50 Convertible Preferred Stock of Stronghold Technologies,
Inc.
4.7 (10) Amended and Restated Certificate of Designation of Series B
$0.90 Convertible Preferred Stock of Stronghold Technologies,
Inc.
4.8 (11) Securities Purchase Agreement dated June 18, 2004 between the
Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.9 (11) Callable Secured Convertible Note in the name of New
Millennium Capital Partners II, LLC dated June 18, 2004
4.10 (11) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated June 18, 2004
4.11 (11) Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated June 18, 2004
4.12 (11) Callable Secured Convertible Note in the name of AJW Partners,
LLC dated June 18, 2004
4.13 (11) Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated June 18, 2004
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4.14 (11) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated June 18, 2004
4.15 (11) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
June 18, 2004
4.16 (11) Stock Purchase Warrant in the name of AJW Partners, LLC dated
June 18, 2004
4.17 (11) Registration Rights Agreement dated June 18, 2004 between the
Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.18(11) Security Agreement dated June 18, 2004 between the Company and
New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
4.19(11) Intellectual Property Security Agreement dated June 18, 2004
between the Company and New Millennium Capital Partners II,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
Partners, LLC
5.1 (12) Sichenzia Ross Friedman Ference LLP Opinion and Consent
10.1 (2) 2002 Stock Incentive Plan.
10.2 (2) Form of Incentive Stock Option Agreement to be issued under
the 2002 Stock Incentive Plan.
10.3 (2) Form of Nonstatutory Stock Option Agreement to be issued under
the 2002 Stock Incentive Plan.
10.4 (5) California 2002 Stock Incentive Plan.
10.5 (5) Form of Incentive Stock Option Agreement to be issued under
the California 2002 Stock Incentive Plan.
10.6 (5) Form of Nonstatutory Stock Option Agreement to be issued under
the California 2002 Stock Incentive Plan.
10.7 (2) Executive Employment Agreement by and between Stronghold
Technologies, Inc. and Christopher J. Carey, dated May 15,
2002.
10.8 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and Lenard Berger, dated August
1, 2000.
10.9 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and Salvatore D'Ambra, dated
July 10, 2000.
10.10 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and James J. Cummiskey, dated
August 14, 2000.
10.11 (2) Business Loan Agreement by and between Stronghold
Technologies, Inc. and UnitedTrust Bank, dated June 30, 2002.
10.12 (2) Promissory Note issued by Stronghold Technologies, Inc. made
payable to UnitedTrust Bank, Dated June 30, 2002.
10.13 (2) Commercial Security Agreement by and between Stronghold
Technologies, Inc. and UnitedTrust Bank, dated June 30, 2002.
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10.14 (2) Promissory Note issued by Stronghold Technologies, Inc. made
payable to Christopher J. Carey, dated May 16, 2002.
10.15 (4) Securities Purchase Agreement, dated May 15, 2002, by and
among TDT Development, Inc., Stanford Venture Capital
Holdings, Inc., Pietro Bortolatti, Stronghold Technologies,
Inc. and Christopher J. Carey.
10.16 (4) Registration Rights Agreement, dated May 16, 2002, by and
among TDT Development, Inc. and Stanford Venture Capital
Holdings, Inc.
10.17 (4) Lock-Up Agreement, dated May 16, 2002, by and among TDT
Development, Inc.
10.18 (4) Stockholders' Agreement, dated May 16, 2002, by and among TDT
Development, Inc., Christopher J. Carey, Mary Carey and
Stanford Venture Capital Holdings, Inc.
10.19 (4) Form of Warrant to be issued pursuant to the Securities
Purchase Agreement (Exhibit 10.11).
10.20 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and UnitedTrust Bank, dated September 30, 2002.
10.21 (6) Commercial Loan Note issued by Stronghold Technologies, Inc.
and its subsidiary made payable to UnitedTrust Bank, dated
September 30,2002
10.22 (6) Security Agreement by and between Stronghold Technologies,
Inc. and UnitedTrust Bank, dated September 30, 2002.
10.23 (6) Security Agreement by and between Stronghold's subsidiary and
UnitedTrust Bank, dated September 30, 2002.
10.24 (6) Subordination Agreement by and among Christopher J. Carey,
Stronghold Technologies, Inc. and UnitedTrust Bank, dated
September 30, 2002.
10.25 (6) Subordination Agreement by and among Christopher J. Carey,
Stronghold's subsidiary and UnitedTrust Bank, dated September
30, 2002.
10.26 (6) Guaranty by Christopher J. Carey in favor UnitedTrust Bank,
dated September 30, 2002.
10.27 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and AC Trust Fund, dated September 30, 2002.
10.28 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and CC Trust Fund, dated September 30, 2002.
10.29 (6) Form of Subscription Agreement by and between Stronghold
Technologies, Inc. and each of the parties listed on the
schedule of purchasers attached thereto.
10.30 (6) Promissory Note issued by Stronghold Technologies, Inc. made
payable to Christopher J. Carey, dated September 30. 2002.
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10.31 (7) Securities Purchase Agreement, dated April 30, 2003, by and
between Stronghold Technologies, Inc. and Stanford Venture
Capital Holdings, Inc.
10.32 (7) Registration Rights Agreement, dated April 30, 2003, by and
between Stronghold Technologies, Inc. and Stanford Venture
Capital Holdings, Inc.
10.33 (7) Consulting Agreement, dated April 30, 2003, by and between
Stronghold Technologies, Inc. and Stanford Venture Capital
Holdings, Inc.
10.34 (9) First Modification to Loan Agreement and Note among Stronghold
Technologies, Inc., Christopher J. Carey and UnitedTrust Bank,
dated July 31, 2003.
21 (5) Subsidiaries of the Registrant.
23.1 Consent of Rothstein Kass - Certified Public Accountants
(filed herewith).
-------------
(1) The exhibits and schedules to the Merger Agreement have been omitted from
this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will
furnish copies of any of the exhibits and schedules to the U.S. Securities and
Exchange Commission upon request
(2) Incorporated herein by reference to the exhibits to Registrant's Quarterly
Report on Form 10-QSB for the fiscal quarter ended June 30, 2002.
(3) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on February 1, 2001 (No. 333-54822).
(4) Incorporated herein by reference to the exhibits to the Registrant's Current
Report on Form 8-K dated May 16, 2002.
(5) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on September 24, 2002.
(6) Incorporated herein by reference to the exhibits to Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2002.
(7) Incorporated by reference to Exhibit 99.3 to the Company's Form 8-K as filed
with the Securities and Exchange Commission on May 8, 2003.)
(8) Incorporated by reference to the exhibits to Registrants Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 2003.
(9) Incorporated by reference to the exhibits to Registrants Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 2003.
(10) Incorporated by reference to the exhibits to Registrants Form 10-KSB for
the year ended December 31, 2003.
(11) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed June 28, 2004.
(12) Incorporate by reference to the exhibits to Registrants Form SB-2
Registration Statement filed July 21, 2004.
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ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Basking
Ridge, State of New Jersey, on September 23, 2004.
STRONGHOLD TECHNOLOGIES, INC.
By: /s/Christopher Carey
---------------------------------------
Christopher Carey, President, Chief Executive Officer,
Principal Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ Robert Nawy Chief Financial Officer, and September 23, 2004
-------------------------- Principal Financial/Accounting
Robert Nawy Officer
/s/ Robert J. Corliss Director September 23, 2004
--------------------------
Robert J. Corliss
/s/ William Lenahan Director September 23, 2004
--------------------------
William Lenahan
Director September 23, 2004
--------------------------
Luis Delahoz
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