UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30,
2004.
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT for the transition
period from _______ to _______.
Commission file number: 333-54822
STRONGHOLD TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 22-3762832
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
106 Allen Road, Basking Ridge, NJ 07920
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(Address of principal executive offices)
(908) 903-1195
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(Issuer's telephone number)
N/A
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(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: as of August 13, 2004, 13,438,277
shares of the Registrant's common stock, (par value, $0.0001), were outstanding.
Transitional Small Business Disclosure Format: (Check One): Yes |_| No |X|
TABLE OF CONTENTS
Page
PART I - Financial Information
Item 1. Financial Statements............................................2
Consolidated Balance Sheet
as of June 30, 2004 (unaudited).................................2
Consolidated Statements of Operations
For the Three Months Ended June 30, 2004 and 2003
and the six months ended June 30, 2004 and 2003 (unaudited).....3
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2004 and 2003
(unaudited).....................................................4
Notes to Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................. 11
Item 3. Controls and Procedures........................................24
PART II - Other Information
Item 1. Legal Proceedings..............................................25
Item 2. Changes in Securities and Use of Proceeds......................25
Item 3. Defaults Upon Senior Securities................................27
Item 4. Submission of Matters to a Vote of Security Holders............27
Item 6. Exhibits and Reports on Form 8-K...............................27
i
PART I - Financial Information
Item 1. Financial Statements
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 $210,318 615,216
Other receivables 16,222
Inventories 100,161
Prepaid expenses 154,773
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Total current assets 1,612,916
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Property and equipment, net 124,111
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Other assets
Software development costs, net of amortization 885,594
Other 124,900
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Total other assets 1,010,494
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$ 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
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Total current liabilities 4,365,932
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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
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Total long term liabilities 3,733,515
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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, $.0001 par value, authorized 50,000,000
shares, 13,438,277 issued and outstanding 1,344
Additional paid-in capital 7,740,816
Stock subscription receivable (3,000)
Accumulated deficit (13,091,531)
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Total stockholders' deficit (5,351,926)
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$ 2,747,521
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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
============ ============ ============ ============
-3-
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)
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Net cash used in operating activities (1,067,346) (1,183,041)
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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)
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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
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Cash, end of period $ 726,544 $ 34,583
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Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 46,333 $ 114,859
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-4-
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.
-5-
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.
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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.
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Three months ended Six months ended
June 30, June 30,
--------------------------------- -------------------------------------
2004 2003 2004 2003
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Net loss applicable to common
stockholders, as reported $ (450,913) $ (934,665) $ (1,034,642) $ (1,555,819)
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Deduct
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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
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Pro forma net loss $ (461,795) $ (955,237) $ (1,058,343) $ (1,595,422)
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Basic and diluted EPS
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As reported $ (0.03) $ (0.09) $ (0.08) $ (0.15)
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Pro forma $ (0.03) $ (0.09) $ (0.08) $ (0.16)
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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.
-7-
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at
June 30, 2004:
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Sales tax $ 83,670
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Payroll taxes 456,359
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401(k) withholding 9,925
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Compensation 402,767
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Commissions 165,673
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Other accrued expenses 212,690
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Total $1,331,084
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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
-8-
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.
-9-
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.
-10-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The following discussion should be read in conjunction with our financial
statements and the accompanying notes appearing subsequently under the caption
"Financial Statements", along with other financial and operating information
included elsewhere in this quarterly report. Certain statements under this
caption "Management's Discussion and Analysis and Results of Operation"
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995.
The statements contained in this Quarterly Report on Form 10-QSB that are
not historical facts are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 ("the Securities Act"), as
amended and the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In particular, our statements regarding the anticipated growth in
the markets for our technologies, the continued development of our products, the
approval of our Patent Applications, the successful implementation of our sales
and marketing strategies, the anticipated longer term growth of our business,
and the timing of the projects and trends in future operating performance are
examples of such forward-looking statements. The forward-looking statements
include risks and uncertainties, including, but not limited to, the timing of
revenues due to the uncertainty of market acceptance and the timing and
completion of pilot project analysis, and other factors, including general
economic conditions, not within our control. The factors discussed herein and
expressed from time to time in our filings with the SEC could cause actual
results to be materially different from those expressed in or implied by such
statements. The forward-looking statements are made only as of the date of this
filing and we undertake no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Executive Overview
We are a Customer Relationship Management ("CRM") solutions provider for
the retail automotive industry. Stronghold's DealerAdvance(TM) Sales Solution is
designed to streamline dealership sales operations using software that
integrates existing technology systems.
-11-
Stronghold's strategic focus since our entry into the automotive retail
market in 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 our 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).
Stronghold's 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 single source solution provider to automobile
dealerships.
o Stronghold's 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
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". As consideration for the merger, we issued 7,000,000 shares
of our common stock, par value $0.0001 per share, to the stockholders of the
Predecessor Entity in exchange for all of the issued and outstanding shares of
the Predecessor Entity. The stockholders of the Predecessor Entity continue to
hold these shares of our common stock. Following the merger, Acquisition Sub,
the survivor of the merger, changed its name to Stronghold Technologies, Inc.
(NJ) and remains our only wholly-owned subsidiary. On July 11, 2002, we changed
our name from TDT Development, Inc. to Stronghold Technologies, Inc. On July 19,
2002, we exchanged all of the shares that we held in our two other wholly-owned
subsidiaries, Terre di Toscana, Inc. and Terres Toscanes, Inc., which conducted
an import and distribution business specializing in truffle-based food product,
for 75,000 shares of our common stock held by Mr. Pietro Bortolatti, our former
president.
-12-
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 the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 to develop proprietary handheld wireless technology
for the automotive dealer software market. Since the merger of the Predecessor
Entity into our subsidiary, we continue to conduct the Predecessor Entity's
handheld wireless technology business.
Our Revenues
Stronghold's 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:
o Software License Revenues: This represents the software license
portion of the Dealer Advance Service Solution purchased by
customers of the Company. The software and intellectual property of
Dealer Advance has been developed and is owned by the Company.
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 the three year
operating history of the Company, approximately 50% of all the
Company's 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.
-13-
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:
The general operating expenses of the Company 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.
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 the Company's limited funding. The Company's 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.
-14-
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 are duction in the number of staff members required to service the
client base.
These improvements in efficiency present the Company 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.
-15-
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors, subject to any restrictions or
prohibitions that may be contained in our loan or preferred stock agreements,
has sole discretion to pay dividends based on our financial condition, results
of operations, capital requirements, contractual obligations and other relevant
factors.
Liquidity and Capital Resources
Overview
As of 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.
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.
-16-
Financings
On July 31, 2000, the Predecessor Entity entered into a line of credit
with Mr. Chris Carey, our President and Chief Executive Officer and the
President and Chief Executive Officer of Stronghold. The terms of the line of
credit made available $1,989,500, which the Predecessor Entity could borrow from
time to time, until August 1, 2001. The outstanding amounts accrued interest at
the per annum rate equal to the floating base rate, as defined therein, computed
daily, for the actual number of days elapsed as if each full calendar year
consisted of 360 days. The first interest payment under the line of credit was
due on August 1, 2001. On such date, the parties agreed to extend the line of
credit for one more year, until August 1, 2002.
On 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).
The Company continues to make timely scheduled payments pursuant to the terms of
the loan and is in forbearance negotiations with the Bank with respect to the
default. On April 1, 2004, the Company received a second Notice of Event of
Default stating that the Bank had accelerated the maturity of the Loan and
declared all principal, interest, and other outstanding amounts due and payable.
However, if the Company is 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 the
assets of the Company pledged as security for the Loan. If either of these
actions occur, we may be unable to continue our operations.
-17-
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
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.
-18-
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%
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.
-19-
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.
On June 16, 2004, to obtain funding for its ongoing operations, 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
3,000,0000 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 was 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 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 $.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.
-20-
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.
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.
To enable us to fund our research and development and commercialization
efforts, during the next several months, we may enter into additional debt
and/or equity transactions with individual investors.
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.
-21-
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,
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.
-22-
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.
Item 3. Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of June 30, 2004. Based on this evaluation, our chief executive officer
and acting chief financial officer concluded that as of June 30, 2004, our
disclosure controls and procedures were (1) designed to ensure that material
information relating to us, including its consolidated subsidiaries, is made
known to our chief executive officer and chief financial officer by others
within those entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
-23-
No change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended June 30, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except 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.
Additionally, we are required to make four consecutive monthly installments of
$50,000.00 on August 15, 2004, September 15, 2004, October 15, 2004 and November
15, 2004 followed by the remaining principal on or before December 15, 2004.
Failure to adhere to this schedule will cause the suit to be reinstated and PNC
Bank will resume collection of the sum under the suit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Series A Purchase Agreement and Series B Purchase
Agreement, 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 have agreed to extend
date of the filing requirements of the Registration Rights Agreement to March
14, 2004. To date we have not yet filed a registration statement.
Pursuant to the Amended and Restated Series A Certificate of Designation
and Series B Certificate of Designation, dated November 11, 2003, by and between
the 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, the Company and Stanford agreed to certain
amendments and restatements. In consideration of the Notice and the granting of
the Consents and Waivers, the Company reduced the Exercise Price of the Stanford
Warrants from $0.25 per share to $.001. On December 15, 2003, Stanford exercised
in full the Stanford Warrant purchasing 2,002,750 shares of common stock for the
purchase price of $2,002.75.
In addition, on April 30, 2003 the Company and Stanford 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.
-24-
In addition, on March 24, 2004 the Company and Christopher J. Carey agreed
to extend the maturity dates of the Promissory Notes, dated March 18, 2003, for
an aggregate amount of $400,000, to June 30, 2004.
In addition, the Company, Christopher J. Carey and Mary Carey (as trustee)
agreed to extend the maturity dates of loans from the Carey family trusts to the
Company in the amount of $730,532, to December 31, 2003.
On June 15, 2004, the stockholders of the Company holding a majority of
the outstanding shares of common stock of the Company approved an amendment to
the Company's Articles of Incorporation, as amended, to replace Article III in
its entirety, which will result in an increase to the number of authorized
shares of Common Stock. The Company's Articles of Incorporation, as amended,
currently authorizes for issuance of 55,000,000 shares consisting of 50,000,000
of common stock and 5,000,000 shares of preferred stock. The approval of this
amendment to the Articles of Incorporation will increase the Company's
authorized shares of common stock to 250,000,000.
On June 16, 2004, Stanford was issued a warrant to purchase an additional
2,000,000 shares of common stock 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 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 rights pursuant to the Series A Stock and the Series B Stock,
as a result of the issuance and conversion of the Notes, or exercise of the
Warrants, into Stronghold common stock.
On June 16, 2004, to obtain funding for its ongoing operations, 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
3,000,0000 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 was 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 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 $.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.
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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.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 15, 2004, the stockholders of the Company holding a majority of
the outstanding shares of common stock of the Company approved an amendment to
the Company's Articles of Incorporation, as amended, to replace Article III in
its entirety, which will result in an increase to the number of authorized
shares of Common Stock. The Company's Articles of Incorporation, as amended,
currently authorizes for issuance of 55,000,000 shares consisting of 50,000,000
of common stock and 5,000,000 shares of preferred stock. The approval of this
amendment to the Articles of Incorporation will increase the Company's
authorized shares of common stock to 250,000,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K
On June 28, 2004, the Company filed a Form 8-K announcing, under Item 5, the
entering into of a Securities Purchase Agreement with four institutional
investors for the sale of (i) $3,000,000 in callable convertible secured notes
and (ii) stock purchase warrants to buy 3,000,0000 shares of the Company's
common stock.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 16th day of
August, 2004.
STRONGHOLD TECHNOLOGIES, INC.
BY: /s/ Christopher J. Carey
--------------------------------------------------
Name: Christopher J. Carey,
Title: President and Chief Executive Officer
(principal executive officer)
BY: /s/ Robert M. Nawy
--------------------------------------------------
Name: Robert M. Nawy
Title: (principal financial officer)
BY: /s/ Karen S. Jackson
--------------------------------------------------
Name: Karen S. Jackson
Title: Controller (principal accounting officer)
Dated: As of August 16, 2004
ITEM 6. EXHIBIT INDEX
Exhibit Description
Number
4.8 (1) 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 (1) Callable Secured Convertible Note in the name of New Millennium
Capital Partners II, LLC dated June 18, 2004
4.10 (1) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated June 18, 2004
4.11 (1) Callable Secured Convertible Note in the name of AJW Offshore, Ltd.
dated June 18, 2004
4.12 (1) Callable Secured Convertible Note in the name of AJW Partners, LLC
dated June 18, 2004
4.13 (1) Stock Purchase Warrant in the name of New Millennium Capital Partners
II, LLC dated June 18, 2004
4.14 (1) Stock Purchase Warrant in the name of AJW Qualified Partners, LLC
dated June 18, 2004
4.15 (1) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated June
18, 2004
4.16 (1) Stock Purchase Warrant in the name of AJW Partners, LLC dated June 18,
2004
4.17 (1) 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(1) 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(1) 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
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
(1) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed June 28, 2004.