UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File No. 333-54822
STRONGHOLD TECHNOLOGIES, INC.
-----------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 22-376235
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
106 Allen Road, Basking Ridge, NJ 07920
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(Address of Principal Executive Offices) (Zip Code)
(908) 903-1195
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(Registrant's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
None.
Check whether the Registrant: (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: [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State Registrant's revenues for fiscal year ended December 31, 2004: 2,489,790
State the aggregate market value of the common stock held by non-affiliates of
the Registrant: $160,873 as of April 11, 2005 based on the closing sales price
of $0.01 on that date.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of April 11, 2005:
Class Number of Shares
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Common Stock, $0.0001 par value 16,087,349
The following documents are incorporated by reference into the Annual Report on
Form 10-KSB: None.
Transitional Small Business Disclosure Format
Yes: [_] No: [X]
TABLE OF CONTENTS
Item Page
---- ----
PART I
Item 1. Business ................................................. 1
Item 2. Properties ............................................... 16
Item 3. Legal Proceedings ........................................ 17
Item 4. Submission of Matters to a Vote of Security Holders ...... 17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters . 18
Item 6. Management's Discussion and Analysis and Results of
Operation ................................................ 18
Item 7. Financial Statements ..................................... 28
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures ..................... 28
Item 8A. Controls and Procedures .................................. 29
Item 8B. Other Information ........................................ 29
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(A) of The Exchange
Act ...................................................... 30
Item 10. Executive Compensation ................................... 33
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ............... 37
Item 12. Certain Relationships and Related Transactions ........... 39
Item 13. Exhibits ................................................. 43
Item 14. Principal Accountant Fees and Services ................... 44
SIGNATURES ............................................................... 46
EXHIBIT INDEX ............................................................ 48
FINANCIAL STATEMENTS ..................................................... F-1
EXHIBITS
PART I
Item 1. BUSINESS
OUR HISTORY
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.
We are engaged in the business of selling, marketing and installing an
Intel based server that, together with wireless handheld PDA's, manages the auto
dealer-client relationship. Our DealerAdvance(TM) suite of Customer Relationship
Management ("CRM") software, has been designed to assist auto dealerships in
collecting cliental contact information, following up on sales prospects and
aiding dealership sales person in finalizing the sale of its automobiles. 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
manage 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
to view dealership traffic in real-time, by salesperson, and can easily pinpoint
deficiencies in the capture and follow up process. The DealerAdvance Sales
Solution(TM) has been designed to allow sales associates of our customers to
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.
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.
2
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, electronic 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 addition, 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.
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.
3
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
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.
4
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
reporting capabilities within DealerAdvance(TM), to provide
activities reporting for increasing repeat sales to dealership
customers.
o In the third quarter of 2005, 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. We
intend to complete the DealerAdvance(TM) Service Solution through
the acquisition of the required technology to finalize this product.
We have entered into a non-binding letter of intend to acquire this
technology. If we are unable to obtain this technology at a
reasonable cost, then we may not be able to complete the
DealerAdvance(TM) Service Solution.
5
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:
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%
6
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%
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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.
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;
7
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 and Dodge. 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.
We further qualify our 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, we limit our market to dealerships in those parts of the country where
it has sales and support coverage.
We have both a direct and a third party distribution strategy. Our direct
distribution strategy consists of a four person direct sales force selling in
California, Oregon, Nevada, Washington, Georgia, North Carolina, and South
Carolina. In connection with our third party distribution strategy, we presently
have distribution agreements with various third parties with sales people
covering Texas, Arkansas, Arizona and Illinois. We established our third party
distribution system in order to more effectively reach a larger portion of our
market while eliminating expenses associated with the expansion of a traditional
internal sales team. Our third party distribution system includes a network of 3
distributors which we have engaged to sell our products to automobile
dealerships. In order to establish our third party distribution system, it was
necessary to enter into agreements with each of our agents as well as train them
to utilize our products with hands on education seminary and the provision of
training guides.
With these partners in place, and in conjunction with our direct sales
force, we are covering 11 states.
Our Intellectual Property
We have a trademark for "DealerAdvance(TM)" and have one patent
application pending covering the system for management of information flow in
automotive dealerships using handheld technology. The patent application is
currently being reviewed by the United States Patent and Trademark Office. We
may face unexpected competition from various sources if our patent is denied
however we do not believe this will have a material impact on our business.
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.
8
EMPLOYEES
As of December 31, 2004, we had a total of 21 full-time employees, of which 9
are dedicated to marketing and sales and regional customer support. As of
December 31, 2004, we had 5 employees in 5 California, 1 in Florida, 1 in
Georgia, 2 in North Carolina, 5 in New Jersey, 1 in Texas, 5 in Virginia and 1
in Washington state.
We have no collective bargaining arrangements with our employees. We believe
that our relationship with our employees is good.
SAFE HARBOR STATEMENT
The statements contained in this Annual Report on Form 10-KSB that are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 ("the Securities Act"), as amended
and the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
In particular, our statements regarding the anticipated growth in the markets
for our technologies, the continued development of our products, the approval of
our Patent Applications, the successful implementation of our sales and
marketing strategies, the anticipated longer term growth of our business, and
the timing of the projects and trends in future operating performance are
examples of such forward-looking statements. The forward-looking statements
include risks and uncertainties, including, but not limited to, the timing of
revenues due to the uncertainty of market acceptance and the timing and
completion of pilot project analysis, and other factors, including general
economic conditions, not within our control. The factors discussed herein and
expressed from time to time in our filings with the SEC could cause actual
results to be materially different from those expressed in or implied by such
statements. The forward-looking statements are made only as of the date of this
filing and we undertake no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Factors that Might Affect Our Business, Future Operating Results, Financial
Condition and/or Stock Price
The more prominent risks and uncertainties inherent in our business are
described below. However, additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations may suffer.
Risks Concerning 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 $3,089,614 and
$4,258,007 for the fiscal years ended December 31, 2004 and December 31, 2003,
respectively. We have an accumulated net operating loss of approximately
$10,620,000 for the period from May 17, 2002 through December 31, 2004 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. As a result of recurring losses, substantial working capital
and stockholders' deficit and negative cash flows from operations our auditors
in their report dated March 22, 2005 for the year ended December 31, 2004
expressed substantial doubt about our ability to continue as a going concern. 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 the factors discussed elsewhere in this "Risk
Factors" section, as well as numerous other factors outside of our control,
including:
o Competing products that are more effective or less costly than ours;
9
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.
If we do not obtain financing when needed, our business will fail as we will not
have sufficient funds to produce and market the Dealeradvance Suite of Products
Our current operating funds together with the $300,000 to be received from
the final closing of the March 2005 Securities Purchase Agreement will allow us
to continue our operations until the end of the second quarter. In order for us
to successfully market our products, we will need to obtain additional financing
after May 2005. As of December 31, 2004, we had cash in the amount of $500 and
accounts receivables of $303,798 and our net loss for year ended December 31,
2004 was $3,089,614. Our business plan calls for significant expenses in
connection with the marketing of DealerAdvance over the next 12 months including
the following:
o Attendance and booth presence at the National Automobile Dealers
Association annual convention; and
o regular advertising in trade magazines and mass mailings.
In the event that we are unable to fund these marketing activities, our
sales volume could be significantly reduced thereby adding to our growing
deficits. In the event that we are not able to raise additional funds beyond the
requirements for operation through the end of the second quarter of 2005, we may
be insolvent and unable to continue operations.
We will also require additional financing if our costs are greater than
anticipated. We will require additional financing to sustain our business
operations if we are not successful in generating additional revenues. We
currently do not have any arrangements for additional financing and we may not
be able to obtain financing when required. If we fail to obtain the required
financing and our business fails, you may be unable to sell your shares of
common stock.
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, which includes
interest and penalties, 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. To date, we have made all payments under the installment
agreement. 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.
10
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 64 Dealerships were using the DealerAdvance Sales
Solution(TM) in 13 states. As of December 31, 2005 a total of 91 Dealerships
were using the DealerAdvance Sales Solution(TM). 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 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 expired on December 31, 2004. He has not, however,
expressed any intention or desire to leave the Company.
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.
11
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 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 the Company 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 April 11, 2005, we had 16,087,349 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 1,460,000,000 shares of common stock at current market prices, and
outstanding warrants or an obligation to issue warrants to purchase 3,650,000
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. As the market
price declines, then the callable secured convertible notes will be convertible
into an increasing number of shares of common stock resulting in dilution to our
shareholders.
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 average of the three lowest intraday trading prices for our common
stock during the previous 20 trading days as of April 11, 2005 of $0.01.
12
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 75% Issuable Stock
------ ----- ------ -------- -----
25% $.0075 $.0019 1,946,666,667 99.18%
50% $.0050 $.0013 2,920,000,000 99.45%
75% $.0025 $.0006 5,840,000,000 99.73%
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 75% 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.
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
debentures 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 financings entered in
June 2004 and March 2005. Although we do not have current plans to hold a
meeting for the purpose of obtaining stockholder approval to increase our
authorized shares of common stock, we intend to coordinate this in the near
future. 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.
13
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.
In addition, in March 2005, we entered into a Securities Purchase Agreement for
the sale of an aggregate of $650,000 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 $3,350,000 callable
secured convertible notes outstanding, the investors are obligated to purchase
additional callable secured convertible notes in the aggregate amount of
$300,000. 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 Concerning Our Capital Structure
Our Management And Other Affiliates Have Significant Control Of Our Common Stock
And, Therefore, Could Control Our Actions In A Manner That Conflicts With Our
Interests And The Interests Of Other Stockholders.
As of December 31, 2004, our executive officers and directors held approximately
31.64% of the voting power of the Company on a fully diluted basis. As a result,
these stockholders, acting together, will be able to exercise considerable
influence over matters requiring approval by our stockholders, including the
election of directors, and may not always act in the best interests of
unaffiliated shareholders. Such a concentration of ownership could have the
effect of delaying or preventing a change in control, including transactions in
which our stockholders might otherwise receive a premium for their shares over
then current market prices.
We Are Controlled By Our President, Which, Therefore, May Result In Shareholders
Having No Control Over Our Direction Or Affairs.
As of December 31, 2004, our President and Chief Executive Officer held
approximately 29.51% of the voting power of the Company on a fully diluted
basis. As a result, he has the ability to control us and direct our affairs and
business, including the approval of significant corporate transactions. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control and may make some transactions more difficult or
impossible without his support. Any of these events could decrease the market
price of our Common Stock.
We Do Not Intend to Pay Cash Dividends On Our Shares of Common Stock, Therefore
Our Stockholders Will Not Be Able to Receive a Return on Their Shares Unless
They Sell Them.
We have never declared or paid dividends on our Common Stock and we do not
intend to pay any Common Stock dividends in the foreseeable future. We intend to
retain any future earnings to finance the development and expansion of our
business. We do not anticipate paying any cash dividends on our Common Stock in
the foreseeable future. Unless we pay dividends, our stockholders will not be
able to receive a return on their shares unless they sell them.
14
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.
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.
Item 2.
DESCRIPTION OF PROPERTIES
We do not currently own any real property. We lease a 2,400 square foot
development facility in Sterling, Virginia, which is staffed with 6 development
and field support personnel. The lease for the Sterling, Virginia facility
expires on June 1, 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, 2008
and the lease for the Lafayette, California facility expires on November 1,
2005. 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:
15
Year ended December 31,
2005 115,000
2006 90,000
2007 81,000
2008 14,000
---------
Total 300,000
=========
Rent expenses were approximately $182,000 for the year ended December 31, 2004.
Item 3.
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. whereby PNC
agreed to delay the pursuit of its lawsuit in exchange of scheduled payments. 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, September 15,
2004 and October 15, 2004. We made the final scheduled payment of $601,000, on
March 31, 2005.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
Item 5. 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". 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, 2003. The quotations set forth below reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not represent actual
transactions.
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 $0.85 $0.45
April 1, 2004 - June 30, 2004 $0.60 $0.24
July 1, 2004 - September 30, 2004 $0.27 $0.11
October 1, 2004 - December 31, 2004 $0.40 $0.11
2005 High Low
---- ----- -----
January 1, 2005 - March 31, 2005 $0.23 $0.01
As of March 9, 2005, there were approximately 126 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.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
This section provides a narrative on the Company's operating performance,
financial condition and liquidity and should be read in conjunction with the
accompanying financial statements. Certain statements under the caption
"Management's Discussion and Analysis and Results of Operation" constitute
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. See "Risk Factors-Cautionary Note Regarding Forward Looking
Statements". For a more complete understanding of our operations see "Risk
Factors" and "Description of 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 the Predecessor Entity into our
wholly-owned subsidiary, TDT Stronghold Acquisition Corp., referred to herein as
"Acquisition Sub". As consideration for the merger, we issued 7,000,000 shares
of our common stock to the stockholders of the Predecessor Entity in exchange
for all of the issued and outstanding shares of the Predecessor Entity.
Following the merger, Acquisition Sub, the survivor of the merger, changed its
name to Stronghold Technologies, Inc. (NJ) and remains our only wholly-owned
subsidiary. On July 11, 2002, we changed our name from TDT Development, Inc. to
Stronghold Technologies, Inc. On July 19, 2002, we exchanged all of the shares
that we held in our two other wholly-owned subsidiaries, Terre di Toscana, Inc.
and Terres Toscanes, Inc., which conducted an import and distribution business
specializing in truffle-based food product, for 75,000 shares of our common
stock held by Mr. Pietro Bortolatti, our former president.
17
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 past results of operations and ensuing financial condition have
resulted from our allocating significant resources to the development of our
wireless technology business for use by the automobile dealership market that
have been traditionally slow to accept such products. We have achieved initial
acceptance, which has resulted in our generating limited revenue. The sales to
date from our inception through the second quarter of 2004 have been achieved
through direct selling efforts defined as employees of our company selling
directly to dealers. We believe the initial sales of our products have
positioned our company to now start selling through third party sellers that
have established distribution channels. We announced our first distribution
agreement in the third quarter and have realized the first sale pursuant to this
distribution agreement.
In the event that our distribution efforts through third party sellers do
not increase our revenue to where we attain cash flow self sufficiency, then we
would have to raise additional capital beyond the final tranche of funding to be
provided with five days after the effective date of the registration statement.
Additionally, should there be a significant slow down in the purchase of
automobile vehicles in the USA domestic market; this could cause dealers to slow
down there buying decision of new technology which would negatively impact our
results of operations.
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 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:
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
our company.
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).
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 our company, approximately 50% of all our
company's customers have prepaid the maintenance fees through a third
party leasing finance company. The third part leasing arrangements are
commitments by the dealer client directly with a financing company with no
recourse to us. 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.
18
General and Administrative Operating Expenses
Our general operating expenses are primarily comprised of: Marketing and
Selling; General and Administrative; and Development & Operations. Our marketing
and selling expenses include all labor, sales commissions and non-labor expenses
of selling and marketing of our products and services. 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 and operations expenses include the expenses for the Client
Consultant group which advises and supports the installations of our Dealer
Advance(TM) clients.
Bad debt expenses are also included under Selling, General and
Administrative Expenses. The policy for recognition of bad debt expenses
established for the year end December 31, 2003 is still in effect. This policy
has been established utilizing the amount of future returns estimated based on
historical calculations, technology obsolescence and return period. We have set
the policy for reserves for doubtful accounts at 20% of our accounts receivables
to account for estimated rights of returns and uncollectible accounts. This is
based on a historical return rate of 18% for 2003 and 16% in 2004. In the first
full operating year of 2002 the return rate was 25%. The estimate for total
returns in the life of our company as of November 2004 is 21 returns on 104
sales for a return rate of 20% for the life of operations. In recognizing
revenue, we consider the following factors:
o Our price to the buyer is substantially fixed or determinable at the
date of sale as evidenced by the contract signed for each sales and
the terms and conditions of each;
o The buyer has paid our company and the buyers obligation is not
contingent on resale of the product;
o The buyer's obligation to our company would not be changed in the
event of theft or physical destruction or damage of the product;
o The buyer acquiring the product for resale has economic substance
apart from that provided by our company;
o we do not have significant obligations for future performance to
directly bring about resale of the product by the buyer; and
o The amount of future returns can be reasonably estimated based on
historical calculations, technology obsolescence and return period.
Year ended December 31, 2004 Compared to the Year Ended December 31, 2003.
Revenue
For the year ended December 31, 2004 we had revenue of $2,489,790 compared
with revenue of $2,996,344 for the year ended December 31, 2003 for a decrease
of 17%. Revenue is generated from software license and system installation,
maintenance support and service revenues. Revenues for the years ended December
31, 2004 and December 31, 2003 are broken down as follows:
2004 2003 $ Change $ Change
---------- ---------- --------- --------
Software License & System
Installation $1,923,523 $2,639,964 $(716,441) -27%
Support & Maintenance $ 515,948 $ 288,075 $ 227,874 79%
Services $ 37,380 $ 68,305 $ (30,925) -45%
---------- ---------- --------- --------
Total Revenue $2,476,851 $2,996,344 $(506,554) -17%
Software license and system installation revenue decreased $716,441 in
2004 to $1,923,523 as compared to $2,369,964 in 2003 for a decrease of 27%. The
company installed 27 sites in 2004 with an average sales price of $58,000 as
compared to 40 sites in 2003, with an average sales price of $60,000. The
decrease in revenue in software license and system installations is primarily
attributable to the following:
o the steps we made to address our limited funding that included
reductions of our sales, marketing and client consultant staffs,
19
o a strategic decision to allocate resources to establish our first
sales efforts through third party distributors; and
o a loss of momentum in the late part of the second quarter and the
early part of the third quarter resulting from concerns regarding
closure of our pending funding that was needed to maintain
operations.
Support and maintenance revenues increased $227,874 in 2004 to $515,948 as
compared to $288,075 in 2003 for an increase of 79%. This increase was
attributable to an increase of 29 sites under maintenance contracts from 55 at
the end of 2003 to 84 at the end of 2004.
Services revenue consisting of training decreased $30,925 in 2004 to
$37,380 as compared to $68,305 in 2003 for a decrease of 45%.
Given that the company has continued to generate losses and are reliant on
raising capital to support operations, the continued loss of momentum may cause
us our revenues to continue to decrease.
Cost of Sales
Cost of sales on a percentage of revenue basis was reduced 7.5% to 33.51%
of revenue for the twelve months ended December 31, 2004 as compared to 41.06%
of revenue for the twelve months ended December 31, 2003. The table below shows
the Cost of Sales and percentage by category and the comparison in dollars and
percentage for the twelve months ended December 31, 2004 and twelve months ended
December 31, 2003. The decrease in Cost of Sales as a percentage of revenue of
7.54% is primarily attributed to corresponding percentage decreases in Hardware
Components, Software and Licensing, Subcontractors and Installations/Travel,
offset by percentage increases in Distribution Fees and Labor. Our cost of sales
as a percentage of revenue may increase in the future as we utilize additional
third party distributors.
2004 2003 2004 2003
% of % of
Cost of Sales Dollars Dollars Revenue Revenue % Change
---------------------------------- --------- ----------- ------- ------- --------
5100 - Hardware Components $ 341,245 $ 479,949 13.71% 16.02% -2.31%
5200 - Client Software & Licensing $ 97,537 $ 151,780 3.92% 5.07% -1.15%
5300 - Distribution Fees $ 11,810 $ -- 0.47% 0.00% 0.47%
5400 - Subcontractors $ 28,987 $ 79,456 1.16% 2.65% -1.49%
5500 - Misc Installation Costs $ 5,306 $ 17,527 0.21% 0.58% -0.37%
5600 - Installations/Travel $ 149,243 $ 254,173 5.99% 8.48% -2.49%
5700 - Shipping $ 41,677 $ 66,247 1.67% 2.21% -0.54%
5800 - Labor $ 158,545 $ 181,040 6.37% 6.04% 0.33%
TOTAL COST OF SALES $ 834,350 $ 1,230,174
-----------------------------------------------------------------------------------------
TOTAL COST OF SALES % OF REVENUE 33.51% 41.06% -7.54%
-----------------------------------------------------------------------------------------
Gross Profits
We generated $1,655,441 in gross profits from sales for the year ended
December 31, 2004, which was a decrease of $110,729 from the year ended December
31, 2003, when we generated $1,766,170 in gross profits. Our gross profit margin
percentage increased by 7.54% from 58.94% in the year ended December 31, 2003 to
66.49% in the year ended December 31, 2004. The Company's ability to increase
its gross profit margin despite the reduction in revenue is due to the Company's
ability to maintain prices and eliminate excess labor capacity present in 2003.
Selling, General and Administrative Expenses
Total Selling, General and Administrative expenses in the year ended
December 31, 2004 were $3,878,044, a decrease of 29.64% or $1,633,998 from the
year ended December 31, 2003 of $5,512,042. The significant reduction in expense
is primarily attributable to efficiencies gained through the reduction of staff
from 41 in December 31, 2003 to 21 in the year ended December 31, 2004. The
significant reduction in staffing resulted in a reduction of payroll expenses of
$1,051,700, which was the largest portion of the $1,633,998 reduction. Other
significant expense reductions within selling, general and administrative
expenses for the year ended December 31, 2004 and December 31, 2003 included
reductions as follows:
20
o legal expenses of $39,187,
o printing and reproduction expenses of $32,602
o travel and automobile expenses reductions of $155,127
o marketing expenses of $37,576.
o recruiting of $47,111
o consultant expenses of $154,835
Our interest and penalty expense increased from $512,135 in the year ended
December 31, 2003 to $867,010 in the year ended December 31 2004. This increase
of $354,875 is primarily due a new non-cash category of interest expense
resulting from the Beneficial Conversion Expense attributed to the AJW
Convertible Notes. This new non-cash category expense is attributed to the
Company's adherence to EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible Instrument". We
recorded $539,581 of Beneficial Conversion Expense in the year ended December
31, 2004 for the closing of the first three tranches of $2,350,000 of
convertible debt detailed in the notes to financials. The comparative increase
of $354,875 also included one time penalty charge in 2003 of $130,000 for IRS
penalties.
Operating Loss
Our operating losses decreased by $1,523,268 in comparing the year ended
December 31, 2004 to the year ended December 31, 2003, which were $2,222,604 and
$3,745,872, respectively. This improvement in operating loss despite the
significant reduction in revenues is attributable to the 7.54% increase of gross
profit margins and the significant reductions of selling, general and
administrative expenses of $1,633,998.
Net Loss
We had a net loss of $3,089,614 for the year ended December 31, 2004
compared to $4,258,007 for the year ended December 31, 2003, a decrease in net
losses of $1,168,393. This reduction of net losses of 27.44% despite the
decrease of revenue and increased interest expense is also primarily
attributable to the 7.54% increase of gross profit margins and the significant
reductions of selling, general and administrative expenses of $1,633,998.
Our loss per share also reduced to $.22 loss per share with a weighted
average of 14,081,263 shares outstanding in the year ended December 31, 2004 as
compared to $0.38 loss per share in the year ended December 31, 2003 with a
weighted average of 11,304,347 shares outstanding.
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors, subject to any restrictions or
prohibitions that may be contained in our loan or preferred stock agreements,
has sole discretion to pay dividends based on our financial condition, results
of operations, capital requirements, contractual obligations and other relevant
factors.
Liquidity and Capital Resources
OVERVIEW
As of December 31, 2004, our cash balance was $500. We had a net loss of
$3,089,614 for the fiscal year ended December 31, 2004. We had a net operating
loss of approximately $10,620,000 for the period from May 17, 2002 through
December 31, 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 December 31, 2004, less allowance
for doubtful accounts of $219,891, was $523,689, and $805,234 as of the year
ended December 31, 2003, less allowances for doubtful accounts of $218,446. The
reason for the decrease in accounts receivable of $281,545 when comparing
accounts receivable as of December 31, 2004 to December 31, 2003 was due to the
decrease in revenues and a faster collection cycle. Accounts receivable balances
represent amounts owed to us for new installations and maintenance, service,
training services, software customization and additional systems components.
21
As of December 31, 2004, we had the following financing arrangements:
Debt Liability Summary Table
----------------------------
Current Debt liabilities
IRS Payment Plan 315,000
Interest payable, stockholders (founding shareholder) 472,779
Notes payable, stockholders, current portion (founding
shareholder) 1,145,530
Notes payable, current portion (PNC Bank) 606,667
----------
Total Debt current liabilities 3,045,876
----------
Long-term Debt liabilities
Notes payable, stockholders, less current portion
(founding shareholder and Stanford) 1,129,600
Note payable, convertible debt, net of debt issuance costs
of $1,810,419 539,581
IRS Payment Plan (Long term portion) 430,000
----------
Total long term Debt liabilities 2,099,181
----------
With respect to liabilities for real property leases, the following table
summarizes these obligations:
MONTHS BALANCE
LOCATION DATE TERM REMAINING ON LEASE
-------- --------- --------- --------- -----------
NJ 8/1/2003 55 months 39 $ 240,051
VA 6/1/2004 24 months 17 $ 53,636
CA 11/1/2004 12 months 10 $ 5,525
-----------
Grand Total $ 299,212
-----------
FINANCING NEEDS
To date, we have not generated revenues in excess of our operating
expenses. We have not been profitable since our inception, we expect to incur
additional operating losses in the future and will require additional financing
to continue the development and commercialization of our technology. We have
incurred a net loss of approximately $3,100,000 and have negative cash flows
from operations of approximately ,1,699,000 for the year ended December 31,
2004, and have a working capital deficit of approximately $4,196,000 and a
stockholders' deficit of approximately $4,873,000 as of December 31, 2004. These
conditions raise substantial doubt about our ability to continue as a going
concern. During 2005, 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.
As of December 31, 2004, we had a commitment for an additional $650,000 of
financing, which was scheduled to be closed on the fifth business day following
the effective date of our registration statement becoming effective. In March of
2005, we received the entire $650,000 of committed funds subsequent to the
balance sheet date reported herein of December 31, 2004 and prior to the
effective date of the registration statement. Additionally, in March of 2005, we
entered in to a new financing in the amount of $650,000 of which $350,000 was
received and an additional $300,000 to be closed on the fifth business day
following the effective date of the registration statement. We expect that the
remaining $300,000 will provide the necessary cash to support operations
throughout the second quarter of 2005. Prior to this funding we will operate
with cash on hand and cash generated from operations. We do not have further
commitments and we will need to raise additional funds after the second quarter
of 2005. In the event that we are unable to maintain our sales volume, collect
current receivables and sustain operations until the final $300,000 is received,
we may be unable to continue operations.
22
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
We have entered into the following financing transactions:
Loans from Christopher J. Carey, an excutive officers, director and shareholder
of our company
On July 31, 2000, the Predecessor Entity entered into a line of credit
with Mr. Chris Carey, our President and Chief Executive Officer and the
President and Chief Executive Officer of Stronghold. The terms of the line of
credit made available $1,989,500, which the Predecessor Entity could borrow from
time to time, until August 1, 2001. The outstanding amounts accrued interest at
the per annum rate equal to the floating base rate, as defined therein, computed
daily, for the actual number of days elapsed as if each full calendar year
consisted of 360 days. The first interest payment under the line of credit was
due on August 1, 2001. On such date, the parties agreed to extend the line of
credit for one more year, until August 1, 2002.
On April 22, 2002, the Predecessor Entity issued 500,000 shares of its
common stock to Mr. Carey (which converted into 1,093,750 shares of our common
stock when we acquired the Predecessor Entity on May 16, 2002) in exchange for
cancellation of $1 million of outstanding indebtedness under the July 31, 2000
line of credit from Mr. Carey.
On May 16, 2002, the total amount outstanding under the July 31, 2000 line
of credit with Mr. Carey was $2.2 million. On such date, we issued 666,667
shares of our common stock to Mr. Carey in exchange for the cancellation of $1
million of the then outstanding amount under the line of credit. We agreed to
pay Mr. Carey the remaining $1.2 million according to the terms of a
non-negotiable promissory note, which was issued on May 16, 2002.
On September 30, 2002, we renegotiated the $1,200,000 promissory note with
Mr. Carey pursuant to a requirement contained in the promissory note with
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 September 30, 2004, $254,600 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. Christopher Carey Jr., Mr. Carey's son, is
the beneficiary of the trust, and Mary Carey, Mr. Carey's wife, is the trustee
of the trust. This bridge loan was for a period of twelve months, with all
principal due and payable on September 30, 2003. The 12.5% interest on the
outstanding principal is due each year. At the end of the loan period, the CC
Trust Fund will be entitled to exercise 25,000 warrants at $1.50 per share. On
September 30, 2003, the CC Trust Fund agreed to extend the term of their loan to
December 30, 2003. On December 30, 2003, the CC Trust Fund agreed to extend the
term of their loan to June 30, 2004. On March 30, 2004, the CC Trust Fund agreed
to extend the term of their loan to March 31, 2005. On May 1, 2004, the AC Trust
Fund agreed to extend the term of their loan to November 1, 2005. As of December
31, 2004, $402,322, including interest, was outstanding under the CC Trust Fund
loan agreement.
On September 30, 2002, we entered into a loan agreement with AC Trust Fund
to borrow an amount up to $375,404. Amie Carey, Mr. Carey's daughter, is the
beneficiary of the trust, and Mary Carey, Mr. Carey's wife, is the trustee of
the trust. This bridge loan is for a period of twelve months, with all principal
due and payable on September 30, 2003. The 12.5% interest on the outstanding
principal is due each year. At the end of the loan period, the Fund will be
entitled to exercise 25,000 warrants at $1.50 per share. On September 30, 2002,
the AC Trust Fund agreed to extend the term of their loan to December 30, 2003.
On December 30, 2003, the AC Trust Fund agreed to extend the term of their loan
to June 30, 2004. On March 30, 2004, the AC Trust Fund agreed to extend the term
of their loan to March 31, 2005. On May 1, 2004, the AC Trust Fund agreed to
extend the term of their loan to November 1, 2005. As of December 31, 2004,
$425,087, including interest, was outstanding under the AC Trust Fund loan
agreement.
23
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
September 30, 2004, 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, 2004, $371,977, including
interest, was outstanding under this bridge loan agreement. On May 1, 2004,
Christopher J. Carey agreed to extend the term of the loan to June 1, 2005.
On April 24, 2003, our President and Chief Executive Officer, Christopher
J. Carey, agreed to convert outstanding loans of $543,000 to 603,333 shares of
our common stock at a price of $.90 per share in conjunction with the Series B
Convertible Stock Financing detailed below.
Financings from PNC Bank (formerly United Trust Bank)
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 September 30, 2002. On September
30, 2002, the line of credit came due and the bank granted a three-month
extension. On September 30, 2002, we converted the outstanding line of credit
with 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.
Because we were in default under the terms of the loan due primarily to
our payroll tax default, the Bank has instituted the default rate of interest
which is 5% above the "highest New York City prime rate" stated above. We have
entered into an installment agreement with the United States Internal Revenue
Service to pay the withholding taxes, under the terms of which we will pay
$100,000 by May 31, 2004 and $35,000 each month, commencing June 28, 2004, until
we have paid the withholding taxes due in full.
On April 27, 2004, PNC Bank, N.A., as successor by merger to 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 may cause the
suit to be reinstated and PNC Bank may resume collection of the sum under the
suit.
24
On November 12, 2004, our company and PNC Bank agreed upon terms of an
amendment to the forbearance agreement whereby by the payment schedule will
change to include interest only payments on November 15, 2004, December 15, 2004
and January 15, 2005. We have made all interest payments.
On March 31, 2005, the Company paid off and satisfied the note due to PNC
bank in the principal amount of $606,667. All accrued interest in the amount of
$16,830 was all paid off.
Financings by Stanford Venture Capital Holdings, Inc.
On May 15, 2002, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc., referred to herein as Stanford, in
which we issued to Stanford (i) such number of shares of our Series A $1.50
Convertible Preferred Stock, referred to herein as Series A Preferred Stock,
that would in the aggregate equal 20% of the total issued and outstanding shares
of our common stock, and (ii) such number of warrants for shares of our common
stock that would equal the number of shares of Series A Preferred Stock issued
to Stanford. The total aggregate purchase price for the Series A Preferred Stock
and warrants paid by Stanford was $3,000,000. The issuance of the Series A
Preferred Stock and warrants took place on each of four separate closing dates
from May 16, 2002 through and July 19, 2002, at which we issued an aggregate of
2,002,750 shares of our Series A Preferred Stock and warrants for 2,002,750
shares of our common stock to Stanford.
The Series A amounts and closing dates are as follows:
-----------------------------------------------------------
CLOSING DATE PURCHASE PRICE
-----------------------------------------------------------
May 17, 2002 $750,000
-----------------------------------------------------------
July 3, 2002 $750,000
-----------------------------------------------------------
July 11, 2002 $750,000
-----------------------------------------------------------
July 19, 2002 $750,000
-----------------------------------------------------------
The warrants issued in 2002 were valued at $294,893 using the
Black-Scholes model using the following assumptions and a stock price of $1.50:
o Conversion price $1.50;
o expected volatility of 0%;
o expected dividend yield rate of 0%;
o expected life of 5 years; and
o a risk-free interest rate of 4.91% for the period ended June 30, 2002.
In connection with our Series B financing, as partial consideration for
the funds received pursuant to the Series B financing, we agreed to decrease the
exercise price to $.25. With respect to the decrease in the exercise price and
the warrants being treated as a cost of the series B financing, the reduction of
series A warrants was written in to the Series B preferred stock agreements as
part of the negotiation. At the end of fiscal 2003, Stanford exercised the
warrants for 2,002,750 shares of our common stock.
25
On April 24, 2003, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc. for the issuance of 2,444,444 shares of
our Series B $0.90 Convertible Preferred Stock. The issuance of the Series B
Preferred Stock took place on six separate closing dates beginning on May 5,
2003 through September 15, 2003. In connection with the Securities Purchase
Agreement, we agreed to modify the previously issued five-year warrants to
purchase 2,002,750 shares of our common stock: (i) to reduce the exercise price
to $.25 per share; and (ii) to extend the expiration date through August 1,
2008. In addition, our President and Chief Executive Officer, Christopher J.
Carey, agreed to convert outstanding loans of $543,000 to 603,333 shares of our
common stock at a price of $.90 per share. In addition, the Company and Stanford
entered into a Registration Rights Agreement, dated April 30, 2003, in which the
Company agreed to register the shares of the Company's common stock issuable
upon conversion of the Series A and Series B Preferred Stock with the Securities
and Exchange Commission, no later than November 15, 2003. The Company and
Stanford agreed to extend the date of the filing requirements of the
Registration Rights Agreement to March 14, 2004. We have not yet filed a
registration statement, and are in negotiations with Stanford regarding an
extension of the registration filing date.
On March 3, 2004 and March 15, 2004 we received loans in the amount of
$437,500 each from Stanford, resulting in a total loan of $875,000. We have
agreed to pay Stanford an 8% annual dividend on the funds invested and to redeem
the securities not later than three years from the date of funding.
Private Placements with Accredited Investors
During August and September 2002, we entered into 9 subscription
agreements with accredited private investors, as defined in Rule 501 of the
Securities Act, pursuant to which we issued an aggregate of 179,333 shares of
our common stock at $1.50 per share. These private investments generated total
proceeds to us of $269,000.
In October 2003, we commenced offerings to accredited investors in private
placements of up to $3,000,000 of our common stock. In the period of October
2003 through January 9, 2004 we 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.
Callable Secured Convertible Notes
Callable Secured Convertible Notes
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 3,000,000 shares of the Company's common
stock (the "Warrants").
The Investors purchased $3,000,000 in Notes, and received Warrants to
purchase an aggregate of 3,000,000 shares of our common stock, in four different
traunches dated June 18, 2004 for $1,500,000, July 27, 2004 for $500,000,
October 22, 2004 for $350,000, and March 18, 2005 for $650,000.
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) 75% of the average of the three lowest
intraday trading prices for the Company's common stock during the 20 trading
days before, but not including, the conversion date. The Company may prepay the
Notes in the event that no event of default exists, 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. The agreement entered into
on June 18, 2004 was amended on March 4, 2005, changing the conversion price of
the convertible notes to the lower of (i) $0.70 or (ii) 25% of the average of
the three lowest intraday trading prices for our common stock during the 20
trading days before, but not including, the conversion date. The original
agreement had the conversion price as the lower of (i) $0.70 or (ii) 50% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
26
The Note payable, convertible debt is recorded at $2,350,000 and the Note
payable, convertible debt, debt discount of $1,810,000 are reported in
accordance with Emerging Issues Task Force "EITF" 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instrument s". The Debt Discount is reported at 100% of the
net proceeds of the Convertible Debt Financing in accordance with paragraph 6 of
EITF 98-5 that specifies that the beneficial conversion expense may not exceed
the net proceeds. Additionally, the debt discount is net of amortization charged
to interest expense of approximately $540,000 recorded for the year ended
December 31, 2004.
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 approximately 15%, expected dividend yield rate of 0%,
expected life of 5 years, and a risk free interest rate of 4.23% for December
31,2004.
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.
New Callable Secured Convertible Notes Issuance
On March 31, 2005, in order to obtain funding for its ongoing operations,
we entered into a new Securities Purchase Agreement the Investors for the sale
of (i) $650,00 in Notes and (ii) warrants to purchase 650,000 shares of the
Company's common stock.On March 31, 2005 the Investors purchased $350,000 in
Notes, and received Warrants to purchase an aggregate of 350,000 shares of the
companies stock. The remaining $300,000 of convertible secured notes will be
purchased 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) 75% of the average of the three lowest
intraday trading prices for the Company's common stock during the 20 trading
days before, but not including, the conversion date. The Company may prepay the
Notes in the event that no event of default exists, there are a sufficient
number of shares available for conversion of the Notes and the market price is
at or below $0.03 per share, the market price at the time of the closing. 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.
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.
Results of Operations
Operations through May 16, 2002, were comprised solely of our truffle
business, which was conducted through our wholly-owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc. Operations from May 16, 2002 through
June 30, 2002 were comprised of our truffle business (which was divested on July
19, 2002, as described above) and our handheld wireless technology business. Our
results of operations as described below reflect the treatment of the truffle
business as discontinued operations and, therefore, figures from those periods
reflect operations of our handheld wireless technology business only, other than
with respect to other expenses. We believe that a comparison of our truffle
business to our handheld wireless technology business is not a relevant
analysis. Therefore, results of operations for the fiscal years ended 2001 and
2002 reflect operations of our handheld wireless technology business only.
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.
27
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 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. All sales agreements with clients do not
require significant production, modification, or customization of software,
additionally all the functionality of the product is made available upon
delivery, therefore the Company recognizes revenue in accordance with Paragraph
8 of 97-2 when:
1) Persuasive evidence of an arrangement exists as evidenced by a signed
contract,
2) Delivery has occurred, please note that Stronghold does not recognize revenue
prior to delivery,
3) The price of Stronghold's system is fixed and determinable as evidence by the
contract, and
4) Collectability is highly probable.
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.
28
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.
Deferred Revenue
Deferred revenue is recorded as a liability when we receive the three year
maintenance contact in an a one-time advance payment. We then recognize the
revenue from the maintenance portion of the contract on a pro rata basis over 36
months as the service is delivered.
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 the
proper treatment of SOP-97-2..
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 year ended December 31, 2004, we capitalized
$407,585 of development costs in developing enhanced functionality of our
DealerAdvance(TM) products. This compares with $683,052 for the year ended
December 31, 2003.
29
Item 7. FINANCIAL STATEMENTS
The financial statements required to be filed pursuant to this Item 7 are
included in this Annual Report on Form 10-KSB beginning on page F-1. A list of
the financial statements filed herewith is found on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
Item 8A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that it is able
to collect the information it is required to disclose in the reports it files
with the SEC, and to process, summarize and disclose this information within the
time periods specified in the rules of the SEC. The Company's Chief Executive
and Chief Financial Officers are responsible for establishing and maintaining
these procedures and, as required by the rules of the SEC, evaluate their
effectiveness. Based on their evaluation of the Company's disclosure controls
and procedures, which took place as of the end of the period covered by this
report, the Chief Executive and Chief Financial Officers believe that these
procedures are effective to ensure that the Company is able to collect, process
and disclose the information it is required to disclose in the reports it files
with the SEC within the required time periods.
Internal Controls
The Company maintains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (i) to permit preparation of financial statements in conformity with
generally accepted accounting principles and (ii) to maintain accountability for
assets. Access to assets is permitted only in accordance with management's
general or specific authorization and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal controls
by the Chief Executive and Chief Financial Officers, there have not been changes
in the Company's internal controls over financial reporting for the period
covered by this report that materially affected or were likely to materially
affect the Company's internal control over financial reporting.
30
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION16(A) OF THE EXCHANGE ACT
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............ 52 President, Chief Executive
Officer and Director
Lenard Berger................... 35 Chief Technology Officer and
Vice President
Robert Nawy..................... 44 Chief Financial Officer
Robert J. Corliss*.............. 51 Director
William Lenahan*................ 53 Director
Luis Delahoz*................... 44 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
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.
31
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.
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. The option is exercisable at $.60 per
share. 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. These
options were granted in November 2004 and have an exercise price of $.25. 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.
32
Item 10. EXECUTIVE COMPENSATION
The following table sets forth executive compensation for fiscal years ended
December 31, 2004, 2003 and 2002. 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."
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) --
Tiziana DiRocco 2003 -- -- -- --
Vice President Director of 2002 -- -- -- --
European Operations
Current Officers(3)
------------------------------------------
Christopher J. Carey(4) 2004 300,000 -- 9,600 --
President, Chief Executive Officer and 2003 300,000 -- 9,600 --
And chairman of the Board 2002 264,000 -- 9,601 --
Lenard Berger(5) 2004 175,000 -- 7,200 --
Vice President and Chief Technology 2003 175,000 29,963 7,200 --
Officer 2002 160,416 50,583 7,100 --
Salvatore D'Ambra(6) 2004 -- -- -- --
Vice President - Development 2003 134,375 27,135 5,912 --
2002 121,397 8,000 6,600 --
Robert Nawy(8) 2004 182,250 -- -- 6,000
Chief Financial Officer 2003 82,967 -- -- 2,398
2002 -- -- -- --
(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.
33
(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. "Other Annual Compensation" consists
solely of the reimbursement of automobile expenses. All of Mr. Carey's salary
for 2002 has been deferred and accrued.
(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. $36,000 of Mr. Berger's salary and other annual
compensation was deferred and accrued in 2004. The terms of Mr. Berger's
Employment Agreement are more fully set forth below. "Other Annual 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. "Other Annual Compensation" consists solely
of the reimbursement of automobile expenses.
(7) 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. As of August 1, 2004, Mr. Nawy's salary increased to
$185,400. $15,300 of Mr. Nawy's salary and other annual compensation was
deferred and accrued in 2004. "Other Annual Compensation" consists solely of the
reimbursement of automobile expenses.
OPTIONS GRANTS
The following table sets forth information concerning individual grants of stock
options under the 2002 Stock Incentive Plan during the fiscal year ended
December 31, 2004 to each of the named executive officers.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2004
% of Total Options Granted Exercise or
Number of Securities to Employees Base
Name Underlying Options in 2002 Price ($/Sh) Grant Date
-------------------------------- --------------------- --------------------------- ------------- -----------
Lenard Berger -- --% -- --
Robert Nawy -- --% -- --
Robert Nawy -- --% -- --
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES
SHARES ACQUIRED VALUE UNDERLYING OPTIONS VALUE OF IN-THE-MONEY OPTIONS
ON EXERCISE (#) REALIZED ($)(1) AT YEAR END (#) AT YEAR-END ($)(2)
--------------- --------------- --------------- ------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME
Christopher J. Carey -- -- -- 200,000 -- --
Lenard J. Berger -- -- 7,600 -- -- --
Robert Nawy -- -- 216,667 33,333 44,000 --
34
(1) Based on the difference between the option exercise price and the fair
market value of our common stock on the exercise date.
(2) Based on the difference between the option exercise price and the closing
sale price of $0.25 of our common stock as reported on the OTC Bulletin Board on
December 31, 2004, the last trading day of our 2004 fiscal year. None of these
options are currently in the money.
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 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 company, 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.
35
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.
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.
36
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.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
our common stock as of April 11, 2005. 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 16,087,349 shares outstanding on April 11,
2005, 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 April 11, 2005.
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) 24.99
Stanford Venture Capital Holdings, Inc.
6075 Poplar Avenue
Memphis, TN 38119 7,519,897(2) 36.62
Other Executive Officers and Directors
---------------------------------------
Robert J. Corliss -- --
William Lenahan -- --
Luis Delahoz -- --
Robert Nawy 200,000(3) 0.97
------------------ -----------
Executive Officers and Directors as a Group
(5 people) 5,331,250 62.58
37
(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
7,519,897 shares which consists of: (i) 2,002,750 shares of Common Stock
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 and (iii) 3,072,703 shares of
Common Stock. 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 2004
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 1,225,408 $0.85 1,142,133
approved by security holders
Equity compensation plans not -- -- --
approved by security holders
Total 1,225,408 $0.85 1,142,133
(1) Issued pursuant to our 2002 Stock Incentive Plan, our 2002 California Stock
Incentive Plan, and our 2000 Stock Option Plan.
(2) 1,063,600 shares are available for future issuance pursuant to the 2002
Stock Incentive Plan and 78,533 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.
Item 12. 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.
38
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.
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.
39
(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
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, 2000, 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.
40
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.
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.
Item 13. EXHIBITS
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.
41
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
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
4.20 Callable Secured Convertible Note in the name of New Millennium
Capital Partners II, LLC dated July 27, 2004 (16)
4.21 Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated July 27, 2004 (16)
4.22 Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated July 27, 2004 (16)
4.23 Callable Secured Convertible Note in the name of AJW Partners,
LLC dated July 27, 2004(16)
4.24 Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated July 27, 2004(16)
42
4.25 Stock Purchase Warrant in the name of AJW Qualified Partners, LLC
dated July 27, 2004(16)
4.26 Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
July 27, 2004(16)
4.27 Stock Purchase Warrant in the name of AJW Partners, LLC dated
July 27, 2004(16)
4.28 Callable Secured Convertible Note in the name of New Millennium
Capital (16) Partners II, LLC dated October 22, 2004
4.29 Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated October 22, 2004 (16)
4.30 Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated October 22, 2004 (16)
4.31 Callable Secured Convertible Note in the name of AJW Partners,
LLC dated October 22, 2004(16)
4.32 Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated October 22, 2004(16)
4.33 Stock Purchase Warrant in the name of AJW Qualified Partners, LLC
dated October 22, 2004(16)
4.34 Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
October 22, 2004(16)
4.35 Stock Purchase Warrant in the name of AJW Partners, LLC dated
October 22, 2004(16)
4.36 Callable Secured Convertible Note in the name of New Millennium
Capital Partners II, LLC dated March 18, 2005(16)
4.37 Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated March 18, 2005 (16)
4.38 Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated March 18, 2005 (16)
4.39 Callable Secured Convertible Note in the name of AJW Partners,
LLC dated March 18, 2005 (16)
4.40 Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated March 18, 2005(16)
4.41 Stock Purchase Warrant in the name of AJW Qualified Partners, LLC
dated March 18, 2005(16)
4.42 Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
March 18, 2005(16)
4.43 Stock Purchase Warrant in the name of AJW Partners, LLC dated
March 18, 2005(16)
4.44 Amendment No. 2 to the Securities Purchase Agreement dated March
4, 2005 by and among the Company and New Millennium Capital
Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd.
and AJW Partners, LLC(16)
4.45 etter Agreement dated March 4, 2005 by and among the Company and
New Millennium Capital Partners II, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd. and AJW Partners, LLC(16)
4.46 Amendment No. 1 to the Securities Purchase Agreement dated
October 22, 2004 by and among the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd. and AJW Partners, LLC (16)
43
4.47 Securities Purchase Agreement dated March 31, 2005 by and among
the Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
(17)
4.48 Form of Callable Secured Convertible dated March 31, 2005 (17)
4.49 Form of Stock Purchase Warrant dated March 31, 2005(17)
4.50 Registration Rights Agreement dated March 31, 2005 by and among
the Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
(17)
4.51 Security Agreement dated March 31, 2005 by and among the Company
and New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (17)
4.52 Intellectual Property Security Agreement dated March 31, 2005 by
and among the Company and New Millennium Capital Partners II,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
Partners, LLC (17)
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.
44
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.
45
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.
10.35(13) Lease Agreement entered between the Company and APA Properties
No. 2, LP
10.36(13) Sublease Agreement between Clark/Bardes Consulting, Inc. and the
Company
10.37(14) Forbearance Agreement entered by and between the Company and PNC
Bank
10.38(14) Amendment No. 1 to the Forbearance Agreement entered by and
between the Company and PNC Bank
21(5) Subsidiaries of the Registrant.
31.1 Certification by the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-------------------------------------------
(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.
46
(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) Incorporated by reference to the exhibits to Registrants Form SB-2
Registration Statement filed July 21, 2004.
(13) Incorporated by reference to the exhibits to Registrants Quarterly Report
on Form 10-QSB for the quarterly period ended September 30, 2004.
(14) Incorporated by reference to the exhibits to Registrants Form SB-2
Registration Statement filed February 11, 2005.
(15) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed June 28, 2004.
(16) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed March 25, 2005.
(17) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed April 11, 2005.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents the aggregate fees billed for professional services
rendered by Rothstein, Kass & Company, P.C. in 2002 and 2003. Other than as set
forth below, no professional services were rendered or fees billed by Rothstein,
Kass & Company, P.C. during 2002 or 2003.
2003 2004
------- -------
Audit Fees (1)................................. $39,000 $64,300
Audit-Related Fees (2) ........................ $ 2,000 $ 9,000
Tax Fees (3)................................... $16,000 $12,700
Other Fees ................................... $ 2,000 $2,000
TOTAL.......................................... $59,000 $88,000
------------------
(1) Audit fees consist of professional services rendered for the audit of the
Company's annual financial statements and the reviews of the quarterly financial
statements.
(2) Audit-related fees include fees related to assurance and related services.
This category also includes fees for issuance of comfort letters, consents and
assistance with and review of documents filed with the SEC.
47
(3) Tax fees consist of fees for services rendered to the Company for tax
compliance, tax planning and advice.
All work performed by Rothstein, Kass & Company, P.C. as described above under
the caption Audit Fees for the fiscal year ended March 31, 2003, has been
approved by the Audit Committee.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized this 14th day of April,
2005.
STRONGHOLD TECHNOLOGIES, INC.
By: /s/ Christopher J. Carey
------------------------------------
Christopher J. Carey, President and
Chief Executive Officer
49
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Christopher J. Carey his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this registration statement, and
to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Christopher J. Carey President and, Chief Executive Officer and April 14, 2005
------------------------ Chairman of the Board of Directors
Christopher J. Carey
/s/ Karen Jackson Controller April 14, 2005
------------------------ (Principal Accounting Officer)
Karen Jackson
/s/ Robert J. Corliss Director April 14, 2005
------------------------
Robert J. Corliss
/s/ William Lenahan Director April 14, 2005
------------------------
William Lenahan
/s/ Luis Delahoz Director April 14, 2005
------------------------
Luis Delahoz
50
EXHIBIT INDEX
51
STRONGHOLD TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 2004
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONTENTS
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Deficit 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the years in the two years period ended December 31, 2004. 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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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, 2004, and the results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated 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.
Roseland, New Jersey
March 31, 2005
1
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
====================================================================================
December 31, 2004
------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 500
Accounts receivable, less allowance for returns and
doubtful accounts of $219,891 303,798
Inventories 44,704
Prepaid expenses 90,484
------------
Total current assets 439,486
------------
PROPERTY AND EQUIPMENT, NET 79,185
------------
OTHER ASSETS
Software development costs, net of amortization 867,786
Deferred charge, convertible debt loan acquisition costs,
net of amortization 347,608
Other 137,645
------------
Total other assets 1,353,039
------------
$ 1,871,710
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 619,179
Accrued expenses and other current liabilities 1,172,897
Interest payable, stockholders 472,779
Notes payable, stockholders, current portion 1,145,530
Note payable 606,667
Deferred revenue 593,408
Obligations under capitalized leases, current portion 25,807
------------
Total current liabilities 4,636,267
------------
LONG-TERM LIABILITIES
Notes payable, stockholders, less current portion 1,129,600
Note payable, convertible debt of $2,350,000 net of debt
discount of $2,350,000 and debt discount amortization of $539,581 539,581
Obligations under capitalized leases, less current portion 8,783
Payroll taxes payable, long term 430,000
------------
Total long-term liabilities 2,107,964
------------
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 $2,200,000) 244
Common stock, $.0001 par value, authorized 50,000,000
shares, 16,087,349 issued and outstanding 1,609
Additional paid-in capital 10,274,928
Stock subscription receivable (3,000)
Accumulated deficit (15,146,503)
------------
Total stockholders' deficit (4,872,521)
------------
$ 1,871,710
============
See accompanying notes to consolidated financial statements.
2
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
==========================================================================
YEARS ENDED DECEMBER 31, 2004 2003
--------------------------------------------------------------------------
NET SALES $ 2,489,790 $ 2,996,344
COST OF SALES 834,349 1,230,174
------------ ------------
GROSS PROFIT 1,655,441 1,766,170
SELLING, GENERAL AND
ADMINISTRATION 3,878,045 5,512,042
------------ ------------
LOSS FROM OPERATIONS (2,222,604) (3,745,872)
INTEREST EXPENSE 867,010 512,135
------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (3,089,614) $ (4,258,007)
============ ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.22) $ (0.38)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,081,263 11,304,347
============ ============
See accompanying notes to consolidated financial statements.
3
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
Preferred Preferred
Stock Stock
Series A Series B Common Stock
Shares Amount Shares Amount Shares Amount
Balances, January 1, 2003 2,002,750 $ 201 $ -- 9,857,000 $ 986
Issuance of preferred stock,
net of costs 2,444,444 244
Warrants issued with debt
Issuance of common stock 362,500 36
Conversion of warrants
to common stock 2,002,750 201
Stock issued for services 465,635 46
Conversion of stockholder
loan to common stock 603,333 60
Net loss
Balances, December 31, 2003 2,002,750 201 2,444,444 244 13,291,218 1,329
Issuance of common stock 157,059 16
Conversion of warrants
to common stock 2,000,000 200
Benificial conversion feature
on debt treated as equity
Stock issued for services 639,072 64
Net loss
Balances, December 31, 2004 2,002,750 $ 201 2,444,444 $ 244 16,087,349 $ 1,609
============= ============= ============= ============= ============= =============
Additional Stock Total
Paid-in Subscription Accumulated Stockholders'
Capital Receivable Deficit Deficit
Balances, January 1, 2003 $ 4,839,635 $ (3,000) $ (7,798,882) $ (2,961,060)
Issuance of preferred stock,
net of costs 1,897,649 1,897,893
Warrants issued with debt 95,000 95,000
Issuance of common stock 174,964 175,000
Conversion of warrants
to common stock 201
Stock issued for services 161,579 161,625
Conversion of stockholder
loan to common stock 542,940 543,000
Net loss (4,258,007) (4,258,007)
Balances, December 31, 2003 7,711,767 (3,000) (12,056,889) (4,346,348)
Issuance of common stock 49,984 50,000
Conversion of warrants
to common stock 1,800 2,000
Benificial conversion feature
on debt treated as equity 2,350,000 2,350,000
Stock issued for services 161,377 161,441
Net loss (3,089,614) (3,089,614)
Balances, December 31, 2004 $ 10,274,928 $ (3,000) $ (15,146,503) $ (4,872,521)
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
4
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================================================
Years ended December 31, 2004 2003
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,089,614) $(4,258,007)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for returns and allowances 1,445 489,205
Depreciation and amortization 515,387 222,678
Amortization of convertible debt discount 539,581
Interest expense for issuance of warrants 95,000
Stock issued for services 161,441 161,625
Increase (decrease) in cash attributable to
changes in operating assets and
liabilities:
Accounts receivable 281,545 116,458
Inventories 127,042 56,667
Prepaid expenses (78,843) 8,265
Other receivables (3,804)
Other assets 2,910
Accounts payable (62,144) (170,337)
Accrued expenses and other current liabilities (409,378) 1,170,558
Interest payable, stockholders 64,875 214,786
Deferred revenue 250,987 342,421
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,698,570) (1,550,681)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of property and equipment (3,737) (19,574)
Payments for software development costs (407,505) (683,052)
Payments of security deposits (47,132)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (411,242) (749,758)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net of financing costs 1,897,893
Proceeds from issuance of common stock, net of financing costs 52,000 175,201
Proceeds from notes payable, stockholders 920,000 712,968
Principal repayments of notes payable, stockholders (21,775) (209,000)
Proceeds from notes payable, convertible debt 2,350,000
Payments made for debt issuance cost relating to notes payable, convertible debt (445,413)
Payments made for loan acquisition cost relating to notes payable, stockholders (82,095)
Principal repayments of notes payable (625,000) (268,333)
Principal payments for obligations under capital leases (45,566) (13,513)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,102,151 2,295,216
----------- -----------
NET DECREASE IN CASH (7,661) (5,223)
CASH, BEGINNING OF PERIOD 8,161 13,384
----------- -----------
CASH, END OF PERIOD $ 500 $ 8,161
=========== ===========
See accompanying notes to consolidated financial statements.
5
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
================================================================================
YEARS ENDED DECEMBER 31, 2004 2003
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the period for interest $ 262,554 $ 202,349
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2004, the Company reclassed $430,000 of
accrued expenses to payroll taxes payable, long term
During the year ended December 31, 2004, the Company recorded $2,350,000 of debt
discount relating to the beneficial conversion feature of the note payable,
convertible debt. The full amount was recorded as additional paid-in capital
and conversely as a contra-liability against the note payable, convertible
debt.
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.
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.
6
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
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.
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 $3,090,000 and has negative cash flows from operations
of approximately $1,699,000 for the year ended December 31, 2004, and has a
working capital deficit of approximately $4,197,000 and a stockholders' deficit
of approximately $4,873,000 as of December 31, 2004. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During 2005, 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.
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
7
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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.
8
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2004 and 2003.
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 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 (APB) 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 (Note 10).
9
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2004 and 2003.
2004 2003
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS, as reported $ (3,089,614) $ (4,258,007)
DEDUCT
Total stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effect 47,793 55,857
-----------------------------------
PRO FORMA $ (3,137,407) $ (4,313,864)
===================================
BASIC AND DILUTED EPS
As reported $ (0.22) $ (0.38)
Pro forma $ (0.22) $ (0.38)
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 approximately 15%, expected dividend yield rate of 0%,
expected life of 10 years, and a risk-free interest rate of 4.23% and 4.27% for
the years ended December 31, 2004 and 2003, respectively.
Stock Issued for Services
Fair Value for determining stock issued for services is done in accordance with
Emerging Issues Task Force (EITF) 96-18. The Company issued stock for services
to Mirador Consulting Group and Capital Growth, which are engaged in public and
investor relations, WJM Associates and Judith Firth for recruiting services,
Michael Carey for insurance brokerage services and Stanford Venture Capital
Holdings for consulting services. Fair Value was determined using the stock
price the day that the commitment was reached as referred to in EITF 96-18.
There were no potential future variability of the value since all terms were
known at the date of the commitment.
10
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
All sales agreements with clients do not require significant production,
modification, or customization of software, additionally all the functionality
of the product is made available upon delivery, therefore the Company
recognizes revenue in accordance with Paragraph 8 of Statement of Position
(SOP) 97-2 when:
1) Persuasive evidence of an arrangement exists as evidenced by a
signed contract, 2) Delivery has occurred, please note that Stronghold
does not recognize revenue prior to delivery, 3) The price of
Stronghold's system is fixed and determinable as evidence by the
contract, and 4) Collectability is highly probable.
Deferred Revenue
Deferred revenue is recorded as a liability when the Company receives the three
year maintenance contact in an a one-time advance payment. The Company then
recognizes the revenue from the maintenance portion of the contract on a pro
rata basis over 36 months as the service is delivered.
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 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.
11
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 loss per share. Basic 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 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.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-based
Compensation (Revised)." SFAS No. 123(R) supersedes APB No. 25 and its related
implementation guidance. SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award the requisite service period (usually
the vesting period). No compensation costs are recognized for equity instruments
for which employees do not render the requisite service. The grant-date fair
value of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant-date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification. The Company has not completed its
evaluation of SFAS No. 123(R) but expects the adoption of this new standard will
have an impact on operating results due to the Company's use of options as
employee incentives. This pronouncement becomes effective as of the beginning of
the first interim or annual reporting period that begins after December 15,
2005.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment of
Accounting Research Bulletin (ARB) No. 43, Chapter 4". SFAS No. 151 has been
issued to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage), which requires that
those items be recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. Management of the Company does
not believe the effects of SFAS No. 151 have a material effect on the
consolidated financial statements, as the Company has not incurred any inventory
costs that meet the definition of "so abnormal." This Statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
12
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 consists of the following:
Computer equipment $ 191,460
Computer software 18,502
Furniture and fixtures 21,717
Computer equipment recorded under capital leases 113,491
Leasehold improvements 7,982
----------
353,152
Less accumulated depreciation
and amortization, including $28,709
relating to computer equipment recorded
under capital leases (273,967)
----------
$ 79,185
==========
5. SOFTWARE DEVELOPMENT COSTS
Software development costs consist of the following at December 31, 2004:
Carrying amount $ 1,313,782
Less accumulated amortization 445,996
-----------
$ 867,786
===========
For the years ended December 31, 2004 and 2003, amortization of capitalized
software development costs charged to operations was $310,672 and $135,324,
respectively.
Estimated amortization expense for the three years subsequent to December 31,
2004 is approximately as follows:
YEARS ENDING DECEMBER 31,
2005 $ 438,000
2006 317,000
2007 113,000
13
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at
December 31, 2004:
Payroll taxes (federal, state and local),
including penalties and interest $ 559,217
Commissions 127,391
Compensation 150,988
Sales tax 95,742
Accrued officer's compensation 171,774
Other 67,785
----------
$1,172,897
==========
7. NOTES PAYABLE, STOCKHOLDERS
At December 31, 2004, notes payable, stockholders consists of the following:
Note payable, stockholder bearig interest at 8%
per annum and due on March 17, 2007 $ 875,000
Note payable, stockholder bearing interest at 12.5%
per annum, are currently due on demand and are
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, are currently due on demand and are
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 $55,000 which is current). 309,600
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) 60,000
----------
2,275,130
Less current portion 1,145,530
----------
$1,129,600
==========
Estimated principal payments for the years ending December 31, 2005, 2006 and
2007 are approximately $1,145,500, $255,000 and $875,000, respectively.
14
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 (5.25% at December 31, 2004), and is due in variable monthly
installments plus interest to PNC (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 $254,600 is subordinated to this note. Interest expense
on the note payable for the year ended December 31, 2004 was approximately
$87,000. As of December 31, 2004 this note payable was in default of its
covenants and as a result, is classified as current. The note payable balance at
December 31, 2004 is $606,667.
(Note 13)
9. STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable represents 1,312,500 shares of the Company's
common stock 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 2,358,541 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.
15
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. STOCK OPTION PLANS (CONTINUED)
The status of the Company's restated stock options per the Plans are summarized
below:
RESTATED WEIGHTED
PLAN PER SHARE AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
Outstanding at
January 1, 2003 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
Granted in the year ended
December 31, 2004 113,000 $0.11-$0.85 $0.26
Terminated in the year ended
December 31, 2004 (796,901) $0.15-$2.00 $0.72
------------
OUTSTANDING AT
December 31, 2004 1,225,408 $0.10-$2.25 $0.85
============
The exercise price ranges for options outstanding and exercisable at December
31, 2004 were:
WEIGHTED
NUMBER OF SHARES NUMBER OF SHARES WEIGHTED AVERAGE
Exercise OUTSTANDING AS OF EXERCISABLE AT AVERAGE REMAINING
Price DECEMBER 31, DECEMBER 31, EXERCISE CONTRACTUAL
Range 2004 2004 PRICE LIFE
-------------------- -----------------------------------------------------------------------
$.10 through $.50 400,878 361,703 $0.29 8 Years
$.51 through $1.00 800,263 159,235 $0.65 9 Years
$1.01 through $1.50 16,850 16,850 $1.50 9 Years
$1.51 through $2.25 7,417 6,416 $1.60 9 Years
------------------------------------
1,225,408 544,204
====================================
16
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. INCOME TAXES
Until May 15, 2002, 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 May 16, 2002 through December 31, 2002, the
Company operated as a "C" corporation and had net operating losses of
approximately $3,273,000. At December 31, 2004, the Company had net operating
losses of approximately $10,620,000 that will expire between 2009 and 2024.
The components of the Company's deferred tax asset at December 31, 2004 is
approximately as follows: The components of the Company's income tax benefit
consists of the following:
Net operating loss carryforwards $ 4,286,000
Allowance for doubtful accounts 89,000
Interest payable, stockholder 192,000
Accrued compensation 173,000
Deferred maintenance fees 241,000
-------------
4,981,000
Less valuation allowance (4,981,000)
-------------
Net deferred income tax asset $ --
=============
The components of the Company's income tax benefit consists of the following:
2004 2003
DEFERRED
Federal $ 1,132,000 $ 1,738,000
State 197,000 302,000
-------------- -------------
1,329,000 2,040,000
Change in valuation allowance (1,329,000) (2,040,000)
-------------- -------------
$ -- $ --
============== =============
A reconciliation of the statutory federal income tax rate and the effective tax
rate follows:
2004 2003
Federal statutory rate 34% 34%
State income taxes, net of federal effect 7 7
S-Corporation earnings passes to shareholders and other
Change in valuation allowance and other (41) (41)
-------- --------
Effective income tax rate 0% 0%
======== ========
17
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. COMMITMENTS AND CONTINGENCIES
Securities Purchase Agreements
The Company 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 $1.50 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.
In accordance with SFAS No. 129 Paragraph 4, the Company is providing the
following summary of the pertinent rights and privileges of these outstanding
securities:
Each Series A $1.50 preferred share and each Series B convertible $.90 Preferred
share is convertible into common shares at a predefined "conversion rate"
(described below). There are two ways to convert this Preferred stock:
Optional conversion: The holder may at any time convert the preferred shares at
the stated "conversion rate" rate into Common stock
Automatic conversion: The shares can be converted by: A) at the date of a vote
by at least two-thirds of the outstanding Preferred shares to convert or, B)
upon the closing of a qualified public offering where the stock is offered to
the public at a price equal to or exceeding $3.00 which generates net proceeds
to the company equal to or exceeding $15,000,000.
"Conversion rate" - each share of the Series A preferred stock and Series B
preferred stock is convertible into the number of shares of the common stock as
shall be calculated by dividing the stated value by $1.50 and $.90,
respectively.
18
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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%.
Notes Payable, Convertible Debt
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").
The Investors purchased $2,350,000 in Notes, and received Warrants to purchase
an aggregate of 2,350,000 shares of the companies stock, in three different
traunches dated June 18, 2004 for $1,500,000, July 21, 2004 for $500,000 and
October 22, 2004 for $350,000.
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) 25% 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.
19
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Note Payable, Convertible Debt is recorded at $2,350,000 and the Note
payable, convertible debt, debt discount of $1,810,000 are reported in
accordance with Emerging Issues Task Force "EITF" 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instrument s". The Debt Discount is reported at 100% of the
net proceeds of the Convertible Debt Financing in accordance with paragraph 6 of
EITF 98-5 that specifies that the beneficial conversion expense may not exceed
the net proceeds. Additionally, the debt discount is net of amortization charged
to interest expense of approximately $540,000 recorded for the year ended
December 31, 2004.
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 approximately 15%, expected dividend yield rate of 0%,
expected life of 5 years, and a risk free interest rate of 4.23% for December
31, 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.
On April 30, 2004, the Company entered into an installment agreement with the
IRS to pay withholding taxes due in the amount of approximately $1,233,000,
which include interest and penalties. Under the terms of this agreement, the
Company will pay $35,000 each month, Commencing June 28, 2004, until the total
balance is paid in full. If the Company is unable to fulfill this agreement, the
IRS could take possession of the Company's assets. As of December 31, 2004, the
Company has made all required payments to the IRS. The outstanding balance of
approximately $745,000 is currently recorded in Payroll taxes payable, long term
for $430,000 and in accrued expenses and other current liabilities for
approximately $315,000.
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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:
YEAR ENDING DECEMBER 31,
2005 $ 115,000
2006 90,000
2007 81,000
2008 14,000
----------
$ 300,000
==========
Rent expense was approximately $107,000 and $87,000 for the years ended December
31, 2004 and 2003, respectively.
Obligations Under Capital Leases
At December 31, 2004, 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, 2004, minimum future lease payments are approximately as
follows:
YEARS ENDING DECEMBER 31,
2005 $ 38,000
2006 10,000
----------
Total minimum lease payments 48,000
Less amounts representing interest 13,410
----------
Present value of net minimum lease payments 34,590
Less current portion 25,807
----------
Long-term portion $ 8,783
==========
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. SUBSEQUENT EVENTS
Callable Secured Convertible Notes
On March, 18 2005, the Investors purchased $650,000 in Notes and received
Warrants to purchase 650,000 shares of our common stock, completing the sale of
(i) $3,000,000 in callable secured convertible notes (the "Notes") and (ii)
stock purchase warrants (the "Warrants") to buy 3,000,0000 shares of our common
stock that was agreed upon on June 18, 2004.
The agreement entered into on June 18, 2004 was amended on March 4, 2005,
changing the conversion price of the convertible notes to the lower of (i) $0.70
or (ii) 25% of the average of the three lowest intraday trading prices for our
common stock during the 20 trading days before, but not including, the
conversion date. The original agreement had the conversion price as the lower of
(i) $0.70 or (ii) 50% of the average of the three lowest intraday trading prices
for our common stock during the 20 trading days before, but not including, the
conversion date.
New Callable Secured Convertible Notes Issuance
On March 31, 2005, in order to obtain funding for its ongoing operations, the
Company entered into a new Securities Purchase Agreement (the "New Securities
Purchase Agreement") with New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (collectively, the
"Investors") for the sale of (i) $650,00 in callable convertible secured notes
(the "Notes") and (ii) stock purchase warrants to buy 650,000 shares of the
Company's common stock (the "Warrants"). On March 31, 2005 the Investors
purchased $350,000 in Notes, and received Warrants to purchase an aggregate of
350,000 shares of the companies stock. The remaining $300,000 of convertible
secured notes will be purchased 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) 25% 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 $0.03
per share, the market price at the time of the closing. 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.
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.
PNC Bank Note Payoff
On March 31, 2005, the Company paid off and satisfied the note due to PNC bank
in the principal amount of $606,667. All accrued interest in the amount of
$16,830 was all paid off.
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