UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended
March 31, 2005.
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT for the transition period from _______ to _______.
Commission file number: 333-54822
STRONGHOLD TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 22-3762832
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
106 Allen Road, Basking Ridge, NJ 07920
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(Address of principal executive offices)
(908) 903-1195
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes |X| No|_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: as of May 19, 2005, 17,287,349 shares
of the Registrant's common stock, (par value, $0.0001), were outstanding.
Transitional Small Business Disclosure Format: (Check One): Yes |_| No |X|
TABLE OF CONTENTS
Page
PART I - Financial Information
Item 1. Financial Statements................................................2
Condensed Consolidated Balance Sheet
as of March 31, 2005(unaudited).....................................2
Condensed Consolidated Statements of Operations
For the Three Months Ended March 30, 2005 and 2004
(unaudited)........................................................3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2005 and 2004
(unaudited)........................................................4
Notes to Condensed Consolidated Financial Statements................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................11
Item 6. Exhibits and Reports on Form 8-K...................................27
-i-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Stronghold Technologies, Inc. and Subsidiary
Condensed Consolidated Balance Sheet
March 31, 2005
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ASSETS
Current assets
Cash $ 500
Accounts receivable, less allowance for returns and 38,124
doubtful accounts of $219,891
Inventories 53,231
Prepaid expenses 33,592
------------
Total current assets 125,447
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Property and equipment, net 57,345
------------
Other assets
Software development costs, net of amortization 823,795
Deferred charge, convertible debt loan acquisition costs,
net of amortization 384,462
Other 127,195
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Total other assets 1,335,452
------------
$ 1,518,244
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 501,638
Accrued expenses and other current liabilities 1,337,471
Interest payable, stockholders 438,155
Notes payable, stockholders, current portion 1,195,531
Deferred revenue 596,953
Obligations under capitalized leases, current portion 18,053
------------
Total current liabilities 4,087,801
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Long-term liabilities
Notes payable, stockholders, less current portion 1,129,600
Note payable, convertible debt of $3,350,000 net of debt
discount of $3,350,000 and debt discount
amortization of $842,209 842,209
Obligations under capitalized leases, less current portion 4,654
Payroll taxes payable, long term 325,000
------------
Total long-term liabilities 2,301,463
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Commitments and contingencies
Stockholders' deficit
Preferred stock, Series A, $.0001 par value; authorized
5,000,000 shares, 2,002,750 issued and outstanding
(aggregate liquidation preference of $3,004,125) 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, 17,287,349 issued and outstanding 1,729
Additional paid-in capital 11,349,219
Stock subscription receivable (3,000)
Accumulated deficit (16,219,413)
------------
Total stockholders' deficit (4,871,020)
------------
$ 1,518,244
============
See accompanying notes to condensed consolidated financial statements
-2-
Stronghold Technologies, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
Three Months Ended March 31,
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2005 2004
Net sales $ 261,652 $ 643,678
Cost of sales 118,179 236,508
------------ ------------
Gross profit 143,473 407,170
Selling, general and
administration 800,285 964,002
------------ ------------
Loss from operations (656,812) (556,832)
Interest expense 416,098 26,897
------------ ------------
Net loss applicable to common
stockholders $ (1,072,910) $ (583,728)
============ ============
Basic and diluted loss per
common share $ (0.07) $ (0.04)
============ ============
Weighted average number of
common shares outstanding 16,394,016 13,341,930
============ ============
See accompanying notes to condensed consolidated financial statements
-3-
Stronghold Technologies, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 2004
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Cash flows from operating activities
Net loss $(1,072,910) $ (583,728)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for returns and allowances -- 14,000
Depreciation and amortization 186,897 96,948
Amortization of convertible debt discount 302,628
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Accounts receivable 265,674 (130,247)
Inventories (8,527) 52,721
Prepaid expenses 56,892 (19,686)
Other receivables --
Other assets 4,362 (78,231)
Accounts payable (117,540) 15,978
Accrued expenses and other current liabilities 59,574 (96,573)
Interest payable, stockholders 39,787 12,095
Deferred revenue 3,545 36,824
----------- -----------
Net cash used in operating activities (279,618) (679,899)
----------- -----------
Cash flows from investing activities
Payments for purchase of property and equipment -- (1,991)
Payments for software development costs (65,455) (134,326)
Payments of security deposits (800)
----------- -----------
Net cash used in investing activities (66,255) (136,317)
----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock, net of financing costs 42,052
Proceeds from notes payable, stockholders 50,000 895,000
Principal repayments of notes payable, stockholders -- (20,000)
Proceeds from notes payable, convertible debt 1,000,000 --
Payments made for debt issuance cost relating to notes payable,
convertible debt (85,577) --
Principal repayments of notes payable (606,667) (45,000)
Principal payments for obligations under capital leases (11,883) (11,042)
----------- -----------
Net cash provided by financing activities 345,873 861,010
----------- -----------
Net increase in cash (0) 44,794
Cash, beginning of period 500 8,161
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Cash, end of period $ 500 $ 52,955
=========== ===========
Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 78,846 $ 14,801
=========== ===========
See accompanying notes to condensed consolidated financial statements
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). These statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary to present fairly the results for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to applicable SEC
rules and regulations. Operating results for the three-month period ended March
31, 2005 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2005. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report of Form 10-KSB for the fiscal year ended December 31,
2004.
1. INVENTORIES
Inventories, which are comprised of hardware for resale, are stated at
cost, on an average cost basis, which does not exceed market value.
2. LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of common
shares outstanding. The Company complies with SFAS No. 128, "Earnings Per
Share," which requires dual presentation of basic and diluted earnings (loss)
per share. Basic earnings (loss) per share excludes dilutions and is computed by
dividing net loss applicable to common stockholders by the weighted average
number of common shares outstanding for the year. Diluted earnings (loss) per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Since the effect of the outstanding options and warrants are
anti-dilutive, they have been excluded from the Company's computation of diluted
loss per common share.
3. 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.
-5-
4. STOCK-BASED COMPENSATION
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123, "Accounting
for Stock-Based Compensation." This Statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. It also amends the disclosure provisions to
require more prominent disclosure about the effects on reported net income
(loss) of an entity's accounting policy decisions with respect to stock-based
employee compensation. As permitted by the Statement, the Company does not plan
to adopt the fair value recognition provisions of SFAS No. 123 at this time.
However, the Company has adopted the disclosure provisions of the Statement.
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized in the accompanying consolidated statements of operations, as
all options granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock at the date of grant.
Had compensation cost for these options been determined consistent with
the fair value method provided by SFAS No. 123, the Company's net loss and net
loss per common share would have been the following pro forma amounts for the
three-month periods ended March 31, 2005 and 2004.
-6-
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Three months ended
March 31,
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2005 2004
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Net loss applicable to common
stockholders, as reported (1,072,910) $ (583,728)
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Deduct
------------------------------------------------------------------------------
Total stock-based compensation expense
determined under fair value method for
all awards, net of related tax effect 3,162 12,819
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Pro Forma (1,076,072) $ (12,819)
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Basic and diluted EPS
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As reported $ (0.07) $ (0.04)
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Pro forma $ (0.07) $ (0.04)
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March 31, 2005 and 2004
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The fair value of issued stock options is estimated on the date of grant
using the Black-Scholes option-pricing model including the following
assumptions: expected volatility of approximately 15%, expected dividend yield
rate of 0%, expected life of 10 years, and a risk-free interest rate of 4.50 and
4.13% for March 31, 2005 and 2004, respectively.
5. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Since the beginning
of the fiscal year, the Company has incurred a net loss of $1,072,910 and has
negative cash flows from operations of $279,618 for the three months ended March
31, 2005, and has a working capital deficit of $3,962,354 and a stockholders'
deficit of $4,871,020 as of March 31, 2005. 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.
-7-
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at March
31, 2005
Sales tax $ 100,518
Payroll taxes 480,965
Compensation 350,420
Commissions 137,479
Other accrued expenses 268,089
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Total $1,337,471
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Payroll Tax Payment Agreement with IRS
On April 30, 2004, the Company entered into an installment agreement with
the United States Internal Revenue Service ("IRS") to pay overdue payroll taxes
and penalties of totaling $1,233,101 under the terms of which the Company will
pay a minimum of $35,000 each month, commencing June 28, 2004, until it has paid
the withholding taxes due in full, to be completed in thirty-six month period by
April 30, 2007. If the Company is unable to fulfill this agreement, the IRS
could take possession of the Company's assets. As of March 31, 2005, the company
has made all required payments to the IRS. The Company has recorded the portion
of the payroll taxes of $325,000 to be paid in the remaining monthly periods of
23 through 36 within the agreed upon payment plan in the long term liabilities
section under the heading "Payroll taxes payable-long term" section of the
balance sheet.
7. NOTES PAYABLE, STOCKHOLDERS
On March 15, 2004, the Company entered into a note payable with its
preferred stockholders Stanford Venture Capital Holdings, Inc. for approximately
$875,000. The note bears interest at 8% per annum and is due on March 15, 2007.
The balance of this note is located in the long-term portion of notes payable,
stockholders.
The Company also has notes payable to its Chief Executive Officer
Christopher J. Carey that are described in detail in the financings section
below under the header Loans from Christopher J. Carey, an Executive Officer,
Director and Shareholder of the Company
The following table provides a reconciliation of these loans to the current and
long term sections of the balance sheet as well notes regarding the extension of
the loans from Mr. Carey:
-8-
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Balance at March 31, 2005
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Original
Term/Due Extended
Current Long Term Total Date To
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Stockholder - Christopher J. Carey
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$20,000 principal
payment Dec 2004
3 mos $20,000 principal
Stockholder Bridge Loan 60,000 60,000 due 9/18/03 11/1/05 payment in June 2003
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3 mos
Stockholder Bridge Loan 300,000 300,000 due 9/18/03 11/1/05
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Principal balance
reduced by $543,000
debt to equity
conversion and
18 mos 12/1/05 reallocation of
Stockholder Loan 105,000 254,600 359,600 due 12/31/03 accrued compensation
and travel and
entertainement originally
included in loan.
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12 mos
Christopher J. Carey - AC Trust Fund 375,403 375,403 due 9/30/03 11/1/05
----------------------------------------------------------------------------------------------------------------------------------
12 mos
Christopher J. Carey - CC Trust Fund 355,127 355,127 due 9/30/03 11/1/05
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Total-Stockholder - Christopher J, Carey 1,195,530 254,600 1,450,130
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Stanford 875,000 875,000 3 yrs
due 3/2007
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Totals 1,195,530 1,129,600 2,325,130
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8. COMMITMENTS AND CONTINGENCIES
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 of the AJW Notes and (ii) stock purchase warrants to
buy 3,000,000 shares of the Company's common stock (the "AJW Warrants").
On June 18, 2004, the Investors purchased $1,500,000 in AJW Notes and
received Warrants to purchase 1,500,000 shares of the Company's common stock. On
July, 28, 2004 the Investors purchased $500,000 in AJW Notes and received
Warrants to purchase 500,000 shares of common stock. On October 22, 2004 the
Investors purchased $350,000 in AJW Notes and received Warrants to purchase
350,000 shares of common stock. On March 18, 2005 the Investors purchased
$650,000 in AJW Notes and received Warrants to purchase 650,000 shares of common
stock.
-9-
The AJW 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
AJW Notes in the event that no event of default exists, there are a sufficient
number of shares available for conversion of the AJW Notes and the market price
is at or below $0.57 per share. The full principal amount of the AJW Notes is
due upon default under the terms of AJW 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 AJW Note payable, convertible debt, is recorded at $3,000,000 net of
debt discount of $3,000,000 and amortization of $842,209, of which such
amortization has been charged to interest expense. This Note payable,
Convertible Debt is 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 Instruments" paragraph 19.
The Debt Discount is reported at 100% of the net proceeds of the Convertible
Debt Financing in accordance with EITF 98-5 that specifies that the beneficial
conversion expense may not exceed the net proceeds. Additionally, the interest
expense and debt discount and corresponding amortization are recorded in
accordance EITF 00-27 paragraph 19 that states that convertible instruments that
have a stated redemption date require a discount resulting from recording a
beneficial conversion option to be accreted from the date of issuance to the
stated redemption date of the convertible instrument, regardless of when the
earliest conversion date occurs.
The Warrants are exercisable until five years from the date of issuance at
a purchase price of $0.57 per share. In addition, the exercise price of the
Warrants is adjusted in the event the Company issues common stock at a price
below market. Since the Company does not intend to issue common stock at below
market price the warrants were valued at $NIL using the Black-Scholes option
pricing model including the following assumptions: exercise price of $0.57,
expected volatility of 2.06%, expected dividend yield rate of 0%, expected life
of 5 years, and a risk free interest rate of 4.73%.
The Investors have contractually agreed to restrict their ability to convert the
AJW 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
Securities Act of 1933.
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.
-10-
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) $650,000 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 Company's stock. On May 4, 2005, the Investors purchased
$300,000 in Notes and received Warrants to purchase 300,000 shares of our common
stock.
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.
9. Restatement of Certain Transactions as of September 30, 2004
For the period ended September 30, 2004 the Company has taken the position of
capitalizing the approximately $334,000 of debt issuance cost, relating to the
Callable Secured Convertible Notes described in footnote 8, as a deferred
charge. As a result, the Company has also recorded the beneficial conversion
feature in the full amount of the outstanding note of $2,000,000. Both items
will be amortized over the life of the loan of 3 years which is in accordance
with EITF 00-27. The effects of this restatement for the three and nine month
periods ended September 30, 2004 are listed below:
Three months Nine months
ended September ended September
30, 2004 30, 2004
Net Loss ($10,904.00) ($47,258.00)
Basic and diluted loss per common share ($ 0.001) ($ 0.003)
-11-
9. SUBSEQUENT EVENTS
New Callable Secured Convertible Notes Issuance
On May 4, 2005, the Investors purchased $300,000 in Notes and received Warrants
to purchase 300,000 shares of our common stock, completing the sale of (i)
$650,000 in callable secured convertible notes (the "Notes") and (ii) stock
purchase warrants (the "Warrants") to buy 650,000 shares of our common stock
that was agreed upon on March 31, 2005.
New Stockholder Loans
Subsequent to the balance sheet, on May 4, 2005 Christopher Carey committed an
additional loan to the company of $100,000, of which the terms are 8%, interest
only, with principal due in 12 months.
-12-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
Definitions
All references to "we," "us," "our," the "Company" or similar terms used
herein refer to Stronghold Technologies, Inc., a Nevada corporation, formerly
known as TDT Development, Inc. and its wholly-owned subsidiary, Stronghold
Technologies, Inc., a New Jersey corporation. All references to "Stronghold"
used herein refer to just our wholly-owned subsidiary, Stronghold Technologies,
Inc., a New Jersey corporation. All references to the "Predecessor Entity" refer
to the New Jersey corporation we acquired on May 16, 2002, Stronghold
Technologies, Inc., which was merged with and into Stronghold.
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, par value $0.0001 per share, to the stockholders of the
Predecessor Entity in exchange for all of the issued and outstanding shares of
the Predecessor Entity. 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.
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.
-13-
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 in order to maintain operations. In the
event we did not raise such additional capital if needed, these conditions would
raise substantial doubt about the Company's ability to continue as a going
concern. 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
Stronghold's revenues are primarily received from system installation,
software licenses and system maintenance. The approximate average selling
package price of the system and installation is $60,000. Additional revenues are
derived from monthly system maintenance agreements that have a monthly fee of
$850 per month and a total contract value of $30,600. The revenues derived from
these categories are summarized below:
o Software License Revenues: This represents the software license
portion of the Dealer Advance Service Solution purchased by
customers of the Company. The software and intellectual property of
Dealer Advance has been developed and is owned by the Company.
o System Installation Revenues: This represents the installation and
hardware portion of the Dealer Advance Service Solution. All project
management during the installation is performed by us. The
installation and hardware portions include cable wiring
subcontracting services and off the shelf hardware and handheld
computers ("PDA"s).
o Monthly Recurring Maintenance Revenue: This represents the
maintenance and support contract for the Dealer Advance Service
Solution that the customer executes with the system installation.
The typical maintenance contract is for 36 months. In the three year
operating history of the company, approximately 50% of all the
company's customers have prepaid the maintenance fees through a
third party leasing finance company. The third part leasing
arrangements with dealers are commitments by the dealer client
directly to the financing company with no recourse to the company.
These prepaid maintenance fees have provided additional cash flow to
us and have generated a deferred revenue liability on or balance
sheet.
Cost of sales for software licensing with the installation are estimated
at 10% of revenue for reproduction, minor customer specific configurations and
the setup cost of interface with the customers' DMS. Cost of sales for the
system installation includes direct labor and travel, subcontractors and third
party hardware.
-14-
General and Administrative Operating Expenses
The general operating expenses of the Company are primarily comprised of:
o Marketing and Selling;
o General and Administrative;
o Development & Operations;
Our marketing and selling expenses include all labor, sales commissions
and non-labor expenses of selling and marketing of our products and services.
These include the salaries of two Vice Presidents of Sales and the Business
Development Manager ("BDM") staff.
Our general and administrative expenses include expenses for all
facilities, insurance, benefits, telecommunications, legal and auditing expenses
are included as well as the executive management group wage expense.
Our development & operations expenses include the expenses for the Client
Consultant group which advises and supports the installations of our Dealer
Advance(TM) clients.
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 March 31, 2005 is 22 returns on 118
sales for a return rate of 18.64% 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.
THREE MONTHS ENDED MARCH 31, 2005 AND THREE MONTHS ENDED MARCH 31, 2004.
Revenue
-15-
For the quarter ended March 31, 2005, we had revenue of $261,652 compared
with revenue of $643,678 for the quarter ended March 31, 2004. Revenue is
generated from software license and system installation, maintenance support and
service revenues. Revenues for the three months ended March 31, 2005 are broken
down as follows:
Three Months Three Months
Ended March 31, Ended March 31,
2005 2004 $ Change % Change
--------------- --------------- --------------- ---------------
Software License & System Installation $ 85,653 $ 530,082 $(444,429) -83.84%
Support Maintenance 162,794 108,509 54,285 50.03%
Services 13,206 5,087 8,119 159.60%
Total Revenue $ 261,652 $ 643,678 $(382,025) -59.35%
This decrease in revenue of $382,025 or 59.35% is primarily attributed to
the following:
o the steps we made to address our limited funding that included
reductions of our sales, marketing and client consultant staffs that
resulted in less installations
o concerns from the market regarding the viability of the company's
ability to continue as a going concern, particularly with respect to
the pending foreclosure suit with PNC Bank, which was finally paid
off and satisfied on March 31, 2005.
Although we cannot provide guarantees, we do believe that our revenues will
stabilize and achieve prior period revenue levels. Additionally, we may increase
revenues in the future as we further develop our third party distributors and as
the market learns that the potential for a bank foreclosure has been removed. We
do not expect that we will incur additional expenses such as training and the
development of training manuals associated with the implementation of our third
party distributor sales strategy.
Cost of Sales
Cost of sales on a percentage basis increased 45.17% of revenue for the
three months ended March 31, 2005 as compared to 36.74% of revenue for the three
months ended March 31, 2004 for a net increase of 8.42%. The table below shows
the Cost of Sales and percentage by category and the comparison in dollars and
percentage for the three months ended March 31, 2005 and three months ended
March 31, 2004. The increase in Cost of Sales as a percentage of revenue of
8.42% is primarily attributed to a corresponding percentage increase in Labor as
a result of fewer installations in the period. We expect that our cost of sales
as a percentage of revenue will increase in the future as we utilize additional
third party distributors to increase the sales volume, however expect the total
gross profit dollars to increase as the revenue volume stabilizes and then
increases.
-16-
-----------------------------------------------------------------------------------------------------------
Q1 2005 Q1 2004 Q1 2005 Q1 2004
-----------------------------------------------------------------------------------------------------------
Cost of Sales Dollars Dollars % of Revenue % of Revenue % Change
------- ------- ------------ ------------ ------------
-----------------------------------------------------------------------------------------------------------
Hardware Components $ 27,346 $ 87,559 10.45% 13.60% -3.15%
-----------------------------------------------------------------------------------------------------------
Client Software & Licensing 13,010 25,313 4.97% 3.93% 1.04%
-----------------------------------------------------------------------------------------------------------
Distribution Fees 422 -- 0.16% -- 0.16%
-----------------------------------------------------------------------------------------------------------
Subcontractors 3,154 7,594 1.21% 1.18% 0.03%
-----------------------------------------------------------------------------------------------------------
Misc Installation Costs 770 1,488 0.29% 0.23% 0.06%
-----------------------------------------------------------------------------------------------------------
Installations/Travel 18,288 51,102 6.99% 7.94% -0.95%
-----------------------------------------------------------------------------------------------------------
Repairs 80 9,611 0.03% 1.49% -1.46%
-----------------------------------------------------------------------------------------------------------
Shipping 9,366 53,342 3.58% 8.29% -4.71%
-----------------------------------------------------------------------------------------------------------
Labor 45,743 500 17.48% 0.08% 17.40%
-----------------------------------------------------------------------------------------------------------
Total Cost of Sales $118,179 $236,508
-----------------------------------------------------------------------------------------------------------
Total Cost of Sales % of Revenue 45.17% 36.74% 8.42%
-----------------------------------------------------------------------------------------------------------
Gross Profits
We generated $143,473 in gross profits from sales for the quarter ended
March 31, 2005, which was a decrease of $263,697 from the quarter ended March
31, 2004, when we generated $407,170 in gross profits. Our gross profit margin
percentage decreased by 8.42% from 63.26% in the quarter ended March 31, 2004 to
54.83% in the quarter ended March 31, 2005. The decrease in gross profit is
primarily attributable to the reduction in installations for the period and
excess labor capacity.
Selling, General and Administrative Expenses
Total Selling, General and Administrative expenses in the quarter ended
March 31, 2005 were $800,285, a decrease of 16.98% or $163,717 from the quarter
ended March 31, 2004 of $964,002. The reduction in expense is primarily
attributable to the reduction of staff from 29 in March 31, 2004 to 17 in the
quarter ended March 31, 2005. The significant reduction in staffing resulted in
a reduction of payroll expenses of $210,586 which was the largest portion of the
$163,717 reduction offset by an increase in amortization of $89,949 attributed
to the Deferred Charge amortization associated with the loan acquisitions costs
of the convertible debt instrument. Other significant expense reductions within
selling, general and administrative expenses for the quarter ended March 31,
2005 and March 31, 2004 included the following:
o Telephone expense of $19,065 and
o Travel and automobile expenses reductions of $31,208
Our interest and penalty expense increased from $26,897 in the quarter
ended March 31, 2004 to $416,098 in the quarter ended March 31, 2005. This
increase of $389,202 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".
The Company recorded $302,628 of Beneficial Conversion Expense in the first
quarter of 2005 as compared to the first quarter of 2004 when there was no
beneficial conversion expense. Additionally, the company also incurred
additional interest charges of $71,815 attributable to the new convertible debt
of $3,350,000 and an additional $12,274 for the additional debt financing of
$875,000 provided by Stanford.
-17-
Operating Loss
The Company's operating losses increased by $99,980 in comparing the
quarter ended March 31, 2005 to the quarter ended March 31, 2004, which were
$656,812 and $556,832 respectively. This increase in losses is primarily
attributed to the significant reduction in revenue of $382,026 for the
comparative periods.
Net Loss
We had a net loss of $1,072,910 for the quarter ended March 31, 2005
compared to $583,728 for the quarter ended March 31, 2004, an increase in net
losses of $489,182. This increase of net losses of 83.8% is primarily
attributable to the $389,000 increase in interest expense and reduction of
revenue of $382,026 for the comparative periods.
Our loss per share increased to $.07 loss per share with a weighted
average of 16,394,016 shares outstanding in the quarter ended March 31, 2005 as
compared to $0.04 loss per share in the quarter ended March 31, 2004 with a
weighted average of 13,341,930 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 March 31, 2005, our cash balance was $500. We had a net loss of
$1,072,910 for the quarter ended March 31, 2005. We had a net operating loss of
approximately $11,300,000 for the period from May 17, 2002 through March 31,
2005 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 March 31, 2005 was $258,015, less allowance for
doubtful accounts of $219,891, and $523,689 as of the year ended December 31,
2004, less allowances for doubtful accounts of $218,446. The reason for the
decrease in accounts receivable, less doubtful accounts was due to the decrease
in revenues. Accounts receivable balances represent amounts owed to us for new
installations and maintenance, service, training services, software
customization and additional systems components.
As of March 31, 2005 the Company had the following financing arrangements:
-18-
Debt Liability Summary Table
Current Debt liabilities
IRS Payment Plan 420,000
Interest payable, stockholders (founding shareholder) 456,566
Notes payable, stockholders, current portion (founding shareholder) 1,195,531
---------
Total Debt current liabilities 2,577,997
---------
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 $2,507,791 842,209
IRS Payment Plan (Long term portion) 325,000
---------
Total long term Debt liabilities 2,296,809
---------
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 $ 222,285
VA 6/1/2004 24 months 17 44,369
CA 11/1/2004 12 months 7 5,525
-----------
Grand Total $ 272,179
-----------
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 $1,100,000 and have negative cash flows
from operations of approximately $280,000 for the quarter ended March 31, 2005,
and have a working capital deficit of approximately $3,960,000 and a
stockholders' deficit of approximately $4,870,000 as of March 31, 2005. 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.
The Company currently has no further commitments for additional financing
as a result of the completion of the new convertible debt of $650,000, of which
the final $300,000 was funded subsequent to the balance sheet date of March 31,
2005 on May 4, 2005.
The Company expects that this funding will provide the necessary cash to
support operations throughout the second quarter of 2005. Since we do not have
further financing commitments and will need to raise additional funds after the
second quarter of 2005, this condition raises substantial doubt about the
Company's ability to continue as a going concern.
Financings
-19-
The Company has entered into the following financing transactions:
Loans from Christopher J. Carey, an Executive Officer, Director and
Shareholder of the 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 March 31, 2005, $359,600 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, 2005, the AC Trust
Fund agreed to extend the term of their loan to November 1, 2005. As of December
31, 2003, $355,128 was outstanding under the CC Trust Fund loan agreement.
-20-
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, 2005, the AC Trust Fund agreed to
extend the term of their loan to November 1, 2005. As of December 31, 2003,
$375,404 was outstanding under the AC Trust Fund loan agreement.
On March 18, 2003, we entered into a bridge loan agreement with
Christopher J. Carey, for a total of $400,000. The agreement stipulates that the
Company will pay an 8% interest rate on a quarterly basis until the loan becomes
due and payable on June 30, 2004. We also issued to Mr. Carey 391,754 warrants
exercisable for common stock for 10 years at a price of $0.97 per share. On
December 30, 2003, Christopher J. Carey agreed to extend the term of the
promissory note to June 30, 2004. As of December 31, 2003, $360,000 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.
-21-
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.
On November 12, 2004, the 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 with the final principal payment being made on or before
January 31, 2005.
The company failed to make the final principal payment on or before
January 31, 2005 and was subsequently put into default under the note. On March
31, 2005 the Company made the final scheduled payment and was released from all
potential claims by PNC Bank.
-22-
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 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.
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.
-23-
On March 3, 2004 and March 15, 2004 we received loans in the amount of
$437,500 each from Stanford. 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. As of March 31, 2005 the accrued interest on the
loan was $74,411. On March 7, 2005, the Company and Stanford agreed to settle
the accrued interest through March 31, 2005 of $74,411 for 826,788 shares of
restricted common stock. The price per share on March 7, 2005 was $.09/share.
Additionally, on March 7, 2005, the Company issued Stanford 373,212 shares as
consideration for their consent to amending the agreement the Company entered
into on June 18, 2004 with respect to the Callable Secured Convertible Notes
Issuance (see the appropriate section below), 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.
Private Placements with Accredited Private 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, the Company commenced offerings to accredited investors
in private placements of up to $3,000,000 of the Company's common stock. In the
period of October 2003 through January 9, 2004 the Company raised $225,000 under
the terms of these private placements. The shares offered in the private
placement are priced at the 5 trading day trailing average closing price of the
common stock on the OTCBB, less 20%. For each share purchased in the private
placements, purchasers received a warrant to purchase one half (0.5) share of
common stock at 130% of the purchase price. A minimum of $25,000 was required
per investor. The number shares issued under this placement total 509,559, at an
average price of $0.44/share.
Warrants
On June 16, 2004, in connection with the issuance of the 12% callable
secured convertible notes (the "AJW Notes")the Company issued to Stanford a
warrant (the "Stanford Warrants") to purchase 2,000,000 shares of Common Stock,
expiring in five years, at an exercise price of $.0001,in consideration 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 issuances required by the Series A Stock and the Series B
Stock as a result of the conversion of the AJW 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%.
-24-
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 of the AJW Notes and (ii) stock purchase warrants to
buy 3,000,000 shares of the Company's common stock (the "AJW Warrants").
On June 18, 2004, the Investors purchased $1,500,000 in AJW Notes and
received Warrants to purchase 1,500,000 shares of the Company's common stock. On
July, 28, 2004 the Investors purchased $500,000 in AJW Notes and received
Warrants to purchase 500,000 shares of common stock. On October 22, 2004 the
Investors purchased $350,000 in AJW Notes and received Warrants to purchase
350,000 shares of common stock. On March 18, 2005 the Investors purchased
$650,000 in AJW Notes and received Warrants to purchase 650,000 shares of common
stock..
The AJW 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
AJW Notes in the event that no event of default exists, there are a sufficient
number of shares available for conversion of the AJW Notes and the market price
is at or below $0.57 per share. The full principal amount of the AJW Notes is
due upon default under the terms of AJW 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 AJW Note payable, convertible debt, is recorded at $3,000,000 net of debt
discount of $3,000,000 and amortization of $842,209, of which such amortization
has been charged to interest expense. This Note payable, Convertible Debt is
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 Instruments" paragraph 19. The Debt Discount is reported at
100% of the net proceeds of the Convertible Debt Financing in accordance with
EITF 98-5 that specifies that the beneficial conversion expense may not exceed
the net proceeds. Additionally, the interest expense and debt discount and
corresponding amortization are recorded in accordance EITF 00-27 paragraph 19
that states that convertible instruments that have a stated redemption date
require a discount resulting from recording a beneficial conversion option to be
accreted from the date of issuance to the stated redemption date of the
convertible instrument, regardless of when the earliest conversion date occurs.
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The Warrants are exercisable until five years from the date of issuance at
a purchase price of $0.57 per share. In addition, the exercise price of the
Warrants is adjusted in the event the Company issues common stock at a price
below market. Since the Company does not intend to issue common stock at below
market price the warrants were valued at $NIL using the Black-Scholes option
pricing model including the following assumptions: exercise price of $0.57,
expected volatility of 2.06%, expected dividend yield rate of 0%, expected life
of 5 years, and a risk free interest rate of 4.73%.
The Investors have contractually agreed to restrict their ability to convert the
AJW 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
Securities Act of 1933.
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) $650,000 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 Company's stock. On May 4, 2005, the Investors purchased
$300,000 in Notes and received Warrants to purchase 300,000 shares of our common
stock.
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.
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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.
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:
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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 forDealerAdvance
Service Solution(TM).
Once DealerAdvance Sales Solution(TM) is installed, Stronghold provides hardware
and software maintenance services for a yearly fee equal to approximately 10% of
the one-time implementation fees. All dealerships are required to purchase
maintenance with installations and pay maintenance fees on a monthly basis.
Stronghold provides our customers with services, including software and report
customization, business and operations consulting, and sales training services
on an as needed basis and typically are charged on a time and expenses basis.
Stronghold offers all new customers a sixty-day performance trial period during
which time performance targets are set. Stronghold installs the system and
agrees to remove the system at no charge if the performance targets are not met.
If performance is met, a large portion of the dealerships enter into a third
party lease generally with lessors introduced by us. We have entered into a
number of relationships with leasing companies in which the leasing company
finances the implementation fees for the dealership in a direct contractual
relationship with the dealership. The lease is based solely on the
creditworthiness of the dealership without recourse to us. The leasing company
receives an invoice from us, and remits funds upon acceptance by the dealership.
We receive all funds as invoiced, with interest costs passed to the dealership.
These leases typically run 36 months in duration, during which time we contract
for service and maintenance services. Stronghold charges separately for future
software customization after the initial installation, for additional training,
and for additions to the base system (e.g., more handheld devices for additional
sales people). Depending upon the dealership arrangement, the support and
maintenance contracts are either billed monthly and recorded as revenue monthly,
or are recorded up front to unearned maintenance fees at the present value of
the 36-month revenue stream and amortized monthly to revenue over the life of
the agreement.
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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.
Software Development Capitalization Policy
Software development costs, including significant product enhancements
incurred subsequent to establishing technological feasibility in the process of
software production, are capitalized according to Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." Costs incurred prior to the
establishment of technological feasibility are charged to research and
development expenses. For the quarter ended March 31, 2005, we capitalized
$65,955 of development costs in developing enhanced functionality of our
DealerAdvance(TM) products. This compares with $134,326 for the quarter ended
March 31, 2004. We capitalized a total of $407,505 of development costs for the
twelve month period ended December 31, 2004.
ITEM 2. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of September 30, 2004. Based on this evaluation, our chief executive
officer and Chief financial officer concluded that as of March 31, 2005, our
disclosure controls and procedures were (1) designed to ensure that material
information relating to us, including its consolidated subsidiaries, is made
known to our chief executive officer and chief financial officer by others
within those entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
No change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
PART II -
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
To obtain funding for its ongoing operations, the Company entered into a
Securities Purchase Agreement (the "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 secured convertible notes (the "Notes") and (ii)
stock purchase warrants (the "Warrants") to buy 3,000,0000 shares of our common
stock.
The following closings have occurred pursuant to the Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in Notes and
received Warrants to purchase 1,500,000 shares of our common stock;
o on July 27, 2004, the Investors purchased $500,000 in Notes and
received Warrants to purchase 500,000 shares of our common stock;
o on October 22, 2004, the Investors purchased $350,000 in Notes and
received Warrants to purchase 350,000 shares of our common stock;
and
o On March 18, 2005, the Investors purchase $650,000 in Notes and
received Warrants to purchase 650,000 shares of our common stock.
The Company entered into a second Securities Purchase Agreement with
the Investors on March 31, 2005 for the sale of (i) $650,000 in callable secured
convertible notes (the "Notes") and (ii) stock purchase warrants (the
"Warrants") to buy 650,000 shares of our common stock.
On March 31, 2005, the Investors purchased $350,000 in Notes and received
Warrants to purchase 350,000 shares of the Company's common stock. On May 4,
2005, the Investors purchased $300,000 in Notes and received Warrants to
purchase 300,000 shares of our common stock.
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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 a conversion price, which was amended on March 4, 2005, equal 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.
We 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 callable
secured convertible notes and the market price is at or below $.57 per share.
The full principal amount of the Notes is due upon default under the terms of
Notes. In addition, we have granted the Investors a security interest in
substantially all of our assets and intellectual property as well as
registration rights.
The Warrants are exercisable until five years from the date of issuance at
a purchase price of $0.57 per share. In addition, the exercise price of the
Warrants is adjusted in the event we issue common stock at a price below market.
The Investors have contractually agreed to restrict their ability to
convert the Notes and exercise the Warrants and receive shares of our common
stock such that the number of shares of the Company common stock held by them
and their affiliates after such conversion or exercise does not exceed 4.99% of
the Company's then issued and outstanding shares of common stock.
The Notes and Warrants were offered and sold to the Investors in a private
placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated thereunder. Each of the Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See Exhibit Index.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this __ day of March
2005.
STRONGHOLD TECHNOLOGIES, INC.
BY: /s/ Christopher J. Carey
--------------------------------------------
Name: Christopher J. Carey,
Title: President ,Chief Executive Officer
and Acting Chief Financial Officers
(principal executive and financial officer)
BY: /s/ Karen S. Jackson
--------------------------------------------
Name: Karen S. Jackson
Title: Controller (principal accounting
officer)
Dated: As of May 20, 2005
ITEM 6. EXHIBIT INDEX
Exhibit Description
Number
31.1 Certification of Chief Executive and Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive and Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.